Question 1

Which of the following statements is an example of confusing association and causation?
A) Senator Jones believes that more tax revenue should be distributed to the poor.
B) A map includes roads, but not every restaurant, telephone pole, and
C) Interest rates rise when it rains, all other factors constant.
D) When the price of Coca-Cola increases, consumers buy more Pepsi, all other factors constant.

Accepted Answer

This statement shows a statistical association between two variables (rain and interest rates), but it does not necessarily mean that one causes the other. There could be confounding variables that affect both variables or a third variable causing both.

Question 2

Normative economics deals with ____ and positive economics deals with ____.
A) what should be; what is
B) fiction; fact
C) microeconomics; macroeconomics
D) negative aspects; positive aspects

Accepted Answer

Normative economics deals with what should be, which is based on opinions and values, while positive economics deals with what is, which is based on facts and data.

Question 3

The Secretary of Labor states that wage rates in the country have risen by 2 percent this past year. The head of a local labor union states that wage gains have not kept pace with the 3 percent rate of inflation. The Secretary's statement is a (n) ____ economic statement, and the labor head's statement is a (n) ____ economic statement.
A) normative; normative
B) normative; positive
C) positive; normative
D) positive; positive

Accepted Answer

The Secretary's statement is positive because it describes an observable fact about wage rates. The labor head's statement is also positive because it describes the relationship between wage gains and inflation, which is measurable and can be verified.

Question 4

If an economist finds that when consumer incomes increase, consumers buy more cars, Ceteris paribus , then  the economist is assuming
A) the price of cars must be decreasing.
B) all other things remain constant.
C) the price of gas must be decreasing.
D) the interest rate on car loans must be decreasing.

Accepted Answer

Ceteris paribus means "all other things being equal," so the economist is assuming that all other factors that could influence car purchases (such as gas prices, car loan interest rates, etc.) remain constant. The answer cannot be A, C, or D because the economist did not make any assumptions about those specific factors.

Question 5

The statement, "Violent crime has decreased in the last five years," is:
A) obviously wrong and, therefore, cannot be a positive statement.
B) normative since it can be answered by simply looking at the facts.
C) positive because it is testable.
D) not very interesting because all normative issues are of little importance.

Accepted Answer

The statement is positive because it is testable and can be verified by looking at crime statistics from the past five years.

Question 6

A positive economic statement is:
A) an opinion of an action that should be taken.
B) an action that will have a positive effect on the economy.
C) a statement testable by facts.
D) a claim that the speaker is positive will occur.

Accepted Answer

A positive economic statement is one that is testable by facts and can be proven to be true or false based on evidence. It is not an opinion or a claim of certainty about future events, but rather a statement about the current state of the economy or the likely outcomes of a specific policy or action.

Question 7

If individuals who sit in the back of the classroom receive lower grades on average than the rest of the class, does that mean that sitting in the back of a classroom causes one to perform poorly on exams?
A) Not necessarily. The reoccurrence of a certain relationship between two variables does not necessarily imply causation.
B) The reccurrence of such a relationship is definitely caused by the variation of another variable.
C) The reccurrence of such a relationship is sufficient evidence that sitting in the back of a classroom will lead to lower grades.
D) The reoccurrence of such a relationship is sufficient evidence that students who receive low grades prefer to keep a low profile and always sit in the back of the classroom.

Accepted Answer

The fact that there is a relationship between sitting in the back of the classroom and receiving lower grades does not necessarily mean that sitting in the back causes one to perform poorly on exams. There could be other variables at play, such as the student's motivation or attention during class. It is important to consider other potential factors before drawing a conclusion about causation.

Question 8

Which of the following is a normative statement?
A) A decrease in price leads to an increase in quantity consumed.
B) Incomes grow more rapidly in high-tax states than low-tax states.
C) People would be better off if government expenditures were higher.
D) People will buy less butter at $1.50 per pound than they will at $1 per pound.

Accepted Answer

A normative statement is a statement about what ought to be, based on opinions and value judgments. Option C is a normative statement because it expresses an opinion about what would be beneficial for people. The other options are positive statements, describing what is or what will be based on factual evidence.

Question 9

Which of the following is an example of a positive economic statement?
A) The economy's real output increased at about 3 percent last year and the unemployment rate decreased.
B) A central bank should not print too much money because inflation could result.
C) Congress should stabilize the social security system by raising taxes now.
D) The surplus of farm products should be distributed to the needy.

Accepted Answer

A is a positive economic statement because it is a fact-based statement about what has occurred in the economy in the past year - an increase in real output and a decrease in unemployment rate. The other options (B, C, and D) are normative statements because they are offering opinions about what should or should not be done.

Question 10

"As soon as a mayor announced his/her 'get tough on crime' policy on New Year's day, criminals got scared and the crime rate went down." Suppose that the lower crime rate was actually caused by freezing cold temperatures in January ⎯ it was just too cold for anybody to be out robbing other people. Which fundamental hazard of the economic way of thinking did the mayor make?
A) believing that what's good for one person is good for the whole group (the fallacy of composition)
B) failing to take into account the benefits of crime (the payoff fallacy)
C) believing that association is the same as causation
D) failing to understand the difference between positive and normative economics.

Accepted Answer

The mayor made the mistake of assuming that the announcement of his/her policy caused the decrease in crime, when in fact it may have been due to other factors, such as the weather. This is an example of the fundamental hazard of believing that association is the same as causation.

Question 11

Which one of the following is a positive economic statement?
A) An increase in the minimum wage will reduce employment for teenagers.
B) The minimum wage should be increased.
C) Social justice will be served by increasing the minimum wage.
D) Thoughtful people oppose an increase in the minimum wage.

Accepted Answer

A is a positive economic statement because it states a cause-and-effect relationship that would occur if the minimum wage were to increase, which can be tested and measured.

Question 12

Someone notices that sunspot activity is high just prior to recessions and concludes that sunspots cause recessions. This person has:
A) confused association and causation.
B) misunderstood the Ceteris paribus assumption.
C) used normative economics to answer a positive question.
D) built an untestable model.

Accepted Answer

The person has made the mistake of assuming that correlation (high sunspot activity and recessions occurring at the same time) implies causation (sunspot activity causing recessions). This confusion of association and causation is a common error in economic analysis.

Question 13

Select the normative statement that completes the following sentence: If the minimum wage is raised:
A) cost per unit of output will rise.
B) workers will gain their rightful share of total income.
C) the rate of inflation will increase.
D) profits will fall.

Accepted Answer

This statement is normative because it expresses a value judgment about what ought to happen if the minimum wage is raised. It assumes that workers deserve a "rightful share" of total income, and that raising the minimum wage will achieve this goal. The other statements are positive because they make predictions about what will happen without expressing a moral or ethical opinion.

Question 14

Select the normative  statement that completes the sentence: If wages rise more rapidly than productivity:
A) profits will fall.
B) workers will earn 3/4 of GDP.
C) the rate of inflation increases.
D) policymakers should impose a wage ceiling.

Accepted Answer

Normative statements are prescriptive and based on opinions or values, suggesting what should be done. Option D, suggesting policymakers should impose a wage ceiling, is a normative statement because it prescribes a course of action.

Question 15

Someone notices that sunspot activity is high just prior to recessions and concludes that sunspots cause recessions. This person has:
A) confused association and causation.
B) misunderstood the Ceteris paribus assumption.
C) used normative economics to answer a positive question.
D) built an untestable model.

Accepted Answer

The person has observed a correlation between sunspot activity and recessions, but has not established a causal relationship with empirical evidence. This is a classic example of confusing association with causation.

Question 16

"The government should provide health care for all citizens." This statement is an illustration of:
A) positive economic analysis.
B) correlation analysis.
C) fallacy of association analysis.
D) normative economic analysis.

Accepted Answer

The statement expresses a normative economic analysis. Normative economics is concerned with what ought to be, how things ought to be, or what goals ought to be sought. The statement expresses an opinion on what the government should do with regards to providing health care for its citizens, which is a normative viewpoint.

Question 17

"An increase in the federal minimum wage causes an increase in unemployment among teenagers" is a:
A) statement of positive economics.
B) statement of normative economics.
C) testable value judgment.
D) fallacy of composition.

Accepted Answer

The statement is a positive economics statement as it describes a cause-and-effect relationship between two variables that can be tested and observed using empirical evidence. It is not a normative economics statement because it does not make a value judgment about whether the minimum wage should be increased, but rather predicts the consequences of such an increase. It is also not a testable value judgment as it is based on empirical evidence and not on subjective opinions. Finally, it is not a fallacy of composition as it does not assume that what is true for one individual is true for a group or society as a whole.

Question 18

To be valid, an economic model must:
A) include every activity which occurs in the real world.
B) not be based on an abstraction of the real world.
C) be able to predict events occurring in the real world.
D) exclude any link to the real world.

Accepted Answer

An economic model must be able to predict events occurring in the real world in order for it to be valid. Including every activity in the real world is not necessary, as long as the model captures the key relationships and factors that drive economic behavior. A model that is not based on an abstraction of the real world would be limited in its usefulness, as it would not be able to capture the complexity of economic behavior. Excluding any link to the real world would render the model meaningless.

Question 19

Suppose an economist tests the theory that when the price of leather increases, fewer pairs of shoes are produced. He observes more shoes being produced when the price of leather increases. At the same time, a new production technology allowed for more shoes to be produced in less time. He has
A) has confused association and causation.
B) cannot test his theory because his observations violate the ceteris paribus assumption.
C) used normative economics to answer a positive question.
D) built a model with too many variables .

Accepted Answer

The economist's observations violate the ceteris paribus assumption, which means "all other things being equal." The introduction of new production technology is an external factor that wasn't accounted for, affecting the outcome and complicating the test of the original theory.

Quiz 1: Introducing the Economic Way of Thinking

Which of the following statements is an example of confusing association and causation?

Normative economics deals with and positive economics deals with .

If an economist finds that when consumer incomes increase, consumers buy more cars, Ceteris paribus , then the economist is assuming

The statement, "Violent crime has decreased in the last five years," is:

A positive economic statement is:

If individuals who sit in the back of the classroom receive lower grades on average than the rest of the class, does that mean that sitting in the back of a classroom causes one to perform poorly on exams?

Which of the following is a normative statement?

Which of the following is an example of a positive economic statement?

Which one of the following is a positive economic statement?

Someone notices that sunspot activity is high just prior to recessions and concludes that sunspots cause recessions. This person has:

Select the normative statement that completes the following sentence: If the minimum wage is raised:

Select the normative statement that completes the sentence: If wages rise more rapidly than productivity:

Someone notices that sunspot activity is high just prior to recessions and concludes that sunspots cause recessions. This person has:

"The government should provide health care for all citizens." This statement is an illustration of:

"An increase in the federal minimum wage causes an increase in unemployment among teenagers" is a:

To be valid, an economic model must:

Suppose an economist tests the theory that when the price of leather increases, fewer pairs of shoes are produced. He observes more shoes being produced when the price of leather increases. At the same time, a new production technology allowed for more shoes to be produced in less time. He has