question
The phrase "no such thing as a free lunch" explains which accounting principle?
answer
People face trade-offs
question
In economics, what is the cost of something?
answer
what you give up to get it (opportunity cost)
question
how do rational people make decisions at the margin?
answer
by comparing the marginal costs and benefits of each decision
question
what makes people likely to respond to a policy change?
answer
Incentives: if it changes either the costs or benefits of their behavior
question
Markets are usually a good way to do what?
answer
organize economic activity?
question
When can the government improve market outcomes?
answer
when markets fail to produce efficient or fair outcomes
question
what does a country's standard of living depend on?
answer
its ability to produce goods and services
question
what happens to prices when the government prints too much money?
answer
they rise (inflation)
question
society faces a short-run tradeoff between what two things?
answer
inflation and unemployment
question
in the short run, when inflation falls, what happens to unemployment?
answer
it rises
question
what concept does economics primarily deal with?
answer
scarcity
question
what does scarcity mean?
answer
resources are limited
question
what is efficiency?
answer
how much a society can produce with its resources
question
what is equality?
answer
how evenly the benefits from using resources are distributed
question
what is efficiency vs equality?
answer
efficiency is how much a society can produce, equality is how evenly the benefits are distributed
question
what guides decisions in a market economy?
answer
self-interest and prices
question
what must we have for markets to work right?
answer
property rights
question
how does the government enforce property rights?
answer
providing police and courts
question
what causes a market to fail?
answer
not allocating resources efficiently
question
what is an externality?
answer
an external impact on the environment where economic efficiency may be enhanced by government intervention
question
what gives a person market power?
answer
the ability to influence market prices
question
what is productivity?
answer
the quantity of goods and services produced from each unit of labor input
question
what causes a movement along the demand curve?
answer
change in quantity demanded
question
what causes a change in quantity demanded?
answer
change in price
question
what causes a movement along the supply curve?
answer
change in quantity supplied
question
what causes a change in quantity supplied?
answer
change in price
question
what happens to the demand curve if the price of a compliment rises?
answer
demand decreases (shifts left)
question
what happens to the demand curve if the price of a substitute rises?
answer
demand increases (shifts right)
question
what happens to current demand if expected future prices increase?
answer
demand increases (shifts right)
question
what happens to demand when income increases for a normal good?
answer
demand increases (shifts right)
question
what happens to demand when income increases for an inferior good?
answer
demand decreases (shifts left)
question
what happens to demand when population increases?
answer
demand increases (shifts right)
question
what happens to supply when the price of an input increases?
answer
supply decreases (shifts left)
question
what happens to supply when there is an increase in the price of a substitute in production?
answer
supply decreases (shifts left)
question
what happens to supply when there is an increase in the price of a compliment in production?
answer
supply increases (shifts right)
question
what happens to current supply when expected prices rise?
answer
supply decreases (shifts left)
question
what causes a shortage?
answer
if the current price is below the equilibrium price
question
what causes a surplus?
answer
if the current price is above the equilibrium price
question
what is the single best measure of a society's economic well-being?
answer
Gross Domestic Product (GDP)
question
what is GDP?
answer
the market value of all final goods and services produced within a country in a given period of time
question
what is the equation for GDP?
answer
Y = C + I + G + NX
question
What does the "c" include in the equation for GDP?
answer
consumption (spending on goods and services by households)
question
What does the "I" include in the equation for GDP?
answer
investment (new housing, equipment, inventories, structures, etc.)
question
What does the "G" stand for in the equation for GDP?
answer
government spending
question
What does the "NX" include in the equation for GDP, and how do you calculate it?
answer
Net exports (exports - imports)
question
What happens if Debbie spends $200 to buy her husband dinner at the finest restaurant in Boston?
answer
Consumption and GDP rise by $200
question
What happens if Sarah spends $1800 on a new laptop to use in her publishing business. The laptop was built in China
answer
Investment rises by $1800, net exports fall by $1800, GDP is unchanged
question
What happens if General Motors builds $500 million worth of cars, but consumers only buy $470 million of them
answer
Consumption rises by $470 million, inventory investment rises by $30 million, and GDP rises by $500 million
question
What happens if Jane spends $1200 on a computer to use in her editing business. She got last year's model on sale for a great price from a local manufacturer
answer
Current GDP and investment do not change, because the computer was built last year
question
What is nominal GDP?
answer
the yearly production of final goods and services valued at current prices (price from the current year)
question
What is real GDP?
answer
is the yearly production of final goods and services valued at constant prices (price from the base year)
question
If the prices of all goods and services produced in the economy rose while the quantity of all goods and services stayed the same, which would rise?
answer
nominal GDP but not real GDP
question
When does nominal GDP equal real GDP?
answer
in the base year
question
If Suzie bought 10 chocolate bars for $2 each in 2000, 15 chocolate bars for $1 each in 2001, assuming that 2000 is the base year, what is her nominal GDP for 2001?
answer
Nominal GDP = (1 x 15) = 15
question
If Suzie bought 10 chocolate bars for $2 each in 2000, 15 chocolate bars for $1 each in 2001, assuming that 2000 is the base year, what is her real GDP for 2001?
answer
Real GDP = (2 x 15) = 30
question
What does CPI measure?
answer
the overall cost of the goods and services bought by a typical consumer
question
How do you calculate CPI?
answer
Price of the basket of goods and services in the given year divided by the price of the basket in the base year, then multiplied by 100
question
Why is CPI the most commonly used measure of prices and inflation?
answer
The CPI better reflects the goods and services bought by consumers
question
How do you calculate inflation from the CPI?
answer
(CPI in Current Year - CPI in Base Year)/(CPI in Base Year) x 100
question
How do you calculate todays prices from prices in an earlier era by using CPI?
answer
Amount in today's dollars = amount in year T dollars x (CPI today) / (CPI in year T)
question
What are the 3 problems with the CPI?
answer
Substitution bias, introduction of new goods, and unmeasured quality change
question
Why is Substitution Bias a problem for the CPI?
answer
the CPI ignores the fact that consumers substitute toward goods that have become relatively less expensive (overestimates inflation)
question
Why is introduction of new goods a problem for the CPI?
answer
the CPI uses a fixed basket of goods, it does not take into account the increased well-being of consumers created when new goods are introduced (overestimates cost of living)
question
What determines production?
answer
the total amount of goods and services produced
question
What is productivity?
answer
the total amount of goods and services produced per worker
question
How do you find productivity?
answer
ide the quantity of output by the number of hours worked (number of units produced per hour)
question
What happens when production grows rapidly?
answer
Living standards grow rapidly
question
High productivity means what for real GDP and income?
answer
real GDP is large and incomes are high
question
What is the catch-up effect?
answer
Other things equal, relatively poor countries tend to grow faster than relatively rich countries
question
How does population growth affect productivity?
answer
Higher population growth can depress economic prosperity by reducing the amount of physical capital per worker (but It also raises the pace of the technological process)
question
What is public saving?
answer
government tax revenue minus government spending (T - G)
question
What is private saving?
answer
the amount of income that households have left after paying for their taxes and consumption (Y-T-C)
question
What is national saving?
answer
the total income in the economy that is left after paying for consumption and government purchases (Private + Public Saving)
question
What are loanable funds?
answer
all income that is not used for consumption or government expenditures
question
What is the source of supply for loanable funds?
answer
Saving
question
What is the source of demand for loanable funds?
answer
investment
question
What is the interest rate?
answer
the price of a loan (the amount that borrowers pay for loans and the amount that lenders receive on their saving)
question
What will tax incentives for saving do to the supply and demand model for loanable funds?
answer
Increase the supply of loanable funds, reducing the equilibrium interest rate, and raising the equilibrium quantity of loanable funds
question
What will investment incentives do to the supply and demand model for loanable funds?
answer
Increase the demand for loanable funds, raising the equilibrium interest rate, and raising the equilibrium quantity of loanable funds
question
What will a government budget deficit do to the supply and demand model for loanable funds?
answer
decrease the supply of loanable funds, raising the equilibrium interest rate, and reducing the equilibrium quantity of loanable funds
question
Who is considered employed?
answer
anyone with a current job
question
Who is considered unemployed?
answer
anyone who is not employed, is available for work, has looked for work in the past 4 weeks, and anyone who is waiting to be recalled from a job from which they have been laid off
question
Who is considered to be in the labor force?
answer
people employed and people unemployed
question
Who is considered to be not in the labor force?
answer
Retirees, the disabled, etc.
question
How do you find the unemployement rate?
answer
number of unemployed / (number of employed + number of unemployed) x 100
question
How do you find the labor force participation rate?
answer
(Labor Force / Adult Population) x 100
question
What is considered commodity money?
answer
money that takes the form of a commodity with intrinsic value
question
What is considered fiat money?
answer
money without intrinsic value, used as money because of government decree
question
What kind of money is a gold coin considered to be?
answer
commodity money
question
What kind of money is the US dollar bill considered to be?
answer
Fiat money
question
What are the three functions of money?
answer
Medium of exchange, unit of account, store of value
question
What is a "medium of exchange"?
answer
an item buyers give to sellers when they want to purchase goods and services
question
What is a "unit of account"?
answer
the yardstick people use to post prices and record debts
question
What is a "store of value"?
answer
an item people can use to transfer purchasing power from the present to the future
question
What are the two components of the money supply?
answer
Currency and demand deposits
question
what is considered currency?
answer
the paper bills and coins in the hands of the (non-bank) public
question
What are demand deposits?
answer
balances in bank accounts that depositors can access on demand by writing a check
question
Who controls the money supply in the US?
answer
the federal reserve (FED)
question
What tools are available to control the money supply?
answer
Open-market operations, term auction, changes in reserve requirements
question
Which tool to control the money supply is used most often?
answer
Open-market operations
question
How do banks create money in a fractional reserve banking system?
answer
banks create money when they make loans
question
What is the reserve ratio?
answer
the percentage of deposits that the bank keeps as reserves (it then loans out the rest)
question
What is the money multiplier?
answer
the amount of money the banking system generates with each dollar of reserves
question
How do you find the money multiplier from the reserve ratio?
answer
Money Multiplier = 1 / R (where R = reserve ratio)
question
If the federal reserve buys bonds with new dollars, how much does the money supply increase by?
answer
Money supply increases = (amount of bonds) x (money multiplier)
question
What is the federal funds rate?
answer
The interest rate at which banks lend reserves to each other overnight, or for short-term loans of reserved
question
How are real variables measured?
answer
in goods
question
How are nominal variables measured?
answer
in monetary units
question
What is the classical dichotomy?
answer
The idea that nominal variables are heavily influenced by the quantity of money and that money is largely irrelevant for understanding the determinants of real variables
question
What tells us that real GDP and other real variables can be determined without knowing the level of the nominal money supply or the rate of inflation?
answer
the classical dichotomy
question
What is the quantity theory of money?
answer
the hypothesis that changes in prices correspond to changes in the monetary supply
question
What is the quantity equation?
answer
M x V = P x Y
question
What does "M" stand for in the quantity equation?
answer
the quantity of money
question
What does "V" stand for in the quantity equation?
answer
the velocity of money
question
What does "P" stand for in the quantity equation?
answer
the price level
question
What does "Y" stand for in the quantity equation?
answer
the quantity of output
question
What is the "P x Y" portion of the quantity equation also equal to?
answer
nominal GDP
question
How will velocity be effected if money changes hands more frequently?
answer
it will rise
question
How can you convert the quantity equation to account for percentages?
answer
(percent change in the money supply) + (percent change in velocity) = (percent change in the price level) + (percent change in output)
question
If the price level increased from 120 to 150, then what was is the inflation rate?
answer
25%
question
What is the classical theory of inflation also known as?
answer
the quantity theory of money
question
What happens when the money supply increases?
answer
There is an excess supply of money that will result in an increase in spending and later inflation
question
If the money supply increases by 5%, then what would happen to nominal GDP?
answer
it would also rise by 5%
question
What does monetary neutrality tell us?
answer
an increase in the money supply will increase the price level, but not real GDP
question
When is monetary neutrality most relevant?
answer
in the long run
question
What is inflation tax?
answer
the revenus a government creates by printing money
question
What are 3 costs of inflation?
answer
Menu costs, infation tax, shoeleather costs
question
What is it called when Inflation induces people to spend more resources maintaining lower money holdings?
answer
a shoeleather cost
question
High and unexpected inflation have a greater cost for whom?
answer
those who save than for those who borrow
question
How is wealth redistributed when infation is expected to be high, but turns out to be low?
answer
wealth is redistributed from debtors to creditors
question
How is wealth redistributed when infation is expected to be low, but turns out to be high?
answer
wealth is redistributed from creditors to debtors
question
What are short run economic fluctuations called?
answer
business cycles
question
What do we use to study fluctuations?
answer
the model of aggregate demand and aggregate supply
question
What does the aggregate demand curve show us?
answer
the quantity of all goods and services demanded at any given price level
question
What is the equation for aggregate demand?
answer
AD = C + I + G + NX
question
What do we assume about government spending in regards to aggregate demand?
answer
it is fixed by government policy
question
What happens to consumption, interest rates, and net exports when the price level increases?
answer
consumption decreases, interest rates rise, and there is a reduction in US net exports
question
What happens to consumption, interest rates, and net exports when the price level decreases?
answer
consumption increases, interest rates fall, and there is an increase in US net exports
question
How does an increase in consumption (or wealth) effect the aggregate demand curve?
answer
Increases quantity demanded (shifts aggregate demand curve to the right)
question
How does a decrease in consumption (or wealth) effect the aggreate demand curve?
answer
Decreases quantity demanded (shifts aggregate demand curve to the left)
question
How does a higher interest rate effect the aggregate demand curve?
answer
Decreases quantity demanded (shifts aggregate demand curve to the left)
question
How does a lower interest rate effect the aggregate demand curve?
answer
Increases quantity demanded (shifts aggregate demand curve to the right)
question
Why does a decrease in the price level increase the quantity demanded?
answer
it raises the real value of money and makes customers wealthier, encourages greater spending on investment goods, and stiumulates net exports
question
Why does an increase in the price level decrease the quantity demanded?
answer
reduces the real value of money and makes consumers poorer, discourages investment spending, and reduces net exports
question
What is one reason that the aggregate demand curve is downward sloping (as defined by the wealth effect) ?
answer
consumers are wealthier, which stimulates the demand for consumptin goods
question
What is one reason that the aggregate demand curve is downward sloping (as defined by the interest rate effect) ?
answer
interest rates fall, which stiumulates the demand for investment goods
question
What is one reason that the aggregate demand curve is downward sloping (as defined by the exchange rate effect) ?
answer
the currency depreciates, which stimulates the demand for net exports
question
Which way does the aggregate supply curve slope in the short run?
answer
upward
question
What is the slope of the aggregate supply curve in the long run?
answer
it is vertical
question
What does the slope of the aggregate supply curve in the long run represent/indicate?
answer
the classical dichotomy (it indicates monetary neutrality)
question
What are the three explanations for the upward slope of the short-run aggregate supply curve?
answer
sticky wages, sticky prices, and misperceptions
question
What does the sticky-price theory of the short-run aggregate supply curve suggest?
answer
when the price level is higher than expected, some firms will have lower than desired prices which leads to an increase in the aggregate quantity of goods and services supplied
question
What happens to the aggregate supply curve if the price level is higher than expected?
answer
it shifts right
question
What would cause price levels to rise in the short run?
answer
aggregate demand shifts right or aggregate supply shifts left
question
What would cause would cause prices and real GDP to rise in the short run?
answer
if aggregate demand shifts right
question
what would cause would cause prices to fall and output to rise in the short run?
answer
if short run aggregate supply shifts right
question
What would an increase in the money supply do to prices and GDP in the short run?
answer
it would cause them to rise
question
What does the misperceptions theory tell us?
answer
if the price level is higher than people expected, then some firms believe that the relative price of what they produce has increased, so they increase production
question
Usually, the short run aggregate supply curve only shifts in response to what?
answer
the aggregate demand curve
question
What causes a shift in the short run aggregate supply curve?
answer
supply shock
question
What are the two kinds of supply shocks?
answer
Adverse supply shocks and positive supply shocks
question
What do adverse supply shocks include (these shirt the short run aggregate supply curve)?
answer
things like increases in oil prices, a drought that destroys crops, and aggressive union actions
question
What do positive supply shocks include (these shirt the short run aggregate supply curve)?
answer
things like decreases in oil prices or an unexpected great crop season
question
What are some things that could cause a shift in the long-run aggregate supply curve?
answer
Technological progress, price of imported natural resources, and an increase in the capital stock
question
What can shifts in aggregate demand contribute to?
answer
fluctuations in output
question
What are the four steps to analyzing economic fluctuations?
answer
1. Determine whether the event shifts AD or AS. 2. Determine whether curve shifts left or right. 3. Use AD-AS diagram to see how the shift changes Y and P in the short run. 4. Use AD-AS diagram to see how economy moves from new SR eq'm to new LR eq'm
question
What happens when the stock market crashes?
answer
people feel poorer, consumption decreases, aggregate demand shifts to the left
question
What happens when there is a boom in th stock market?
answer
people feel wealthier, consumption increases, aggregate demand shifts to the right
question
What has the most important effect on the US economy in terms of aggregate demand?
answer
the interest rate
question
What has the least important effect on the USeconomy in terms of aggregate demand?
answer
the wealth effect
question
What has the most important effect on a small economy in terms of aggregate deamnd?
answer
the exchange-rate
question
What can fiscal policy influence in the long run?
answer
saving, investment, and growth
question
What does fiscal policy influence in the short run?
answer
the aggregate demand for goods and services
question
What are the two ways in which monetary policy can be described?
answer
in terms of the money supply or in terms of the interest rate
question
What are the two effects that fiscal policy can have on aggregate demand?
answer
the multiplier effect and the crowding out effect
question
What is the multiplier effect?
answer
additional shifts in aggregate demand that result when fiscal policy increases income and thereby increases consumer spending
question
What does the size of the multiplier effect depend on?
answer
Marginal propensity to consume (MPC)
question
What is the Marginal propensity to consume (MPC)
answer
the fraction of extra income that households consume rather than save
question
if MPC = 0.8 and income rises $100, how much would C rise?
answer
$80
question
How do you find the multiplier?
answer
1 - (1/MPC)
question
How do you find the change in aggregate demand by using the multiplier effect?
answer
1/(1-MPC) x change in government expenditures
question
What is the crowding out effect?
answer
The change in aggregate demand that results from fiscal expansion changing the interest rate
question
What happens when the FED buys bonds?
answer
aggregate demand increases
question
What happens whe the FED sells bonds?
answer
aggregate demand decreases
question
What happens if the gov't increases spending holding taxes constant or decreases taxes holding spending constant?
answer
there is a crowding out effect
question
What does the crowding out effect do to aggregate demand?
answer
it reduces the increase in aggregate demand
question
What does an increase in government spending do to aggregate demand?
answer
increasing government spending increases aggregate demand
question
What is physical capital?
answer
tools, machinery, equipment, and structures used to produce goods and services
question
What is human capital?
answer
the knowledge workers gain through training, education, and experience
question
When is the government running a budget surplus?
answer
when it spends less than it collects in tax revenues
question
What does investment include?
answer
Spending on new capital, such as machines, equipment, tools, or buildings
question
What could cause you to be structurally unemployed?
answer
if the number of jobs available in the labor market is insufficient to provide a job for everyone
question
What could cause you to be frictionally unemployed?
answer
if job seekers and employers need time to find one another (this kind of unemployement is usually brief)
question
What could cause you to be cyclically unemployed?
answer
a recession
question
When is an economy at its natural rate of unemployment?
answer
when there is no cyclical unemployment
question
How does money act as a medium of exchange?
answer
by providing an accepted method of payment for goods and services
question
how does money act as a unit of account?
answer
by providing buyers and sellers a common reference point for valuing goods and services
question
how does money act as a store of value?
answer
by providing a means of transferring purchasing power from the present to the future
question
Why would the federal reserve sell bonds?
answer
to decrease the money supply
question
Why would the federal reserve buy bonds?
answer
to increase the money supply
question
How do we calculate reserves?
answer
demand deposits - loans
question
how do we calculate required reserves?
answer
demand deposits x required reserve ratio
question
how do we calculate excess reserves?
answer
reserves - required reserves
question
What is the discount rate?
answer
the interest rate on loans that the federal reserve makes to banks
question
What happens to the federal funds rate then the Federal Reserve uses open market operations to buy government bonds?
answer
the federal funds rate decreases
question
What is the difference between nominal variables and real variables?
answer
Nominal variables are measured in monetary units ($), whereas real variables are measured in physical units
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