D089 Principles of Economics - Set 2 - Part 2

Correct Answer: It has no effect

A price ceiling set above the equilibrium price has no impact because the market price is already below the ceiling, so the market functions as usual.

Correct Answer: A period of declining GDP and rising unemployment

A recession is characterized by a significant decline in economic activity, marked by falling GDP and rising unemployment over a sustained period.

Correct Answer: Inflation occurs

When aggregate demand outpaces aggregate supply, it puts upward pressure on prices, leading to inflation as consumers compete for limited goods and services.

Correct Answer: Through the interaction of buyers and sellers

The equilibrium price is determined by the point where the quantity of a good demanded by consumers equals the quantity supplied by producers.

Correct Answer: A sustained increase in real GDP

Economic growth refers to a long-term rise in real GDP, indicating an increase in the economy's overall production of goods and services.

Correct Answer: An economy where production and prices are determined by the interaction of supply and demand

In a market economy, production and pricing decisions are made through the free interaction of supply and demand, with minimal government interference.

Correct Answer: A change in price

A movement along the demand curve occurs when the price of a good or service changes, while all other factors affecting demand remain constant.

Correct Answer: The supply curve shifts to the right

If production costs decrease, firms can produce more at every price level, leading to an increase in supply and a rightward shift of the supply curve.

Correct Answer: When government borrowing leads to higher interest rates, reducing private investment

The crowding out effect occurs when government borrowing increases interest rates, which can discourage private investment.

Correct Answer: The value of all goods and services produced, adjusted for inflation

Real GDP adjusts for inflation to measure the value of goods and services produced in constant prices, providing a more accurate picture of economic growth.

Correct Answer: The fluctuation of economic activity over time, including expansions and contractions

The business cycle refers to the ups and downs in economic activity, marked by periods of expansion (growth) and contraction (recession).

Correct Answer: The buying and selling of government bonds by the Federal Reserve

Open market operations are one of the Federal Reserve's key tools for managing the money supply, where they buy or sell government bonds to influence interest rates and liquidity.

Correct Answer: An increase in the general price level of goods and services

Inflation refers to the general rise in prices across the economy, which reduces the purchasing power of money.

Correct Answer: Unemployment due to economic downturns or recessions

Cyclical unemployment occurs when there is insufficient demand for goods and services in the economy, often resulting from a recession.

Correct Answer: To prevent prices from rising above a certain level

A price ceiling is a government-imposed limit on how high a price can be charged for a product, usually to protect consumers from excessively high prices.

Correct Answer: The ability of a country to produce a good at a lower opportunity cost than another country

Comparative advantage allows countries to specialize in the production of goods where they have a lower opportunity cost, leading to gains from trade.

Correct Answer: Banks borrow less from the Federal Reserve

A higher discount rate makes borrowing more expensive for banks, which discourages them from taking loans from the Federal Reserve.

Correct Answer: Payments made by the government to individuals, without goods or services being exchanged

Transfer payments, such as welfare benefits and Social Security, are payments made by the government to individuals without requiring any goods or services in return.

Correct Answer: The relationship between inflation and unemployment

The Phillips curve shows the inverse relationship between inflation and unemployment, indicating that as one rises, the other tends to fall.

Correct Answer: To increase aggregate demand and stimulate economic growth

Expansionary fiscal policy, such as increasing government spending or cutting taxes, aims to boost aggregate demand and promote economic growth.