Chapter 2

Name:

Chapter 2

True/False
Indicate whether the statement is true or false.

Economic models must mirror reality or they are of no value.

Assumptions make the world easier to understand because they simplify reality and focus our attention.

It is reasonable to assume that the world is composed of only one person when modelling international trade.

When people act as scientists, they must try to be objective.

If an economy is operating on its production possibilities frontier, it must be using its resources efficiently.

If an economy is operating on its production possibilities frontier, it must produce less of one good if it produces more of another.

Points outside the production possibilities frontier are attainable but inefficient.

If an economy were experiencing substantial unemployment, the economy is producing inside the production possibilities frontier.

The production possibilities frontier is bowed outward because the trade-offs between the production of any two goods are constant.

10.

An advance in production technology would cause the production possibilities curve to shift outward.

11.

Macroeconomics is concerned with the study of how households and firms make decisions and how they interact in specific markets.

12.

The statement, "An increase in inflation tends to cause unemployment to fall in the short run," is normative.

13.

When economists make positive statements, they are more likely to be acting as scientists.

14.

Normative statements can be refuted with evidence.

15.

Most economists believe that tariffs and import quotas usually reduce general economic welfare.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

16.

A scientific method requires that

a.	the scientist be objective.
b.	the scientist use precision equipment and technology.
c.	only correct theories are tested.
d.	only incorrect theories are tested.
e.	the scientist use test tubes and have a clean lab.

17.

Which of the following is most likely to produce scientific evidence about a theory?

a.	A lawyer employed by Renault addressing the impact of air bags on passenger safety.
b.	An economist permanently employed at a leading university analysing the impact of bank regulations on lending to small businesses.
c.	An economist employed by the Trades Union Congress doing research on the impact of trade policy on workers' wages.
d.	A radio talk show host collecting data from listeners on how capital markets respond to taxation.

18.

Which of the following statements regarding the circular-flow diagram is true?

a.	If Susan works for BAe Systems and receives a salary payment, the transaction takes place in the market for goods and services.
b.	If BAe Systems sells a military aircraft, the transaction takes place in the market for factors of production.
c.	None of these answers.
d.	The factors of production are owned by households.
e.	The factors of production are owned by firms.

19.

In which of the following cases is the assumption most reasonable?

a.	To address the impact of taxes on income distribution, an economist assumes that everyone earns the same income.
b.	To address the impact of money growth on inflation, an economist assumes that money is strictly coins.
c.	To model the benefits of trade, an economist assumes that there are two people and two goods.
d.	To estimate the effect of tax changes on spending, economists assume that 50 per cent of people are rational and 50 per cent are not.

20.

Economic models are

a.	usually made of wood and plastic.	c.	useless if they are simple.
b.	built with assumptions.	d.	created to duplicate reality.

21.

Which of the following is not a factor of production?

a.	labour
b.	land
c.	money
d.	capital
e.	enterprise.

22.

Points on the production possibilities frontier are

a.	inefficient.
b.	normative.
c.	unattainable.
d.	efficient.
e.	equitable.

23.

Which of the following will not shift a country's production possibilities frontier outward?

a.	an advance in technology	c.	an increase in the capital stock
b.	an increase in the labour force	d.	a reduction in unemployment

24.

Economic growth is depicted by a:

a.	shift in the production possibilities frontier outward.
b.	movement from inside the curve toward the curve.
c.	shift in the production possibilities frontier inward.
d.	movement along a production possibilities frontier toward capital goods.

25.

Refer to Exhibit 6. If the economy is operating at point C, the opportunity cost of producing an additional 15 units of bacon is

a.	40 units of eggs.
b.	10 units of eggs.
c.	20 units of eggs.
d.	30 units of eggs.
e.	50 units of eggs.

26.

Refer to Exhibit 6. If the economy were operating at point E,

a.	the opportunity cost of 20 additional units of eggs is 10 units of bacon.
b.	the opportunity cost of 20 additional units of eggs is 20 units of bacon.
c.	the opportunity cost of 20 additional units of eggs is 30 units of bacon.
d.	20 additional units of eggs can be produced with no impact on bacon production.

27.

Refer to Exhibit 6. Point F represents a combination of production that:

a.	is a more equitable output level of both bacon and eggs
b.	can be reached if we reduce the production of eggs by 20 units.
c.	can be reached if there is a sufficient advance in technology.
d.	is inefficient because there are unemployed resources.

28.

Refer to Exhibit 6. As we move from point A to point D,

a.	the opportunity cost of eggs in terms of bacon falls.
b.	the opportunity cost of eggs in terms of bacon rises.
c.	the opportunity cost of eggs in terms of bacon is constant.
d.	the economy becomes less efficient.
e.	the economy becomes more efficient.

29.

Which of the following issues is related to microeconomics?
The impact of:

a.	oil prices on car production	c.	technology on economic growth
b.	money on inflation	d.	the deficit on saving

30.

Which of the following statements about microeconomics and macroeconomics is not true?

a.	The study of very large industries is a topic within macroeconomics.
b.	Macroeconomics is concerned with economy-wide phenomena.
c.	Microeconomics is a building block for macroeconomics.
d.	Microeconomics and macroeconomics cannot be entirely separated.

31.

Which of the following statements is normative?

a.	Large government deficits cause an economy to grow more slowly.
b.	People work harder if the wage is higher.
c.	The unemployment rate should be lower.
d.	Printing too much money causes inflation.

32.

In making which of the following statements is an economist acting more like a scientist?

a.	A reduction in unemployment benefits will reduce the unemployment rate.
b.	The rate of inflation should be reduced because it robs the elderly of their savings.
c.	The unemployment rate should be reduced because unemployment robs individuals of their dignity.
d.	The state should increase subsidies to universities because the future of our country depends on education.

33.

Positive statements are

a.	macroeconomic.
b.	microeconomic.
c.	statements of description that can be tested.
d.	statements of prescription that involve value judgments.

34.

Suppose two economists are arguing about policies that deal with unemployment. One economist says, "The government should fight unemployment because it is the greatest social evil." The other economist responds, "Nonsense! Inflation is the greatest social evil." These economists

a.	really don't disagree at all. It just appears that they disagree.
b.	disagree because they have different values.
c.	none of these answers
d.	disagree because they have different scientific judgments.

35.

Suppose two economists are arguing about policies that deal with unemployment. One economist says, "The government could lower unemployment by one percentage point if it would just increase government spending by 50 billion euro." The other economist responds, "Nonsense! If the government spent an additional 50 billion euro, it would reduce unemployment by only one tenth of one percent, and that effect would only be temporary!" These economists

a.	represent different schools of thought
b.	disagree because they have different scientific judgments.
c.	really don't disagree at all. It just appears that they disagree.
d.	disagree because they have different beliefs.