0i 0iv EPP GRA FM 895335 - Glencoe/McGraw- · PDF file ·...

Guided Reading Activities

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TO THE TEACHER

The Guided Reading Activities provide students with a “foundation for study.” They provide the groundwork that helps students identify and comprehend important information in the textbook chapters. The worksheets guide students to the key ideas and concepts they need to know to meet chapter objectives.One Guided Reading page is provided for every section of Economics: Principles and Practices. In a variety of presentations, students are asked to list, outline, analyze, apply,and evaluate the information they have read. The Guided Reading Activities help students organize their learning and prepare them for the section quizzes and the chapter tests.Answers to the Guided Reading Activities can be found at the back of the booklet.

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Permission is granted to reproduce the material contained herein on the condition that such materials be reproduced only for classroom use; be provided to students, teachers, and families without charge; and be used solely in conjunction with the Economics: Principles and Practices program. Any other reproduction, for sale or other use, is expressly prohibited.

Send all inquiries to:Glencoe/McGraw-Hill8787 Orion PlaceColumbus, OH 43240-4027

ISBN: 978-0-07-895335-4MHID: 0-07-895335-9

Printed in the United States of America.

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C ONTENTS1 What Is Economics?

1 Scarcity and the Science of Economics . . . . . . . . . . . . . . . . . . . . . . . . . 12 Basic Economic Concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Economic Choices and Decision Making. . . . . . . . . . . . . . . . . . . . . . . . 3

2 Economic Systems and Decision Making1 Economic Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Evaluating Economic Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 American Free Enterprise. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

3 Business Organizations1 Forms of Business Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Business Growth and Expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Nonprofit Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

4 Demand1 What Is Demand? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Factors Affecting Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Elasticity of Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

5 Supply1 What Is Supply? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 The Theory of Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 Cost, Revenue, and Profit Maximization . . . . . . . . . . . . . . . . . . . . . . . . 15

6 Prices and Decision Making1 Prices as Signals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 The Price System at Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 Social Goals and Market Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

7 Market Structures1 Competition and Market Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 Market Failures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 The Role of Government. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

8 Employment, Labor, and Wages1 The Labor Movement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222 Wages and Labor Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 Employment Trends and Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

9 Sources of Government Revenue1 The Economics of Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252 Federal, State, and Local Revenue Systems . . . . . . . . . . . . . . . . . . . . . 263 Current Tax Issues and Reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

10 Government Spending1 The Economics of Government Spending . . . . . . . . . . . . . . . . . . . . . . . 282 Federal, State, and Local Government Expenditures . . . . . . . . . . . . . . 293 Deficits, Surpluses, and the National Debt . . . . . . . . . . . . . . . . . . . . . . 30

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11 Financial Markets1 Savings and the Financial System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312 Financial Assets and Their Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . 323 Investing in Equities and Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

12 Macroeconomic Performance1 Measuring the Nation’s Output and Income . . . . . . . . . . . . . . . . . . . . 342 Population and Economic Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353 Poverty and the Distribution of Income . . . . . . . . . . . . . . . . . . . . . . . . 36

13 Economic Instability1 Business Cycles and Fluctuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372 Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 383 Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

14 Money, Banking, and the Fed1 The Evolution, Functions, and Characteristics of Money. . . . . . . . . . . 402 The Development of Modern Banking. . . . . . . . . . . . . . . . . . . . . . . . . . 413 The Federal Reserve System and Monetary Policy. . . . . . . . . . . . . . . . 42

15 Economic Stabilization Policies1 Macroeconomic Equilibrium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 432 Stabilization Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 443 Economics and Politics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

16 International Trade1 Absolute and Comparative Advantage . . . . . . . . . . . . . . . . . . . . . . . . . 462 Barriers to International Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473 Foreign Exchange and Trade Deficits . . . . . . . . . . . . . . . . . . . . . . . . . . 48

17 Developing Countries1 Economic Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 492 Achieving Economic Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503 The Transition to Capitalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

18 Global Economic Challenges1 Globalization: Characteristics and Trends . . . . . . . . . . . . . . . . . . . . . . 522 Global Problems and Economic Incentives . . . . . . . . . . . . . . . . . . . . . . 533 Applying the Economic Way of Thinking . . . . . . . . . . . . . . . . . . . . . . . 54

Answer Key . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

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Guided Reading Activities 1

Name Date Class

For use with textbook pages 5–10

S CARCITY AND THE SCIENCE OF ECONOMICS

RECALLING THE FACTS

Directions: Use the information in your textbook to answer the questions. Use another sheet of paper if necessary.

1. What is the basic economic problem facing all societies?

2. How is need different from want?

3. What do the letters TINSTAAFL stand for, and what does the term mean to consumers?

4. What are the three basic questions societies have to answer about the way their resources are used?

a.

b.

c.

5. List the factors of production and define each one.

a.

b.

c.

d.

6. What are the four key elements of the study of economics? Explain briefly why each one is important.

a.

a.

b.

b.

c.

c.

d.

d.

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2 Guided Reading Activities

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B ASIC ECONOMIC CONCEPTS

OUTLINING

Directions: Locate the following headings in your textbook. Then use the information under the headings to help you write each answer. Use another sheet of paper if necessary.

I. Goods, Services, and Consumers

A. Introduction—What are economic products?

B. Goods—What is the difference between a consumer good and a capital good?

B.

C. Services—What kind of economic product is a service?

B.

D. Consumers—What is a consumer?

II. Value, Utility, and Wealth

A. Introduction—To what does value refer?

B. The Paradox of Value—What is the paradox of value?

B.

C. Utility—What is required for something to have value?

B.

D. Wealth—What is wealth?

III. The Circular Flow of Economic Activity

A. Introduction—What is the key feature of circular flow?

B. Factor Markets—What is a factor market?

C. Product Markets—Where do individuals spend their income from the resources they sell?

B.

IV. Productivity and Economic Growth

A. Productivity—What is productivity?

B. Investing in Human Capital—In what ways can government, businesses, and individuals invest in human capital?

C. Division of Labor and Specialization—How do division of labor and specialization affect productivity?

B.

D. Economic Interdependence—What is economic interdependence?

B.


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E CONOMIC CHOICES AND DECISION MAKING

FILLING IN THE BLANKS

Directions: Use your textbook to fill in the blanks using the words in the box. Some words may be used more than once. Use another sheet of paper if necessary.

trade-offs cost-benefit analysis maximum combinations

free enterprise economy standard of living decision-making grid

production possibilities curve (frontier) opportunity cost fully employed

Trade-Offs and Opportunity Cost

Whenever people make economic decisions, they face 1 , or alternative choices. Using a

2 allows consumers to consider various alternatives and decide which one comes closest

to meeting their needs. 3 is more than the price tag on a good or service. It is the cost

of the next-best alternative use of money, time, or resources.

Production Possibilities

To illustrate the concept of 4 , economists use a diagram representing various

combinations of goods and/or services an economy can produce when all productive resources are

5 . By showing the various alternatives, the 6 allows

producers to decide how to allocate limited resources. The diagram indicates the 7 of

goods and/or services that can be produced. If, however, for various reasons some resources are not

8 , the producer cannot reach its full production potential and the

9 of that failure is whatever is not produced. Economic growth occurs when more

resources or increased productivity causes the 10 to move outward.

Thinking Like an Economist

Economists use various methods to help people make the best choices among the many wants that compete for the use

of scarce resources. One of the most important ways is to build economic models. Another is 11 ,

a way of thinking about a problem that compares the costs of an action to the benefits received. This allows a business,

for example, to choose investment projects that give the highest return per dollar spent.

The Road Ahead

The study of economics can provide a more detailed understanding of a 12 , where

consumers and privately owned businesses, rather than government, make the majority of economic decisions. It

provides an understanding of a number of factors that have a bearing on our 13 , which

is the quality of life based on the ownership of the necessities and luxuries that make life easier.


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E CONOMIC SYSTEMS

RECALLING THE FACTS


1. Define the term economic system.

2. Describe each type of economic system. Then briefly state its major advantages and disadvantages.

a. Traditional economy

Advantages:

Disadvantages:

b. Command economy

Advantages:

Disadvantages:

c. Market economy

Advantages:

Disadvantages:

d. Mixed economy

Advantages:

Disadvantages:

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E VALUATING ECONOMIC PERFORMANCE

OUTLINING


I. Economic and Social Goals

A. Economic Freedom

1. What are three examples of economic freedom for individuals?

2. What kind of economic freedom do business owners want?

B. Economic Efficiency—What happens if resources are wasted?

C. Economic Equity—What are two examples of economic equity?

D. Economic Security

1. What do American workers want protection from?

2. What kind of protection does Social Security offer?

E. Full Employment

1. What happens when people work?

2. What happens when people do not have jobs?

F. Price Stability

1. What is inflation?

2. What happens to people on fixed incomes when there is inflation?

G. Economic Growth—Why is economic growth needed as a population grows?

H. Future Goals—What may happen to our goals as society evolves?

II. Resolving Trade-Offs Among Goals

A. What is the opportunity cost of a policy of protecting a domestic industry, such as shoe manufacturers?

B. What is the trade-off in increasing the minimum wage?

C. How are trade-offs among goals resolved?

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A MERICAN FREE ENTERPRISE



economic freedom profit capitalism

private property rights voluntary exchange mixed economy

competition consumer sovereignty profit motive

free enterprise modified free enterprise economy

Introduction/Characteristics of Free Enterprise Capitalism

1 is an economic system in which private citizens own and use the factors of production

to generate profits. The U.S. economy is based on 2 , under which resources are privately

owned and competition is allowed to flourish with a minimum of government interference. One characteristic of this

kind of economy is 3 , which allows people to choose their occupation, employer, and

job location. Another characteristic is 4 , the act of buyers and sellers freely and willingly

engaging in market transactions that benefit both the buyer and seller.

Another major feature of capitalism is 5 , the privilege that entitles people to own and

control their possessions. The extent to which people or organizations are better off at the end of a period than they

were at the beginning is called 6 . The 7 is the incentive

that encourages people and organizations to improve their material well-being. Finally, 8

thrives on 9 , which is the struggle among sellers to attract consumers.

The Role of the Entrepreneur

The entrepreneur’s role is to start new businesses and take risks. They are the sparkplugs of a

10 economy. When entrepreneurs are successful, many benefit.

The Role of the Consumer

In the United States, consumers have power in the economy because they determine which products are produced.

The term 11 is another way of saying that the customer is always right. Consumers

“vote” with their dollars; that is, they have a say in what is and what is not produced.

The Role of Government

The government’s involvement in the economy reflects people’s desire to modify the economic system. The result is

the emergence of the 12 , or 13 , one in which people and

businesses carry on their economic affairs freely but are subject to some government intervention and regulation.

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F ORMS OF BUSINESS ORGANIZATION

RECALLING THE FACTS


1. What are the advantages and disadvantages of a sole proprietorship?

Advantages:

Disadvantages:

2. What is the difference between a general partnership and a limited partnership?

3. How is a corporation formed?

4. What are the advantages and disadvantages of a corporation?

Advantages:

Disadvantages:

5. Explain the connection between a bond, principal, and interest.

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B USINESS GROWTH AND EXPANSION

OUTLINING


I. Growth Through Reinvestment

A. Estimating Cash Flows—What does cash flow represent?

B. Reinvesting Cash Flows

1. What can business owners do with cash flow to help their businesses?

2. What can happen when cash flows are reinvested in the business?

II. Growth Through Mergers

A. Introduction—What happens when two firms merge?

B. Types of Mergers—What is the difference between a horizontal merger and a vertical merger?

C. Reasons for Merging—What are five possible reasons for mergers?

D. Conglomerates—What is the main reason for a conglomerate to want diversification?

E. Multinationals—What are the advantages and disadvantages of multinationals?

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N ONPROFIT ORGANIZATIONS


Directions: Use your textbook to fill in the blanks using the words in the box. Use another sheet of paper if necessary.

public utilities professional association credit union

consumer cooperative cooperative collective bargaining

service cooperative labor union nonprofit organization(s)

Introduction

In addition to businesses that use scarce resources to produce goods and services in hopes of earning a profit, there

are 1 that operate to promote the collective interests of their members rather than to

seek financial gain for their owners.

Community Organizations and Cooperatives

Nonprofit organizations include community organizations, such as schools, churches, and hospitals. Another example

of a nonprofit organization is a 2 , which is a voluntary association of people formed

to carry on some kind of economic activity that will benefit its members. The 3 is a

voluntary association that buys bulk amounts of goods on behalf of its members. A 4

provides services rather than goods. One example is a 5 that accepts deposits from, and

makes loans to, employees of a particular company or agency.

Labor, Professional, and Business Organizations

Another important economic institution is the 6 , an organization of workers formed

to represent its members’ interests in employment matters. It participates in 7

when it negotiates with management over various job-related matters. Workers may also belong to a

8 —a group of people in a specialized occupation that works to improve the working

conditions, skill levels, and public perceptions of the profession.

Government

Government plays a direct role in the economy when it supplies a good or service. It plays an indirect role when it

regulates certain areas of the economy. One such case is the regulation of 9 , where

investor- or municipal-owned companies offer important products to the public, such as water or electric service.

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HAT IS DEMAND?

RECALLING THE FACTS


1. What three factors determine the demand for a product?

2. What is microeconomics?

3. What is the purpose of a demand schedule?

4. How is a demand curve similar to a demand schedule? How is it different?

5. What does the Law of Demand state?

6. What does the market demand curve show?

7. What is marginal utility?

8. How does the principle of diminishing marginal utility affect how much people are willing to pay?

W

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F ACTORS AFFECTING DEMAND

OUTLINING


I. Change in the Quantity Demanded

A. Introduction—What change is graphically represented as movement along the demand curve?

B. The Income Effect

1. What happens when prices drop?

2. How can an increase in price affect demand?

C. The Substitution Effect—What do consumers tend to do when similar products are available and one is more costly than the other?

II. Change in Demand

A. Introduction—What is a change in demand?

B. Consumer Income—What happens if consumer income rises?

C. Consumer Tastes—What factors can affect consumer tastes?

D. Substitutes—What happens to the demand for a product if the price of its substitute goes up?

E. Complements—How does an increase in a product’s price affect demand for the product’s complement?

F. Expectations

1. What happens to the demand for a product if consumers think that a future product will be better?

2. What happens to the demand for a product if consumers think there will be a shortage in the future?

G. Number of Consumers

1. What happens to the market demand curve if there is an increase in the number of consumers?

2. What happens to the market demand curve whenever anyone leaves the market?


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E LASTICITY OF DEMAND



elastic demand elasticity inverse

proportional inelastic unit elastic

elasticity total expenditures

Introduction/Demand Elasticity

Consumers are sensitive to changes in prices. A change in price can affect quantity demanded. This cause-and-effect

relationship in economics is known as 1 . The extent to which a change in price causes a

change in the quantity demanded is called 2 . Demand is 3

when a given change in price causes a relatively larger change in quantity demanded. Sometimes a lower or higher

price does not create much change in demand. When the change in demand is relatively small, the demand is

considered 4 . When demand is elastic and inelastic, the demand is called

5 , the percentage change in quantity equals the percentage change in price. Unit

elastic demand causes a(n) 6 change in quantity demanded.

The Total Expenditures Test

To estimate elasticity, one can look at the effect that a price change has on 7 , which is

the amount that consumers spend on a product at a particular price. Total expenditures are found by multiplying the

price of a product by the quantity demanded. For elastic demand, when the price goes down, total expenditures go

up. This is called a(n) 8 relationship. For inelastic demand, total expenditures decline

when the price declines. For unit elastic demand, total expenditures remain unchanged when the price decreases.

If the change in price and expenditures move in opposite directions, demand is 9 . If

they move in the same direction, demand is 10 . If there is no change in expenditures,

demand is 11 .

Determinants of Demand Elasticity

Several factors determine whether a good is elastic or inelastic. When a consumer needs the product and cannot

postpone the purchase, demand tends to be 12 . If there are enough substitutes available,

consumers can switch back and forth between products in order to get the best price. Demand is then said to be

13 . The fewer the substitutes, however, the more inelastic the demand. If the

purchase uses a large portion of income, people are more sensitive to price changes, and demand tends to be

14 .

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W HAT IS SUPPLY?

RECALLING THE FACTS


1. What does the Law of Supply State?

2. Explain how each of the following tools can help businesses make production decisions.

a. Supply schedule:

b. Supply curve:

c. Market supply curve:

3. What does a change in quantity supplied respond to?

4. What causes the supply curve to shift to the left?

5. Name the seven factors that determine whether supplies increase or decrease.

a.

b.

c.

d.

e.

f.

g.

6. What is supply elasticity?

7. What characterizes an inelastic supply curve?

8. What changes does a unit elastic supply curve show?

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T HE THEORY OF PRODUCTION

OUTLINING


I. The Production Function

A. Introduction—What is a production function?

B. The Production Period

1. What is the short run?

2. What is the long run?

C. Total Product—What is total product?

D. Marginal Product—What is marginal product?

II. Stages of Production

A. Stage I—Increasing Marginal Returns

1. What is the criterion for determining how long total output will rise at an increasingly faster rate?

2. When do companies try to hire more workers?

B. Stage II—Decreasing Marginal Returns

1. What happens to the rate of increase in total production during this stage?

2. What is the principle of diminishing returns?

C. Stage III—Negative Marginal Returns

1. What happens to marginal product during this stage?

2. What happens to total output during this stage?

3. What effect does this stage have on hiring?


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C OST, REVENUE, AND PROFIT MAXIMIZATION



overhead total costs marginal costs equal

variable costs total revenue e-commerce break-even point

marginal analysis marginal revenues fixed costs

Measures of Cost

Cost is divided into several categories. The first is 1 —the costs that an organization

incurs even if there is little to no activity. The total of these unchanging costs, or 2 ,

remains the same. On the other hand, expenses that change—such as one associated with labor and raw materials—

are 3 . The sum of these two costs is 4 . Another category

of cost is 5 —the extra costs incurred when a business produces one additional unit of a

product.

Applying Cost Principles

An entrepreneur engaged in 6 —electronic business or exchange conducted over the

Internet—is an example of a business with very low 7 . When a business analyzes its

costs, it can find the level of production where it generates just enough revenue to cover its total operating costs,

which is called the 8 .

Marginal Analysis and Profit Maximization

Businesses use two key measures of revenue to find the amount of output that produces the greatest profit.

9 is all the revenue that a business receives. Even more important is

10 ,

which is the extra revenue associated with the production and sale of one additional unit of output. Economists use

11 , a type of decision making that compares the extra benefits to the extra costs of

taking an action. Businesses want to know how to generate the maximum profit. They can do so by comparing extra

expenses, or 12 , and extra benefits, or 13 . The profit-

maximizing quantity of output is reached when the benefit and cost are 14 .


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For use with textbook pages 143–146.

P RICES AS SIGNALS

RECALLING THE FACTS


1. What are the four reasons that prices in a market economy perform the allocation function so well?

a.

b.

c.

d.

2. What is rationing, and when is it most likely to be used?

3. Describe the problems that rationing can lead to.

a.

a.

a.

b.

a.

b.

c.

a.

4. What is a rebate, and how is it used?

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T HE PRICE SYSTEM AT WORK

OUTLINING


I. The Price Adjustment Process

A. A Market Model

1. What are economic models used for?

2. What is the equilibrium price?

B. Surplus—What can we assume about price based on the size of the surplus?

a.

C. Shortage—What will happen to the price and quantity supplied in the next trading period as a result of a shortage?

a.

D. Equilibrium Price—What tends to happen to the market once the equilibrium price has been reached?

II. Explaining and Predicting Prices

A. Introduction—What factors are important in predicting changes in prices?

a.

B. Change in Supply—What is one of the main reasons for variations in agricultural supplies?

C. Change in Demand—Why did the price of oil increase dramatically when demand increased in 2005 and 2006?

a.

D. Change in Supply and Demand—Why did the price of oil increase even more after hurricanes Katrinaand Rita?

E. The Importance of Elasticity—How does elasticity affect the size of the price change when supply or demand changes?

F. Prices and Competitive Markets

1. When is the price system most efficient?

2. What is the great advantage of competitive markets?

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S OCIAL GOALS AND MARKET EFFICIENCY



target price nonrecourse loan price ceiling

social goals “land banks” price floor

deficiency payment impersonal mechanisms economic security

Introduction/Distorting Market Outcomes

In order to achieve the seven broad economic and 1 , we may require policies that distort

allocations made in the market. Achieving the goal of 2 occasionally results in legislation

changes that can benefit some and be detrimental to others. One of the common ways of achieving

3 involves setting prices at “socially desirable” levels. When this happens, prices are not

allowed to adjust to their equilibrium levels. One type of control is the 4 , a maximum

legal price that can be charged for a product. Another is the 5 , which is the lowest legal

price that can be paid for a good or service. An example is the minimum wage.

Agricultural Price Supports

In the 1930s, farmers borrowed money from the Commodity Credit Corporation, an agency of the Department of

Agriculture. In an effort to support American farmers, the CCC used a(n) 6 , which is

essentially a price floor for farm products. The farmers borrowed money at the 7 and

pledged their crops as security. Since such a loan had neither a penalty nor further obligation if not paid back, it was

called a(n) 8 . This loan program’s drawback was that the U.S. Department of Agriculture

ended up owning enormous stockpiles of food. The next solution was to give farmers a(n)

9 .In this situation, farmers sold their crops on the open market for the best price they

could get. Then the government sent them a check to make up the difference between the actual market price and

the 10 . To help offset the cost of farm programs, the Conservation Reserve Program of

1985 offered to pay farmers not to farm. Under the program, farmers agreed to set aside previously farmed acreage

into 11 , and they were paid an annual fee in return. However, efforts to make agricul-

tural output responsive to market forces have not lowered the overall cost of farm programs.

When Markets Talk

Markets are 12 that bring buyers and sellers together. They are said to “talk” when

prices in them move up or down significantly in response to outside events, such as government policy changes.

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C OMPETITION AND MARKET STRUCTURES

RECALLING THE FACTS


1. What is the role of government under Adam Smith’s laissez-faire philosophy?

2. Define market structure.

3. What are the five major conditions that characterize perfectly competitive markets? Explain each condition briefly.

a.

b.

c.

d.

e.

4. List the three imperfect competition market structures:

a.

b.

c.

5. Name and describe the four different types of monopolies.

a.

b.

c.

d.

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M ARKET FAILURES



positive externality market failure unemployed

negative externality distort public goods

inadequate competition externality adequate information

Types of Market Failures

Over time, mergers and acquisitions have had several consequences. One is inefficient resource allocation because

1 tends to reduce the efficient use of scarce resources. 2

may also enable a business to influence politicians in order to get special treatment that enriches its managers and

owners. To allocate resources efficiently, consumers, businesspeople, and government officials must have

3 about market conditions. Some information is harder to find than other kinds, and

that can lead to a(n) 4 . A difficult problem in any economy is resource immobility, when

land, capital, labor, and entrepreneurs do not move to markets in which the returns are the highest and sometimes

remain 5 . Another form of 6 shows up in the form of

7 those products that are collectively consumed by everyone and whose use by one

individual does not diminish the satisfaction or value received by others. They are usually provided by the government.

Many activities generate some kind of 8 or unintended side effect that either benefits or

harms a third party not involved in the activity that caused it. A(n) 9 is the harm, cost, or

inconvenience suffered by a third party because of actions by others. A(n) 10 is a benefit

received by someone who was not involved in the activity that generated the benefit. A(n)

11 is a(n) 12 because its costs and benefits are not

reflected in the market prices that buyers and sellers pay.

Dealing with Externalities

The problem with externalities is that they 13 the decisions made by consumers

and producers. Pollution is an example of a(n) 14 . Forcing firms to address pollution

problems increases the firms' production costs, resulting the higher prices for the consumer. Education is an example

of a(n) 15 . Communities and their economies benefit when their people are better

educated.

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T HE ROLE OF GOVERNMENT

OUTLINING


I. Maintain Competition

A. Antitrust Legislation

1. What was the antitrust legislation of the late 1800s trying to restrict?

2. What was the purpose of the Sherman Antitrust Act?

3. What was the purpose of the Clayton Antitrust Act of 1914, and what practice did it outlaw?

B. Government Regulation

1. Under what conditions are monopolies acceptable?

2. What is one example of how local or state government allows and regulates a monopoly?

II. Improve Economic Efficiency

A. Introduction—What are two market failures the government is able to correct?

B. Promote Transparency

1. What is the purpose of public disclosure?

2. What is the advantage to the public of truth-in-advertising laws?

C. Provide Public Goods—What are two examples of needed public goods that are provided by the government?

III. Modified Free Enterprise—What government actions led to a modification of free enterprise?

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T HE LABOR MOVEMENT

RECALLING THE FACTS


1. How do a trade union and an industrial union differ?

2. What actions could unions take if negotiations with industry employers failed? Explain each one.

a.

b.

3. What actions could employers take in their fight against unions? Explain each one.

a.

b.

4. How did the Clayton Antitrust Act help labor unions?

5. What did the National Labor Relations Act of 1935 do for unions?

6. What did the Fair Labor Standards Act of 1938 do for labor?

7. How did the Taft-Hartley Act of 1947 affect labor? What is a right-to-work law?

8. What are the four kinds of union arrangements? Explain each one.

a.

b.

c.

d.

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W AGES AND LABOR DISPUTES

OUTLINING


I. Wage Determination

A. Introduction—What is a wage rate?

B. Noncompeting Categories of Labor

1. What is unskilled labor?

2. What is semiskilled labor?

3. What is unskilled labor

4. What is professional labor?

C. Market Theory of Wage Determination—What does the market theory of wage determination state about the

differences in wage rates?

D. Theory of Negotiated Wages—How does the bargaining strength of organized labor help to determine

wages?

E. Signaling Theory—What does a degree “signal” to some employers?

II. Resolving Labor Disputes

A. Collective Bargaining—What is collective bargaining?

B. Mediation—What is the goal of mediation?

C. Arbitration—What is the difference between arbitration and mediation?

D. Fact-Finding—What is fact-finding?

E. Injunction and Seizure—What is the purpose of a government seizure?

F. Presidential Intervention—What can the president of the United States do to end a labor dispute?


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E MPLOYMENT TRENDS AND ISSUES



distribution labor market giveback minimum wage

prices set-aside contract debate loyalty

gender discrimination equivalent

two-tier wage system unions constant dollars

Introduction/Decline of Union Influence

Workers have seen a decline of 1 which limits their ability to influence wages. Reasons

for this decline include efforts by employers to keep unions out of their businesses, little

2 to organized labor from new additions to the work force, and an increase in

Americans working in part-time jobs with little time to support unions. The most important reason for the decline is

that high union wages cause union-made product 3 to rise. Employers have been able

to reduce union wages is by asking for a 4 from union workers or by using the

5 to keep high wages for current workers, but setting lower wages for newly hired

workers.

Lower Pay for Women

Over a 50-year period, female income has been only a fraction of male income. About one-third of this gap is due to

differences in the skills and experience that women bring to the 6 . The uneven

7 of men and women among various occupations also contributes to the income gap.

The final reason for the gap may be due to employer 8 . To combat wage discrimination,

the Equal Pay Act of 1963 prohibits pay discrimination between men and women in the same company for jobs that

require 9 skills and responsibilities. Also, the Civil Rights Act of 1964 prohibits job dis-

crimination on the basis of 10 , race, color, religion, or national origin. The government

attempts to reserve some business for minority companies with a 11 , a guaranteed

contract reserved for a targeted group.

The Minimum Wage

The 12 was intended to prevent exploitation of workers. However, there is an ongoing

13 about the benefits and disadvantages of minimum wage. Rather than looking at

minimum wage history in current dollars, economists like to use real, or 14 to remove

the distortion of inflation. When the minimum wage becomes unacceptably low to voters, Congress will increase it.

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T HE ECONOMICS OF TAXATION

OUTLINING


I. Economic Impact of Taxes

A. Resource Allocation—What can happen to the fa ctors of production when prices go up as an end result of taxation?

B. Behavior Adjustment—What is a sin tax and what is it usually applied to?

C. Productivity and Growth—What effect might taxes have on productivity and economic growth?

D. Incidence of a Tax—What situation must exist to make it easier for a producer to shift the incidence of a tax to the consumer?

II. Criteria for Effective Taxes

A. Equity—What criteria is generally recognized as making taxes fairer?

B. Simplicity—What makes taxes more tolerable to many people?

C. Efficiency—What are two criteria for making a tax efficient?

III. Two Principles of Taxation

A. Benefit Principle—What is the benefit principle of taxation?

B. Ability-to-Pay Principle—What two factors is the ability-to-pay principle based on?

IV. Three Types of Taxes

A. What three general types of taxes exist in the United States?

B. What is a marginal tax rate?

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F EDERAL, STATE, AND LOCAL REVENUE SYSTEMS



FICA property tax intergovernmental revenue

excise taxes public utilities individual income tax

sales tax real estate corporate income tax

Medicare borrowing payroll withholding system

Federal Government Revenue Sources

The most important sources of government revenue are the 1 , Social Security tax, borrowing, 2 , and 3 , in that order. In most cases the

individual income tax is paid over time through a 4 , a system that requires an employer

to automatically deduct income taxes from an employee's paycheck and send it directly to the IRS. The second most

important federal revenue source is 5 , the Federal Insurance Contributions Act tax levied

on both employers and employees for Social Security and 6 .

7 by the federal government is the third-largest source of federal revenue. If the

government does not collect enough money in taxes and user fees to meet its spending, it borrows the rest by selling

bonds to investors. The 8 is the tax a corporation, as a separate legal entity, pays on

its profits. The federal government also receives other revenues from 9 , estate and gift

taxes, custom duties, and miscellaneous fees.

State Government Revenue Sources

The largest source of state revenue consists of 10 , funds collected by one level of

government that are distributed to another level of government for expenditures. States receive these funds from

the federal government to help fund welfare, education, and hospital expenses. Most states also use

11 , a general tax levied on consumer purchases of nearly all products. All but seven

states also rely on 12 for revenue. Other sources of state revenue include interest

earnings on surplus funds, tuition and fees collected from state-owned universities, and hospital fees.

Local Government Revenue Sources

The largest source of revenue for local governments is 13 .

14 , a tax on tangible and intangible possessions, is the second largest revenue source.

Property taxes on 15 raise the most revenue. Local revenue is also raised from

16 , sales taxes, and a variety of other sources.

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C URRENT TAX ISSUES AND REFORMS

RECALLING THE FACTS


1. What information does a payroll withholding statement show?

2. What breaks did businesses gain from the Economic Recovery Tax Act of 1981?

3. What is an alternative minimum tax?

4. What was behind the unexpectedly high tax revenues in 1997?

5. What additional tax bracket was added in 2001?

6. In 2003, how did the government accelerate many of the 2001 tax reforms?

7. What factors brought an end to the tax cuts of 2002 and 2003?

8. What is one advantage and one disadvantage of a flat tax?

9. What is one advantage and one disadvantage of a value-added tax?

10. What are four factors that ensure further reform in the federal tax code?

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T HE ECONOMICS OF GOVERNMENT SPENDING



transfer payments pork private sector

public sector grant-in-aid resource allocation

distribution of income tax burden goods and services

Introduction/Government Spending in Perspective

The government's amount of net spending amounts to an ever-increasing portion of our GDP, the dollar measure of

all final 1 produced in a country in a year. Federal budget expenditures that circumvent

normal budget-building procedures are sometimes referred to as 2 projects. Because

most of these projects provide generous benefits to a small number of individuals or businesses, taxpayers generally

would not otherwise approve the projects. The growth in the 3 , which is the part of

the economy made up of federal, state, and local governments, has led some people to question how many goods

and services the government should provide and what should be provided by the 4 ,

the part of the economy made up of private individuals and privately owned businesses. Government makes two

broad kinds of expenditures. The first is in the form of 5 . The second is what is called

6 . These are payments for which the government receives neither goods nor services

in return. One type is known as a 7 . An example is the interstate highway construction

programs for which the federal government grants money to cover the major part of the cost. The states through

which the highways pass pay the rest.

Impact of Government Spending

Government spending decisions directly affect 8 . Resources are shifted to wherever the

government chooses to spend its revenues. Government spending also influences the 9 ,

or the way in which income is allocated among families, individuals, or other groups. The government, by producing

10 , is often in competition with producers in the 11 . The

increased 12 that is needed to support the government's expenditures has attracted

enormous attention in recent years. Finding the money to pay for these expenditures is a difficult task. Yet many

people seem to want even more of these goods, services, and 13 .

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F EDERAL, STATE, AND LOCAL GOVERNMENT EXPENDITURES

RECALLING THE FACTS


1. Why does the federal budget’s proposal offer only a rough estimate of the actual revenues and expenditures?

2. What is a fiscal year?

3. What is an appropriations bill?

4. What is the difference between a federal budget deficit and a federal budget surplus?

5. What is the difference between mandatory spending and discretionary spending in the federal budget?

6. What is Medicare?

7. What is a balanced budget amendment?

8. What are the top three categories of state spending?

9. Who approves government spending at the local level?

10. What area of expenditure is the primary responsibility of the local government?

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D EFICITS, SURPLUSES, AND THE NATIONAL DEBT

OUTLINING


I. From Deficits to Debt

A. Predicting the Deficit—What factors affect the accuracy of the deficit projection?

a.

B. Deficits Add to the Debt—What is the only way the annual budget can lower the federal debt?

a

C. A Growing Public Debt—Why do most economists tend to disregard trust fund balances?

a.

D. Public vs. Private Debt—How much of the public debt is owed by foreigners?

a.

II. Impact of the National Debt

A. Transferring Purchasing Power—What happens to the purchasing power of individuals as a consequence of the national debt?

a.

B. Reducing Economic Incentives—How can government spending reduce economic incentive?

a

C. Crowding Out—What is the crowding-out effect?

a.

a.

D. Redistributing Income—How can national debt and the tax structure affect the distribution of income?

a.

III. Reducing Deficits and the Debt

A. Legislative Failures—What was the 1990 Budget Enforcement Act’s main feature?

a.

B. Raising Revenues—What feature of the Omnibus Budget Reconciliation Act of 1993 helped to account for the 1998 budget surplus?

a.

C. Reducing Spending—What is the connection between entitlements and mandatory spending in the federal budget?

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S AVINGS AND THE FINANCIAL SYSTEM

RECALLING THE FACTS


1. What are savings?

2. What is a financial asset?

3. What is a financial system?

4. What is a financial intermediary? Name some examples of financial intermediaries.

5. What is the circular flow of funds?

6. What sectors of the economy are the largest borrowers?

7. What are three examples of nonbank institutions that can act as financial intermediaries? Explain the purpose of each one.

a.

b.

c.

8. What are two pieces of advice analysts offer to investors about consistency and simplicity?

9. What is risk?

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F INANCIAL ASSETS AND THEIR MARKETS

OUTLINING


I. Bonds as Financial Assets

A. Introduction—What is a bond?

a.

B. Bond Components—What are the three components of a bond?

a

C. Bond Prices—What two factors do investors consider before they decide what to offer for a bond?

a.

D. Bond Yields—What is a bond's current yield?

a.

E. Bond Ratings—What are three factors bonds are rated on?

a.

II. Financial Assets and Their Characteristics

A. Certificates of Deposit—Why are CDs attractive to small investors?

a.

B. Corporate Bonds; Municipal Bonds; Government Savings Bonds—Which type of bond is generally tax-exempt?

a

C. Treasury Notes and Bonds; Treasury Bills—What is the difference in maturity between Treasury notes, bonds, and bills?

a.

D. Individual Retirement Accounts—What is an IRA?

a.

III. Markets for Financial Assets

A. Capital Markets—What is the capital market?

a.

B. Money Markets—What is a money market?

a.

C. Primary Markets—What is a primary market?

D. Secondary Markets—What is the major benefit of the secondary market?

a.

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I NVESTING IN EQUITIES AND OPTIONS



over-the-counter market options Efficient Market Hypothesis

bear market bull market Standard & Poor's 500

New York Stock Exchange futures contract securities exchange

Dow-Jones Industrial Average equities portfolio diversification

mutual funds 401(k) plan

Stocks and Efficient Markets

In addition to financial assets, investors may also buy 1 , which are shares of common

stocks that represent ownership of corporations. Many stock market experts subscribe to the

2 , which poses that stocks are always priced about right because they are followed

closely by so many investors. For a cautious investor, then, 3 —the practice of holding

a large number of different stocks so that increases in some offset declines in others—is a popular strategy. Because

of the advantages of diversification, many investors buy shares in 4 . Investors also take

advantage of a popular tax-deferred investment and savings plan offered by their employers known as a

5 . Employees contribute to the plan through payroll deductions.

Stock Markets and Their Performance

A place where buyers and sellers can meet to trade stocks is called a 6 . The oldest stock

exchange is the 7 , while the American Stock Exchange tends to be smaller. Regional

stock exchanges are located in major cities, and global stock exchanges are found throughout the world. The majority

of stocks in the United States are traded on the 8 , an electronic marketplace for

securities that are not traded on an organized exchange. There are two popular indicators of the stock market's per-

formance. The 9 uses 30 stocks as indicators. The 10 uses

500 representative stocks. When the market is strong with prices moving up for several months or years in a row, it is

called a 11 . When the prices of equities fall sharply for several months or years in a row,

the market is known as a 12 .

Trading in the Future

In a 13 , investors can agree to buy or sell at a specific future date at a predetermined

price. A contract that gives the buyer the right to cancel the contract is called an 14 .


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M EASURING THE NATION’S OUTPUT AND INCOME

RECALLING THE FACTS


1. What is gross domestic product?

2. What things may be excluded from GDP? In each case, give a brief explanation why.

a.

b.

c.

d.

3. What are the limitations of the GDP?

4. List the five measures of national income.

a.

b.

c.

d.

e.

5. What are the four sectors of the economy? Explain each one briefly.

a.

b.

c.

d.

6. What is the output-expenditure model?


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P OPULATION AND ECONOMIC GROWTH

OUTLINING


I. Introduction—Why does the government periodically take a census?

II. Population in the United States

A. Counting the Population—What are the two classifications of population?

B.

B. Historical Growth—What has been the trend in the rate of population growth since colonial times?

B.

C. Regional Change—Which parts of the country are growing in population and which are showing losses?

B.

D. Consequences of Growth—What happens when a population shifts toward a certain area while growing overall?

B.

III. Projected Population Trends

A. Age and Gender

1. What is the population pyramid?

2. What is the dependency ratio?

B. Race and Ethnicity

1. What group is currently the largest component in the total population?

2. What other racial/ethnic groups make up the total population?

C. Population Growth—What are the three most important factors affecting the rate of population growth?

B.

D. Future Population Growth—What is expected of the rate of future population growth?

B.

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P OVERTY AND THE DISTRIBUTION OF INCOME



Lorenz curve food stamps workfare

welfare negative income tax income assistance

poverty threshold Earned Income Tax Credit discrimination

monopoly power enterprise zones education

Poverty

Poverty is a relative measure that depends on prices, the standard of living, and the incomes that others earn. People

are living in poverty if their incomes fall below the 1 , even if they have supplements

such as food stamps, subsidized housing, and Medicaid. To evaluate the distribution of income, economists use the

2 , which shows how much the actual distribution of income varies from an equal

distribution.

Reasons for Income Inequality

A number of reasons explain why the incomes of various groups may be different. One is

3 , which puts workers in a better position to get higher-paying jobs. The wealthy can

afford to send their children to expensive schools or set them up in a high-paying job. There are also groups that hold

4 and are in a better position to demand higher wages. Another factor is

5 , which may favor some groups over others in hiring and advancement.

Antipoverty Programs

Over the years, the federal government has instituted a number of programs to help the needy. Most come under

the general heading of 6 . Some programs provide direct cash assistance. Supplemental

Security Income (SSI) is an 7 program that makes cash payments to blind or disabled

persons age 65 or older. Other programs, such as 8 , do not provide direct cash

payments. Instead, eligible persons receive government-issued coupons that can be redeemed for food. Many working

low-income Americans qualify for special tax credits such as the 9 , which provides

federal tax credits and sometimes cash. To help businesses start up in run-down or depressed areas, laws have been

set up to establish 10 . Because of rising welfare costs, many states now have

11 programs in which welfare recipients work for their benefits. The

12 , is a proposed type of tax that would make cash payments to certain groups below

the poverty line.

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B USINESS CYCLES AND FLUCTUATIONS

OUTLINING


I. Business Cycles: Characteristics and Causes

A. Phases of the Business Cycle—What is the difference between a recession and a depression?

B. Changes in Investment Spending—How do changes in capital expenditures affect business cycles?

C. Innovation and Imitation—What does an innovation usually trigger in industry?

D. Monetary Policy Decisions—What happens when the Fed follows an easy money policy?

E. External Shocks—Give an example of a positive and a negative external shock.

II. Business Cycles in the United States

A. The Great Depression—Why did the government declare a “bank holiday” in 1933?

B. Causes of the Great Depression—How did easy and plentiful credit contribute to the Great Depression?

C. Recovery and Legislation—List two laws or agencies that were established after the Great Depression in an effort to protect people and prevent another depression.

D. Cycles After World War II—What happened to business cycles following World War II?

III. Forecasting Business Cycles

A. Using Everyday Economic Statistics—What is the composite index of leading economic indicators?

B. Using Econometric Models—What is an econometric model?

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I NFLATION

OUTLINING


I. Measuring Prices and Inflation

A. Introduction

1. What is a price index?

2. What is the consumer price index?

B. Market Basket

1. What is a market basket?

2. What is a base year?

C. The Price Index—How is the dollar cost of a market basket converted to an index value?

D. Measuring Inflation

1. What is the difference between creeping inflation and hyperinflation?

2. What is stagflation?

E. Other Price Indexes—What is the producer price index?

II. Causes of Inflation

A. Demand-Pull—In what way does excessive demand cause inflation?

B. Cost-Push—How do labor costs affect inflation?

C. Wage-Price Spiral—What is the wage-price spiral?

III. Consequences of Inflation—What effects does inflation have on an economy?


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U NEMPLOYMENT



unemployed outsourcing GDP gap

cyclical unemployment frictional unemployment unemployment rate

labor force technological unemployment misery index

structural unemployment seasonal unemployment uncertainty

Measuring Unemployment

The measure of joblessness is the 1 . The Bureau of Labor Statistics defines the civilian

labor force, or 2 , as the sum of all persons age 16 and above who are either employed

or actively seeking employment. The Bureau of the Census defines the 3 as people

available for work who have made a specific effort to find a job in the past month and who, during the most recent

survey week, worked less than one hour for pay or profit. The monthly unemployment rate is expressed as a

percentage of the entire 4 . The 5 understates

unemployment because it does not count workers who are too frustrated to look for work, and considers part-time

workers as employed.

Sources of Unemployment

Economists have identified several kinds of unemployment. One common type is 6 ,

where workers are between jobs for one reason or another. A more serious type of unemployment is

7 —when a fundamental change in the economy reduces the demand for workers and

their skills. More recently, businesses have increased the use of 8 . A third kind of

unemployment is 9 , which occurs when machines or automated systems replace

workers. A fourth kind of unemployment is 10 , which is directly related to swings in

the business cycle. A fifth type of unemployment is 11 , resulting from seasonal changes

in the weather or in the demand for certain products or jobs.

Costs of Instability

Costs of economic instability can be measured in economic and human terms. One measure of the economic cost of

unemployment is the 12 —the difference between the actual GDP and the potential GDP

that could be produced if all resources were fully employed. The 13 is the sum of the

monthly inflation and unemployment rates. In an unstable economy, a great deal of 14

exists. An unstable economy can also lead to political instability as well as a rise in crime rates and poverty.

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T HE EVOLUTION, FUNCTIONS, AND CHARACTERISTICS OF MONEY

RECALLING THE FACTS


1. What is the Federal Reserve System?

2. What is a barter economy?

3. What is commodity money?

4. What is fiat money?

5. In early America, what was used to “back” paper currency?

6. Why was specie considered the most desirable form of money?

7. What is a monetary unit?

8. What characteristics must money have in order to have value?

9. What are three functions of money? Define each term.

a.

b.

c.

10. What do these money supplies consist of?

a. M1:

b. M2:

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T HE DEVELOPMENT OF MODERN BANKING

OUTLINING


I. The Development of Banking in America

A. Privately Issued Bank Notes—What led to Americans' distrust of paper currency during the Revolutionary War?

B. Growth of State Banking—Why did banking become popular after the Revolution?

C. Problems with Currency—What three problems arose from having different sources of paper currency?

D. Greenbacks—Why did Congress finally decide to print paper currency?

E. The National Banking System—What was established by the National Currency Act of 1863?

F. Other Federal Currencies—What were gold and silver certificates?

II. The Creation of the Fed

A. The Federal Reserve System—Who owns the Federal Reserve System?

B. Banking in the Great Depression—List two factors that contributed to the bank failures at the start of the Great Depression.

C. Federal Deposit Insurance—What is the FDIC?

D. Fractional Reserves and Deposit Expansion—How is the size of bank reserves determined?

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T HE FEDERAL RESERVE SYSTEM AND MONETARY POLICY



open market operations regulatory and supervisory FOMC currency

monetary policy easy money policy member bank district banks

reserve requirement federal government Board of Governors

discount rate tight money policy interest rates

Structure of the Fed

One of the unique features of the Fed is that it is privately owned by its 1 , commercial

banks that are members of, and hold shares or stock in, the Fed. The Fed is governed by a seven-member

2 , who are appointed by the U.S. president and approved by the Senate for a 14-year

term of office. The Board is primarily a 3 agency that sets general policies for its member

banks. It also helps make policies that affect the level of 4 and the general availability of

credit. It reports annually to Congress. The Fed has twelve 5 that provide many of the same

functions for banks and depository institutions that banks provide for the public. The 6

meets eight times a year to review the economy and to evaluate factors such as trends in wages, prices, and consumer

spending. The Federal Advisory Council, the Consumer Advisory Council, and the Thrift Institutions Advisory Council

advise the Board.

Conducting Monetary Policy

One of the most important functions of the Fed is to conduct 7 —short run changes in

the availability and cost of credit in order to influence the general level of economic activity. Under an

8 , the Fed expands the money supply, causing interest rates to fall. Using a

9 , the Fed restricts the size of the money supply. The Fed uses three tools to conduct

monetary policy, changing the amount of excess reserves. The first is the 10 . The second

tool is 11 , which is the buying and selling of government securities in financial markets.

The third tool is the 12 —the interest the Fed charges on loans to financial institutions.

Other Fed Responsibilities

Today's 13 , the paper component of the money supply, is made up of Federal Reserve

notes and is distributed to the Fed's district banks. Some of the Fed's other responsibilities include maintaining the

payments system, establishing guidelines that govern banking behavior, preparing consumer legislation, and providing

financial services to the 14 .

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M ACROECONOMIC EQUILIBRIUM

RECALLING THE FACTS


1. What tools do we use to discover where the balance is in macroeconomics?

2. What is aggregate supply?

3. What is an aggregate supply curve?

4. What factors could decrease aggregate supply?

5. What is aggregate demand?

6. What is an aggregate demand curve?

7. What factors could cause aggregate demand to decrease?

8. What is macroeconomic equilibrium?

9. What determines the point of macroeconomic equilibrium?

10. What is one dilemma facing economic policy makers?

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S TABILIZATION POLICIES

OUTLINING


I. Demand-Side Policies

A. Introduction

1. What is the goal of demand-side policies?

2. What is fiscal policy and from whose theories does it derive?

B. Keynesian Economics—According to Keynes, which sector of the economy creates economic instability?

C. Role of Government—What is Keynes' justification for temporary federal deficits?

D. Automatic Stabilizers—What are automatic stabilizers?

E. Limitations of Fiscal Policy—What is most effective at countering business cycles?

II. Supply-Side Policies

A. Introduction—What are supply-side policies?

B. Smaller Role for Government—What are some ways that the government’s role in the economy can be reduced?

C. Lower Federal Taxes—What is the supply-siders’ argument for lowering tax rates?

D. Limitations of Supply-Side Policies—What is a limitation of supply-side policies?

III. Monetary Policies—Who are monetarists and what kinds of policies do they favor to combat inflation?

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E CONOMICS AND POLITICS



monetarists structural lags supply-side

passive discretionary monetary policy demand-side

economic politics Congress economic theories

Council of Economic Advisers fiscal policies

Introduction/Changing Nature of Economic Policy

1 are government attempts to manage the economy through taxing and spending

actions. Fiscal policy can take any of three forms. Policy that someone must choose to implement is called

2 fiscal policy. When no new or special action is required, that is

3 fiscal policy. When it involves plans and programs to strengthen the economy in the

long run, it is called 4 fiscal policy. One reason that 5

fiscal policy is being used less today is that various 6 occur between recognizing that

there is a problem and actually doing something about it. The Congressional gridlocks that occurred in the 1990s over

views on the budget also contributed to the decline of 7 fiscal policy. The void created

by its decline has been filled by the 8 of the Fed.

Economics and Politics Today

Choosing what economic policies will work best is difficult. In recent years, politics and economics seem to have

merged in what might be called 9 . Most of the major debates in

10 are overspending, taxing, and other budgetary matters. Economists differ for various

reasons. Sometimes they support a certain policy because they think some problems are more critical than others.

They also differ because most 11 are a product of the times. The period following the

Great Depression produced 12 economists. The 13 who

emerged in the 1960s through 1980s gained influence because of the decline of discretionary fiscal policy.

14 economics grew from the rejection of “big government” by those who thought a

smaller government was the key to economic growth. Today’s politicians are concerned with the economic

consequences of what they do. A three-member group called the 15 reports to the

president on economic developments and also proposes strategies.

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A BSOLUTE AND COMPARATIVE ADVANTAGE

RECALLING THE FACTS


1. Why is specialization an important reason for trade?

2. What is the difference between exports and imports?

3. What evidence is there to show the importance of international trade to the United States?

4. Under what circumstances does a country have an absolute advantage?

5. What is a production possibilities curve (frontier)?

6. Under what circumstances does a country have a comparative advantage?

7. On what assumption is the concept of comparative advantage based?

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B ARRIERS TO INTERNATIONAL TRADE

OUTLINING


I. Restricting International Trade

A. Tariffs—What is a protective tariff? A revenue tariff?

B. Quotas—How are quotas typically used?

II. Arguments for Protection

A. Introduction—What is the difference between what protectionists and free traders want?

B.

B. Aiding National Defense

1. How do protectionists use national defense as an argument to support trade barriers?

2. What is the free traders’ argument in response?

C. Promoting Infant Industries—What is the infant industry argument?

B.

D. Protecting Domestic Jobs—How could tariffs and quotas protect domestic jobs?

B.

E. Keeping the Money at Home

1. What is the response of free traders to this argument?

2. What industries can be hurt by this type of protectionism?

F. Helping the Balance of Payments—What is the balance of payments?

B.

III. The Free Trade Movement

A. The World Trade Organization—What is the role of the World Trade Organization?

B.

B. NAFTA—How has trade changed between the U.S., Canada, and Mexico since NAFTA was created?

B.


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F OREIGN EXCHANGE AND TRADE DEFICITS



flexible exchange rate trade deficit fixed exchange rate

foreign exchange rate trade surplus foreign exchange markets

trade-weighted value of the dollar gold standard trade imbalance

Introduction/Financing International Trade

Because each country has its own currency, trade between nations is made somewhat more complicated. Foreign

currencies are bought and sold in 1 . This market includes banks that help secure foreign

currencies for importers, as well as banks that accept foreign currencies from exporters. The

2 is the price of one country's currency in terms of another country's currency. There

are two types of exchange rates. Under a 3 system, the price of one currency is fixed in

terms of another so that the rate does not change. This system was used when the world was on the

4 but ended when the United States stopped redeeming foreign-held dollars for gold.

Now, under the 5 , the forces of supply and demand establish the value of one country’s

currency in terms of another country's currency.

Trade Deficits and Surpluses

A country has a 6 whenever the value of the products it imports exceeds the value of

the products it exports. It has a 7 , whenever the value of its exports exceeds the value

of its imports. Each is dependent on the international value of its currency. The Fed keeps a statistic that measures

the international value of the dollar. It is called the 8 , and it is an index that shows the

strength of the dollar against a group of major foreign currencies. When the index falls, the dollar is weak. When the

index rises, the dollar is strong.

A persistent 9 tends to reduce the value of a country’s currency and can cause a chain

reaction that affects income and employment. However, under 10 , trade deficits tend

to correct themselves automatically through the price system. A strong currency tends to cause a trade deficit; a weak

currency tends to cause a 11 , which eventually pulls up the value of the currency.

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E CONOMIC DEVELOPMENT



17-1

developing countries semidevelopment crude birthrate external debt

population growth life expectancy takeoff corruption

primitive equilibrium high development natural resources

transition poverty industrialized countries

Introduction/The Importance of Economic Development

Most people in the world today live in 1 . In most of these countries,

2 is rampant. The income gap between 3 and developing

countries is large. The industrialized countries of the world have helped developing countries for various humanitarian,

economic, and political reasons.

Stages of Economic Development

It is helpful to think of economic development as occurring in stages. Economic development begins with the

4 stage. At this stage, the society has no formal economic organization. The second

stage is 5 —a break from the primitive equilibrium and a move toward economic and

cultural changes. The third stage is 6 . The people begin to put aside old customs and

start to imitate new techniques displayed by outsiders. New industries begin to grow rapidly. The fourth stage is

7 : national income grows faster than the population, and the country builds its core

industries, invests more on capital investments, and makes technological advances. The final stage is

8 , which is when the nation no longer emphasizes industrial production, but with its

basic needs met, it increases services and provides more public goods.

Obstacles to Development

One major obstacle to economic development is 9 . The population of most developing

countries grows at a rate much faster than the populations of industrialized nations. Reasons for this growth include

the high 10 and an increasing 11 —the average remaining

lifetime in years for persons who reach a certain age. There are several other hindrances to economic growth: limited

12 , major health problems and substance abuse, lack of appropriate education and

technology, significant amounts of 13 , government 14 ,

and capital flight.


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A CHIEVING ECONOMIC DEVELOPMENT

OUTLINING


I. Funding Economic Development

A. Importance of Savings—What must a country do to generate internal funds?

B. Microfinance—What is a micro loan?

C. International Agencies

1. What is the International Monetary Fund?

2. What is the World Bank?

D. Government Aid Grants—How can governments assist needy countries?

E. Private Foreign Investment—How does expropriation discourage foreign investment?

II. Regional Economic Cooperation

A. Introduction

1. What is a free-trade area?

2. What is a customs union?

B. The European Union—How is the EU a single market?

C. ASEAN—What countries are ASEAN members?

D. OPEC—How is OPEC a cartel?


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T HE TRANSITION TO CAPITALISM

RECALLING THE FACTS


1. What is capitalism?

2. Why is there a macroeconomic trend toward capitalism?

3. What is privatization, and why is it so important in a country’s transition to capitalism?

4. What incentives are essential for a successful transition to capitalism?

5. What was the Russian Gosplan and how did it manage the economy?

6. What was China’s Great Leap Forward, and what was its outcome?

7. What two Latin American countries have taken steps toward capitalism?

8. What is the black market, and how did Hungary’s experience with it affect their transition to a market economy?

9. What are the reasons for Japan’s economic success?

10. What led to the defeat of the Socialist Party in Sweden?


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G LOBALIZATION: CHARACTERISTICS AND TRENDS



18-1

Introduction/Characteristics of Globalization

One of the most important trends in the world today is 1 —the movement toward

a more integrated and interdependent world economy. This is taking place because of the voluntary decisions we

make as consumers. Many of the products we use are made by 2 that produce and

sell without regard to national boundaries. Globalization extends beyond international business to production as

well. One of the more controversial aspects of global production is 3 , or hiring outside

firms for non-core operations to lower operating costs. Another aspect of globalization is the growth of international

organizations that promote trade between nations. One example is the 4 , which led to

the World Trade Organization.

Globalization Trends

With continued globalization, two trends stand out: growing economic 5 and

growing regional integration. As markets develop, producers become more specialized in their activities. If

producers who perform a specialized task have a 6 , they will be able to compete

more effectively in the market. When countries focus on producing their specialized product, the result is an

incredible amount of 7 , in which countries rely heavily upon one another. The

European Union was born out the 8 and is one of the most successful examples of

regional 9 . The organization was formed in 1951 to coordinate iron and steel

production, making it difficult for the member countries to go to war against each other. Another example is the

10 , established in 1994 to set up a regional free trade area in the Americas with no

internal barriers to trade. Despite the growth and support for 11 , progress has not

always been smooth. While globalization can lead to great economic gains, these gains may not be important to

everyone.

interdependence outsourcing ECSC

economic integration globalization Free Trade Area of the Americas

comparative advantage multinationals General Agreement on Tariffs and Trade


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G LOBAL PROBLEMS AND ECONOMIC INCENTIVES

OUTLINING


I. Global Population Growth

A. Malthus: Views on Population—What makes Malthus’ views relevant in today’s world?

B. World Population Growth—What is the annual population growth rate?

C. Economic Incentives—What is one explanation for the high rate of population growth in developing countries?

II. The Demand for Resources

A. Renewable Resources—What is an example of biomass and what makes biomass sources important?

B. Nonrenewable Resources—How is population pressure affecting the supply of fossil fuels?

C. Energy Use in the United States—What is the energy type most commonly consumed in the United States?

D. Markets and Price Incentives—What was the result of the 1973 oil embargo?

III. Pollution and Economic Incentives

A. The Incentive to Pollute

1. Why does pollution occur?

2. How can pollution be controlled?

B. Legislated Standards—What are legislated standards?

C. Pollution Fees—How do pollution taxes motivate companies to stop polluting?


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A PPLYING THE ECONOMIC WAY OF THINKING

RECALLING THE FACTS


1. What are the five steps to economic decision-making as recommended by the National Council on Economic Education?

a.

b.

c.

d.

e.

2. What is cost-benefit analysis?

3. What are opportunity costs?

4. What is one advantage of a market economy?

5. What has happened to these competing economic systems?

a. communism in the Soviet Union:

b. socialism:

6. What was the capitalism of the 1930s like?

7. In what ways has that early capitalism been modified?


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Chapter 1Section 1–1

1. scarcity of resources, which results from society not having enough resources to produce all of the things people would like to have

2. A need is a basic requirement for survival and includes food, clothing, and shelter. A want is simply something we would like to have but is not necessary for survival.

3. “There is no such thing as a free lunch.” It means that most things in life are not free because someone has to pay for the production in the first place.

4. a. What to produce? b. How to produce? c. For whom to produce?

5. a. land: natural resources not created by people; b. capital: the tools, equipment, machinery, and factories used in the production of goods and services; c. labor: people with all their efforts, abilities, and skills; d. entrepreneur: a risk-taker in search of profits who does something new with existing resources

6. a. description: We need to know what the world around us looks like. b. analysis: It helps us to discover why things work and how things happen. c. explanation: If we all have a common understanding of the way our economy works, some economic problems will be much easier to address or even fix in the future. d. prediction: It can help predict what may happen in the future, including the most likely effects of different actions.

Section 1–2

I.A. Economic products are goods and services that are useful, relatively scarce, and transferable to others.

I.B. A consumer good is intended for final use by individuals; a capital good is used to produce other goods and services.

I.C. work performed for someone

I.D. a person who uses goods and services to satisfy wants and needs

II.A. a worth that can be expressed in dollars and cents

II.B. the situation in which some necessities have little monetary value while some non-necessities have a much higher value

II.C. utility

II.D. the accumulation of those economic products that are tangible, scarce, useful, and transferable

III.A. the market

III.B. a market in which factors of production are bought and sold

III.C. in product markets

IV.A. a measure of the amount of goods and services produced with a given amount of resources in a specific period of time

IV.B. Government can help provide education and health care; businesses can provide training; individuals can further their own education.

IV.C. They improve productivity.

IV.D. when we rely on others, and others rely on us, to provide most of the goods and services we consume

Section 1–3

1. trade-offs

2. decision-making grid

3. Opportunity cost

4. opportunity cost

5. fully employed

6. production possibilities curve (frontier)

7. maximum combinations

8. fully employed

9. opportunity cost

10. production possibilities curve (frontier)

11. cost-benefit analysis

12. free enterprise economy

13. standard of living


1. an organized way of providing for the wants and needs of people

2. a. use of scarce resources and other economic activity stems from ritual, habit, or custom

Advantages: everyone knows which role to play; little uncertainty regarding what to produce or how to produce; for whom to produce is determined by the customs and traditions of the society

Disadvantages: tends to discourage new ideas or ways of doing things; strict roles have the effect of

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ANSWER KEY


punishing people who act differently or break the rules; lack of progress leads to economic stagnation and a lower standard of living than in other economic systems

2. b. central authority makes the major decisions about what, how, and for whom to produce; can be led by king, dictator, president, or anyone who makes the major economic decisions

Advantages: can change direction drastically; many health and public services are available to everyone at little or no cost

Disadvantages: ignores basic wants and needs of consumers; gives people incentive to fill quotas in production rather than producing a good product; requires a large decision-making bureaucracy; planning bureaucracy lacks the flexibility to deal with minor day-to-day problems; rewards for individual initiative are rare

2. c. people make decisions in their own best interest.

Advantages: high degree of individual freedom; adjusts to change gradually over time; relatively little government interference; decision-making decentralized; variety of goods and services; high degree of consumer satisfaction

Disadvantages: does not provide for everyone—may be difficult for some people to survive; may not provide enough of some basic goods and services; high degree of uncertainty

2. d. combines elements of the three other types of economic systems

Advantages: provides assistance for people otherwise left out; if society has democracy, voters can use electoral power to affect what, how, and for whom decisions

Disadvantages: costs for benefits can be high; availability of services may be limited or the quality may deteriorate over time; may be less efficient than capitalism

Section 2–2

I.A.1. choice of own occupations, employers, and uses for money

I.A.2. choice of where and how to produce

I.B. Fewer goods and services can be produced and fewer wants and needs can be satisfied.

I.C. Any two of the following: equal pay for equal work; minimum wage; the fact that false advertising is illegal

I.D.1. adverse economic events such as layoffs and illnesses.

I.D.2. disability and retirement benefits for those unable or too old to work; benefits for survivors

I.E.1. They earn income by producing goods and services for others.

I.E.2. People cannot support themselves or their families, nor can they produce output for others.

I.F.1. a rise in the general level of prices

I.F.2. They find that bills are harder to pay and planning for the future is more difficult.

I.G. It is necessary to meet the needs of a growing population.

I.H. Our goals could change, or new goals could develop.

II.A. restricting individual freedom of choice

II.B. fewer people may be hired; restricting employers’ freedom

II.C. by comparing estimates of costs to estimates of benefits and then by voting for candidates who back a certain position

Section 2–3

1. capitalism

2. free enterprise

3. economic freedom

4. voluntary exchange

5. private property rights

6. profit

7. profit motive

8. capitalism

9. competition

10. free enterprise

11. consumer sovereignty

12. mixed economy

13. modified free enterprise economy


1. Advantages: It is easy to start up; management is relatively simple; the owner does not have to share profits; the business is exempt from taxes on income; owners have a sense of personal satisfaction; the business can be closed down easily.

Disadvantages: The owner has unlimited liability; financial capital may be difficult to raise; sole


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ANSWER KEY


proprietors often have limited capital and limited inventory; the owner may not have good managerial experience; it may be difficult to attract qualified employees; the business ceases to exist when the owner dies, quits, or sells the business.

2. In a general partnership, all partners are responsible for the management and financial obligations of the business. In a limited partnership, at least one partner is not active in the daily affairs of the business and has limited responsibility for the debts and obligations of the business.

3. To incorporate, people must file for permission with the government where the business will have its headquarters. If approved, a charter is granted that states the company’s name, address, purpose, and other features, as well as the number of shares of stock that will be sold.

4. Advantages: Capital is easy to raise by selling stock; owners have limited liability; directors can hire professional managers to run the firm; the firm continues to exist even when ownership changes; ownership can be transferred by selling stock.

Disadvantages: Corporate profits are double taxed; obtaining a charter is difficult and expensive; owners have little say in the running of the business once they have voted for a board of directors; corporations are subject to more government regulation.

5. A bond is a written promise to repay, at a later date, the amount borrowed, which is known as the principal. While the money is borrowed, the corporation pays interest, or the price paid for the use of another’s money.

Section 3–2

I.A. the total amount of new funds generated from operations

I.B.1. reinvest it in the form of new plants, equipment, and technologies

I.B.2. The business can produce additional products to generate additional sales and a larger cash flow during the next sales period.

II.A. One gives up its separate legal identity.

II.B. A horizontal merger is when two or more firms producing the same kind of product join forces. A vertical merger is when firms involved in different stages of manufacturing or marketing merge.

II.C. to grow faster, become more efficient, acquire or deliver a better product, eliminate a rival, or change an image

II.D. to protect overall sales and profits if one product line fails

II.E. Advantages include: They transfer new technology and generate new jobs in areas where jobs are needed and produce tax revenues for the host country. Disadvantages include: They may abuse their power by paying low wages, exporting scarce natural resources, or adversely interfering with the development of local businesses.

Section 3–3

1. nonprofit organizations

2. cooperative

3. consumer cooperative

4. service cooperative

5. credit union

6. labor union

7. collective bargaining

8. professional association

9. public utilities


1. the desire, ability, and willingness to buy a product

2. the part of economic theory that deals with behavior and decision making by individual units, such as people and businesses

3. It shows the various quantities demanded of a particular product at all prices that might prevail in the market at a given time.

4. similar: a demand curve displays the same information as a demand schedule—it shows the quantity demanded at each and every price that might prevail in the market; different: the information is presented in a graph, and forms a curve when the points are connected.

5. that the quantity demanded varies inversely with its price

6. the quantities demanded by everyone who is interested in purchasing the product

7. the extra usefulness or additional satisfaction a person gets from acquiring or using one more unit of a product

8. The extra satisfaction we get from using additional quantities of the product begins to decline; because


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of our diminishing satisfaction, we usually are not willing to pay as much for the second, third, fourth, and so on, as we did the first unit.

Section 4–2

I.A. change in quantity demanded

I.B.1. Consumers pay less and have extra income to spend.

I.B.2. Consumers feel poorer and buy less.

I.C. Consumers have a tendency to replace the more costly item with the less costly one.

II.A. Factors change while price remains the same; when this happens, people may decide to buy different amounts of the product at the same prices.

II.B. People can afford to buy more at all possible prices.

II.C. advertising, fashion trends, and even changes in the season

II.D. The demand for the original product tends to increase.

II.E. It decreases.

II.F.1. Consumers might hold off buying a product due to their expectations, causing demand to decline.

II.F.2. Demand will increase.

II.G.1. The market demand curve would shift to the right, signifying an increase in demand.

II.G.2. The market demand curve would shift to the left, signifying a decrease in demand.

Section 4–3

1. elasticity

2. demand elasticity

3. elastic

4. inelastic

5. unit elastic

6. proportional

7. total expenditures

8. inverse

9. elastic

10. inelastic

11. unit elastic

12. inelastic

13. elastic

14. elastic


1. Suppliers will normally offer more for sale at high prices and less at lower prices.

2. a. A supply schedule shows the various quantities of a particular product supplied at all possible prices in the market. b. A supply curve shows the various quantities supplied at all possible prices that might prevail in the market. c. A market supply curve shows the quantities offered at various prices by all firms that offer the product for sale in a given market.

3. a change in price

4. Less is offered for sale at all possible prices.

5. a. cost of resources; b. productivity; c. technology; d. taxes and subsidies; e. expectations; f. government regulations; g. number of sellers

6. a measure of the way in which quantity supplied responds to a change in price

7. a proportionally smaller change in quantity supplied

8. a proportional change in the quantity supplied

Section 5–2

I.A. a figure that shows how total output changes when the amount of a single variable input changes while all other inputs are held constant.

I.B.1. a period so brief that only the amount of the variable input can be changed

I.B.2. a period long enough for firms to adjust the quantities of all productive resources, including capital

I.C. total output produced by the firm

I.D. the extra output or change in total product caused by the addition of one more unit of input

II.A.1. as long as each new worker hired contributes more to total output than the worker before

II.A.2. when each new worker increases output more than the last

II.B.1. It is starting to slow.

II.B.2. the stage at which output increases at a diminishing rate as more variable outputs are added


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II.C.1. It becomes negative.

II.C.2. It decreases.

II.C.3. Most companies do not hire workers whose addition would cause total production to decrease.

Section 5–3

1. fixed costs

2. overhead

3. variable costs

4. total costs

5. marginal costs

6. e-commerce

7. fixed costs or overhead

8. break-even point

9. Total revenue

10. marginal revenue

11. marginal analysis

12. marginal costs

13. marginal revenue

14. equal


1. a. Prices are neutral; they favor neither the producer nor the consumer. Since prices are the result of competition between buyers and sellers, they represent compromises that both sides can live with. b. Prices in a market economy are flexible. The ability of the price system to absorb unexpected “shocks” is one of the strengths of a market economy. c. Most people have known about prices all their lives; prices are familiar and easy to understand. This allows people to make decisions quickly and efficiently, with a minimum of time and effort. d. Prices have no cost of administration.

2. Rationing is a system under which a government agency decides everyone’s “fair” share, and under which everyone receives a ration coupon for a certain amount of a product. It has been widely used during wartime.

3. a. Almost everyone feels his or her share is too small. b. Rationing has administrative costs, and there is no way to ensure coupons are used only for those intended. c. Rationing could cause a negative impact on the incentive to produce, if workers are paid in set numbers of coupons.

4. A rebate is a partial refund of the original price of the product. When a product is not selling as well as producers expected, a rebate is used by producers as an incentive for buyers to purchase the product

Section 6–2

I.A. 1. Economic models are used to analyze behavior and predict outcomes.

I.A. 2. the price at which the number of units produced equals the number of units sold; there is neither a surplus nor a shortage of the product at this price

I.B. The product’s price will go down proportionate to the amount of surplus.

I.C. Both price and quantity supplied will increase in the next trading period.

I.D. The market is cleared, leaving neither a surplus nor a shortage at the end of the trading period.

II.A. change in supply, change in demand, or changes in both, as well as elasticity

II.B. weather

II.C. because both the demand and the supply were inelastic

II.D. The hurricanes’ destruction caused a decrease in the supply of gasoline.

II.E. When both supply and demand are inelastic, the change in price is relatively large. If either is elastic, the change in price is smaller.

II.F.1. in competitive markets

II.F.2. They allocate resources efficiently.

Section 6–3

1. social goals

2. economic security

3. social goals

4. price ceiling

5. price floor

6. target price

7. target price

8. nonrecourse loan

9. deficiency payment

10. target price

11. “land banks”

12. impersonal mechanisms


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1. The government’s role is limited to protecting property, enforcing contracts, settling disputes, and protecting firms against foreign competition.

2. the nature and degree of competition among firms doing business in the same industry

3. a. There must be a large number of buyers and sellers; no single buyer or seller is big enough to single-handedly affect the price. b. Buyers and sellers deal in identical products; with no differences in the product, one seller’s merchandise is just as good as another’s. c. Each buyer and seller acts independently; sellers compete against one another for the consumer’s dollar, and consumers compete against one another to obtain the best price. d. Buyers and sellers are reasonably well informed about products and prices; well-informed buyers shop at the store with the lowest prices, and well-informed sellers match the lowest prices of their competitors to keep buyers. e. Buyers and sellers are free to enter into, conduct, or get out of business; this makes it difficult for producers to keep the market to themselves; producers must keep their prices competitive or risk losing business.

4. a. monopolistic competition b. oligopoly c. monopoly

5. a. natural monopoly; a market situation where the costs of production are minimized by having a single firm produce the product b. geographic monopoly; a monopoly based on the absence of other sellers in a certain geographical area c. technological monopoly; a monopoly based on ownership or control of a manufacturing method, process, or other scientific advance d. government monopoly; a monopoly owned and operated by the government

Section 7–2

1. inadequate competition

2. inadequate competition

3. adequate information

4. market failure

5. unemployed

6. market failure

7. public goods

8. externality

9. negative externality

10. positive externality

11. externality

12. market failure

13. distort

14. negative externality

15. positive externality

Section 7–3

I.A.1. monopolies and trusts

I.A.2. “to protect trade and commerce against unlawful restraint and monopoly”

I.A.3. to give the government greater power against monopolies; it outlawed price discrimination

I.B.1. a natural monopoly that is regulated so it cannot take advantage of the consumer

I.B.2. Local and state governments regulate cable television companies and water and electric utilities; to increase rates, these monopolies must make their case before a regulatory commission.

II.A. inadequate information and public goods

II.B.1. to require businesses to reveal certain information to the public

II.B.2. They prevent sellers from making false claims about their products.

II.C. any two of the following: good roads and highways, museums and libraries, education

III. the passing of laws to prevent “evil monopolies” and to protect the rights of workers; the passing of food and drug laws to protect people from false claims and harmful products; and government regulation of public utilities to prevent price gouging

Chapter 8: Employment, Labor, and WagesSection 8–1

1. The trade, or craft, union is an association of skilled workers who performed the same type of work; the industrial union is made up of all workers in a given industry.

2. a. Workers can strike, or refuse to work until management meets certain demands.

b. A boycott is a mass refusal to buy products from targeted employers or companies.


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3. a. Employers can use a lockout, which is a refusal to let employees work until they agreed to management demands.

b. Owners may set up company unions—unions organized, supported, or run by employers—to head off efforts by others to organize workers.

4. It exempted labor unions from prosecution under the Sherman Antitrust Act, so that they could not be charged with restraint of trade in their efforts to use boycotts to achieve their ends.

5. It established the right of unions to collective bargaining and created the National Labor Relations Board (NLRB), giving it the power to police unfair labor practices.

6. It set the first minimum wage, established time-and-a-half pay for overtime, and prohibited oppressive child labor.

7. It allowed states to pass right-to-work laws. A right-to-work law is a state law making it illegal to force workers to join a union as a condition of employment, even though a union may already exist.

8. a. A closed shop is an arrangement under which workers must join a union before they are hired. b. A union shop requires workers to join a union after being hired. c. A modified union shop gives workers the option to join a union after being hired. d. An agency shop does not require workers to join a union but does require them to pay union dues.

Section 8–2

I.A. a standard amount of pay given for work performed

I.B.1. workers in jobs that do not require people with special training and skills

I.B.2. workers in jobs that ask for enough mechanical skills to operate machines for which they need a minimum amount of training

I.B.3. workers who operate complex equipment and perform all of their tasks with little supervision

I.B.4. individuals that have the highest level of knowledge-based education and managerial skills

I.C. The theory states that the supply and demand for a worker’s skills and services determine the wage or salary.

I.D. A strong union may be able to force higher wages on some firms that would not be able to afford having work interruptions due to a strike.

I.E. A degree signals to employers that the individual possesses the intelligence, perseverance, and maturity to succeed.

II.A. negotiations that take place between labor and management over issues such as pay, working hours, health care coverage, and other job-related matters

II.B. to find a solution that both parties will accept by bringing in a neutral third person or persons to help settle a dispute

II.C. Arbitration is binding; mediation is not.

II.D. an agreement between union and management to have a neutral third party collect facts about a dispute and present nonbinding recommendations

II.E. to allow the government to negotiate with the union

II.F. A president can enter a labor-management dispute by publicly appealing to both sides to resolve their differences. A president can use emergency powers to end some strikes.

Section 8–3

1. unions

2. loyalty

3. prices

4. give-back

5. two-tier wage system

6. labor market

7. distribution

8. discrimination

9. equivalent

10. gender

11. set-aside contract

12. minimum wage

13. debate

14. constant dollars

Chapter 9: Sources of Government RevenueSection 9–1

I.A. Cost of production may rise; if people buy less, firms may cut back on production; unemployment may rise.

I.B. a relatively high tax designed to raise revenue and reduce consumption of a socially undesirable product such as liquor or tobacco


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I.C. It might reduce them by changing the incentives to save, invest, and work.

I.D. a consumer’s demand curve that is relatively inelastic

II.A. fewer exceptions, deductions, and exemptions

II.B. They should be simple and easy to understand.

II.C. It should be relatively easy to administer and reasonably successful at generating revenue.

III.A. Those who benefit from government goods and services should pay in proportion to the amount of benefits they receive.

III.B. It recognizes that societies cannot always measure the benefits derived from government spending; it assumes that people with higher incomes suffer less discomfort paying taxes than people with lower incomes.

IV.A. proportional, progressive, and regressive

IV.B. the tax rate that applies to the next dollar of taxable income

Section 9–2

1. individual income tax

2. borrowing

3. corporate income tax

4. payment withholding system

5. FICA

6. Medicare

7. borrowing

8. corporate income tax

9. excise taxes

10. intergovernmental revenue

11. sales tax

12. individual income tax

13. intergovernmental revenue

14. property tax

15. real estate

16. public utilities

Section 9–3

1. It summarizes income, tax withholdings, and other deductions.

2. Businesses benefited from accelerated depreciation and investment tax credits.

3. the personal income tax rate that applies whenever the amount of taxes paid falls below a designated level

4. The higher marginal tax brackets introduced in 1993 and the closure of some tax loopholes resulted in most people paying more taxes.

5. A 10 percent tax bracket was added.

6. The top four marginal tax brackets were reduced immediately rather than in 2006.

7. the election of Barack Obama, democratic control of the House and Senate, and a severe recession

8. Advantages: the simplicity it offers to taxpayer; it closes most tax loopholes; it reduces the need for tax accountants, tax preparers, and a large portion of the IRS; Disadvantages: it would remove many incentives (exemptions and deductions) built into the tax code; no one knows what rate is needed to replace the revenues collected under the current tax system; no clear answer as to whether a flat tax would further stimulate economic growth

9. Advantages: it is hard to avoid; it is widely spread; it is easy to collect; Disadvantages: it tends to be virtually invisible, so it is not obvious that the VAT is what raised the price of any item

10. the tax code is more complex than ever; unexpected events that require new expenditures; political change; difficult for politicians to give up power that can effect change through tax reform

Chapter 10: Government SpendingSection 10–1

1. goods and services

2. pork

3. public sector

4. private sector


6. transfer payments

7. grant-in-aid

8. resource allocation

9. distribution of income


11. private sector

12. tax burden

13. transfer payments


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Section 10–2

1. The budget is a rough estimate because various factors could affect the actual budget, such as an economic slow down or rise or events require unanticipated spending.

2. a 12-month financial planning period that may or may not coincide with the calendar year

3. an act of Congress that allows federal agencies to spend money for a specific purpose

4. A budget deficit is an excess of expenditures over revenues, while a budget surplus is an excess of revenues over expenditures.

5. Mandatory spending is authorized by law and continues without the need for annual approvals by Congress; discretionary spending must be approved by Congress in the annual budgetary process.

6. a health-care program available to all senior citizens regardless of income

7. a constitutional provision requiring that annual spending not exceed revenues

8. intergovernmental expenditures, public welfare, insurance and retirement funds for state employees

9. mayor, city council, county judge, or some other elected representative or body

10. elementary and secondary education

Section 10–3

I.A. the way expenditures are reported and changes in the economy

I.B. by generating a surplus

I.C. because trust fund balances represent money the government owes to itself

I.D. 15 to 20 percent

II.A. it diminishes

II.B. if it appears to spend money in a way that taxpayers would consider careless

II.C. When there is heavy government borrowing, it drives up the interest rates and causes private borrowers to be “crowded out” of the market because they are unable to afford the higher interest rates,

II.D. When the government taxes the high-income population and then spends the collected revenue on the poor, income is redistributed; the reverse is also true.

III.A. a “pay-as-you-go provision

III.B. the fact that the individual income tax became more progressive

III.C. Entitlements are considered “mandatory spending”; however, Congress can choose to revise them.

Chapter 11: Financial MarketsSection 11–1

1. the dollars that become available when people abstain from consumption

2. documents that represent a claim made on the income and property of the borrower

3. a network of savers, investors, and financial institutions that work together to transfer savings to investors

4. An institution that lends the funds that savers provide to borrowers, who put the money to work. Examples include depository institutions, life insurance companies, credit unions, pension funds, mutual funds, and finance companies.

5. a network of savers, borrowers, and financial institutions that work together to transfer savings to investors

6. governments and businesses

7. a. Finance companies make loans directly to consumers. b. Life insurance companies provide financial protection for survivors of the insured. c. Pension funds collect income and disburse payments to those persons eligible for retirement, old-age, or disability benefits.

8. invest consistently over long periods of time; stay with what you know; ignore investments that seem too complicated; consider the level of risk you can tolerate; know the reasons why you are investing

9. the degree to which the outcome is uncertain but a probable outcome can be estimated

Section 11–2

I.A. formal long-term contracts that require repayment of borrowed money and interest on the borrowed funds at regular intervals for a specified period of time

I.B. the coupon, the maturity, and the par value

I.C. changes in future interest rates and the risk that the company will default

I.D. the annual interest divided by the purchase price

I.E. the basic financial health of the issuer, the expected ability to make the future coupon


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and principal payments, and the issuer’s past credit history

II.A. their low cost; investors can select the length of maturity; they are insured by the FDIC

II.B. municipal bonds

II.C. A Treasury note has a maturity rate of 2 to 10 years, a Treasury bond has a maturity rate of 10 to 30 years, and a Treasury bill has a maturity rate of one year or less.

II.D. a long-term, tax-sheltered time deposit that can be set up as part of an individual retirement plan

III.A. a market in which money is loaned for more than one year

III.B. a market in which money is loaned for periods of less than one year

III.C. a market where only the original issuer can repurchase or redeem a financial asset

III.D. the liquidity the secondary market provides to investors

Section 11–3

1. equities

2. Efficient Market Hypothesis

3. portfolio diversification

4. mutual funds

5. 401(k) plan

6. securities exchange

7. New York Stock Exchange

8. over-the-counter market

9. Dow Jones Industrial Average

10. Standard & Poor’s 500

11. bull market

12. bear market

13. futures contract

14. option

Chapter 12: Macroeconomic PerformanceSection 12–1

1. the market value of all final goods and services produced within a country’s national borders in a year

2. a. intermediate products, whose value would otherwise be counted twice; b. secondhand sales because no new production is created;

c. nonmarket transactions because they are so difficult to measure and do not generate expenditures in the market; d. transactions in the underground economy because they are difficult to measure and are not socially acceptable

3. The GDP tells nothing about what makes up the output; it tells little about the impact of production on the quality of life; some GDP is produced to control activities that provide little utility or satisfaction.

4. a. Gross National Product (GNP); b. net national product (NNP); c. national income (NI); d. personal income (PI); e. disposable personal income (DPI)

5. a. consumer sector: households; b. investment sector: proprietorships, partnerships, and corporations; c. government sector: all local, state, and federal levels of government; d. foreign sector: all consumers and producers outside the United States

6. a macroeconomic model used to show aggregate demand by the consumer, investment, government, and foreign sectors

Section 12–2

I. It is required by the Constitution.

II.A. urban population and rural population

II.B. It is declining.

II.C. growing: southern and western areas; showing losses: older industrial northern and eastern

II.D. It puts different pressure on existing resources.

III.A.1. a type of bar graph that shows the breakdown of population by age and gender

III.A.2. the number of children and elderly people in the population for every 100 persons in the working-age bracket of ages 18 through 64

III.B.1. whites

III.B.2. African Americans, Hispanic Americans, Asian Americans, and Native Americans

III.C. fertility rate, life expectancy, and net immigration

III.D. It is expected to grow more slowly.

Section 12–3

1. poverty threshold

2. Lorenz curve

3. education

4. monopoly power


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5. discrimination

6. welfare

7. income assistance

8. food stamps

9. Earned Income Tax Credit

10. enterprise zones

11. workfare

12. negative income tax

Chapter 13: Economic InstabilitySection 13–1

I.A. A recessions is a set period of time during which real GDP declines for six months in a row; a depression is more severe and is characterized by mass unemployment, severe supply shortages, and excess capacity in manufacturing plants.

I.B. During an expansion, businesses invest more in capital goods. When businesses have expanded enough and decrease investments, layouts and even recessions can result.

I.C. increased profits for the innovator and investment by the competitors to catch up to the innovators

I.D. When “easy money” policies are in effect, interest rates are low and loans are easy to get, which encourages borrowing. Eventually, due to heavy borrowing, interest rates rise again, and borrowing and spending slow down.

I.E. positive: Great Britain discovering North Sea oil in the 1970s; negative: high oil prices in the U.S. in mid-2005, war

II.A. All of the banks were closed for a few days to prevent panic withdrawals by depositors.

II.B. Many people borrowed heavily, which made them vulnerable to such things as high interest rates and business fluctuations.

II.C. the Social Security Act of 1935; minimum wage; new unemployment programs; Security and Exchange Commission (SEC); Federal Deposit Insurance Corporation (FDIC)

II.D. Business cycles become more moderate with shorter recessions and longer periods of expansion.

III.A. a monthly statistical series that uses a combination of 10 individual indicators to forecast changes in real GDP

III.B. a mathematical model that uses algebraic equations to describe how the economy behaves

Section 13–2

I.A.1. a statistical series used to measure changes in the level of prices over time

I.A.2. a statistical series used to measure changes in the prices paid by urban consumers for a representative “basket” of goods and services

I.B.1. a representative selection of commonly purchased goods and services

I.B.2. a year that serves as the basis of comparison for all other years

I.C. by dividing the cost of every market basket by the base year market basket cost

I.D.1. Creeping inflation is a relatively long rate of inflation, usually 1 to 3 percent per year; hyperinflation is inflation in the range of 500 percent a year and above.

I.D.2. a period of stagnant economic growth coupled with inflation

I.E. a monthly series that reports prices received by domestic producers

II.A. As consumers, businesses, and governments converge on stores, they cause shortages and drive prices up.

II.B. Higher wages drive up the manufacturers’ cost of products, forcing them to raise prices.

II.C. a self-perpetuating spiral of wages and prices that becomes difficult to stop

IV. Inflation reduces the purchasing power of consumers, causes spending habits to change, can lead to increased speculating, and alters the distribution of income.

Section 13–3

1. unemployment rate

2. labor force

3. unemployed

4. labor force

5. unemployment rate

6. frictional unemployment

7. structural unemployment

8. outsourcing

9. technological unemployment


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10. cyclical unemployment

11. seasonal unemployment

12. GDP gap

13. misery index

14. uncertainty

Chapter 14: Money, Banking, and the FedSection 14–1

1. the privately owned, publicly controlled central bank of the United States

2. a moneyless economy that relies on trade

3. money that has an alternative use as an economic good or commodity

4. money by government decree

5. usually gold and silver deposits

6. because it was in limited supply

7. standard unit of currency

8. It must be portable, durable, divisible, and limited in supply.

9. a. medium of exchange: something accepted by all parties as payment for goods and services; b. measure of value: a common measuring stick that can be used to express worth in terms that most individuals understand; c. store of value: the quality that allows purchasing power to be saved until needed

10. a. M1 is the components of the money supply that most closely match money’s role as a medium of exchange: traveler’s checks, coins, currency, demand deposits, and other checkable deposits. b. M2 is a measure of money that includes those components most closely conforming to money’s role as a store of value. It includes M1, small denomination time deposits, savings deposits, and money market funds.

Section 14–2

I.A. Americans distrusted paper currency issued by the government because the nearly 250Zmillion Continental dollars printed during the Revolutionary War had become worthless by the end of the war.

I.B. The new Constitution allowed private banks to issue paper currency. The banks backed their currency with gold or silver.

I.C. First, each bank issued its own currency, resulting in hundreds of different kinds of notes in circulation. Second, banks were tempted to

issue too many notes because they could print more money whenever they wanted. Third, counterfeiting became a major problem due to the many different kinds of notes in circulation.

I.D. to finance the Civil War

I.E. The National Currency Act established the National Banking System (NBS), which was made up of national banks chartered by the federal government.

I.F. Gold certificates were paper currency backed by gold placed on deposit with the U.S. Treasury; silver certificates were paper currency backed by silver dollars and bullion placed on reserve with the Treasury.

II.A. The Federal Reserve System is owned by all national banks, which are required to become members, or part owners, of the Fed by purchasing shares of stocks in the system.

II.B. the banking industry was overextended due to overexpansion after the Civil War; people made frequent bank runs to withdraw their funds before a bank failed, further weakening banks

II.C. the Federal Deposit Insurance Corporation, which insures customers deposits up to a specified maximum

II.D. The size of the reserves are determined by a reserve requirement, which is the percentage of every deposit that must be set aside as legal reserves.

Section 14–3

1. member banks

2. Board of Governors

3. regulatory and supervisory

4. interest rates

5. district banks

6. FOMC

7. monetary policy

8. easy money policy

9. tight money policy

10. reserve requirement

11. open market operations

12. discount rate

13. currency

14. federal government


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Chapter 15: Economic Stabilization PoliciesSection 15–1

1. supply and demand

2. the total value of goods and services that all firms would produce in a specific period of time at various price levels

3. a graph curve that shows the amount of real GDP produced at various price levels

4. factors that increase the cost of production such as higher oil prices, higher interest rates, and lower labor productivity

5. the total value of all goods and services demanded at different price levels

6. a graph curve that shows the amount of total output, measured in terms of real GDP, that would be purchased at every possible price level

7. more saving and less spending; higher taxes and lower transfer payments

8. the point at which the level of real GDP is consistent with a given price level

9. the intersection of the aggregate supply and demand curves

10. how to make real GDP grow without unduly increasing the price level and thereby the rate of inflation

Section 15–2

I.A.1. to increase or decrease total demand in the economy

I.A.2. the federal government’s attempt to influence or stabilize the economy through taxing and government spending; derived from Keynesian economics

I.B. the business sector

I.C. They are an unfortunate but necessary step to stop further declines in economic activity.

I.D. programs that automatically trigger benefits if changes in the economy threaten income

I.E. automatic stabilizers

II.A. policies designed to stimulate output and lower unemployment by increasing production rather than by stimulating demand

II.B. by reducing the number of federal agencies; by spending less at the federal level; by implementing deregulation

II.C. Supply-siders argue that if tax rates were lower, individuals would be able to keep more of what

they earn, which would encourage them to work harder. They would then have more to spend, which would stimulate the economy.

II.D. a lack of experience with supply-side policies to know how they affect the economy

III. those who place primary importance on the role of money in the economy; they favor policies that lead to stable, long-term monetary growth at levels low enough to control inflation

Section 15–3

1. fiscal policies

2. discretionary

3. passive

4. structural

5. discretionary

6. lags

7. discretionary

8. monetary policy

9. economic politics

10. Congress

11. economic theories

12. demand-side

13. monetarists

14. supply-side

15. Council of Economic Advisers

Chapter 16: International TradeSection 16–1

1. because people produce and sell the goods and services they are best at, and then trade them for the goods and services that other people are best at

2. Exports are the goods and service that a country produces and sells to other nations. Imports are the goods and services that one country buys from other countries.

3. The sheer volume of international trade between the United States and other nations with such different geographic, political, and religious characteristics is proof that trade is beneficial. U.S. imports alone amount to $1,645 billion.

4. when a country can produce more of a good than another country

5. a diagram that shows the maximum combination of goods and services an economy can produce when all resources are fully employed


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6. when it has the ability to produce a product relatively more efficiently, or at a lower opportunity cost

7. the assumption that everyone will be better off specializing in the products they produce best

Section 16–2

I.A. A protective tariff is a tariff high enough to protect less-efficient domestic industries. A revenue tariff is a tariff high enough to generate revenue for the government without actually prohibiting imports.

I.B. to reduce the total supply of a product to keep prices high for domestic producers

II.A. Protectionists want trade barriers to protect domestic industries, while free traders want fewer or even no trade restrictions.

II.B.1. They argue that without trade barriers, a country could become too dependent on other countries and not have enough domestic supplies of oil and weapons.

II.B.2. They argue that the advantages of having a reliable source of domestic supply must be weighed against the disadvantages that the supply will be smaller and possibly less efficient than it would be with free trade. Also, it is difficult to determine which industries are critical to national defense.

II.C. the belief that new or emerging industries should be protected from foreign competition

II.D. they protect domestic jobs from cheap foreign labor

II.E.1. American dollars that go abroad generally come back again.

II.E.2. American industries that depend on exports for their jobs.

II.F. the difference between the money a country pays out to, and receives from, other nations when it engages in international trade

III.A. It administers trade agreements signed under GATT, settles trade disputes between nations, organizes trade negotiations, and provides technical assistance and training for developing countries.

III.B. Trade among the three countries has grown dramatically and allowed the partners to capitalize on their comparative advantages.

Section 16–3

1. foreign exchange markets

2. foreign exchange rate

3. fixed exchange rate

4. gold standard

5. flexible exchange rate

6. trade deficit

7. trade surplus

8. trade-weighted value of the dollar

9. trade imbalance

10. flexible exchange rates

11. trade surplus

Chapter 17: Developing CountriesSection 17–1

1. developing countries

2. poverty

3. industrialized countries

4. primitive equilibrium

5. transition

6. takeoff

7. semidevelopment

8. high development

9. population growth

10. crude birthrate

11. life expectancy

12. natural resources

13. external debt

14. corruption

Section 17–2

I.A. it must produce more than it consumes

I.B. a small unsecured loan, often as small as $50, made primarily to women who want to undertake an income-generating project

I.C.1. an international organization that offers advice to all countries on monetary and fiscal policies; also helps support currencies

I.C.2. an international corporation that makes loans and provides financial assistance advice to developing countries

I.D. by providing loans to needy countries

I.E. Expropriation—the taking over of foreign property without some sort of payment in


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return—is a sign of political instability. This policy makes it harder for developing nations to attract foreign capital.

II.A.1. an agreement in which two or more countries reduce trade barriers and tariffs among themselves

II.A.2. an agreement in which two or more countries abolish tariffs and trade restrictions among themselves and adopt uniform tariffs for nonmember countries

II.B. The EU is a single market because there are no internal barriers regulating the flow of workers, financial capital, or goods and services.

II.C. Indonesia, Malaysia, Singapore, the Philippines, and Thailand

II.D. OPEC limits the production and sale of gasoline to drive up prices.

Section 17–3

1. the economic system in which private citizens own and use the factors of production

2. Capitalism is the most remarkable engine of economic growth and capital accumulation the world has ever seen. Other countries are more aware of and want the wealth that capitalism can generate.

3. Privatization is the conversion of state-owned factories and other property to private ownership. It is important because entrepreneurs want to receive rewards for undertaking business ventures involving risk and people take better care of property they own.

4. independent decision-making, taking the initiative, price interpretation, and being able to stand alone in free markets

5. The Gosplan was the central authority that devised the plans and directed overall economic activity. It attempted to manage the economy by assigning production quotas to all Soviet industries and by introducing collectivization.

6. China’s Great Leap Forward was an attempt to revolutionize industrial and agricultural production almost overnight. It failed because the economy never came close to achieving the planned degree of industrialization.

7. Chile and Argentina

8. A black market is a market in which entrepreneurs and merchants sell goods illegally. Hungary’s experience with the black market made its transition to capitalism easier.

9. Japan has a loyal and dedicated work force and its people are able and willing to develop new technologies.

10. The heavy tax burden, costs of the welfare state, and massive government deficits cut into Sweden’s economic growth and led to the defeat of the Socialist Party.

Chapter 18: Global Economic ChangesSection 18–1

1. globalization

2. multinationals

3. outsourcing

4. General Agreement on Tariffs and Trade

5. interdependence

6. comparative advantage

7. interdependence

8. ECSC

9. economic integration

10. Free Trade Area of the Americas

11. globalization

Section 18–2

I.A. because of the growing demand for resources

I.B. 1.13 percent

I.C. parents consider children an asset rather than a cost

II.A. Examples of biomass include wood and wood waste, peat, municipal solid waste, straw, corn, tires, landfill gases, fish oils, and other waste. Biomass is important because it is a form of renewable energy.

II.B. Fossil fuels are being consumed at an alarming rate and at current consumption levels may only last for a few more generations.

II.C. fossil fuels such as coal, natural gas, and petroleum

II.D. The embargo caused prices to rise dramatically, so many countries increased their production and interest in alternative energy sources grew enormously.

III.A.1. because people and firms have an incentive to pollute

III.A.2. through legislated standards and economic incentives


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III.B. laws that specify minimum levels of purity for air, water, and auto emissions

III.C. The pollution taxes are designed to make it cheaper to make changes to lower pollution than to pay the pollution tax.

Section 18–3

1. a. State the problem or issue. b. Determine the personal or broad social goals to be attained. c. Consider the principal alternative means of achieving the goals. d. Select the economic concepts needed to understand the problem and use them to appraise the merits of each alternative. e. Decide which alternative best leads to the attainment of the most goals or the most important goals.

2. way of thinking that compares the costs of an action to its benefits

3. the cost of the next best alternative use of money, time, or resources when one choice is made rather than another

4. the ability to adjust to change gradually without the need for government intervention

5. a. collapsed under the weight of its own inefficiencies; b. many socialist countries have embraced capitalism and the discipline of the market system

6. ruthlessly efficient in providing only for those who produced or earned enough to buy the necessities of life; had little room for the elderly, ill, or incapacitated

7. modified to satisfy the economic goals of freedom, efficiency, equity, security, full employment, price stability, and economic growth


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