D089 Principles of Economics - Set 3 - Part 2

Correct Answer: It decreases

Inflation reduces the purchasing power of money, meaning the same amount of money buys fewer goods and services over time.

Correct Answer: To provide a fixed income for the bondholder in exchange for lending money

Bonds are debt instruments where investors lend money to entities (governments or corporations) in exchange for periodic interest payments and repayment of principal at maturity.

Correct Answer: Government spending and taxation decisions

Fiscal policy uses government spending and taxation to influence the economy, aiming to control inflation, stimulate growth, or reduce unemployment.

Correct Answer: As price increases, quantity supplied increases

The law of supply shows a direct relationship between price and quantity suppliedfirms are willing to supply more at higher prices and less at lower prices.

Correct Answer: To track changes in the price level of a basket of goods and services over time

The CPI measures inflation by tracking how the prices of a selected basket of consumer goods and services change over time.

Correct Answer: When consumers switch to cheaper alternatives as prices rise

The substitution effect occurs when consumers opt for less expensive alternatives as the price of a preferred product increases, thus impacting demand.

Correct Answer: A tax system where higher-income earners pay a higher percentage of their income

In a progressive tax system, the tax rate increases as the taxpayer's income increases, placing a higher burden on wealthier individuals.

Correct Answer: Demand is elastic

When the price elasticity of demand is greater than 1, it means that demand is elastic, meaning consumers are highly responsive to changes in price.

Correct Answer: A good for which demand increases as income increases

Normal goods are products for which demand rises as consumers' income rises, such as luxury items or higher-quality foods.

Correct Answer: The opportunity costs and trade-offs between producing two different goods

The PPF shows the maximum feasible output combinations of two goods an economy can produce, illustrating trade-offs and opportunity costs.

Correct Answer: It imposes a tax on imported goods

A tariff is a tax on imports that makes foreign goods more expensive and encourages consumers to buy domestically produced goods.

Correct Answer: Total revenue decreases

When demand is elastic, consumers are highly responsive to price changes, so an increase in price leads to a significant drop in quantity demanded, reducing total revenue.

Correct Answer: Goods that are both non-excludable and non-rivalrous

Public goods, such as street lighting or national defense, are available to all without reducing their availability to others, and no one can be excluded from using them.

Correct Answer: To control inflation and manage the money supply

The Federal Reserve is responsible for controlling inflation, managing the money supply, and setting interest rates to ensure economic stability.

Correct Answer: To stimulate economic growth

Expansionary fiscal policy, such as increasing government spending or cutting taxes, aims to boost economic activity, especially during recessions.

Correct Answer: When the government spends more than it receives in taxes

A budget deficit occurs when the government's expenditures exceed its revenues in a given fiscal period.

Correct Answer: The self-regulating nature of a free market

Adam Smiths "invisible hand" refers to the idea that individuals' pursuit of self-interest in free markets leads to the efficient allocation of resources, benefiting society as a whole.

Correct Answer: Unemployment caused by the fluctuation of the business cycle

Cyclical unemployment occurs when there is a downturn in the economy, reducing demand for labor.

Correct Answer: To decrease the money supply and control inflation

Contractionary monetary policy reduces the money supply, raises interest rates, and helps control inflation by slowing down economic activity.

Correct Answer: Interest rates decrease

When the Federal Reserve buys government securities, it injects money into the economy, increasing the money supply and lowering interest rates to encourage borrowing and investment.