Principles of Economics (IN01 D089)
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Free Principles of Economics (IN01 D089) Questions
Which inflation rate is the major goal for the United States
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0%
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2%
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4%
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6%
Explanation
Correct Answer:
B. 2%
Explanation:
The Federal Reserve targets a 2% inflation rate as its long-term goal, which is considered a stable and sustainable rate. It allows for price stability while encouraging economic growth.
Why other options are wrong:
A. 0%: Zero inflation can lead to deflationary pressures, which harm the economy by discouraging spending and investment.
C. 4%: While higher inflation may temporarily boost some economic activity, it risks eroding purchasing power and creating instability.
D. 6%: This rate is too high and often leads to negative economic consequences, such as hyperinflation and uncertainty.
Which action will create a negative externality
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Building a private school in a rural and underdeveloped area
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Taking a commuter train with frequent stops to work
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Moving a noisy, large manufacturing plant to a small town
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Expanding the number of beehives near an apple orchard
Explanation
Correct Answer:
C. Moving a noisy, large manufacturing plant to a small town
Explanation:
A noisy, large manufacturing plant can impose costs on the residents of the small town, such as noise pollution and environmental damage, creating a negative externality.
Why other options are wrong:
A. Building a private school in a rural and underdeveloped area: This is likely to create positive externalities, such as improved education opportunities.
B. Taking a commuter train with frequent stops to work: This reduces traffic congestion and pollution, which is a positive externality.
D. Expanding the number of beehives near an apple orchard: Bees pollinate apple trees, creating a positive externality that benefits both the orchard and the environment.
What does positive economics primarily focus on
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Analyzing behavior and facts to be tested
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Setting economic goals based on opinions
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Evaluating the morality of economic decisions
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Determining the best economic policies
Explanation
Correct Answer:
A. Analyzing behavior and facts to be tested
Explanation:
Positive economics involves studying economic phenomena as they are, based on observable and testable data, without making judgments or setting goals.
Why other options are wrong:
B Setting economic goals based on opinions: This refers to normative economics, which deals with what ought to be, not what is.
C Evaluating the morality of economic decisions: Morality and ethical judgments are outside the scope of positive economics.
D Determining the best economic policies: This involves normative economics and value judgments, which are not the focus of positive economics.
Lubbell Trains in Michigan has been experiencing downward-trending sales for the last 10 years and can no longer afford to pay the higher union salaries of its workers. Lubbell makes a strategic decision to relocate operations to Alabama where they can get cheaper facilities and cheaper labor. Lubbell has 63 employees at 2 different sites in Michigan and plans to lock the gates at both locations in two weeks and completely shut down operations in Michigan; Lubbell has already signed a lease and hired employees in Alabama. Which of the following regarding the WARN Act applies to Lubbell Trains
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Nothing, a company can close when business operations are failing.
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Nothing because Lubbell Trains does not have 100 employees.
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It will be guilty of violating the WARN Act because it did not give 60-days advance notice.
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It will be guilty of violating the WARN Act because it did not give 30-days advance notice.
Explanation
Correct Answer:
B. Nothing because Lubbell Trains does not have 100 employees.
Explanation:
The Worker Adjustment and Retraining Notification (WARN) Act requires employers to provide at least 60 days’ notice to employees in the event of a plant closing or mass layoff. However, the WARN Act only applies to employers with 100 or more full-time employees or 100 employees working a total of 4,000 hours per week. Since Lubbell Trains has only 63 employees across its two sites, it does not meet the WARN Act's threshold and is not legally required to provide 60 days’ notice.
Why other options are wrong:
A. Nothing, a company can close when business operations are failing: While it is true that companies can close when operations are failing, this does not account for the specific legal obligations under the WARN Act, which applies to certain employers. In this case, the exemption is due to the number of employees, not the company’s financial situation.
C. It will be guilty of violating the WARN Act because it did not give 60-days advance notice: This would be true if Lubbell Trains had 100 or more employees and failed to provide the required notice. However, since the company does not meet the WARN Act's threshold, it is not guilty of a violation.
D. It will be guilty of violating the WARN Act because it did not give 30-days advance notice: The WARN Act mandates 60 days’ notice, not 30. Furthermore, Lubbell Trains is exempt because it does not meet the required employee count.
What is the relationship between a nation's standard of living and its productivity
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A nation's standard of living is unrelated to its production capabilities
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A nation's standard of living is solely based on its wealth
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A nation's standard of living is determined by its productivity
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A nation's standard of living is determined by its population size
Explanation
Correct Answer:
C. A nation's standard of living is determined by its productivity
Explanation:
A nation's productivity, defined as the amount of goods and services produced per unit of labor, is the most significant determinant of its standard of living. Higher productivity enables more resources to be available per person, leading to improved living standards through better goods, services, and incomes.
Why other options are wrong:
A: This is incorrect because productivity and standard of living are closely related; productivity impacts the availability and quality of goods and services.
B: A nation's wealth is not the sole determinant of living standards; wealth distribution and productivity play crucial roles.
D: While population size can influence economic dynamics, it does not directly determine the standard of living. High productivity in a smaller population can result in a high standard of living.
Country A places a limit on the amount of beer that can be imported into the country. Which action does Country A take in this situation
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Imposing a quota
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Dumping
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Imposing a tariff
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Providing an export subsidy
Explanation
Correct Answer:
A. Imposing a quota
Explanation:
A quota is a limit on the quantity of a good that can be imported into a country. By placing a restriction on the amount of beer imported, Country A is imposing a quota to protect domestic industries or control trade volume.
Why other options are wrong:
B. Dumping: Dumping occurs when a country exports goods at a price lower than the production cost to gain market share, which is unrelated to import limits.
C. Imposing a tariff: A tariff is a tax on imports, not a quantity restriction. While tariffs increase the cost of imports, they do not directly limit the quantity.
D. Providing an export subsidy: An export subsidy is a financial incentive given to domestic producers to encourage exports, not a restriction on imports.
Quinn found herself running late to work because there was a long line at Starbucks that morning. When she got to work, she noticed an order in her e-mail and had to literally sprint down to the production department to place an order for one of her customers to ensure it met the production deadline, which was in 30 minutes. While running through the plant, she tripped and fell, breaking her arm. Which of the following is most true regarding Quinn’s right to pursue a Worker’s Compensation claim
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It happened at work, while performing work-related functions, so she is entitled to it.
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She may be entitled to it, but her workplace will probably deny her claim.
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She is not entitled to it; it was her fault she was running and therefore negligent.
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She may only be entitled to it if she can prove there was a hazard that caused her to trip; otherwise, she was running and negligent, so she may not get it.
Explanation
Correct Answer:
A. It happened at work, while performing work-related functions, so she is entitled to it.
Explanation:
Under Workers Compensation law, employees are entitled to benefits if they sustain injuries while performing job-related duties, regardless of fault. Quinn was acting within the scope of her employment by trying to meet a production deadline, which constitutes a work-related function. Even though she was running and may have acted hurriedly, this does not disqualify her from coverage since the injury occurred at her workplace and while fulfilling her job responsibilities.
Why other options are wrong:
B. She may be entitled to it, but her workplace will probably deny her claim: Employers may dispute claims, but that does not affect Quinn's legal right to Worker’s Compensation. Her injury clearly occurred during the course of her work duties, making her eligible for benefits under the law.
C. She is not entitled to it; it was her fault she was running and therefore negligent: Worker’s Compensation is a no-fault system, meaning negligence on the part of the employee does not eliminate their right to benefits. The focus is on whether the injury arose during work-related activities.
D. She may only be entitled to it if she can prove there was a hazard that caused her to trip; otherwise, she was running and negligent, so she may not get it: Worker’s Compensation does not require employees to prove a specific hazard caused the injury. The key factor is whether the injury occurred during the course and scope of employment, which is clearly the case here.
What explains the downward slope of the aggregate demand curve
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At lower price levels, exports increase, resulting in an increase in the real GDP.
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At lower price levels, real wealth decreases, resulting in a decrease in the quantities of goods and services demanded.
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At lower price levels, interest rates decrease, resulting in a decrease in the quantities of goods and services demanded.
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At lower price levels, imports increase, resulting in an increase in the real GDP.
Explanation
Correct Answer:
A. At lower price levels, exports increase, resulting in an increase in the real GDP.
Explanation:
The aggregate demand curve slopes downward because lower price levels make domestic goods relatively cheaper than foreign goods, increasing exports and reducing imports. This increases the real GDP, contributing to the inverse relationship between price levels and the quantity of goods and services demanded.
Why other options are wrong:
B. Real wealth decreases: This is incorrect because at lower price levels, real wealth increases, encouraging more consumption rather than a decrease.
C. Interest rates decrease, decreasing demand: Lower price levels lead to lower interest rates, which typically stimulate demand, not reduce it.
D. Imports increase: Lower price levels reduce the cost of domestic goods, decreasing imports and not increasing them.
A bakery spends $140 per day on fixed costs and $90 per day for labor for each employee. One employee can bake 60 cakes in a day. What is the total cost to produce 300 cakes per day
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$320
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$590
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$230
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$1,150
Explanation
Correct Answer:
B. $590
Explanation:
To produce 300 cakes per day:
Each employee bakes 60 cakes per day, so 300 cakes require 30060 = 5 employees.
Fixed costs = $140
Variable costs (labor) = 5 × 90=450
Total Cost = Fixed Costs + Variable Costs
= 140 + 450
= 590
Why other options are wrong:
A. $320: This accounts for fixed costs but underestimates variable costs.
C. $230: This incorrectly combines some costs but ignores others.
D. $1,150: This overestimates total costs, likely doubling the labor cost.
What does the term 'opportunity cost' refer to in economic reasoning
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The monetary cost of a decision only
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The benefits received from a decision made
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The total cost of all alternatives considered
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The value of the next best alternative that is given up
Explanation
Correct Answer:
D. The value of the next best alternative that is given up
Explanation:
Opportunity cost refers to the value of the next best alternative that is foregone when making a decision. It is a fundamental concept in economics that emphasizes the trade-offs involved in choosing one option over another, highlighting the cost of missed opportunities.
Why other options are wrong:
A: Opportunity cost includes more than just monetary costs—it considers the value of the alternative benefits foregone, not only the financial expenditure.
B: This describes the benefits of the decision made but does not account for the cost of what was sacrificed to achieve those benefits.
C: Opportunity cost refers to the value of the single next best alternative, not the total cost of all alternatives considered.
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D089 Principles of Economics - Study Notes
1. Introduction to Economics
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Economics is the study of how individuals, businesses, and governments allocate limited resources to satisfy their needs and wants.
- It is divided into Microeconomics (study of individual markets) and Macroeconomics (study of the entire economy).
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Scarcity: Resources (land, labor, capital, and entrepreneurship) are limited compared to unlimited human wants.
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Opportunity Cost: The next best alternative forgone when making a choice.
- Example: If a company has $1 million to invest and chooses to build a factory instead of investing in research and development, the opportunity cost is the forgone innovation.
2. Demand and Supply
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Law of Demand: As price decreases, quantity demanded increases (inverse relationship).
- Law of Supply: As price increases, quantity supplied increases (direct relationship).
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Income Levels
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Prices of Related Goods (substitutes and complements)
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Consumer Preferences
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Future Expectations
- Population Size
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Production Costs
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Technology
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Number of Sellers
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Future Price Expectations
- Government Policies (taxes, subsidies, regulations)
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The price at which quantity demanded equals quantity supplied.
- Example: If the market for coffee experiences a sudden increase in demand due to health benefits, the equilibrium price rises as suppliers adjust.
3. Market Structures
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Many buyers and sellers, homogeneous products, no barriers to entry.
- Example: Agricultural markets like wheat or corn.
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Single sellers dominate the market, high barriers to entry.
- Example: Utility companies (electricity, water supply).
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Few firms dominate, often with significant barriers to entry.
- Example: Automobile and airline industries.
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Many firms, product differentiation, free entry and exit.
- Example: Fast food industry (McDonald's, Burger King, KFC).
4. Macroeconomic Indicators
- Measures the total value of goods and services produced within a country.
- Types: Nominal GDP (current prices) vs. Real GDP (adjusted for inflation).
- Example: If Kenya’s GDP grows by 5%, it suggests economic expansion.
-
Types:
- Frictional: Short-term job transitions.
- Structural: Mismatch of skills.
- Cyclical: Due to economic downturns.
- Seasonal: Based on time of year (e.g., tourism industry fluctuations).
- Rise in the general price level over time.
- Measured by Consumer Price Index (CPI).
- Example: If inflation is 10%, purchasing power declines, affecting consumer spending.
5. Fiscal and Monetary Policy
- Expansionary Policy: Increases government spending and cuts taxes to stimulate the economy.
- Contractionary Policy: Reduces government spending and increases taxes to curb inflation.
- Example: During a recession, the government may increase infrastructure projects to boost employment.
-
Tools Used:
- Open Market Operations: Buying/selling government securities.
- Interest Rate Changes: Raising/lowering borrowing costs.
- Reserve Requirements: Adjusting banks’ required reserves.
- Example: If the Central Bank of Kenya lowers interest rates, borrowing becomes cheaper, encouraging investment.
6. International Trade and Global Economy
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Absolute Advantage: When a country produces more efficiently than another.
-
Comparative Advantage: When a country produces at a lower opportunity cost.
- Example: Kenya has a comparative advantage in tea production, while China has one in electronics.
- Tariffs: Taxes on imports.
- Quotas: Limits on the quantity of imports.
- Embargoes: Bans on trade with specific countries.
- Example: The US imposes tariffs on Chinese steel to protect domestic producers.
7. Market Failures and Government Intervention
- Public Goods: Non-excludable and non-rivalrous (e.g., street lighting).
- Externalities: Costs/benefits affecting third parties.
- Negative: Pollution from factories.
- Positive: Education benefits society.
- Monopoly Power: Requires regulation to prevent price exploitation.
- Information Asymmetry: Buyers and sellers have unequal information (e.g., used car market).
- Taxes/Subsidies: Correct negative/positive externalities.
- Regulation: Enforcing laws against monopolies.
- Public Provision: Government services like healthcare and education.
Frequently Asked Question
Price elasticity of demand measures how responsive the quantity demanded of a good is to changes in its price. Learn more in-depth on the topic and practice questions on ULOSCA.com.
Taxes on goods, like sugary drinks, increase their price. This typically causes a leftward shift in the demand curve. Understand the mechanics behind this with additional resources at ULOSCA.com.
A shift in demand refers to a change in the entire demand curve due to factors like income or preferences, while a movement along the curve happens when the price changes but no other factors are at play. Learn more through practice questions at ULOSCA.com.
A rightward shift in the demand curve can occur when factors such as an increase in consumer income, favorable changes in tastes, or a reduction in the price of complementary goods cause consumers to demand more. Find relevant explanations on ULOSCA.com.
Complementary goods are products that are consumed together. For instance, coffee and sugar. Learn how price changes in one good affect its complement on ULOSCA.com.
'Elastic' demand means that the quantity demanded of a good changes significantly in response to a price change. Understand elasticity in detail with examples and exercises at ULOSCA.com.
Inelastic demand means that price increases do not significantly reduce the quantity demanded. Explore further examples and case studies at ULOSCA.com.