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Econ Final Exam Study Guide
Terms in this set (39)
define cost-push inflation.
Suppliers are getting pinched because prices of resources are going up hard to make a profit.
consumers are demanding more which is putting pressure on price
What happens to equilibrium price and quantity after a shift in either the demand or supply curve?
If the supply curve shifts upward, meaning supply decreases but demand holds steady, the equilibrium price increases but the quantity falls. ... If the demand curve shifts downward, meaning demand decreases but supply holds steady, the equilibrium price and quantity both decrease.
How are the Money Multiplier and the Reserve Requirement related?
The money multiplier tells you the maximum amount the money supply could increase based on an increase in reserves within the banking system.
How would the government respond to an economy that was operating at full employment and causing the price level to increase?
use contractionary monetary policy, drain the bathtub, contractionary fiscal policy, but the breaks on too much money being spent. Grow expansionary, contraction to shrink
What happens to the purchasing power of money when inflation either goes up or down?
inflation reduces purchasing power of money
How does the Federal Reserve increase/decrease the money supply and why would they do either?
set short term interest rates, sets the reserve requirement
If the Federal Reserve raised the Reserve Requirement, would that create more credit or less?
Know the basics of the fractional reserve banking system.
creates credit money through multiple deposit expansion
What is meant by opportunity cost?
The amount of other products that must be forgone or sacrificed to produce a unit of a product
What happens when a tariff is placed on an imported good
Raises domestic price above world price. Reduces quantity of imports and moves a market closer to the equilibrium that would exist without trade.
what happens when foreigners place tariffs on our exports?
decrease consumption. dampens world trade
What is the driving force behind international trade?
The government is a driving force that helps businesses enter foreign markets. Absolute advantage and comparative. Comparative
public debt deficit?
the total amount owed by the federal government to the owners of government securities; equal to the sum of past government budget deficits less government budget surpluses
the amount by which expedentures exceed revenues in ant year
What are the components of GDP and be able to identify some of the sub-components and where they fit in.
GDP = C + I + G + NE
C= consumption (personal expenditures), non durable goods, durable goods, and services = 71%
I= business investment. ex: machinery, computer system factories. = 13%
G= government spending. ex: salaries, roads, bridges.
NE= net exports. (exports - imports) = 4%
How are bond prices and interest rates related?
They are inversely related. High interest rates cause bond prices to decline
Know the 4 types of unemployment.
Individuals searching for jobs or waiting to take jobs soon
Occurs due to changes in the structure of the demand for labor
Caused by the recession phase of the business cycle
What happens to consumer and producer surplus when a country allows trade and becomes either an importer or an exporter of a good?
the surplus meets equilibrium. Consumers are better of when countries allows trade imported. Producers better on exports
What happens to a country's overall welfare when tariffs and import quotas are imposed?
Both tariffs and import quotas reduce quantity of imports
Why is there no shortage of scarce resources in a free market economy?
prices adjust to eliminate shortages.
quantity output x base year price
price level x output
changes in government spending and tax collections designed to achieve full employment, price stability, and economic growth
a central banks changing of the money supply to influence interest rates and assist the economy in achieving price level stability, full employment, and economic growth
What factors would shift the Aggregate Demand or Aggregate Supply curve and in which direction?
is affected by production costs including taxes, subsidies, price of labor (wages), and the price of raw materials. Demand GDP components.
What does Okun's Law suggest and how does it relate to GDP potential?
For every 1% of cyclical unemployment presents 2% GDP gap. Measures difference between potential and actual GDP
How does the GDP multiplier impact the economy?
when increased or changed, causes increases or changes in many other related economic variables.
What is meant by "crowding out"?
occurs when borrowing by the federal government reduces borrowing by households and businesses. Government borrows money and everyone else borrows money, there is only so much to be lent out.
What gives our money value?
The value of money is determined by the demand for it, just like the value of goods and services.
What are demand shocks?
unexpected changes in the demand for goods and services
APC, APS, MPC, and MPS.
APC- consumption/income, APS- savings/income
MPC- change in consumption/ change in income
MPS= change in savings/ change in income
Measures the market value of all final goods and services produced within a country in a given period of time
GDP - depreciation
Know the 4 phases of the business cycle
expansion, peak, contraction, trough
How do we know when the allocation of resources is efficient?
occurs when we produce the goods and services that people value most highly. - Resources are allocated efficiently when it is not possible to produce more of a good or service without giving up some other good or service that is valued more highly.
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