Essentials of Economics, 7th Edition solutions manual and test bank by N. Gregory Mankiw

Essentials of Economics, 7th Edition solutions manual and test bank by N. Gregory Mankiw

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		THINKING LIKE AN ECONOMIST

WHAT’S NEW IN THE SEVENTH EDITION:

There is a new In the News feature on "Actual Economists and Virtual Realities." Figure A-1 has been updated.

LEARNING OBJECTIVES:

By the end of this chapter, students should understand:

Ø how economists apply the methods of science.

Ø how assumptions and models can shed light on the world.

Ø two simple models—the circular flow and the production possibilities frontier.

Ø the difference between microeconomics and macroeconomics.

Ø the difference between positive and normative statements.

Ø the role of economists in making policy.

Ø why economists sometimes disagree with one another.

CONTEXT AND PURPOSE:

Chapter 2 is the second chapter in a three chapter section that serves as the introduction of the text. Chapter 1 introduced ten principles of economics that will be revisited throughout the text. Chapter 2 develops how economists approach problems while Chapter 3 will explain how individuals and countries gain from trade.

The purpose of Chapter 2 is to familiarize students with how economists approach economic problems. With practice, they will learn how to approach similar problems in this dispassionate systematic way. They will see how economists employ the scientific method, the role of assumptions in model building, and the application of two specific economic models. Students will also learn the important distinction between two roles economists can play: as scientists when we try to explain the economic world and as policymakers when we try to improve it.

KEY POINTS:

· Economists try to address their subject with a scientist’s objectivity. Like all scientists, they make appropriate assumptions and build simplified models to understand the world around them. Two simple economic models are the circular-flow diagram and the production possibilities frontier.

· The field of economics is divided into two subfields: microeconomics and macroeconomics. Microeconomists study decision making by households and firms and the interaction among households and firms in the marketplace. Macroeconomists study the forces and trends that affect the economy as a whole.

· A positive statement is an assertion about how the world is. A normative statement is an assertion about how the world ought to be. When economists make normative statements, they are acting more as policy advisers than as scientists.

· Economists who advise policymakers sometimes offer conflicting advice either because of differences in scientific judgments or because of differences in values. At other times, economists are united in the advice they offer, but policymakers may choose to ignore the advice because of the many forces and constraints imposed by the political process.

CHAPTER OUTLINE:

I. The Economist as Scientist

A. Economists Follow the Scientific Method.

1. Observations help us to develop theory.

2. Data can be collected and analyzed to evaluate theories.

3. Using data to evaluate theories is more difficult in economics than in physical science because economists are unable to generate their own data and must make do with whatever data are available.

4. Thus, economists pay close attention to the natural experiments offered by history.

B. Assumptions Make the World Easier to Understand.

1. Example: to understand international trade, it may be helpful to start out assuming that there are only two countries in the world producing only two goods. Once we understand how trade would work between these two countries, we can extend our analysis to a greater number of countries and goods.

2. One important role of a scientist is to understand which assumptions one should make.

3. Economists often use assumptions that are somewhat unrealistic but will have small effects on the actual outcome of the answer.

C. Economists Use Economic Models to Explain the World around Us.

1. Most economic models are composed of diagrams and equations.

2. The goal of a model is to simplify reality in order to increase our understanding. This is where the use of assumptions is helpful.

D. Our First Model: The Circular Flow Diagram

1. Definition of circular-flow diagram: a visual model of the economy that shows how dollars flow through markets among households and firms.

2. This diagram is a very simple model of the economy. Note that it ignores the roles of government and international trade.

a. There are two decision makers in the model: households and firms.

b. There are two markets: the market for goods and services and the market for factors of production.

c. Firms are sellers in the market for goods and services and buyers in the market for factors of production.

d. Households are buyers in the market for goods and services and sellers in the market for factors of production.

e. The inner loop represents the flows of inputs and outputs between households and firms.

f. The outer loop represents the flows of dollars between households and firms.

E. Our Second Model: The Production Possibilities Frontier

1. Definition of production possibilities frontier: a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.

2. Example: an economy that produces two goods, cars and computers.

a. If all resources are devoted to producing cars, the economy would produce 1,000 cars and zero computers.

b. If all resources are devoted to producing computers, the economy would produce 3,000 computers and zero cars.

c. More likely, the resources will be divided between the two industries, producing some cars and some computers. The feasible combinations of output are shown on the production possibilities frontier.

Figure 2

3. Because resources are scarce, not every combination of computers and cars is possible. Production at a point outside of the curve (such as C) is not possible given the economy’s current level of resources and technology.

4. Production is efficient at points on the curve (such as A and B). This implies that the economy is getting all it can from the scarce resources it has available. There is no way to produce more of one good without producing less of another.

5. Production at a point inside the curve (such as D) is inefficient.

a. This means that the economy is producing less than it can from the resources it has available.

b. If the source of the inefficiency is eliminated, the economy can increase its production of both goods.

6. The production possibilities frontier reveals Principle #1: People face trade-offs.

a. Suppose the economy is currently producing 600 cars and 2,200 computers.

b. To increase the production of cars to 700, the production of computers must fall to 2,000.

7. Principle #2 is also shown on the production possibilities frontier: The cost of something is what you give up to get it (opportunity cost).

a. The opportunity cost of increasing the production of cars from 600 to 700 is 200 computers.

b. Thus, the opportunity cost of each car is two computers.

8. The opportunity cost of a car depends on the number of cars and computers currently produced by the economy.

a. The opportunity cost of a car is high when the economy is producing many cars and few computers.

b. The opportunity cost of a car is low when the economy is producing few cars and many computers.

9. Economists generally believe that production possibilities frontiers often have this bowed-out shape because some resources are better suited to the production of cars than computers (and vice versa).

10. The production possibilities frontier can shift if resource availability or technology changes. Economic growth can be illustrated by an outward shift of the production possibilities frontier.

F. Microeconomics and Macroeconomics

1. Economics is studied on various levels.

a. Definition of microeconomics: the study of how households and firms make decisions and how they interact in markets.

b. Definition of macroeconomics: the study of economy-wide phenomena, including inflation, unemployment, and economic growth.

2. Microeconomics and macroeconomics are closely intertwined because changes in the overall economy arise from the decisions of individual households and firms.

3. Because microeconomics and macroeconomics address different questions, each field has its own set of models which are often taught in separate courses.

II. The Economist as Policy Adviser

A. Positive versus Normative Analysis

1. Example of a discussion of minimum-wage laws: Polly says, “Minimum-wage laws cause unemployment.” Norma says, “The government should raise the minimum wage.”

2. Definition of positive statements: claims that attempt to describe the world as it is.

3. Definition of normative statements: claims that attempt to prescribe how the world should be.

4. Positive statements can be evaluated by examining data, while normative statements involve personal viewpoints.

5. Positive views about how the world works affect normative views about which policies are desirable.

6. Much of economics is positive; it tries to explain how the economy works. But those who use economics often have goals that are normative. They want to understand how to improve the economy.

B. Economists in Washington

1. Economists are aware that trade-offs are involved in most policy decisions.

2. The president receives advice from the Council of Economic Advisers (created in 1946).

3. Economists are also employed by administrative departments within the various federal agencies such as the Office of Management and Budget, the Department of Treasury, the Department of Labor, the Congressional Budget Office, and the Federal Reserve.

4. The research and writings of economists can also indirectly affect public policy.

C. Why Economists’ Advice Is Not Always Followed

1. The process by which economic policy is made differs from the idealized policy process assumed in textbooks.

2. Economists offer crucial input into the policy process, but their advice is only part of the advice received by policymakers.

III. Why Economists Disagree

A. Differences in Scientific Judgments

1. Economists may disagree about the validity of alternative positive theories or about the size of the effects of changes in the economy on the behavior of households and firms.

2. Example: some economists feel that a change in the tax code that would eliminate a tax on income and create a tax on consumption would increase saving in this country. However, other economists feel that the change in the tax system would have little effect on saving behavior and therefore do not support the change.

B. Differences in Values

C. Perception versus Reality

1. While it seems as if economists do not agree on much, this is in fact not true. Table 1 contains 20 propositions that are endorsed by a majority of economists.

2. Almost all economists believe that rent control adversely affects the availability and quality of housing.

3. Most economists also oppose barriers to trade.

IV. In the News: Actual Economists and Virtual Realities

A. Professional Economists have begun working in the video game industry as consultants to developers and to experiment with policy options.

B. This is an article from the Washington Post describing the involvement of economists in the video game industry.

V. Appendix—Graphing: A Brief Review

A. Graphs of a Single Variable

1. Pie Chart

2. Bar Graph

3. Time-Series Graph

B. Graphs of Two Variables: The Coordinate System

1. Economists are often concerned with relationships between two or more variables.

2. Ordered pairs of numbers can be graphed on a two-dimensional grid.

a. The first number in the ordered pair is the x-coordinate and tells us the horizontal location of the point.

b. The second number in the ordered pair is the y-coordinate and tells us the vertical location of the point.

3. The point with both an x-coordinate and y-coordinate of zero is called the origin.

4. Two variables that increase or decrease together have a positive correlation.

5. Two variables that move in opposite directions (one increases when the other decreases) have a negative correlation.

C. Curves in the Coordinate System

1. Often, economists want to show how one variable affects another, holding all other variables constant.

a. An example of this is a demand curve.

b. The demand curve shows how the quantity of a good a consumer wants to purchase varies as its price varies, holding everything else (such as income) constant.

c. If income does change, this will alter the amount of a good that the consumer wants to purchase at any given price. Thus, the relationship between price and quantity desired has changed and must be represented as a new demand curve.

d. A simple way to tell if it is necessary to shift the curve is to look at the axes. When a variable that is not named on either axis changes, the curve shifts.

D. Slope

1. We may want to ask how strongly a consumer reacts if the price of a product changes.

a. If the demand curve is very steep, the quantity desired does not change much in response to a change in price.

b. If the demand curve is very flat, the quantity desired changes a great deal when the price changes.

2. The slope of a line is the ratio of the vertical distance covered to the horizontal distance covered as we move along the line (“rise over run”).

3. A small slope (in absolute value) means that the demand curve is relatively flat; a large slope (in absolute value) means that the demand curve is relatively steep.

E. Cause and Effect

1. Economists often make statements suggesting that a change in Variable A causes a change in Variable B.

2. Ideally, we would like to see how changes in Variable A affect Variable B, holding all other variables constant.

3. This is not always possible and could lead to a problem caused by omitted variables.

a. If Variables A and B both change at the same time, we may conclude that the change in Variable A caused the change in Variable B.

b. But, if Variable C has also changed, it is entirely possible that Variable C is responsible for the change in Variable B.

4. Another problem is reverse causality.

a. If Variable A and Variable B both change at the same time, we may believe that the change in Variable A led to the change in Variable B.

b. However, it is entirely possible that the change in Variable B led to the change in Variable A.

c. It is not always as simple as determining which variable changed first because individuals often change their behavior in response to a change in their expectations about the future. This means that Variable A may change before Variable B but only because of the expected change in Variable B.

SOLUTIONS TO TEXT PROBLEMS:

Quick Quizzes

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, economics 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 inefficient point (inside the frontier), and point C is an infeasible point (outside the frontier).

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. (If a drought also reduced the amount of cotton available for the production of clothing, the intercept on the vertical axis would also decrease.)

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 phenomena, including inflation, unemployment, and economic growth.

2. An example of a positive statement 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 normative 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 employment 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 developments. Many other answers are possible.

3. Economic advisers to the president might disagree about a question of policy because of differences in scientific judgments or differences in values.

Questions for Review

1. Economics is like a science because economists use the scientific method. They devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories about how the world works. Economists use theory and observation like other scientists, but they are limited in their ability to run controlled experiments. Instead, they must rely on natural experiments.

2. Economists make assumptions to simplify problems without substantially affecting the answer. Assumptions can make the world easier to understand.

3. An economic model cannot describe reality exactly because it would be too complicated to understand. A model is a simplification that allows the economist to see what is truly important.

4. There are many possible answers.

5. There are many possible answers.

6. Figure 3 shows a production possibilities frontier between milk and cookies (PPF₁). If a disease kills half of the economy's cow population, less milk production is possible, so the PPF shifts inward (PPF₂). Note that if the economy produces all cookies, it does not need any cows and production is unaffected. But if the economy produces any milk at all, then there will be less production possible after the disease hits.

Figure 3

7. An outcome is efficient if the economy is getting all it can from the scarce resources it has available. In terms of the production possibilities frontier, an efficient point is a point on the frontier, such as point A in Figure 4. When the economy is using its resources efficiently, it cannot increase the production of one good without reducing the production of the other. A point inside the frontier, such as point B, is inefficient since more of one good could be produced without reducing the production of another good.

Figure 4

8. The two subfields in economics are microeconomics and macroeconomics. Microeconomics is the study of how households and firms make decisions and how they interact in specific markets. Macroeconomics is the study of economy-wide phenomena, including inflation, unemployment, and economic growth.

9. Positive statements are descriptive and make a claim about how the world is, while normative statements are prescriptive and make a claim about how the world ought to be. Here is an example. Positive: A rapid growth rate of money is the cause of inflation. Normative: The government should keep the growth rate of money low.

10. Economists sometimes offer conflicting advice to policymakers for two reasons: (1) economists may disagree about the validity of alternative positive theories about how the world works; and (2) economists may have different values and, therefore, different normative views about what public policy should try to accomplish.

Quick Check Multiple Choice

1. c

2. a

3. b

4. c

5. d

6. a

Problems and Applications

1. See Figure 5; the four transactions are shown.

Figure 5

2. a. Figure 6 shows a production possibilities frontier between guns and butter. It is bowed out because of the law of increasing opportunity costs. As the economy moves from producing many guns and a little butter (point H) to producing fewer guns and more butter (point D), the opportunity cost of each additional unit of butter increases because the resources best suited to producing guns are shifting toward the production of butter. Thus, the number of guns given up to produce one more unit of butter is increasing.

Figure 6

b. Point A is impossible for the economy to achieve; it is outside the production possibilities frontier. Point B is feasible but inefficient because it is inside the production possibilities frontier.

c. The Hawks might choose a point like H, with many guns and not much butter. The Doves might choose a point like D, with a lot of butter and few guns.

d. If both Hawks and Doves reduced their desired quantity of guns by the same amount, the Hawks would get a bigger peace dividend because the production possibilities frontier is much flatter at point H than at point D. As a result, the reduction of a given number of guns, starting at point H, leads to a much larger increase in the quantity of butter produced than when starting at point D.

3. See Figure 7. The shape and position of the frontier depend on how costly it is to maintain a clean environment¾the productivity of the environmental industry. Gains in environmental productivity, such as the development of new way to produce electricity that emits fewer pollutants, lead to shifts of the production-possibilities frontier, like the shift from PPF₁ to PPF₂ shown in the figure.

Figure 7 Figure 8

4. a. A: 40 lawns mowed; 0 washed cars

B: 0 lawns mowed, 40 washed cars

C: 20 lawns mowed; 20 washed cars

D: 25 lawns mowed; 25 washed cars

b. The production possibilities frontier is shown in Figure 8. Points A, B, and D are on the frontier, while point C is inside the frontier.

c. Larry is equally productive at both tasks. Moe is more productive at washing cars, while Curly is more productive at mowing lawns.

d. Allocation C is inefficient. More washed cars and mowed lawns can be produced by simply reallocating the time of the three individuals.

5. a. A family's decision about how much income to save is related to microeconomics.

b. The effect of government regulations on auto emissions is related to microeconomics.

c. The impact of higher saving on economic growth is related to macroeconomics.

d. A firm's decision about how many workers to hire is related to microeconomics.

e. The relationship between the inflation rate and changes in the quantity of money is related to macroeconomics.

6. a. The statement that society faces a short-run trade-off between inflation and unemployment is a positive statement. It deals with how the economy is, not how it should be. Since economists have examined data and found that there is a short-run negative relationship between inflation and unemployment, the statement is a fact.

b. The statement that a reduction in the rate of money growth will reduce the rate of inflation is a positive statement. Economists have found that money growth and inflation are very closely related. The statement thus tells how the world is, and so it is a positive statement.

c. The statement that the Federal Reserve should reduce the rate of money growth is a normative statement. It states an opinion about something that should be done, not how the world is.

d. The statement that society ought to require welfare recipients to look for jobs is a normative statement. It does not state a fact about how the world is. Instead, it is a statement of how the world should be and is thus a normative statement.

e. The statement that lower tax rates encourage more work and more saving is a positive statement. Economists have studied the relationship between tax rates and work, as well as the relationship between tax rates and saving. They have found a negative relationship in both cases. So the statement reflects how the world is and is thus a positive statement.

 

Thinking Like an Economist

Multiple Choice – Section 00: Introduction

1. Which of the following is not correct?

a. Economists use some familiar words in specialized ways.

b. Economics has its own language and its own way of thinking, but few other fields of study do.

c. Supply, demand, elasticity, comparative advantage, consumer surplus, and deadweight loss are all terms that are part of the economist’s language.

d. The value of the economist’s language lies in its ability to provide you with a new and useful way of thinking about the world in which you live.

ANSWER: b

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.5 - LO: 2-0

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

2. Economists use some familiar terms in specialized ways

a. to make the subject sound more complex than it is.

b. because every respectable field of study has its own language.

c. to provide a new and useful way of thinking about the world.

d. because it was too difficult to come up with new terms.

ANSWER: c

POINTS: 1

DIFFICULTY: Difficulty: Easy

LEARNING OBJECTIVES: ECON.MANK.15.5 - LO: 2-0

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

3. The language of economics is

a. needlessly arcane.

b. valuable because it provides a new and useful way of learning about the world.

c. easy to learn within a day.

d. unnecessary to learn for a thorough understanding of economics.

ANSWER: b

POINTS: 1

DIFFICULTY: Difficulty: Easy

LEARNING OBJECTIVES: ECON.MANK.15.5 - LO: 2-0

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

Multiple Choice – Section 01: The Economist as Scientist

1. Economists, like mathematicians, physicists, and biologists,

a. make use of the scientific method.

b. try to address their subject with a scientist’s objectivity.

c. devise theories, collect data, and then analyze these data in an attempt to verify or refute their theories.

d. All of the above are correct.

ANSWER: d

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

2. The essence of science is

a. the laboratory experiment.

b. the scientific method.

c. the study of nature, but not the study of society.

d. All of the above are correct.

ANSWER: b

POINTS: 1

DIFFICULTY: Difficulty: Easy

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: General Principles

KEYWORDS: BLOOM'S: Knowledge

3. The scientific method is

a. the use of modern technology to understand the way the world works.

b. the use of controlled laboratory experiments to understand the way the world works.

c. the dispassionate development and testing of theories about how the world works.

d. the search for evidence to support preconceived theories about how the world works.

ANSWER: c

POINTS: 1

DIFFICULTY: Difficulty: Easy

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: General Principles

KEYWORDS: BLOOM'S: Knowledge

4. The scientific method is applicable to studying

a. natural sciences, but not social sciences.

b. social sciences, but not natural sciences.

c. both natural sciences and social sciences.

d. None of the above is correct.

ANSWER: c

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: General Principles

KEYWORDS: BLOOM'S: Comprehension

5. Who said, "The whole of science is nothing more than the refinement of everyday thinking"?

a. Isaac Newton

b. Albert Einstein

c. Adam Smith

d. Benjamin Franklin

ANSWER: b

POINTS: 1

DIFFICULTY: Difficulty: Easy

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: General Principles

KEYWORDS: BLOOM'S: Knowledge

6. Albert Einstein once made the following observation about science:

a. "The whole of science is nothing more than the refinement of everyday thinking."

b. "The whole of science is nothing more than an interesting intellectual exercise."

c. "In order to understand science, one must rely solely on abstraction."

d. "In order to understand science, one must transcend everyday thinking."

ANSWER: a

POINTS: 1

DIFFICULTY: Difficulty: Easy

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: General Principles

KEYWORDS: BLOOM'S: Knowledge

7. Sir Isaac Newton's development of the theory of gravity after observing an apple fall from a tree is an example of

a. a controlled experiment that lead to the formulation of a scientific theory.

b. being in the right place at the right time.

c. an idea whose time had come.

d. the interplay between observation and theory in science.

ANSWER: d

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: General Principles

KEYWORDS: BLOOM'S: Comprehension

8. Which of the following steps does an economist take when studying the economy?

a. devise theories

b. collect data

c. analyze data

d. All of the above are correct.

ANSWER: d

POINTS: 1

DIFFICULTY: Difficulty: Easy

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

9. Which of the following is an example of using the scientific method with a natural experiment?

a. measuring how long it takes a marble to fall from a ten story building

b. comparing plant growth with and without a soil additive

c. tracking the price of oil when a war in the Middle East interrupts the flow of crude oil

d. observing the reaction when two chemicals are mixed together

ANSWER: c

POINTS: 1

DIFFICULTY: Difficulty: Easy

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: General Principles

KEYWORDS: BLOOM'S: Application

NOTES: s

10. The goal of an economist who formulates new theories is to

a. provide an interesting framework of analysis, whether or not the framework turns out to be of much use in understanding how the world works.

b. provoke stimulating debate in scientific journals.

c. contribute to an understanding of how the world works.

d. demonstrate that economists, like other scientists, can formulate testable theories.

ANSWER: c

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

11. Suppose an economist develops a theory that higher food prices arise from higher gas prices. According to the scientific method, which of the following is the economist’s next step?

a. Collect and analyze data.

b. Go to a laboratory and generate data to test the theory.

c. Publish the theory without testing it.

d. Consult with other economists to see they agree with the theory.

ANSWER: a

POINTS: 1

DIFFICULTY: Difficulty: Easy

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: General Principles

KEYWORDS: BLOOM'S: Application

12. Which of the following statements applies to economics, as well as to other sciences such as physics?

a. Experiments are considered valid only when they are conducted in a laboratory.

b. Good theories do not need to be tested.

c. Real-world observations often lead to theories.

d. Economics, as well as other sciences, is concerned primarily with abstract concepts.

ANSWER: c

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: General Principles

KEYWORDS: BLOOM'S: Comprehension

13. With respect to how economists study the economy, which of the following statements is most accurate?

a. Economists study the past, but they do not try to predict the future.

b. Economists use “rules of thumb” to predict the future.

c. Economists devise theories, collect data, and analyze the data to test the theories.

d. Economists use controlled experiments in much the same way that biologists and physicists do.

ANSWER: c

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

14. Economists face an obstacle that many other scientists do not face. What is that obstacle?

a. It is often difficult to formulate theories in economics.

b. It is often impractical to perform experiments in economics.

c. Economics cannot be addressed objectively; it must be addressed subjectively.

d. The scientific method cannot be applied to the study of economics.

ANSWER: b

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: General Principles

KEYWORDS: BLOOM'S: Comprehension

NOTES: s

15. In conducting their research, economists face an obstacle that not all scientists face; specifically, in economics, it is often impractical to

a. make use of theory and observation.

b. rely upon the scientific method.

c. conduct laboratory experiments.

d. find articles or books that were written before 1900.

ANSWER: c

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: General Principles

KEYWORDS: BLOOM'S: Comprehension

NOTES: s

16. The use of theory and observation is more difficult in economics than in sciences such as physics due to the difficulty in

a. performing an experiment in an economic system.

b. applying mathematical methods to economic analysis.

c. analyzing available data.

d. formulating theories about economic events.

ANSWER: a

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: General Principles

KEYWORDS: BLOOM'S: Comprehension

17. Which of the following statements is (are) correct?

a. Relative to some other scientists, economists find it more difficult to conduct experiments.

b. Theory and observation are important in economics as well as in other sciences.

c. To obtain data, economists often rely upon the natural experiments offered by history.

d. All of the above are correct.

ANSWER: d

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: General Principles

KEYWORDS: BLOOM'S: Comprehension

18. Because it is difficult for economists to use experiments to generate data, they generally must

a. do without data.

b. substitute assumptions for data when data are unavailable.

c. rely upon hypothetical data that were previously concocted by other economists.

d. use whatever data the world gives them.

ANSWER: d

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

19. Which of the following statements is correct?

a. Economists almost always find it easy to conduct experiments in order to test their theories.

b. Economics is not a true science because economists are not usually allowed to conduct experiments to test their theories.

c. Economics is a social science rather than a true science because it cannot employ the scientific method.

d. Economists are usually not able to conduct experiments, so they must rely on natural experiments offered by history.

ANSWER: d

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

20. Instead of conducting laboratory experiments to generate data to test their theories, economists often

a. ask winners of the Nobel Prize in Economics to evaluate their theories.

b. argue that data is impossible to collect in economics.

c. gather data from historical episodes of economic change.

d. assume that data would support their theories.

ANSWER: c

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

21. The most common data for testing economic theories come from

a. carefully controlled and conducted laboratory experiments.

b. computer models of economies.

c. historical episodes of economic change.

d. centrally planned economies.

ANSWER: c

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

22. In conducting their research, economists often substitute historical events and historical episodes for

a. theories and observations.

b. laboratory experiments.

c. models.

d. assumptions.

ANSWER: b

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

23. For economists, substitutes for laboratory experiments often come in the form of

a. natural experiments offered by history.

b. untested theories.

c. “rules of thumb” and other such conveniences.

d. reliance upon the wisdom of elders in the economics profession.

ANSWER: a

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

24. Economists regard events from the past as

a. irrelevant, since history is unlikely to repeat itself.

b. of limited interest, since those events seldom provide any useful economic data.

c. interesting but not particularly valuable, since those events cannot be used to evaluate present-day economic theories.

d. interesting and valuable, since those events are capable of helping us to understand the past, the present, and the future.

ANSWER: d

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

25. For economists, historical episodes

a. are not worthy of study because they offer few insights into current economic events and problems.

b. are not worthy of study because laboratory experiments provide more reliable data.

c. are worthy of study because economists rely entirely on observation, rather than on theory.

d. are worthy of study because they serve as valuable substitutes for laboratory experiments.

ANSWER: d

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

26. Historical episodes are

a. valuable to economists because they allow economists to see how the science of economics has evolved.

b. valuable to economists because they allow economists to evaluate economic theories.

c. not of concern to economists because economics is about predicting the future, not dwelling on the past.

d. not of concern to economists because the exact circumstances of historical episodes are unlikely to be observed again.

ANSWER: b

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

27. One thing economists do to help them understand how the real world works is

a. make assumptions.

b. ignore the past.

c. try to capture every aspect of the real world in the models they construct.

d. All of the above are correct.

ANSWER: a

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

28. Which of the following is not an example of a natural experiment an economist might use to evaluate a theory?

a. Transit ridership increased in Atlanta following an increase in gas prices.

b. Federal tax revenue increased following a decrease in the tax rate.

c. Students in a principles of microeconomics course are asked to play a game with classmates to determine what decisions they make under certain circumstances.

d. Following the imposition of austerity measures, the growth rate of the economy in Greece slowed.

ANSWER: c

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Application

29. Economists make assumptions to

a. mimic the methodologies employed by other scientists.

b. minimize the number of experiments that yield no useful data.

c. minimize the likelihood that some aspect of the problem at hand is being overlooked.

d. focus their thinking on the essence of the problem at hand.

ANSWER: d

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

NOTES: s

30. Economists make use of assumptions, some of which are unrealistic, for the purpose of

a. teaching economics to people who have never before studied economics.

b. advancing their political agendas.

c. developing models when the scientific method cannot be used.

d. focusing their thinking.

ANSWER: d

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension

31. For an economist, the idea of making assumptions is regarded generally as a

a. bad idea, since doing so leads to the omission of important ideas and variables from economic models.

b. bad idea, since doing so invariably leads to data-collection problems.

c. good idea, since doing so helps to simplify the complex world and make it easier to understand.

d. good idea, since economic analysis without assumptions leads to complicated results that the general public finds hard to understand.

ANSWER: c

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: ECON.MANK.15.6 - LO: 2-1

NATIONAL STANDARDS: United States - BUSPROG: Analytic

TOPICS: DISC: Thinking Like an Economist

KEYWORDS: BLOOM'S: Comprehension