ECON 111 Midterm 1 || A+ GRADED SOLUTIONS!!
What is an economy? correct answers a set of social arrangements that answers three
fundamental questions: 1. what is produced? 2. how is it produced? 3. for whom is it
produced?
Thus, economics is the study of the production, distribution and consumption of goods and
services
Economics correct answers the study of the production, distribution and consumption of
goods and services
Market correct answers an institution that brings together buyers and sellers of goods or
services, who may be either individuals or businesses
Market-oriented economy correct answers most economic decisions about what to produce,
how to produce it, and for whom to produce it are made by these buyers and sellers.
a market economy is an economic system in which economic decisions and the pricing of
goods and services are guided solely by the aggregate interactions of a country's individual
citizens and businesses
This is one of two extremes describing how economic activity can be organized
Command economy correct answers the government either makes most economic decisions
itself or at least strongly influences how the decisions are made.
a command economy is a system where the government determines what goods should be
produced, how much should be produced and the price at which the goods are offered for sale
Ex: North Korea, the Soviet Union
This is one of two extremes describing how economic activity can be organized
Division of labor correct answers Dividing the work required to produce a good or service
into tasks performed by different workers.
Allows for businesses to produce a greater quantity of output
Specialization correct answers When workers or firms focus on particular tasks in the overall
production process for which they are well-suited.
economies of scale correct answers refers to the common pattern for many goods and services
that as the level of production increases, the average cost of producing each individual unit
declines.
Globalization correct answers refers to when buying and selling in markets crosses national
borders.
Exports correct answers Goods and services that are produced domestically and sold in
another country.
,Imports correct answers Goods and services produced abroad and sold domestically.
GDP correct answers the ratio of exports divided by GDP measures what share of a country's
total economic production is sold in other countries.
Microeconomics correct answers The branch of economics that focuses on actions of
particular actors within the economy, like households, workers, and business firms.
Macroeconomics correct answers The branch of economics that focuses on the economy as a
whole, including issues like growth, unemployment, inflation, and the balance of trade.
Goods and services market correct answers A market in which firms are sellers of what they
produce and households are buyers.
firms are sellers and households are buyers, so the arrow for goods and services leads from
firms to households. Payments for these goods and services flow back in the other direction,
from households to firms, so the arrow for payments flows back in the opposite direction.
Labor market correct answers The market in which households sell their labor as workers to
businesses or other employers.
households sell their labor to firms. Conversely, firms buy labor when they hire workers.
Thus, the flow of labor runs from households to firms, but the flow of payments for labor—in
the form of wages, salaries, bonuses, and benefits—flows from firms to households.
Financial capital market correct answers The market in which those who save money provide
financial capital and receive a rate of return from those who wish to raise money and pay a
rate of return.
individuals or firms who save money and make financial investments are suppliers of
financial capital. Those who borrow money or receive financial investments are the recipients
of financial capital. For example, someone who deposits money in a savings account at a
bank is supplying financial capital, and someone who receives a loan from the bank is
demanding financial capital. Individual households and firms can be either suppliers or
demanders of capital, depending on whether they are saving or borrowing. However, in the
circular flow diagram, the convention is to draw the most common direction of the financial
capital flow as running from households to firms—that is, households taken as a group are
saving and making financial investments.
Financial capital or financial investment correct answers refers to flows of money from those
people or firms who save and make a financial investment to those who borrow or receive the
financial investment
Real capital or real investment correct answers refers to physical items like buildings or
equipment, although the terms are sometimes also applied to intangible business investments,
like the spending on research and development that seeks to produce new inventions.
Rate of return correct answers the payment in addition to the original investment from those
who have received financial capital to those who provided it.
, Can be through interest or through future profits earned by a business
Principal correct answers The amount of an original financial investment, before any rate of
return is paid.
interest rate correct answers A payment calculated as a percentage of the original amount
saved or borrowed, and paid by the borrower to the saver.
When nations desire a healthy macroeconomy, they typically focus on four goals: correct
answers growth in the standard of living, a low level of unemployment, low inflation, and a
sustainable balance of trade between countries.
monetary policy correct answers Policy that involves altering the quantity of money and thus
affecting the level of interest rates and the extent of borrowing.
fiscal policy correct answers Economic policies that involve government spending and
taxation.
Impact of a change in income on a budget constraint correct answers A higher income level
means that the budget constraint will shift to the right of the original budget constraint;
conversely, a lower income level means that the budget constraint will lie to the left of the
original budget constraint.
Impact of a change in price on a budget constraint correct answers A higher price for one
good causes the budget constraint to move inward; more specifically, the budget constraint
swings inward as if on a hinge attached to the vertical axis or the horizontal axis—depending
on which good's price has risen. Conversely, a lower price for one good would lead to an
outward swing of the budget constraint.
Utility correct answers The level of satisfaction or pleasure that people receive from their
choices.
-when people make the choices that provide the highest level of satisfaction, economists say
that they are "maximizing utility."
Labor-Leisure Budget Constraint correct answers involves illustrating three factors—hours of
labor, hours of leisure, and dollars of income—on only two axes. This illustration only works
because the hours of both labor and leisure appear on the horizontal axis. After all, all leisure
means no labor, and all labor means no leisure. On the horizontal axis, hours of leisure are
measured from left to right, but hours of labor are measured from right to left. The
fundamental trade-off here is between the two goods of leisure and income. In this model,
labor is not a "good" in itself, but instead a mechanism for earning income.
Thus, the labor-leisure budget constraint illustrates: (1) possible choices for leisure and
income are determined by the wage rate and the total quantity of hours that can be worked;
(2) changes in the wage rate cause the budget constraint to move; and (3) the personal
preferences of an individual choosing between leisure and income are represented by the
point that is selected on the budget constraint.
