0538453044_284671-1 - S olutions to Quick Quizzes Chapter 1...

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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 PPF 2 PPF 1 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.
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0538453044_284671-1 - S olutions to Quick Quizzes Chapter 1...

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