MTTC Economics Flashcards

Which of the following provides the most effective illustration of marginal analysis?

Answer: comparing the costs and benefits of a proposed investment

Marginal analysis weighs the additional (incremental) costs of a decision against its additional benefits, which is exactly what comparing the costs and benefits of a proposed investment does. Estimating sales, forecasting trends, or determining fixed costs do not involve evaluating incremental change at the margin.

Two pharma firms that are each separately owned come to an agreement to combine their operations. However, in order to make sure that the merger does not break antitrust rules, the merger must first have government approval. This scenario most likely took place in which of the following types of economic systems?

Answer: mixed-market economic system

A contraction begins right after the economy's peak, so the best signal is an indicator pointing to overheating that is just about to turn — a rise in commodity prices reflects the peak input-cost pressure that precedes the downturn rather than an established decline. Falling inventories and longer delivery times typically indicate continued strong demand, while a shorter average workweek reflects an already-underway slowdown (a recession signal).

Which of the following theories best explains how the fundamental economic tenet that free trade generates prosperity works?

Answer: specialization

A reduction in the average workweek is the clearest early sign a recession has begun, because employers cut workers' hours before resorting to layoffs as demand falls. Rising commodity prices, longer delivery times, and declining inventories more often reflect strong or expanding activity, not the onset of contraction.

Which of the following would be initially affected by government aircraft purchases?

Answer: Payment for Goods and Services

In the circular-flow model, government aircraft purchases enter as Payment for Goods and Services—the money flow going to the product market. Goods and Services and Land, Labor, Capital are the real (non-money) flows, and Rent, Wages, Interest are factor-market payments, none of which is the direct payment for the aircraft.

As a gauge of a country's economic success, the gross domestic product (GDP) has the following significant limitations:

Answer: nonmarket activities.

GDP only counts officially traded, market transactions, so it omits nonmarket activities such as unpaid household work, volunteer labor, and do-it-yourself production. Overseas transactions, inventory investment, and government purchases are all already captured in GDP.

Which of the following is the best sign that a business cycle's recession phase has begun for the economy?

Answer: a reduction in the length of the average workweek

A recession reflects falling demand for output and labor, and shortening the average workweek is the most direct early signal because employers reduce hours before laying workers off. Rising commodity prices, longer delivery times, and falling inventories generally indicate strong or expanding activity rather than the start of a downturn.