Macroeconomics - Homework 1 Answer Key

1 MACROECONOMICS Homework 1. Multiple Choice 1) Macroeconomics studies: a. how consumers can achieve the goal of utility maximization. b. the economy as a whole, specifically the nature of business cycles and growth. c. how firms can achieve the goal of profit maximization. d. the individual components of the economy as they relate to one another. 2) Economics is best defined as the a. science of efficiency. b. science of scarcity. c. study of markets. d. study of human activity. 3) When economists speak of scarcity, they are referring to the a. condition in which society is not employing all its resources in an efficient way. b. condition in which people's wants outstrip the limited resources available to satisfy those wants. c. economic condition that exists in only very poor countries of the world. d. condition in which society produces too many frivolous goods and not enough socially desirable goods. 4) Normative economics: a. is primarily concerned with scientific predictions about economics relationships. b. is based on facts and addresses “what is.” c. relies on statistical analysis to explain how the real world works under normal conditions. d. is based on value judgements and addresses “what should be.” 5) Opportunity cost is: a. the value of the best alternative that must be foregone when a choice is made. b. the value of all alternatives that must be foregone when a choice is made. c. not as important to microeconomic decisions as it is to macroeconomics decisions. d. not useful when evaluating economic alternatives. 6) Produced goods used as inputs for the production of other goods comprise the resource known as a. natural resources. b. services. c. capital. d. entrepreneurship. 2 7) The term ceteris paribus means: a. “all else is a parable.” b. “assumptions are partial.” c. “all other things unchanged.” d. “certain assumptions pertain.” 8) Assuming that because the economy as a whole may benefit from reduced military activity and spending, each sector of the economy will benefit from reduced military activity and spending is an example of: a. the fallacy of false cause. b. the post hoc fallacy. c. the fallacy of composition. d. the fallacy of division. 9) Bob ate eggs and bacon before taking an economics exam on which he earned an “A”. Bob’s friend, Steve, decided to eat eggs and bacon before taking his exam because he believed that what Bob had for breakfast determined his grade. Steve’s conclusion that eating eggs and bacon resulted in Bob earning an “A” is an example of: a. fallacy of composition. b. the fallacy of division. c. the ceteris paribus assumption. d. the fallacy of false cause (post hoc fallacy). 10) In the circular flow model, the business sector: a. demands goods and services in output markets. b. demands factors of production in resource markets. c. supplies factor of production to resource markets d. both a. and c. are true. 3 Use the graph below to answer the next three questions 11) If PPF2 is the relevant production possibilities frontier, then point __________ illustrates productive inefficiency. a. A b. B c. C d. J e. a, b, or c 12) If PPF2 is the relevant production possibilities frontier, then point __________ is efficient. a. B b. D c. I d. F e. both b. and d. are correct. 13) The production possibilities frontiers shown above depict _______________ opportunity costs. a. constant b. increasing c. decreasing d. There is not enough information provided to answer this question. 4 Use the data below to answer the next three questions: Combination A B C D E Production Possibilities Schedule Cars Bicycles 0 180 1 165 2 135 3 90 4 0 14) The opportunity cost of the third car is: a. 15 bicycles b. 35 bicycles c. 45 bicycles d. 65 bicycles 15) The above production possibilities schedule illustrate: a. increasing opportunity cost. b. decreasing opportunity cost. c. constant opportunity cost. d. a direct relationship between the production of cars and the production of bicycles. 16) The combination of 2 cars and 165 bicycles: a. is unattainable given current resources and technology. b. represents an inefficient use of resources. c. is the optimal way of using current resources and technology. d. efficiently employs the resources and technology available. 17) Points inside a production possibilities frontier imply that: a. resources are efficiently allocated and fully employed. b. resources are inefficiently allocated or unemployed. c. the maximum amount of goods is being produced, given the available resources and state of technology. d. the economy is not capable of further growth. 18) In the production possibilities model, the opportunity cost of a good is: a. not related to the production of other goods. b. the amount of money that must be spent to produce it. c. the amount of other goods that must be sacrificed in order to produce it. d. the amount by which any point on the curve deviates from the optimal point. 5 19) In the production possibilities model, economic growth is illustrated by: a. a straight-line PPF. b. a bowed outward PPF. c. the downward slope of the PPF d. an outward shift of the PPF. Use the graph below to answer the next question. Shoes PPF1 PPF2 Skateboards 20) To shift from PPF1 to PPF2 indicates: a. technological improvements in the shoe industry. b. technological improvements in the skateboard industry. c. unemployment in the shoe industry. d. unemployment in the skateboard industry.