FMSC 290 (Exam 1)

Question 1

An increase in the overall level of prices

Answer 1

Inflation

Question 2

Fluctuations in economic activity

Answer 2

Business cyle

Question 3

The property of society getting the most from its scarce resources

Answer 3

Efficiency

Question 4

Systematically and purposefully doing the best you can to achieve your objectives

Answer 4

Rational

Question 5

An incremental adjustment to an existing plan

Answer 5

marginal change

Question 6

an economic system where interaction of households and firms in markets determines the allocation of resources

Answer 6

market economy

Question 7

the ability of an individual to own and exercise control over scarce resources

Answer 7

property rights

Question 8

the principle that self-interested market participants may unknowingly maximize the welfare of society as a whole

Answer 8

invisible hand

Question 9

the ability of an individual or group to substantially influence market prices

Answer 9

market power

Question 10

the case in which there is only one seller in the market

Answer 10

monopoly

Question 11

limited resources and unlimited wants

Answer 11

scarcity

Question 12

study of how society manages its scarce resources

Answer 12

economics

Question 13

the property of distributing economic prosperity uniformly among society’s members

Answer 13

equality

Question 14

whatever is given up to get something else

Answer 14

opportunity cost

Question 15

something that induces a person to act

Answer 15

incentive

Question 16

a situation in which the market fails to allocate resources efficiently

Answer 16

market failure

Question 17

when one person’s actions have an impact on a bystander

Answer 17

externality

Question 18

the amount of goods and services produced from each unit of labor input

Answer 18

productivity

Question 19

descriptions of the world as it is

Answer 19

positive statements

Question 20

prescription for how the world ought to be

Answer 20

normative statements

Question 21

a diagram of the economy that shows the flow of goods and services, factors of production and monetary payments between households and firms

Answer 21

circular flow diagram

Question 22

a graph that shows the combinations of output the economy can possibly produce given the available factors of production and the available production technology

Answer 22

production possibilities frontier

Question 23

objective development and testing of theories

Answer 23

scientific method

Question 24

simplifications of reality based on assumptions

Answer 24

economic models

Question 25

the inputs such as land, labor, and capital

Answer 25

factors of production

Question 26

the study of how households and firms make decisions about how they interact in markets

Answer 26

microeconomics

Question 27

the study of economy-wide phenomena

Answer 27

macroeconomics

Question 28

the ability to produce a good using fewer inputs than another producer

Answer 28

absolute advantage

Question 29

the ability to produce a good at a lower opportunity cost than another producer

Answer 29

comparative advantage

Question 30

the increase in total production due to specialization allowed by trade

Answer 30

gains from trade

Question 31

goods produces abroad and sold domestically

Answer 31

imports

Question 32

goods produced domestically and sold abroad

Answer 32

exports

Question 33

If a producer is _self-sufficient,_ the PPF is also the ...

Answer 33

_consumption_ possibilities fronter (CPF)

Question 34

if all countries have the _same opportunity cost_ of production, then...

Answer 34

there are no gains from trade

Question 35

countries should specialize in production of goods for which they have...

Answer 35

the _comparative advantage_

Question 36

production outside of the PPF can be caused by...

Answer 36

* an advance in technology * an increase in the capital stock * an increase in the labor force * economic growth

Question 37

Why is the PPF bowed outward?

Answer 37

because the trade-off between the production of any two goods is _not constant_

Question 38

the factors of production are owned by... Firms or Households?

Answer 38

Households

Question 39

list the four principles of **How People Make Decisions** (principles 1-4)

Answer 39

* People Face Trade-offs * The Cost of Something is What you give up to get it * rational people think at the margin * people respond to incentives

Question 40

List the three principles of **How People Interact** (principles 5-7)

Answer 40

* Trade can make everyone better off * markets are usually a good way to organize economic activity * governments can sometimes improve market outcomes

Question 41

List the three principles of **How the Economy as a Whole Works** (principles 8-10)

Answer 41

* a country's standard of living depends on its ability to produce goods and services * prices rise when the government prints too much money * society faces a short-run trade-off between inflation and unemployment