GED Social Studies Test: Microeconomics

By Achim K. Krull, Murray Shukyn

The GED Social Studies test will expect you to know a few fundamentals about microeconomics. On a microeconomic level, individuals make decisions about savings, spending, starting or closing businesses, and even investments. If enough people make decisions to buy a particular product, that may influence prices to rise or manufacturers to increase production of that product.

Similarly, new products that don’t find sufficient customers will quickly disappear in accordance with consumer choice theory. Adam Smith’s “invisible hand” will determine success or failure. That “invisible hand” also influences the price of a product because a high demand coupled with a limited supply raises its price. As more manufacturers produce that product, increasing supply results in falling prices. Microeconomics also studies wages, employment, personal debt, and consumer choice.

Wages and employment

A number of forces influence both employment levels and employee income levels. Government can affect employment levels by imposing various taxes and by setting minimum wages. Unions can influence wage levels and job security through collective bargaining. An over- or under-supply of workers in a given economic sector has the same effect on wages as demand for goods has on prices.

If unemployment is high and many workers are available, wages tend to remain low and stable. If unemployment is low, the reduced availability of workers applies an upward pressure on wages. Social action, such as the demand for a $15/hour minimum wage, can also create pressures to which employers respond, even without an accompanying shortage of labor.

A law that increases the minimum wage is most likely to

  • (A) increase job security

  • (B) lead to a recession

  • (C) discourage employers from hiring more workers

  • (D) encourage employers to hire more workers

A law that increases the minimum wage would probably cause employers to raise prices or lay off workers to mitigate the loss of profit from having to pay higher wages, so Choice (C) is the best answer.

Debt

Debt also affects the economy. Most people can’t afford to pay cash for major purchases, so they borrow money to finance cars, homes, and even higher education. As long as debtors are able to repay their loans, the debt isn’t a problem. The issue is bad debts, debts that can’t be repaid or recovered. The crash in 2008 was caused in part because of a high volume of bad debts.

Lenders had issued a large number of variable rate mortgages to individuals who couldn’t afford their monthly payments when interest rates increased. In addition, lenders often approved loans in excess of the value of the homes used to secure those loans. When housing prices dropped, the value of many homes wasn’t enough to cover the balance remaining on the loan.

When homeowners couldn’t make their monthly mortgage payments, they had to sell their homes, often for less than they had paid for them and less than they owed on their mortgages. Or they simply abandoned their homes, leaving the bank to deal with the financial shortfall. Banks foreclosing on these mortgages lost money — so much money that they faced serious financial problems.

Financial regulation can limit risks from certain types of loans and discourage speculation in the housing market by requiring minimum down payments, restricting the degree of debt leverage, or changing tax laws to discourage speculation and riskier loan types.

Consumer choice

Governments often use taxes to influence consumer behavior on a microeconomic scale. For example, the government charges a “sin” tax on tobacco and alcohol sales to discourage the use of these substances and collect money to help offset the medical and related costs (including lost tax revenue) associated with the consumption of these substances.

The government also uses a host of tax incentives to encourage certain behaviors, such as owning a home, investing in green energy products, making charitable contributions, obtaining health insurance, pursuing educational opportunities, and much more. These incentives come in the form of tax deductions and tax credits. A tax deduction is an amount you subtract from your income before calculating the taxes due on that income. A tax credit is an amount you subtract directly from the amount of taxes due.

A sin tax is designed to

  • (A) discourage certain consumer behaviors

  • (B) encourage certain consumer behaviors

  • (C) punish consumers

  • (D) reward consumers

A sin tax is designed to discourage certain consumer behaviors, such as the purchase of potentially harmful products, so Choice (A) is the correct answer.