Economics Trivia

1. What happens to public preferences with regards to bonds and money during a liquidity trap at the zero lower bound?

From Quiz The Liquidity 'Trap'ped?

Answer: They seem almost like interchangeable assets because of no returns

The zero lower bound, government bonds with an approx. 0% nominal yield rate, has been seen in the US economy after the onset of the 2008 recession. Since the public may prefer money over assets which offer returns (negligible), this situation is called the Liquidity Trap. Why the 'Trap', you ask? Well, play on, my dears.

From Quiz Supply and Demand

Answer: It will not shift.

A change in price is represented by a movement along the demand curve, not by a demand curve shift. The quantity demanded (not the demand itself) will decrease due to the price increase.

From Quiz Major Economic Thinkers

Answer: Jean-Baptiste Colbert

Colbert was economic adviser for Louis XIV. During his tenure, France practiced a specific brand of mercantilism named Colbertism.

From Quiz Elasticities

Answer: relatively inelastic

The Price Elasticity of Demand measures the responsiveness of the quantity demanded of a good to a change in its own price. PED = change in Quantity/change in Price. The Good X has a relatively inelastic demand because PED is less than 1 and greater than -1, which means that the relative change in the quantity demanded of the product is less than the relative change in its price. In the case of the relatively elastic demand the PED is greater than 1 or PED is less than -1, which means that the relative change in quantity demanded of a product is greater than the relative change in its price. If it's a perfectly elastic demand then the PED = infinity because the producer can sell all his output at the prevailing market price, however if he increases the price then the demand will fall to zero. The demand curve for this type of elasticity is a horizontal line parallel to the Quantity axis. In the case of the unitary elasticity the PED = 1 or PED = -1, which means that the relative change in quantity demanded of the product is equal to the relative change in its price.

From Quiz The Basics of Economics

Answer: Capital is produced by factors of production

Factors of production are the scare resources available for use in the production of goods and services to satisfy wants. Capital is a man-made resource.

From Quiz Basic Economics

Answer: increase

Notwithstanding this assertion, the quantity demanded of an "inferior good" will decrease when the price falls.

From Quiz Macroeconomics

Answer: 2

Okun's Law is named after Arthur Okun who discovered that unemployment rate and GDP are negatively correlated.

From Quiz Simpleton Learns Economics

Answer: Cardinalist & Ordinalist

Cardinalist approach says that utility can be measured in monetary units. Some economists even coined the word 'utils' for measurement units. The Ordinalist approach says the consumer need not know in specific units the utility, but it is enough if he can rank the various 'baskets of goods' to determine order of preference. Ordinalist approach can be further divided into "indifference curves" and "revealed preference hypothesis."

From Quiz More Economics Terms

Answer: Marginal utility

Diminishing marginal utility is when the product loses its usefulness as more is bought. An example is water. After a hot day outside mowing the lawn, you would probably be really thirsty. The first glass gives you full satisfaction, the second about half and so on. Soon if you don't stop, you'll have no use for it and theoretically you would pay to have it taken away.

From Quiz What Makes Your Money Work?

Answer: Alan Greenspan

The most powerful man in our economy then, he could cause markets to move merely on his words.

From Quiz Veblen Good or Veblen Bad?

Answer: Conspicuous Consumption

Thorstein Veblen used the phrase "Conspicuous Consumption" to describe the acquisition of expensive objects as a means to convey the relative wealth of the owner. Veblen's 1899 treatise "The Theory of the Leisure Class" postulated that the newly rich owners of industrial era businesses displayed their relative power and prestige by buying products that were expensive rather than of utility. Indeed, it is the very excesses of conspicuous consumption that defined the so-called "Gilded Age" of late 19th Century America. Showy and over the top consumption was likened to the displays of bright plumage by animals to signify attractiveness to females and to take the place of battles to establish the dominance of an alpha male. The concept of consumption for status continued well into the 20th and 21st Centuries and extended beyond the upper classes to the middle classes as well. The concept of "keeping up with the Joneses" or securing increased status from the ownership and display of possessions are examples of conspicuous consumption. Veblen also coined the less well-known corollary phrase of "Conspicuous Leisure" to describe the increasing amount of time and effort the 19th Century wealthy spent "playing". Veblen concluded that like the ostentatious possession, the engagement in long and intricate leisure activities served as a wealth status marker.

From Quiz Math for Economists

Answer: 4x - 6

To find the marginal cost, one must differentiate the cost function with respect to the variable in question, in this case x. By the exponent rule, the derivative of 2x^2 with respect to x yields 4x, and the derivative of -6x with respect to x yields -6. Using the summation rule of derivatives, the first derivative of the cost function is 4x - 6. 5 is the fixed cost of firm, and is not included in the marginal cost. It does not change as x increases, and is therefore irrelevant in terms of marginal thinking.

From Quiz The Liquidity 'Trap'ped?

Answer: Conventional Monetary Policy

Or technically speaking, the LM (Liquidity preference - Money supply) curve is horizontal on the IS-LM plane.

From Quiz Supply and Demand

Answer: It will shift to the left.

An increase in income decreases the demand for an inferior good (a good whose demand is inversely related to the change in income); thus, it shifts its demand curve to the left.

From Quiz Major Economic Thinkers

Answer: Adam Smith

The Scottish philosopher wrote the first modern work on economics in 1776. In the work he develops such concepts as the invisible hand and the division of labor.

From Quiz Elasticities

Answer: it falls

With elastic demand the Total Revenue changes in the opposite direction to the price i.e if the price increases then the Total Revenue falls. The Total Revenue would increase only if the demand for the good is inelastic and it would remain unchanged if the product has unitary elasticity.

From Quiz Macroeconomics

Answer: Laspeyres Index

CPI or Lapeyres Index uses fixed weights on price of various goods. CPI measures the price of the commodities that is bought by domestic consumers. Thus, CPI indexes vary between countries because different countries have different consumer needs, tastes and priorities, and thus form different 'national shopping baskets'.

From Quiz More Economics Terms

Answer: Bond

Principal is the amount borrowed; interest is the price paid for the use of another's money; bankruptcy is court granted permission to not pay some or all of its debts which forces it out of business.

From Quiz What Makes Your Money Work?

Answer: Hamilton

Men were men back then. He angered Vice President Aaron Burr, who then shot him in a duel.

From Quiz Math for Economists

Answer: Integration

The marginal cost is the derivative of the total cost, and therefore in order to find the total cost given the marginal cost, one must compute the anti-derivative, or indefinite integral. As per the fundamental theorem of calculus, integration can be reversed by differentiation. Using indefinite integrals to calculate the total cost of a firm given its marginal cost yields an infinite amount of positive fixed costs, as the constant of integration must be added to the total cost. Therefore, if the only given information is the marginal cost, it is impossible to compute the fixed cost of a firm.

From Quiz The Liquidity 'Trap'ped?

Answer: By lowering interest rates, thus giving an incentive for businesses to invest and consumers to borrow and spend

Of course, in a liquidity 'trap'ped economy, the interest rates cannot be further lowered. So, conventional monetary policy is ineffective.

From Quiz Supply and Demand

Answer: It will not shift.

A change in price is represented by a movement along the supply curve, not by a supply curve shift. The quantity supplied (not the supply itself) will increase due to the price increase.

From Quiz Major Economic Thinkers

Answer: Comparative Advantage

The London born economist, David Ricardo, published "On the Principles of Political Economy and Taxation" in 1817. In it he develops the idea that nations should produce what they are best at compared to other goods. From this specialization, along with freer trade, nations can increase the wealth of its producers and make goods more inexpensive for the consumer.

From Quiz Elasticities

Answer: it will be positive

Cross Elasticity of Demand is the responsiveness of the quantity demanded for Good B to a change in the price of Good A. If the two goods are close substitutes, e.g. green tea and black tea, then the CED will be positive if the price for either green or black tea goes up. For instance if the price of the black tea increases, then the consumers will switch to buying the green tea as its price remained unchanged. This will increase the demand for the green tea and therefore the CED will be positive. The CED will be negative in the case of complementary goods like car and petrol. If the price of the car increases then the demand for petrol will fall. The CED is equal to zero when the two goods are completely independent of each other e.g. coffee and car. Even if the price of the coffee increases there will be no effect on the demand for cars. The CED is equal to infinity if the two goods are perfect complements e.g. left and right shoe. One cannot be sold without the other. The ratio between the sales of two products will always be 1:1.

From Quiz The Big View on Economics

Answer: labor

The households provide the necessary workers needed by the firms. The factors for production market are part of the circular flow that also includes the markets of goods and services where the firms sell to the households.

From Quiz Basic Economics

Answer: Satisfy the most urgent needs which can be met within his/her income levels

Though Buddha said that one should renounce all wants to attain happiness, unfortunately, in real world, it appears that people are more inclined towards being jealous of well-to-do neighbours, or be resigned to their fate, as some of us Indians are.

From Quiz Macroeconomics

Answer: A one for one relation between inflation and the nominal interest rate

Thus a 1% increase in inflation rate results in a 1% increase in nominal interest rate.

From Quiz The Liquidity 'Trap'ped?

Answer: Since the interest rates won't rise, it fills the aggregate demand gap as there is no crowding out of the private sector

The Government should be spending a lot of money on useful things like infrastructure during a liquidity trap, especially if the bond rates are near 0%. Most economists who believe this theory say the desired fiscal stimulus for the 2008-11 crisis should have been around 1.5-$2 trillion over the course of 2 years.

From Quiz Supply and Demand

Answer: increase; decrease

If the supply decreases, the supply curve shifts to the left and thus increases the equilibrium price and decreases the equilibrium quantity. A decrease in equilibrium price and an increase in equilibrium quantity will result from a supply increase in which the supply curve will shift to the right. It is impossible that both will increase or decrease (ceteris paribus).

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