MTTC Economics Flashcards

Which Federal Reserve tool is considered the most frequently used instrument of monetary policy?

Answer: Conducting open market operations

Open market operations — buying and selling U.S. government securities — are the Fed's primary and most frequently used tool for controlling the money supply and interest rates.

A negative externality exists when:

Answer: A firm's production generates costs borne by third parties not involved in the transaction

Negative externalities occur when production or consumption imposes costs on uninvolved third parties, causing the social cost to exceed the private cost and leading to market overproduction.

In a perfectly competitive market, a firm's demand curve is:

Answer: Perfectly elastic (horizontal) at the market price

A perfectly competitive firm is a price taker, so it faces a perfectly elastic horizontal demand curve at the prevailing market price — it can sell any quantity at that price.

Which economic concept refers to the additional satisfaction gained from consuming one more unit of a good?

Answer: Marginal utility

Marginal utility is the additional satisfaction (utility) a consumer receives from consuming one additional unit of a good or service.

Stagflation, which plagued the U.S. economy in the 1970s, is best described as a period of:

Answer: High inflation combined with high unemployment and slow growth

Stagflation combines stagnant economic growth, high unemployment, and high inflation simultaneously — a combination that challenged traditional Keynesian policy prescriptions.

Which of the following is an example of a public good?

Answer: National defense

National defense is non-excludable (you cannot prevent anyone from being protected) and non-rival (one person's protection does not reduce another's), making it a pure public good.

The long-run Phillips Curve is best described as:

Answer: A vertical line at the natural rate of unemployment, indicating no long-run trade-off

In the long run, the Phillips Curve is vertical at the natural rate of unemployment because workers and firms adjust expectations, eliminating any lasting trade-off between inflation and unemployment.