Clever Concepts & Tumultuous Trade-offs
What is the economic significance of scarcity?
Limited resources force societies to choose how to allocate them efficiently regarding who receives them and for what purpose.
If the price of a good decreases what will happen to the quantity demanded for that good?
It will increase
What is the profit-maximizing rule for all firms?
Produce at the point where Marginal Revenue = Marginal Cost
Expansionary fiscal policy affects aggregate demand in which direction?
Increases (a shift to the right)
If a Country’s currency appreciates relative to another currency will it be more or less expensive to buy goods from that country?
More expensive
If a PPC is bowed out, what does that indicate about the opportunity cost?
The opportunity cost is increasing
How do you know if a price ceiling is binding?
If the price is below the equilibrium price in the market.
In the long run, what type of profit can firms in perfect competition earn?
Zero economic profit (normal profit).
If MPC is 0.6 and government spending increases by $100B, what is the maximum change in GDP?
$250B (multiplier = 1/(1-0.6) = 2.5)
If the U.S. dollar depreciates, what happens to U.S. net exports?
Net exports increase
A country can produce 30 units of wheat or 90 units of cloth. What is the opportunity cost of 1 unit of wheat?
3 units of cloth
If a good does not have many close substitutes and one can not switch out of it easily, what can be said about the demand for the good?
it is inelastic
A monopolist charges a price above marginal cost. What type of inefficiency does this create?
Allocative inefficiency (deadweight loss).
What happens to the real interest rate if the government runs a large deficit in an open economy?
It increases
If a country has a trade deficit what is happening in their financial account?
They have a financial account surplus.
If the marginal benefit of producing an extra unit exceeds the marginal cost, what should the firm do?
continue/increase production
A 10% increase in price causes a 20% drop in quantity demanded. How is the elasticity defined (elastic, unit elastic, inelastic)?
Elastic because the price elasticity of demand is 2 which is greater than 1.
What type of profit does a natural monopoly earn in the long run?
normal profit or zero economic profit.
If the central bank raises the reserve requirement. What happens to the money supply?
It decreases
If interest rates rise in the U.S. relative to other countries, what happens to the demand for the dollar and the value of the dollar?
Demand for the dollar increases and the dollar appreciates in value
A firm is what when they are producing where marginal benefit = marginal cost?
allocatively efficient
This term describes the relationship between two goods when an increase in the price of one leads to a leftward shift in the demand curve of the other?
complementary goods
Why does a Natural Monopoly experience economies of scale in the long run?
Its ATC is decreasing throughout its entire demand curve.
Which policy action could the central bank take if it wanted to decrease the price level?
any type of contractionary monetary policy such as increasing the federal funds rate.
A country imposes a tariff on imports. What is a likely effect on the prices consumers have to pay?
Consumers will face higher prices.