How do economists approach the world? practice questions.

The 'invisible hand' is a metaphor describing how

• governments secretly influence market prices
• individuals' self-interest, guided by prices, benefits society
• central banks control the money supply without public awareness
• large firms collude to fix prices in their industry

Answer: individuals' self-interest, guided by prices, benefits society

The invisible hand describes how self-interested behaviour, coordinated by market prices, can unintentionally promote the interests of society as a whole.

Which view is most closely associated with John Maynard Keynes?

• Economies always return quickly to full employment without any intervention
• Steady growth of the money supply is the key to economic stability
• In a recession, governments should raise spending to boost demand
• Free trade should be abandoned in favour of national self-sufficiency

Answer: In a recession, governments should raise spending to boost demand

After the Great Depression, Keynes argued that economies can remain stuck below full employment, so governments should intervene by raising spending to stimulate demand.

An economic model is best described as

• an exact replica of the economy containing every relevant detail
• a normative statement about how the economy ought to work
• a set of government regulations governing markets
• a simplified representation of reality used to explain and predict

Answer: a simplified representation of reality used to explain and predict

Models deliberately simplify reality, keeping only the key variables, so that relationships can be analysed and predictions tested against evidence.

Which of the following statements could, in principle, be tested against real-world evidence?

• The government ought to spend more on healthcare
• A rise in the minimum wage will increase youth unemployment
• Income inequality is the most serious problem facing society
• Taxes on the wealthy should be raised

Answer: A rise in the minimum wage will increase youth unemployment

Only the claim about the minimum wage is a positive statement: it makes a factual prediction that data can support or refute, whereas the others express value judgements.

An economy's production possibilities curve is drawn as a straight, downward-sloping line. What does this shape imply?

• Resources become steadily less suited to the second good as more of it is produced
• Every point on the line leaves some resources unemployed, unlike a curved boundary
• Resources are equally suited to producing either good, so opportunity cost is constant
• The economy can produce more of both goods at once without sacrificing anything

Answer: Resources are equally suited to producing either good, so opportunity cost is constant

The slope of the curve is the opportunity cost, so a constant slope means a constant trade-off. The familiar bowed-out shape arises only when resources are not equally suited to both uses.

An economy produces only wheat and machinery. A new technology raises productivity in machinery production only. Which change to the production possibilities curve shows this best?

• The whole curve shifts outwards, with both intercepts rising by the same proportion
• The curve pivots outwards along the machinery axis, with the wheat intercept unchanged
• The economy moves from a point inside the curve to a point on the existing curve
• The curve pivots inwards along the wheat axis, with the machinery intercept unchanged

Answer: The curve pivots outwards along the machinery axis, with the wheat intercept unchanged

Only the maximum quantity of machinery changes, so only that intercept moves. A parallel outward shift would require an improvement affecting the production of both goods.