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187 Cards in this Set
- Front
- Back
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1. Economics is primarily the study of
a. how individuals make choices because of scarcity. b. how to succeed in business. c. how to make money in the stock market. d. how the values and preferences of people are formed. |
a
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2. Scarcity implies that when resources are used to accomplish one thing
a. it was an inefficient use of those resources. b. those resources are less available for use toward other things. c. those resources will soon be depleted. d. the cost of those resources will be lower than the cost of non-scarce resources. |
b
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. Lance Armstrong’s endurance, Albert Einstein’s intelligence, and Henry Fords’ ingenuity are all examples of
a. natural resources. b. physical resources. c. human resources. d. All of the above. |
c
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The benefit (or satisfaction) that an individual expects to derive from an activity is called
a. opportunity cost. b. utility. c. marginal cost. d. scarcity. |
b
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5. The most fundamental concept in economics is that
a. changes in incentives influence behavior in a predictable way—people will be less likely to choose an option as it becomes more expensive. b. changes in incentives generally do not influence human behavior. c. goods that are provided by government are free for society. d. individuals generally do not consider other alternatives when making a choice. |
a
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. Based on the idea of opportunity cost, which of the following students would be most likely to drop out of college before completing their degree?
a. a senior mathematics major with a solid B average b. a junior physical therapy student who has just read about the fantastic job offers available to students with degrees in her area c. a star college football player in his junior year that just received a $5 million offer from a professional team d. a junior economics major who wants to attend graduate school |
c
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The price of an airline ticket from Denver to Washington, D.C. costs $600. A bus ticket costs $150. Traveling by plane takes 6 hours compared with 51 hours by bus. Other things constant, an individual would gain by choosing air travel if, and only if, his time were valued at more than
a. $6 per hour. b. $8 per hour. c. $10 per hour. d. $15 per hour. |
c
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After eating 11 bananas in 20 minutes, Lashaunda says, “There is no way I can eat another banana” This statement best illustrates
a. the law of supply. b. the substitutability among goods. c. that bananas are an inferior good. d. the law of diminishing marginal utility. |
d
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Susan wishes to buy gasoline and have her car washed. She finds that if she buys 9 gallons of gasoline at $1.50 per gallon, the car wash costs $1, but if she buys 10 gallons of gasoline, the car wash is free. For Susan, the marginal cost of the tenth gallon of gasoline is
a. zero. b. 50 cents. c. $1. d. $1.50. |
b
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10. Voluntary exchange creates wealth
a. because trade moves products into the hands of people who value them more. b. only when trade results in new products being made. c. for one person at the expense of another person. d. because money is now used, where previously people simply traded goods for other goods. |
a
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. According to the law of comparative advantage, a country should import goods
or services a. only when it cannot provide those goods or services domestically. b. when it has something of comparable value to trade directly for a good or service. c. as little as possible. It is better to export as much as possible and import as little as possible. d. if other countries can provide those goods or services at a lower cost than they could be provided domestically. |
d
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. Giant retailers, such as Walmart, function as middlemen by
a. increasing the transaction costs associated with buying goods and services b. raising the price while providing nothing of value c. making it easier for buyers to find the goods and services they want and, thus, reducing transaction costs d. increasing the amount of time it takes for buyers to locate the goods and services they want. |
c
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When a business is making losses, it indicates that this business is
a. using resources to produce something that people value more. b. operating efficiently and maximizing the value of productive resources. c. likely to operate for a long time into the future. d. Using resources to produce something that people value less and it is likely that this business will shut down so that the resources can be put to alternative uses. |
d
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___ 14. When an entrepreneur like Bill Gates makes $10 billion through creating and selling new products,
a. there will be exactly $10 billion less for other individuals in the economy. b. the total size of the economic pie has been increased. c. there will be more than $10 billion in losses to other workers who lose their jobs. d. it is likely that the new products are not as good as other products that are available in the market. |
b
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The process by which new products and methods of production are continuously replacing old ones, such as when CD’s replaced audio tapes, is known as:
a. The invisible hand theory b. The replacement effect c. Creative destruction d. The fallacy of composition |
c
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Adam Smith’s invisible hand principle stresses
a. that benevolence is a powerful motivator that encourages individuals to engage in productive economic activity. b. the tendency of the competitive market process to direct self-interested individuals into activities that enhance the economic welfare of society. c. the potential of government regulation as a means of bringing the self-interest of individuals into harmony with the economic welfare of society. d. the tendency of self-interested individuals to pursue activities that benefit themselves but harm the overall economic welfare of society |
b
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17. What was a secondary effect of steel import quotas imposed in 2002, which
sharply reduced steel imports? a. U.S. steel prices fell overall. b. Goods that used steel in production became cheaper to make. c. U.S. exports rose as the steel industry exported larger amounts of its product. d. Other American industries that utilized steel curtailed employment because of rising steel prices and declining exports. |
d
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Legislation to protect red-cockaded woodpeckers created incentives that resulted in premature harvesting of trees the woodpeckers like to nest in. This is an example of which of the following?
a. Good intentions do not always lead to desirable outcomes. b. the fallacy of composition c. the use of ceteris paribus conditions in economic analysis d. Association is not causation |
a
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Which of the following best illustrates the fallacy of composition?
a. If Mr. Johnson had more money, he could afford to buy more goods. b. If Ms. Dawes stood up at a basketball game, she could get a better view of the game; if everyone stood up at a basketball game, everyone could have a better view of the game. c. If the price of bread rose, consumers would buy less; if consumers bought less bread, the price of bread would rise. d. High housing prices cause people to buy less housing, but an increase in income might cause them to buy more housing. |
b
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Figure 1
___ 20. In Figure 1, there are two triangular areas indicated by the letters A and B. Which of the following is true? a. A represents consumer surplus; B represents producer surplus. b. A represents producer surplus; B represents consumer surplus. c. Both areas A and B represent consumer surplus. d. Both areas A and B represent producer surplus. |
a
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The law of demand refers to the
a. inverse relationship between the price of a good and the willingness of consumers to buy it. b. price increase that results from an increase in demand for a good of limited supply. c. inverse relationship between the price of a good and the quantity offered for sale. d. increase in the quantity of a good available when its price increases. |
a
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Which of the following would be most likely to cause the demand for Miller beer to increase?
a. a decrease in the price of Miller beer b. an increase in the price of Budweiser beer (a substitute good) c. a decrease in the price of barley used to make Miller beer d. All of the above |
b
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23. According to the law of supply, as the price of a good increases,
a. buyers will buy more of the good. b. buyers will buy less of the good. c. sellers will produce more of the good. d. sellers will produce less of the good. |
c
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24. Chuck Norris is paid $25,000 to sell his latest stock of Total Gyms even though he would have been willing to have sold them for as little as $20,000, this indicates that
a. Chuck Norris received no producer surplus from the transaction. b. Chuck Norris received $5,000 of producer surplus from the transaction. c. Chuck Norris received $20,000 of producer surplus from the transaction. d. Chuck Norris received $25,000 of producer surplus from the transaction. |
b
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___ 25. A technological breakthrough lowers the cost of manufacturing DVDs. As a result, the market changes to a new equilibrium because of
a. an upward movement along the demand curve for DVDs. b. a rightward shift in the demand curve for DVDs. c. a rightward shift in the supply curve for DVDs. d. a leftward shift in the supply curve for DVDs. |
c
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A recent study suggested that moderate wine drinking may actually benefit one’s health. If this information leads to an increased demand for wine, we would expect
a. both the price and quantity of wine sold to increase. b. both the price and quantity of wine sold to decrease. c. the price to decrease and the quantity of wine sold to increase. d. the price to increase and the quantity of wine sold to decrease. |
a
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A tariff on Chinese imports has increased the price of tires used to make nice cars (a
normal good). At the same time, the general income level of the population has decreased. Given these two effects, what can we say about the equilibrium price and quantity of nice cars? a. Equilibrium quantity will decrease; the effect on price is ambiguous. b. Equilibrium price will decrease; the effect on quantity is ambiguous. c. Equilibrium price will increase; the effect on quantity is ambiguous. d. Equilibrium quantity will decrease; equilibrium price will increase. |
a
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___ 28. Other things constant, an increase in the demand for automobiles will
a. decrease the price of automobiles. b. decrease the quantity of automobiles bought and sold. c. decrease the demand for automobile workers and lower their wages. d. increase the demand for automobile workers and increase their wages. |
d
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When several hurricanes hit Florida in 2004, a number of local governments imposed price controls that prevented sellers from raising their prices for badly needed products like plywood and generators. In the areas where the controls were imposed, they resulted in
a. an expanded availability of these badly needed products. b. a reduced availability of these badly needed products. c. an increase in the speed with which people recovered from the hurricanes. d. a more efficient allocation of these goods for which price controls were in effect. |
b
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If an increase in the government-imposed minimum wage pushes the price (wage) of unskilled labor above market equilibrium, which of the following will most likely occur in the unskilled labor market?
a. an increase in quantity of unskilled labor demanded b. a decrease in the quantity of unskilled labor supplied c. a shortage of unskilled labor d. a surplus of unskilled labor (unemployment) |
d
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With a price ceiling above the equilibrium price,
a. quantity demanded would exceed quantity supplied. b. quantity supplied would exceed quantity demanded. c. the market would be in equilibrium. d. the equilibrium price would be expected to fall over time. |
c
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The more inelastic the demand for a product, the more likely that the actual burden of a tax on the product will
a. fall on sellers. b. fall on buyers. c. fall equally on both buyers and sellers. d. create a larger deadweight loss (or excess burden). |
b
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Figure 2
___ 33. Refer to Figure 25. The benefit to the government is a. measured by tax revenue and is represented by area A + B. b. measured by tax revenue and is represented by area B + D. c. measured by the net gain in total surplus and is represented by area B + C. d. measured by the net gain in total surplus and is represented by area D + E. |
b
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34. Carrie Bradshaw works full time during the day as a columnist and faces a 30 percent marginal tax rate. If Carrie were to get an offer to write a book for $10,000, how much of this additional income would she be able to keep as net pay after taxes?
a. $1,000 b. $3,000 c. $7,000 d. $10,000 |
c
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The deadweight loss resulting from levying a tax on an economic activity is the
a. tax revenue raised by the government as the result of the tax. b. loss of potential gains from trade from activities forgone because of the tax. c. increase in the price of an activity as the result of the tax levied on it. d. marginal benefits derived from the expansion in government activities made possible by the increase in tax revenues. |
b
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Economics is primarily the study of
a. why people like to make money. b. the management of a business. c. the choices people make as the result of scarcity. d. how to make money in the stock market. |
c
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___ 2. With the passage of time and advancements in technology, scarce resources
a. can be transformed into goods and services more efficiently, but still remain scarce. b. are no longer scarce. c. become cheaper to obtain and more readily available to the consumer. d. become less scarce, so that we do not have to choose between alternative uses of those resources. |
a
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The pencil you are writing with, the building you are sitting in, and the desk you writing on are all considered
a. natural resources. b. physical resources. c. human resources. d. All of the above |
b
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In economics the term utility refers to
a. the subjective benefit or satisfaction a person expects to receive from a choice or course of action. b. the number of possible uses for a resource. c. the fact that human desire for goods is unlimited while the resources available to meet those desires is limited. d. the highest valued alternative that must be sacrificed when a choice is made. |
a
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Which of the following is true?
a. Changes in personal costs and benefits will exert a predictable impact on the choices of human decision makers. b. Only direct monetary costs matter in making decisions. c. If a good is provided free to an individual, its production will not consume valuable scarce resources. d. Secondary effects are seldom of importance in economics. |
a
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For most students attending state universities, the largest cost component of going to college is
a. the cost of books and supplies. b. the cost of room and board. c. tuition. d. the opportunity cost in terms of forgone current income from the time spent attending college. |
d
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7. Air travel from New York to Miami costs $300 and takes 6 hours. A bus ticket between the cities costs $150 and takes 56 hours. Other things constant, the minimum value of one’s time that would induce a rational individual to fly rather than drive would be
a. $1 per hour. b. $3 per hour. c. $5 per hour. d. $50 per hour. |
b
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After eating 11 bananas in 20 minutes, Samantha says, “There is no way I can eat another banana” This statement best illustrates
a. the law of supply. b. that bananas are an inferior good. c. the law of diminishing marginal utility. d. the substitutability among goods. |
c
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Ralph wants to buy some milk and a box of cereal. If Ralph buys 2 quarts of milk at $1 per quart, the box of cereal costs 75 cents. If he buys 3 quarts of milk at $1 per quart, the box of cereal is free. For Ralph, the marginal cost of the third quart of milk is
a. zero. b. 25 cents. c. 75 cents. d. $1. |
b
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. In sports, as with any entity motivated by trade, two teams will engage in a trade
a. because the team performing well will take advantage of the under-performing team. b. if one team has no other options but to engage in a trade. c. because both teams expect to improve their position from the trade. d. as long as neither team is vastly improved by the trade |
c
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. According to the law of comparative advantage, it makes sense for an
individual or a business to hire someone else to perform a service a. when the opportunity cost of performing that service themselves is high. b. when the opportunity cost of performing that service themselves is low. c. if someone else is worse at performing the service and needs to practice. d. only when they do not have enough time to do it themselves. |
a
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Which of the following scenarios would most likely result in increased
transaction costs? a. A new mall opens bringing together area merchants at one location. b. A city ordinance bans large “superstores” in order to preserve small, local businesses. c. A canal is dug, allowing ships to reduce travel time by 50 percent. d. A website quickly connects new students to people seeking roommates |
b
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If a business is losing money on the goods it is producing, the losses indicate
that a. the price of the goods are set too low and should be raised. b. the resources used to produce the goods are too expensive. c. the consumer fails to recognize the value of the good, so the goods should be better marketed. d. the resources used to produce the goods are not being used productively and should be put to alternative uses. |
d
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The direct link between helping others and earning income provides a strong
incentive to a. skip college and work for a non-profit organization. b. enter into those professions that have a stated purpose of helping people, as opposed to professions that are only out for profit. c. acquire skills and invest in education that will increase the ability to provide valuable goods and services to others. d. only help others when there is high income involved. |
c
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When an emerging industry renders an existing industry obsolete because of
advances in technology a. it is bad for the economy because the people in the existing industry will be out of jobs. b. it spurs economic progress through increased productivity and the demand for new jobs. c. there is no net benefit to the economy because one industry simply replaces another. d. it spurs economic progress, but at the expense of jobs. |
b
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“When directed by competitive market prices, self-interested individuals will tend to pursue activities that also promote the general welfare of society.” This statement most clearly reflects the
a. fallacy of composition. b. law of comparative advantage. c. invisible hand principle. d. law of demand. |
c
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. The popularity of trade restrictions, tariffs, and quotas is often accounted for
because a. the immediate benefits are highly visible, while the secondary effects of lost jobs in other industries are less visible. b. the benefits are felt domestically, while the secondary effects only negatively impact other nations. c. the benefits of “job protection” are greater than the costs of other jobs that may be lost due to the restrictions. d. there are very few secondary effects. |
a
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Legislation to protect red-cockaded woodpeckers created incentives that resulted in premature harvesting of trees the woodpeckers like to nest in. This is an example of which of the following?
a. Association is not causation. b. the fallacy of composition c. the use of ceteris paribus conditions in economic analysis d. Good intentions do not always lead to desirable outcomes. |
d
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“If Tom had twice as much money, he could consume twice as much. If everyone had twice as much money, they could consume twice as much.” This quote illustrates
a. the difference between positive and normative economics. b. the fallacy of composition. c. that association is not causation. d. the law of unintended consequences |
b
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The law of demand refers to the
a. decrease in price that can be expected as more units of a product are demanded. b. increase in price that results from an increase in demand for a good of limited supply. c. inverse relationship between the price of a good and the quantity demanded. d. increase in the quantity of a good available when its price increases. |
c
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If cigars and cigarettes are substitute goods, an increase in the price of cigars would result in
a. an increase in the demand for cigarettes. b. a decrease in the price of cigarettes. c. a decrease in the demand for cigarettes. d. a decrease in the demand for cigars. |
a
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According to the law of supply, as the price of a good increases,
a. buyers will buy more of the good. b. buyers will buy less of the good. c. sellers will produce more of the good. d. sellers will produce less of the good. |
c
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Bill is willing to cut lawns for a minimum of $200 a week. He is, however, paid $250 for the same service by a lawn maintenance company. This is an example of
a. consumer surplus. b. employment discrimination. c. the derivation of accounting profit. d. producer surplus |
d
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An increase in the price of plastic raises the cost of manufacturing VCRs. As a result, the market changes to a new equilibrium because of
a. a surplus of VCRs. b. an increase in the demand for VCRs. c. a leftward shift in the demand curve for VCRs. d. a leftward shift in the supply curve for VCRs |
d
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After a hurricane in Florida knocked out the regional water supply for several days, the demand for bottled water increased sharply. In a market economy, how will this increase in demand affect the equilibrium price and quantity of bottled water?
a. Price will increase, and quantity will decrease. b. Price will decrease, and quantity will decrease. c. Price will decrease, and quantity will increase. d. Price will increase, and quantity will increase |
d
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. The government imposes a tax on Roman Noodles (an inferior good). The income of the
general population has decreased. Given these two effects, what can we say about the equilibrium price and quantity of Roman Noodles? a. Equilibrium price will decrease, equilibrium quantity will increase. b. Equilibrium quantity will decrease; the effect on price is ambiguous. c. Equilibrium price will increase; the effect on quantity is ambiguous. d. Equilibrium quantity will increase; the effect on price is ambiguous. |
c
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If the demand for a consumer good decreases, the demand for resources required to produce the good will
a. increase. b. decrease. c. remain unchanged. d. increase if the demand for the consumer good is relatively inelastic; otherwise, the demand will decrease. |
b
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After a natural disaster, such as a hurricane, the increased demand for certain items (like lumber, electric generators, and chainsaws) causes their prices to rise. These higher prices
a. discourage the flow of these items into the area. b. encourage consumers to purchase the items even if they do not plan to use them. c. help to direct the items toward their highest valued uses. d. do all of the above. |
c
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A legally mandated minimum wage is an example of
a. the invisible hand principle. b. a price floor. c. a price ceiling. d. a fringe benefit. |
b
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With a price floor below the equilibrium price,
a. the market would be in equilibrium. b. quantity supplied would exceed quantity demanded. c. quantity demanded would exceed quantity supplied. d. the equilibrium price would be expected to rise over time |
a
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The burden of a tax will fall primarily on sellers when the
a. demand for the product is highly inelastic and the supply is relatively elastic. b. demand for the product is highly elastic and the supply is relatively inelastic. c. tax is legally (statutorily) imposed on the seller of the product. d. tax is legally (statutorily) imposed on the buyer of the product. |
b
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Carrie Bradshaw works full time during the day as a columnist and faces an 80 percent
marginal tax rate. If Carrie were to get an offer to write a book for $10,000 , how much of this additional income would she have to pay in taxes? a. $1,000 b. $2,000 c. $8,000 d. $10,000 |
c
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When the government levies a tax in a market, some of the trades that would have occurred are now forgone. Economists call the losses from this forgone activity
a. regressive taxation. b. progressive taxation. c. the neutrality of taxation. d. the deadweight loss of taxation |
d
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Entrepreneurs generally have higher savings-rates, which further contributes to
their wealth, because a. they are more disciplined at transferring business profits into savings accounts. b. they invest much of their profit in the stock market. c. they are more frugal than others, so they are able to save more. d. they often reinvest profits back into the business for improvement and expansion. |
d
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A monthly budget can help you achieve financial security by
a. Helping you choose stocks that are most likely to increase in price. b. Reducing the likelihood that you will face unexpected expenditures for maintenance and repairs. c. Expanding the borrowing limits on your existing credit cards and increasing the number of credit cards you hold. d. Increasing your financial awareness and helping you allocate your funds more effectively. |
d
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What is the advantage of saving within a tax sheltered investment such as a traditional
IRA? a. It reduces your taxable income, which allows you to keep and invest more of your money now. b. It leaves your taxable income unchanged, but allows you to withdraw the money without paying taxes later in life. c. It increases your current taxable income, but allows you to pay taxes at a later time. d. There are no financial benefits, but it takes money from your paycheck before you can spend it. |
a
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Which of the following is generally considered worth financing over a lengthy period of
time? a. Your honeymoon b. Your college tuition payments c. A ticket to see your favorite band d. All of the above |
b
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Because we will incur the expense of unexpected events throughout the year,
a. it is impossible to budget for them since we do not know when they will occur. b. we can budget for the fact that they will occur, even if we cannot predict when they will occur. c. we will always be unprepared for them, simply because they are unexpected. d. we should always keep a credit card with an unused balance on hand. |
b
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The best and most likely way to have accumulated a million dollars or more at retirement is to
a. win the lottery close to retirement. b. devote your life to work and just start saving when you are close to retirement. c. begin saving early, maybe make a few minor sacrifices, and take advantage of compound interest. d. become a shrewd investor in the stock market who buys and sells stocks on a daily basis in an attempt to beat the market return. |
c
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Holding a large amount of stock in a company that also employs you is
a. Always smart, because you can benefit in two ways from the company doing well. b. risky, because your employment and the value of your investment is dependent on one company. c. diversifying, because even if you lose your job you can still benefit from the company being profitable. d. safe, because the company you work for is far less likely to go out of business than other companies with which you don’t hold stock. |
b
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The average return on stocks is significantly higher than returns on savings accounts and
government bonds because a. the stock market is a safer investment. b. of the higher risk associated with investing in the stock market. c. the rate of return is guaranteed when investing in the stock market. d. of the high volatility associated with investing in government bonds. |
b
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If a company is on the verge of new technology that has potential for high future profits,
the random walk theory would indicate that a. stock of that company should be purchased before the price increases. b. the likelihood that the new technology is actually profitable is random. c. the current price of the stock will already reflect future potential profit. d. People should stay away from this stock because it is actually more likely to fail |
c
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If there is an unexpected decrease in the interest rate, the market price of an outstanding
long term bond (for example, one that will not mature for another 20 years) will generally a. increase. b. decrease more than the interest rate. c. decrease by the same amount as the interest rate d. remain the same; the market value of outstanding bonds is unaffected by the interest rate. |
a
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What should be the portfolio mix of stocks and bonds for a person saving for a down payment to buy a house within the next couple of years?
a. almost exclusively stocks b. a much larger mix of stocks than bonds c. an equal amount of stocks and bonds d. almost exclusively bonds |
d
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When there is potential conflict between what is best for the investor and what is best for
an agent hired to solicit investors, economists refer to this as a. the principal-agent problem. b. the random walk theory. c. the mechanic’s dilemma. d. high pressure marketing techniques. |
a
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What is one way to teach children about the value of money?
a. Buying them a brand new car. b. Paying their way through school c. Keeping all financial decisions from them until they are older. d. Encouraging them to get a part-time job to pay for some of their own expenses |
d
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The widespread financial insecurity of Americans is primarily because
a. The incomes of Americans are low. b. Most Americans save a very high proportion of their income. c. Government programs are unavailable to help people when they are disabled or experience unemployment. d. The saving rate of Americans is low and many borrow in order to spend more than they earn. |
d
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. It is costly to purchase a new car every two or three years because
a. The maintenance cost of a new car is generally higher than for a used one. b. The financing cost is significantly higher for a new car than for a used one. c. A new car will depreciate rapidly in value during the first few years of use. d. The taxes for the fuel of a new car are generally higher than for a used one. |
c
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. What is the best way to take advantage of the historically higher returns associated with
investing in the stock market? a. Investing in a managed equity fund that has performed well in recent years. b. Investing in an indexed fund tied to a diverse set of stocks, such as the S&P 500. c. Finding a good individual company stock and sticking with it. d. Investing only in stocks that pay dividends. |
b
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___ 17. According to the rule of 70, how long will it take an investment to double if the rate of
return is 5%. a. 5 years b. 10 years c. 14 years d. 70 years |
c
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Which one of the following is a tip for avoiding investment fraud?
a. Only deal with reputable parties b. Make sure your investment purchases are in person, over the phone, or by email c. It is alright to be forced into a quick decision, but only if that person is a friend or family member d. Invest in companies that use high pressured marketing techniques because they frequently have the best investments |
a
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. According to the investment formula that Mr. Terry Biebout mentioned in his financial
presentation to this class, what percentage of a 24 year old person’s financial portfolio should be invested in stocks? a. 24% b. 48% c. 76% d. 100% |
c
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Private property rights involve
a. the right to exclusive use of the property. b. legal protection against those who would seek to use or abuse the property without the owner’s permission. c. the right to transfer, sell, exchange, or mortgage the property. d. all of the above. |
d
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In Africa, which of the following policies has been most successful at increasing elephant populations?
a. banning the ivory trade (making the buying and selling of ivory illegal) b. making elephants the common property of the people of the country through government ownership and control and making the killing of elephants illegal c. allowing private ownership of elephants and making the ivory trade legal d. When used together, the policies in a and b have been more successful than the policy in c. |
c
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. Competition is the lifeblood of a market economy because
a. it results in low-cost production, even though it often results in poor quality as well. b. everyone is allowed to produce whatever they want, regardless of costs or quality. c. it weeds out high-cost producers and concentrates production to those whose costs are low. d. it results in high profits, even though resources are being used inefficiently. |
c
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Which of the following would be most likely to cause the demand for Miller beer to increase?
a. a decrease in the price of Miller beer b. an increase in the price of Budweiser beer (a substitute good) c. a decrease in the price of barley used to make Miller beer d. All of the above |
b
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With a price floor below the equilibrium price,
a. quantity demanded would exceed quantity supplied. b. quantity supplied would exceed quantity demanded. c. the equilibrium price would be expected to fall over time. d. the market would be in equilibrium |
d
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The more inelastic the supply of a product, the more likely that the actual burden of a tax on the product will
a. fall on sellers. b. fall on buyers. c. fall equally on both buyers and sellers. d. create a larger deadweight loss (or excess burden). |
a
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___ 26. Joe wants to upgrade his current cell phone for a new one. How would marginal
decision making help Joe decide if this is a good idea? a. He should consider what his life would be like without a cell phone. b. He should add up his total cell phone expenses from last year. c. He should weigh the cost of upgrading his phone with the additional benefits he expects to receive from a new phone. d. If he is going to upgrade his phone regardless, he might as well get the best phone available. |
c
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In a market economy, when a company or industry is subsidized because it is not
profitable, a secondary effect of the subsidies will likely be that a. jobs will be saved, so the subsidies were used in an efficient manner. b. resources that were being used unproductively will continue to be utilized toward unproductive uses. c. the company or industry will stabilize and become profitable. d. the subsidies are directing resources toward wealth-creating projects. |
b
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Why is it the case that diamonds, which are not essential to our survival, are so
expensive while water, which is most essential to our survival, is so cheap? a. We already have a lot of water available to us, but not so many diamonds, so the additional benefit we gain from more water will be less than the additional benefit we get from more diamonds. b. With the invention of other products, water is not nearly as important as it used to be and, therefore, has decreased in value. c. The value of water has gone down as a result of severe levels of pollution. d. People are too ignorant to know how useless diamonds are and so they will pay a lot for them. |
a
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Your friend claims that Walmart should have its greeters control which checkout lines people go to because this way the greeters can plan ways for everyone to get through the lines as quickly as possible. Having taken economics, you politely correct your friend by saying that self-interested people will already automatically choose to get into the shortest lines and this will cause everyone to get through the line as quickly as possible. You tell your friend that this is most clearly a reflection of the
a. fallacy of composition. b. law of comparative advantage. c. invisible hand principle. d. law of demand. |
c
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Winston is a ghostbuster and also an excellent typist. He can type 120 words per minute, but he is pressed for time because he has all the ghostbusting work he can handle at $100 per hour. Janine is a secretary and would like some typing work but can only type 60 words per minute. According to the law of comparative advantage, Winston should hire Janine to do his typing if and only if her wage rate is less than
a. $10 per hour. b. $50 per hour. c. $60 per hour. d. $100 per hour. |
b
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Which of the following statements about voluntary exchange is false?
a. The expectation of gain motivates people to engage in trade. b. If a party to a potential exchange does not believe that it will lead to personal gain, he or she can chose not to engage in the trade. c. Voluntary exchange is generally mutually advantageous to the trading partners. d. If one trading partner gains, the other must lose. |
d
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Use the table below to choose the correct answer.
Income Tax (dollars) (dollars) 10,000 4,000 20,000 5,000 30,000 6,000 For the income range illustrated, the tax shown here is a. regressive. b. proportional. c. progressive. d. progressive up to $20,000 but regressive beyond that. |
a
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. The government removes a tax from the production of orange juice. At the same time, the price of grape juice (a substitute good) has increased. Given these two effects, what can we say about the equilibrium price and quantity of orange juice?
a. Equilibrium quantity will decrease, equilibrium price will increase. b. Equilibrium price will decrease; the effect on quantity is ambiguous. c. Equilibrium price will increase; the effect on quantity is ambiguous. d. Equilibrium quantity will increase; the effect on price is ambiguous. |
d
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Which of the following would be the best example of consumer surplus?
a. Jane pays $30 a month for phone service even though it is worth $70 to her. b. Sam refuses to pay $10 for a hair cut because it is only worth $8 to him. c. Fred buys a car for $4,000, the maximum amount that he would be willing to pay for it. d. When Sue purchases a candy bar for $.50, she uses a $20 bill to pay for it. |
a
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Employees can adopt the characteristics of self-employed entrepreneurs by
a. investing their savings into stocks, thus experiencing some of the returns that come with business ownership. b. working longer hours and saving more of what they earn. c. developing talents, skills, and work habits that are highly valued by their employer or company. d. all of the above |
d
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When developing a budget, a regular savings plan
a. should be kept separate from the budget. b. should be funded with discretionary income. c. should only be included if there is money left over. d. should be treated like housing, food, transportation, and other regular expenses. |
d
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What is the advantage of saving within a tax sheltered investment such as a Roth IRA?
a. It reduces your taxable income, which allows you to keep and invest more of your money b. It leaves your taxable income unchanged, but allows you to withdraw the money without paying taxes later in life. c. It increases your current taxable income, but allows you to pay taxes at a later time. d. There are no financial benefits, but it takes money from your paycheck before you can spend it. |
b
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Which of the following is generally considered worth financing over a lengthy period of time?
a. An expensive dinner at a fancy restaurant b. Superbowl tickets c. Your house d. None of the above |
c
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___ 5. The alternative to a “real world” savings account is
a. remembering that the likelihood of incurring unexpected costs is low. b. probably having enough money on hand to cover the expenses. c. being able to defer the costs of an unexpected event until a time when it is more convenient to pay. d. running up credit card balances or borrowing funds on highly unfavorable terms when an unfortunate event does happen. |
d
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The “miracle of compound interest” is a key to saving for retirement because
a. though the interest being earned is reducing current consumption, it is increasing future wealth. b. it works the same no matter when you begin saving for retirement. c. the interest being earned on interest accumulates rapidly and does not reduce current consumption. d. though it requires a large amount of money to take advantage of compound interest, it forces you to save for retirement. |
c
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Holding a large amount of stock in a company that also employs you is
a. Always smart, because you can benefit in two ways from the company doing well. b. risky, because your employment and the value of your investment is dependent on one company. c. diversifying, because even if you lose your job you can still benefit from the company being profitable. d. safe, because the company you work for is far less likely to go out of business than other companies with which you don’t hold stock. |
b
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In a diversified portfolio, the rate of return
a. will be more volatile than that of a single stock. b. is guaranteed to be really high because of the law of large numbers. c. will converge toward the average returns of all the investments. d. will be zero, as the investments that do well will be offset by the investments that do poorly. |
c
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The idea that all known information has been capitalized into the price of the stock so that the only thing that can change the price of the stock are those things that are currently unforeseeable is called
a. the law of large numbers b. the random walk theory c. the principle-agent problem d. investment effect |
b
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If there is an unexpected increase in the interest rate, the market price of an outstanding long term bond (for example, one that will not mature for another 20 years) will generally
a. decrease. b. increase more than the interest rate. c. increase by the same amount as the interest rate d. remain the same; the market value of outstanding bonds is unaffected by the interest rate. |
a
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What should be the portfolio mix of stocks and bonds for a person saving for a down payment to buy a house within the next couple of years?
a. almost exclusively stocks b. a much larger mix of stocks than bonds c. an equal amount of stocks and bonds d. almost exclusively bonds |
d
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. An agent can potentially mislead an investor of both the risks and potential returns of an investment in cases where
a. the agent’s potential returns are tied to the investor’s potential returns. b. the investor is knowledgeable about the investment. c. the investor has little knowledge of the investment. d. the agent has nothing to gain from the investor’s potential investment. |
c
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. What is one way to teach children about the value of money?
a. Buying them a brand new car. b. giving them an allowance c. linking an allowance to performing household chores or other types of labor. d. keeping all financial decisions from them until they are older. |
c
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Which of the following is responsible for the current high level of financial insecurity in America?
a. Recently Americans have been consuming more and saving less b. The level of unpaid credit card balances have increased in recent years c. Interest as a percentage of household income has reached new heights in recent years d. All of the above |
d
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An indexed equity mutual fund
a. is directly tied to the consumer price index. b. is a fund that hires a manager who will try to pick the stocks that will increase most in value in the future. c. merely holds stocks in the same proportion as they exist in a broad stock market index like the Standard & Poor's 500. d. will have high operating costs because these funds engage in a substantial amount of stock trading. |
c
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It is costly to purchase a new car every two or three years because
a. The maintenance cost of a new car is generally higher than for a used one. b. The financing cost is significantly higher for a new car than for a used one. c. A new car will depreciate rapidly in value during the first few years of use. d. The taxes for the fuel of a new car are generally higher than for a used one. |
c
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According to the rule of 72, how long will it take an investment to double if the rate of
return is 8%. a. 8 years b. 9 years c. 14 years d. 72 years |
b
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According to the investment formula that Mr. Terry Biebout mentioned in his financial
presentation to this class, what percentage of a 20 year old person’s financial portfolio should be invested in stocks? a. 20% b. 40% c. 80% d. 100% |
c
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Which one of the following is NOT a tip for avoiding investment fraud?
a. If it looks too good to be true it probably is b. Never purchase an investment by phone or email c. It is alright to be forced into a quick decision, but only if that person is a friend or family member d. Avoid investments that use high pressured marketing techniques |
c
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Private property rights involve
a. the right to exclusive use of the property. b. legal protection against those who would seek to use or abuse the property without the owner’s permission. c. the right to transfer, sell, exchange, or mortgage the property. d. all of the above. |
d
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In Zimbabwe and Botswana, elephants can be owned by local tribes and trade in ivory is legal, while in countries such as Kenya, it is illegal to trade in ivory and elephants cannot be privately owned but are protected by the government. Which of the following is true regarding the change in the elephant populations since 1979 in these countries?
a. In Zimbabwe and Botswana, elephants are near the verge of extinction, while in Kenya, the population of elephants is growing rapidly. b. There has been a similar decline in the population of elephants in all of these countries. c. There has been a similar increase in the population of elephants in all of these countries. d. In Zimbabwe and Botswana, elephant populations have more than doubled, while in Kenya, the population of elephants has fallen to less than one-third of its previous level. |
d
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For firms to be successful in a competitive market,
a. they must eliminate all other competition. b. they must offer consumers at least as much value as is available from rivals. c. they must charge high enough prices to cover their costs. d. they have to pay their employees low wages. |
b
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Which of the following would be most likely to cause the demand for Miller beer to increase?
a. a decrease in the price of Miller beer b. an increase in the price of Budweiser beer (a substitute good) c. a decrease in the price of barley used to make Miller beer d. All of the above |
b
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With a price floor below the equilibrium price,
a. the market would be in equilibrium. b. quantity supplied would exceed quantity demanded. c. quantity demanded would exceed quantity supplied. d. the equilibrium price would be expected to fall over time. |
a
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The more elastic the supply of a product, the more likely that the actual burden of a tax on the product will
a. fall on sellers. b. fall on buyers. c. fall equally on both buyers and sellers. d. create a smaller deadweight loss (or excess burden). |
b
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Websites, such as Amazon.com and eBay, function as middlemen by
a. increasing the costs associated with matching sellers and buyers. b. decreasing the volume of internet trade. c. increasing the efficiency in matching sellers and buyers. d. increasing the amount of time it takes for buyers to locate sellers. |
c
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Which of the following provides the clearest evidence that a business firm is using resources productively?
a. high wages paid to workers b. low wages paid to workers c. profit d. loss |
c
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Which of the following best explains the water-diamond paradox where water, which is
necessary for life, is so cheap and diamonds, which are relatively useless, are so expensive? a. The total value of water is higher than the total value of diamonds and that is why diamonds are more expensive b. The total value of diamonds is higher than the total value of water and that is why diamonds are more expensive c. Diamonds and water are equally valuable, people just get tricked into paying more for diamonds d. The marginal value of an additional diamond is higher than the marginal value of additional water and that is why diamonds are more expensive. |
d
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Your friend claims that Walmart should have its greeters control which checkout lines people go to because this way the greeters can plan ways for everyone to get through the lines as quickly as possible. Having taken economics, you politely correct your friend by saying that self-interested people will already automatically choose to get into the shortest lines and this will cause everyone to get through the line as quickly as possible. You tell your friend that this is most clearly a reflection of the
a. fallacy of composition. b. law of comparative advantage. c. law of demand. d. invisible hand principle. |
d
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Miranda is an attorney and also an excellent typist. She can type 120 words per minute, but she is pressed for time because she has all the legal work she can handle at $80 per hour. Miranda’s friend Steve drives a taxi and would like some typing work but can only type 60 words per minute. The law of comparative advantage indicates
a. Miranda should do the typing. b. Steve should do the typing, provided he is willing to do so for less than $80 per hour. c. Steve should do the typing, provided he is willing to do so for less than $40 per hour. d. Steve should do the typing, provided he is paid more than $40 per hour. |
c
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If Matt trades two candy bars to Andy in exchange for one baseball card,
a. Matt must have valued the baseball card more than the two candy bars. b. Andy must have valued the two candy bars more than the baseball card. c. Matt must lose an equal amount if Andy gains. d. Both a and b are correct, c is incorrect. |
d
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Income Tax
(dollars) (dollars) 10,000 2,000 20,000 4,000 40,000 8,000 The tax schedule shown here is a. regressive. b. proportional. c. progressive. d. proportional up to $20,000 and regressive beyond that. |
b
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The Laffer curve indicates that
a. when tax rates are low, a decrease in tax rates is likely to increase tax revenues. b. when tax rates are high, an increase in tax rates is likely to a decrease in tax revenues. c. tax revenue will always increase when tax rates are increased. d. tax revenue will always decrease when tax rates are lowered. |
b
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The government imposes a tax on the production of orange juice. At the same time, the price of grape juice (a substitute good) has decreased. Given these two effects, what can we say about the equilibrium price and quantity of orange juice?
a. Equilibrium quantity will decrease; the effect on price is ambiguous. b. Equilibrium price will decrease; the effect on quantity is ambiguous. c. Equilibrium price will increase; the effect on quantity is ambiguous. d. Equilibrium quantity will increase, equilibrium price will decrease. |
a
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Bill pays $150 a month for electricity, when he would be willing to pay $250 for the same service. This is an example of
a. consumer surplus. b. producer surplus. c. irrational pricing by the electric company. d. This is a trick question because nobody pays less for something than it is worth to them. |
a
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Which of the following is the best example of a public good?
a. public financing of a new stadium b. free healthcare c. education d. national defense |
d
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If a project is approved by a majority of voters, would this be a good indication that the
project is economically productive? a. No, only projects that are undertaken through market allocation are economically efficient, it is impossible for the government to do something where the benefits outweigh the costs. b. No, because while the project may benefit the majority, the costs to the minority who voted against it may be greater. c. Yes, because the majority of voters are indicating that they are willing to bear the cost of the project. d. Yes, if a majority of voters approve a project, then it is economically productive. |
b
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The opportunity cost of producing goods supplied by the government is
a. the amount of taxes required to pay for producing those goods. b. the potential use in the private sector of the resources used to produce goods supplied by the government. c. zero, only if the government can produce the goods cheaper than the private sector. d. zero, because the government is producing the goods instead of the private sector. |
b
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. For vote-seeking politicians, special-interest groups represent
a. a group representing interests with which politicians should not be concerned. b. a reliable sample of the issues that are important to the general voting-public. c. an easily-identifiable source of campaign workers and political contributions. d. the issues that are vital to economic growth. |
c
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Budget deficits are politically attractive to politicians because
a. deficits make it possible to provide benefits to voters without having to impose corresponding taxes. b. deficits are normally offset by budget surpluses of previous years. c. the cost of political benefits is passed on to the voter in the form of higher current taxes. d. the costs associated with political benefits are accounted for promptly and tied directly to the benefits. |
a
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Which of the following contributed to the severity of the Great Depression in the 1930s?
a. large increases in taxes designed to balance the budget in the early 1930s b. large increases in the money supply during the early 1930s c. a reduction in tariffs protecting many U.S. industries d. a substantial tax rate reduction, which led to large deficits and high interest rates during the early 1930s |
a
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Which of the following was a direct result of the Smoot-Hawley trade bill of 1930?
a. The stock market began a steady recovery from the crash of October 1929. b. Many countries responded by imposing higher tariffs on American products, reducing overall trade. c. Imports decreased, while exports increased, resulting in an overall increase in GDP and tariff revenues. d. The unemployment rate, which had been rising, began to steadily decline as jobs were protected by the trade restrictions |
b
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How can the Federal Reserve Bank be held accountable to achieve monetary and price
stability? a. Salary and funding incentives of the Bank can be tied to the stability of prices. b. The government could regulate the Federal Reserve and not let them make any decisions. c. The President can veto the Fed’s policy changes. d. It cannot; the Federal Reserve Bank operates independent of political oversight. |
a
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How will high tax rates affect the level and efficiency of capital formation projects?
a. Higher tax rates will attract more foreign investment, while reducing domestic investment. b. Investors will seek out investments with higher rates of return to offset higher taxes. c. Investors will seek out investments with lower rates of return and higher tax-sheltering benefits. d. Investment will increase because in order to show lower profits, investors will spend more on capital formation. |
c
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The main problem with using the infant industries argument to justify protecting an industry from foreign competition is that
a. all industries will claim that they are infant industries in order to gain protection. b. the protected industry will become too efficient and drive out foreign competition. c. once in place, it is difficult to remove protection even as the industry matures. d. it causes the goods that are produced in the protected industry to have lower prices. |
c
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Fannie Mae and Freddie Mac held a competitive advantage over other mortgage lenders primarily because
a. they were established as non-profit entities and thus did not need to show that they were profitable. b. they could borrow funds cheaper than other lenders because their bonds were perceived to be backed by the federal government. c. they were allowed to institute higher loan standards than other banks and mortgage lenders. d. they were exempt from federal regulations monitoring lending practices. |
b
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Since 1995, federal regulations have
a. tightened mortgage lending standards and therefore made it very difficult to obtain a loan to purchase a house. b. increased the down payment housing buyers are required to make in order to obtain a mortgage loan. c. loosened lending standards and made it possible for many buyers to purchase a house with little or no down payment. d. required investment banks to maintain more capital against their holdings of mortgage loans. |
c
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During 2006-2008, the housing foreclosure rate rose sharply
a. for fixed interest rate loans, but it was virtually unchanged for adjustable rate loans. b. for adjustable rate loans to both subprime and prime borrowers, but there was little change in the foreclosure rate on fixed interest rate loans. c. for adjustable rate loans to subprime borrowers, but the foreclosure rate on these loans to prime borrowers was virtually unchanged. d. for adjustable rate loans to prime borrowers, but the foreclosure rate on these loans to subprime borrowers was virtually unchanged. |
b
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Subprime loans are
a. loans made to borrowers with blemished credit histories, generally with a higher interest rate than those loans made to borrowers with better credit histories. b. loans made to borrowers with great credit histories, generally with a lower interest rate than those loans made to borrowers with bad credit histories. c. under the table loans that go unrecorded by the government. d. loans for projects that are deemed valuable by the public, but are often opposed by the government. |
a
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How do high tariffs and other restraints on international trade affect a nation's prosperity?
a. They increase employment and thereby promote the growth of GDP. b. They prevent a nation from fully realizing the potential gains from specialization, exchange, and competition. c. They protect domestic producers and thereby promote economic growth. d. Both a and c are correct. |
b
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1. You are doing really well in the stock market and earning a high rate of return on your stock investments. Meanwhile, your performance on bonds has only been average at best. However, retirement is approaching and you know you are going to need to cash out some of your investments pretty soon. Which type of investment should you predominantly hold in your portfolio?
Stocks Bonds |
bonds
|
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2. Stocky McStockerson sells mutual funds managed by his financial company. He tells you that you should really go with his managed funds over the index funds because his managed funds have vastly outperformed the market over the last 5 years. Where should you put your money?
Index Funds Stocky’s Managed Funds |
index funds
|
|
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3. You have just got your first job out of college and you are amazed at how much money you are making. You get a signing bonus of $5,000 which you are going to invest in mutual funds this year. Should you invest this money in steady increments throughout the year or invest it all at once in the beginning of the year so that your money will be working for you as long as possible?
Steady Increments All At Once |
steady increments
|
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. If stocks historically earn a higher rate of return than bonds, why would it be
important to switch from stocks to bonds as retirement approaches? a. because short-term bonds earn higher rates than stocks over a short period of time b. bonds are easier to liquidate (turn into cash) than stocks c. it is not important; retirement funds should be kept in stocks as long as possible d. to avoid having to sell stocks at temporarily low stock prices when funds are needed during retirement |
d
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What should be the portfolio mix of stocks and bonds for a person saving for a
down payment to buy a house within the next couple of years? a. almost exclusively stocks b. a much larger mix of stocks than bonds c. an equal amount of stocks and bonds d. almost exclusively bonds |
d
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Because indexed equity funds engage in less research and stock trading,
a. they are usually outperformed by managed funds. b. there are fewer fees involved, but the returns are lower than those of managed funds. c. they charge lower fees, so more of your investment dollars flow directly into the purchase of stock. d. their administrative costs are generally higher, but they still outperform managed funds. |
c
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Which strategy will reduce the volatility of returns from stock ownership?
a. regular investing into a diverse portfolio of stocks over a lengthy period of time b. buying more shares of your stocks that have risen in price during the last 12 months, while selling those that have fallen c. selling more shares of your stocks that have risen in price during the last 12 months, while buying those that have fallen d. investing in a few companies that have performed well historically |
a
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The key to converting a small amount of money now into a large amount of
money in the future is a. Making high-risk investments in the hopes of high returns. b. Saving as soon as possible and taking advantage of compound interest. c. Living a life of extreme frugality and sacrifice so that a significant amount of money will be available at retirement. d. Spending a small amount each month on lottery tickets. |
b
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What criteria should be used to determine if it makes sense to purchase a good on
credit? a. If the good is a long-lasting asset and the borrowed funds will be repaid before the asset is worn out b. If the useful life of the asset is less than 5 years c. If the good is something that is really needed, but funds are not currently available to purchase it d. If the funds can be borrowed at a low interest rate |
a
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Paying only the minimum balance on a credit card
a. Is a quick way to pay off the credit card balance. b. Is a good way to have more funds available to purchase other items. c. Is a temptation that often leads to large credit card balances with high interest rates. d. Only makes sense if the additional funds available to pay down a credit card are put into a savings account |
c
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It is costly to purchase a new car every two or three years because
a. The maintenance cost of a new car is generally higher than for a used one. b. The financing cost is significantly higher for a new car than for a used one. c. A new car will depreciate rapidly in value during the first few years of use. d. The taxes for the fuel of a new car are generally higher than for a used one. |
c
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The one thing successful entrepreneurs have in common is that
a. they never start their own businesses. b. they are good at discovering better ways of doing things and acting on opportunities that have been overlooked by others. c. they are always highly educated. d. they were successful in the corporate world before being self-employed. |
b
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According to the investment formula that Mr. Terry Biebout mentioned in his financial
presentation to this class, what percentage of a 22 year old person’s financial portfolio should be invested in stocks? a. 22% b. 39% c. 78% d. 100% |
c
|
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|
Which one of the following is not a reason why Americans are currently so
financially insecure? a. In recent years, Americans have been consuming more and saving less. b. Americans are racking up more debt on credit cards without paying them off every month. c. Americans’ income has been declining over the last 50 years. d. All of the above are reasons for the financial insecurity in America. |
c
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___ 2. One of the keys to financial success is to
a. search out and find those activities that you can do at a lower opportunity cost than other people. b. Put a large percentage of your purchases on credit cards so that you have more money to invest in day to day stock trading. c. wait until you are older to start saving money. d. always spend more than you earn. |
a
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___ 1. The importance of managing money and increasing wealth
a. is over exaggerated, especially for those with no interest in money. b. is significant for everyone, regardless of their objectives in life. c. only has value to people who desire a lot of money and wealth. d. varies, depending on how a person defines success. |
b
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4 incentives of private property rights
|
Use the resource in ways that benefit others
ex. Empty Lot 2. Care for and manage what they own ex. Driving rental car vs. driving own car Private owners have an incentive to conserve for the future ex. reason cows outnumber elephants 4. Private owners have an incentive to make sure their property does not damage your property ex. Keeping your dog on leash |
|
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Competitive markets
|
Place pressure on producers to operate efficiently
B. Provide strong incentives to lower costs develop better products C. Helps business discover the structure and size of the firm that can keep per-unit costs low |
|
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limit gov requlations
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Limits entry into business and reduces competition.
Regulations encourage government lobbying instead of production. Price controls stifle trade |
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an efficent capital market
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When the government intervenes in capital markets it:
A. Distorts market incentives Increases the importance of political action relative to economic action Makes unproductive investments more likely |
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low tax rates
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High tax rates:
Discourage work effort and reduce the productivity of labor Reduce the level and efficiency of capital formation Encourage individuals to consume tax deductible goods |
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Free Trade
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Know that free trade is important because:
The law of comparative advantage Economies of scale Free trade promotes competition |
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crisis of 2008
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The Housing Crisis was characterized by a sharp decline in housing prices, high mortgage default rates, and high foreclosure rates.
This was followed by a decline in the stock market between 2007 and 2009 |
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4 Major Causes of the Financial Crisis
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The Role of Fannie Mae and Freddie Mac (GSEs)
A. regulations required more loans to low and moderate income households. Low interest rate policy of the Fed between 2002-2004. Fed kept interest rates artificially low and when they increased, ARM loan default rates soared. Increased debt-to-capital ratio of investment banks A. regulations allowed banks to leverage their capital by larger amounts B. When default rates rose, investment banks failed High Debt to Income Ratio of Households Government encourages people to hold more debt in housing. When economic conditions decline, housing is hit particularly hard |
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Causes of the great depression
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Fed reduced money. Smoot-Hawley Tariff of 1930
Increased tariffs by more than 50% on 3,200 products B. Countries responded with higher tariffs, trade was reduced and unemployment soared Tax Increase Price Controls, Regulations, and Constant Policy Changes |
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#1 roll of Gov
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Protect individuals property rights, and provide goods that can not be easily provided by the market
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#2 Government is not a corrective device
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With majority rule unproductive projects may pass while productive ones may not
Requiring people to pay in proportion to the benefits they receive ensures that only productive projects pass (user charges |
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#3 Costs of Government Are Not Only Taxes
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Costs of Government also include
The opportunity cost of private sector output The cost of resources used to collect taxes and enforce regulations C. The cost of price distortions of taxes and borrowing (deadweight loss) |
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#4 Special Interest Groups Fleece Taxpayers
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Special interest effect: An issue that generates substantial benefits for a small group by generating minimal costs to a large group. (in aggregate, losses may exceed benefits).
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#5 Legislators Will Run Budget Deficits and Spend Excessively
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Shortsightedness Effect: politicians will favor programs that generate current visible benefits, even if long-term costs of the project outweighs the benefits.
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#6 Government Slows Progress When Helping Some People at the Expense of Others
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There are two ways to acquire wealth: production and plunder
The government can be used as an agent to take the wealth of others |
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#7 Costs of Government Transfers Are Greater than the Net Gain to Beneficiaries
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Government transfers reduces the incentive of people to work
B. Competition for transfers erode most of the gain C. Programs that protect people from adversity encourage them to undertake that adversity |
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8 Central Planning Replaces Markets with Politics
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Central planning substitutes politics for market verdicts (logrolling and pork-barrel legislation)
B. Government operated firms don’t face a profit motive C. Central planners don’t usually invest wisely D. Central planning suffers from a lack of information |
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#9 Competition is just as important in government as in markets
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Government works best when it has to compete
Decentralized governments are better at serving its citizens |
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#10 Constitutional Rules Constrain Government and Promote Economic Progress
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In giving the government the power to protect our rights, we also give it the ability to violate our rights
The constitution is the citizens’ way to constrain the government. |
