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In a market economy, supply and demand determine:
both the quantity of each good produced and the price at which it is sold.
 
In a market economy, supply and demand are important because they:
can be used to predict the impact on the economy of various events and policies.
 
a likely example of a complementary goods for most people would be
canoes and paddles
 
The forces that make market economies work are
supply and demand
 
"Other things equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises." This relationship between price and quantity demanded is referred to as
the law of demand
 
The demand for a good or service is determined by:
those who buy the good or service.
 
For a market for a good or service to exist, there must be a:
group of buyers and sellers.
 
A decrease in demand is represented by
leftward shift of a demand curve
 
In a market economy
supply and demand determine prices and prices, in turn, allocate the economy's scarce resources
 
a group of buyers and sellers of a particular good or service is called a
market
 
In a free market, who determines how much of a good will be sold and the price at which it is sold?
suppliers and demanders together
 
An import quota is a supply restriction that prohibits the importation of more  than a specified quantity of a particular good in a one-year period.
True
 
Suppose that Carolyn receives a pay increase. We would expect ________________.
Carolyn's demand for inferior goods to decrease
 
If a study by the AMA found that brown sugar caused weight loss while white sugar caused weight gain we would see _______________. an increase in demand for brown sugar and a decrease in demand for white
sugar
 
The movement from D to D1 is called ____________.
a decrease in demand
 
The side of the market that deals with the willingness and ability to produce and sell is _____________.
Supply
 
When both supply and demand curves change, the outcome is definite for both equilibrium price and equilibrium quantity.
False
 
If the price of a good is low ___________________.
quantity supplied could be zero
 
The positive relationship between price and quantity supplied is called ______________.
the law of supply
 
If the number of sellers in a market increases, the __________________.
supply in that market will increase
 
The movement from S to S1 is called ________________.
an increase in supply
 
When both supply and demand decrease, the equilibrium price ________  and the equilibrium quantity ________.
change is uncertain; decreases
 
If price in this market is currently $14, there would be a ______________.
surplus of 40 units and price would tend to fall
 
If price in this market is currently $8, quantity supplied would be _____________.
40 and quantity demanded would be 60
 
A black market is a market in which a price-controlled good is sold at an  illegally high price.
True
 
Which of the following is NOT a characteristic of a perfectly competitive market?
market power
 
If price is $15, quantity supplied would be ______________.
400
 
Suppose roses are currently selling for $40.00 per dozen. The equilibrium price of roses is $30.00 per dozen. We would expect a _____________.
surplus to exist and the market price of roses to decrease
 
Voluntary exchange refers to an act of trading between individuals that  makes both parties to the trade subjectively better off.
True
 
If a surplus exists in a market we know that the actual price is ________________.
above equilibrium price and quantity supplied is greater than quantity demanded
 
As long as a price floor is ________ the market clearing price, imposing a  price floor creates a ________.
above; surplus
 
As long as a price ceiling is ________ the market clearing price, imposing a  price ceiling creates a ________.
below; shortage
 
An effective price _________________ is an enforced regulation that sets the legal price below the market clearing​ price, which often leads to nonprice rationing devices and __________________ markets
ceiling; black
 
_________________ prices perform three​ functions: (1) allocating existing scarce housing among competing​ claimants, (2)
promoting efficient maintenance of existing houses and stimulating new housing​ construction, and​ (3) rationing the use of
existing houses by current demanders.
Rental
 
Effective rent ___________________ impede the functioning of rental prices. Construction of new rental units is discouraged.
controls
 
If the demand for a product increases, we would expect equilibrium price ____________.
and equilibrium quantity to both increase
 
Suppose that the incomes of buyers in a particular market for a normal good decline and there is also a reduction in input prices.
What would we expect to occur in this market? The equilibrium price would decrease, but the impact on the amount sold
in the market would be ambiguous.
 
Voluntary exchange refers to an act of trading between individuals that makes both parties to the trade subjectively better off.
True
 
In​ general, the less organized the​ market, the lower the transaction costs.
False
 
Middlemen specialize in lowering transaction costs.
True
 
Most of the benefits from agricultural price supports have gone to small,  family-owned farms.
False
 
There are simultaneous changes in the demand for and supply of​ global-positioning-system (GPS)​ devices, with the consequences being an unambiguous increase in the market clearing price of these devices but no change in the equilibrium quantity.
What changes in the demand for and supply of GPS devices could have generated these​ outcomes?
demand increases and supply decreases
 
Suppose that you are investigating the market for wheat. The price of corn​, a substitute​ good, has decreased. Which of the following would best describe the market reaction to this​ event?
the demand for wheat decreases, which creates a surplus of wheat, causing the price of wh
 
When demand decreases and the​ (upward sloping) supply curve remains in the same​ position,
price falls and equilibrium quantity falls.
 
When supply increases and the​ (downward-sloping) demand curve remains in the same​ position,
price falls and equilibrium quantity rises.
 
Black markets usually arise when there are
price ceilings
 
A price ceiling is
a​ government-imposed maximum price that may be charged for a good or​ service, which can lead to shortages.
 
In a rent controlled​ market, we would expect to observe
renters moving into the market to take advantage of the lower rents.
 
Price​ ceilings, such as rent controls
discourage the construction of new housing; lead to the deterioration of existing housing; reduce tenant mobility
as people may be reluctant to change apartments
 
Which of the following statements is true concerning the consequences of rent​ controls?
Upper income earners are big winners due to the fact that they can better exploit nonprice rationing devices.
 
A black market is a market in which a​ price-controlled good is sold at an illegally high price.
true
 
As long as a price ceiling is​ ________ the market clearing​ price, imposing a price ceiling creates a​ ________.
below; shortage
 
Rent control is a type of price floor.
False
 
Evidence indicates that the group which benefits most from rent ceilings is
upper-income professionals.
 
Governments sometimes impose price controls in the form of price __________________ and price ______________________
ceilings; floors
 
Other things remaining​ equal, a decrease in the world oil supply like those that occurred in​ 1973-74 and 1979 would
increase the price of airline travel and decrease its equilibrium quantity.
 
What happens in the market with an upward sloping supply curve when there is a shift in the demand curve due to an external​ shock?
A new equilibrium price will be achieved over some period of time
 
Economists assume that when there is a change in demand​ and/or supply, that prices reach a new equilibrium
after an adjustment period that varies.
 
People often complain about price gouging after a natural disaster. Suppose the government imposed limitations on price increases in the aftermath of a disaster. One would expect
reconstruction to take longer because the quantity supplied of new materials would increase more slowly
 
The more flexible prices​ are,
the more quickly a shock to the economy can be absorbed.
 
If demand increases while supply remains​ unchanged, the equilibrium price of the product will​ ________
and the equilibrium quantity will​ ________.
increase; increase
 
Suppose that demand increases AND supply decreases. What would happen in the market for the good?
Equilibrium price would increase, but the impact on equilibrium quantity would be ambiguous.
 
If there is a shortage of farm laborers, we would expect _____________.
the wages of farm laborers to increase
 
When both supply and demand curves​ change, the outcome is definite for both equilibrium price and equilibrium quantity.
False
 
When both supply and demand​ decrease, the equilibrium price​ ________ and the equilibrium quantity​ ________.
change is​ uncertain; decreases
 
Markets which are temporarily out of equilibrium will always return to equilibrium immediately.
False
 
Scarcity implies that
a way of rationing supplies of goods must be found.
 
In a​ market-based economy, what is the role of a system of​ prices?
To address the problem of scarcity.
 
Given the existence of relative​ scarcity, resources can be ration
a system of prices; political mandate; queuing, or standing in line.
​
Government-enforced prices such as price ceilings
disrupt the rationing function performed by prices in a market system.
 
Rationing by the price system leads to the most efficient use of available resources.
True
 
What is the economic effect of price​ ceilings?
An effective price ceiling will lead to a shortage
 
Markets which are temporarily out of equilibrium will always return to  equilibrium immediately.
False
 
What would happen to the equilibrium price and quantity of coffee if the wages of coffee-bean pickers fell and the price of tea fell?
Price will fall and the effect on quantity is ambiguous.
 
Middlemen specialize in lowering transaction costs.
True
 
Beef is a normal good. You observe that both the equilibrium price and quantity of beef has fallen over time.
Which of the following would be most consistent with this observation?
Consumer tastes have changed so as to prefer beef less than before.
 
Buyers and sellers who have no influence on market price are referred to as _______________.
price takers
 
Which of the following would be most likely to increase the price of a new house?
Higher wages for carpenters, higher wood prices, increases in consumer incomes, higher apartment rents, increases in population and expectations of higher house prices in the future.
 
An above-equilibrium minimum wage will result in ________ in the  quantity of labor demanded
and ________ in the quantity of labor supplied.
a decrease; an increase
 
A monopoly is a market ________________.
with one seller
 
Rent control is a type of price floor.
False
 
If a seller is supplying a product that is slightly different from that of many close competitors and is able to charge
a different price than competitors, then the seller _______________.
is participating in a monopolistically competitive market
 
Evidence indicates that the group which benefits most from rent ceilings is
upper-income professionals
 
When it comes to people's tastes, economists generally believe that _____________.
tastes are based on historical and psychological forces
 
The minimum wage is an example of a price ceiling.
False
 
You love peanut butter. You hear on the news that 50 % of the peanut crop in the South has been wiped out,
which will cause the price to double by the end of the year. As a result, __________________.
your demand for peanut butter increases today
 
If demand increases while supply remains unchanged, the equilibrium price  of the product will ________ and the
equilibrium quantity will ________.
increase; increase
 
Alyssa rents 5 movies per month when the price is $3.00 each and 7 movies per month when the price is $2.50. Alyssa has demonstrated the ______________.
law of demand
 
Suppose that the American Medical Association announces that men who shave their heads are less likely to die of heart failure.
We could expect the current demand for _____________.
razors to increase
 
Rationing by the price system leads to the most efficient use of available  resources.
True
 
A monopoly is a market with one:
seller, and that seller sets the price.
 
A decrease in quantity demanded:
results in a movement upward and to the left along a demand curve.
 
A movement upward and to the left along a demand curve is called a(n):
decrease in quantity demanded.
 
An increase in the price of a good will:
decrease quantity demanded.
 
The law of demand states that, other things equal, when the price of a good:
falls, the quantity demanded of the good rises.
 
Which of the following demonstrates the law of demand?
Dave buys more donuts at $0.25 per donut than at $0.50 per donut, other things equal.
 
A demand schedule is a table that shows the relationship between:
price and quantity demanded.
 
Refer to Figure 4-2. If Consumer A and Consumer B are the only consumers in the market, then the market
quantity demanded when the price is $6 is:
12 units
 
A competitive market is a marker in which
no individual buyer or seller has any significant impact on the market price
 
A CPA recently has come to expect higher prices for expert tax advice in the near future. we would expect
The CPA to supply less expert tax advice now than she was supplying previously
 
A monopoly is a market with one
seller, and that seller sets the price.
 
A group of buyers and sellers of a particular good or service is called a
market
 
A decrease in quantity supplied
results in a movement downward and to the left along a fixed supply curve
 
A markets equilibrium is the point at which the supply and demand curves intersect
true
 
If buyers today become more willing and able than before to purchase larger quantities of Vanilla Coke
at each price of Vanilla Coke, then:
the demand curve for Vanilla Coke will shift to the right.
 
When the price of hot dogs changes, the demand curve for hot dogs:
does not shift because the price of hot dogs is measured on the vertical axis of the graph.
 
A competitive market is a marker in which
no individual buyer or seller has any significant impact on the market price
 
A CPA recently has come to expect higher prices for expert tax advice in the near future. we would expect
The CPA to supply less expert tax advice now than she was supplying previously
 
A monopoly is a market with one
seller, and that seller sets the price.
 
A group of buyers and sellers of a particular good or service is called a
market
 
A decrease in quantity supplied
results in a movement downward and to the left along a fixed supply curve
 
A markets equilibrium is the point at which the supply and demand curves intersect
true
 
The quantity supplied of a good is the amount that:
sellers are willing and able to sell.
 
A movement along the supply curve might be caused by a change in:
the price of the good or service that is being supplied.
 
An increase in the price of oranges would lead to:
a movement up and to the right along the supply curve for oranges
 
"Other things equal, when the price of a good rises, the quantity supplied of the good also rises, and when the price falls,
the quantity supplied falls as well." This relationship between price and quantity supplied:
is referred to as the law of supply.
 
The difference between a supply schedule and a supply curve is that a supply schedule:
is a table, and a supply curve is drawn on a graph.
 
Refer to Table 4-5. If these are the only four sellers in the market, then the market quantity supplied at a price of $4 is:
20 units.
 
Refer to Table 4-5. If these are the only four sellers in the market, then when the price decreases from $10 to $8,
the market quantity supplied decreases by:
10 units.
 
If income rises in the market for a normal good, will the demand curve for the normal good shift to the right or to the left?
the demand curve will shift to the right
 
A decrease in supply is represented by
a leftward shift of the supply curve
 
A movement upward and to the left along a given demand curve is called a decrease in demand.
false
 
A decrease in the number of sellers in the market causes
the supply curve to shift to the left
 
A reduction in an input price will cause a change in quantity supplied but not a change in supply
false
 
according to the law of demand, when price increases the quantity demanded of a good
decreases
 
A improvement in production technology will shift the:
supply curve to the right.
 
If suppliers expect the price of their product to fall in the future, then they will:
increase supply now.
 
At the equilibrium price, the quantity of the good that buyers are willing and able to buy:
exactly equals the quantity that sellers are willing and able to sell.
 
Which of the following events must cause equilibrium quantity to fall?
demand and supply both decrease
 
Equilibrium quantity must increase when demand:
increases and supply does not change, when demand does not change and supply increases,
and when both demand and supply increase.
 
Suppose roses are currently selling for $40 per dozen, but the equilibrium price of roses is $30 per dozen. We would expect a:
surplus to exist and the market price of roses to decrease.
 
Suppose the incomes of buyers in a market for a particular normal good decrease and there is also a reduction in input prices.
What would we expect to occur in this market?
Equilibrium price would decrease, but the impact on equilibrium quantity would be ambiguous.
 
What would happen to the equilibrium price and quantity of lattés if coffee shops began using a machine that reduced the amount of labor necessary to produce steamed milk, which is used to make lattés, and scientists discovered that lattés cause heart attacks?
The equilibrium price would decrease, and the effect on equilibrium quantity would be ambiguous
 
Sellers as a group determine the demand for a product, and buyers as a group determine the supply of a product.
False
 
A movement upward and to the left along a given demand curve is called a decrease in demand.
False
 
The desire to have a relatively even pattern of consumption over time is known as
the consumption-smoothing motive.
 
When a person gets an increase in current income, what is likely to happen to consumption and saving?
Consumption increases and saving increases.
 
The fraction of additional current income that a person consumes in the current period is known as
the marginal propensity to consume.
 
An increase in expected future output while holding today's output constant would
increase today's desired consumption and decrease desired national saving.
 
When a person receives an increase in wealth, what is likely to happen to consumption and saving?
Consumption increases and saving decreases.
 
Aunt Agatha has just left her nephew $5000. The most likely response is for her nephew to
increase both current consumption and future consumption.
 
The stock market just crashed; the Dow Jones Industrial Average fell by 750 points. You would expect the effect on aggregate consumption to be the largest if which of the following facts was true?
Many individuals had invested in the stock market immediately prior to the crash.
 
If the substitution effect of the real interest rate on saving is larger than the income effect of the real interest rate on saving,
then a rise in the real interest rate leads to a _____ in consumption and a _____ in saving, for someone who's a lender.
fall; rise
 
If the substitution effect of the real interest rate on saving is smaller than the income effect of the real interest rate on saving,
then a rise in the real interest rate leads to a _____ in consumption and a _____ in saving, for someone who's a lender.
rise; fall
 
Three factors that cause interest rates among different financial instruments to vary are
default risk, maturity, and taxability.
 
The yield curve shows
the interest rates on bonds of different maturities.
 
Desired national saving would increase unambiguously if there were
a fall in both government purchases and expected future output.
 
The Ricardian equivalence proposition suggests that a government deficit caused by a tax cut
doesn't affect consumption.
 
If the government cuts taxes today, issuing debt today and repaying the debt plus interest next year, a rational taxpayer will
increase saving today, leaving consumption unchanged.
 
Which of the factors listed below might cause the Ricardian equivalence proposition to be violated?
Consumers may not understand that an increase in government borrowing today is likely to lead to higher future taxes.
 
You are trying to figure out how much capacity to add to your factory. You will increase capacity as long as the expected
marginal product of capital is greater than or equal to the
user cost of capital.
 
The relationship between stock prices and firms' investments in physical capital is captured by what theory?
Q-theory
 
Tobin's q is equal to
the ratio of capital's market value to its replacement cost.
 
A technological improvement will
increase the desired capital stock.
 
Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent decline in the expected
real interest rate now has what effect on your desired capital stock?
Raises it, because the user cost of capital is now lower
 
Suppose your company is in equilibrium, with its capital stock at its desired level. A permanent increase in the
depreciation rate now has what effect on your desired capital stock?
Lowers it, because the user cost of capital is now higher
 
Cummins, Hubbard, and Hassett studied the effects of taxes on investment by
examining what happened to investment when major tax reforms took place.
 
What is the difference between gross investment and net investment?
Net investment = gross investment minus depreciation
 
When desired national saving equals desired national investment, what market is in equilibrium?
The goods market
 
Any change in the economy that raises desired national saving for a given value of the real interest rate will shift the
desired national saving curve to
the right and decrease the real interest rate.
 
An increase in the expected real interest rate tends to
raise desired savings, but lower desired investment.
 
The saving-investment diagram shows that a higher real interest rate due to a leftward shift of the saving curve
causes the total amounts of saving and investment to fall.
 
A temporary decrease in government purchases would cause
a rightward shift in the saving curve, but no shift in the investment curve.
 
If consumers foresee future taxes completely, a reduction in taxes this year that is accompanied by an offsetting
increase in future taxes would cause
a shift in neither the saving nor the investment curve.
 
An invention that raises the future marginal product of capital would cause an increase in desired investment,
which would cause the investment curve to shift to the ________ and would cause the real interest rate to ________.
right; increase
 
A temporary supply shock, such as a drought, would
have little or no effect on desired investment.
 
A curve that connects all the consumption combinations that yield the same level of utility is known as
an indifference curve.
 
Suppose the government provides a tax cut today that is matched by a tax increase in the future that's equal in present
value to the tax cut. This causes a consumer's saving to
increase.
 
The substitution effect of a decrease in real interest rates is to cause a consumer to
decrease future consumption and increase current consumption.
 
For a borrower, an increase in the real interest rate will lead to
lower current consumption and less borrowing.