1 Tutorial Chapter 3 Growth

2 1. Which of the following factors are most important to a country’s obtaining a high standard of living? a. It must have abundant land good for farming. b. It must have an abundant supply of raw materials. c. It must have an educated workforce. d. It must encourage entrepreneurship and provide incentives to work, save, and to make a profit. D. A country can have abundant resources and an educated work force, but if it does not provide opportunities and give the proper incentives, it will not grow.

3 2. Rational households with limited resources attempt to maximize a. the amount of goods acquired. b. the amount of services obtained. c. marginal utility. d. average utility. e. total utility. E. Households make individual decisions based on their marginal utility; in the process their total utility is maximized.

4 3. It takes 14 glassblowing machines, each operated by only one person, to produce 90% of all the glass bulbs used in the U.S. This is an example of how automation leads to a loss of jobs over the long run. False In a micro sense this could be a true statement, but in a macro sense the statement is false because more machines leads to lower costs, lower costs lead to lower prices, lower prices leads to an increase in buying power, and this leads to more production and jobs.

5 4. The key to wealth building is to a. Borrow as much money as you can and make risky investments. b. Work and save a part of what you earn. c. Make wise investments with your savings. d. Both b and c. D. Wealth building is a two step process: save a part of your earnings and then learn how to make profitable investments with your savings.

6 5. Which of the following best describes Japan’s mistake in the 1990s? a. Marginal analysis b. Economies of scale c. Moral hazard d. The Pareto Effect C. Moral hazard is the consequence of the practice of the government supporting failing companies. The consequence is that there will be less incentive to make careful investments in the future if there is the belief that any losses will be paid for by the government.

7 6. Let's say that you are driving 65 mph in a 45 mph zone. A policeman stops you and gives you a ticket for driving 20 mph over the speed limit. This is an example of a. the rule of law. b. the rule of man. c. suffering the consequences. d. paying the price of driving. A. The rule of law. The law says that you can get a ticket for speeding, the ticket is in accordance to how the law is written.

8 7. Let's say that you are driving 45 mph in a 45 mph zone. A policeman stops you and gives you a ticket for driving 20 mph over the speed limit in anticipation of a bribe. This is an example of a. the rule of law. b. the rule of man. c. negative intensions. d. the rich get richer and the poorer get poorer. B. The rule of man refers to a situation whereby whoever is in authority uses his authority to enrich himself. Sometimes this can be contrary to the rule of law.

9 8. In a business sense, productivity increases when the amount of output increases to a greater extent than does the amount of inputs. True This is one definition of an increase in productivity. Another way to look at an increase in productivity is to produce more per unit of time at a lower per unit cost.

10 9. The assembly line technique of production can increase productivity by a. making better use of robotics. b. eliminating non-productive activity. c. enabling workers to become more efficient performing the same task over and over again. d. all of the above. D. The assembly line is contrasted to the skilled craftsmen technique of production whereby one or a small group of workers would do the assembling.

Which of the following is an example of rent seeking? a. Cotton farmers pay money to politicians to influence legislation, such as raising tariffs against Brazilian cotton. b. People looking for rental property seek available apartments in the newspaper. c. Landlords seek out the highest paying renters. d. none of the above A. Rent seeking is the term used to describe the practice of special interest groups putting money into politicians pockets for the purpose of influencing legislation which will benefit their business.

Because machines replace people’s jobs, the more we automate the fewer jobs we will have. False Automation leads to more jobs because it lowers costs of production, which allows for lower prices, an increase in buying power, more sales, more production, and more jobs.

An increase in productivity enables a business owner to produce more goods per unit of time at a lower per unit cost. True The key to economic growth is to increase productivity. By becoming more efficient the lower costs and lower prices increase buying power and raises the standard of living for the average person.

Up to a certain point, improvements in capital will result in an increase in productivity. True New and better machines increase productivity because they tend to be more efficient and require fewer repairs, which helps lower costs.

The key behind economies of scale is that the more people to divide up the labor the more productivity increases, at least up to a certain point. True The more labor is divided among workers the more non-productive activity we can eliminate and the more productivity increases, at least up to a certain point. Economists call this economies of scale. Beyond a certain point when productivity begins to decline is when diseconomies of scale set in.

International trade leads to greater economies of scale. True The more we trade with other nations, the greater the economic pie, and the more ways we can divide up the labor among different countries.

Federal laws that redistribute the wealth, to take from the wealthy and give to the less fortunate, always lead to economic stagnation. False There is a natural principle which says that “he who has will be given more and he who has not, that thing which he does not have will be taken away.” If you have money in savings, the bank gives you more money. If you do not have money and need to borrow from a bank, the bank takes money away from you in the form of interest. Therefore, some amount of redistribution of wealth may be necessary to prevent too much wealth concentration in a few hands.

A persistent decline in productivity will cause an increase in unemployment. True A decline in productivity causes an increase in costs, and an increase in costs will lead to an increase in prices, eroding consumer buying power and a decline in consumer demand, leading to an increase in unemployment.

A free market system can only maintain its vitality when hard work and risk taking are rewarded. True Would you be in college if you knew that your hard work and investing money for college expenses would not benefit you in the future?

The American government has subsidized the Brazilian cotton farmer. True America has put up trade restrictions against the importation of cotton from Brazil to protect the American cotton farmer from this competition. When Brazil won a court case from an international court concerning free trade agreements, the U.S. government decided to subsidize the Brazilian farmer as well as the American farmer.

The faster we grow the sooner we will experience long lasing economic prosperity. False The best way to grow is slow and steady. Unemployment results from a slow down in the growth rate, not necessarily a decline in growth itself. A slow growth rate is easier to maintain than large spurts in growth that are temporary.

History has taught us that for a modern industrial society to prosper we need a strong central government, but when the government gets too big and intrusive there is a tendency toward slow growth and economic stagnation. True There are many reasons we need a strong national government in a free market system, but a free market system is based on the profit motive and individuals making decisions in accordance to their own self interest.

An Austrian economist would tend to favor market solutions to market problems, whereas a Keynesian economist would tend to favor government solutions to economic problems. True Whereas Austrians tend to favor market solutions to economic problems, such as laws favoring saving and investing to aid long term growth, Keynesians tend to favor government programs that will boost demand during periods of unemployment.

In 2002, Congress passed the Sarbanes-Oxley Accounting Reform Law. A part of the law requires costly external audits of companies in addition to the traditional audits of a company’s financial statements. True This law has greatly added to the costs of accounting and record keeping for large firms.

Coal fired plants give us half of our electricity, yet we are witnessing the mass retirement of coal-fired plants in America today. True Because the Environment Protection Agency (EPA) considers coal a danger to the environment, strict regulations and government mandates are restricting the burning of coal.

The United States has a perfectly free market economic system. False The government has essentially taken over the health care and financial sectors of the economy. With the highest corporate taxes in the world as well as high personal taxes and a huge national debt, the U.S. is becoming a system that is less and less a free market system.

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