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Macro 1 Mid-Term
Chapters 1,2,5,6 and 7
| Question | Answer |
|---|---|
| Principle 1 | People face tradeoffs where they compare benefits and costs of alternate choices (contains efficiency and equality) |
| Principle 2 | Opportunity cost is the true cost, where the best decision making is maximizing net benefit or choosing the option with the lowest OC |
| Principle 3 | Rational people think at the margin, where they evaluate the costs and benefits of marignal change |
| Principle 4 | Rational people respond to incentives to obtain an award of avoid a punishment |
| Principle 5 | Trade can make everyone involved better off, where countries specialize in one good or service to trade with others |
| Principle 6 | Markets often maximize economic well-being as people interact in markets to determine prices that maximizes effiicency |
| Principle 7 | Government can improve market outcomes such as enforcing property rights |
| Principle 8 | Productivity and Growth depends on the K, A, H, L and N to find the measured amount of goods produced per hour of a worker's time |
| Principle 9 | Inflation occurs when the bank produces too much money and more people have money to demand for goods, and then prices increase as well (demand-pull inflation) |
| Principle 10 | Unemployment, where high ones lower the standard of living due to the GDP decreasing |
| Micro vs Macro focus | Micro sees how economic agents interact with markets of goods and services to determine prices and quantities while macro focus how the model can apply to GDP |
| What does the Circular Flow Diagram demonstrate? | shows how goods, inputs and money flow through markets where households and firms trade and can further look at the GDP measures on total income, total spending and total production |
| 3 ways to measure economic activity | spending, income and value added |
| Economic study in 3 ways | How people make decisions, how people interact and forces and trends affect the whole economy |
| 4 spending components of the expenditure approach of measuring GDP | Consumption, Investment, Government Purchases and Net Exports |
| What are problems with GDP measurement? | Outputs not traded in the market, Outputs not reported, Improvements of Outputs are difficult to account for and some outputs repersent the use of resources to avoid "bads" |
| What are the biases in measuring price changes? | Commodity substitution, new goods, quality and outlet |
| What is the Law of One Price? | A good should sell for the same price in all markets, which is used for PP |
| What is PPP? | Purchase Power Parity explains that purchasing power everywhere should be the same when in a common currency |
| Burgernomics | compares the cost of living amoung countries every 6 months by using the price of a big mac |
| PPP Index | Decides differences in prices across countries and is similar to creating a CPI |
| Exponentional Growth Equation | Vt = Vo(1+g)^t |
| Annual Average ROG Formula | g = (Vt/Vo)/t-1 |
| What are differences and changes between rich and poor countries? | Some are naturally richer than others, some are more productive and some have policies that help raise their growth rates |
| The Principle of the SOL | depends on its ability to produce goods and services |
| Components of Productivity | Physical Capital, Human Capital, Natural Resources and Technical Progress |
| What is the difference between human capital and technical progress? | A refers to the knowledge of how do to things and the application of new methods while H results from the effort people expend to aquire the knowledge |
| What is Diminishing Marginal Returns on Capital? | K increases by a high amount each time but, eventually begins to increase at a decreasing rate (corollary) |
| What can the Government do to increase the K/L Ratio? | Use foreign direct investment or foreign portfolio investment |
| What happens if natural resources are more scarce? | The market prices increase and then there is a higher incentive to save the resources |
| What was Malthus theory and why was he wrong? | He believed that population growth would decreasing living standards; this was incorrect as he did not account for technical progress |
| CPI | Consumer Price Index that is used to adjust or index the COL in private sector wages, government programs, etc |
| Core Inflation vs. Core CPI | Inflation looks at food and energy prices where their price changes are temporary while CPI does not look at that |
| What are the differences between CPI and the GDP deflator? | CPI looks at the prices of goods and services bought by the average person while GDP deflator looks at all prices of all goods in the domestic economy. CPI looks at imports while GDP deflator does not. GDP deflator changes every year. |
| What are similarities with CPI and GDP Deflator? | Both are indexes used to measure the standard of living, if inflation goes below zero they both go down and they go in the same direction but, different amounts. |
| What is the 'Invisible Hand' Theory? | Households and firms are guided by an invisible hand that leads them to desired outcomes, even if they act in their own self-interest |
| What are the 3 allocation decisions? | How to produce a good to, what goods to produce and who gets the good produced |
| What is Productivity? | The average quantity of goods produced per worker per hour |
| What are the 3 basic income components? | Returns on capital, wages and sale taxes |
Created by:
evehec