The Circular-Flow Diagram Illustrates That, In Markets For The Factors Of Production,

Chapter 2: Thinking Like an Economists

An economic model isA. a mechanical machine that replicates the functioning of the economy.
B. a fully detailed, realistic description of the economy.
C. a simplified representation of some aspect of the economy.
D. a computer program that predicts the future of the economy.

Answer: C

The circular-flow diagram illustrates that, in markets for the factors of production,A. households are seller, and firms are buyers.
B. households are buyers, and firms are sellers.
C. households and firms are both buyers.
D. households and firms are both sellers.

Answers: A

A point inside the production possibilities frontier isA. efficient, but not feasible.
B. feasible, but not efficient.
C. both efficient and feasible.
D. neither efficient nor feasible..

Answer: B

An economy produces hot dogs and hamburgers. If a discovery of the remarkable health benefits of hot dogs were to change consumers’ preferences, it wouldA. expand the production possibilities frontier.
B. contract the production possibilities frontier.
C. move the economy along the production possibilities frontier.
D. move the economy inside the production possibilities frontier.

Answer: C

All of the following topics fall within the study of microeconomics EXCEPTA. the impact of cigarette taxes on the smoking behavior of teenagers.
B. the role of Microsoft’s market power in the pricing of software.
C. the effectiveness of antipoverty programs in reducing homelessness.
D. the influence of the government budget deficit on economic growth.

Answer: D

Which of the following is positive, rather than a normative, statement?A. Law X will reduce national income.
B. Law X is a good piece of legislation.
C. Congress ought to pass the law X.
D. The President should veto law X.

Answer: A

Classify the following topics as relating to microeconomics or macroeconomics.
1. A family’s decision about how much income to save.
2. The effect of government regulations on auto emissions.
3. The impact of higher national saving on economic growth.
4. A firm’s decision about how many workers to hire.
5. The relationship between the inflation rate and changes in the quantity of money.
1. Microeconomics
2. Microeconomics
3. Macroeconomics
4. Microeconomics
5. Macroeconomics
Classify each of the following statements as positive or normative.
1. Society faces a short-run tradeoff between inflation and unemployment.
2. A reduction in the rate of money growth will reduce the rate of inflation.
3. The Federal Reserve should reduce the rate of money growth.
4. Society ought to require welfare recipients to look for jobs.
5. Lower tax rates encourage more work and more saving.
1. Positive
2. Positive
3. Normative
4. Normative
5. Positive
Role of Assumption1. Makes it easier to understand
2. The art in scientific thinking: deciding which assumptions to make
Economic Models– Built with assumption
– diagrams & equation
– omit many detail
– allows to see what’s really important
-simplify reality to improve our understanding of it
Circular-flow Diagram– Visual model of the economy
– Shows how dollars flow through markets among household and firms
– Markets for goods and services: Firms = seller ; Household = buyers
– Markets for factors of production: Firms = buyers ; Household = sellers
Production Possibilities Frontier– a graph
– combo of output that the economy can possibly produce
– given the factors of production and production technology
– points outside the frontier are not feasible given the economy’s resources.
– the economy can produce any combo on or inside the frontier
– if the point is out, the point is infeasible
– if the point is inside the shade or below the line, it is inefficient
– if the point is on the line, it is efficient
Microeconomicsthe study of how households and firms make decisions and how they interact in markets
Macroeconomicsthe study of economy-wide phenomena, including inflation, unemployment, and economic growth
Positive Statements– attempt to describe the world as it is
– descriptive
– confirm or refute by examining evidence
Normative Statements– attempt to prescribe how the world should be
– prescriptive