Three Principles Describe How Economy as a Whole Works
Prices rise when the government prints too much money because more money in circulation reduces the value of money, causing inflation. Society faces a short-run trade-off between inflation and unemployment that is only temporary. Policymakers have some short-term ability to exploit this relationship using various policy instruments. Quantity of Clothing Produced the frontier), point B is an inefficient point (inside the frontier), and point C is an infeasible point (outside the frontier). Microeconomics is the study of how households and firms make decisions and how they interact in markets.
Macroeconomics is the study of economy-wide phenomena, including inflation, unemployment, and economic growth. 2. An example of a positive statement is “a higher price of coffee causes me to buy more tea. ” It is a positive statement because it is a claim that describes the world as it is. An example of a normative statement is “the government should restrain coffee prices. ” It is a normative statement because it is a claim that prescribes how the world should be. Many other examples are possible.
Parts of the government that regularly rely on advice from economists are the Department of the Treasury in designing tax policy, the Department of Labor in analyzing data on the employment situation, the Department of Justice in enforcing the nation’s antitrust laws, the Congressional Budget Office in evaluating policy proposals, and the Federal Reserve in analyzing economic developments. Many other answers are possible. 3. Economic advisers to the president might disagree about a question of policy because of differences in scientific judgments or differences in alues. C A B Quantity of Food Produced Figure 1 The effects of a drought are shown in Figure 2. The drought reduces the amount of food that can be produced, shifting the production possibilities frontier inward. Quantity of Clothing Produced Chapter 2 1. Economics is like a science because economists devise theories, collect data, and analyze the data in an attempt to verify or refute their theories. In other words, economics is based on the scientific method. Figure 1 shows the production possibilities frontier for a society that produces food and clothing.
Point A is an efficient point shows Robinson Crusoe’s production possibilities frontier for gathering coconuts and catching fish. If Crusoe lives by himself, this frontier limits his consumption of coconuts and fish, but if he can trade with natives on the island, he will possibly be able to consume at a point outside his production possibilities frontier. Fish Caught group of sellers (who determine supply) of a particular good or service.