Economics Grade Flashcards

When the price of smartphones falls significantly, many consumers choose to buy them instead of older flip phones. This reflects:

Answer: The substitution effect

The substitution effect occurs when consumers switch to a relatively cheaper good as its price falls compared to alternatives.

Which best explains why the U.S. dollar is considered a 'fiat currency'?

Answer: Its value comes from government decree, not a physical commodity

Fiat currency derives its value from government declaration and public trust rather than being backed by a physical commodity like gold.

A nation experiences rapid technological improvement in agriculture. On a production possibilities frontier graph showing food and electronics, this would:

Answer: Shift only the food axis outward, rotating the frontier

A technological improvement in only one sector rotates the PPF outward along that sector's axis, increasing maximum output of that good.

Which of the following is an example of structural unemployment?

Answer: A factory worker whose job was eliminated by automation

Structural unemployment occurs when workers' skills no longer match available jobs, often due to technological change or industry shifts.

A business has total revenue of $50,000 and total costs of $45,000. It is operating in a competitive market. What should it do in the short run?

Answer: Continue operating since it is earning a profit

With revenue exceeding total costs, the business is profitable and should continue operating in the short run.

The Consumer Price Index (CPI) is primarily used to measure:

Answer: Changes in the average prices paid by consumers over time

The CPI tracks price changes for a basket of goods and services commonly purchased by households, serving as the main inflation indicator.

When two countries each specialize in goods they produce at a lower opportunity cost and then trade, economists say they are following the principle of:

Answer: Comparative advantage

Comparative advantage states that countries benefit by specializing in goods with lower opportunity costs and trading for others.