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52 ❖ Chapter 1/Ten Principles Of Economics
53. Which of the following is an important cause of inflation in an economy?
a.
increases in productivity in the economy
b.
the influence of positive externalities on the economy
c.
lack of property rights in the economy
d.
growth in the quantity of money in the economy
54. The mainstream view among economists is that
a.
society faces a tradeoff between unemployment and inflation, but only in the short run.
b.
society faces a tradeoff between unemployment and inflation, but only in the long run.
c.
society faces a tradeoff between unemployment and inflation, both in the short run and in the long
run.
d.
no tradeoff exists between unemployment and inflation, either in the short run or in the long run.
55. Which of the following claims is consistent with the views of mainstream economists?
a.
If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will
temporarily fall.
b.
If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will
temporarily rise.
c.
If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will
permanently fall.
d.
If we increase the rate of inflation from 3 percent to 6 percent, then the rate of unemployment will
permanently rise.
56. For a very long time Treeland has had an inflation rate of 9%. Suddenly its inflation rate drops to 3%. The drop in
the inflation rate
a.
could be due to slower money supply growth. We would expect unemployment to be higher.
b.
could be due to slower money supply growth. We would expect unemployment to be lower.
c.
could be due to higher money supply growth. We would expect unemployment to be higher.
d.
could be due to higher money supply growth. We would expect unemployment to be lower.
57. For a number of years country A had inflation of 3% but for the last five years has had inflation of 6%. Country B
had inflation of 4% for many years, but very recently inflation unexpectedly rose to 9%. Other things the same, in
which of the countries would the higher inflation rate be more likely to reduce unemployment?
a.
both country A and country B
b.
neither country A nor country B
c.
country A but not country B
d.
country B but not country A
Chapter 1/Ten Principles of Economics ❖ 53
58. In the early 1980s, U.S. economic policy was directed toward reducing inflation. What would you have expected to
observe during this short period of time?
a.
Inflation fell and unemployment fell.
b.
Inflation and unemployment were both unaffected.
c.
Inflation fell and unemployment increased.
d.
Inflation fell and unemployment was unchanged.
59. The relatively low inflation experienced in the United States in the 1990s is attributable to
a.
slow growth of U.S. productivity during the 1990s.
b.
slow growth of the quantity of money in the U.S. in the 1990s.
c.
low levels of government spending in the U.S. in the 1980s and 1990s.
d.
the eight-year presidency of William Jefferson Clinton during the 1990s.
60. During the 1990s, the United Kingdom experienced low levels of inflation while Turkey experienced high levels of
inflation. A likely explanation of these facts is that
a.
the United Kingdom has a better education system than Turkey.
b.
the rate of growth of the quantity of money was slower in the United Kingdom than in Turkey.
c.
workers in Turkey are more productive than workers in the United Kingdom.
d.
there are more instances of market power in Turkey than in the United Kingdom.
61. The tradeoff between inflation and unemployment
a.
implies that policies designed to reduce unemployment also reduce inflation.
b.
was eliminated by improved economic policies in the 1900s.
c.
is a long-run tradeoff, persisting for decades, according to most economists.
d.
None of the above are correct.
62. Germany could have avoided the high inflation that it experienced in the 1920s by
a.
not directing so many of its resources toward preparation for World War II.
b.
not increasing taxes so much on the German middle class.
c.
not allowing the quantity of money to increase so rapidly.
d.
using government policies to stimulate the economy more so than what was done.
63. In the short run, which of the following is not correct?
a.
Increasing the money supply increases the demand for goods and services.
b.
Increasing the money supply encourages firms to hire more workers.
c.
Lowering the money supply leads to a higher level of unemployment.
d.
Policies that encourage higher employment will also induce a lower rate of inflation.
54 ❖ Chapter 1/Ten Principles Of Economics
64. In response to the deep economic downturn in the US in 2008 and 2009, the US
a.
reduced taxes.
b.
increased government spending.
c.
increased the supply of money.
d.
All of the above are correct.
65. The combination of President Obama’s strategies and the Federal Reserve’s reaction to the deep economic down-
turn in the US in 2008 and 2009
a.
intended to reduce unemployment.
b.
may lead to excessive inflation over time.
c.
resulted in higher taxes and an increased supply of money.
d.
Both a and b are correct.
66. The short-run tradeoff between inflation and unemployment implies that, in the short run,
a.
a decrease in the growth rate of the quantity of money will be accompanied by an increase in the
unemployment rate.
b.
an increase in the growth rate of the quantity of money will be accompanied by an increase in the
unemployment rate.
c.
policymakers are able to reduce the inflation rate and, at the same time, reduce the unemployment
rate.
d.
policymakers can influence the inflation rate, but not the unemployment rate.
67. The business cycle is the
a.
relationship between unemployment and inflation.
b.
irregular fluctuations in economic activity.
c.
positive relationship between the quantity of money in an economy and inflation.
d.
predictable changes in economic activity due to changes in government spending and taxes.
68. The business cycle is measured by the
a.
production of goods and services.
b.
number of people employed.
c.
the interest rate.
d.
Both a and b are correct.
69. Irregular fluctuations in economic activity are known as the
a.
business cycle.
b.
broken window fallacy.
c.
tradeoff between inflation and unemployment.
d.
ten principles of economics.
Chapter 1/Ten Principles of Economics ❖ 55
70. Both the production of goods and services and the unemployment rate are used to measure
a.
the business cycle.
b.
productivity.
c.
the interest rate.
d.
inflation.
71. The “broken window fallacy”
a.
explains why inflation is so high.
b.
is a justification for the government to print more money.
c.
is illustrated when a government program is justified not on its merits but on the number of jobs it
will create.
d.
has nothing to do with public policy.
72. When a government program is justified not on its merits but on the number of jobs it will create,
a.
the program is an efficient use of taxpayer dollars.
b.
it should be approved only if the unemployment rate is low.
c.
taxes should be raised to fund the program.
d.
it is known as the “broken window fallacy.”
73. It once took 90 percent of our population to grow our food. It now takes only 3 percent of the population to grow
our food. Which of the following statements is true?
a.
This loss of jobs has been detrimental to our economy.
b.
The government should provide subsidies to encourage more people to become farmers.
c.
This reduction in the number of farmers explains the increase in the price of food.
d.
This is progress because freed-up labor that is used to produce other goods.
74. Congressman Dearmark justified spending $3 million on a new entertainment complex in his district because it
will create 450 new jobs for his residents. As a student of economics, you know that
a.
this is a case of the “broken window fallacy.”
b.
this is a great use of taxpayer dollars.
c.
this policy diverts money from spending somewhere else in the economy.
TRUE/FALSE
1. Scarcity means that there is less of a good or resource available than people wish to have.
56 ❖ Chapter 1/Ten Principles Of Economics
2. Economics is the study of how evenly goods and services are distributed within society.
3. Economics is the study of how society allocates its unlimited resources.
4. Because resources are scarce, a society cannot give all individuals the standard of living to which each aspires.
5. Equality means distributing society’s resources in the most efficient manner.
6. Economists study how people make decisions.
7. With careful planning, we can usually get something that we like without having to give up something else that we
like.
8. Choosing not to attend a concert so that you can study for your exam is an example of a tradeoff.
9. The classic tradeoff between “guns and butter” states that when a society spends more on national defense, it has
less to spend on consumer goods to raise the standard of living.
10. Efficiency means everyone in the economy should receive an equal share of the goods and services produced.
11. Equality refers to how the pie is divided, and efficiency refers to the size of the economic pie.
12. Government policies that improve equality usually increase efficiency at the same time.
Chapter 1/Ten Principles of Economics ❖ 57
13. Using income tax revenue to fund the welfare system illustrates the conflict between efficiency and equality.
14. An individual deciding how to allocate her limited time is dealing with both scarcity and trade-offs.
15. The cost of an action is measured in terms of foregone opportunities.
16. Tuition is the single-largest cost of attending college for most students.
17. If wages for accountants rose, then accountants’ leisure time would have a lower opportunity cost.
18. A marginal change is a small incremental adjustment to an existing plan of action.
19. An increase in the marginal cost of an activity necessarily means that people will no longer engage in any of that
activity.
20. If the average cost of transporting a passenger on the train from Chicago to St. Louis is $75, it would be irrational
for the railroad to allow any passenger to ride for less than $75.
21. The fact that people are willing to pay much more for a diamond, which is not needed for survival, than they are
willing to pay for a cup of water, which is needed for survival, is an example of irrational behavior.
22. A rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal benefit.
58 ❖ Chapter 1/Ten Principles Of Economics
23. Suppose one county in Missouri decides it wants to reduce alcohol consumption, so the county passes a law that
raises the price of a bottle of beer by $1. As a result, people drive to other counties to drink alcohol, which results
in an increase in drunk driving. This illustrates the principle that people respond to incentives.
24. A tax on gasoline is an incentive that encourages people to drive smaller more fuel-efficient cars.
25. To say people respond to incentives means that people may alter their decisions when the costs and benefits of an
action change.
26. One of the effects of gas prices rising from about $2 to about $4 per gallon was airlines ordering new, fuel-efficient
aircraft.
27. Trade allows each person to specialize in the activities he or she does best, thus increasing each individual's
productivity.
28. Trade with any nation can be mutually beneficial.
29. Trade can make everyone better off except in the case where one person is better at doing everything.
30. The invisible hand ensures that economic prosperity is distributed equally.
31. A market economy cannot produce a socially desirable outcome because individuals are motivated by their own
selfish interests.
32. Communist countries worked on the premise that government officials were in the best position to allocate the
economy’s scarce resources.
Chapter 1/Ten Principles of Economics ❖ 59
33. The government can potentially improve market outcomes if market inequalities or market failure exists.
34. One way that governments can improve market outcomes is to ensure that individuals are able to own and exercise
control over their scarce resources.
35. Market failure refers to a situation in which the market does not allocate resources efficiently.
36. Market power and externalities are two possible causes of market failure.
37. Market failure is the ability of a single person to have a substantial influence on market prices.
38. Productivity is defined as the quantity of goods and services produced from each unit of labor input.
39. Inflation is the primary determinant of a country's living standards.
40. Inflation increases the value of money.
41. Inflation measures the increase in the quantity of goods and services produced from each hour of a worker’s time.
42. The goal of President Obama’s stimulus package and increased government spending following the deep economic
downturn in 2008 and 2009 was to reduce inflation.
43. Variations in the standard of living across countries is due almost entirely to differences in each nation’s total out-
put of goods and services.
60 ❖ Chapter 1/Ten Principles Of Economics
44. In the short-run, society faces a tradeoff between inflation and unemployment.
45. In the long run the primary effect of increasing the quantity of money is higher prices.
46. The business cycle refers to fluctuations in economic activity such as employment and production.
47. The broken window fallacy states that when a window breaks and someone spends money to repair it, they have
created new economic activity that would not have otherwise taken place.
SHORT ANSWER
1. How does the study of economics depend upon the phenomenon of scarcity?
2. One tradeoff society faces is between efficiency and equality. Define each term. If the U.S. government redistrib-
utes income from the rich to the poor, explain how this action affects equality as well as efficiency in the economy.
Chapter 1/Ten Principles of Economics ❖ 61
3. Define opportunity cost. What is the opportunity cost to you of attending college? What was your opportunity cost
of coming to class today?
4. With the understanding that people respond to incentives, outline the possible outcome for teachers if the K-12
school year is extended to 11 months per year instead of the existing 9 months per year.
5. Under what conditions might government intervention in a market economy improve the economy’s performance?
6. Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short-
run.
