What Is Economics? Complete Test Bank Chapter 1

Indicate whether the statement is true or false.

1. The steepness of a curve is partially determined by the units of measurement.

2. The United States has chosen to balance the competing claims of efficiency versus equality by emphasizing greater efficiency over greater equality.

3. Lower inflation rates are usually correlated with lower unemployment rates.

4. All two-dimensional graphs must have an origin, a horizontal axis, and a vertical axis.

5. “Correlation” is a measure of how one variable causes another to change.

6. A graph’s origin is the point of intersection of all lines or curves in the graph.

7. The United States has been willing to trade-off greater efficiency for greater wage equality.

8. The high unemployment of 2008–2010 caused a substantial decrease in inflation, which created fears of deflation.

9. Productivity growth is the main cause of rising living standards.

10. A contour map illustrates a cause-and-effect relationship among three variables.

11. Economists are often required to make unrealistic assumptions concerning the problems they are investigating.

12. The Phillips curve illustrates the trade-off between inflation and economic growth.

13. Economic efficiency and income equality are often conflicting goals in an economy.

14. A model that is an oversimplification for one purpose will likely be an oversimplification for other purposes as well.

15. When controls over market prices are enacted, the consequences are always clear.

16. There is no trade-off between efficiency and equality.

17. Even though international trade is undertaken voluntarily, a country that engages in trade may not benefit from it.

18. One of the consequences of allowing wages to fall in the United States has been growing wage inequality.

19. Eliminating important details in economic analysis is necessary to understand the complexity of the economy.

20. Externalities can only involve the imposition of harm on a party not directly involved in an economic transaction.

21. Externalities are costs to society, which have an impact on parties not directly involved into a particular economic transaction.

22. In economic theorizing, common sense will always lead to the correct answer.

23. When the economy experiences a bust, the government knows exactly which policies will spur an economic recovery.

24. Abstraction ignores many details in order to focus on the most important elements of a problem.

25. In the calculation of the cost of going to college, an economist would always include the cost of room and board.

26. The marginal cost of an airline ticket is the total cost of operating a flight divided by the number of passengers who buy tickets.

27. The optimal degree of abstraction depends on the objective of the analysis.

28. In scientific language, a theory is an untested assertion of alleged fact.

29. Graphs are valuable because they facilitate interpretation of data.

30. In her calculation of the cost of going to college, an economist would include the amount of forgone earnings over the years spent at college.

31. Comparative advantage explains how two nations can benefit from trade.

32. Statistical correlation always implies causation.

33. Government controls over market prices are often enacted to benefit a specific group.

34. Individuals will have different value judgments about the appropriate rate of unemployment and the appropriate rate of inflation.

35. Economic problems are made manageable by stripping away some of the unnecessary details.

36. Abstraction is used in economics to omit unnecessary details and focus on the essence of the problem being studied.

37. A government has the ability to use fiscal and monetary policy to mitigate the effects of economic fluctuations.

38. Externalities are created when parties not involved in an economic transaction are affected by it.

39. The market price of a transaction always includes all of the costs and benefits associated with the transaction.

40. If Japan is twice as good at producing cameras and three times as good at producing TV sets as the United States, Japan is said to have a comparative advantage in TV sets and the United States has a comparative advantage in cameras.

41. The word “theory” means the same to the scientist as it does to the man on the street.

42. Slope will vary along a curve (as opposed to a straight line).

43. A graph conveys information about a cause-and-effect relationship.

44. In both the 1970s and the 1990s, extreme economic events caused unemployment to move in the same direction as inflation.

45. A theory is an untested assertion of alleged fact.

46. Economists probably agree more often than they disagree.

47. A theory is an explanation of the causal mechanism behind observed phenomena.

48. Inaccurate prediction generally invalidates the use of theory in economics.

49. Airlines can use marginal analysis to set ticket prices, which can increase profits for the company.

50. In international trade, one country’s gain is another country’s loss.

51. Abstraction is unnecessary when economic analysis is done properly.

52. Two variables that systematically change together are correlated.

53. A line that slopes downward from left to right has a positive slope.

54. With the technological developments in the twenty-first century, productivity growth is no longer an important factor in economic well-being.

55. Greater economic efficiency and income equality can usually both be achieved in an economy simultaneously.

56. As a student, one of the costs of sleeping in rather than going to class is likely to be a lower grade in the class.

57. A ray through the origin always has a slope of one.

58. Greater economic efficiency often leads to greater economic inequality.

59. A vertical line always has a slope of one.

60. Economic analysis requires both mathematical reasoning and historical study.

61. The growth rate of productivity is the most important determinant of material well-being in the short run.

62. A horizontal line has a slope of 0.

63. One of the consequences of preventing wages from falling in the European Union has been growing unemployment.

64. The market mechanism provides a financial incentive for firms to minimize the pollution they create.

65. It is impossible for both nations to gain when trading with one other.

66. Only economists and other “social” scientists have areas of dispute within their disciplines.

67. In economics, the true cost of making a choice is the value of what must be given up.

68. A small increase in productivity growth can have a huge impact on a country’s standard of living.

69. The statement “saccharine causes cancer” is not a theory; it is a hypothesis.

70. The achievement of greater efficiency in the United States has been at the expense of growing inequality.

71. Opportunity cost is the value of the next best alternative to a given choice.

72. Both parties gain in a voluntary exchange.

73. Marginal analysis involves looking at the extra costs involved in a decision.

74. The relatively low rate of inflation coupled with a low unemployment rate that occurred in the 1990s represented a “normal” economic situation.

75. Market-based policies are effective methods that the government can use to address externality problems.

76. Externalities affect only the buyer and seller involved in an exchange.

77. A graph with a positive slope indicates that the variables depicted on the axes move in the same directions.

78. If you go to the movies on Thursday night, the only cost to you is the price you pay for the movie ticket.

79. Slope is measured as rise/run.

80. The slope of a line with rise of five and run of two is positive.

81. Models are used to describe cause-and-effect relationships.

82. There are never any adverse consequences of government attempts to modify the laws of supply and demand.

83. A theory is a deliberate simplification or abstraction of factual relationships.

84. An economic model is a realistic depiction of the operation of the economy.

85. Government controls over market prices frequently “backfire.”

86. One problem with the European Union’s choice regarding equality versus efficiency is that it may inadvertently shrink the size of its “economic pie.”

87. The use of abstraction in economics is analogous to the use of a road map providing directions to a location.

88. Abstract economic theory can be used by academicians but not by politicians or business people.

89. Abstraction can lead to gross distortions of pertinent facts.

90. The concept of economic efficiency refers to the size of the “economic pie” whereas the concept of equality refers to how the “pie” is distributed.

91. Economic theory is necessary and extremely important because of its relationship to economic policy.

92. It is not possible for both parties to gain in a voluntary trade.

93. All economic transactions involve only buyers and sellers; no third parties are involved.

94. Attempts by the government to reduce the rate of inflation often result in higher unemployment in the short run.

95. Slope is measured as run/rise.

96. The use of abstraction in economic analysis is one of its primary weaknesses.

97. When nations trade based upon comparative advantage, only one side of the transaction will benefit.

98. Economic theory simplifies relationships to explain how the relationships interact.

99. Unemployment and inflation are important determinants of short-run material welfare, whereas productivity growth is an important determinant of long-run material well-being.

100. Opportunity cost is the highest possible price you can receive when you sell an object.

101. The lower left-hand corner of a graph where the two axes meet is called the graph’s origin.

102. In economics, abstraction from reality is necessary because of the complexity of the real world.

103. Over the past century, the main factor responsible for rising living standards in the United States has been productivity growth.

104. A line that rises from left to right has a positive slope.

105. Economists disagree on most economic issues facing an economy.

106. Value judgments are based on people’s tastes, preferences, and ethical opinions.

107. The terms “correlation” and “causation” are synonymous.

108. Models are simplifications that are used to observe the workings of a system.

109. A horizontal line always has a slope of one.

Indicate the answer choice that best completes the statement or answers the question.

110. If a rent control policy is enacted to protect apartment renters, this is likely to lead to

111. You just purchased a lawn mower from your next-door neighbor. How can we measure the gains from this transaction?

112. The US Navy determines that the navigation system on its submarines, which use low-frequency radio waves, is reducing the population of humpback whales. The is an example of

113. In 1981, the US government passed a law that significantly lowered tax rates on high-income individuals. The premise was that high tax rates deter high-income individuals from working and investing, reducing the growth of the economy. This is an example of

114. Which of the following statements is true?

115. Economics is a social science in the sense that it

116. An economic model can be defined as

117. Economists may disagree about how to solve an economic problem because they

118. Graphs are useful because of the way they

119. A diagram is a good example of a(n)

120. Which of the following mathematical expressions represents the equation of a straight line with a slope of zero at all points on a graph with Y on the vertical axis and X on the horizontal axis?

121. The law of comparative advantages explains why

122. Tools used by economists include

123. Some economists develop theories concerning policy issues to

124. A price floor on the sale of wheat would be likely to benefit

125. If movement along a graph causes the value on the vertical axis to rise by 5 units and the value on the horizontal axis to fall by 10 units, the slope of the function is

126. Economic models are often expressed in

127. Jack, an outstanding high school baseball player, has to decide whether to sign a contract with a major league baseball organization or to go to college. If Jack is determining his opportunity costs to go to college instead, he would include

128. Economic models are rarely constructed using

129. To an economist, theory can be thought of as

130. Opportunity cost can best be defined as the

Figure 1-2

131. Identify the slope of the two curves A and B in Figure 1-2.

132. Economic theory

133. Suppose that a curve has a slope equal to zero at some point A. To the right of A, the curve may

134. Policy-oriented economists seek to develop theories to

135. To analyze policy options, economists are forced to deal with

136. The use of chlorofluorocarbons in refrigerators and air conditioners is alleged to cause the destruction of the ozone layer that surrounds the earth. This layer protects humans from ultraviolet radiation, which causes skin cancer. Industry has been prohibited from using these substances in aerosol cans, but the government has been reluctant to ban their use altogether because of the serious economic consequences. Economists analyze such problems and refer to them as

137. A recent article about the US economy asked, “What is the price of low inflation?” In this context, the price is likely to be measured by

138. You have just bought a used car and drive away satisfied that you’ve made a good deal on the purchase. What would an economist say about your “gain” on the deal?

139. If a decision maker uses marginal analysis, then the relevant costs are the

140. If a government enacts a price floor on agricultural products to protect wheat farmers, the result is likely going to be

141. Which of the following is an example of an externality?

142. Since a trade-off exists between total output and equality of income distribution,

143. If trade between two countries is voluntary, one can expect that

144. A horizontal line has a slope of

145. In Egypt, in 1970, the Aswan Dam was completed. By preventing the annual flood of the Nile (thereby providing millions of acres of arable land) and by providing electricity, the dam was expected to raise the living standard of the Egyptian people—and it has. However, it has also led to a rise in the water table, which causes Egypt’s limestone structures, including the pyramids, to absorb more salt water and to suffer serious erosion from crystallized salts. Combined with air pollution and traffic vibration, this erosion is turning the pyramids to dust. Economists analyze this type of problem with the concept of

146. Economists may disagree about how to solve an economic problem because they

147. Arguably, the most important factor affecting economic well-being is

148. If an economic curve has a negative slope, then one variable

149. Opportunity cost includes

150. When voluntary trade takes place,

151. A music venue discovers that its concerts consistently have empty seats in the back rows of the facility. If the venue owner uses marginal analysis to evaluate this situation, he should

152. Why do economists tend to create models in diagrammatic form?

153. “The hotter it gets, the more water people drink.” This statement implies that the relationship between temperature and water consumption must have a

154. Which of the following is one source of disagreement between economists?

155. In 1980, in order to stimulate agricultural production, Fidel Castro allowed Cuban farmers to sell their goods directly to consumers and keep whatever profit they made. Some farmers were earning $50,000 per year, compared with the average worker income of $2,400. The workers resented this. Castro denounced the farmers as “capitalist gangsters” and closed the free markets. Cuban cash income declined 5 percent and fresh vegetables were in short supply. This illustrates the economic concept of the

156. Economic analysis and policy are made more difficult by

157. Efforts to reduce the unemployment rate are likely, in the short run, to lead to

158. In the twentieth century, Russian peasants noticed that during cholera epidemics there were lots of doctors around; in an attempt to eliminate cholera, they killed all the doctors. This is an example of

159. The term opportunity cost refers to the

160. In the winter quarter at Frozen U. one year, snow falls every Friday night. Students conclude that, on their campus, Fridays cause snow. This hypothesis

161. If an airline company has several empty seats on a flight and the full price of an air ticket is $500 and the marginal cost per passenger is $100, then it will be profitable for the airline to

162. Economics is a social science rather than a “hard” science like physics because

163. Using economic theory to analyze policy issues

164. The slope of a downward-sloping straight line can be calculated as the distance from the

165. There is an inverse relationship between inflation and unemployment in the short run and this can be seen as an

166. Rational choice requires that opportunity cost be

167. Jack buys a computer from Sam, knowing fully well that the technology used in it is obsolete. In this case, the trade is

168. Economists are often perceived as disagreeing with each other. Is this the way things really are?

169. If Taiwanese workers can produce all goods at lower wages than American workers, then

170. An externality is defined as

171. Two advisors to the president have given their policy recommendations, and they are in disagreement. Why do these economists disagree?

172. A useful economic model

173. The beginning point of a graph (the 0,0 point) is known as

174. There are possible policies that could significantly reduce income inequality but opponents argue that such policies would be likely to lead to

175. Which of the following is an example of an undesirable side effect of the operation of the market mechanism?

176. A contour map illustrates which of the following?

177. Which of the following is an example of a fiscal policy initiative?

Figure 1-1

178. The slope of the line in Figure 1-1 is

179. Opportunity cost is the

180. When residents surrounding an airport complain about noise from aircraft landings and takeoffs, the relevant economic analysis is that of

181. When economists are critical of government regulations that prohibit free individuals from making certain kinds of contracts, for example, to purchase a good or service, they will usually invoke the concept of

182. Standby passengers on airlines who pay low rates for seats benefit from the low price. How are the airlines affected?

183. The process of focusing on only the most important factors to explain a phenomenon is called

184. Consider the following information regarding a person’s decision to go to college: college tuition is $20,000 per year, room and board is $10,000 per year, and books and materials are $2,000 per year. Suppose that instead of going to college this person could have earned $18,000 working in a store. An economist would calculate the cost of going to college as

185. During a war, a government will often draft people, most of whom are presently employed, into the army. An economist, computing the real cost of the war, would be sure to include which of the following items?

186. People generally purchase less of a commodity as its price increases. This implies that the relationship between quantity purchased and the price of the commodity must have a

187. A vertical line has a slope of

188. Although economic science can contribute theoretical and factual knowledge on a particular issue, the final decision on policy questions often depends on

189. It is possible to represent three dimensions on a two-dimensional graph by using

190. The United States produces both automobiles and computers more efficiently than Mexico. Nevertheless, it is possible that both nations would benefit from trade in these items. The reason for this is

191. Economic models

192. In terms of the competing claims of equality and efficiency, in the United States we have

193. A theory is an abstraction used often by economists to

194. Abstraction can be thought of as

195. Which of the following is an example of an externality?

196. Which of the following statements is NOT true?

197. Suppose that interdiction efforts have stemmed the flow of illegal drugs into the United States. If there is no change in demand, this leads to higher prices for these substances. The result is an increase in crime as users attempt to maintain their now more expensive habits. Economists would call this effect

198. In contrast to the United States, the European Union has chosen

199. In 1971, a bank worker could process 265 checks in 1 hour. Currently, computers with built-in reader-sorter processing capacity have pushed that number above 100,000 checks per hour. Economists describe this type of activity as

200. Is it possible to express an economic model in words without diagrams?

201. The opportunity cost to you of an action is

202. A ____ is a graph whose axes show the quantities of two inputs that are used to produce some output.

203. To an economist, the cost of a college education

204. Economists use models in order to

205. The tangent at point A on a curve has a positive slope. Therefore, the curve has a

206. Economic theory is a necessity, not a luxury. This statement is true because theory

207. Economists make assumptions because

208. Economists use models in order to

209. The slope of a curved line at a particular point is

210. Suppose Tammy grew up on a farm and is very good at plowing. In addition, suppose she is a popular country singer who earns $4,000 per performance. If her husband Bob can plow (but not as well as Tammy) but he can’t carry a tune, then it would be most efficient if

211. The principle of comparative advantage explains how

212. An “opportunity cost” may be described as

213. Regarding economic models, which of the following statements is NOT true?

214. Economic models cannot take the form of

215. When variable A rises by 10 units, variable B rises by 15 units. The slope of the line describing this relationship is

216. Which of the following statements is correct?

217. An introductory course in economics should allow a student to

218. A student eats a candy bar just prior to taking a test and receives a high grade. He does not buy one for the next test and receives a low score. On his third test, he again eats a candy bar and gets a high score. This student concludes that eating candy bars leads to higher test scores. His hypothesis

219. Some college students think that because a college degree greatly increases their earning potential there is no opportunity cost of attending college. How would an economist look at the matter?

220. Over the last 40 years, the gap between the rich and the poor in the United States has been increasing. Economists have justified this outcome by noting that

221. Because there is a trade-off between inflation and unemployment in the short run,

222. The opportunity cost of any good or service is the

223. Throughout the 1980s, accounting departments in U.S. universities were unable to fill many available faculty positions. This fact suggests that the salaries offered by these departments

224. Which person has the highest opportunity cost of obtaining a college degree (assuming that attending college requires giving up his or her current position)?

225. Economists and others use economic theory

226. A theory can best be defined as

227. What is the “right” degree of abstraction necessary to analyze an economic problem?

228. A line that rises at a 45 degree angle has a slope of

229. The rationale for rent control is that it protects moderate- to low-income families from the burden of rapidly rising rents and from eviction if they are unable to pay. It also prevents landlords from reaping windfalls as property values rise. Opponents note that rent controls usually lead to a reduced supply of rental housing and shortages. The proponents of rent controls support them primarily on the grounds of

230. When a teacher in a private school points out to her high school principal that since there are empty seats in all classrooms, the cost of additional students is really zero, she is using the

231. An economist is unlikely to be hired to do research about the following?

232. The dramatic increase in the standard of living since the Industrial Revolution

233. “Assume that all individuals have perfect information about prices now and in the future, that they have identical tastes, that all markets are competitive, and that there is no government." This statement is an example of how economists

234. A large factory pours its toxic wastewater into a nearby river, and as a result, the residents of a downstream community experience high rates of illness and birth defects. The economic problem illustrated by this example is

235. The slope of a curved line differs from that of a straight line in that

236. What is the role of value judgments in economic analysis?

237. It has been said that “economics is the science of common sense.” Is economics synonymous with common sense?

238. How would you interpret (1) an upward sloping curve and (2) a zero slope curve in a two variable diagram?

239. In the United States the distribution of income is relatively unequal, and output is relatively high, while in the former Soviet Union the distribution of income was more equal and output per worker was much lower. Give one possible explanation for this phenomenon.

240. In the early 1800s, there was a smallpox outbreak in a remote part of Russia. The government sent in a large group of army doctors, but they were too late to stop the epidemic. Thirty years later, there was another smallpox scare. A local statistician cautioned the government against a similar response, noting the increased mortality and high number of army doctors during the earlier epidemic. Was the statistician providing good advice?

241. Harry Truman is credited with the statement, “Give me a one-armed economist,” because economists are likely to say, “On the one hand, . . . on the other hand.” Why do economists “waffle” more than physicists or chemists?

242. Carefully distinguish between an economic theory and economic model.

243. It has been found that people die at a much higher rate in hospitals than in most other environments, leading some to conclude that hospitals cause death. What is the problem with this reasoning?

244. Explain the following statement: “Good decisions typically require marginal analysis, which weighs added costs against added benefits.”

245. How do markets respond to price ceilings and price floors? Do attempts to repeal the laws of supply and demand meet their objectives?

246. Explain why an airline may decide to sell an air ticket to a stand-by passenger at less than the full fare if there are empty seats on the airplane?

247. How does the United States differ from the European Union in how it balances the competing claims of equality and efficiency?

248. Why might well-educated economists disagree on appropriate public policy in some situations?

249. What are the tools available to governments to mitigate cycles of boom and bust? Why do these tools fail?

250. Economists often say that trade is a win–win situation. How do you justify this?

251. Suppose that one can read a graph that shows information about price and quantity of some product. Relying solely on the graph, is it possible to explain the relationship between the two variables?

252. Carefully define the following terms and explain their importance.

a. Variable

b. Ray

c. Slope

d. Contour map

253. Why do economists abstract, and is it appropriate?

254. A large airline calculates that the additional cost of a having a passenger on a flight to the Bahamas as the cost of a bag of peanuts and a soft drink, which totals $1.50, but the airline’s price is $600 for potential customers who want to buy vacant seats on the day of the flight. Which economic principle is this airline failing to utilize?

255. How is a production indifference map helpful?

256. How does correlation differ from causation? Give an example of each to illustrate your answer.

257. A student was heard to remark, “Even though I am certain to fail this course, I cannot withdraw from it since it is too late to get back my tuition.” Use one or more “Ideas for Beyond the Final Exam” to analyze this reasoning.

258. Many believe that fairness calls for higher income taxes on the wealthy. Using one of the “Ideas for Beyond the Final Exam,” explain how higher taxes on the wealthy will affect output.

259. Carefully define the following terms, and explain their importance in economics.

a. Opportunity cost

b. Abstraction

c. Theory

d. Model

e. Marginal analysis