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Principles of Economics Study Guide Questions and Answers, Exams of Economics

D089 - Study Guide Questions Module 1-9 Principles of Economics Study Guide Questions and Answers 2023 / 2023

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2022/2023

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D089 - Study Guide Questions Module 1-9
Principles of Economics Study Guide Questions and
Answers 2023 / 2023
D089 - Study Guide Questions
Module 1 – The Economic Way of Thinking
1. What are the three fundamental questions every economy must answer? Give an example
of a
“What” question.
What to produce, how it will be produced, and for whom the goods or
services are produced. What to produce example: What to produce to feed
farm animals?
2. What do economists mean when they say that people “think at the margin”?
People will think about what the next step or additional action means
for them. (Principle 3)
3. According to the 10 Principles of Economics, what determines a nation’s standard of living?
The standard of living for a nation is determined by its ability to produce
goods and services. (The more productive a society, the better its people live.)
(Principle 8)
4. Using the 10 Principles of Economics, explain why trade is beneficial?
Trade can leave everyone in a better position. It allows people to concentrate
on what they do best and exchange their ability with others to supplement
their own needs. (Principle 5)
5. How does printing money impact prices?
Printing too much money causes prices to rise. Consistently rising prices for
goods and services results in inflation. The more a government prints money,
the less the money is worth, thus making goods and services more expensive.
(Principle 9)
6. What are the differences between the Traditional and the Market economy?
In a Traditional Economy, individuals make decisions based on traditions,
beliefs, and customs.
In a Market Economy, businesses make decisions based on consumer demand.
7. Identify two disadvantages of a Command economy?
Rationing commonly occurs due to poor planning and an inability to meet
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D089 - Study Guide Questions Module 1-

Principles of Economics Study Guide Questions and

Answers 2023 / 2023

D089 - Study Guide Questions Module 1 – The Economic Way of Thinking

  1. What are the three fundamental questions every economy must answer? Give an example of a “What” question. What to produce, how it will be produced, and for whom the goods or services are produced. What to produce example: What to produce to feed farm animals?
  2. What do economists mean when they say that people “think at the margin”? People will think about what the next step or additional action means for them. (Principle 3)
  3. According to the 10 Principles of Economics, what determines a nation’s standard of living? The standard of living for a nation is determined by its ability to produce goods and services. (The more productive a society, the better its people live.) (Principle 8)
  4. Using the 10 Principles of Economics, explain why trade is beneficial? Trade can leave everyone in a better position. It allows people to concentrate on what they do best and exchange their ability with others to supplement their own needs. (Principle 5)
  5. How does printing money impact prices? Printing too much money causes prices to rise. Consistently rising prices for goods and services results in inflation. The more a government prints money, the less the money is worth, thus making goods and services more expensive. (Principle 9)
  6. What are the differences between the Traditional and the Market economy? In a Traditional Economy, individuals make decisions based on traditions, beliefs, and customs. In a Market Economy, businesses make decisions based on consumer demand.
  7. Identify two disadvantages of a Command economy? Rationing commonly occurs due to poor planning and an inability to meet

societal demands. People are discouraged from innovating and are required to follow orders and keep with the central plan.

  1. Explain one of the advantages of the Mixed economy? Goods and services are distributed to where they are needed the most: therefore, prices are set by supply and demand.
  2. How are macroeconomics and microeconomics different? Microeconomics is about the individuals’ decisions and how they affect the economy where macroeconomics looks at the broader issues in the economy.
  3. Give an example of a normative statement. Milk should be $6.00 a gallon so that dairy farmers may have a higher standard of living.
  4. Identify the payment that goes to each of the four factors of production. Natural resources: rent for land and buildings. Labor: wages and salaries for labor Capital: interest and dividends for the use of financial capital (Loans and equity investments) Entrepreneur: profit for entrepreneurship
  5. What does the circular flow diagram depict? A circular flow diagram depicts the flow of money and goods through the economy between firms and households). Module 2 – The Economic Problem
  6. Why is the concept of scarcity so important in economics? There will never be enough resources to meet everyone’s needs.
  7. What does an individual’s budget constraint identify? It identifies what is affordable within your discretionary income when looking at possible purchase combination options of two different items.
  8. Identify two ways in which the budget constraint and the PPF are similar and two ways in which they are different. Both are similar in that they both assume that resources and technology are fixed. A difference between budget constraint and PPF are that budget constraints are used by individuals and PPF is used by firms.
  9. Using the graph below, explain the trade-off associated with a movement from Point A to Point B.

Module 3 – Supply, Demand and Elasticity

  1. Explain the “Law of Demand” using a demand curve to illustrate the concept. If the price of ice cream decreases (Vertical), The Quantity demanded of Ice Cream increases. Assume A = $8 for ½ gallon of ice cream – only 20 are demanded. Then B= Price at $4 for ½ gallon and 40 are demanded.
  1. Describe and illustrate a case where there is an increase in demand. Be sure to identify the market being analyzed and the event leading to the increase in demand. Typically, people in colder climates do not eat ice cream as often as people in warmer climates. Wisconsin ice cream producers will lower the price in winter which entices consumers to demand more ice cream.
  2. Does a change in the price of a good cause a change in demand or a change in quantity demand? Explain. If an item is less expensive, consumers are smore likely to purchase more.
  3. Explain the “Law of Supply” using a supply curve to illustrate the equipment concept. Price is Vertical and Quantity is Horizontal – As Price increases, quantity Supplied increases.
  4. Describe and illustrate a case where there is a decrease in supply. Be sure to identify the market being analyzed and the event leading to the decrease is supply. If Peru has a freeze and most coffee bean plants are damaged, the supply of coffee beans will decrease.
  5. Does a change in the price of a good cause a change in supply or a change in quantity supplied? Explain. It causes an equal change in Quantity Supplied but an opposite change in Quantity supplied.
  6. If the price in the market is $10, is the market in equilibrium? Explain. How will the market adjust to reach equilibrium? Price Quantity Demanded Quantity Supplied $0 50 0 $10 40 15 $20 30 30 $30 20 45 No, it is below the equilibrium point. If they raise the price to $20 then the Quantity demanded will equal the quantity supplied

Price controls stop those supplying and those demanding from completing transactions both parties would be willing to make.

  1. What is a “thin market” and how is this related to the problem of imperfect information? A market with few buyers and few sellers.
  2. What is “moral hazard” and how can it lead to market inefficiency? A moral hazard is a situation where a business or individual is willing to take a bigger risk when they have protection from that risk. It can lead to riskier behavior when you feel you are protected versus when you are not protected.
  3. What is “adverse selection”? Provide an example where adverse selection impacts the market. Adverse selection is when the market deteriorates because consumers have imperfect or asymmetric information.
  4. What techniques do firms use to reduce the problem of imperfect information in the market? They can use money back guarantees, service contracts and warranties to offset the imperfect information problem.
  5. Give an example of a positive externality. When there are positive externalities present in a market, how does the market output differ from the socially optimal level of output? A casino is being built on the property next to your farm. You are happy that the gravel roads all around your property are being upgraded to four lane paved roads as part of the Casino’s deal with the county.
  6. Give an example of a negative externality. When there are positive externalities present in a market, how does the market output differ from the socially optimal level of output? You purchased a condo above a bakery in New York. The Bakery just sold their suite to a Music lesson studio. The constant loud music is dominating everything in your life.
  7. What policies can governments use to correct negative externalities? Governments can issue policies regulating many of the issues that cause negative externalities and impose fines to help pay for the damage of them. Module 5 – Production and Costs
  8. Give examples of an implicit cost and an explicit cost. Explain.

A building you already own is an implicit cost. Payroll is an explicit cost.

  1. Why do economists calculate profits in a different from accountants? Economists take into consideration all opportunity costs which includes both implicit and explicit costs.
  2. The following equation describes costs in the short run.
  1. When a firm has economies of scale, what happens to its average total costs as it increases output?

The average total cost goes down. Module 6 – Market Structures

  1. Complete the table below summarizing the characteristics of each market structure. Perfect Competition Monopolistic Competition Oligopoly Monopoly Barriers to Entry or Exit No No Yes Yes Market Compositio n Many small firms Many firms 3-5 firms 1 seller Types of Goods Homogenous/ Identical Similar product Different & Homogenou s Unique Pricing Price takers Set prices Can set prices Set prices
  2. What is the profit maximizing rule? Producing at a level where marginal revenue equals marginal costs.
  3. At its current level of production, a firm’s marginal revenue is less than its marginal cost. What change can the firm make to increase profits? Explain. If they increase their production, it will decrease their marginal cost.
  4. Explain why perfectly competitive firms choose the quantity of output to maximize profits while firms in other markets choose both price and quantity. …
  5. What type of market structure is most likely to have collusion? …
  6. How does collusion change market outcomes? Who benefits and who loses? …
  7. What happens when firms make positive economic profits in the short run, when the firms operate in a a. perfectly competitive market structure? … b. oligopoly market structure?
  1. Why is advertising more valuable for firms in monopolistic competition than for firms in other market structures? Firms in monopolistic competition have unique products so advertising would bring their product in the know but the other firm’s products are either identical or similar so everyone already know what they have.
  2. Why are concentration ratios used? To determine the concentration of total of the industry’s largest 4 - 8 firms’ sales
  3. What is the difference between the HHI and the 4-firm concentration ratio? 4 Firm concentration adds the market shares of the four largest firms but the HHI combines the squares of the market shares.
  4. The table below lists the market shares for each of the firms in the industry. Use the data in the table to calculate the HHI and the 4-firm concentration ratio. Firm Percent of Market Firm A

Firm B 20% Firm C 20% Firm D

Firm E 15% 4 Firm is 85; HHI is 2150 Module 7 – Macroeconomic Measurements and Theories

  1. Using the expanded circular flow model, describe the transactions that take place in the a. Goods and services market? The exchange of products between buyers and sellers. b. Factor market? Wages, profit, interest, and rent. c. Financial market? Borrowing, lending, and saving.
  2. What is the GDP and how is it calculated? Gross Domestic Product (GDP) is the market value of all final goods and services produced in a country in a single year. GDP = Consumption + Investment + Government + Net Exports
  3. What is the largest component of GDP? Consumption
  1. Identify and explain two of the challenges to calculating the GDP.
  1. Which groups benefit from inflation? Explain. Borrowers benefit because the value of the money they pay back is less.

Module 8 – Economic Growth and Fluctuations

  1. Draw a graph of Aggregate Demand. Make sure to label the axis.
  2. How does the quantity of GDP demand change as the price level in the economy increases? Illustrate this on your graph. As the price goes up, quantity decreases.
  3. List and explain the components of aggregate demand. Consumption Spending: When disposable income increases, so does consumption spending, and AD shifts to the right. When disposable income decreases, so does consumption spending, and AD shifts to the left. Investment Spending: Firms make investment decisions based on how the goods will affect their profits. Decreases in investments causes the AD to shift to the left and increases in investments cause the AD to shift to the right. Government Spending: The changes in government spending are determined independently of the factors that may influence spending by households and firms. Spending on Net Exports: Higher foreign incomes will increase demand for exports, shifting AD to the right. Lower foreign income will reduce demand for exports, shifting AD to the left. An increase in the exchange rate reduces U.S. exports and increases U.S. imports, shifting AD to the left. Depreciation of the dollar lowers the exchange rate and leads to an increase in net exports. A lower exchange rate would shift AD to the right.
  4. Identify the factors that shift AD. Consumer confidence,
  5. Draw a graph of short run AS. Make sure to label the axis.
  6. Why is the short run AS curve (SRAS) upward sloping? As prices increase, AS increases.

supply. Setting reserve requirements: holding a portion of deposits and not lending it out, operating the discount window – the amount of money banks must have on hand at the end of the day, or they need to borrow from other banks or the FEC, conducting open market operations.

The Fed buy or sell Treasury Notes or mortgage-backed securities which increases or decreases the money supply and paying interest on reserves. The FED encourages banks to hold reserves rather than make loans which reduces the money supply. To increase the money supply, the FED lowers the interest paid on reserves, providing banks an incentive to make loans.

  1. Using a graph of the money market, show what happens to interest rates when the FED decreases the money supply. …
  2. Identify two factors that can shift the demand for money. …
  3. How would an increase in the demand for money change the interest rate? …
  4. What are two of the policies the FED used to address the problem of inflation? …
  5. What are the tools of fiscal policy? Expansionary and contractionary.
  6. How can the government use fiscal policy to address a recession? By using taxation and government spending to influence the economy.
  7. What is the difference between a debt and a deficit? Deficit is the amount budgeted for the current time frame. Debt is the accumulation of all deficits.
  8. Under what economic conditions would you expect a budget deficit to increase? During a recession.
  9. What is the relationship between inflation and unemployment shown by the Phillip’s curve? Inflation decreases when unemployment increases.
  10. When unemployment is below its natural rate, what changes occur to bring the economy back to the long run Phillips curve? Increase interest rates. Module 10 – Open Markets
  11. Explain the difference between absolute and comparative advantage. …