D089 Principles of Economics - Set 2 - Part 1

Correct Answer: Increase in aggregate demand

An increase in the money supply typically lowers interest rates, encouraging borrowing and spending, which in turn increases aggregate demand.

Correct Answer: A tax on goods to protect domestic industries

Protective tariffs are designed to make imported goods more expensive, thus encouraging consumers to buy domestically produced goods.

Correct Answer: It increases borrowing

Lower interest rates reduce the cost of borrowing, making loans more attractive for businesses and consumers, leading to an increase in borrowing.

Correct Answer: Control inflation and stabilize the currency

The Federal Reserve's main role is to manage the money supply and implement policies to control inflation, stabilize prices, and maintain a healthy economy.

Correct Answer: Higher prices and lower output

A decrease in aggregate supply leads to cost-push inflation, where rising production costs result in higher prices and reduced output.

Correct Answer: GDP measured in current prices

Nominal GDP measures the value of all goods and services produced in an economy using current prices, without adjusting for inflation.

Correct Answer: The benefit of the next best alternative that is forgone

Opportunity cost refers to the value of the next best alternative that is given up when making a choice.

Correct Answer: An increase in aggregate demand

Lower taxes increase disposable income, which encourages more spending, leading to higher aggregate demand.

Correct Answer: To take risks and create new products or services

Entrepreneurs are individuals who take risks to start businesses and innovate, contributing to economic growth by creating new products and services.

Correct Answer: They raise prices above competitive levels

Monopolies have market power, allowing them to restrict output and raise prices above what would occur in a competitive market.

Correct Answer: A tax imposed as a fixed amount per unit of imported goods

A specific tariff is a fixed fee that is charged on each unit of an imported good, regardless of its value.

Correct Answer: A surplus

When a price floor is set above the equilibrium price, it leads to a surplus because the quantity supplied exceeds the quantity demanded at the higher price.

Correct Answer: Government decisions on taxes and spending to influence the economy

Fiscal policy refers to government actions involving taxation and spending to influence the economy's overall level of demand and activity.

Correct Answer: The unemployment rate when the economy is at full employment

The natural rate of unemployment is the level of unemployment that exists when the economy is producing at its potential output, including frictional and structural unemployment.

Correct Answer: Prices increase

When there is excess demand, consumers compete for the limited quantity of goods, driving prices upward.

Correct Answer: It shifts the supply curve to the right

A subsidy reduces production costs, enabling producers to supply more goods at each price level, shifting the supply curve to the right.

Correct Answer: Output increases at a decreasing rate as more inputs are added

The law of diminishing returns states that after a certain point, adding more inputs (like labor or capital) results in progressively smaller increases in output.

Correct Answer: To reduce inflation

Contractionary fiscal policy, such as decreasing government spending or increasing taxes, aims to reduce aggregate demand and curb inflation.

Correct Answer: Microeconomics focuses on individual markets; macroeconomics focuses on the economy as a whole

Microeconomics examines the behavior of individuals and firms in specific markets, while macroeconomics looks at broader economic factors such as GDP, unemployment, and inflation.

Correct Answer: Increases aggregate demand

Higher consumer confidence leads to increased spending, which raises aggregate demand as consumers are more willing to purchase goods and services.