question
explain how scarcity and choice are central to the study of economics. why do we have to make choices?
answer
Everything is scarce and the economy is a system that coordinates choices in production to choices in consumption.
question
define economic system
answer
The economy is a system that coordinates choices about production with choices about consumption, and distributes goods and services to the people who want them.
question
identify the four factors of production
answer
Land, labor, capital and entrepreneurship
question
explain the importance of opportunity cost in individual choice and decision making
answer
- Opportunity cost -what you must give up in order to
get it.
-with every choice, an alternative is forgone—money
or time spent on one thing can't be spent on another.
- people must know what they are giving up by making a decision
get it.
-with every choice, an alternative is forgone—money
or time spent on one thing can't be spent on another.
- people must know what they are giving up by making a decision
question
explain how unemployment and inflation change over the business cycle
answer
-The business cycle is the short-run
alternation between economic downturns,
known as recessions, and economic upturns,
known as expansions.
-when in a recession unemployment increases and inflation must always be followed by contraction.
- unemployment is the total number of people who are actively looking for work but aren't currently employed.
alternation between economic downturns,
known as recessions, and economic upturns,
known as expansions.
-when in a recession unemployment increases and inflation must always be followed by contraction.
- unemployment is the total number of people who are actively looking for work but aren't currently employed.
question
explain how a production possibilities curve demonstrates opportunity cost
answer
- The production possibilities curve
illustrates the trade-offs facing an economy
that produces only two goods. It shows the
maximum quantity of one good that can be
produced for each possible quantity of the
other good produced.
- it demonstrates what you must give up to produce multiple items.
illustrates the trade-offs facing an economy
that produces only two goods. It shows the
maximum quantity of one good that can be
produced for each possible quantity of the
other good produced.
- it demonstrates what you must give up to produce multiple items.
question
explain why the production possibilities curve is bowed out
answer
- The bowed-out shape of the production possibilities
curve reflects increasing opportunity cost. In this
example, to produce the first 20 fish, Tom must give up
5 coconuts. But to produce an additional 20 fish, he
must give up 25 more coconuts.
GRAPH
curve reflects increasing opportunity cost. In this
example, to produce the first 20 fish, Tom must give up
5 coconuts. But to produce an additional 20 fish, he
must give up 25 more coconuts.
GRAPH
question
calculate opportunity costs, comparative advantage and who should specialize in what
answer
-An individual has a comparative
advantage in producing a good or service if
the opportunity cost of producing the good or
service is lower for that individual than for
other people.
- people should specialize in the activity they are best at.
advantage in producing a good or service if
the opportunity cost of producing the good or
service is lower for that individual than for
other people.
- people should specialize in the activity they are best at.
question
explain how comparative advantage leads to gains from trade in the global marketplace
answer
-If one country is better at producing a specific item then each country can only produce that item and trade to recieve the items they can not produce.
question
explain the difference between movements along the demand curve and shifts of the demand curve
answer
- a movement along the demand curve illustrates an increase or decrease in the price of a good and a shift of the demand curve illustrates a change in the quantity demanded of an item.
question
identify the factors that shift the demand curve
answer
-■Changes in the prices of related goods or services
■Changes in income
■Changes in tastes
■Changes in expectations
■Changes in the number of consumers
■Changes in income
■Changes in tastes
■Changes in expectations
■Changes in the number of consumers
question
explain what happens to the demand of x if the price of y changes
answer
-Two goods are substitutes if a rise in the
price of one of the goods leads to an increase
in the demand for the other good.
- Two goods are complements if a rise in the
price of one of the goods leads to a decrease
in the demand for the other good.
price of one of the goods leads to an increase
in the demand for the other good.
- Two goods are complements if a rise in the
price of one of the goods leads to a decrease
in the demand for the other good.
question
explain how a change in price is illustrated with a supply curve
answer
-As price rises, the quantity supplied rises.
-the change in price is showed through the y axis
-the change in price is showed through the y axis
question
identify the factors that shift the supply curve
answer
-■Changes in input prices
■Changes in the prices of related goods or services
■Changes in technology
■Changes in expectations
■Changes in the number of producers
■Changes in the prices of related goods or services
■Changes in technology
■Changes in expectations
■Changes in the number of producers
question
explain how in the case of a shortage or surplus, how price moves the market back to equilibrium
answer
-the prices naturally change. in a shortage the prices would rise and in a surplus prices would fall.
- The surplus offers an
incentive for those frustrated would-be sellers to offer a lower price in order to poach
business from other producers and entice more consumers to buy.
- Shortage- In this situation, either buyers will offer more than the prevailing price or sellers will realize that they can charge higher prices.
- The surplus offers an
incentive for those frustrated would-be sellers to offer a lower price in order to poach
business from other producers and entice more consumers to buy.
- Shortage- In this situation, either buyers will offer more than the prevailing price or sellers will realize that they can charge higher prices.
question
explain what happens to the demand for x when income changes (know for both normal & inferior goods)
answer
- if income increases then the demand will increase; if income decreases then demand will decrease. (normal)
- if income increases then demand will decrease; if income decreases then demand will increase. (inferior)
- if income increases then demand will decrease; if income decreases then demand will increase. (inferior)
question
identify what happens to equilibrium price and equilibrium quantity when demand and/or supply shifts.
answer
- A decrease in supply leads to a movement along the demand curve to
a higher equilibrium price and lower equilibrium quantity. (look at graphs)
a higher equilibrium price and lower equilibrium quantity. (look at graphs)
question
explain how price controls can create problems and make a market inefficient
answer
- Price ceilings often lead to inefficiency in the form of inefficient allocation to
consumers: people who want the good badly and are willing to pay a high price don't
get it, and those who care relatively little about the good and are only willing to pay a
relatively low price do get it.
- Price ceilings typically lead to inefficiency in
the form of wasted resources: people expend money, effort, and time to cope with
the shortages caused by the price ceiling.
- Price ceilings often lead to inefficiency in thatthe goods being offered are of inefficiently low quality: sellers offer low quality goods at a low price even though buyers would prefer a higher quality at a higher price.
- A black market is a market in which goods or services are bought and sold illegally—
either because it is illegal to sell them at all or because the prices charged are legally
prohibited by a price ceiling.
consumers: people who want the good badly and are willing to pay a high price don't
get it, and those who care relatively little about the good and are only willing to pay a
relatively low price do get it.
- Price ceilings typically lead to inefficiency in
the form of wasted resources: people expend money, effort, and time to cope with
the shortages caused by the price ceiling.
- Price ceilings often lead to inefficiency in thatthe goods being offered are of inefficiently low quality: sellers offer low quality goods at a low price even though buyers would prefer a higher quality at a higher price.
- A black market is a market in which goods or services are bought and sold illegally—
either because it is illegal to sell them at all or because the prices charged are legally
prohibited by a price ceiling.
question
identify the flows and participants of the circular flow diagram of the economy
answer
- This diagram represents the flows of money and goods and services in the economy. In the markets for goods and services, households purchase goods and services from firms, generating a flow of money to the firms and a flow of goods and services to the households. The money flows back to households as firms purchase factors of production from the households in factor markets.
- SEE GRAPH
- SEE GRAPH
question
explain what gross domestic product or GDP is, and the three ways of calculating it
answer
- Gross domestic product, or GDP, is the total value of all final goods and services
produced in the economy during a given year.
- to add up the value of all the final goods and services
produced in the economy—a calculation that excludes the value of intermediate goods
and services.
- Another way to calculate GDP is
by adding up aggregate spending on domestically produced
final goods and services.
- A final way to calculate GDP is to add up all the income earned by factors of production in the economy—the wages earned by labor; the interest earned by those who lend their savings to firms and the government; the rent earned by those who lease their land or structures to firms; and the profit earned by the shareholders, the owners of the firms' physical capital.
produced in the economy during a given year.
- to add up the value of all the final goods and services
produced in the economy—a calculation that excludes the value of intermediate goods
and services.
- Another way to calculate GDP is
by adding up aggregate spending on domestically produced
final goods and services.
- A final way to calculate GDP is to add up all the income earned by factors of production in the economy—the wages earned by labor; the interest earned by those who lend their savings to firms and the government; the rent earned by those who lease their land or structures to firms; and the profit earned by the shareholders, the owners of the firms' physical capital.
question
identify why is it important not to double count
answer
- if we were to double count products then our over all GDP would not be correct.
question
identify where residential construction falls under in calculating GDP
answer
- building the house does cost money, but if we counted all the supplies used it would end up being double counted with the sale of thee house.
question
explain inventory investment
answer
- Inventories, then, are goods and raw materials that firms hold to facilitate their operations. The national accounts count this investment spending—spending on new productive physical capital, such as machinery and buildings, and on changes in inventories—as part of total spending on goods and services.
question
identify under which (if any) category of GDP, a certain transaction would get recorded
answer
- A household is a person or group of people who share income.
- A firm is an organization that produces goods and services for sale.
- Product markets are where goods and services are bought and sold.
- Factor markets are where resources, especially capital and labor, are bought
and sold.
- Consumer spending is household spending on goods and services.
- A firm is an organization that produces goods and services for sale.
- Product markets are where goods and services are bought and sold.
- Factor markets are where resources, especially capital and labor, are bought
and sold.
- Consumer spending is household spending on goods and services.
question
how unemployment is measured (what are the different types of unemployment)
answer
- Unemployed people are actively looking for work but aren't currently employed.
- The unemployment rate, defined as the percentage of the total number of people
in the labor force who are unemployed, is calculated as follows:
(12-2) Unemployment rate = Number of unemployed workers/ Labor force × 100
- Discouraged workers are nonworking people who are capable of working but have
given up looking for a job due to the state of the job market.
- Marginally attached workers would like to be employed and have looked for a job in
the recent past but are not currently looking for work.
- The underemployed are people who work part time because they cannot find
full-time jobs.
- The unemployment rate, defined as the percentage of the total number of people
in the labor force who are unemployed, is calculated as follows:
(12-2) Unemployment rate = Number of unemployed workers/ Labor force × 100
- Discouraged workers are nonworking people who are capable of working but have
given up looking for a job due to the state of the job market.
- Marginally attached workers would like to be employed and have looked for a job in
the recent past but are not currently looking for work.
- The underemployed are people who work part time because they cannot find
full-time jobs.
question
explain how discouraged workers affect the calculation of the unemployment rate
answer
- Because it does not count discouraged workers, the measured unemployment rate may understate the percentage of people who want to work but are unable
to find jobs.
to find jobs.
question
identify the three different types of unemployment and their causes
answer
-Frictional unemployment is unemployment due to the time workers spend in job search.
-Structural unemployment is unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage rate.
- Cyclical unemployment is the deviation of the actual rate of unemployment from the
natural rate.
-Structural unemployment is unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage rate.
- Cyclical unemployment is the deviation of the actual rate of unemployment from the
natural rate.
question
identify the factors that determine the natural rate of unemployment
answer
- The natural rate of unemployment is the unemployment rate that arises from the
effects of frictional plus structural unemployment.
- Natural unemployment =
Frictional unemployment + Structural unemployment
- Actual unemployment =
Natural unemployment + Cyclical unemployment
effects of frictional plus structural unemployment.
- Natural unemployment =
Frictional unemployment + Structural unemployment
- Actual unemployment =
Natural unemployment + Cyclical unemployment
question
explain how the wealth effect and interest rate effect explain the aggregate demand curve's negative slope
answer
- The wealth effect of a change in the aggregate price level is the change in consumer spending caused by the altered purchasing power of consumers' assets. Because of
the wealth effect, consumer spending, C, falls when the aggregate price level rises, leading to a downward -sloping aggregate demand curve.
- So a rise in the aggregate price level depresses investment spending, I, and consumer spending, C, through its effect on the purchasing power of money holdings, an effect known as the interest rate effect of a change in the aggregate price level. This also leads to a downward -sloping aggregate demand curve.
the wealth effect, consumer spending, C, falls when the aggregate price level rises, leading to a downward -sloping aggregate demand curve.
- So a rise in the aggregate price level depresses investment spending, I, and consumer spending, C, through its effect on the purchasing power of money holdings, an effect known as the interest rate effect of a change in the aggregate price level. This also leads to a downward -sloping aggregate demand curve.
question
identify what factors cause a shift of the aggregate demand curve
answer
- Changes in expectations
If consumers and firms become more optimistic, . . . . . aggregate demand increases.
If consumers and firms become more pessimistic, . . . . aggregate demand decreases.
Changes in wealth
If the real value of household assets rises, . . . . . . aggregate demand increases.
If the real value of household assets falls, . . . . . . aggregate demand decreases.
Size of the existing stock of physical capital
If the existing stock of physical capital is relatively small, aggregate demand increases.
If the existing stock of physical capital is relatively large, aggregate demand decreases.
Fiscal policy
If the government increases spending or cuts taxes, aggregate demand increases.
If the government reduces spending or raises taxes, aggregate demand decreases.
Monetary policy
If the central bank increases the quantity of money, . . aggregate demand increases.
If the central bank reduces the quantity of money, . . aggregate demand decreases.
If consumers and firms become more optimistic, . . . . . aggregate demand increases.
If consumers and firms become more pessimistic, . . . . aggregate demand decreases.
Changes in wealth
If the real value of household assets rises, . . . . . . aggregate demand increases.
If the real value of household assets falls, . . . . . . aggregate demand decreases.
Size of the existing stock of physical capital
If the existing stock of physical capital is relatively small, aggregate demand increases.
If the existing stock of physical capital is relatively large, aggregate demand decreases.
Fiscal policy
If the government increases spending or cuts taxes, aggregate demand increases.
If the government reduces spending or raises taxes, aggregate demand decreases.
Monetary policy
If the central bank increases the quantity of money, . . aggregate demand increases.
If the central bank reduces the quantity of money, . . aggregate demand decreases.
question
identify what federal government policy has a direct impact on aggregate demand
answer
Fiscal Policy
question
explain how the aggregate supply curve illustrates the positive relationship between the aggregate price level and the quantity of aggregate output supplied in the economy
answer
they use the overall price level of final goods and services in the economy and the the total quantity of final goods and services, or aggregate output, producers are willing to supply.
question
identify what factors can shift the aggregate supply curve
answer
identify what factors can shift the aggregate supply curve
Changes in commodity prices (ex. oil)
If commodity prices fall, . . . . . . short - run aggregate supply increases.
If commodity prices rise, . . . . . . short - run aggregate supply decreases.
Changes in nominal wages (dollar amount of the wage paid)
If nominal wages fall, . . . . . . short - run aggregate supply increases.
If nominal wages rise, . . . . . . short - run aggregate supply decreases.
Changes in productivity (An increase in productivity means that a worker can produce more units of output with the same quantity of inputs.)
If workers become more productive, . . . . . . short - run aggregate supply increases.
If workers become less productive, . . . . . . short - run aggregate supply decreases.
Changes in commodity prices (ex. oil)
If commodity prices fall, . . . . . . short - run aggregate supply increases.
If commodity prices rise, . . . . . . short - run aggregate supply decreases.
Changes in nominal wages (dollar amount of the wage paid)
If nominal wages fall, . . . . . . short - run aggregate supply increases.
If nominal wages rise, . . . . . . short - run aggregate supply decreases.
Changes in productivity (An increase in productivity means that a worker can produce more units of output with the same quantity of inputs.)
If workers become more productive, . . . . . . short - run aggregate supply increases.
If workers become less productive, . . . . . . short - run aggregate supply decreases.
question
explain why the aggregate supply curve is different in the short run from the long run (what adjustments happen in the long-run, why the LRAS is vertical)
answer
all prices, including nominal wages, were fully flexible.
The long -run aggregate supply curve is vertical because changes in the aggregate price level have no effect on aggregate output in the long run.
The long -run aggregate supply curve is vertical because changes in the aggregate price level have no effect on aggregate output in the long run.
question
explain why the aggregate supply curve is different in the short run from the long run (what do sticky wages have to do with anything)
answer
So in the long run, nominal wages—like the aggregate price level—are flexible, not sticky.
question
define potential GDP
answer
all prices, including nominal wages, were fully flexible.
question
explain the difference between short-run and long-run macroeconomic equilibrium
answer
Short Run: the point at which the quantity of aggregate output supplied is equal to the quantity demanded by domestic households, businesses, the government, and the rest of the world.
Long Run: where the short -run equilibrium aggregate output is equal to potential output, YP.
Long Run: where the short -run equilibrium aggregate output is equal to potential output, YP.
question
define stagflation
answer
combination of inflation and falling aggregate output
question
explain the causes and effects of demand shocks and supply shocks
answer
Demand Shock- An event that shifts the aggregate demand curve, such as a change in expectations or wealth, the effect of the size of the existing stock of physical capital, or the use of fiscal or monetary policy
Supply Shock- An event that shifts the short -run aggregate supply curve, such as a change in commodity prices, nominal wages, or productivity
Supply Shock- An event that shifts the short -run aggregate supply curve, such as a change in commodity prices, nominal wages, or productivity
question
determine if an economy is experiencing a recessionary gap or an inflationary gap
answer
Recessionary gap- aggregate output is below potential output. In the face of high unemployment, nominal wages eventually fall, as do any other sticky prices.
Inflationary gap- aggregate output is above potential output. In the face of low unemployment, nominal wages will rise, as will other sticky prices.
Inflationary gap- aggregate output is above potential output. In the face of low unemployment, nominal wages will rise, as will other sticky prices.
question
explain what adjustments are made to return the economy back to the LRAS when there is an output gap
answer
The output gap is the percentage difference between actual aggregate output and potential output.
The economy is self -correcting when shocks to aggregate demand affect aggregate output in the short run, but not the long run.
The economy is self -correcting when shocks to aggregate demand affect aggregate output in the short run, but not the long run.
question
explain how the AD-AS model is used to formulate macroeconomic policy
answer
We've just seen that the economy is self - correcting in the long run: it will eventually trend back to potential output. Most macroeconomists believe, however, that the process of self -correction typically takes a decade or more. In particular, if aggregate output is below potential output, the economy can suffer an extended period of depressed aggregate output and high unemployment before it returns to normal.
question
identify which policies constitute expansionary fiscal policy and which constitute contractionary fiscal policy and when would they be used
answer
Government Spending-
in a recessionary gap (increase money supply)- increase gov spending
in an inflationary gap (decrease money supply)- decrease gov spending
Taxes-
in a recessionary gap (increase money supply)- decrease in tax
in an inflationary gap (decrease money supply)- increase in tax
in a recessionary gap (increase money supply)- increase gov spending
in an inflationary gap (decrease money supply)- decrease gov spending
Taxes-
in a recessionary gap (increase money supply)- decrease in tax
in an inflationary gap (decrease money supply)- increase in tax
question
define open-market operations
answer
bonds lent out by the federal reserve. trading bonds for money
question
explain how the tools of Monetary policy are used to close recessionary or inflationary gaps
answer
Reserve Ratio- the amount of money that the bank must hold
in a recessionary gap (increase money supply)- decrease reserve ratio
in an inflationary gap (decrease money supply)- increase reserve ratio
Discount rate- interest rate
in a recessionary gap (increase money supply)- decrease disount rate
in an inflationary gap (decrease money supply)- increase discount rate
Open market op.- borrowing bonds
in a recessionary gap (increase money supply)- buy bonds
in an inflationary gap (decrease money supply)- sell bonds
in a recessionary gap (increase money supply)- decrease reserve ratio
in an inflationary gap (decrease money supply)- increase reserve ratio
Discount rate- interest rate
in a recessionary gap (increase money supply)- decrease disount rate
in an inflationary gap (decrease money supply)- increase discount rate
Open market op.- borrowing bonds
in a recessionary gap (increase money supply)- buy bonds
in an inflationary gap (decrease money supply)- sell bonds
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