Questions and Answers of Modern Principles Of Economics

What is the difference between a free trade association, a common market, and an economic union?
Why would countries promote protectionist laws, while also negotiate for freer trade internationally?
What might account for the dramatic increase in international trade over the past 50 years?
How does competition, whether domestic or foreign, harm businesses?
What are the gains from competition?
Who does protectionism protect? From what does it protect them?
Name and define three policy tools for enacting protectionism.
How does protectionism affect the price of the protected good in the domestic market?
Does international trade, taken as a whole, increase the total number of jobs, decrease the total number of jobs, or leave the total number of jobs about the same?
Is international trade likely to have roughly the same effect on the number of jobs in each individual industry?
How is international trade, taken as a whole, likely to affect the average level of wages?
Is international trade likely to have about the same effect on everyone’s wages?
What are main reasons for protecting “infant industries”? Why is it difficult to stop protecting them?
What is dumping? Why does prohibiting it often work better in theory than in practice?
What is the “race to the bottom” scenario?
Do the rules of international trade require that all nations impose the same consumer safety standards?
What is the national interest argument for protectionism with regard to certain products?
Name several of the international treaties where countries negotiate with each other over trade policy.
What is the general trend of trade barriers over recent decades: higher, lower, or about the same?
If opening up to free trade would benefit a nation, then why do nations not just eliminate their trade barriers, and not bother with international trade negotiations?
Who gains and who loses from trade?
Why is trade a good thing if some people lose?
What are some ways that governments can help people who lose from trade?
Show graphically that for any tariff, there is an equivalent quota that would give the same result. What would be the difference, then, between the two types of trade barriers? Hint: It is not
From the Work It Out "Effects of Trade Barriers," you can see that a tariff raises the price of imports. What is interesting is that the price rises by less than the amount of the tariff. Who pays
If trade barriers hurt the average worker in an economy (due to lower wages), why does government create trade barriers?
Why do you think labor standards and working conditions are lower in the low-income countries of the world than in countries like the United States?
How would direct subsidies to key industries be preferable to tariffs or quotas?
How can governments identify good candidates for infant industry protection? Can you suggest some key characteristics of good candidates? Why are industries like computers not good candidates for
Microeconomic theory argues that it is economically rationale (and profitable) to sell additional output as long as the price covers the variable costs of production. How is this relevant to the
How do you think Americans would feel if other countries began to urge the United States to increase environmental standards?
Is it legitimate to impose higher safety standards on imported goods that exist in the foreign country where the goods were produced?
Why might the unsafe consumer products argument be a more effective strategy (from the perspective of the importing country) than using tariffs or quotas to restrict imports?
Why might a tax on domestic consumption of resources critical for national security be a more efficient approach than barriers to imports?
Why do you think that the GATT rounds and, more recently, WTO negotiations have become longer and more difficult to resolve?
An economic union requires giving up some political autonomy to succeed. What are some examples of political power countries must give up to be members of an economic union?
What are some examples of innovative products that have disrupted their industries for the better?
In principle, the benefits of international trade to a country exceed the costs, no matter whether the country is importing or exporting. In practice, it is not always possible to compensate the
Economists sometimes say that protectionism is the “second-best” choice for dealing with any particular problem. What they mean is that there is often a policy choice that is more direct or
Assume two countries, Thailand (T) and Japan (J), have one good: cameras. The demand (d) and supply (s) for cameras in Thailand and Japan is described by the following functions:P is the price
Trade has income distribution effects. For example, suppose that because of a government-negotiated reduction in trade barriers, trade between Germany and the Czech Republic increases. Germany sells
The country of Pepper-land exports steel to the Land of Submarines. Information for the quantity demanded (Qd) and quantity supplied (Qs) in each country, in a world without trade, are given in Table
You have just been put in charge of trade policy for Malawi. Coffee is a recent crop that is growing well and the Malawian export market is developing. As such, Malawi coffee is an infant industry.
Name three kinds of graphs and briefly state when is most appropriate to use each type of graph.
What is slope on a line graph?
What do the slices of a pie chart represent?
Why is a bar chart the best way to illustrate comparisons?
How does the appearance of positive slope differ from negative slope and from zero slope?
What point is preferred along an indifference curve?
Why do indifference curves slope down?
Why are indifference curves steep on the left and flatter on the right?
How many indifference curves does a person have?
How can you tell which indifference curves represent higher or lower levels of utility?
What is a substitution effect?
What is an income effect?
Does the “income effect” involve a change in income? Explain.
Does a change in price have both an income effect and a substitution effect? Does a change in income have both an income effect and a substitution effect?
Would you expect, in some cases, to see only an income effect or only a substitution effect? Explain.
Which is larger, the income effect or the substitution effect?
Sketch the aggregate expenditure-output diagram with the recessionary gap.
Sketch the aggregate expenditure-output diagram with an inflationary gap.
Table D7 represents the data behind a Keynesian cross diagram. Assume that the tax rate is 0.4 of national income; the MPC out of the after-tax income is 0.8; investment is $2,000; government
An economy has the following characteristics:Y = National incomeTaxes = T = 0.25YC = Consumption = 400 + 0.85(Y – T)I = 300G = 200X = 500M = 0.1(Y – T)Find the equilibrium for this economy. If
Explain how the multiplier works. Use an MPC of 80% in an example.
What is on the axes of an expenditure-output diagram?
What does the 45-degree line show?
What determines the slope of a consumption function?
What is the marginal propensity to consume, and how is it related to the marginal propensity to import?
Why are the investment function, the government spending function, and the export function all drawn as flat lines?
Why does the import function slope down? What is the marginal propensity to import?
What are the components on which the aggregate expenditure function is based?
Is the equilibrium in a Keynesian cross diagram usually expected to be at or near potential GDP?
Why are savings, taxes, and imports referred to as “leakages” in calculating the multiplier effect?
Will an economy with a high multiplier be more stable or less stable than an economy with a low multiplier in response to changes in the economy or in government policy?
How do economists use the multiplier?
What does it mean when the aggregate expenditure line crosses the 45-degree line? In other words, how would you explain the intersection in words?
Which model, the AD/AS or the AE model better explains the relationship between rising price levels and GDP? Why?
What are some reasons that the economy might be in a recession, and what is the appropriate government action to alleviate the recession?
What should the government do to relieve inflationary pressures if the aggregate expenditure is greater than potential GDP?
Two countries are in a recession. Country A has an MPC of 0.8 and Country B has an MPC of 0.6. In which country will government spending have the greatest impact?
Compare two policies: a tax cut on income or an increase in government spending on roads and bridges. What are both the short-term and long-term impacts of such policies on the economy?
What role does government play in stabilizing the economy and what are the tradeoffs that must be considered?
If there is a recessionary gap of $100 billion, should the government increase spending by $100 billion to close the gap? Why? Why not?
What other changes in the economy can be evaluated by using the multiplier?
Does a price ceiling change the equilibrium price?
Select the correct answer. A price floor will usually shift:a. Demandb. Supplyc. Bothd. NeitherIllustrate your answer with a diagram.
Select the correct answer. A price ceiling will usually shift:a. Demandb. Supplyc. Bothd. Neither
What is the “price” commonly called in the labor market?
From the data in Table 5.5 about demand for smart phones, calculate the price elasticity of demand from: point B to point C, point D to point E, and point G to point H. Classify the elasticity at
What would be a sign of a shortage in financial markets?
Other than the demand for labor, what would be another example of a “derived demand?”
From the data in Table 5.6 about supply of alarm clocks, calculate the price elasticity of supply from: point J to point K, point L to point M, and point N to point P. Classify the elasticity at each
Why is the demand curve with constant unitary elasticity concave?
Why is the supply curve with constant unitary elasticity a straight line?
The federal government decides to require that automobile manufacturers install new anti-pollution equipment that costs $2,000 per car. Under what conditions can carmakers pass almost all of this
Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from
The average annual income rises from $25,000 to $38,000, and the quantity of bread consumed in a year by the average person falls from 30 loaves to 22 loaves. What is the income elasticity of bread
Suppose the cross-price elasticity of apples with respect to the price of oranges is 0.4, and the price of oranges falls by 3%. What will happen to the demand for apples?
What is the formula for calculating elasticity?
What is the price elasticity of demand? Can you explain it in your own words?

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