D089 Principles of Economics - Set 3 - Part 1

Correct Answer: The limited nature of society's resources

Scarcity refers to the basic economic problem where resources are limited, but human wants are unlimited.

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

Opportunity cost is what is sacrificed in making one choice over another, highlighting the trade-offs involved in decision-making.

Correct Answer: As price increases, quantity demanded decreases

The law of demand shows an inverse relationship between price and quantity demanded—consumers tend to buy more at lower prices and less at higher prices.

Correct Answer: To act as a medium of exchange

Money facilitates trade by serving as a medium of exchange, making transactions easier and more efficient.

Correct Answer: An economy with a combination of free market and government intervention

A mixed economy combines aspects of a free market with some level of government regulation to correct market failures and provide public goods.

Correct Answer: To decrease aggregate demand and control inflation

Contractionary fiscal policy is used to reduce inflation by decreasing aggregate demand through reduced government spending or increased taxes.

Correct Answer: The minimum legal price at which a good can be sold

A price floor is the lowest legal price a product can be sold at, usually set by the government to protect producers.

Correct Answer: A model showing the flow of resources and products through the economy

The circular flow model illustrates how households, businesses, and the government interact in the economy, involving flows of money, goods, and services.

Correct Answer: Many firms sell identical products, and no single firm can influence the market price

In perfect competition, firms are price takers, meaning they must accept the market price because there are many competitors offering identical products.

Correct Answer: A benefit or cost that affects a third party not directly involved in the transaction

Externalities occur when a third party experiences a benefit or cost from an economic transaction they are not directly involved in, such as pollution or education.

Correct Answer: A statement that can be tested and validated

Positive economic statements are objective and based on factual data, making them testable and verifiable.

Correct Answer: They can lead to shortages if set below the equilibrium price

Price ceilings can cause shortages when set below equilibrium, as the lower price increases demand but discourages supply.

Correct Answer: The maximum combinations of goods and services that can be produced given available resources

The PPF demonstrates the trade-offs and opportunity costs of producing different combinations of goods within an economy’s resource constraints.

Correct Answer: The total value of all goods and services produced within a country's borders in a given period

GDP measures the economic output within a country, capturing the value of all goods and services produced in a specific time frame.

Correct Answer: To match borrowers with savers

Financial intermediaries, such as banks, play a key role in facilitating the flow of funds between those who want to save money and those who need to borrow.

Correct Answer: Access to cheaper goods and services

Free trade allows countries to specialize in producing goods at a lower opportunity cost, which leads to more efficient production and lower prices for consumers.

Correct Answer: A worker is unemployed because of a recession

Cyclical unemployment occurs during economic downturns or recessions when there is not enough demand for goods and services.

Correct Answer: To control the money supply and maintain price stability

Monetary policy aims to manage inflation, control interest rates, and regulate the money supply to ensure economic stability.

Correct Answer: National defense

Public goods are non-excludable and non-rivalrous, meaning that individuals cannot be excluded from their use and one person’s use does not reduce availability for others.

Correct Answer: Unemployment resulting from workers’ skills not matching the jobs available

Structural unemployment occurs when there is a mismatch between the skills of the labor force and the jobs available in the market.