Macroeconomics Krugman 3rd Edition Test Bank

The objective is to identify, in each of the given statements which are the twelve principles is at work.

a)

The fourth principle that underlies the Economics of individual choice – People usually exploit opportunities to make themselves better off – determines the situation.

An individual always tries to purchase same quality of merchandise at a cheaper rate which benefits the individual.

b)

The first principle that underlies the Economics of individual choice – Resources are scarce – determines the situation.

A person should enjoy the spring break trip with a budget constraint of $35 per day. He or she cannot spend more than $35 a day.

c)

The fourth principle that underlies the Interactions of individual choices – Markets usually lead to efficiency – determines the situation. This principle enables the departing students to seek the opportunity to make them-selves better off without making others worse off.

Instead of giving away their items, the students sell it to someone who is willing to buy them. This ensures mutual gains to both parties.

d)

The third principle that underlies is the Economy-wide interactions, which states overall spending sometimes gets out of the line with the economy’s productive capacity, determines the situation.

The economy just after the hurricane is insufficient to meet the demand of building materials and labor for reconstruction which lead to soaring prices of goods and services in the island of St. Crispin.

The first principle that underlie Economy-wide interactions – One person’s spending is another person’s income- determines the situation.

What you spend on used textbook is an income to your roommate and your roommate’s spending on iTunes is income to someone else.

f)

The third principle that underlies the Economics of individual choice – “How much?” is a decision at the margin – determines the situation.

A person has to compare the cost and benefit of having a cup of coffee and then had to decide how many cups of coffee one should consume to study in the night. The cost of a cup of coffee is how much jittery it will make a person and the benefit of it is how much more work one can do by consuming it. As long as the benefit of having a cup of coffee outweighs its cost, one can decide to consume one more cup of coffee.

g)

The third principle that underlies the Interaction of individual choices – Resources should be used as efficiently as possible to achieve society’s goals – determines the situation.

The lab supervisor should allocate the scarce lab space in such way that each student get time to do the project and everyone is better off without making anybody worse off.

h)

The second principle that underlies the Economics of individual choice – The real cost of something is what you must give up getting it – determines the situation.

The real cost of something is its opportunity cost; what one has to forgo in order to get something. The opportunity cost of graduating a semester early is to lose the alternative choice of studying a semester abroad.

i)

The second principle that underlies the Interaction of individual choices – Markets move towards equilibrium – determines the situation. When the bikes are available in same quality and at the same price, the buyers and the sellers of bikes will be in a situation of equilibrium – a position of no change.

If a seller charges a higher price for the product, no buyer will be willing to buy as the same quality of bike is already available at a lower price. So, both of them will be better off, if they don’t change their position.

j)

The first principle that underlie the Interaction of Individual choices – There are gains from trade – determines the situation.

Gains from trade can be achieved due to specialization. If one person is specialized in lab experiments and the other one in lab report writing, there will be division of work which leads to increased production. So, there will be more gains from work after the introduction of specialization.

k)

The fifth principle that underlie the Interaction of Individual Choices – When markets don’t achieve efficiency, government intervention can improve society’s welfare – determine the situation.

Unqualified drivers pose threat to the society in the form of rash driving leading to accidents. They never seem to be accountable to the loss of society that they inflict. Government intervention requires in such cases to avoid inconvenience to the society. Making it mandatory for everyone to pass the driving exam, the government ensures that everyone in the society is well off.

l)

The third principle that underlie Economy-Wide Interactions – Government policies can change spending- determines the situation.

Any cut in taxes by the government will increase the after-tax income of one’s parents. This results in excess spending on other activities like spending more on spring break vacation.