Economic Theory & Principles Flashcards

According to the theory of comparative advantage, trade between two countries is beneficial when:

Answer: Each country specializes in goods with lower opportunity costs

Comparative advantage holds that countries gain from trade by specializing in goods they produce at relatively lower opportunity cost.

The velocity of money (V) in the Quantity Theory of Money equation MV = PQ represents:

Answer: The average number of times a unit of currency is spent in a period

Velocity measures how frequently money circulates through the economy to facilitate transactions.

Which of the following best describes 'moral hazard' in economics?

Answer: Risk-taking behavior that increases when one party is insulated from consequences

Moral hazard arises when insulation from risk (e.g., through insurance) leads to riskier behavior.

A rightward shift in the aggregate supply curve most likely results in:

Answer: Lower price levels and higher output

An increase in aggregate supply shifts the AS curve right, reducing the price level and increasing real GDP output.

The 'crowding out' effect refers to:

Answer: Government spending reducing private investment by raising interest rates

When government borrows to fund spending, it competes for loanable funds, pushing up interest rates and reducing private investment.

In the context of monetary policy, 'open market operations' involve:

Answer: Buying or selling government securities to influence the money supply

The Fed buys or sells Treasury securities to inject or withdraw reserves from the banking system, altering the money supply.

The concept of 'economies of scale' means that as output increases:

Answer: Long-run average costs fall

Economies of scale exist when expanding production causes long-run average costs to decrease.