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Macroeconomics 20th Edition by McConnell, Brue, Flynn - Test Bank
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,Chapter 01 - Limits, Alternatives, and ChoicesCHAPTER 1
Limits, Alternatives, and Choices
A. Short-Answer, Essays, and Problems
1. What is a brief definition of economics? What are the conditions that give rise to this definition?
2. What are the three interrelated features of the economic perspective?
3. What do economists mean when they say that “there is no free lunch”? Give another example to which this
statement applies.
4. (Consider This) Some stores give “free” products to consumer. An economist would say the products are not
free. Why the difference?
5. Is rational self-interest the same thing as selfishness? Explain.
6. Use marginal analysis to explain why it is possible to “have too much of a good thing.” Use education as an
example.
7. (Consider This) How can the economic perspective help us understand the behavior of fast-food consumers?
Explain several insights it provides about customer behavior.
8. The distinguished economist Kenneth Boulding stated: “Theories without facts may be barren, but facts
without theories are meaningless.” Explain what he meant.
9. What are the distinctions made in the text among the terms “hypotheses,” “theories,” “laws,” and “principles”?
10. Why are economic theories and principles imprecise? Shouldn’t they apply to everyone?
11. Explain the importance of the ceteris paribus or “other-things-equal” assumption.
12. “Bad theories are abstract and therefore unrealistic; good theories are fully realistic and fit all the facts.”
Evaluate.
13. “Gathering economic facts is futile unless accompanied by economic analysis.” Explain.
14. “To be sure, any theoretical model must be abstracted ‘from the richness and complexity of behavior.’
However, abstraction becomes falsification when it so simplifies human behavior as to leave it unrecognizable
and unexplained.” Explain.
15. Distinguish between microeconomics and macroeconomics.
16. Below are six statements. Indicate whether each one pertains to microeconomics (MIC) or macroeconomics
(MAC).
(a) “Last year, IBM was the U.S. business with the most patents registered with the U.S. government.”
(b) “The U.S. economy grew at an annual rate of 4.2 percent last year.”
(c) “Snow in the northeast has reduced the number of holiday shoppers at clothing stores and clothing prices
are falling.”
(d) “More workers are being hired by the nation’s businesses.”
(e) “The U.S. economy imported more goods and services than it exported last year.”
(f) “New discoveries in medicine are leading to strong growth in the biotech industry.”
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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
,Chapter 01 - Limits, Alternatives, and Choices
17. Below are six statements. Indicate whether each one pertains to microeconomics (MIC) or macroeconomics
(MAC).
(a) “The inflation rate in the United States hit its lowest level in the last twenty years.”
(b) “The profits of Microsoft rose 20 percent during the past quarter.”
(c) “Rains from El Nino again hit the California region causing severe flooding in farms. The prices for citrus
and produce are expected to rise sharply.”
(d) “The nation’s economy grew at an annual rate of 3.7 percent in the final quarter of the year.”
(e) “The trade deficit in the United States was $20 billion last month.”
(f) “General Motors plans to spend $800 million on a new automobile plant.”
18. Give one example of a positive economic statement and one example of a normative economic statement.
19. Below are six statements. Identify whether each is a positive or normative statement.
(a) The national economy grew at a 6.2 percentage rate in the last quarter as the economy continues to recovers
from the past recession.
(b) The unemployment rate fell to 5.7 percent this month, and is expected to fall to 5.5 percent next month.
(c) The rate of inflation should be reduced to zero to maintain the value of the U.S. dollar.
(d) The government should take action to reduce the prices of prescription drugs charged by drug companies.
(e) Interest rates for home mortgages are at their lowest rate in thirty years.
(f) The Federal government should increase income taxes on the wealthy to reduce the budget deficit.
20. Below are six statements. Identify whether each is a positive or normative statement.
(a) The minimum wage would be increased so low-income workers can earn a living wage.
(b) The unemployment rate is too high and should be reduced through government actions.
(c) The rate of inflation was about 2 percent last year, a low for the past decade.
(d) The government should take action to break up the monopoly power of Google.
(e) Interest rates should be lower in the United States so that people can afford to build a home.
(f) The Federal government achieved a budget surplus for the first time in thirty years.
21. “Economists are scientists and therefore should not become involved in making value judgments which policy
formulation necessarily entails.” Do you agree?
22. “Economics cannot be scientific because it is based upon the value judgment that ‘more (output) is better’.” Do
you agree?
23. What is shown by the budget line in a two-product (A and B) case? Describe what happens when there is a
change in income or the price of a product.
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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
, Chapter 01 - Limits, Alternatives, and Choices
24. Suppose a consumer has a daily income of $48 and purchases just two goods, A and B. The price of A is $8
and the price of B is $6. In the graph below, draw the budget line for the consumer. Indicate the area of the
graph that is attainable given the income and the area that is unattainable.
25. Below is the budget line for George. Answer the following questions based on his monthly budget constraint.
a. Suppose the price of lattes is $4.00. What is George’s monthly income?
b. Based on the income found in Part A. What is the price of donuts?
c. Suppose the price of lattes increased to $5.00. Draw the new budget line.
d. Assume George’s monthly income changes to $60 (Keep the price of lattes at $4.00). Draw the new budget line.
26. How will an increase in income affect the budget line for two goods, all other things equal?
27. Explain: “It is in the nature of all economic problems that absolute solutions are denied us.”
28. Comment on the statement from an opportunity cost perspective: “The major cost of going to college is the
$15,000 per year in tuition.” Assume that a person could have earned $30,000 a year if the person did not go to
college.
29. (Consider This) Why might it be a good economic decision for a person such as Oprah Winfrey or Mark
Zuckerberg to drop out of college? Give an economic justification for such a decision.
30. What is meant by the “economizing problem”?
31. List the four resource categories and give a brief description of each.
32. What four basic functions does the entrepreneur perform for the economy?
33. What do economists mean when they say that economic resources or factors of production are scarce or limited
in supply?
34. Explain and evaluate: “If resources were infinitely abundant in relation to the demand for them, the
economizing problem would dissolve in a sea of affluence.”
35. “The relative scarcity of resources makes the operation of any economy a matter of choosing between
alternatives.” Explain.
36. “The two cornerstones of economics are the scarcity of resources and the multiplicity of wants. True economy
consists of deriving maximum want satisfaction from available resources.” Explain.
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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
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