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Terms in this set (126)
individual consumer surplus
the net gain to an individual buyer from the purchase of a good. It is equal to the difference between the buyer's willingness to pay and the price paid.
quantity demanded, how it relates to price
actual amount consumers are willing to buy at a price. as P falls, Q rises
shift of the demand curve
change in quantity demanded at any given price, the ENTIRE CURVE MOVES
-number of buyers, income, price of related goods, tastes, expectations
change in the demand
this describes a movement along the demand curve, not the entire curve shifting
inc. in price in one good leads to inc. demand for the other
ex: muffins and donuts
inc. in price of one good leads to dec. in demand for other good
ex: peanut butter and jelly
rise in income increases demand for a good
rise in income decreases the demand for a good
actual amount of a good or service people are willing to sell at some specific price
supply curve and how it relates to the quantity supplied
shows the relationship between quantity supplied and price, inc. price, inc. quantity
shift of the supply curve, and what causes this?
change in the quantity supplied of a good or service at any given price, SHIFT OF ENTIRE CURVE
-input price, prices of related goods or services, technology, expectations, number of producers
(market clearing price) quantity of good demanded equals quantity of good supplied, where they intersect
quantity supplied exceeds the quantity demanded, occurs when the price is above equilibrium, drives price level down to equilibrium
quantity demanded exceeds the quantity supplied, when price is BELOW equilibrium, drives price up
an increase in demand ___ equilibrium price and ___ e quantity
increase in supply ___ e price and ____ e quantity
decrease in supply ___ e price and ___ e quantity
what happens when the demand and supply curve shift simultaneously in opposite directions?
the change in equilibrium price is predictable, but equilibrium quantity is not
what happens when the demand and supply curve shift simultaneously in the same direction?
change in equilibrium quantity is predictable, change in equilibrium price is not
macroeconomics is the study of _____
the behavior of the economy as a whole, and how its different from the sum of its parts
If goods A and B are substitutes, a decrease in the price of good B will __ demand for good A
If the demand for tires goes down when the price of gas goes up, then tires and gas are:
Assuming that desktop computers are normal goods, which of the following will NOT increase demand for desktop computers?
-inc in the incomes of computer users
- price of notebook computers inc
- very large computer company going out of business
-cool new computer games that can only be played on desktop computers
-very large computer company going out of business
If the price of a commodity increases, you can expect the quantity supplied to ___
A leftward shift of a supply curve is caused by a ___ in cost of an input
If the supply and demand curves intersect at $47, then any price above that would result in:
For consumers, pizza and hamburgers are substitutes. A rise in the price of a pizza causes _____ in the equilibrium price of a hamburger and _____ in the equilibrium quantity of hamburgers.
Consider two competing motorcycle manufacturers, Harley-Davidson and Honda. If Harley-Davidson raises the price of its motorcycles, we can expect:
a ___ shift in the demand curve for Hondas, and __ prices for Hondas
An increase in supply with no change in demand will lead to _____ in equilibrium quantity and _____ in equilibrium price.
A decrease in demand and a decrease in supply will lead to _____ in equilibrium quantity and _____ in equilibrium price.
decrease, an indeterminate change
general prices of the whole economy and how high/low prices are relative to the market as a whole, focus on Keynesian economic theory
Keynesian economics believes that a depressed economy is the result of ____, which can be mitigated by
inadequate spending, government spending
2 policies for government intervention:
monetary policy, fiscal policy
uses changes in the QUANTITY of money to alter interest rates, which in turn affect the level of OVERALL spending
changes in taxes and government spending to affect overall spending.
self regulating economy
describes an economy in which problems such as unemployment are resolved without government intervention, through the working of the invisible hand, and in which government attempts to improve the economy's performance would be ineffective at best, and would probably make things worse.
recessions also called
contractions, periods of economic downtown when output and employment are falling
expansions also called
recoveries, periods of economic upturn when output and employment are rising. when an economy isnt in a recession, it is normally in an upward trend (expanding)
short-run alternation between recessions and expansions
business cycle peak
point at which the economy turns from expansion to recession
business cycle trough
point where economy turns from recession to expansion
long run economic growth
sustained upward trend in the economy's output over time
why is long run economic growth important?
fundamental to many economic questions today, responses to key policy questions (like government programs), higher standards of living, crucial for poorer countries
long run growth per capita is key to
higher wages and a rising standard of living
rise in overall level of prices
falling in overall level of prices
inflation and deflation are closely related to:
the business cycle
when the economy is depressed and jobs are hard to find inflation tends to:
when the economy is booming, inflation tends to:
in the long run, overall level of prices are mainly determined by changes in the ____
price stability occurs when
the overall level of price sis changing slowly or not at all
an open economy is
an economy that trades goods and services with other countries
value of goods and services bought from foreigners is more than value of goods it sells to them
value of goods and services bought from other countries is less than value it sells to them
how would macroeconomics explain what determines whether a country is in trade surplus or trade deficit?
decisions about investment spending and savings.
investment in goods like machinery and factories that are used to produce goods
countries with high investment spending relative to savings run trade ____
countries with low investment spending relative to savings run trade ____
The view that the government should take an active role in the macroeconomy dates to:
the Great Depression
The central mission of modern macroeconomics is to prevent:
high gas prices.
a deep recession like the Great Depression.
a deep recession like the Great Depression
Keynesian economics stressed:
-the self-correcting power of free markets.
-that the Depression should run its course to bring down the high cost of living.
-the importance of total spending.
-the long run.
importance of total spending
If during several months the economy is simultaneously increasing its levels of output and employment, then the economy is in a(n):
An economic expansion in the United States is typically associated with a(n):
falling unemployment rate
Long-run growth is the sustained upward trend in:
aggregate output per person over several decades
Which of the following statements is TRUE?
-Long-run growth models and business cycle models are the same.
-The level of saving is important for long-run growth.
-Since World War II, the economy of Argentina has grown faster than the economy of Canada.
-In the past century, the population of the United States has grown faster than output.
the level of saving is important for long-run growth
If workers' nominal wages have risen by 50% over a 10 years and prices have increased by 40% in that same period, then we can safely conclude that the amount of goods and services workers can buy has:
The relation between a country's level of saving and investment: (choose 1)
-has often been used to correct a trade deficit but not a trade surplus.
-does not affect an open economy.
-affects its trade balances.
-pertains to trade surpluses only.
affects its trade balances
If wages grew at 5% last year and average prices grew at 3%, then the average worker:
is better or worse off?
is better off
The annual percentage change in the aggregate price level is negative when there is:
Deflation encourages people to hold onto cash or invest?
hold onto cash rather than invest
Inflation affects people adversely because: (choose 1)
-nominal income falls.
-the budget deficit increases.
-it causes money to lose its value over time.
-purchasing power tends to increase.
it causes money to lose its value over time
what indicates a countrys economic growth and if it is advanced?
national income and product accounts, more reliable the accounts the more economically advanced the country
keep track of the flows of money between different sectors of the economy
-spending of consumers, sales of producers, business investment spending, government purchases, etc
circular flow diagram connects what 4 sectors of the economy and through what type of markets?
households, firms, government, and the rest of the world.
through factor markets (factors of production, labor, raw materials, etc), markets for goods and services, and financial markets
money travels from firms to households through?
wages, profit, interest and rent via factor markets
when do households have disposable income and where is it used?
after paying taxes to the government and receiving government transfers, it goes to private savings and consumer spending via financial markets
money travels from governments and households to firms through?
market for goods and services
gross domestic product
value of all final goods and services in US
household spending on goods and services, most households derive the bulk of their income from wages earned by selling labor and human capital
share in the ownership of a company held by a shareholder. how households derive additional income
borrowing in the form of an IOU that pays interest, profits distributed to shareholders known as dividends, and the interest payments on bonds held by bondholders
payments by the government to individuals for which no good or service is provided in return
ex: social security benefits and unemployment insurance payments
money households have left after paying taxes and receiving government transfers
equal to disposable income minus consumer spending, disposable income that is not spent on consumption
banking stock and bond markets which channel private savings and foreign lending into investment spending, government borrowing and foreign borrowing
total amount of funds borrowed by federal, state and local governments in the financial markets,
government purchases of goods and services
total purchases by federal, state and local governments including everything from military spending on ammunition to local public school supplies
how does the rest of the world participate in the US economy?
-exports (we export US goods to other countries)
-imports (goods purchased from other countries by the US)
-lending by foreigners to borrowers in the US, and purchases by foreigners of shares of American stock,
stocks of goods and raw materials held to facilitate business operations
spending on productive physical capital such as machinery and construction of buildings and changes to inventories
why are changes to inventories included in investment spending?
they change the ability of a firm to make future sales, form of investment
intermediate goods and services
goods that are inputs for production of final goods and services, bought from one firm to another
SUM OF CONSUMER SPENDING, investment spending, government purchases of goods and services, and exports minus imports, TOTAL SPENDING ON DOMESTICALLY PRODUCED FINAL GOODS AND SERVICES
3 ways to calculate the GDP
1. adding up total value of all final goods and services produced
2. adding up spending on all domestically produced goods and services
3. adding up total factor income earned by households from firms in the economy
value added and why its important
value added= difference between the value of its sales and value of intermediate goods and services it purchases from other businesses
-its important because it accounts for the value of intermediate goods so as not to double count it in GDP
economy's total quantity of output of final goods and services
total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year
value of al final goods and services produced in the economy during a given year, calculated using the prices current in the year in which the output is produced
method of calculating changes in the GDP using the average between the growth rate calculated using an early base year and the growth rate calculated using a late base year
GDP per capita
GDP divided by the size of the population; it is equivalent to the average GDP per person.
aggregate price level
measure of the overall prices in the economy
US statistics on GDP are always expressed using
hypothetical set of consumer purchases of goods and services, used to measure average price changes in overall price level
price index in a given year
(cost of a market basket in a given year/cost of market basket in a base year)x100
(price index yr 2-price index yr 1/price index yr 1)x100
annual percent change in an official price index
consumer price index CPI
measures the cost of the market basket of a typical urban American family, most widely used measure of aggregate price level, and used to measure inflation
producer price index
wholesale price index, tracks changes in the prices of goods and purchased by producers containing raw commodities such as steel, electricity, coal, etc
why is PPI considered an early warning signal of changes in the inflation rate?
because commodity producers are relatively quick to change prices when they perceive a change in overall demand for their goods
for a given year is 100 times the ratio of nominal GDP to real GDP in that year.
The circular-flow diagram illustrates all of the following in the U.S. economy EXCEPT:
-the purchase and sale of factors of production.
-flows of money.
-growing income inequality.
-flows of goods and services.
-growing income inequality
Goods that are produced in a particular period but NOT sold in that period:
end up in inventory and are included in investment
The equation that breaks GDP down by the four sources of aggregate spending is:
GDP = C + I + G + X - IM.
Enchanté Inc., a designer clothing company, buys $400 worth of silk and $30 worth of accessories to produce each dress. If the value added by Enchanté is equal to $200, then according to the value-added approach, the price of the designer dress should be:
A country's exports minus its imports during a period are:
The dollar value of final goods and services only is counted in GDP because:
if we counted the value of all goods, we would count inputs, like the value of steel in a new automobile, more than once.
A country's GNP:
is the total factor income earned by residents of a country.
total value of goods produced by a country during one year, equal to GDP PLUS net income from foreign sources (citizens abroad)
why is GDP not necessarily a good measure of the economy?
some of the increase in the value of GDP over time represent increases in the prices of goods, instead of increase in OUTPUT
Explain what is meant by shoe leather costs of
Shoe-leather costs are the increased costs of transactions
caused by inflation. When there is a severe inflation, people
tend to withdraw their deposits in banks more frequently,
making them spend more time on transactions.
What are some reasons a firm might choose to
pay efficiency wages, above the market clearing
Higher wages than necessary are likely to lead workers to
work harder and to attract more productive workers in the labor market.
Full employment is when actual unemployment is equal to natural unemployment, which means only frictional and
Explain why, when inflation is higher than
expected, borrowers gain at the expense of
The purchasing power of money that borrowers repay is lower, so their real wealth will get higher, while lenders' real
wealth will get lower.
total number of poeple who are actively looking for work but arent currently employed
why is the unemployment rate significant?
good indicator of how easy or difficult it is to find a job given the current state of the economy
nonworking people who are capable of working but have given up looking for a job given the state of the job market
unemployment rate does not include discouraged workers
marginally attached workers
not included in unemployment rate or work force
would like to be employed and have looked for a job in the past, currently not looking
otherwise called a growth recession, is a period in which the real GDP growth is positive but unemployment rate is still rising
unemployment due to the time workers spend in job search
more people are seeking jobs in a particular labor market then there are jobs available at the current wage rate, even when the economy is at the peak of the business cycle
THIS SET IS OFTEN IN FOLDERS WITH...
Krugman Microeconomics 2nd Ed, Chapter 2
Econ 101 CHP 6
Krugman Microeconomics 2nd Ed, Chapter 3
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