Economic Theory & Principles Flashcards

The 'paradox of thrift' in Keynesian economics suggests that:

Answer: An increase in individual saving can reduce aggregate demand and total savings economy-wide

When everyone saves more simultaneously, aggregate demand falls, reducing income and potentially total savings in the economy.

Which theory argues that workers and firms form rational expectations about future inflation when negotiating wages, affecting the short-run Phillips Curve?

Answer: Rational expectations theory

Rational expectations theory holds that economic agents use all available information efficiently, making systematic policy surprises impossible.

A tariff imposed on imported goods primarily benefits:

Answer: Domestic producers of the good

Tariffs raise the price of imports, giving domestic producers a competitive advantage and allowing them to expand output and profits.

The 'marginal propensity to consume' (MPC) is defined as:

Answer: The change in consumption resulting from a one-unit change in income

MPC measures how much of each additional dollar of income is spent on consumption rather than saved.

Which of the following best describes a 'public good'?

Answer: A good that is non-excludable and non-rivalrous in consumption

Public goods are non-excludable (can't prevent use) and non-rivalrous (one person's use doesn't reduce availability to others).

In supply and demand analysis, a binding price floor must be set:

Answer: Above the equilibrium price

A price floor only affects the market if set above equilibrium, creating a surplus by preventing prices from falling to clear the market.

Which of the following best describes the concept of 'opportunity cost'?

Answer: The value of the next best alternative foregone when making a choice

Opportunity cost represents what is sacrificed — the value of the best alternative not chosen — rather than just money paid.