Macro Exam 1 (Chapters 2-4, 10-11)

question

Circular Flow Diagram

answer

A visual model of the economy that shows how dollars flow through markets among households and firms

question

Opportunity Cost

answer

Whatever must be given up to obtain some item

question

Production Possibilities Frontier

answer

A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

question

Efficient Outcome (PPF)

answer

A point along the production possibilities frontier which maximizes amount of goods produced with given supplies.

question

Inefficient Outcome (PPF)

answer

A point below the production possibilities frontier curve, where less goods/services are produced with given supplies than possible.

question

Not possible Outcome (PPF)

answer

A point about the production possibilities frontier curve, where the number of goods/services is too much where it is not possible given the supplies.

question

The possibilities frontier shifts outward as...

answer

The economy grows

question

Macroeconomics

answer

The study of economy-wide phenomena

question

Microeconomics

answer

The study of how households and firms make decisions and how they interact in specific markets.

question

Positive Statements

answer

Claims that attempt to describe the world as it is.

question

Normative Statements

answer

Claims that attempt to prescribe how the world should be.

question

Reasons why economists disagree on normative statements

answer

1. Differences in values
2. Differences in scientific judgements
3. Perception vs Reality

question

Specialization

answer

The concentration of the productive efforts of individuals and firms on a limited number of activities.

question

Why do we Trade?

answer

1. Countries can always engage in a mutually beneficial exchange
2. Countries specialize in the thing they're good at, and trade for everything else

question

Comparitive advantage

answer

The ability to produce a good at a lower opportunity cost.
*The most important aspect for trading

question

Absolute Advantage

answer

The ability to produce more goods/services using fewer inputs.

question

Specialization and Comparative Advantage

answer

1. Specialization allows people to focus on producing goods they produce most efficiently
2. If everyone specializes and trades, everyone gets richer
3. Most wealth is created through this process

question

Demand

answer

The amount of goods and services people are willing to buy.

question

Supply

answer

The amount of goods and services that producers are able and willing to sell at a given price.

question

Law of Demand

answer

Other things equal, the quantity demanded of a good falls when when the price rises.

question

Law of Supply

answer

Other things equal, the quantity supplied rises when price rises.

question

Determinants of Demand

answer

1. Taste and Preference
2. Income
3. Number of buyers
4. Prices of Related goods
5. Expectations (for the future)

question

Normal goods

answer

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

question

Inferior Goods

answer

Goods for which demand tends to fall when income rises.

question

Substitute goods

answer

Products or services that can be used in place of each other.
-When demand rises for one, it falls for the other

question

Complimentary goods

answer

Goods that are often bought together
-When demand rises for one, it rises for the other

question

When you have multiple D/S changes in different directions...

answer

You can't make a clear prediction.

question

Market System

answer

1. Decentralized, individual decision-making
2. Flexible prices
3. Individual property rights
4. Competition

question

Command Economy

answer

1. Centralized decision-making
2. Controlled prices
3. Limited property rights, or collective ownership

question

Feudalism

answer

1. Rigid social hierarchy
2. Economic function dictated by tradition
3. People are bound by mutual duties and obligations

question

Elasticity

answer

The responsiveness of one variable to changes in another.
Elastic = responsive
Inelastic = nonresponsive
*Usually refers to price sensitivity
*Related to slope of supply/demand curve

question

If demand for avocados is ELASTIC and the store puts more on sale, will they sell a lot more/few more?

answer

A lot more

question

If labor supply is inelastic, and the gov't imposes new taxes on labor income, what happens to the number of hours people work?

answer

Hours will decrease slightly

question

Real GDP

answer

The production of goods and services valued at constant prices.
*Adjusted for inflation

question

Nominal GDP

answer

The production of goods and services valued at current prices.
*Not adjusted for inflation

question

Gross Domestic Product

answer

The market value of all final goods and services produced in a country in a given period of time.

question

Components of GDP equation

answer

Y = C + I + G + NX
= Consumption (household spending) + Investments (firms spending) + Government spending + Net exports (exports-imports)

question

What is Not Included in GDP?

answer

1. Informal markets (baby sitting, black markets)
2. Home production
3. Environmental services

question

How does GDP measure well-being/progress?

answer

*1. Income / standard of living
- Poverty
- Hunger
*2. Health, education
3. Environment
4. Crime
*Captured by GDP pretty well

question

GDP Deflator equation

answer

Nominal GDP/Real GDP x 100

question

Inflation Rate equation

answer

CPI this year - CPI last year / CPI last year x 100

question

Consumer Price Index (CPI)

answer

The overall cost of goods and services purchased by a typical consumer.

question

CPI equation

answer

(cost of basket in current year/cost of basket in base year) x 100

question

Real interest rate equation

answer

Nominal interest rate - inflation rate

question

Reasons why CPI overstates inflation rate

answer

1. Substitution bias (people can change behavior)
2. Introduction of new goods (doesn't show up in inflation until there is a history)
3. Unmeasured changes in quality
*Overall, about 0.5% point upward bias each year

question

Economic Growth

answer

Change in GDP over time (pos or neg)

question

2 Goals of Economic growth

answer

1. Steady and consistent growth
2. Stability (ability to avoid recessions)

question

Productivity

answer

The quantity of goods and services produced from each unit of labor input

question

Physical Capital

answer

The equipment and structures used to produce goods and services (investment spending).

question

Infrastructure

answer

The basic framework of a building or a system that allows wider trade.

question

Investment

answer

Spending on new capital.
*Savings fund this

question

Poverty trap

answer

Countries can be too poor to save and invest in capital and infrastructure.

question

Solutions to poverty trap

answer

1. Finance/banking
2. External/international investment in capital

question

Using CPI to compare dollar values across time equation

answer

Price today= price earlier x (CPI today / CPI earlier)

1 of 54

question

Circular Flow Diagram

answer

A visual model of the economy that shows how dollars flow through markets among households and firms

question

Opportunity Cost

answer

Whatever must be given up to obtain some item

question

Production Possibilities Frontier

answer

A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

question

Efficient Outcome (PPF)

answer

A point along the production possibilities frontier which maximizes amount of goods produced with given supplies.

question

Inefficient Outcome (PPF)

answer

A point below the production possibilities frontier curve, where less goods/services are produced with given supplies than possible.

question

Not possible Outcome (PPF)

answer

A point about the production possibilities frontier curve, where the number of goods/services is too much where it is not possible given the supplies.

question

The possibilities frontier shifts outward as...

answer

The economy grows

question

Macroeconomics

answer

The study of economy-wide phenomena

question

Microeconomics

answer

The study of how households and firms make decisions and how they interact in specific markets.

question

Positive Statements

answer

Claims that attempt to describe the world as it is.

question

Normative Statements

answer

Claims that attempt to prescribe how the world should be.

question

Reasons why economists disagree on normative statements

answer

1. Differences in values
2. Differences in scientific judgements
3. Perception vs Reality

question

Specialization

answer

The concentration of the productive efforts of individuals and firms on a limited number of activities.

question

Why do we Trade?

answer

1. Countries can always engage in a mutually beneficial exchange
2. Countries specialize in the thing they're good at, and trade for everything else

question

Comparitive advantage

answer

The ability to produce a good at a lower opportunity cost.
*The most important aspect for trading

question

Absolute Advantage

answer

The ability to produce more goods/services using fewer inputs.

question

Specialization and Comparative Advantage

answer

1. Specialization allows people to focus on producing goods they produce most efficiently
2. If everyone specializes and trades, everyone gets richer
3. Most wealth is created through this process

question

Demand

answer

The amount of goods and services people are willing to buy.

question

Supply

answer

The amount of goods and services that producers are able and willing to sell at a given price.

question

Law of Demand

answer

Other things equal, the quantity demanded of a good falls when when the price rises.

question

Law of Supply

answer

Other things equal, the quantity supplied rises when price rises.

question

Determinants of Demand

answer

1. Taste and Preference
2. Income
3. Number of buyers
4. Prices of Related goods
5. Expectations (for the future)

question

Normal goods

answer

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

question

Inferior Goods

answer

Goods for which demand tends to fall when income rises.

question

Substitute goods

answer

Products or services that can be used in place of each other.
-When demand rises for one, it falls for the other

question

Complimentary goods

answer

Goods that are often bought together
-When demand rises for one, it rises for the other

question

When you have multiple D/S changes in different directions...

answer

You can't make a clear prediction.

question

Market System

answer

1. Decentralized, individual decision-making
2. Flexible prices
3. Individual property rights
4. Competition

question

Command Economy

answer

1. Centralized decision-making
2. Controlled prices
3. Limited property rights, or collective ownership

question

Feudalism

answer

1. Rigid social hierarchy
2. Economic function dictated by tradition
3. People are bound by mutual duties and obligations

question

Elasticity

answer

The responsiveness of one variable to changes in another.
Elastic = responsive
Inelastic = nonresponsive
*Usually refers to price sensitivity
*Related to slope of supply/demand curve

question

If demand for avocados is ELASTIC and the store puts more on sale, will they sell a lot more/few more?

answer

A lot more

question

If labor supply is inelastic, and the gov't imposes new taxes on labor income, what happens to the number of hours people work?

answer

Hours will decrease slightly

question

Real GDP

answer

The production of goods and services valued at constant prices.
*Adjusted for inflation

question

Nominal GDP

answer

The production of goods and services valued at current prices.
*Not adjusted for inflation

question

Gross Domestic Product

answer

The market value of all final goods and services produced in a country in a given period of time.

question

Components of GDP equation

answer

Y = C + I + G + NX
= Consumption (household spending) + Investments (firms spending) + Government spending + Net exports (exports-imports)

question

What is Not Included in GDP?

answer

1. Informal markets (baby sitting, black markets)
2. Home production
3. Environmental services

question

How does GDP measure well-being/progress?

answer

*1. Income / standard of living
- Poverty
- Hunger
*2. Health, education
3. Environment
4. Crime
*Captured by GDP pretty well

question

GDP Deflator equation

answer

Nominal GDP/Real GDP x 100

question

Inflation Rate equation

answer

CPI this year - CPI last year / CPI last year x 100

question

Consumer Price Index (CPI)

answer

The overall cost of goods and services purchased by a typical consumer.

question

CPI equation

answer

(cost of basket in current year/cost of basket in base year) x 100

question

Real interest rate equation

answer

Nominal interest rate - inflation rate

question

Reasons why CPI overstates inflation rate

answer

question

Economic Growth

answer

Change in GDP over time (pos or neg)

question

2 Goals of Economic growth

answer

1. Steady and consistent growth
2. Stability (ability to avoid recessions)

question

Productivity

answer

The quantity of goods and services produced from each unit of labor input

question

Physical Capital

answer

The equipment and structures used to produce goods and services (investment spending).

question

Infrastructure

answer

The basic framework of a building or a system that allows wider trade.

question

Investment

answer

Spending on new capital.
*Savings fund this

question

Poverty trap

answer

Countries can be too poor to save and invest in capital and infrastructure.

question

Solutions to poverty trap

answer

1. Finance/banking
2. External/international investment in capital

question

Using CPI to compare dollar values across time equation

answer

Price today= price earlier x (CPI today / CPI earlier)

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