Ten Principles of Macroeconomics

Review Questions

1. Give three examples of important trade offs you face in your life.
Spending time with your family vs working at your job, money vs time, and saving vs
spending

2. What items would you include to figure out the opportunity cost of a vacation to
disneyworld? You would need to calculate the time spent there and the cost it would take
for traveling and the cost of the ticket and stuff your buying to take home.

3. Is the marginal benefit of a glass of water large or small? It would depend on how badly
you need that water, like if you had just got done working out then the benefit would be
large etc.
4. Why should policymakers think about incentives?
They need to have a better understanding of people's opinions and how they will
respond to the policies and changes they are making.

5. Why isn't trade among countries like a game with some winners and some losers.
A trade between two countries could benefit both countries which means neither one
wins or loses technically its a double win.

6. What does the "invisible hand" of the marketplace do?

It seems as though they are being selfish though they arent doing what's best for society
but that really is what they are trying to do and are guided to do.

7. What are the two main causes of market failure? Give an example of each.
The effect of one person's actions on the well being of a bystander. Market power the
ability of a sginle person to unduly influence market prices. Examples would be pollution
and in a town there is only one company for something.

8. Why is productivity important?

Productivity is important because the country needs to continue to provide the best
goods and services it can, the more productive we are the better the amount of services
is.

9. What is inflation and what causes it?

Inflation is an increase in overall level of prices in the economy and it is caused by the
increase in the quantity of money .

10. How are inflation and unemployment related in the short run?

They are not related reducing inflation costs higher unemployment.

Multiple choice
1.economics is best defined as the study of
a) How society manages its scarce resources
2. Your opportunity cost of going to the movie is
c)the total cash expenditure needed to go to the movie plus the value of your time.

3) A marginal change is one that:

b)incrementally alters an existing plan
4)Adam Smith's "invisible hand" refers to:

b) the ability of free markets to reach desirable outcomes, despite the self-interest of
market participants.

5. Governments may intervene in a market economy in order to:

d) all of the above

6.If a nation has high and persistent inflation, the most likely explanation is:

b) the central bank creating excessive amounts of money.

Problems and Applications

1. Describe some of the trade-offs faced by each of the following:
a) Af amily deciding whether or not to buy a new car might experience some doubt and
tradeoffs like saving vs spending or worrying about crashing the brand new car and
higher insurance
b) The congress knows that tehy have to use their money for other things such as building
highways, replacing and repairing things thought a park might not seem important the
citizens enjoy so that is a benefactor to the spending
c) Opening a new factory costs money so they would have to decide how much money
they are willing to put in and it takes time they also have to determine how much money
would come out of the factory and if it would be a success
d) The professor wouldnt want to over prepare for class because they might run out of time
during class but he wouldnt want to under prepare because they might have a lot time
left over where they would be doing something productive.

2. .You are trying to decide whether to take a vacation. Most of the costs of the vacation
(airfare, hotel, and forgone wages) are measured in dollars, but the ben-efits of the
vacation are psychological. How can you compare the benefits to the costs? The
 benefits are better the higher the prices get. So the higher the price the better the
psychological outcomes are.

3. You were planning to spend Saturday working at your part-time job, but a friend asks
you to go skiing. What is the true cost of going skiing? Now suppose you had been
planning to spend the day studying at the library. What is the cost of going skiing in this
case? Explain.

The true cost of going skiing is not earning any money and in fact losing more money
because you have to spend more money on skiing while not going to work. The cost of
skiing is losing your time studying and risking the fact of failing your class.

4. You win $100 in a basketball pool. You have a choice between spending the money
now and putting it away for a year in a bank account that pays 5 percent interest. What is
the opportunity cost of spending the $100 now? It depends on how much money you
would have a year from now if you decided to not spend money five percent would make
it go up to 105 in a year which means you are giving up 105.

5 The company that you manage has invested $5 million in developing a new product,
but the development is not quite finished. At a recent meeting, your sales-people
reported that the introduction of competing products has reduced the expected sales of
your new product to $3 million. If it would cost $1 million to fin-ish development and
make the product, should you go ahead and do so? What is the most that you should pay
to complete development? Yes the total loss would be 3 instead of five million. You
should pay 2 million

6. The Social Security system provides income for people over age 65. If a recipient of
Social Security decides to work and earn some income, the amount received in Social
Security benefits is typically reduced.

a) People already know how social security works, so if it makes them income it will
make them want to work longer
b) It makes them not want to work.

7. A 1996 bill reforming the federal government’s anti-poverty programs limited many welfare
recipients to only two years of benefits.

a) The limitation would make people not want to work, decreasing the employment there
would be no productivity whatsoever.
b) It would make everyone equal in pay but it would not be an efficient way to handle or
make money
 8. Explain whether each of the following government activities is motivated by a concern
about equality or a concern about efficiency. In the case of efficiency, discuss the type of
market failure involved.

a) Concern about efficiency tv has nothing to do with equality, but that the tvs arent
good enough
b) Only providing some is inequality
c) Efficiency nobody want someone or a business to smell like smoke since it looks
bad for business and people will voice their concern.
d) Efficiency they want to spread out their offices to make better stuff
e) Equality its only fair to charge people who make more more
f) Efficiency its a better and safe way if driving

9. Discuss each of the following statements from the standpoints of equality and efficiency.

a) Equality because this means no matter what everyone is getting the same health care
b) Effiency for the uneployed at leat so they can get back on their feet

10. In what ways is your standard of living different from that of your parents or grandparents
when they were your age? Why have these changes occurred? They were constantly working
and had stricter points of view i think everyone has relaxed and have a better understanding of
eachother

11. Suppose Americans decide to save more of their in-comes. If banks lend this extra saving to
businesses, which use the funds to build new factories, how might this lead to faster growth in
productivity? Who do you suppose benefits from the higher productivity? Is soci-ety getting a
free lunch? They have more places for business and they can work faster. Yes.

12.During the Revolutionary War, the American colo-nies could not raise enough tax revenue to
fully fund the war effort; to make up the difference, the colonies decided to print more money.
Printing money to cover expenditures is sometimes referred to as an “inflation tax.” Who do you
think is being “taxed” when more money is printed? Why? Technically the government is being
taxed because they are the ones printing more money.

Chapter 2
Quesitons for review

1. How is economics a science?

 Economists use the scientific method. Collecting dara and analyzing it such as a
scientist would.

2. 2. Why do economists make assumptions? They make them to simplify problems

without knowing the actual answer.
3. Should an economic model describe reality exactly?

No it can not it would be too complex

4. Name a way that your family interacts in the factor market and a way that it
interacts in the product market. My family buys meat farmers produce it
5. Name one economic interaction that isn't covered by the simplified circular-flow diagram.
Interactions with the government .
6. What happens to this frontier if a disease kills half of the economy's cows?

Less meat and mik prodctuiun is possible.

7. Use a production possibilities frontier to describe the idea of "efficiency" if the economy
is receiving all that they from a rar resource then they being efficient
8. What are the two subfields into which economics is divided? Explain what each subfield
studies. Microeconomics is the study of how households and firms make decision and
ow they interact with specific markets and macroeconomics is the study of the economy
wide phenomena
9. What is the difference between a positive and a normative statement? Give an example
of each. Positive are descriptive and talk about how the world is and a normative
statement is making a claim on how the world shoul dbe. Producing more money aat a
fast pace causes inflation and the government should be smart and slow down the rate
at wich they produce money
10. Why do economists sometimes offer conflicting advice to policymakers? Economists
disagree abut the positive theories about how the world works

Quick check multiple choice:

1) An economic model is: c
2) A
3) A
4) C
5) D
6) A

Problems and Applications:

1.Draw a circular-flow diagram. Identify the parts of the model that correspond to the flow of
goods and ser-vices and the flow of dollars for each of the following activities

a) Selena pays a storekeeper $1 for a quart of milk: GS Firm to household, $ Household to

firm

bStuart earns $4.50 per hour working at a fast-food restaurant: GS Household to firm, $ Firm to
household

cShanna spends $30 to get a haircut: GS Firm to household $ Household to firm

dSalma earns $10,000 from her 10% ownership of Acme Industrial GS Household to firm $ Firm
to household

2 Imagine a society that produces military goods and consumer goods, which we’ll call “guns” and
butter

a) When the economy reallocates the products become better

b) The economy can be really successful and make a lot of money near a military base or working
with the military but working in a place that doesnt use weapons and such would be inefficent
c) The hawks might run into lack of strong in anyone or finding a stronger opponent and the doves
might fall quickly while having a smaller military
d) If they focus less on the guns both parites would be more at peace and have more butter
production

3. The first principle of economics discussed in Chapter 1 is that people face trade-offs. Use a
production possi-bilities frontier to illustrate society’s trade-off between two “goods”—a clean
environment and the quantity of industrial output. What do you suppose deter-mines the shape
and position of the frontier? Show what happens to the frontier if engineers develop a new way
of producing electricity that emits fewer pollutant. It all depends on the quality of technology
and resource availability.

4. An economy consists of three workers: Larry, Moe, and Curly. Each works 10 hours a day and
can produce two services: mowing lawns and washing cars. In an hour, Larry can either mow
one lawn or wash one car; Moe can either mow one lawn or wash two cars; and Curly can either
mow two lawns or wash one car.

a) Larry mor eand curly all mow 10 lawns each

b) Larry and moe all washe 20 cars each culr washes 10
c) Larry and moe and curly 5 lawns and ten cars
d) Larry moes 5 cars and lawns curly 10 lawns 0 cars moe 0 lawns and ten cars

C explain why the production possibilities frontier has the shape it does it has a bowed
shape bcause resources are not equally efficient.

D yes because abc ar inside the ppf

 5 classify the following

a) Mircoencomic
b) Microeconomics
c) Macroeconomics
d) Micro

E marco

6 classify the following

a?)positive

B positive

C normative

Nomraitve

E positive

Chapter 3
Questions for review

1. Under what conditions is the production possibilities frontier linear rather than bowed
out?The switching between the two goods allows the line to linear rather than bowed
out.
2. Explain how absolute advantage and comparative advantage differ. Absolute advantage
is the idea of the amount of input needed to be put in to produce some good
comparative is the idea of producing but at lower opportunity
3. Give an example in which one person has an absolute advantage in doing something
but another person has a comparative advantage. Farmer and a butcher

4. Is absolute advantage or comparative advantage more important for trade? Explain your
reasoning using the example in your answer to Question 3. Comparative is more
important for trade because it takes in both idea and time
5. If two parties trade based on comparative advantage and both gain, in what range must
the price of the trade lie?At a range that is in between the two traders opportunity costs.
 6. Will a nation tend to export or import goods for which it has a comparative advantage?
Explain. Export is because it can make good at lower opportunity

Multiple choice
1. D
2. B
3. A
4. B
5. B
6. D

Problems and Applications:

1. B what is the coats of readin sociaooly
2. She could bei readin about econ but she is reading about sociology instead.\

2. A

B us cars 400m grains 100 m\

Japan 400m 500m

C us 1 car 1 car equals 2.5 grain in japan 10 ens cars equals ten grains

D the countries have the same absolute in cars and the us has more in grains

E us comparative advantage in grains

Japan comparative advantage in cars

F us 200 million

Japan 200 million

G the us should trade grain because ehtye have a lot of it andjpan should tade cars
because they have a lotof car s

3. A pat has the opportunity of to make a pizza and kat has the opportunity to make a
pizza asa well

b) kat would tarde root beer and pat would trade pizza
 4. Suppose there are 10 million worker in canada and that eah of these workers can
produce either 2 cars or 30 bushels of wheat in a year

a)? There is no opportunity it takes forever for them to make a a car there is a better
chance of getting wheat in canada

5. England

B they will trade sweaters and scones

c) yes because they are still trading something at least

6. a) probably five dollars

B boston and chicago

White and red

About a couple of dollars in price changes

7. a) any number that is not 3

B they will import wines for a value that is less than 3

8. B china would trade shirts because they have a more comparative advantage

c)china would trade one computer for ten shirts

d) there will no longer exist the nedd for trade

9. a) true

b) fals comparative advangteages

c) false comparative advantages

d) fals not everyone has the same needs

e) not all would be equally distributed to all individuals so false.