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SOLUTIONS TO TEXT PROBLEMS Chapter 1

SOLUTIONS TO TEXT PROBLEMS Chapter 1 - QuickQuizzes 1 2 3...

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SOLUTIONS TO TEXT PROBLEMS: Quick Quizzes The answers to the Quick Quizzes can also be found near the end of the textbook. 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 government prints  too much money; and (3) society faces a short-run trade-off between inflation and unemployment.  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 various policy instruments. Questions for Review 1. Examples of trade-offs include time trade-offs (such as studying one subject over another or studying  at all compared to engaging in social activities) and spending trade-offs (such as whether to use your  last 15 dollars to purchase a pizza or to buy a study guide for that tough economics course). 2. The opportunity cost of seeing a movie includes the monetary cost of admission plus the time cost of  going to the theater and attending the show. The time cost depends on what else you might do with  that time; if it is staying home and watching TV, the time cost may be small, but if it is working an extra  three hours at your job, the time cost is the money you could have earned. 3. The marginal benefit of a glass of water depends on your circumstances. If you have just run a  marathon or you have been walking in the desert sun for three hours, the marginal benefit is very  high. But if you have been drinking a lot of liquids recently, the marginal benefit is quite low. The point  is that even the necessities of life, like water, do not always have large marginal benefits. 4. Policymakers need to think about incentives so they can understand how people will respond to the  policies they put in place. The text’s example of seat belt laws shows that policy actions can have  unintended consequences. If incentives matter a lot, they may lead to a very different type of policy;  for example, some economists have suggested putting knives in steering columns so that people will  drive much more carefully! While this suggestion is silly, it highlights the importance of incentives.
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