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Macro Exam 1

QuestionAnswer
Shift Factors of Demand: Society's Income, the prices of other goods, tastes, expectations, taxes/subsidies
Scarcity definition: The goods available are too few to satisfy individuals' desires.
2 Elements of Scarcity: Our wants, and our means of fulfilling those wants.
What does scarcity depend on? Technology and human action.
Implicit Costs definition: Costs associated with a decision that often aren't included in normal accounting costs.
Opportunity Cost definition: The benefit that you might have gained from choosing the next-best alternative.
Economic Decision Rule: If the marginal benefit of doing something exceeds the marginal cost, DO IT! If the marginal costs of doing something exceed the marginal benefits, DON'T DO IT!
Marginal Cost definition: the additional cost to you over and above the costs you have already incurred. ADDITIONAL
Marginal Benefit definition: The additional benefit above what you've already derived.
Macroeconomics definition: the study of the economy as a whole.
Problems macroeconomics considers: inflation, unemployment, business cycles, and growth.
Macroeconomics vs Microeconomics: Macro: analyzes from the whole to parts. Micro: analyzes from the parts to whole.
Microeconomics definition: the study of how individual choice is influenced by economic forces.
Problems microeconomics considers: pricing policies of firms, household decisions on what to buy, how markets allocate resources.
3 Central Coordination Problems: What, and how much to produce. How to produce it. For whom to produce it.
What problems must every economy solve? The 3 Central Coordination Problems
Economics definition: the study of how human beings coordinate their wants/desires, given the decision making mechanisms, social customs, and political realities of the society.
Economic Force definition: the necessary reactions to scarcity.
Market Force definition: An economic force that is given relatively free rein by society to work through the market.
Economic Policies definition: actions (or inactions) taken by the government to influence economic actions.
Sunk Cost definition: Costs that have already been incurred and cannot be recovered.
If you bought a camper for $27K, and you have no marginal benefit, is there a sunk cost? You already paid the $27K and there is no way of getting that back. It is a sunk cost.
Theorems definition: Propositions that are logically true on assumptions in a model.
Precepts definition: policy rules that conclude that a particular course of action is preferable.
Experimental Economics definition: a branch of economics that studies the economy through controlled experiments.
Types of experimental economics: lab, field, computer, and natural
Economic Model definition: a framework that places the generalized insights of the theory in a more specific contextual setting.
Economic Principle definition: a commonly held economic insight stated as law or principle.
Social Forces definition: forces that guide individual actions even though those actions may not be in an individual's selfish interest.
Political Forces definition: legal directives that direct actions.
Normative Economics definition: SHOULD. The study of what should be.
Positive Economics definition: the study of what is, and how the economy works.
Art of Economics definition: application of the knowledge learned in positive economics to achieve the goals one has determined in normative economics.
Invisible Hand Theorem: a market economy, through price mechanism, will tend to allocate resources efficiently.
Coercion definition: limiting people's wants and increasing the amount of work individuals are willing to do to fulfill those wants.
How does a government deal with scarcity? Coercion
Excess Demand SHORTAGE; quantity demanded is greater than quantity supplied. More consumers who want it than there are suppliers supplying it.
Will price increase or decrease in shortages? Price will increase.
Excess Supply SURPLUS; quantity supplied is greater than quantity demanded.
Will price increase or decrease in a surplus? Price will decrease. Quantity demanded will increase.
Equilibrium Price definition: the price toward which the invisible hand drives the market
Equilibrium Quantity definition: the amount bought and sold at equilibrium price
Equilibrium definition: opposing dynamic forces cancel each other out. Upward pressure on price is offset by downward pressure.
Excess supply pressure on price; downward or upward? Downward (surplus)
Excess demand pressure on price; downward or upward? Upward (shortage)
What causes a shift in supply? A change in a shift factor causes a shift in supply.
What causes a movement along the Supply Curve? A change in price causes a movement along the supply curve.
What do shift factors do to the supply curve? Shift the entire curve.
Law of Supply: Quantity supplied rises as price rises, other things constant. Quantity supplied falls as prices fall, other things constant.
Shift Factors of Supply: Price of inputs, technology, expectations, taxes/subsidies.
How does price of inputs shift supply? If the input price is high, supply is low. If the input price is low, supply is high.
How does technology shift supply? production improvement
How do expectations shift supply? If you think the price of the item you supply is going to increase in a month, you supply less now and save for then when the price is high.
Supply Curve definition: representation between prices and quantity supplied.
What does the supply curve represent? The minimum price an individual seller will accept for various quantities of a good.
Quantity Supplied-Supply: Quantity supplied rises as prices rise. Quantity supplied falls as prices fall. Varies DIRECTLY with price.
What causes a movement along a demand curve? A change in price
Market Law of Supply: At higher prices, existing suppliers supply more. At higher prices, new suppliers enter the market.
Market Supply Curve: the horizontal sum of all individual supply curves.
Quantity Demanded definition: refers to a specific amount that will be demanded per unit of time at a specific price, other things constant.
Quantity Demanded Rules: The quantity you demand at low prices differs from the quantity you demanded at high prices. The quantity you demand varies in OPPOSITE direction with price.
Law of Demand: states that the quantity of a good demanded is inversely related to the price. Quantity demanded rises as price falls. Quantity demanded falls as price rises.
What happens to demand when the price of a good rises? People substitute away from that good to other goods.
Demand Curve: the representation of the relationship between price and quantity demanded.
Demand definition: refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant.
Shifts in Demand: A change in a shift factor causes a shift in demand. Effect of anything other than price on demand.
What causes a movement ALONG a demand curve? Change in price changes quantity demanded.
What causes a movement OF the demand curve? the effect of anything other than price. Shift factors of demand.
Market Law of Demand: At lower prices, existing demanders buy more. At lower prices, new demanders enter the market.
Market Demand Curve: the horizontal sum of all individual demand curves.
Should Opportunity Cost be less or more than the benefit of what you have chosen? less
The _________ of college includes: items you could have purchased with money spent for tuition and books. Loss of income from a full-time job. Opportunity Cost
Economic Institutions: laws, common practices, and organizations in society that affect the economy.
Positive vs Normative Economics: Positive: what is Normative: what should be
What happens to demand for CD's if you won $1 million in the lottery? Demand would shift out to the right because your income increased.
Normal goods definition: as income rises, you buy more of these.
Inferior goods definition: as your income rises, you buy less of these.
An increase in demand or a decrease in supply does what? Creates excess demand at the original equilibrium price. Excess demand increases price until a new higher equilibrium price is reached.
A decrease in demand or an increase in supply does what? Creates excess supply at the original equilibrium price. Excess supply decreases price until a new lower equilibrium price is reached.
Fallacy of Composition definition: the false assumption that what is true for a part will also be true for the whole.
A hurricane damages farms in NE US, destroying a significant portion of the apple crop. What happens to the supply curve? The damage shifts the supply curve for apples to the left. Prices rose.
The price of gasoline in the US rose to high levels. What happened to the demand curve? Increasing costs caused the demand curve to shift left. Price for SUVs fell.
What happens to P and Q: when supply increases Price goes down, quantity up.
What happens to P and Q: when supply decreases Price goes up, quantity down.
What country has price controls? Venezuela
Price Ceiling definition: a government-imposed limit on how high a price can be changed. (You walk along and keep bumping your head, can't get up)
Price Ceilings create: shortages
When does the government impose a price ceiling? When they want to hold prices down to favor buyers.
After WWII, rent controls were put into place. What is this an example of? Price Ceiling.
Rent Controls cause a surplus or shortage? A shortage
Price Floor definition: a government-imposed limit on how low a price can be charged.
What does Price floors supply? Excess supply (surplus)
Why does the government impose a price floor? To prevent a price from falling below a certain level to favor suppliers.
According to the book, does minimum wage cause unemployment? Yes
Is minimum wage price floor or a price ceiling? A price floor.
Excise Tax definition: a tax that is levied on a specific good.
Tariff definition: an excise tax on an imported good.
What is the result of taxes and tariffs? an increase in equilibrium prices and reduction of equilibrium quantities
What happens if the government imposes a $10K luxury tax on the suppliers of boats? The supply curve shifts up by the amount of the tax. The price of boats rises by less than the tax.
How does the government regulate markets? licenses
Examples of professions that need licenses: doctors, financial planners, electricians, bus drivers, cosmetologists, etc.
What is the result of limited number of licenses in a market? An increase in wages and an increase in the price of obtaining the license.
The taxi medallion system is an example of what? Licenses and government restrictions. The demand for services increased, because the number of licenses was limited, and wages increased.
In third-party-payer markets, what happens? The person who chooses how much to purchase doesn't pay the entire cost. The person who receives the good differs from the person paying for the good.
How are goods from a third-party-payer system rationed? Through social and political means.
Adam Smith 1776: Wealth of nations. Free market.
What kind of economist was Adam Smith? Classical
Bond vs Stock Bond: debt, no ownership. Stock: equity, ownership.
If a company goes under, who gets paid back first, bonds or stocks? Bonds
Normal GDP growth? (secular growth trend) 2.5%-3.5%
Normal Unemployment? 5%
Classical Economists definition: believe business cycles are temporary glitches. Favor non-activist policies.
Laissez-Faire is an example of what economist view? Classical
Keynesian Economists definition: believe that business cycles reflect underlying problems that can be addressed with activist government policies.
Examples of Keynesian economics after depression were: New Deal. WPA, SEC, FDIC, etc.
Structural Stagnation: a period of protracted slow growth.
What happened after the crash of 2008? Structural Stagnation
What does the long-run growth framework focus on? incentives for supply. Issues of growth.
What does the short-run business cycle focus on? demand.
GDP of China? 8%. More development to do.
Should developed countries have lower or higher GDP rates? lower
Potential Output definition: the highest amount of output an economy can sustainably produce and sell using existing production processes and resources.
Per capita output definition: output divided by the total population.
Business cycle definition: the upward/downward movement of economic activity that occurs around the growth trend.
Business Cycles and Classical Economists: They argue that government should just accept that business cycles occur and take a laissez-fair stance.
Business Cycles and Keynesians: Argue that government can temper these fluctuations with policy actions.
Before Great Depression, Classical or Keynesian? Classical
After Great Depression, Classical or Keynesian? Keynesian. Both later combined.
Four phases of the business cycle? (in order) peak, downturn, trough, and upturn.
What is the top of a business cycle called? the peak
Recession definition: a decline in real output that persists for more than two consecutive quarters of one year.
What comes after the peak? the economy enters the downturn and may enter a recession.
What is the bottom of a recession or depression called? trough
What happens as total output begins to expand? the economy comes out of the trough and enters the upturn.
Structural Stagnation definition: a cyclical downturn that is becoming an increasing part of the macroeconomic debate.
Unemployment Rate definition: the percentage of people in the economy who are willing and able to work, but cannot find jobs. Actively seeking.
If you aren't actively seeking a job, are you included in the unemployment rate? No. You aren't considered unemployed.
Cyclical unemployment definition: results from fluctuations in economic activity.
Are the disabled included in unemployment? No
Structural unemployment definition: caused by the institutional structure of an economy or by economic restructuring, making some skills obsolete.
Labor force definition: those people in an economy who are willing and able to do work.
Early capitalism unemployment solution: fear of hunger
Employment Act of 1946: US government took responsibility for unemployment.
Discouraged workers definition: want a job but can't find one. Stop looking for one.
Underemployed definition: Have a job, but are still looking for a "real" job.
Full Employment definition: an economic climate where nearly everyone who wants a job has one.
Frictional unemployment definition: unemployment causes by people entering the job market and people quitting a job just long enough to look for and find another job.
Target Rate of unemployment definition: the lowest sustainable rate of unemployment that policy makers believe is achievable given existing conditions.
Cyclical unemployment is defined as unemployment that results from: fluctuations in economic activity.
The business cycle is? the term used to describe fluctuations in output around its long-term trend.
The long-run growth framework focuses on factors affecting: incentives to produce
The unemployment that occurs when people first enter the labor force, or when they are int he process of changing jobs, is called: frictional unemployment
If output is below potential output, it is most likely that the economy is: near a trough
T/F: The answers to an economy’s three central economic problems are determined by the interaction of three forces: economic forces, political forces, and social forces. True
T/F: The economic decision rule is to undertake an action only when the marginal benefits of that action are greater than its total costs. False
T/F: Scarcity exists because economies cannot produce enough to meet the perceived desires of all individuals. True
T/F: The economic decision rule is to undertake an action only when the marginal benefits of that action are greater than its total costs False
T/F: The opportunity cost of undertaking an activity includes any sunk cost False
T/F: the “invisible hand” is the price mechanism that guides people’s actions in the market. true
T/F: Social and political forces affect the way in which the invisible hand works True
T/F: Macroeconomics is the study of how individual choices are affected by economic forces False
T/F: Deciding what the distribution of income should be is an example of normative economics. True
T/F: Only marginal costs, not sunk costs, affect economic decisions if individuals are rational. True
T/F: A demand curve is downward sloping because as the price of a good falls, demanders will substitute some other good for the good whose price has fallen. False
T/F: A change in the price of carrots will cause a movement along the demand for carrots curve and a shift in the demand for substitute vegetables. True
T/F: The law of supply states that more of a good will be supplied the lower its price, other things constant. False
T/F: An improvement in the technology for producing a good will shift the supply curve for that good to the left. False
T/F: Real world experience shows that when weather conditions reduce crop yields, the price of agricultural products will fall. False
T/F: When the person who chooses how much to purchase doesn't have to bear the full cost, the quantity demanded tends to be higher. True
T/F: Suppliers will supply more of a goo when the price of that good rises because the opportunity cost of not producing that good has risen. True
T/F: An increase in the number of firms causes the price firms can charge to fall, which results in a movement along the market supply curve. False
T/F: Production possibility curves are upward sloping because increased production of one good implies reduced production of other goods. False
T/F: Suppliers will supply more of a good when the price of that good rises because the opportunity cost of not producing that good has risen. True
T/F: When quantity demanded is greater than quantity supplied, the resulting shortage causes the prices to fall. False
Microsoft filed a lawsuit against people who sent spam. A spokesman for Microsoft said the they were "trying to change the economics of spam" by increasing the cost of being a spammer. What would an economist agree with them about? Their approach of trying to charge the costs of spamming is the most effective way to change behavior
An increase in demand for a good is likely to cause: excess demand (a shortage) before the price changes.
Which factor will help the US regain comparative advantages in industries where it has lost comparative advantages? if the US exchange rate falls
Why does scarcity exists? Because incentives that encourage work and reduce human desires cannot keep new wants from developing.
What relates positive economics to normative economics? the art of economics
The marginal benefit from consuming another unit of good: equals the increase in total benefits from consuming the unit.
Suppose the marginal cost of dating Perry is $30 and the marginal benefit is worth $40 to you. Following economic reasoning, you should? Date Perry
The price of a new model of iPod tends to fall a year after it is introduced. Suppose Jane bought an ipod as soon as it was introduced and paid a premium price for it. Now she wants to buy a cover. What should she first consider? The price of the cover and the benefit she will get from it.
You bought one share of McD. stock for $10, one Coca-Cola for $15, and one Pepto-Bismol for $20. Currently, each stock is $15. Assuming there were no issues, if you needed $15, which stock would you sell? Any, all sunk costs.
At a Chicago Bulls game 20,000 tickets were sold at $30. The game was sold out and some didn't get tickets. This suggests that the selling price: was below equilibrium
Supposed the equilibrium price of oranges is $.79/orange, but the gov. takes steps to prevent the price from exceeding $.60/orange. The result would be: Shortage of oranges as the price ceiling keeps the market from reaching equilibrium.
The most likely impact of an effective price floor is: a surplus
If the gov were to issue a fixed number of licenses to produce a good or provide a service, this would likely? Increase the wage received by those who have licenses.
If the US imposes tariffs on steel imports: The supply of the imported steel shifts to the left and raises its market price.
"Price controls in competitive markets cause shortages" is an example of: positive economics
"Government should not use price controls" is an example of: normative conomics
Sunk Costs are what to economic reasoning? Irrelevant
The invisible hand theorem relates mostly to macro or micro? Micro
"we should support the market because it is efficient" is an example of: normative economics
The term efficiency involves achieving a goal as: cheaply as possible
Economic forces are: a reaction to scarcity
Countries gain from trade by producing: the goods they can produce at the lowest opportunity cost.
Your opportunity cost of taking this course is: the net benefit of the activity you would have chosen if you had not taken the course.
Suppose you paid $300 to take class. Instead of attending class, you could have worked for $8/hr. Given this info, the opportunity cost of each class is? $8.
The growing popularity of the Atkins diet caused? a decrease in the demand for bread
According to the law of demand, an increase in the price of baseball trading cards causes: people to buy fewer trading cards
According to the law of supply, what will motivate firms to increase their quantity supplied of a product? price
The quantity of goods and services available to society depends on: human action
An economic force given relatively free reign by society to work through the market is: a market force
The price of computers has fallen each year for the last 10 years. This is likely an example of the working of: economic forces
The price mechanism is also known as the: invisible hand
Compared to last year, fewer oranges are being bought and the selling price decreased. This could have been caused by: a decrease in demand
A decrease in supply will: be reflected graphically as a leftward shift of the supply curve
If demand and supply both increase, this will cause: an increase in the equilibrium quantity, but an uncertain effect on the equilibrium price.
A tax on suppliers will do what to the curve? Shift the supply curve by the amount of the tax.
Rational decision making means that: if the marginal benefit of the last unit of an activity exceeds its marginal cost, the more of that activity should be undertaken.
Output fell by how much during the depression? 30%
What was the unemployment during the depression? 25%
Short-run issues, Classical or Keynesian? Keynesian
Long-run issues, Classical or Keynesian? Classical
What did the Classical economists blame the depression on? They argued that labor unions and government policies kept prices and wages from falling. The invisible hand was not being allowed to coordinate economic activity.
Classical Economist prescription for the depression: Eliminate labor unions, and change gov policies that held wages too high.
What is one issue Keynesian economics left out? Inflation
When did the two types merge into the new conventional macroeconomics? 1980's
What happened in 2008? output declined, unemployment rose, entered a recession.
Long-Run framework focuses on: incentives for supply. Policies that affect supply, such as incentives that promote work, are key.
Short-Run framework focuses on: demand. (Demand-side econ). Ways to increase/decrease aggregate expenditures, such as policies to get consumers and businesses to increase their spending.
Are the short and long runs that separate? No, the economy is constantly in both of them.
When the economy grows, what happens to income and output? Both increase
Growth rates of China and India: Slowly until the 1990s, now increasing substantially.
Growth rates of Western Europe and Japan: Fell considerably in the 1990s and have remained low.
What does the National Bureau of Economic Research do? determines the government's official dates of contractions and expansions.
Depression definition: deep and prolonged recession
Created by: lbielinski
 

 



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