Principles of Macroeconomics Sixth Canadian Edition Canadian 6th Edition Mankiw Kneebone and McKenzie Test Bank
Principles of Macroeconomics Sixth Canadian Edition Canadian 6th Edition Mankiw Kneebone and McKenzie Test Bank
Principles of Macroeconomics Sixth Canadian Edition Canadian 6th Edition Mankiw Kneebone and McKenzie Test Bank
MULTIPLE CHOICE
1. Which statement best describes the way economists study the economy?
a. Economists study the past, but do not try to predict the future.
b. Economists use a probabilistic approach based on correlations between economic events.
c. Economists devise theories, collect data, and then analyze the data to test the theories.
d. Economists use controlled experiments much the same way a biologist or physicist does.
c. the use of controlled experiments in understanding the way the world works
d. finding evidence to support preconceived theories about how the world works
4. Who said, “The whole of science is nothing more than a refinement of everyday thinking”? a. Isaac
Newton
b. Albert Einstein
c. Sigmund Freud
d. Stephen Hawking
6. Sir Isaac Newton developed the theory of gravity after observing an apple fall from a tree. What is this
an example of?
a. a controlled experiment used to develop scientific theory
b. being in the right place at the right time
c. an idea whose time had come
the interplay between observation and theory in science
D PTS: 1 DIF: Average
7. What is a common thread between economics and other sciences, such as physics?
a. Experiments are most often conducted in a lab.
b. Real-world observations often lead to theories.
d.
8. Why is the use of theory and observation more difficult in economics than in sciences, such as physics?
a. It is difficult to evaluate an economic experiment.
b. It is difficult to devise an economic experiment.
c. It is difficult to actually perform an experiment in an economic system.
d. It is difficult to collect sufficient data.
9. Because it is difficult for economists to use experiments to generate data, what must they generally do?
a. do without data
b. use whatever data the world gives them
c. select a committee of economists to make up data for all economists to use
d. use hypothetical, computer-generated data
11. Which of the following is one difficulty economists face that some other scientists do not?
d.
a. Unlike other sciences, economic studies must include the largest economic player, the
government.
b. Economists unfortunately receive less government funding than other scientists.
c. Corporations are reluctant to disclose necessary information for economic research.
d. Experiments are often difficult to conduct in economics.
12. Where do the most common data for testing economic theories come from?
a. carefully controlled and conducted laboratory experiments
b. traditional economies
c. historical episodes of economic change
centrally planned economies
C PTS: 1 DIF: Average
13. For economists, what are often used as substitutes for laboratory experiments?
a. natural experiments offered by history
b. computer-generated experiments
c. studies conducted by other disciplines, such as sociologists
d. well-constructed simulations
15. Which of the following does the art of scientific thinking include?
d.
16. If an economist develops a theory about international trade based on the assumption that there are only
two countries and two goods, what is most likely?
a. The theory can be useful only in situations involving two countries and two goods.
b. It is a total waste of time, since the actual world has many countries trading many goods.
c. The theory can be useful in helping economists understand the complex world of international
trade involving many countries and many goods.
d. The theory can be useful in the classroom, but has no use in the real world.
20. When economists attempt to simplify the real world and make it easier to understand, what do they do?
a. They make assumptions.
b. They make mistakes in judgment.
c. They make predictions.
d. They make evaluations.
25. Which of the following is an example of a product that experiences infrequent price changes?
a. stocks on the Toronto Stock Exchange
b. gasoline
c. the newsstand price of magazines
d. gold in international markets
26. When studying the effects of public policy changes, what have economists often observed?
a. There is a difference between the long run and the short run.
b. Unemployment and inflation are directly related in the short run.
c. With stock prices, what goes up must come down.
d. If the policy is well designed, it will always be effective.
27. When studying the effects of public policy changes, what do economists do?
a. They often falsify results if the desired effect is not reached.
b. They may make different assumptions for the long run and the short run.
c. They attempt to consider only the direct effects and not the indirect effects.
d. They can immediately change policies if they are ineffective.
36. What are the foundation stones from which economic models are built?
a. economic policies
b. legal systems
c. assumptions
d. statistical forecasts
40. In the simple circular-flow diagram, who are the decision makers?
a. firms and government
b. households and firms
c. households and government
d. households, firms, and government
46. What is another name for goods and services produced by firms?
a. factors of production
b. outputs
c. inputs
d. resources
49. According to a simple circular-flow diagram, how many markets do households and firms interact in? a.
one type of market
b. two types of markets
c. three types of markets
d. four types of markets
51. In the goods and services market, how do households and firms interact?
a. Households and firms are both buyers.
b. Households are sellers and firms are buyers.
c. Households are buyers and firms are sellers.
d. Households and firms are both sellers.
ANS: C PTS: 1 DIF: Average REF: p. 25
BLM: Remember NOT: Macro TB_2-51
52. In the factors of production market, how do households and firms interact?
a. Households are sellers and firms are buyers.
b. Households are buyers and firms are sellers.
c. Households and firms are both buyers.
d. Households and firms are both sellers.
Figure 2-1
53. Refer to Figure 2-1. Which arrow shows the flow of goods and services?
a. arrow A
b. arrow B
c. arrow C
d. arrow D
54. Refer to Figure 2-1. Which arrow shows the flow of spending by households?
a. arrow A
b. arrow B
c. arrow C
d. arrow D
ANS: A PTS: 1 DIF: Average REF: p. 25
BLM: Higher Order NOT: Macro TB_2-54
55. Refer to Figure 2-1. Which arrow shows the flow of the factors of production?
a. arrow A
b. arrow B
c. arrow C
d. arrow D
56. Refer to Figure 2-1. Which arrow shows the flow of income payments?
a. arrow A
b. arrow B
c. arrow C
d. arrow D
Figure 2-2
62. Refer to Figure 2-2. What does the inner loop represent?
a. the flow of inputs to firms and output to households
b. the flow of output to firms and inputs to households
c. the flow of spending to firms and factor payments to households
d. the flow of spending to households and factor payments to firms
ANS: A PTS: 1 DIF: Challenging REF: p. 25
BLM: Remember NOT: Macro TB_2-62
63. Refer to Figure 2-2. What does the outer loop represent?
a. the flow of goods
b. the flow of spending
c. the flow of factors of production
d. the flow of services
64. Refer to Figure 2-2. Which of the following best characterizes the money held by households in the
circular-flow diagram?
a. It is earned from the sale of factors of production.
b. It becomes profit to firms.
c. It cannot be tracked in the circular-flow diagram.
d. It is used to purchase factors of production.
69. What revenue is received by firms from sales that is NOT used to pay for factors of production? a. rent
b. wages
c. profit
d. interest
73. Suppose an economy produces two goods: food and machines. This economy always operates on its
production possibilities frontier. Last year, it produced 50 units of food and 30 machines. This year, it is
producing 55 units of food and 33 machines. Which of the following would NOT explain the increase in
output?
a. a reduction in unemployment
b. an increase in the labour force
c. an improvement in technology
d. an increase in worker productivity
74. Suppose an economy produces two goods: food and machines. This economy always operates on its
production possibilities frontier. Last year, it produced 72 units of food and 28 machines. This year, it is
producing 75 units of food and 30 machines. Which of the following would NOT explain the increase in
output?
a. a reduction in unemployment
b. an increase in the labour force
c. an improvement in technology
d. an increase in worker productivity
76. The country of Econoland produces two goods: textbooks and widgets. Last year, it produced 200
textbooks and 500 widgets. This year, it produced 250 textbooks and 600 widgets. Given no other
information, which of the following could NOT explain the change? a. Econoland experienced a
reduction in unemployment.
b. Econoland experienced an improvement in widget-making technology.
c. Econoland acquired more resources.
d. Econoland experienced a high level of emigration out of the country.
77. The country of Econoland produces two goods: textbooks and widgets. Last year, it produced 300
textbooks and 600 widgets. This year, it produced 350 textbooks and 700 widgets. Given no other
information, which of the following could NOT explain the change? a. Econoland experienced a
reduction in unemployment.
b. Econoland experienced an improvement in widget-making technology.
c. Econoland acquired more resources.
d. Econoland experienced a high level of emigration out of the country.
78. Suppose there are two countries, Freedonia and Sylvania, which have identical amounts of resources,
identical technologies, and identical populations. Both produce two types of goods, consumer goods and
capital goods, and they both always operate on their production possibilities frontiers. The only
difference is that this year Freedonia chooses to produce relatively more consumer goods than Sylvania.
What will happen as a result?
a. Freedonia will have a higher living standard this year but will grow slower than Sylvania.
b. Freedonia will have a higher living standard this year and will grow faster than Sylvania.
c. Sylvania will have a higher living standard this year but will grow slower than Freedonia.
d. Sylvania will have a higher living standard this year and will grow faster than Freedonia.
ANS: A PTS: 1 DIF: Challenging REF: p. 26-28
BLM: Higher Order NOT: Macro TB_2-78
79. Suppose there are two countries, Freedonia and Sylvania, which have identical amounts of resources,
identical technologies, and identical populations. Both produce two types of goods, consumer goods and
capital goods, and they both always operate on their production possibilities frontiers. The only
difference is that this year Sylvania chooses to produce relatively more consumer goods than Freedonia.
What will happen as a result?
a. Freedonia will have a higher living standard this year but will grow slower than Sylvania.
b. Freedonia will have a higher living standard this year and will grow faster than Sylvania.
c. Sylvania will have a higher living standard this year but will grow slower than Freedonia.
d. Sylvania will have a higher living standard this year and will grow faster than Freedonia.
81. In what region of the production possibilities frontier can an economy produce?
a. An economy can produce only on the production possibilities frontier.
b. An economy can produce at any point inside or outside the production possibilities frontier.
c. An economy can produce at any point on or inside the production possibilities frontier, but not
outside the frontier.
d. An economy can produce at any point inside the production possibilities frontier, but not on or
outside the frontier.
83. When constructing a production possibilities frontier, which of the following is NOT an assumption?
a. The economy produces only two goods.
b. All the economy’s factors of production are being used.
c. The economy has a fixed level of technology.
d. The economy may increase its available factors of production.
86. Which of the following concepts is NOT illustrated by the production possibilities frontier? a. efficiency
b. opportunity cost
c. equity
d. tradeoffs
88. Suppose a nation is currently producing at a point inside its production possibilities frontier. What do we
know?
a. The nation is producing beyond its capacity, and inflation will occur.
b. The nation is not using all available resources and is inefficient.
c. The nation is producing an efficient combination of goods.
d. There will be a large opportunity cost if the nation tries to increase production.
Figure 2-3
89. Refer to Figure 2-3. At which point or points can the economy produce?
a. points B, D, and E
b. points A, B, D, and E
c. points D and C
d. point D
90. Refer to Figure 2-3. Which point represents the maximum possible production of tubas? a. point A
b. point B
c. point C
d. point E
91. Refer to Figure 2-3. At which point or points can the economy NOT produce? a. point A
b. point C
c. points A and C
d. points A, C, and D
94. What is the opportunity cost of obtaining more of one good, as shown on the production possibilities
frontier?
a. the amount of the other good that must be given up
b. the market price of the additional amount produced
c. the amount of resources that must be devoted to its production
d. the number of dollars that must be spent to produce it
ANS: A PTS: 1 DIF: Average REF: p. 27
BLM: Higher Order NOT: Macro TB_2-94
Figure 2-4
95. Refer to Figure 2-4. What is the opportunity cost to the economy of getting 30 additional toothbrushes
by moving from point A to point D? a. 10 toasters
b. 15 toasters
c. 20 toasters
d. 25 toasters
96. Refer to Figure 2-4. Suppose the economy is at point A. What is the opportunity cost of increasing the
production of toothbrushes by 20 units? a. 10 toasters
b. 20 toasters
c. 30 toasters
d. 40 toasters
97. Refer to Figure 2-4. What is the opportunity cost in terms of toothbrushes of getting 10 additional
toasters by moving from point B to point A? a. 20 toothbrushes
b. 10 toothbrushes
c. 5 toothbrushes
d. 0 toothbrushes
98. Refer to Figure 2-5. Which of the following most likely caused the shift of the production possibilities
frontier from A to B?
a. technological improvement in the production of batteries
b. more labour available in the economy
c. a general technological breakthrough
d. more capital available in the economy
Figure 2-6
99. Refer to Figure 2-6. What is the opportunity cost to society of the movement from point A to point
C? a. 50 baseballs
b. 100 baseballs
c. 100 bananas
d. 300 bananas
ANS: B PTS: 1 DIF: Average REF: p. 27
BLM: Higher Order NOT: Macro TB_2-99
100. Refer to Figure 2-6. What is the opportunity cost to society of moving from point B to point D? a.
100 bananas and 100 baseballs
b. 50 bananas and 50 baseballs
c. 100 bananas and 50 baseballs
d. 50 bananas and 100 baseballs
101. Refer to Figure 2-6. What was the most likely cause of the movement from point C to point D? a.
unemployment
b. a decrease in society’s preference for bananas
c. a decrease in society’s preference for playing baseball
d. a shift to a longer working day
102. Refer to Figure 2-6. If this economy put all available resources into the production of bananas, how
many could it produce? a. 200
b. 300
c. 400
d. 600
105. When a production possibilities frontier shifts outward, what concept is being demonstrated? a.
tradeoffs
b. efficiency
c. economic growth
d. opportunity cost
106. When an economy is operating inside its production possibilities frontier, what do we know?
a. There are unused resources or inefficiencies in the economy.
b. The economy is operating with efficiency.
c. Moving to a point on its production possibilities frontier would be economic growth.
d. To produce more of one good, the economy would have to give up some of the other good.
Figure 2-7
107. Refer to Figure 2-7. Which of the following would most likely have caused the production possibilities
frontier to shift outward from A to B?
a. an increase in resources necessary to produce capital goods
b. an improvement in the technology of producing consumer goods
c. an increase in the overall level of technology in the economy
d. an increase in unemployment
ANS: C PTS: 1 DIF: Average REF: p. 28-29
BLM: Higher Order NOT: Macro TB_2-107
108. Refer to Figure 2-7. What would best describe the movement from frontier A to B?
a. a downturn in the economy
b. economic growth
c. a more equitable distribution of income
d. an improvement in the allocation of resources
Table 2-1
110. Refer to Table 2-1. What is the opportunity cost to Toyland of increasing the production of dolls from
200 to 300?
a. 200 fire trucks
b. 150 fire trucks
c. 100 fire trucks
d. 50 fire trucks
112. Refer to Table 2-1. What is the opportunity cost to Toyland of increasing the production of dolls from
100 to 200?
a. 200 fire trucks
b. 150 fire trucks
c. 100 fire trucks
d. 50 fire trucks
113. Refer to Table 2-1. What is the opportunity cost to Toyland of increasing the production of dolls from 0
to 100?
a. 200 fire trucks
b. 150 fire trucks
c. 100 fire trucks
d. 50 fire trucks
114. Refer to Table 2-1. What is the opportunity cost to Toyland of increasing the production of fire trucks
from 0 to 200? a. 200 dolls
b. 150 dolls
c. 100 dolls
d. 50 dolls
115. Refer to Table 2-1. What is the opportunity cost to Toyland of increasing the production of fire trucks
from 450 to 500? a. 200 dolls
b. 150 dolls
c. 100 dolls
d. 50 dolls
116. Refer to Table 2-1. How does the opportunity cost of producing an additional 100 dolls change as more
dolls are produced?
a. It is constant and equal to 50 fire trucks.
b. It is constant and equal to 100 fire trucks.
c. It decreases as more dolls are produced.
d. It increases as more dolls are produced.
Figure 2-8
117. Refer to Figure 2-8. What would be an efficient combination of bathtubs and barrels? a. 30 barrels and
6 bathtubs
b. 20 barrels and 8 bathtubs
c. 25 barrels and 10 bathtubs
d. 15 barrels and 12 bathtubs
118. Refer to Figure 2-8. What is the opportunity cost of moving from point A to point B? a. 8 bathtubs
b. 20 barrels
c. the difference between the 8 bathtubs you get and the 20 barrels you give up
d. the difference between the 20 barrels you get and the 8 bathtubs you give up
119. Refer to Figure 2-8. If this economy puts all of its resources into the production of bathtubs, how many
could it produce?
a. 35 barrels and 0 bathtubs
b. 20 barrels and 12 bathtubs
c. 12 barrels and 35 bathtubs
d. 0 barrels and 16 bathtubs
120. Refer to Figure 2-8. Which of the following combinations is impossible for this economy to produce?
a. 30 barrels and 6 bathtubs
b. 25 barrels and 10 bathtubs
c. 20 barrels and 8 bathtubs
d. 10 barrels and 14 bathtubs
121. Refer to Figure 2-8. What would happen if this economy moved from point C to point E?
a. It still would not be producing efficiently.
b. There would be no gain in either bathtubs or barrels.
c. It would be producing more barrels and more bathtubs than at point C.
d. It is not possible for this economy to move from point C to point E without additional resources.
122. What two broad subfields is the field of economics traditionally divided into?
a. national economics and international economics
b. consumer economics and producer economics
c. private sector economics and public sector economics
d. microeconomics and macroeconomics
ANS: D PTS: 1 DIF: Easy REF: p. 29
BLM: Remember NOT: Macro TB_2-122
128. What are economists who try to explain economic phenomena considered? a. scientists
b. policy advisors
c. mathematicians
d. teachers
129. What are economists who try to improve the world considered?
a. mathematicians
b. policy advisors
c. scientists
d. politicians
130. What are the roles of economists when trying to explain or to improve the world?
a. In trying to explain the world, economists are policy advisers; in trying to improve the world, they
are scientists.
b. In trying to explain the world, economists are mathematicians; in trying to improve the world, they
are policymakers.
c. In trying to explain the world, economists are mathematicians; in trying to improve the world, they
are scientists.
d. In trying to explain the world, economists are scientists; in trying to improve the world, they are
policy advisers.
131. For economists, what are the two types of statements about the world?
a. assumptions and theories
b. true statements and false statements
c. specific statements and general statements
d. positive statements and normative statements
ANS: D PTS: 1 DIF: Easy REF: p. 30
BLM: Remember NOT: Macro TB_2-131
137. What type of statement is “Prices rise when the government prints too much money”?
a. a positive economic statement
b. a statement made by the Harper administration
c. a normative economic statement
d. a welfare statement
139. When economists are speaking as policy advisors, which statements are they more likely to use? a.
normative statements
b. positive statements
c. objective statements
d. descriptive statements
142. Two economists, Adam and Joan, are discussing the possibility of substantially reforming the current
federal tax system. Adam thinks the current system is fine, but Joan is in favour of reform. Which of
the following is the LEAST likely explanation for the disagreement?
a. Adam is a positive economist, and Joan is a normative economist.
b. Adam and Joan have different positive views about the effect of changing the tax system.
c. Adam and Joan have different values, and so they have different normative views about policy.
d. Adam is better off under the current system, and Joan would be better off if the reforms were
implemented.
143. When do you know an economist has crossed the line from scientist to policy adviser?
a. when he explains just the facts
b. when he makes positive statements
c. when he makes normative statements
d. when he cannot reach a conclusion
148. Economists outside the government also offer policy advice. Which of the following institutions does
NOT publish reports by economists? a. C.D. Howe Institute
b. Fraser Institute
c. Institute for Research on Public Policy
d. H.M. Holmes Institute
149. What do economists at Foreign Affairs Canada and International Trade Canada do?
a. help negotiate trade agreements with other countries
b. offer advice on overseas economic development projects
c. publish economic research
d. compile databases on the economy
150. What do the duties of the economists employed by Human Resources and Skill Development Canada
include?
a. advising Parliament
b. designing tax policy
c. writing the annual Economic Report
d. studying the relationship between average wages and gender
155. What famous economist said, “The ideas of economists and political philosophers … are more
powerful than is commonly understood”? a. Gregory Mankiw
b. John Maynard Keynes
c. Paul Krugman
d. David Ricardo
156. What are the two basic reasons why economists often appear to give conflicting advice to
policymakers?
a. differences in opinions and education
b. differences in scientific judgments and values
c. differences in scientific judgments and education
d. differences in opinions and values
157. Why did George Bernard Shaw, among others, criticize economists?
a. because they have too much influence over government decisions
b. because many ideas are too theoretical and therefore do not work in “real life”
c. because they tend to speak a different language, causing most people to not understand them
d. because they seem to give conflicting advice to policymakers
159. What did a survey that asked the opinion of academic, business, and government economists on ten
propositions about economic policy find?
a. The respondents were almost equally divided on the propositions.
b. The respondents favoured the propositions by a slight margin.
c. The respondents disagreed with the propositions by a slight margin.
d. There was overwhelming endorsement of the propositions among the respondents.
161. Which of the following is the best explanation for why policies such as rent control and import quotas
persist in spite of the fact that experts are united in their opposition to such policies?
a. Economists have not yet convinced the general public that the policies are undesirable.
b. Economists are simply wrong about the economic impact of these policies.
c. Economists have different values than do most people.
d. Economists are usually of a different political party than are lawmakers.
162. What are the three propositions about which most economists agree most often (in order from first to
third)?
a. rent control, tariffs and quotas, and floating exchange rates
b. tariffs and quotas, floating exchange rates, and fiscal policy
c. rent control, fiscal policy, and tariffs and quotas
d. fiscal policy, rent control, and floating exchange rates
164. How would any economist who says all policy decisions are easy be best described?
a. They must understand the relationship between a market economy and the government.
b. They must be running for office.
c. They have a Ph.D. in economics.
d. They cannot be trusted.
165. What did John Maynard Keynes believe the ideas of economists to be?
a. generally incorrect
b. powerful
c. pie-in-the-sky ideals
d. not taken seriously
169. In a pie chart, what does each “slice” of the pie represent?
a. a specific percentage of the total pie
b. an equal share of the total pie
c. the amount of the pie each of the two variables represents
d. one-half of the total pie
171. In order to provide information on two variables, what must an economist use? a. a bar graph
b. a pie chart
c. the coordinate system
d. a time-series graph
172. What is a type of graph that can be used to display the relationship between two variables? a. a pie
chart
b. a bar graph
c. a time-series graph
d. the coordinate system
180. What is the point where both x and y are zero called?
a. the origin
b. the null
c. the zero coordinate
d. the centre
Figure 2-9
181. Refer to Figure 2-9. What is this type of graph known as?
a. a time-series graph
b. a bar graph
c. a scatterplot graph
d. a pie chart
182. Refer to Figure 2-9. What is the correct designation of point A? a. (6, 0)
b. (0, 24)
c. (6, 24)
d. (24, 6)
183. Refer to Figure 2-9. What do cups of coffee per day and the hours that someone can go without sleep
have?
a. a positive correlation
b. a negative correlation
c. a random correlation
d. no correlation
ANS: A PTS: 1 DIF: Average REF: p. 44
BLM: Higher Order NOT: Macro TB_2-183
184. Refer to Figure 2-9. What would you say about the relationship between coffee and hours without
sleep?
a. The less coffee a person drinks per day, the more time he can go without sleep.
b. There is no relationship between how much coffee per day a person drinks and how long they can
go without sleep.
c. The more coffee a person drinks per day, the longer he can go without sleep.
d. The relationship between cups of coffee per day and time without sleep is too unpredictable to
consider.
187. Refer to Figure 2-10. What is the movement from point A to point B?
a. a shift of the curve
b. a change in preferences
c. a movement along the curve
d. a change in consumer income
188. Refer to Figure 2-10. What is the movement from point B to point C?
a. a shift of the curve
b. a change in price
c. a movement along the curve
d. a change in costs to the firm
189. Refer to Figure 2-10. What is the slope of the curve between point A and point B? a. 5/2
b. 2/5
c. –2/5
d. –5/2
190. Refer to Figure 2-10. What could have caused the movement from point B to point C? a. inflation
b. a change in income
c. a change in the price of roses
d. a change in the cost of producing roses
191. Refer to Figure 2-10. How are the price of roses and the quantity of roses related?
a. directly related, and therefore moving in the same direction
b. directly related, and therefore moving in opposite directions
c. inversely related, and therefore moving in opposite directions
d. independent of each other
194. If Steven chooses to buy more bagels per month at each price, what will happen to his demand curve?
a. It will shift inward.
b. It will shift outward.
c. It will not shift, but he will move along his demand curve from left to right.
d. It will not shift, but he will move along his demand curve from right to left.
195. What happens when a relevant variable that is not named on either axis changes?
a. There will be a movement along the curve.
b. The curve may or may not change depending on how the variables are related.
c. The curve will be unaffected since only the variables on the axis affect the curve. d. The curve will
shift.
199. What will the slope of a fairly flat upward-sloping line be?
a. a small positive number
b. a large positive number c.
a small negative number
d. a large negative number
201. Which of the following is NOT a problem associated with graphing in economics? a. omitted variables
b. holding everything else constant
c. reverse causality
d. the ability to show a relationship between two variables
202. Bill has noticed that increases in unemployment insurance claims are associated with recessions, and
therefore advocates limits on unemployment insurance so as to prevent recessions. Martha has noticed
that most drug addicts once attended schools, and therefore advocates getting rid of schools so as to
prevent drug addiction. What do we know about the reasoning of Bill and Martha?
a. The reasoning of both Bill and Martha suffers from the omitted variable problem.
b. The reasoning of both Bill and Martha suffers from the reverse causality problem.
c. Bill’s reasoning suffers from the reverse causality problem, and Martha’s reasoning suffers from
the omitted variable problem.
d. Martha’s reasoning suffers from the reverse causality problem, and Bill’s reasoning suffers from
the omitted variable problem.
TRUE/FALSE
1. While the scientific method is applicable to studying natural sciences, it is not useful in studying an
economic system.
ANS: F PTS: 1 DIF: Average REF: p. 22
BLM: Remember NOT: Macro TB_2-203
2. Since natural experiments offered by history cannot be used in economics, carefully constructed
laboratory experiments must be used.
3. An economic model can accurately explain how the economy is organized because it is designed to
include every feature of the real world.
4. All scientific models, including economic models, simplify reality in order to improve our understanding
of it.
6. In a simple circular-flow diagram, firms own the factors of production and use them to produce goods
and services.
7. In a simple circular-flow diagram, the two types of markets in which households and firms interact are
the markets for goods and services and the markets for factors of production.
8. In the markets for goods and services, as in the markets for the factors of production, households are
buyers and firms are sellers.
9. In a circular-flow diagram, one loop shows the flow of real goods, services, and factors of production,
and the other loop shows the corresponding flow of dollars.
10. A production possibilities frontier is a graph that shows the various combinations of outputs the
economy can possibly produce given its factors of production and technology.
11. An economy can produce at any point on or outside the production possibilities frontier, but it cannot
produce at points inside the frontier.
12. An efficient outcome in economics is one in which the economy is conserving the largest possible
amount of resources, while still meeting the needs of society.
13. An economy is being efficient if it is impossible to produce more of one good without producing less of
another.
Figure 2-11
14. Refer to Figure 2-11. Points A, B, and D represent feasible or attainable outcomes for society.
15. Refer to Figure 2-11. The opportunity cost to the economy of moving from point A to point B is 10
dishwashers.
ANS: T PTS: 1 DIF: Average REF: p. 27
BLM: Higher Order NOT: Macro TB_2-217
16. Refer to Figure 2-11. The opportunity cost of more doghouses increases as more doghouses are
produced.
17. The tradeoff between the production of different goods can change because of technological
improvement over time.
19. The field of economics is divided into two subfields: microeconomics and macroeconomics.
20. Normative statements describe how the world is, while positive statements prescribe how the world
should be.
21. “Society would be better if the welfare system were abolished” is a normative statement, not a positive
statement.
22. When economists are trying to explain the world they are acting as scientists, and when they are trying
to improve it, they are policymakers.
SHORT ANSWER
1. Using this outline, draw a circular-flow diagram representing the interactions between households and
firms in a simple economy. Explain briefly the various parts of the diagram.
ANS:
This diagram should duplicate the essential characteristics of the diagram in the text, with an
explanation of the meaning of each flow and each market. It is important that the student understands
that the inner loop represents the flow of real goods and services and that the outer loop represents the
corresponding flow of payments.
2. Draw a production possibilities frontier showing increasing opportunity cost for hammers and horseshoes.
a. On the graph, identify the area of feasible outcomes and the area of unfeasible outcomes.
b. On the graph, label a point that is efficient as point E and a point that is inefficient as point I.
c. On the graph, illustrate the effect of the discovery of a new vein of iron ore, a resource needed to
make both horseshoes and hammers, on this economy.
d. On a separate graph for hammers and horseshoes, illustrate the effect a new computerized
assembly line in the production of hammers would have.
ANS:
The graph on the left answers a, b and c. The graph on the right answers d.
3. The prairie dog has always been considered a problem for Canadian cattle ranchers. They dig holes that
cattle and horses can step in, and they eat grass necessary for cattle. Recently, ranchers have discovered
that there is a demand for prairie dogs as pets. In some areas, prairie dogs can sell for as high as $150.
Cattlemen are now fencing off prairie dog towns on their land so these towns will not be disturbed by
their cattle.
Draw a production possibilities frontier demonstrating a rancher’s production option between cattle
production and prairie dog production, showing increasing opportunity cost and what would happen in
each of the following situations (using a separate graph for each situation):
a. The outcome is efficient, with ranchers choosing to produce equal numbers of cattle and prairie
dogs.
b. As a protest against the government introducing the grey wolf back into the wild in their province,
ranchers decide not to use 25% of the available grassland for grazing.
c. The price of prairie dogs increases to $200 each, so ranchers decide to allot additional land for
prairie dogs.
d. The government grants new leases to ranchers, giving them 10 000 new hectares of grassland each
for grazing.
e. A drought destroys most of the available grass for grazing of cattle, but not prairie dogs since they
also eat plant roots.
ANS:
5. Which of the following statements are positive and which are normative?
a. The minimum wage creates unemployment among young and unskilled workers.
b. The minimum wage ought to be abolished.
c. If the price of a product in a market decreases, other things equal, quantity demanded will
increase.
d. A little bit of inflation is worse for society than a little bit of unemployment.
e. There is a tradeoff between inflation and unemployment in the short run.
f. If consumer income increases, other things equal, the demand for automobiles will increase.
g. The Canadian income distribution is not equitable.
h. Canadian workers deserve more liberal unemployment benefits.
i. If interest rates increase, investment will decrease.
j. If welfare benefits were reduced, the country would be better off.
a. (20, 24)
b. a demand curve
c. a negative correlation between price and quantity
d. –8/20 or –2/5
e. –2/5; because the slope of a straight line is constant
f. an increase in demand
g. because the two lines are parallel
PTS: 1 DIF: Average REF: p. 45-47 BLM: Higher Order NOT: Macro TB_2-230
PROBLEM
1. All people use models in their everyday lives, and I am no exception in this regard. While meteorologists
use extremely complex weather forecasting models, my model is much simpler. My model predicts that if
it is cold in the morning, it will be cold in the afternoon.
a. Why do I need such a silly model, instead of using more reliable forecasts that are easily and
freely available?
b. What is the main assumption of my model?
c. How did I choose the assumption underlying my model?
d. Is my assumption (and, therefore, my model) realistic?
e. Is my model useful?
f. How can I improve the predictions of my model?
g. What is your model of weather forecasting when deciding what to wear for the day?
h. What other simple models of weather forecasting can you imagine?
ANS:
a. People think in models. Even when I know the “official” weather forecast of the day, I use some
kind of a rudimentary model to decide whether to trust the forecast. Another reason for which I
need my model is that I may not have access to more informed forecasts. And yet another reason
is that I need very short-term forecasts, such as is it going to rain over the next half an hour? Can
I go out to run in the park?
b. The main assumption of my model is that the weather is stable over the day.
c. The assumption underlying my model is based on past experience concerning how fast the
weather changes in the area.
d. My model is not very realistic, because the weather sometimes changes quickly.
e. Absolutely. If I had no model, I wouldn’t be able to make up my mind as to how to dress. Every
decision people make is based on some model, even when people are not fully aware of that.
f. One way is to gather more information about the current outside temperature and atmospheric
pressure. Another way would be to look out the window to see how other people are dressed.
This last method is indeed very valuable, since it uses the power of collective wisdom.
g. Different people have different models. For instance, some people carry an umbrella all the time,
implicitly assuming that rain is always possible.
h. Other model could assume that the weather is going to be this afternoon the same as yesterday
afternoon; yet somebody else may assume that the weather is the same all month: hot and dry in
July and August, warm and rainy in September, etc.
2. This is an exercise in model building, based on the idea that one better understands the concept of models
when faced with the task of making them.
a. Construct a block diagram showing how different levels of governments interact with taxpayers
and with each other in a federal state like Canada. Indicate with arrows what they exchange with
each other. Identify the main elements of your model.
b. Describe your model in a few sentences.
c. What makes your description to be a model, instead of an accurate picture of the Canadian
economy?
d. What purpose can your model serve, or is there anything that this model helped you understand?
ANS:
a.
b. A federal state has mainly three levels of government: federal, provincial, and local. Taxpayers,
according to the model illustrated at point a, pay taxes directly to each level of government and
receive transfers from each level of government. (This structure may be different for other
federal structures.)
c. This is a very simplified model. It does not say, for instance, how much taxes people pay to
various levels of government or how much of the tax revenue is paid back to taxpayers. The
model also omits to show what governments provide other than transfers.
d. The model can be useful in describing the structure of a federal state, in particular showing how
taxes and transfers move between taxpayers and various levels of government. The model
needs to be more complex for other purposes, such as analysis.
3. The purpose of this exercise is to acquaint you with some simple mathematical relationships and how they
translate into graphs. Economic models can come under the form of equations such as Y=F(L), where Y
is sometimes called the “dependent variable” and L is the “independent variable.” F, called “function,”
tells us what the precise relationship between Y and L is. Theoretical relationships (models) are those that
can be described by an equation like this. When equations are sufficiently simple, they can be put under
the form of a curve in a graph. Consider the equation Y=2 L, where Y is the number of apple pies that
Jonathan can cook in L hours. This equation describes the process of producing apple pies.
a. How many pies does Jonathan cook in 2, 3, 4, and 5 hours?
b. Draw a vertical axis and label it Y; draw a horizontal axis and label it L. Show on this graph the
four pairs (L, Y) you determined in part a.
c. Draw a line connecting your four points and extend it to the left until it reaches the vertical axis.
d. Identify a few assumptions that underlie your apple pie production model.
e. Are your assumptions realistic?
f. Can you identify a few limitations of your model?
g. What could you use this model for?
ANS:
a. We use the equation to calculate the number of pies corresponding to various numbers of hours of
work: Y=2 2 = 4, when L=2. Similarly, we can find Y=6 for 3 hours, Y=8 for 4 hours, and Y=10
when Jonathan works 5 hours.
b.
c.
d. An important assumption of this model is that Jonathan never gets tired, even after a few hours of
work: he is able to produce the same number of apple pies in the 5th hour as in the first. Another
assumption is that Jonathan needs no preparation time: At the end of the first ten minutes, he
must have produced already 2/6=1/3 of a finished pie.
e. The assumptions are realistic as long as we do not ask Jonathan how many pies he has produced
after ten minutes or if we do not make Jonathan work many extra hours.
f. The conditions mentioned in the answer to point e are also the limitations of the model. In
general, we should not try to use the model to predict the number of apple pies in unusual
circumstances.
g. The model can be used to predict, under normal circumstances, how many apple pies can be
produced in a certain number of hours, and what the cost of that production would be.
4. The purpose of this exercise is to show you how a mathematical (economic) model can be adjusted to
better represent an economic phenomenon. Consider the equation Y=2 L, where Y is the number of
apple pies that Jonathan can cook in L hours. This equation describes the process of producing apple pies.
a. In a Y?2-L graph, draw the line described by the equation Y=2 L. What is the slope of this line?
What does the slope represent? Note that the slope is the same for the first, second, and all
subsequent hours. In other words, the slope is constant. Why is the constant slope of the line a
limitation of your model?
b. How should the slope change for higher values of L, the number of hours worked, to account for
the fact that the worker might get tired?
c. How could you modify the model to capture the change in slope you identified in part b?
ANS:
a.
The slope of the curve can be calculated by the ratio ?0?Y/?0?L, where the symbol ?0? represents
a small change. For instance, if L changes from 4 to 5, ?0?L=5?-4=1; the corresponding change in
Y is an increase from 8 to 10. Thus, the slope =
?0?Y/?0?L=(10?2-8)/(5?2-4)=2. The slope shows by how much Y changes when L increases by
one unit. In our example, the slope shows how many pies Jonathan produces in an extra hour.
Constant slope suggests that Jonathan doesn’t ever get tired: he produces in the late hours of the
workday as much as in the first hours. This may be a limitation of the model.
b. A more realistic model should imply that Jonathan produces fewer pies per hour after a few hours
of work than at the beginning of the workday. Since the number of apple pies per hour is the
slope, we want the slope to become smaller at larger values of L. In other words, we want the
curve to go up at larger Ls, but at a lower and lower rate.
c. The following graph represents such a modified curve that better represents our situation. The
curve becomes flatter at larger values of L.
ouslope you
identified at point b?apture the change he number of hours worked?s. In other words, the slope is
constant. hours,
5. This exercise will show you how different theories (models) can lead to very different courses of action.
Suppose we ask the following question: Does income inequality promote economic growth and society’s
overall prosperity? Suppose two economists come up with the following theories (models): Economist A
believes that wealth accumulation in just a few hands increases savings because consumption is
necessarily limited. Higher savings, in turn, allow investing in new production facilities that increase the
country’s overall income and everybody is better off. So, Economist A advocates a non-equalitarian
society.
Economist B thinks that a very unequal distribution of wealth will increase capacities of production
beyond the purchasing power of an essentially poor mass of consumers. For a while, consumers will
increase their consumption, and prosperity, by borrowing from the rich, but eventually they will not be
able to repay their debts and the economy will collapse for lack of demand. At that point, investing in
new production facilities becomes unnecessary. In conclusion, Economist B thinks that extreme
income inequality is counterproductive.
a. What are the policy implications of the two theories? (In other words, does it matter which theory
is correct?)
b. How would a scientist determine which theory is correct?
c. Under what conditions would each of the two models be correct? Could one use both models
under different circumstances?
ANS:
a. The two theories have very different implications for policymaking. If policymakers believe the
first theory, they advocate low corporate taxes, large corporations, little employment protection
measures, and unregulated economies. If theory B is believed to be true, policymakers advocate
a very progressive income tax system, so that an important part of large incomes is
redistributed to the poor.
b. The scientific method would try to compare economies that are similar in all respects except for
income inequality, and see which of them fares better in terms of social prosperity, however
one would like to measure it.
c. The first model might be correct at relatively low levels of inequality, and the second would be
correct when inequality reaches extreme levels. The question is: How low is “low” inequality,
and what level could be dubbed “extreme”? It is hard to tell, unfortunately.