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A. Explain the “principles” that Economists use to understand human behavior. B. Explain the “process” that Economists use to analyze reality. Suppose Ali bought opera tickets on Friday for $100 for a Saturday night showing.On Saturday afternoon, a friend invites Ali to go bowling that night, but what Ali really wants to do on Saturday night is spend the evening painting at home alone.What does it cost Ali to stay home on Saturday night?Explain.A.Assume countries can produce two goods, X and Y.Country A can produce 5 X if it uses all of its resources for X production or 5 Y if it uses all resources for Y production.Country B can either produce 12 X or 2 Y with its resources.Illustrate and evaluate the potential of these countries to trade.What about when Country B invents a new machine that can increase its maximum amount of Y production to 6? B. Given Part A, should these countries adopt free trade policies with each other?Explain.answer the question from the doc.
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Test Bank
Section 1
1. A. Explain the “principles” that Economists use to understand human behavior.
B. Explain the “process” that Economists use to analyze reality.
1. Suppose Ali bought opera tickets on Friday for $100 for a Saturday night
showing. On Saturday afternoon, a friend invites Ali to go bowling that night, but
what Ali really wants to do on Saturday night is spend the evening painting at
home alone. What does it cost Ali to stay home on Saturday night? Explain.
2. A. Assume countries can produce two goods, X and Y. Country A can produce 5
X if it uses all of its resources for X production or 5 Y if it uses all resources for Y
production. Country B can either produce 12 X or 2 Y with its resources.
Illustrate and evaluate the potential of these countries to trade. What about when
Country B invents a new machine that can increase its maximum amount of Y
production to 6?
B. Given Part A, should these countries adopt free trade policies with each other?
Explain.
2. Given the following information:
Year
2000
2001
Price
Jelly Beans
5
6
Quantity
Jelly Beans
10
12
Price
Tuna
20
30
Quantity
Tuna
4
5
A. Calculate Nominal GDP in 2000.
B. Calculate Real GDP in 2001 (Use 2000 as base year).
C. Calculate the percent change in real GDP between 2000 and 2001.
3. A. Explain how the government runs a budget deficit and what effect an increase
in government spending has on a closed economy. Illustrate and explain.
B. True/False/Uncertain: Government deficit/debt is detrimental to our economy.
Explain.
4. True/False/Uncertain: In a closed economy, the real interest rate will rise and the
level of investment will decrease if there is an increase in the productivity of
capital and consumers become worried about the future. Illustrate and explain.
5. A. Explain why net exports equal net capital outflows.
B. True/False/Uncertain: In an open economy, if domestic national saving is low,
then the country will have high GDP growth, due to high levels of domestic
investment.
6. Calculate the change in the real exchange rate and determine what happens to the
relative value of the goods between a Japanese car selling for 1,500,000 yen and a
domestic car selling for $30,000 dollars when the nominal exchange rate changes
from 100 yen per dollar to 150 yen per dollar.
7. A. Illustrate and explain the relationship between net exports and the real
exchange rate.
B. Illustrate and explain the relationship between net capital outflows and the real
interest rate.
8. Illustrate and explain what occurs in the open economy model given an increase
in government spending.
Section 2
1. A. Illustrate and explain the capital accumulation process for a county using
the Solow Model.
B. True/False/Uncertain: A country should focus on increasing GDP per worker.
Illustrate and explain.
2. Illustrate and explain the difficulties that low-income African countries are
faced with in attempting to increase their quality of life.
3. Which type of economic growth is responsible for the majority of increases in
quality of life: capital accumulation, population or productivity? Illustrate and
explain.
4. A. Explain the functions of the Federal Reserve and what it uses to control the
money supply.
B. Graph and explain money neutrality and the quantity theory of money.
5. A. Contrast the CPI and the GDP deflator and explain two problems with
calculating the CPI.
B. Explain the impacts of inflation on an economy.
6. Given the following information:
Year
Price Jelly
Beans
5
6
2020
2021
Quantity of
Jelly Beans
10
12
Price of Tuna
20
30
Quantity of
Tuna
4
5
a. Calculated the rate of inflation between the two years using GDP deflator.
b. Calculated the rate of inflation between the two years using the CPI. Assume the
average consumer basket is 4 Jelly Beans and 2 Tuna.
7. Derive the Keynesian Cross and explain what happens given an increase in
Government spending.
Section 3
1. A. Illustrate and explain why the AD curve slopes downward.
B. Using both the Keynesian Cross and the AD-AS Model, illustrate and explain
what happens when the Federal Reserve (The Fed) increases the money supply
2. Using the AD-AS Model, illustrate and explain the causes of and the resulting
government response.
a. The Great Depression
b. The 2001 Recession
3. Illustrate and explain the stock market crash and bank failures of the Great
Depression according to Cathing-Foster and Fisher.
4. A. Explain the three causes of structural unemployment discussed in class.
B. Illustrate and explain the difference between a permanent recession and a
temporary recession.
5. A. Illustrate and explain the difficulties that demand-side economics faced in the
1970’s and how it was eventually dealt with in the early 1980’s.
B. Illustrate and explain the method and ideas of supply-side economics.
6. Explain the Great Recession according to the “Crisis of Credit” video.
7. Compare the Great Depression with the 2007-2009 Recession using the AD-AS
Model. Illustrate and Explain.
8. A. Explain Japan’s “Lost Decade” through the Balance-Sheet Theory.
B. Explain how the US situation may differ from Japan’s “Lost Decade”.

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