principles of economics robert

Question 1

what is important precondition for specialization?

Answer 1

population density

Question 2

outsourcing

Answer 2

a term increasingly used to connote having services performed by low- wage workers overseas

Question 3

In the book The New Division of Labor, economists Frank Levy and Richard Murnane attempt to identify the characteristics of a job that make it a likely can- didate for outsourcing.

Answer 3

1. any job that is amenable to computerization is also vulnerable to outsourcing.
2. Levy and Murnane describe a second category of tasks that are less vulner- able to outsourcing—namely, those that for one reason or another require the worker to be physically present.

Question 4

Writing in the late nineteenth century, the British economist Alfred Marshall was among the first to

Answer 4

show clearly how costs and value interact to determine both the prevailing market price for a good and the amount of it that is bought and sold.

Question 5

buyer’s reservation price

Answer 5

the largest dollar amount the buyer would be willing to pay for a good

Question 6

cash on the table

Answer 6

an economic metaphor for unexploited gains from exchange

Question 7

Flows

Answer 7

physical quantities per unit of time—in this case, pints per year. Consumption is always measured as a flow.

Question 8

When we have more than three goods, the budget constraint becomes what mathematicians call a hyperplane, or multidimensional plane. The only real difficulty is in representing this multidimensional case geometrically. We are just not very good at visualizing surfaces that have more than three dimensions.
The nineteenth-century economist Alfred Marshall proposed a disarmingly simple solution to this problem.

Answer 8

It is to view the consumer’s choice as being one between a particular good—call it X—and an amalgam of other goods denoted Y. This amalgam is called the composite good. We may think of the composite good as the amount of income the consumer has left over after buying the good X.

Question 9

hurdle method of price discrimination

Answer 9

the practice by which a seller offers a discount to all buyers who overcome some obstacle

Question 10

cost-plus regulation

Answer 10

Government regulators gather data on the monopolist’s explicit costs of production and then permit the monopolist to set prices that cover those costs, plus a markup to ensure a normal return on the firm’s investment.

Question 11

For games in which timing matters,

Answer 11

a decision tree, or game tree, is a more useful way of representing the payoffs than a traditional payoff matrix. This type of diagram describes the possible moves in the sequence in which they may occur, and lists the final payoffs for each possible combination of moves.

Question 12

The late Nobel laureate Herbert Simon (1984) was the first to

Answer 12

to impress upon economists that human beings are incapable of behaving like the rational beings portrayed in standard rational choice models.

Question 13

availability heuristic

Answer 13

a rule of thumb that estimates the frequency of an event by the ease with which it is possible to summon examples from memory. Murders are easier to recall not because they are more frequent, but because they are more salient.

Question 14

Representativeness heuristic

Answer 14

heuristic a rule of thumb according to which the likeli- hood of something belonging to a given category increases with the extent to which it shares characteristics with stereotypical members of that category. For example, because librarians are stereotypically viewed as introverted while salespersons are viewed as gregarious, the representativeness heuristic suggests that a given shy person is more likely to be a librarian than a salesperson.

Question 15

regression to the mean

Answer 15

the phenomenon that unusual events are likely to be followed by more nearly normal ones

Question 16

Another common judgmental heuristic is called anchoring and adjustment.

Answer 16

It holds that when we try to estimate something, we often begin with a tentative initial estimate, called the anchor, which we then adjust in the light of whatever additional information is avail- able. A common bias pattern observed in anchoring and adjustment is that the anchors are sometimes of questionable relevance, and the adjustments people make are often insufficient.

Question 17

Weber-Fechner law

Answer 17

the relationship according to which the perceived change in any stimulus varies according to the size of the change measured as a proportion of the original stimulus. Buyers might be reluctant to spend $5,000 for a jacuzzi for a house they already owned, but might see the same expense as far less daunting if it meant paying $250,000 for a new house instead of $245,000.

Question 18

status quo bias

Answer 18

the general resistance to change, often stemming from loss aversion

Question 19

present-aim standard of rationality

Answer 19

a variant of the rational choice model that permits greater flexibility in assumptions about preferences

Question 20

the adaptive rationality standard

Answer 20

assumes that people choose efficient means to achieve their ends. But unlike the other conceptions, which take goals as given, adaptive rationality regards goals as objects of choice themselves and, as such, subject to a similar efficiency requirement.

Question 21

theory of natural selection

Answer 21

Charles Darwin’s

Question 22

ultimatum bargaining game

Answer 22

a game in which the first player has the power to confront the second player with a take-it or-leave-it offer

Question 23

Many traditional economic models assume that well-being depends on current and future levels of absolute consumption. Considerable evidence suggests, however,

Answer 23

that well-being depends as much or more on current and future levels of relative consumption.

Question 24

The late British economist Fred Hirsch coined the term positional good to

Answer 24

describe things that derive their value primarily from their relative scarcity rather than from their absolute characteristics.

Question 25

positional good

Answer 25

good a good whose value depends relatively heavily on how it compares with other goods in the same category

Question 26

nonpositional good

Answer 26

a good whose value does not depend heavily on how it compares with other goods in the same category

Question 27

positional externality

Answer 27

this occurs when an increase in one person’s performance reduces the expected reward of another’s in situations in which reward depends on relative performance

Question 28

If nominal wages and prices are not flexible, which of the following must be true when the economy has a severe recessionary gap?

Answer 28

The short run aggregate supply curve is horizontal

Question 29

If a country is experiencing a recessionary gap, which of the following fiscal and monetary policy combinations would be most likely to move the nation closer to full employment with a minimum change in interest rates?

Answer 29

An increase in government spending and the purchase of bonds on the open market

Question 30

The basic Keynesian model is built on a key assumption:

Answer 30

In the short run, firms meet the demand for their products at preset prices.

Question 31

In the Keynesian model, output is determined by

Answer 31

planned aggregate expenditure, or planned spending, for short.

Question 32

The original purpose of the IMF

Answer 32

was to help manage the system of fixed exchange rates, called the Bretton Woods system, put in place after the war. Under Bretton Woods, the IMF’s principal role was to lend international reserves to member countries that needed them so that those countries could maintain their exchange rates at the official values. However, by 1973 the United States, the United Kingdom, Germany, and most other industrial nations had abandoned fixed exchange rates for flexible rates, leaving the IMF to find a new mission. Since 1973, the IMF has been involved primarily in lending to developing countries. For example, during the currency crises of the 1990s, it lent to Mexico, Russia, Brazil, and several East Asian countries. During the 2008 crisis, it again made loans to countries that saw their currencies under pressure. During the 2010s, the IMF joined European countries in making loans to Greece—a developed country—with the Europeans providing two-thirds of the money Greece needs to pay its gov- ernment debts, and the IMF providing one-third. And in early 2020, the IMF made available $50 billion for low-income and emerging-market economies seeking loans related to addressing the global coronavirus epidemic.

Question 33

aggregate expenditure

Answer 33

the sum of consumer expenditures, firms’ investment, government purchases, and net exports

Question 34

aggregation

Answer 34

the adding up of individual economic variables to obtain economywide totals

Question 35

autarky

Answer 35

a situation in which a country is economically self-sufficient

Question 36

autonomous consumption

Answer 36

consumption spending that is not related to the level of disposable income

Question 37

autonomous expenditure

Answer 37

the portion of planned aggregate expendi ture that is independent of output

Question 38

balance-of-payments deficit

Answer 38

the net decline in a country’s stock of international reserves over a year

Question 39

bequest saving

Answer 39

saving done for the purpose of leaving an inheritance

Question 40

costly-to-fake principle

Answer 40

to communicate information credibly to a potential rival, a signal must be costly or difficult to fake

Question 41

dominated strategy

Answer 41

any other strategy available to a player who has a dominant strategy

Question 42

first-dollar insurance coverage

Answer 42

insurance that pays all expenses generated by the insured activity

Question 43

forward guidance

Answer 43

information that a central bank provides to the financial markets regarding its expected future monetary- policy path

Question 44

head tax

Answer 44

head taxa tax that collects the same amount from every taxpayer

Question 45

law of one price

Answer 45

price if transportation costs are relatively small, the price of an internationally traded commodity must be the same in all locations

Question 46

lemons model

Answer 46

George Akerlof’s explanation of how asymmetric information tends to reduce the average quality of goods offered for sale

Question 47

means-tested

Answer 47

a benefit program whose benefit level declines as the recipient earns additional income

Question 48

Okun’s law

Answer 48

each extra percentage point of cyclical unemployment is associated with about a 2 percentage point increase in the output gap, measured in relation to potential output

Question 49

quantitative easing (QE)

Answer 49

an expansionary monetary policy in which a central bank buys long-term financial assets, thereby lowering the yield or return of those assets while increasing the money supply

Question 50

Weber-Fechner law

Answer 50

the relationship according to which the perceived change in any stimulus varies according to the size of the change measured as a proportion of the original stimulus. a proposed relationship between the magnitude of a physical stimulus and the intensity or strength that people feel.

Question 51

This new system, called the welfare state

Answer 51

one in which markets direct the detailed activities of day-to- day economic life while government regulates social conditions and provides pensions, health care, and other necessities for poor families.

Question 52

posed the paradox of value

Answer 52

Adam Smith

Question 53

Modern utility theory stems from

Answer 53

utilitarianism.

Question 54

Utilitarianism was introduced in

Answer 54

Jeremy Bentham, An Introduction to the Principles of Morals

Question 55

The income statement measures

Answer 55

the flows into and out of the firm, while the balance sheet measures the stocks of assets and liabilities at the end of the accounting year.

Question 56

Marginal revenue is positive when demand is

Answer 56

is elastic, zero when demand is unit-elastic, and negative when demand is inelastic.

Question 57

The theory of monopoly was developed by

Answer 57

Alfred Marshall around 1890

Question 58

He argued that the essence of economic development is innovation and that monopolists are in fact the wellsprings of innovation in a capitalist economy.

Answer 58

Joseph Schumpeter

Question 59

Rent (or pure economic rent) is payment

Answer 59

for the use of factors of production that are fixed in supply.

Question 60

Present value for perpetuity which is an asset like land that lasts forever and pays $N each year from now to eternity. We are seeking the pres- ent value (V ) if the interest rate is i percent per year, where the present value is the amount of money invested today that would yield exactly $N each year. This is simply

Answer 60

PV = $N/I This says that if the interest rate is always 5 per- cent per year, an asset yielding a constant stream of income will sell for exactly 20 (􏰁 1 􏰌 5⁄100) times its annual income. In this case, what would be the present value of a perpetuity yielding $100 every year? At a 5 percent interest rate its present value would be $2000 (􏰁 $100 ÷ 0.05). The formula for perpetuities can also be used to value stocks.

Question 61

A poll tax is

Answer 61

a lump-sum tax, or a fixed tax per person. The advantage of this tax is that, like a land tax, it would induce no inefficiencies.

Question 62

In market economies, wealth is much more

Answer 62

unequally distributed than is income

Question 63

Political philosophers write of three types of equality

Answer 63

(a) equality of political rights, such as the right to vote; (b) equality of opportunity, providing equal access to jobs, education, and other social systems; and (c) equality of outcomes, whereby people are guaranteed equal incomes or consumptions. Whereas the first two types of equality are increasingly accepted in most advanced democracies like the United States, equality of outcomes is generally rejected as impractical and too harmful to economic efficiency.

Question 64

The goals of macroeconomic policy are:

Answer 64

1. A high and growing level of national output 2. High employment with low unemployment 3. A stable or gently rising price level

Question 65

If the central bank cannot lower short-term interest rates below zero, what other steps can it take to stimulate a depressed economy?

Answer 65

One step would be to attempt to lower long-term inter- est rates. This would require that the central bank purchase long-term bonds instead of focusing on short-term securities, which is its usual practice. A second step would be to reduce the risk premium on risky securities. Acting with the U.S. Treasury, the Fed has been taking forceful steps in this direction since the early stages of the 2007–2009 credit crisis.

Question 66

Monetarism holds that

Answer 66

that the money supply is the pri- mary determinant of both short-run movements in nominal GDP and long-run movements in prices.

Question 67

The speed of the turnover of money is described by the concept of the velocity of money, intro- duced by

Answer 67

Cambridge University’s Alfred Marshall and Yale University’s Irving Fisher.

Question 68

The Federal Reserve has four major functions

Answer 68

conducting monetary policy by setting short-term interest rates, maintaining the stability of the financial system and containing systemic risk as the lender of last resort, supervising and regulating banking institutions, and providing financial services to banks and the government.

Question 69

Statistical studies indicate that velocity tends to be

Answer 69

positively correlated with interest rates, a finding that undermines the monetarist policy prescription.

Question 70

Compound growth formula

Answer 70

g = 100 x ((x-y)^(1/n) - 1

Question 71

The actual budget records

Answer 71

the actual dollar expen- ditures, revenues, and deficits in a given period.

Question 72

The structural budget calculates

Answer 72

what govern- ment revenues, expenditures, and deficits would be if the economy were operating at potential output.

Question 73

The cyclical budget is the

Answer 73

difference between the actual budget and the structural budget. It measures the impact of the business cycle on the budget, tak- ing into account the effect of the cycle on revenues, expenditures, and the deficit.

Question 74

real-business- cycle (RBC) theory

Answer 74

This theory was developed principally by Finn Kydland and Edward C. Prescott, who won the Nobel Prize for their work in this area. This approach holds that business cycles are primarily due to technological shocks and do not invoke any monetary or demand-side forces. In the RBC approach, shocks to technology, investment, or the labor supply change the potential output of the economy. In other words, the shocks shift a vertical AS curve. These supply shocks are transmitted into actual output by the fluctuations of aggregate supply and are completely independent of AD. Similarly, movements in the unemployment rate are the result of movements in the natural rate of unemployment (the NAIRU) due either to microeconomic forces, such as the intensity of sectoral shocks, or to tax and regulatory policies. Standard Keynesian monetary and fiscal policies have no effect on output or employment in RBC models; they affect only AD and the price level.

Question 75

Ricardian view of fiscal policy

Answer 75

developed by Harvard University’s Robert Barro, argues that changes in tax rates have no impact upon consumption spending. In the Ricardian view, consumers have rational expectations about future policies, so when a tax cut occurs, they know they must plan for a future tax increase. They will therefore increase their saving by the amount of the tax cut, and their consumption will remain unchanged.

Question 76

a popular school known as supply- side economics

Answer 76

which emphasized incentives and tax cuts as a means of increasing economic growth. According to supply siders, high taxes lead people to reduce their labor and capital supply. Indeed, supply-side economists like Arthur Laffer suggested that high tax rates might actually lower tax revenues.

Question 77

Discretionary fiscal pol- icy is useful in

Answer 77

recessions as a one-time stimulus. When the economy approaches a liquidity trap, fiscal policy must be the primary source of economic stimulus.

Question 78

Expected inflation is on the

Answer 78

long-run Phillips curve

Question 79

Chicago School of Economics

Answer 79

A group of economists (among whom Henry Simons, F. A. von Hayek, and Milton Friedman have been the most prominent) who believe that competitive markets free of government intervention will lead to the most efficient oper- ation of the economy.

Question 80

Debit

Answer 80

An accounting term signifying an increase in assets or decrease in liabilities. (2) In balance-of-payments accounting, a debit is an item such as imports that reduces a country’s stock of foreign currencies.

Question 81

Exogenous vs. induced variables.

Answer 81

Exogenous variables are those determined by conditions outside the economy. They are contrasted with induced variables, which are determined by the internal work- ings of the economic system. Changes in the weather are exog- enous; changes in consumption are often induced by changes in income.

Question 82

Flow vs. stock

Answer 82

A flow variable is one that has a time dimension or flows over time (like the flow through a stream). A stock variable is one that measures a quantity at a point of time (like the water in a lake). Income represents dollars per year and is thus a flow. Wealth as of December 2005 is a stock.

Question 83

Hedging

Answer 83

A technique for avoiding a risk by making a counteract- ing transaction. For example, if a farmer produces wheat that will be harvested in the fall, the risk of price fluctuations can be offset, or hedged, by selling in the spring or summer the quantity of wheat that will be produced.

Question 84

Intervention

Answer 84

An activity in which a government buys or sells its cur- rency in the foreign exchange market in order to affect its currency’s exchange rate.

Question 85

Labor theory of value

Answer 85

The view, often associated with Karl Marx, that every commodity should be valued solely according to the quantity of labor required for its production.

Question 86

Legal tender

Answer 86

Money that by law must be accepted as payment for debts. All U.S. coins and currency are legal tender, but checks are not.

Question 87

Managed exchange rate

Answer 87

. The most prevalent exchange-rate system today. In this system, a country occasionally intervenes to stabilize its currency but there is no fixed or announced parity.

Question 88

Marxism

Answer 88

The set of social, political, and economic doctrines devel- oped by Karl Marx in the nineteenth century. As an economic theory, Marxism predicted that capitalism would collapse as a result of its own internal contra- dictions, especially its tendency to exploit the working classes.

Question 89

Mercantilism

Answer 89

A political doctrine emphasizing the importance of balance-of-payments surpluses as a device to accumulate gold. Pro- ponents therefore advocated tight government control of economic policies, believing that laissez-faire policies might lead to a loss of gold.

Question 90

conglomerate mergers

Answer 90

which occur when the two firms operate in unrelated markets (e.g., shoelaces and oil refining).

Question 91

Momentary run

Answer 91

A period of time that is so short that production is fixed.

Question 92

Monetary base

Answer 92

The net monetary liabilities of the government that are held by the public. In the United States, the monetary base is equal to currency and bank reserves. Sometimes called high- powered money.

Question 93

Monetary transmission mechanism

Answer 93

In macroeconomics, the route by which changes in the supply of money are translated into changes in output, employment, prices, and inflation.

Question 94

Okun’s law

Answer 94

The empirical relationship, discovered by Arthur Okun, between cyclical movements in GDP and unemployment. The law states that when actual GDP declines 2 percent relative to potential GDP, the unemployment rate increases by about 1 per- centage point. (Earlier estimates placed the ratio at 3 to 1.)

Question 95

National income and product accounts (NIPA)

Answer 95

A set of accounts that measures the spending, income, and output of the entire nation for a quarter or a year.

Question 96

Optimal currency area

Answer 96

A group- ing of regions or countries which have high labor mobility or have common and synchronous aggre- gate supply or demand shocks. Under such conditions, significant changes in exchange rates are not necessary to ensure rapid macro- economic adjustment, and the countries can have fixed exchange rates or a common currency.

Question 97

Say’s Law of Markets

Answer 97

The the- ory that “supply creates its own demand.” J. B. Say argued in 1803 that, because total purchas- ing power is exactly equal to total incomes and outputs, excess demand or supply is impossible. Keynes attacked Say’s Law, pointing out that an extra dollar of income need not be spent entirely (i.e., the marginal propensity to spend is not necessarily unity).

Question 97

Paradox of thrift

Answer 97

The principle, first proposed by John Maynard Keynes, that an attempt by a society to increase its saving may result in a reduction in the amount which it actually saves.

Question 98

Usury

Answer 98

The charging of an interest rate above a legal maximum on borrowed money.