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Macro Exam 1
| Question | Answer |
|---|---|
| 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 |
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