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Macroeconomics Quiz 1
Terms in this set (234)
the limited nature of society's resources
society has limited what? and cannot produce what?
society has limited resources and cannot produce all goods and services people want
the study of how society manages its scarce resources, study of how people make decisions, study of how people interact with one another, study of forces and trends
what is principle 1?
people face trade offs
the property of society getting the most it can from its scarce resources
the property of distribution economic prosperity uniformly among the members of society
what are items that reduce efficiency but cultivate equality
welfare, income tax
whats the problem with income tax
reduces the reward of working hard, people then produce less
what is principle 2?
the cost of something is what you give up to get it
what is principle 3?
rational people think at the margin
people who systematically and purposefully do the best they can to achieve their objectives
a small increment adjustment to a plan of action
rational people make decisions by comparing what?
marginal benefits and costs
a rational decision maker takes action only if the marginal benefit does what?
only if the marginal benefit of the action exceeds the marginal cost
what is principle 4?
people respond to incentives
something that induces a person to act
if policymakers change incentives then it will cause people to do what?
alter their behavior
what is principle 5?
trade can make everyone better off
trade between two countries does what?
makes each country better off
trade allows people to do what?
buy goods and services at a lower cost
what is principle 6?
markets are usually a good way to organize economic activity
an economy that allocates resources throughout the decentralized decisions of many firms and households as they interact in markets for goods and services
produce goods through labor, land, and capital (buildings and machines)
own factors of production and consume the goods firms make
in any market, buyers and sellers do what?
buyers look at the price for items they want to buy and sellers look at the price for items they want to make
what is principle 7?
governments can sometimes improve market outcomes
the government does what?
enforces rules and maintains the institutions that are key to a market economy
the ability of an individual to own and exercise control over scarce resources
most policies want to change what?
efficiency or equality
a situation in which a market left on its own fails to allocate resource efficiently
the impact of one person's actions on the well being of a bystander
the ability of a single economic factor (or small group of factors) to have a substantial influence on market prices
a market economy rewards people for doing what?
for their ability to produce things people are willing to pay for
the government can improve on market outcomes, but...?
does not always
what is principle 8?
A country's standard of living depends on its ability to produce goods and services
higher average income equates to?
higher rate of productivity
the quality of goods and services produced from each unit of labor input
to boost living standards policymakers need to do what?
a nation can have a higher standard of living when?
when workers can produce a large quantity of goods and service per hour
what is principle 9?
price rises when the government prints too much money
an increase in the over-all level of prices in the economy
inflation occurs when what?
when too much money is printed
what is principle 10?
society faces a short-run trade-off between inflation and unemployment
increasing the amount of money in the economy does what?
stimulates the overall level of spending and thus the demand for goods and services
inflation and unemployment are usually pushed in?
fluctuations in economic activity such as employment and production
factors of production
labor, land, and capital (buildings and machines)
households buy the output of production and consume the goods firms make
households provide the input that firms use to produce goods and services
circular flow diagram
visual model of the economy that shows how dollars flow through markets among households and firms
what is the inner loop of the circular flow diagram
flows of inputs and outputs
Goods and Services bought
goods and services bought
Goods and Services sold
goods and services sold
Factors of production
land, labor, capital
profit of sold good
what do firms pay?
wages, rent, and profit
Market for goods and services
firms sell, households buy
Markets for factors of production
households sell, firms buy
what is the outer loop in the circular flow diagram?
flow of dollars
Production Possibility Frontier (PPF/ PPC)
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
in the PPF, what do the two endpoints represent?
the most extreme possibilities
When is a point on the outside of the PPF?
when there are not enough resources to produce that outcome
when is an outcome efficient?
if the economy is getting all it can from the scarce resources it has available
when is an economy inefficient?
when the economy is producing less than it could from the resources is has available
the cost of something is what you give up to get it
PPF often have what type of shape?
PPFs can be a straight line if what?
If it has a constant opportunity cost
The PPF shows what at any given time?
trade-offs between the outputs of different goods
claims that attempt to describe the world as it is
claims that attempt to prescribe how the world should be called
Supply and Demand refer to what?
the behavior of people as they interact with one another in competitive markets
a group of buyers and sellers of a particular good or service
buyers determine what?
the demand of the product
sellers determine what?
the supply of a product
a market in which there are many buyers and sellers so that each has a negligible impact on the market
no individual's actions have a noticeable effect on the price
highest form of competition
what are the prices in a perfectly competitive market?
the prices are all the same
when buyers and sellers must accept the price of a product determined by the market
a seller who has a good or service that no one else sells and therefore can set the price of that good/service
the amount of a good that buyers are willing and able to purchase
law of demand
the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises
a table that shows the relationship between the price of a good and the quantity demanded
a graph of the relationship between the price of a good and the quantity demanded
which way does a demand curve slope?
a lower price on the demand curve means
greater quantity demanded
the demand curve shows the maximum that an individual is willing to do what?
it shows the maximum an individual is willing to pay to purchase an extra amount
the sum of all the individual demands for a particular good or service
if something happens to alter the quantity demanded at any given time, what happens to the demand curve?
what are the causes of shifts for a demand curve?
changes in price of related goods, changes in income, changes in taste, changes in expectation
law of demand
there is an inverse relationship between price and quantity
a good for which other things being equal, an increase in income leads to an increase in demand
a good for which, all other things being equal, an increase in income leads to a decrease in demand
two goods for which an increase in the price of one leads to an increase in the demand for the other
two goods for which an increase in the price of one leads to a decrease in the demand for the other
the amount of a good that sellers are willing and able to sell
when prices are high, then quantity supply is?
when is supply 0?
when the company shuts down
law of supply
the claim that, other things being equal, the quantity supplied of a good rises when the price of the good rises
a table that shows the relationship between the price of a good and the quantity supplied
a graph of the relationship between the price of a good and the quantity supplied
what is the slope of a supply curve?
what represents a movement along the supply curve?
a change in price
what causes shifts in supply curve?
changes in input prices, changes in technology, changes in expectations
a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
the price that balance quantity supplied and quantity demanded
the quantity supplied and the quantity demanded at the equilibrium price
a situation in which quantity supplied is greater than quantity demanded
how do sellers respond to surplus?
cutting their prices which increase the quantity demanded and decreases the quantity supplied
a situation in which quantity demanded is greater than quantity supplied
how do sellers respond to shortages?
raising prices without losing sales
law of supply and demand
the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
what is the difference between supply and quantity supplied?
the position of the curve v. the amount suppliers wish to sell
a measure of the responsiveness of quantity demanded or quality supplied to a change one of its determinants
price elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good, computed as the % change in quantity demanded divided by the % change in price
if demand substantially responds to change in price then it is?
if demand only slightly responds to change in price then it is?
demand elasticity will most likely always be?
negative due to the law of demand
goods with close substitutes tend to be what?
more elastic because its easier for consumers to switch from that good to others
necessities have __________ demands and luxuries have __________ demands
goods tend to have what kind of demand over time?
when is demand considered elastic?
when it is greater than 1
when is demand considered inelastic?
when it is less than 1
when the change in quantity equals the change in price (elasticity is exactly 1)
the flatter the demand curve that passes through a given point, the greater the what?
the greater the price elasticity of demand
when is the demand curve perfectly inelastic?
when it has 0 elasticity (vertical demand curve)
when is the demand curve perfectly elastic?
when price elasticity of demand approaches infinity and the demand curve becomes horizontal
price elasticity decreases when what happens?
when we move down the curve
the amount paid by buyers and receiver by sellers of a good
total revenue increase if what happens?
prices increase in an inelastic demand (price and total revenue move in same direction)
total revenue decreases if what happens?
increases in prices an elastic demand (price and total revenue moves in opposite directions
even though the slope of a linear demand is constant, what is not?
at points with a high price and low quantity, the demand curve is what?
income elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in consumers' income
normal goods have what type of income elasticities?
inferior goods have what type of income elasticities?
cross-price elasticity of demand
a measure of how much the quantity demand of one good responds to a change in the price of another good
substitutes usually move in the same direction, so what type of cross-price elasticity do they have?
complements usually move in opposite directions, so what type of cross-price elasticity do they have?
what kind of elasticity does a steep demand/supply curve have
price elasticity of supply
a measure of how much the quantity supplied of a good responds to a changing in the price of that good
when is the supply of a good said to be elastic?
when the quantity supplied responds substantially to changes in price
when is supply usually more elastic?
in the long run
a legal maximum on the price at which a good can be sold
when the government imposes a price ceiling above the equilibrium price, what effect does it have on the quantity sold?
it can have no effect (not binding, ineffective)
when the government imposes a price ceiling below equilibrium price, what effect does it have on the quantity sold?
it can cause a shortage (binding constraint, effective)
what happens when a shortage arises?
sellers must ration scarce goods among the large number of potential buyers
what is the result of price ceilings?
black markets, shortages, inefficient allocation of resources
when do policymakers impose a price ceiling?
when they believe that the market price is unfair
a legal minimum on the price a good can be sold
when the government imposes a price floor below the equilibrium price, what effect does it have on the economy?
no effect (not binding, ineffective)
when the government imposes a price floor above the equilibrium price, what effect does it have on the economy?
it creates a surplus (binding, effective)
the manner in which the burden of a tax is shared among participants in a market
taxes levied on sellers and taxes levied on buyers are __________?
taxes discourage what?
when a good is taxed, the quantity of the good sold is ____________?
smaller in the new equilibrium
Buyers and sellers share the burden of taxes. In the new equilibrium, buyers and sellers do what?
buyers pay more for a good and sellers receive less
when the supply curve is flat, who pays most of the tax?
when the demand curve is flat, who pays most of the tax?
the study of how households and firms make decisions and how they interact in markets
the study of economy-wide phenomena, including: inflation, unemployment, and economic growth
What two things does GDP measure?
the total income of everyone in the economy and the total expenditure on the economy's output of goods and services
GDP can measure total income and expenditure because both items are ___________
Every dollar spent by some buyer is a dollar of __________ for some seller
Gross Domestic Product
a measure of the income and expenditures of an economy (the market value of all final goods and services produced within the geographical confines of a country in a given period of time)
GDP is the market value of all __________ goods ad services produced within a country in a given period of time
GDP adds together many different kinds of products into a __________ measure of the value of economic activity
If the price of good A is twice that of good B, then what?
good A contributes twice as much to the GDP as good B
What is not included in the GDP?
Items that are illegally produced and sold, vegetables that you grow in your garden
For transactions to be part of the GDP, what must happen?
goods must be sold in the market
a product utilized to produce a final good or finished product.
What are some examples of intermediate goods?
steel, which can be used in the construction of a house or in the production of cars; wood, used to make flooring and furniture
The value of the intermediate good is already included in what in the GDP?
it is already included in the prices of the final goods
When is an intermediate good a temporary final good?
when it is added to the firm's inventory of goods for use or sale at a later date
A good or service that is consumed by the end user and does not require any further processing.
what are tangible goods?
food, clothing, cars
what are intangible goods?
haircuts, house cleaning, doctor visits
GDP includes goods and services of __________ produced, not transactions involving items in the __________
goods are included in the GDP as long as they are produced where?
within the geographic confines of a country (regardless of the nationality of the producer)
how many months are in a quarter?
GDP measures the flow of income, as well as expenditure, during what?
during an interval of time
what is quarterly GDP?
the amount of income and expenditure during the quarter multiplied by four
a statistical procedure that modifies the GDP before being present in a quarterly report
what do government statisticians do to modify the quarterly of the GDP?
they take out the seasonal cycle
the difference between the two calculations of GDP
spending by households on goods and services with the exception of purchases of new housing
what is included in consumption?
durable, non-durable, tangible, intangible, and education
the sum spending on business capital, residential capital, and inventories and structures
the spending on goods and services by local, state, and federal governments
what does government purchases include?
salaries of government workers & expenditures on public works
what does government purchases not include?
when the government makes payments that is not made for an exchange for a currently produced good or service
what are examples of transfer payments
medicare, gov paying social security and unemployment insurance
Transfer payments do what?
alter household income, but do not reflect the economy's production
spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)
What does the net in net exports refer to?
the fact that imports are subtracted from exports
when a domestic household/firm/government buys a good or service abroad, what happens?
the purchase reduces net exports, but because it raises consumption/investment/gov purchases it does not affect GDP
when net export is negative, then what?
you're importing way more than you're exporting
If total spending rises from one year to the next, what must be true?
the economy is producing a larger output of goods and services and the goods and services are being sold at higher prices
values the production of goods and services at current prices
values the production of goods and services at constant prices
what does real GDP measure?
the total quantity of goods and services the economy is producing that is not affected by changes in the prices of those goods and services
what does real GDP show?
the economy's overall production of goods and services over time
An accurate view of the economy requires you to change GDP from __________ to __________ GDP
what does real GDP use to place a value on the economy's production of goods and services?
because real GDP is not affected by changes in prices, what does it show?
changes in real GDP only reflect changes in the amounts being produced
what does real GDP reflect?
the economy's ability to satisfy people's needs and desires
what can better gauge the economic well being of the country: nominal or real GDP?
what is GDP deflator?
a measure of the price level
what does GDP deflator measure?
the current level of prices relative to the level of prices in the base year
GDP deflator reflects what?
what's happening to the prices, not quantity
what is inflation rate?
the percentage in some measure of the price level from one period to the next
what can inflation rate be used for?
to take out the inflation in nominal GDP
why is GDP not the best measure of economic well being?
because leisure, goods and services produced at home, quality of the environment, and distribution of income are left out
what is Gross National Product
measures the income or production of a country's nationals, no matter where they are located
what is consumer price index?
a measure of the overall cost of the goods and services bought by a typical consumer
what is used to monitor the cost of living over time?
The CPI is an accurate measure of what?
selected goods that make up a typical bundle
IS CPI a perfect measure of the cost of living?
what does CPI not take into account?
substitution bias, introduction of new goods, unmeasured quality changes
what is substitution bias?
consumers substitute toward goods that have become relatively less expensive
what happens when the CPI does not take substitution bias into consideration?
it overstates the increase in the cost of living
what happens when new products are introduced?
there is more variety, which in turn makes each dollar more valuable
if the quality of a good rises from one year to the next, what happens?
the value of the dollar rises (even if the price of the good stays the same)
if the quality of a good falls from one year to the next, what happens?
the value of the dollar falls (even if the price of the good stays the same)
what causes the CPI to overstate the cost of living?
substitution bias, intro of new goods, and unmeasured quality changes
what are price indexes used for?
to correct for the effect of inflation when comparing dollar figures from different times
what does the CPI compare?
the price of a fixed basket of goods and services to the price of the basket in the base year
what does the GDP deflator compare?
the price of currently produced goods and services to the price of the basket in the base year
the automatic correction by law of contract of a dollar amount for the effects of inflation
nominal interest rate
the interest rate as usually reported without a correction for the effects of inflation
real interest rate
the interest rate corrected for the effects of inflation
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