D089 Principles of Economics - Set 1 - Part 2

Correct Answer: The ability to produce goods at a lower opportunity cost

Comparative advantage refers to the ability of a country to produce a good at a lower opportunity cost than another country, making trade beneficial.

Correct Answer: When private investment decreases due to higher government borrowing

Crowding out occurs when government borrowing drives up interest rates, reducing the availability of funds for private investment.

Correct Answer: Wages increase

In the long run, an inflationary gap (when actual GDP exceeds potential GDP) leads to upward pressure on wages as employers compete for labor.

Correct Answer: It facilitates trade

As a medium of exchange, money allows people to trade goods and services without the complications of bartering.

Correct Answer: Progressive income taxes

Automatic stabilizers, like progressive taxes, naturally adjust to economic conditions by reducing tax burdens during recessions and increasing them during booms.

Correct Answer: Wages decrease

In the long run, a recessionary gap (when actual GDP is below potential GDP) leads to lower wages as there is less demand for labor.

Correct Answer: To influence interest rates and the money supply

Open market operations involve the Federal Reserve buying and selling government securities to control the money supply and influence interest rates.

Correct Answer: Frictional unemployment

Frictional unemployment happens when workers are in transition between jobs or are entering the labor market for the first time.

Correct Answer: Increases aggregate demand

Lower interest rates make borrowing cheaper, encouraging businesses to invest and consumers to spend, thereby increasing aggregate demand.

Correct Answer: Shortage

A price ceiling set below the equilibrium price causes a shortage because the quantity demanded exceeds the quantity supplied at the lower price.

Correct Answer: A general rise in prices over time

Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time.

Correct Answer: Between unemployment and inflation

The Phillips curve illustrates the inverse relationship between unemployment and inflation, where lower unemployment often leads to higher inflation and vice versa.

Correct Answer: The money supply and interest rates

Monetary policy involves managing the money supply and interest rates to achieve macroeconomic objectives like controlling inflation and stabilizing the currency.

Correct Answer: The demand for the related good increases

When the price of a substitute good rises, consumers tend to switch to the related good, increasing its demand.

Correct Answer: A tax that increases as income increases

A progressive tax system imposes a higher tax rate on higher-income earners and a lower rate on lower-income earners.

Correct Answer: A change in the price of the good itself

A movement along the demand curve occurs when the price of the good changes, while other factors like preferences and income remain constant.

Correct Answer: GDP adjusted for inflation

Real GDP measures the value of all goods and services produced in an economy, adjusted for inflation, to provide a clearer picture of economic growth.

Correct Answer: Full employment output

The LRAS curve is vertical because, in the long run, the economy's output is determined by available resources, technology, and full employment, not by price levels.

Correct Answer: Additional input eventually leads to less additional output

The law of diminishing returns states that as more of a variable input (like labor) is added to a fixed input (like land), the additional output from each new unit of input will eventually decrease.

Correct Answer: By dividing the number of unemployed people by the labor force

The unemployment rate is calculated by dividing the number of unemployed individuals (who are actively seeking work) by the total labor force.