PRINCIPLES OF MACROECONOMICS
Study Guide for Chapter Two and Three
September 8, 2008
Definitions: Be able to recognize the definition of terms on pages 40 and 73 which
were identified in lecture.
Illustrations: UNDERSTAND WHAT YOU ARE ILLUSTRATING!!!
1. Production Possibilities Frontier
a. Linear PPF
b. Non-linear PPF
c. Expansions in the PPF
2. The Circular Flow Diagram
Short Answer Questions: for Appendix to Chapter Two
1-4: Answer questions 3-6 on page 52 of the text.
Given P = 100 - 4Q
5. If Q changes by one unit, how much will P change?
6. If Q changes by 3 units, how much will P change?
7. What is the P / Q?
8. If Q is zero, what is the value of P?
Answer questions 5-8 for the following equations.
b. P = 10 – 3Q
c. P = 25+ 2Q
d. P = 100 – 0.25Q
Short Answer Questions: for Chapter Two
1. As explained in lecture, what two basic principles does the production possibilities curve
2. Explain why the production possibilities curve is a non-linear curve, and not a
3. Explain how expansions in the production possibilities frontier are made possible.
Given the following answer questions 4-7
England can produce cloth with 4 hours of labor.
grain with 20 hours of labor.
France can produce cloth with 200 hours of labor.
grain with 50 hours of labor.
4. Who has the absolute advantage in the production of each commodity? Why?
5. Who has the comparative advantage in the production of each commodity? Why?
6. Before trade, with respect to a unit of cloth, what is each nation’s opportunity cost?
Answer this question with respect to a unit of grain.
7. If each nation has 1,000 units of labor, what is the maximum amount of each commodity
each nation can produce before trade?
8. a. If the terms of trade are one unit of cloth trades for one unit of grain, how much
more of the comparatively disadvantage good could each nation purchase.
b. Answer 8a if the terms of trade are
1 unit of cloth for 2 units of grain
2 units of cloth for 1 unit of grain
Which terms of trade does each nation prefer? Explain
9. After trade, which nation is better off? Explain why.
10. In addition to an expansion in a nation’s consumption possibilities, list three additional
benefits a nation derives from free trade.
11. Explain why, despite the arguments of economists, nations do not practice completely
Short Answer Questions: Chapter Three Appendix
12. Explain, according to lecture, why economic growth was typically zero prior to the
advent of capitalism.
13. Explain, according to lecture, why economic growth is typically greater than zero under
Define each of the following economic systems and briefly explain how western civilization
14. Feudalism to Mercantilism.
15. Mercantilism to Capitalism
16. Capitalism to Socialism
17. Capitalism to Mixed Capitalism
18. List, and briefly explain, Adam Smith’s three laws of the market.
19. According to Marx, how would the system of capitalism impact the population of
workers and owners of capital?
20. Why does Marx believe workers are exploited under the system of capitalism?
21. Briefly, why did Marx believe socialism would follow the system of capitalism?
22. How does a centrally planned society answer the basic questions each society faces?
Contrast the central plan with how capitalism answers these basic questions.
Short Answer Questions: Chapter Three
23. Define the term ‘consumer sovereignty’ and briefly explain John Kenneth Galbraith’s
critique of this concept.
24. List the three forms of business utilized in our economy. What share of sales and
enterprises does the book report each form holds? Be able to list the positives and
negatives associated with each form of business.
25. Briefly explain how the corporation became the dominant form of business in the
26. What are the three major sources of revenue for state and local governments? What are
these government’s three leading expenditures?
27. Answer #26 for the federal government.
28. a. Define the following: Progressive Tax, Regressive Tax, Proportional Tax
b. Provide an example of a progressive tax and a regressive tax.
29. According to the cited web site: In 1990, if the world were a village of 1000
persons, how many persons were
a. North Americans? b. Asians?
c. Africans? d. Latin Americans?
e. speaking English? f. speaking Spanish?
g. speaking Mandarin? h. Christian?
i. Muslims? j. children?
k. owning an automobile? l. college educated?
Answers can be found on the following website:
Short Answer Questions: The Role of Government
30. a. List and briefly explain the six roles of the government in the marketplace,
as noted in lecture and the text.
b. Define the following terms and connect these to the relevant government role.
i. monopoly power. ii. externality
iii. macroeconomic externality iv. public vs. private goods
31. Explain the difference between a market and government failure.