Three Principles Describe How Economy as a Whole Works

Topics: Supply and demand, Consumer theory, Microeconomics Pages: 39 (11269 words) Published: August 13, 2012
Solutions to Quick Quizzes
Chapter 1
1. There are many possible answers. 2. There are many possible answers. 3. The three principles that describe how the economy as a whole works are: (1) a country’s standard of living depends on its ability to produce goods and services; (2) prices rise when the government prints too much money; and (3) society faces a short-run tradeoff between inflation and unemployment. A country’s standard of living depends largely on the productivity of its workers, which in turn depends on the education of its workers and the access its workers have to the necessary tools and technology. Prices rise when the government prints too much money because more money in circulation reduces the value of money, causing inflation. Society faces a short-run trade-off between inflation and unemployment that is only temporary. Policymakers have some short-term ability to exploit this relationship using various policy instruments. Quantity of Clothing Produced

the frontier), point B is an inefficient point (inside the frontier), and point C is an infeasible point (outside the frontier).

Microeconomics is the study of how households and firms make decisions and how they interact in markets. Macroeconomics is the study of economy-wide phenomena, including inflation, unemployment, and economic growth. 2. An example of a positive statement is “a higher price of coffee causes me to buy more tea.” It is a positive statement because it is a claim that describes the world as it is. An example of a normative statement is “the government should restrain coffee prices.” It is a normative statement because it is a claim that prescribes how the world should be. Many other examples are possible. Parts of the government that regularly rely on advice from economists are the Department of the Treasury in designing tax policy, the Department of Labor in analyzing data on the employment situation, the Department of Justice in enforcing the nation’s antitrust laws, the Congressional Budget Office in evaluating policy proposals, and the Federal Reserve in analyzing economic developments. Many other answers are possible. 3. Economic advisers to the president might disagree about a question of policy because of differences in scientific judgments or differences in values.



Quantity of Food Produced

Figure 1 The effects of a drought are shown in Figure 2. The drought reduces the amount of food that can be produced, shifting the production possibilities frontier inward. Quantity of Clothing Produced

Chapter 2
1. Economics is like a science because economists devise theories, collect data, and analyze the data in an attempt to verify or refute their theories. In other words, economics is based on the scientific method. Figure 1 shows the production possibilities frontier for a society that produces food and clothing. Point A is an efficient point (on



Chapter 3
Quantity of Food Produced

Figure 2

1. Figure 1 shows Robinson Crusoe’s production possibilities frontier




for gathering coconuts and catching fish. If Crusoe lives by himself, this frontier limits his consumption of coconuts and fish, but if he can trade with natives on the island, he will possibly be able to consume at a point outside his production possibilities frontier. Fish Caught

group of sellers (who determine supply) of a particular good or service. A perfectly competitive market is one in which there are many buyers and many sellers of an identical product so that each has a negligible impact on the market price. 2. Here is an example of a monthly demand schedule for pizza: Price of Pizza Slice $0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 Number of Pizza Slices Demanded 10 9 8 7 6 5 4 3 2 1 0

another along the same demand curve. 3. Here is an example of a monthly supply schedule for pizza: Price of Pizza Slice $0.00 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 2.25...
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