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CHAPTER 1Ten lessons from economics

TRUE/FALSE

1. The word economy comes from the Latin word for production.

ANS: F PTS: 1 DF: !asy T"P: ntroduction

#. Scarcity means that society has $ess to offer than peop$e wish to ha%e.

ANS: T PTS: 1 DF: !asy T"P: ntroduction

&. !conomics is the study of the circu$ation of money 'etween 'an(s) ta*payers and the +o%ernment.

ANS: F PTS: 1 DF: ,oderate T"P: ntroduction

-. !conomists study how indi%idua$s ma(e decisions) how they interact with each other and the factorsthat affect the economy as a who$e.

ANS: T PTS: 1 DF: !asy T"P: ntroduction

. /ith carefu$ p$annin+) we can usua$$y +et somethin+ that we $i(e without ha%in+ to +i%e up somethin+e$se that we $i(e.

ANS: F PTS: 1 DF: !asy T"P: Lesson 1: Peop$e face trade0offs

. Societies face trade0offs 'ecause of scientific impro%ements to techno$o+y.

ANS: T PTS: 1 DF: !asy T"P: Lesson 1: Peop$e face trade0offs

2. !3uity means that e%eryone in the economy shou$d recei%e an e3ua$ share of the +oods and ser%icesproduced.

ANS: F PTS: 1 DF: ,oderate T"P: Lesson 1: Peop$e face trade0offs

4. Peop$e are $i(e$y to ma(e +ood decisions on$y if they understand the options that are a%ai$a'$e to them.


5. Po$$ution re+u$ations ma(e society 'etter off 'y raisin+ incomes.

ANS: F PTS: 1 DF: ,oderate T"P: Lesson 1: Peop$e face trade0offs

16. /hen the +o%ernment redistri'utes income from the rich to the poor) society 'enefits since there aremore poor than rich.

ANS: F PTS: 1 DF: ,oderate T"P: Lesson 1: Peop$e face trade0

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offs

11. !fficiency refers to the si7e of the economic pie and e3uity refers to how the pie is di%ided.


1#. n economic po$icyma(in+) there is often a conf$ict 'etween the +oa$ of efficiency and the +oa$ ofe3uity.


1&. The opportunity cost of somethin+ is not what you +i%e up to +et somethin+ e$se.

ANS: F PTS: 1 DF: !asy T"P: Lesson #: The cost ofsomethin+ is what you +i%e up to +et it

1-. The opportunity cost of consumin+ a unit of +ood 8 is the amount of resources that must 'e de%oted toits production.

ANS: F PTS: 1 DF: ,oderate T"P: Lesson #: The cost ofsomethin+ is what you +i%e up to +et it

1. A mar+ina$ chan+e is a $ar+e and si+nificant chan+e to an e*istin+ p$an of action.

ANS: F PTS: 1 DF: !asy T"P: Lesson &: 9ationa$ peop$ethin( at the mar+in

1. A rationa$ decision ma(er ta(es an action on$y if the mar+ina$ cost e*ceeds the mar+ina$ 'enefit.

ANS: F PTS: 1 DF: ,oderate T"P: Lesson &: 9ationa$ peop$ethin( at the mar+in

12. Pu'$ic po$icies to reduce emissions from cars do not affect the pri%ate costs and 'enefits of dri%in+cars.

ANS: F PTS: 1 DF: ,oderate T"P: Lesson -: Peop$e respond toincenti%es

14. !conomist Sam Pe$t7man found that seat'e$t $aws caused $ess accidents and more pedestrian deaths.

ANS: F PTS: 1 DF: ,oderate T"P: Lesson -: Peop$e respond toincenti%es

15. Austra$ian +o%ernment po$icies announcin+ when chan+es to chi$d 'enefits wou$d occur had no effecton the timin+ decision of some Austra$ian fami$ies to ha%e 'a'ies.

ANS: F PTS: 1 DF: !asy T"P: Lesson -: Peop$e respond toincenti%es

#6. n internationa$ trade) if one party +ains) the other party $oses.

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ANS: F PTS: 1 DF: !asy T"P: Lesson : Trade can ma(ee%eryone 'etter off

#1. A 'enefit of trade is that it permits two parties to specia$ise in those tas(s in which they ha%e thehi+hest producti%ity.

ANS: T PTS: 1 DF: !asy T"P: Lesson : Trade can ma(ee%eryone 'etter off

##. Trade ma(es rich nations richer and poor nations poorer.

ANS: F PTS: 1 DF: ,oderate T"P: Lesson : Trade can ma(ee%eryone 'etter off

#&. n his 'oo( The Wealth of Nations) Adam Smith o'ser%ed that househo$ds and firms interactin+ inmar(ets are $ed 'y an in%isi'$e hand to ma(e decisions that produce desira'$e outcomes for society.

ANS: T PTS: 1 DF: !asy T"P: Lesson : ,ar(ets areusua$$y a +ood way to or+anise economic acti%ity

#-. f each person pursues their own se$f0interest throu+h a mar(et0institution) the resu$tin+ chaos wou$d

cause the mar(et to co$$apse.

ANS: F PTS: 1 DF: ,oderate T"P: Lesson : ,ar(ets areusua$$y a +ood way to or+anise economic acti%ity

#. o%ernments can impro%e efficiency in an economy 'y inter%enin+ when the richest companies arenot payin+ enou+h out to shareho$ders

ANS: F PTS: 1 DF: !asy T"P: Lesson : ,ar(ets areusua$$y a +ood way to or+anise economic acti%ity

#. /hi$e the in%isi'$e hand cannot +uarantee efficiency) it is 'etter at +uaranteein+ e3uity.

ANS: F PTS: 1 DF: !asy T"P: Lesson : ,ar(ets areusua$$y a +ood way to or+anise economic acti%ity

#2. The two 'road reasons for a +o%ernment to inter%ene in the economy are to promote efficiency and topromote e3uity.

ANS: T PTS: 1 DF: !asy T"P: Lesson 2: o%ernments cansometimes impro%e mar(et outcomes

#4. /hen mar(ets a$$ocate resources efficient$y) the natura$ outcome of this is mar(et fai$ure.

ANS: F PTS: 1 DF: !asy T"P: Lesson 2: o%ernments cansometimes impro%e mar(et outcomes

#5. A monopo$ist has $imited mar(et power.

ANS: F PTS: 1 DF: !asy T"P: Lesson 2: o%ernments cansometimes impro%e mar(et outcomes

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&6. A mar(et economy rewards peop$e accordin+ to their a'i$ity to produce thin+s that other peop$e arewi$$in+ to pay for.

ANS: T PTS: 1 DF: ,oderate T"P: Lesson 2: o%ernments cansometimes impro%e mar(et outcomes

&1. ,onopo$y power and income ine3ua$ity are e*amp$es of mar(et fai$ure.

ANS: F PTS: 1 DF: Difficu$t T"P: Lesson 2: o%ernments can

sometimes impro%e mar(et outcomes

. Producti%ity is defined as the 3uantity of +oods and ser%ices produced from each hour of a wor(erstime.

ANS: T PTS: 1 DF: !asy T"P: Lesson 4: A countrysstandard of $i%in+ depends on its a'i$ity to produce +oods and ser%ices

&&. The countries with the $owest $a'our producti%ities tend to ha%e the $owest wa+es.


&-. ;etter too$s and techno$o+y can increase producti%ity and therefore $i%in+ standards in countries.


&. Protectin+ domestic

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-6. nf$ation in an economy is primari$y caused 'y profiteerin+ 'y +reedy firms.

ANS: F PTS: 1 DF: Difficu$t T"P: Lesson 16: Society faces ashort0term trade0off 'etween inf$ation and unemp$oyment

MULTIPLE CHOICE

1. The word economy comes from the ree( word for:

A. one who mana+es a househo$d;. one who participates in a mar(et=. en%ironmentD. conser%ation

ANS: A PTS: 1 DF: !asy T"P: ntroduction

#. The centra$ concept of economics is:A. finance;. scarcity=. ener+yD. emp$oyment

ANS: ; PTS: 1 DF: !asy T"P: ntroduction

&. The study of economics is concerned with:A. (eepin+ pri%ate 'usinesses from $osin+ money;. demonstratin+ that capita$istic economies are superior to socia$istic economies=. how society mana+es its scarce resourcesD. determinin+ the most e3uita'$e distri'ution of society>s output

ANS: = PTS: 1 DF: !asy T"P: ntroduction

-. /hich of the fo$$owin+ is N"T inc$uded in the decisions that e%ery society must ma(e?A. what +oods wi$$ 'e produced

;. what determines consumer preferences=. who wi$$ produce +oodsD. who wi$$ consume the +oods

ANS: ; PTS: 1 DF: ,oderate T"P: ntroduction

. n order for scarcity to e*ist) it must 'e that:A. there is a finite amount of a resource;. more peop$e want the resource than there is a%ai$a'$e of it=. the resource is non0renewa'$eD. no'ody wants to purchase the resource

ANS: ; PTS: 1 DF: ,oderate T"P: ntroduction

. For society) a +ood is not scarce if:A. a$$ mem'ers of society can ha%e a$$ they want of it;. at $east one indi%idua$ in society can o'tain a$$ he or she wants of the +ood=. firms are producin+ at fu$$ capacityD. those who ha%e enou+h income can 'uy a$$ they want of the +ood

ANS: A PTS: 1 DF: ,oderate T"P: ntroduction

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ANS: = PTS: 1 DF: ,oderate T"P: Lesson 1: Peop$e face trade0offs

1-. f stricter re+u$ations are used to reduce po$$ution then:A. e%eryone wi$$ 'enefit so there is no trade0off;. on$y firms that po$$uted wi$$ 'e affected=. there wi$$ 'e no trade0off as the firms can afford to reduce po$$utionD. incomes of these firms owners) wor(ers and customers wi$$ 'e affected) and this means a

trade0off must resu$t

ANS: D PTS: 1 DF: !asy T"P: Lesson 1: Peop$e face trade0offs

1. !fficiency means that:A. society is +ettin+ the most it can from its scarce resources;. society is conser%in+ resources in order to sa%e them for the future=. societys +oods and ser%ices are distri'uted fair$y amon+ societys mem'ersD. society has $essened its dependence on forei+n ener+y sources

ANS: A PTS: 1 DF: !asy T"P: Lesson 1: Peop$e face trade0offs

1. !3uity means that:A. a$$ mem'ers of society ha%e the same income;. the 'enefits of societys resources are distri'uted fair$y amon+ societys mem'ers=. societys +oods and ser%ices are distri'uted accordin+ to needD. society is +ettin+ the most it can from its scarce resources

ANS: ; PTS: 1 DF: ,oderate T"P: Lesson 1: Peop$e face trade0offs

12. An e3uita'$e outcome is one where:A. rich peop$e +i%e more to charities

;. it can 'e descri'ed as fair=. it can 'e descri'ed as efficientD. e%eryone has the same income

ANS: ; PTS: 1 DF: !asy T"P: Lesson 1: Peop$e face trade0offs

14. /hen +o%ernment po$icies are 'ein+ desi+ned:A. e3uity and efficiency +oa$s are usua$$y independent of each other;. there is usua$$y a trade0off 'etween e3uity and efficiency=. e3uity can usua$$y 'e achie%ed without an efficiency $ossD. increasin+ efficiency usua$$y resu$ts in more e3uity

ANS: ; PTS: 1 DF: !asy T"P: Lesson 1: Peop$e face trade0offs

15. f the +o%ernment redistri'utes income from the rich to the poor:A. there is no chan+e to efficiency 'ecause rich peop$e can afford it;. e%eryone +ains when the poor ha%e more money=. peop$e respond 'y wor(in+ harderD. peop$e tend to wor( $ess and this causes $osses in output

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ANS: D PTS: 1 DF: Difficu$t T"P: Lesson 1: Peop$e face trade0offs

#6. n economics) the cost of somethin+ is:A. the out0of0poc(et e*pense of o'tainin+ it;. what you +i%e up to +et it=. a$ways measured in units of timeD. a$ways hi+her than peop$e thin(

ANS: ; PTS: 1 DF: !asy T"P: Lesson #: The cost ofsomethin+ is what you +i%e up to +et it

#1. The opportunity cost of +oin+ to uni%ersity is:A. the tota$ spent on food) c$othin+) 'oo(s) transportation) tuition) $od+in+ and other e*penses;. 7ero for students who are fortunate enou+h to ha%e a$$ of their uni%ersity e*penses paid 'y

someone e$se=. the %a$ue of the 'est opportunity a student +i%es up to attend uni%ersityD. 7ero) since a uni%ersity education wi$$ a$$ow a student to earn a $ar+er income after

+raduation

ANS: = PTS: 1 DF: ,oderate T"P: Lesson #: The cost ofsomethin+ is what you +i%e up to +et it

##. From an economic point of %iew for most students) the $ar+est sin+$e cost of a uni%ersity educationis:A. transportation) par(in+ and entertainment;. tuition fees and 'oo(s=. the wa+es +i%en up to attend uni%ersityD. room and 'oard

ANS: D PTS: 1 DF: ,oderate T"P: Lesson #: The cost ofsomethin+ is what you +i%e up to +et it

#&. From an accountin+ point of %iew) the $ar+est sin+$e cost of a uni%ersity education for most students is:A. transportation) par(in+ and entertainment

;. tuition fees and 'oo(s=. the wa+es +i%en up to attend uni%ersityD. room and 'oard


#-. The opportunity cost of an item is:A. the num'er of hours needed to earn money to 'uy it;. what you +i%e up to +et that item=. a$ways $ess than the do$$ar %a$ue of the itemD. a$ways e3ua$ to the do$$ar %a$ue of the item


#. Lee accepts a contract to photo+raph a weddin+ on Saturday for @1666. She cance$s p$ans to +o to the7oo with her friends instead. er opportunity cost of photo+raphin+ the weddin+ is:A. the @1666 she earns;. the en

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friendsD. nothin+) as she wasnt +oin+ to earn any money at the 7oo

ANS: ; PTS: 1 DF: Difficu$t T"P: Lesson #: The cost ofsomethin+ is what you +i%e up to +et it

#. 9yan spends an hour studyin+ instead of +oin+ for a 'i(e ride. The opportunity cost to him of studyin+is:A. the impro%ement in his +rades from studyin+ for the hour

;. the difference 'etween the impro%ement in his +rades from studyin+ minus the en

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&1. Bou ha%e spent @66 purchasin+ and repairin+ an o$d car which you e*pect to se$$ for @466 once therepairs are comp$ete. Bou disco%er that you need an additiona$ part) which wi$$ cost @-66) inc$udin+$a'our) in order to comp$ete the repairs. Bou can se$$ the car as it is now for @&66. /hat shou$d you do?A. you shou$d ne%er se$$ somethin+ for $ess than it costs;. you shou$d cut your $osses and ta(e the @&66=. you shou$d comp$ete the repairs and se$$ the carD. it doesnt matter which action you ta(eC the outcome is the same either way

ANS: = PTS: 1 DF: ,oderate T"P: Lesson &: 9ationa$ peop$e

thin( at the mar+in

. !conomists ha%e reco+nised that peop$e respond to:A. the aspirations of po$icyma(ers;. incenti%es=. re+u$ations rather than pricesD. po%erty rather than po$$ution

ANS: ; PTS: 1 DF: !asy T"P: Lesson -: Peop$e respond toincenti%es

&&. /hich of the fo$$owin+ is important for po$icyma(ers to consider when desi+nin+ pu'$ic po$icy?

A. the possi'i$ity that po$icies mi+ht chan+e 'eha%iour;. the direct effect of po$icies=. the indirect effect of po$iciesD. a$$ of the a'o%e

ANS: D PTS: 1 DF: ,oderate T"P: Lesson -: Peop$e respond toincenti%es

&-. =ompu$sory seat'e$t $aws in Austra$ia ha%e resu$ted in:A. a decrease in 'oth dri%er and pedestrian deaths;. $itt$e chan+e in dri%er deaths and an increase in pedestrian deaths=. $itt$e chan+e in either dri%er deaths or pedestrian deathsD. an increase in 'oth dri%er and pedestrian deaths

ANS: ; PTS: 1 DF: Difficu$t T"P: Lesson -: Peop$e respond toincenti%es

&. Accordin+ to Pe$t7man) one effect of a +o%ernment0imposed seat'e$t $aw has 'een:A. fewer pedestrian deaths;. safer dri%in+=. an increase in the num'er of accidentsD. that e%eryone now wears seat'e$ts

ANS: = PTS: 1 DF: ,oderate T"P: Lesson -: Peop$e respond toincenti%es

&. Trade can 'enefit a fami$y:A. 'y increasin+ the %ariety of +oods and ser%ices they can 'uy at a $ower cost;. 'y re3uirin+ each person to perform a wide ran+e of tas(s) inc$udin+ those they are not

%ery producti%e in=. on$y if the +o%ernment pro%ides them with a su'sidyD. 'oth A and ;

ANS: D PTS: 1 DF: !asy T"P: Lesson : Trade can ma(ee%eryone 'etter off

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&2. /hich is the most accurate statement a'out trade?A. trade ma(es some nations 'etter off and others worse off;. trade can ma(e e%ery nation 'etter off=. tradin+ for a +ood can ma(e a nation 'etter off on$y if the nation cannot produce that +oodD. trade he$ps rich nations and hurts poor nations

ANS: ; PTS: 1 DF: !asy T"P: Lesson : Trade can ma(ee%eryone 'etter off

&4. Trade 'etween Austra$ia and New ea$and:A. is a $osin+ proposition for New ea$and 'ecause Austra$ian wor(ers are more producti%e;. is a $osin+ proposition for Austra$ia 'ecause New ea$and has cheaper $a'our=. is $i(e a sports contest E one side wins and the other side $osesD. 'enefits 'oth Austra$ia and New ea$and

ANS: D PTS: 1 DF: ,oderate T"P: Lesson : Trade can ma(ee%eryone 'etter off

&5. Austra$ia can 'enefit from trade if itA. trades with a$$ other countries;. does not trade with countries that ma(e the same +oods as Austra$ia=. does not trade with any country with $ower wa+es than Austra$iaD. trades on$y with countries that ha%e hi+her wa+es than Austra$ia

ANS: A PTS: 1 DF: !asy T"P: Lesson : Trade can ma(ee%eryone 'etter off

-6. f Austra$ia is 'etter than the S at producin+ wheat) 'ut the S is 'etter than Austra$ia at producin+cars) the S shou$d:A. impose a tariff on Austra$ian wheat in order to protect

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-&. =oordination of economic acti%ity in a mar(et economy is achie%ed 'y:A. +o%ernment re+u$ations;. 'an(s and other financia$ intermediaries=. p$annin+ a+encies within +o%ernmentD. prices

ANS: D PTS: 1 DF: !asy T"P: Lesson : ,ar(ets areusua$$y a +ood way to or+anise economic acti%ity

--. "ne ad%anta+e mar(et economies ha%e o%er centra$ p$annin+ is that mar(et economies:A. are more efficient;. so$%e the pro'$em of scarcity=. esta'$ish +o%ernment economic contro$D. pro%ide an e3ua$ distri'ution of +oods and ser%ices to consumers

ANS: A PTS: 1 DF: !asy T"P: Lesson : ,ar(ets areusua$$y a +ood way to or+anise economic acti%ity

-. /hich of the fo$$owin+ o'ser%ations was made famous 'y Adam Smith in his 'oo( The Wealth ofNations?A. There is no such thin+ as a free $unch;. Peop$e 'uy more when prices are $ow than when prices are hi+h=. No matter how much peop$e earn) they tend to spend more than they earnD. ouseho$ds and firms interactin+ in mar(ets are +uided 'y an in%isi'$e hand that $eads

them to desira'$e mar(et outcomes


-. The mechanism emp$oyed 'y the in%isi'$e hand to direct economic acti%ity is:A. un$imited 3uantity;. $ar+e corporations=. ad%ertisin+

D. prices


-2. The main moti%ation 'ehind the in%isi'$e hand is:A. the threat of +o%ernment inter%ention;. 'usiness ethics=. se$f0interestD. the $e+a$ system

ANS: = PTS: 1 DF: !asy T"P: Lesson : ,ar(ets areusua$$y a +ood way to or+anise economic acti%ity

-4. A mar(et economy rewards peop$e accordin+ to:A. their need for +oods and ser%ices;. how wi$$in+ they are to wor(=. their a'i$ity to produce thin+s of cu$tura$ importanceD. their a'i$ity to produce thin+s that other peop$e are wi$$in+ to pay for

ANS: D PTS: 1 DF: ,oderate T"P: Lesson : ,ar(ets areusua$$y a +ood way to or+anise economic acti%ity

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-5. /hen the +o%ernment pre%ents prices from ad

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. f a uranium mine does not'ear the entire cost of c$eanin+ up its waste then it wi$$:A. c$ean up its waste so others are not e*posed to it;. reduce the %o$ume of waste it produces=. +enerates an accepta'$e $e%e$ of wasteD. +enerate an e*cessi%e $e%e$ of waste

ANS: D PTS: 1 DF: Difficu$t T"P: Lesson 2: o%ernments cansometimes impro%e mar(et outcomes

. A situation in which a mar(et $eft on its own fai$s to a$$ocate resources efficient$y is (nown as:A. scarcity;. opportunity cost=. mar(et fai$ureD. mar(et power

ANS: = PTS: 1 DF: ,oderate T"P: Lesson 2: o%ernments cansometimes impro%e mar(et outcomes

2. /hich of these consumption acti%ities is most $i(e$y to cause an e*terna$ cost?A. an e*ecuti%e p$ays a %i+orous +ame of +o$f;. a student in a f$at p$ays her =Ds at 1#6 deci'e$s $ate at ni+ht=. a youn+ mother e*ercises to an aero'ics %ideoD. a construction wor(er eats a sandwich durin+ the $unch 'rea(

ANS: ; PTS: 1 DF: ,oderate T"P: Lesson 2: o%ernments cansometimes impro%e mar(et outcomes

4. f paper0pu$p factories +enerate too much water po$$ution with their dischar+e) which (i$$s $oca$ fishstoc(s then:A. the +o%ernment wi$$ not 'e a'$e to do anythin+ to stop this;. the factories wi$$ 'e concerned a'out the $oss of fish and reduce their po$$ution=. the +o%ernment can treat the water for po$$ution and restoc( the ri%erD. the +o%ernment can use en%ironmenta$ re+u$ations to reduce the po$$ution and impro%e

economic we$$ 'ein+

ANS: D PTS: 1 DF: ,oderate T"P: Lesson 2: o%ernments cansometimes impro%e mar(et outcomes

5. ,ar(et power refers to the:A. re$ati%e importance of a mar(et to the o%era$$ economy;. a'i$ity of a person or +roup of peop$e to successfu$$y mar(et new products=. power of the +o%ernment to re+u$ate a mar(etD. power of a sin+$e person Gor sma$$ +roup of peop$eH to undu$y inf$uence mar(et prices

ANS: D PTS: 1 DF: !asy T"P: Lesson 2: o%ernments cansometimes impro%e mar(et outcomes

6. A +ood e*amp$e of a monopo$y is:A. a commercia$ fishin+ 'oat operatin+ in the inshore fishery;. an eco0tourist 'usiness that has so$e ri+hts to ta(e %isitors into a reser%e=. a $ar+e computer company with many 'usiness software productsD. a 'oo(store in a $ar+e city

ANS: ; PTS: 1 DF: !asy T"P: Lesson 2: o%ernments cansometimes impro%e mar(et outcomes

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1. /hich is the most correct statement a'out the in%isi'$e hand?A. The in%isi'$e hand a$ways ensures 'oth e3uity and efficiency;. The in%isi'$e hand ne%er ensures either e3uity or efficiency=. The in%isi'$e hand is more effecti%e at ensurin+ e3uity than it is at ensurin+ efficiencyD. The in%isi'$e hand is more effecti%e at ensurin+ efficiency than it is at ensurin+ e3uity

ANS: D PTS: 1 DF: !asy T"P: Lesson 2: o%ernments cansometimes impro%e mar(et outcomes

#. n Austra$ia) it wou$d 'e possi'$e to

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A. actua$ amount of effort wor(ers put into an hour of wor(in+ time;. num'er of wor(ers re3uired to produce a +i%en amount of +oods and ser%ices=. amount of $a'our that can 'e sa%ed 'y rep$acin+ wor(ers with machinesD. amount of +oods and ser%ices produced from each hour of a wor(ers time

ANS: D PTS: 1 DF: !asy T"P: Lesson 4: A countrysstandard of $i%in+ depends on its a'i$ity to produce +oods and ser%ices

4. Domestic fishers in South0!ast Asia use sma$$ 'oats and nets whi$e in New ea$and) fishers use $ar+e

powered 'oats with modern na%i+ation de%ices and $ar+e nets. New ea$and fishers earn more money.The difference in the incomes of the two +roups of fishers is 'ecause:A. New ea$and fishers 'e$on+ to powerfu$ unions;. $a'our is more efficient at catchin+ fish with $ar+e modern 'oats usin+ the $atest

techno$o+y=. there is more demand for fish from New ea$and than for fish from South0!ast AsiaD. fish from New ea$and are worth more than fish from South0!ast Asia

ANS: ; PTS: 1 DF: ,oderate T"P: Lesson 4: A countrysstandard of $i%in+ depends on its a'i$ity to produce +oods and ser%ices

5. A$most a$$ %ariation in $i%in+ standards is attri'uta'$e to differences in countries:A. popu$ation +rowth rates;. endowments of natura$ resources=. producti%ityD. defence 'ud+ets

ANS: = PTS: 1 DF: !asy T"P: Lesson 4: A countrysstandard of $i%in+ depends on its a'i$ity to produce +oods and ser%ices

26. The countrys standard of $i%in+ is +enerated 'y its:A. +o%ernments industria$ po$icies;. $e%e$ of natura$ resources a%ai$a'$e=. popu$ation +rowth ratesD. producti%ity

ANS: D PTS: 1 DF: !asy T"P: Lesson 4: A countrysstandard of $i%in+ depends on its a'i$ity to produce +oods and ser%ices

21. The historica$ rise in $i%in+ standards of Austra$ian wor(ers is primari$y a resu$t of:A. the inf$uence of $a'our unions;. the rise in $a'our producti%ity=. minimum0wa+e $awsD. tariff protection

ANS: ; PTS: 1 DF: !asy T"P: Lesson 4: A countrysstandard of $i%in+ depends on its a'i$ity to produce +oods and ser%ices

2#. To increase $i%in+ standards) the most appropriate pu'$ic po$icy measure is to:A. acce$erate the con%ersion of natura$ forests to farm$and;. ma(e unemp$oyment 'enefits more +enerous=. encoura+e wor(ers to 'ecome more educated and ha%e the necessary too$s and techno$o+yD. re3uire a$$ wor(ers to 'e$on+ to unions and set hi+h minimum wa+es

ANS: = PTS: 1 DF: !asy T"P: Lesson 4: A countrysstandard of $i%in+ depends on its a'i$ity to produce +oods and ser%ices

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2&. =oncern amon+ economists a'out their countrys 'ud+et deficit is 'ased $ar+e$y on the:A. $i(e$ihood that the deficit wi$$ cause the country to +o 'an(rupt;. deficits ad%erse impact on producti%ity=. fact that part of the deficit is co%ered 'y 'orrowin+ from forei+nersD. fact that the deficit is co%ered 'y printin+ money

ANS: ; PTS: 1 DF: ,oderate T"P: Lesson 4: A countrysstandard of $i%in+ depends on its a'i$ity to produce +oods and ser%ices

2-. /hich of the fo$$owin+ tends to decrease producti%ity?A. 'ud+et deficits;. education=. competitionD. in%estment

ANS: A PTS: 1 DF: ,oderate T"P: Lesson 5: Prices rise whenthe +o%ernment prints too much money

2. nf$ation is defined as:A. a period of risin+ producti%ity in the economy;. an increase in the o%era$$ $e%e$ of output in the economy=. a period of risin+ income in the economyD. an increase in the o%era$$ $e%e$ of prices in the economy

ANS: D PTS: 1 DF: !asy T"P: Lesson 5: Prices rise whenthe +o%ernment prints too much money

2. Periods of hi+h) persistent inf$ation are a$most a$ways caused 'y:A. risin+ ta*es;. $ow producti%ity=. a++ressi%e wa+e increasesD. rapid and sustained +rowth in the 3uantity of money

ANS: D PTS: 1 DF: !asy T"P: Lesson 5: Prices rise when

the +o%ernment prints too much money

22. nf$ation causes:A. the %a$ue of money to fa$$;. producti%ity to increase=. the +o%ernment to $ower ta*esD. profiteerin+ 'y +reedy corporations

ANS: A PTS: 1 DF: !asy T"P: Lesson 5: Prices rise whenthe +o%ernment prints too much money

24. /hich of the fo$$owin+ is the most correct statement a'out the re$ationship 'etween inf$ation andunemp$oyment?A. n the short run) reducin+ inf$ation is associated with risin+ unemp$oyment;. n the short run) reducin+ inf$ation is associated with fa$$in+ unemp$oyment=. n the $on+ run) reducin+ inf$ation is associated with fa$$in+ unemp$oymentD. n the $on+ run) reducin+ inf$ation is associated with risin+ unemp$oyment

ANS: A PTS: 1 DF: !asy T"P: Lesson 16: Society faces ashort0term trade0off 'etween inf$ation and unemp$oyment

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25. The trade0off 'etween inf$ation and unemp$oyment is demonstrated 'y the:A. Laffer cur%e;. Loren7 cur%e=. Demand cur%eD. Phi$$ips cur%e

ANS: D PTS: 1 DF: !asy T"P: Lesson 16: Society faces ashort0term trade0off 'etween inf$ation and unemp$oyment

46. "ne e*p$anation of the trade0off 'etween inf$ation and unemp$oyment is that:A. prices are f$e*i'$e;. prices are stic(y=. prices a$ways tend to riseD. unemp$oyment increases demand

ANS: ; PTS: 1 DF: !asy T"P: Lesson 16: Society faces ashort0term trade0off 'etween inf$ation and unemp$oyment

41. n the ear$y 1546s) S economic po$icy was directed toward reducin+ inf$ation. /hat wou$d youassume a'out inf$ation and unemp$oyment durin+ this period?A. inf$ation fe$$ and unemp$oyment increased;. inf$ation and unemp$oyment were 'oth unaffected=. inf$ation fe$$ and unemp$oyment fe$$D. inf$ation fe$$ and unemp$oyment was unchan+ed

ANS: A PTS: 1 DF: Difficu$t T"P: Lesson 16: Society faces ashort0term trade0off 'etween inf$ation and unemp$oyment

4#. n the recent $o'a$ Financia$ =risis) the S economy went from a situation of fu$$ emp$oyment to oneof 1# per cent unemp$oyment. /hat do you assume happened to prices?A. prices were unaffected;. prices fe$$ and the economy e*perienced def$ation=. prices rose and the economy e*perienced inf$ationD. it is impossi'$e to +uess what happened to prices from the information +i%en

ANS: ; PTS: 1 DF: ,oderate T"P: Lesson 16: Society faces ashort0term trade0off 'etween inf$ation and unemp$oyment

SHORT ANSWER

1. Amy is a recent uni%ersity +raduate. She has 'een offered a hi+h payin+

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For househo$ds) e*amp$es wou$d inc$ude: who feeds the catC who ta(es out the +ar'a+eC who preparesmea$sC who runs errands) etc. For society) e*amp$es wou$d inc$ude: who wi$$ produce foodC who wi$$produce computersC how $and wi$$ 'e a$$ocated for food production) housin+ and factory constructionand recreationa$ use) etc.

PTS: 1 DF: !asy T"P: ntroductionI Lesson 1: Peop$e face trade0offs

&. ouseho$ds face many of the same decisions that societies face. !*p$ain why this is true.

ANS:Li(e househo$ds) societies must decide which mem'ers do which tas(s and what each mem'er +ets inreturn for doin+ those tas(s. Li(e societies) househo$ds must a$$ocate their scarce resources amon+their mem'ers) +i%en each mem'ers a'i$ities) efforts and desires.


-. /hat wou$d happen to the study of economics if scarcity disappeared?

ANS:Since economics is the study of how society a$$ocates its scarce resources) if there was no scarcity)there wou$d 'e no need for economics. !%eryone cou$d ha%e a$$ the +oods and ser%ices they wanted.

No one wou$d ha%e to ma(e decisions 'ased on trade0offs) 'ecause there wou$d 'e no opportunity cost.Gt is difficu$t to concei%e of a situation where time is not scarce) howe%er.H

PTS: 1 DF: ,oderate T"P: ntroductionI Lesson 1: Peop$e face trade0offs

. Suppose you +ot out to $unch with your wea$thy 'ut 'orin+ unc$e. e pays for your mea$. Does this%io$ate the economic concept that There is no such thin+ as a free $unch?

ANS:The issue is that e%erythin+ has an opportunity cost. /hi$e there is no monetary cost to you) there issti$$ an opportunity cost. Bou ha%e to +i%e up some of your time.


. New ea$and used to use a 'ounty system to contro$ possums. Trappers +ot paid a fi*ed amount foreach possum they cau+ht. i%en that peop$e respond to incenti%es) e*p$ain why this system fai$ed toha$t the spread of possums in New ea$and.

ANS:Trappers did not ha%e an incenti%e to trap a$$ the possums in their area 'ecause this wou$d resu$t in the$oss of the income from 'ounties. 9ather they wou$d ha%e an incenti%e to increase possum num'ers sothat more cou$d 'e trapped for 'ounties.

PTS: 1 DF: Difficu$t T"P: ntroductionI Lesson 1: Peop$e face trade0offs

2. A 'iscuit shop in a shoppin+ centre is open from 5 a.m. to p.m.) ,onday to Friday. The cost ofma(in+ and se$$in+ 'iscuits a%era+es @6.6 per 'iscuit. At p.m. on Friday e%enin+) the owner sti$$ hasse%era$ do7en unso$d 'iscuits. The 'iscuits wi$$ not 'e sa$ea'$e on ,onday. /hat is the 'est pricestrate+y for the 'iscuit shop to ta(e? Justify your answer.

ANS:

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The owner shou$d continua$$y reduce the price of the 'iscuits so that a$$ the 'iscuits are so$d 'y c$osin+time) e%en if the price fa$$s 'e$ow @6.6.


4. "ne trade0off that society faces is 'etween efficiency and e3uity. Define each term and e*p$ain thistrade0off.

ANS:

!fficiency is the property of society +ettin+ the most it can from its scarce resources.!3uity is defined as the property of distri'utin+ economic prosperity fair$y amon+ the mem'ers ofsociety. "ften these two +oa$s conf$ict. /hen the +o%ernment redistri'utes income from the rich to thepoor) it reduces the reward for wor(in+ hard. Fewer +oods and ser%ices are produced and the economicpie +ets sma$$er. /hen the +o%ernment tries to cut the economic pie into more e3ua$ s$ices) the pie +etssma$$er.


5. Define opportunity cost. /hat is the opportunity cost of a forestry company p$antin+ an area withseed$in+s?

ANS:The %a$ue of the 'est a$ternati%e use of the resource. For a forestry company the opportunity cost is theincome it +i%es up from usin+ the $and in an a$ternati%e) producti%e use Ge.+. dairy farmin+H.

PTS: 1 DF: !asy T"P: Lesson &: 9ationa$ peop$e thin( at the mar+in

16. /hat is the +enera$ ru$e for rationa$ decision ma(in+?

ANS:An action is ta(en on$y if the mar+ina$ 'enefit of the action e*ceeds the mar+ina$ cost.

PTS: 1 DF: !asy T"P: Lesson &: 9ationa$ peop$e thin( at the mar+in

11. A forestry company is tryin+ to decide whether to har%est a p$antation of pine trees or $ea%e har%est foranother year. ow mi+ht it use mar+ina$ ana$ysis to ma(e a decision on timin+?

ANS:The company wou$d ha%e to consider whether waitin+ for the trees to +row for one more year createsenou+h additiona$ 'enefit Ghi+her re%enueH to

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Stan shou$d 'e indifferent a'out finishin+ the pro

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12. n the o$d days of the So%iet nion) ideo$o+y dictated that the prices of consumer +oods shou$d dec$ineo%er time. ence) the So%iet p$anners consistent$y set the prices of +oods $i(e 'read and meat much'e$ow the cost of the materia$s used to produce them. They did not) howe%er) su'sidise the prices ofthe +oods and materia$s used 'y producers. So%iet fur 'reeders were supposed to purchase anima$products at hi+h prices to feed their min( and sa'$e) and 'read and meat at $ow prices to feed theirfami$ies. f these producers responded to incenti%es) how do you thin( they ad

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ANS:!fficient a$$ocation of resources depends on information that ref$ects the true mar+ina$ 'enefit tosociety of consumin+ products and the true mar+ina$ cost to society of producin+ products. ,ar(etprices contain this information. These prices are determined automatica$$y in a mar(et economythrou+h the interactions of the decisions of mi$$ions of househo$ds and firms. Since the centra$p$anners do not ha%e access to a$$ of the information the mar(et uses in determinin+ prices) it isimpossi'$e for the p$anners to set prices that ref$ect mar+ina$ 'enefit and mar+ina$ cost. Therefore) it isimpossi'$e for the centra$ p$anners to a$$ocate resources efficient$y.

PTS: 1 DF: Difficu$t T"P: Lesson : ,ar(ets are usua$$y a +ood way toor+anise economic acti%ity

##. Pu'$ic po$icies often a$ter the costs and 'enefits of pri%ate actions. /hy is it important forpo$icyma(ers to consider 'oth the direct and indirect effects of pu'$ic po$icies?

ANS:f po$icyma(ers dont consider how 'eha%iour mi+ht 'e chan+ed 'oth direct$y and indirect$y) theirpo$icies can ha%e effects that they did not intend. The e*amp$e used in the te*t is the seat'e$t $aw.

PTS: 1 DF: !asy T"P: Lesson 2: o%ernments can sometimes impro%emar(et outcomes

#&. ;oth Japan and the Phi$ippines were 'ad$y dama+ed 'y the Second /or$d /ar. /a+es in Japanhowe%er) 3uic($y o%ertoo( that of the Phi$ippines in the post0war period. /hat is the fundamenta$cause of this difference?

ANS:The main cause of wa+e $e%e$s is producti%ity. Producti%ity must ha%e 'een $ower in the Phi$ippinesre$ati%e to Japan and hence) $i%in+ standards ha%e stayed $ower.

PTS: 1 DF: ,oderate T"P: Lesson 4: A countrys standard of $i%in+ dependson its a'i$ity to produce +oods and ser%ices

#-. 9usse$$ $earned in his economics c$ass that income depends primari$y on producti%ity. e too( asummer

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To $ower inf$ation) the +o%ernment may choose to reduce the money supp$y in the economy. /hen themoney supp$y is reduced) prices dont ad

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