Solutions to Quick Quizzes
1
Chapter 1
1. There are many possible answers.
2. There are many possible answers.
3. The three principles that describe
how the economy as a whole
works are: (1) a country’s standard
of living depends on its ability
to produce goods and services;
(2) prices rise when the govern-
ment prints too much money; and
(3) society faces a short-run trade-
off between inflation and unem-
ployment. A country’s standard
of living depends largely on the
productivity of its workers, which
in turn depends on the education
of its workers and the access its
workers have to the necessary
tools and technology. Prices rise
when the government prints too
much money because more money
in circulation reduces the value of
money, causing inflation. Society
faces a short-run trade-off between
inflation and unemployment that
is only temporary. Policymakers
have some short-term ability to
exploit this relationship using vari-
ous policy instruments.
Chapter 2
1. Economics is like a science because
economists devise theories, collect
data, and analyze the data in an
attempt to verify or refute their
theories. In other words, eco-
nomics is based on the scientific
method.
Figure 1 shows the production
possibilities frontier for a society
that produces food and clothing.
Point A is an efficient point (on
the frontier), point B is an inef-
ficient point (inside the frontier),
and point C is an infeasible point
(outside the frontier).
B
A
Quantity of Food Produced
Quantity of Clothing Produced
C
Figure 1
The effects of a drought are
shown in Figure 2. The drought
reduces the amount of food that
can be produced, shifting the
production possibilities frontier
inward.
Quantity of Food Produced
Quantity of Clothing Produced
PPF2PPF1
Figure 2
Microeconomics is the study of
how households and firms make
decisions and how they interact in
markets. Macroeconomics is the
study of economy-wide phenom-
ena, including inflation, unem-
ployment, and economic growth.
2. An example of a positive state-
ment is “a higher price of coffee
causes me to buy more tea.” It is
a positive statement because it is
a claim that describes the world
as it is. An example of a norma-
tive statement is “the government
should restrain coffee prices.” It
is a normative statement because
it is a claim that prescribes how
the world should be. Many other
examples are possible.
Parts of the government that
regularly rely on advice from
economists are the Department
of the Treasury in designing tax
policy, the Department of Labor
in analyzing data on the employ-
ment situation, the Department of
Justice in enforcing the nation’s
antitrust laws, the Congressional
Budget Office in evaluating policy
proposals, and the Federal Reserve
in analyzing economic develop-
ments. Many other answers are
possible.
3. Economic advisers to the president
might disagree about a question
of policy because of differences in
scientific judgments or differences
in values.
Chapter 3
1. Figure 1 shows Robinson Crusoe’s
production possibilities frontier
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