You explain to your roommate Surya, who makes beaded headbands, about an economic theory which asserts that consumers will purchase more of a product at lower prices than they will at higher prices. She contends that the theory is incorrect because over
the past two years she has lowered the price of her headbands and yet has seen a decrease in sales. How would you respond to Surya?
A) Surya is right; she has evidence to back her claim. The theory must be erroneous.
B) Surya is making the mistake of assuming that correlation implies causation.
C) I will explain to her that she is making the error of reverse causality: it is the decrease in demand that has caused her to lower her prices.
D) I will explain to her that there are some omitted variables that have contributed to a decrease in her sales such as changes in income.
Answer: D
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The Federal Reserve System provides banking services to ________ because ________
A) consumers and businesses; it is a central bank with responsibilities to the entire U.S. population B) banks and businesses; it is a central bank with the primary purpose of regulating financial institutions and markets C) commercial banks; it is a central bank with the primary purpose of regulating financial institutions and markets D) no one; it is a central bank with the primary purpose of regulating financial markets E) FDIC insured banks; they are the ones that have paid their membership fees and the only ones the U.S. central bank guarantees
Intermediate goods and services are those:
a. which are ready for final sale to the consumer. b. which are purchased for additional processing and resale. c. which are ready for final delivery to the retail stores. d. whose sales are included in Gross Domestic Product.
The horizontal axis of the aggregate demand and aggregate supply graph has the
a) the price level as measured by the CPI. b) unemployment rate. c) the price level as measured by the GDP deflator. d) output of goods and services.
If cost-push inflation occurs and the government adopts a "hands-off" policy approach, then according to the simple extended AD-AS model, in the long run the economy will:
A. Get back to where it started from B. Get stuck with high unemployment C. Experience an inflationary spiral D. Have a higher price level