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GOVT 350 Exam 2 (1)
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Exam of 5 pages for the course Texas Government 2306 Unit 1 Exam Study Guide. at Texas Government 2306 Unit 1 Exam Study Guide. (GOVT 350 Exam 2 (1))
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GOVT 350 Exam 2What is the general role of prices in a free market system? - ANS-•Transmits only the
important information and only to the people who need to know
•Connected with third function: determining the distribution of income and can't be
explained without bringing that function into the account
•Operates as a signaling system to producers and consumers to distribute and
exchange scarce resources for the most efficient uses
How does voluntary exchange facilitate cooperation in the market? - ANS-•Jobs are a
way to get the goods and services desired
•Every time you go to the store you exchange a bit of your services for the infinitesimal
amount of services that each of the thousands contribute toward producing the pencil
•The price system utilizes alternative applications of labor and capital to meet market
demands
-Promotes stewardship and the wise use of scarce resource
How does the price system overcome scarcity? - ANS-•Price system enables people to
cooperate peacefully in one phase of their life while each one goes about their business
in respect of everything else
•Economic order can emerge as the unintended consequence of the actions of many
people, each seeking his own interest
•Price system utilizes alternative application of labor and capital to meet market
demands
- Promotes stewardship and the wise use of scarce resources
•Resources can be used in various ways for various purposes, in various quantities
•An economy which depends upon prices to allocate resources will not be overwhelmed
with products no one wants, or be deficient in those products in high demand
How do prices reflect supply and demand? - ANS-•In order to induce suppliers to
produce more items, wholesalers have to increase the price
•Higher prices induce the suppliers to increase their work force to meet higher demand
•To get more workers, they have to offer higher wages and better working conditions
•Individual demand for a particular good or service is reflected in the price a consumer
is willing to purchase at particular prices
•Purchasers advertise their products with various price-points for given quantities and
consumers communicate their desire or demand for the product relative to their
willingness to pay or not pay the advertised price
•Demand also varies given unique and fluctuating consumer preferences
, •The law of demand states that there is an inverse relationship between the price of a
good or service and the quantity of it that consumers are willing to purchase
How does government intrusion distort market information? - ANS-•Uses 1973 oil
shortage as example
•Prevents information about the effect of OPEC cartel from being transmitted accurately
to users of petroleum
•Result strengthened both the OPEC cartel by preventing a higher price from leading
U.S. consumers to economize on the use of oil, and required the introduction of major
command elements in the U.S. to allocate the scare supply
•Government is major source of interference with a free market system through tariffs
and other restraints on international trade, domestic action fixing or affecting individual
prices, including wages, government regulation of specific industries, monetary and
fiscal policies producing erratic inflation and numerous other channels
•Price mechanism generates economic order, directs the efficient use of scare
resources, and results in productivity and consumer satisfaction
•When government intervenes, information is distorted, and both consumers and
producers are incentivized to redirect their economic activity in contrary ways
- Disruptions are induced by taxes and subsidies, as well as various forms of price
controls which include wage caps
What are the three functions of the price system in a free market economy? -
ANS--Transmit information: prices transmit information supply and demand for goods
and services, and labor
-Provide incentive to adopt those methods of production that are least costly and
thereby use available resources for the most highly valued purposes
-Determine who gets how much of the product—distribution of income
According to Friedman, what is the role of civil government relative to the economy? List
4 roles - ANS-1. Duty of protecting the society from the violence and invasion of other
independent societies
2. Duty of protecting every member of the society from the injustice or oppression of
every other member of it/the duty of establishing an exact administration of justice
3. Duty of erecting and maintaining certain public works and certain public institutions
4. Duty to protect members of the community who cannot be regarded as "responsible"
individuals
-Parents are responsible for children
Explain the nature of an economic policy of protectionism - ANS-•Means exploiting the
consumer
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