MACROecon study guide

How does a market economy solve the for whom to produce problem?

Those who are willing to pay for the goods and services at the market-determined prices will get them.

Deficit

A shortfall of revenues under payments.

if cross elasticity of demand is negative, then the two goods are a. substitutes b. complements

COMPLEMENTS NEGATIVE

Which of the following is not a determinant of price elasticity of demand? -availability of substitutes. -number of producers. -size of budget. -time period. -whether the good is a necessity or luxury.

-number of producers.

Market economies are based upon: -private property and individual good will toward others. -government planning and individual good will toward others. -government planning and individual self-interest. -private property and individual planning.

-private property and individual planning.

The shapes of the curves in the AS/AD model are based: -upon the principle of substitution. -upon the principle of opportunity cost. -upon the relationship between a single good and its price. -on the relationship between the price level and total output.

-on the relationship between the price level and total output.

Which of the following is the best example of an excise tax? -A tax on all capital gains (the amount by which the value of an asset has risen between the time it was purchased and the time it was sold) -A tax paid by employers on income paid to workers -A tax collected on each gallon of gasoline sold -A tax that is levied on the value of land and buildings

-A tax collected on each gallon of gasoline sold

Households supply factors of production to business and are paid by business for doing so. The market where this interaction takes place is called the factor market. True False

true

In a market economy, society relies on the self-interest of individuals to determine what, how, and for whom to produce. True False

true

natural rate of unemployment

unemployment is unemployment you will always have

when you have trade deficit

value of dollar goes down (more imports than exports)

what does the imf do

international monetary fund

crownding out

poeple dont invest as much because intrest rates are higher

Which of the following is not an example of an externality? -An increase in education enhancing the ability of citizens to solve societal problems. -A loud party in Tenleytown keeping neighbors awake. -One household"s good lawn maintenance increases the value of neighboring houses. -An increase in apartment rent rates forcing people to find housing elsewhere. -Unfiltered car exhaust causing lung cancer.

-An increase in apartment rent rates forcing people to find housing elsewhere.

Which of the following statements is correct? -Stockholders are legally liable for all the debt of a corporation. -A corporation is a business that is legally owned by its employees. -Corporations are legal entities that, in law, are treated as persons. -Most large companies and many small companies in the United States are not corporations.

-Corporations are legal entities that, in law, are treated as persons.

Which of the following is NOT a characteristic of the Industrial Revolution? -Increased urbanization. -Increased productivity. - Growth of democratic ideals. -Decline of the middle class. -Rise of individualism.

-Decline of the middle class.

Libertarians would align most closely with which of the following thoughts? -Human beings are self-interested beings, and private property and free markets are needed to provide protection and incentives to these individuals -Human beings are interested in the well-being of all individuals in society and will therefore work altruistically to improve everyone's general well-being -Government intervention in the economy is best for society. -Work is pointless and should be avoided at all costs. -There should be an expansion of government social programs to provide a wider array of services to the members of society.

-Human beings are self-interested beings, and private property and free markets are needed to provide protection and incentives to these individuals

Which of the following is most likely an action that supports competition? -Requiring professionals, such as architects and engineers, to be licensed -Using tariffs to restrict the ability of foreign firms to sell products in domestic markets -Preventing two dominant firms in the same market from merging -Granting subsidies to farmers based on production levels

-Preventing two dominant firms in the same market from merging

Which of the following is NOT a reason why the AD curve slopes downward? -International effect -Interest rate effect -Substitution effect -Money wealth effect

-Substitution effect

Which of the following can be determined by cross elasticity of demand analysis: -Whether a good is a normal or inferior good. -Whether demand for a good is elastic or inelastic with respect to its own price. -Whether a country is rich or poor. -Whether two goods are substitutes or complements.

-Whether two goods are substitutes or complements.

If the price elasticity of demand is highly elastic, then an increase in the price of the good will lead to: -an increase in total revenue for the firm. -a decrease in total revenue for the firm. -no change in total revenue for the firm. -an increase in the quantity demanded. -consequences too horrible to contemplate.

-a decrease in total revenue for the firm.

Example(s) of externalities are: -the underground economy. -the househusband. -a polluted river. -all of the above. -none of the above.

-a polluted river.

A good for which the consumption by one individual excludes completely the consumption of that very same unit of good is called: -a pure public good. -a pure private good. -a producer externality. -a consumer externality.

-a pure private good.

The most likely impact of an effective price floor is: -the supply curve will shift to the right. -the demand curve will shift to the left. -a surplus will develop. -a shortage will develop.

-a surplus will develop.

A tariff is: -a tax that government places on imported goods. -a quantity limitation placed on imports -an all-out restriction on imports. -a government-imposed procedural rule limiting imports.

-a tax that government places on imported goods.

The Neolithic Revolution was characterized by: -discovery and use of fire. -adoption of agriculture and domestication of animals. -development of the three crop system. -division of labor. -sheer boneheadness.

-adoption of agriculture and domestication of animals.

When hurricane Irene tore through the northeastern United States, destroying a significant portion of the Hudson Valley apple crop: -apple prices rose, and quantity sold rose. -apple prices declined, and quantity sold fell. -apple prices rose, and quantity sold fell. -apple prices declined, and quantity sold rose.

-apple prices rose, and quantity sold fell.

Externalities are -only in evidence in socialist economies. -not a problem in capitalist economies. -benefits or costs not included in price. -taken care of by the "invisible hand. -what's outside of the government's budget, but important for macro-stability.

-benefits or costs not included in price.

Businesses do all of the following except: -pay taxes to the government. -demand labor services from households in the factor market. -demand goods and services from households in the goods market. -supply goods and services to the government in the goods market.

-demand goods and services from households in the goods market.

In the United States, government performs all of the following functions except: -redistributing income. -purchasing goods and services. -regulating the economy. -determining production levels.

-determining production levels.

If you have a price inelastic demand for notebooks and the notebook industry decides to jack up the price, the total revenue for the notebook producers will: -increase. -decrease. -stay the same. -increase, then go back to equilibrium.

-increase.

A negative income elasticity of demand is representative of -inferior goods. -superior goods. -exterior goods. -normal goods. -luxury goods.

-inferior goods.

A fall in the U.S. price level will cause foreigners to: -substitute U.S. goods for their own domestically-produced goods. -substitute their own domestically-produced goods for U.S. goods. -buy more of their own domestically-produced goods. -buy fewer U.S. goods.

-substitute U.S. goods for their own domestically-produced goods.

If cross elasticity of demand is greater than 0, then the goods are -complements. -inferior. -elastic. -substitutes. -stupid.

-substitutes.

Households are on the: -supply side of factor markets and the demand side of goods markets. -demand side of factor markets and the supply side of goods markets. -supply side of both factor markets and goods markets. -demand side of both factor markets and goods markets.

-supply side of factor markets and the demand side of goods markets.

The reason why the AS/AD model does not depend upon the concepts of substitution and opportunity cost is that: -in groups, people do not make the same choices as when they are alone. -the AS/AD model considers total output. There are no goods to substitute. -the AS/AD model considers the effects of other countries' decisions. -other things remain constant in the AS/AD model.

-the AS/AD model considers total output. There are no goods to substitute.

As prices fall, people become richer and buy more. This occurs as a result of: -the international effect. -the multiplier effect. -the interest rate effect. -the money wealth effect.

-the money wealth effect.

The Katrina disaster in New Orleans decreased the ability of oil companies to purify crude oil into gasoline. This caused: -the supply curve for gasoline to shift inward. -the supply curve for gasoline to shift outward. -the quantity of gasoline demanded to move out along the demand curve. -the quantity of gasoline supplied to move in along the supply curve.

-the supply curve for gasoline to shift inward.

A public good is a good that: -is owned by the public. -when consumed by one individual, can still be consumed by others. -when consumed by one individual, cannot be consumed by another. -is available only to those people who help to pay for it.

-when consumed by one individual, can still be consumed by others.

Identify four shift factors of demand with the correct explanation of how each affects demand.

1. Change in income. As income rises, demand for a normal good increases. 2. Change in consumer tastes. As the taste for a product rises, demand increases. 3. Change in taxes paid by consumers. As taxes rise, demand falls. 4. The price of a related consumer good changes. As the price of a complement falls, demand increases.

Identify four shift factors of supply with the correct explanation of how each affects supply.

1. Producers expect prices of their products to change in the future. As the price that producers expect to sell their products for increases, supply decreases. 2. When new production technologies are introduced the cost of production falls and supply increases. 3. Change in taxes paid by producers. As the amount of taxes that producers pay increases, supply decreases. 4. The price of inputs changes. As the price of inputs rises, supply decreases.

quantity theory of money

A theory that the price level varies in response to changes in the quantity of money.

debt

Accumulated deficits minus accumulated surpluses

Why is price directly related to quantity supplied?

As price rises, suppliers rearrange their activities to supply more of that good in order to take advantage of the higher price.

Mary has just stated that normally, as price rises, supply will increase. Her teacher grimaces. Why?

Because as price rises, quantity supplied will increase, not supply will increase. Saying that supply increases means that the curve has shifted to the right, which is not the result of a price change. The correct statement is that normally, as price rises, the quantity supplied increases, other things constant.

The oil crisis of the 1970s, where OPEC increased prices of petroleum from $1.80 a barrel in 1970 to $34 a barrel in 1978, is an example of: a. Cost-push inflation. b. Demand-pull inflation. c. When demand is inelastic in the short run and elastic in the long run. d. When demand is elastic in the short run and inelastic in the long run. Both A and C. Both A and D.

Both A and C a. Cost-push inflation. c. When demand is inelastic in the short run and elastic in the long run.

How does a market economy solve the how to produce problem?

Businesses decide how to produce guided by what they believe will earn them the largest profit.

How does a market economy solve the what to produce problem?

Businesses decide what to produce based on what they think will sell and earn profit for the business.

In most developing countries, there are long lines of taxis at airports, and these taxis often wait two or three hours for a customer. a. What does this tell you about the price in that market?

The price must be greater than the equilibrium price, causing excess supply.

Assume that Argentina imposes a 20 percent tax on natural gas exports.

The tax will likely reduce the price of natural gas in Argentina as more gas is diverted to the domestic market.

governments running of a deficit or surplus with the objective of effecting the level of output is ______

FISCAL POLICY

Why are international organizations limited in their effectiveness?

Membership is voluntary and there is no world government to enforce the laws.

take action to lower natural rate of unemplyoment

ONE WAY TO DECREASE-----increase gov. spending on training programs to help these people get jobs

State the law of supply.

Quantity supplied rises as price increases, other things constant. Quantity supplied falls as price decreases, other things constant.

if cross elasticity of demand is positive, then the two goods are a. substitutes b. complements

SUBSTITUES POSITIVE

OPEC announces it will increase oil production by 20 percent. What is the effect of this action on the price of oil now?

Supply will increase, causing the price of oil to fall.

In a market economy, what is the central coordinating mechanism?

The price mechanism.

In the AS/AD model, as the price level falls, the holders of money become richer and buy more. This is one reason why the aggregate demand curve is downward sloping. True False

True This is called the money wealth effect

State the law of demand. a. Demand increases as price rises. Demand decreases as price falls. b. Demand increases as price falls. Demand decreases as price rises. c. Quantity demanded rises as price rises, other things constant. Quantity demanded falls as price falls, other things constant. d. Quantity demanded rises as price falls, other things constant. Quantity demanded falls as price rises, other things constant.

b. Demand increases as price falls. Demand decreases as price rises

if the us dollar depreciates in the foreign exchange markets- a. price level in us will decrease b. us exports will increase c. goods produced in us will become more expensive in foreign countries d. us demand for imports will increase

b. US exports will increase

what would NOT destabilize the economy? a. increase in taxes during recession b. a decline in asset prices leads people to begin to buy more stocks c. a budget deficit produced during an inflationary period d. an annually balanced budget

b. a decline in asset prices leads people to begin to buy more stocks if the prices decline, things are cheaper so people are going to buy more of it, a natural reaction to an economic change

in 2007 oil prices increased sharply, actual output was less than potential output and inflation increased. given the circumstances, the increase in inflation was most likely a. demand pull inflation b. cost push inflation c. hyper inflation d. asset inflation

b. cost push inflation caused by an increase in prices of input decrease in supply, so a decrease in supply but demand is still high prices are going to increase because you're trying to get less demanders how do you bring demand down to get supply to meet in the middle? you increase the prices so supplier will want to supply more in order to get that higher price and demanders are going to buy less because they don't want to pay the higher price

what would not destabilize eocnomy

b. deceline in asset prices leads poeple to beign to buy more stocks if prices deceline, things are cheaper so people buy more

which of the following organizations work with developing countries to secure low interest loans that foster economic growth a. imf b. world bank c. federal trade commission d. national labor relations board

b. world bank

Adam Smith believed that the division of labor a. would anger workman and incite them to revolution. b. was forced upon workers by a deistic God. c. was a force that would make workers "as stupid and ignorant as it is possible for a human creature to become." d. would increase productivity. both c and d above.

both c and d above. c. was a force that would make workers "as stupid and ignorant as it is possible for a human creature to become." d. would increase productivity

if the government finances an increase in its expenditures by selling bonds to the public, then the aggregate demand curve will what? a. shift out by the same amount regardless of whether crowding out occurs b. not shift c. shift out but not as much as it would if crowding out didn't occur d. shift out more if crowding out occurs

c. shift out but not as much as it would if crowding out didn't occur crowing out is when people don't invest as much because interest rates are higher

if gov finances by selling bonds, then aggregate demand curve will

c. shift out but not as much if crownding out didnt occur

cost push and demand pull inflation

caused by an increase of prices and input decrease in supply- and demand is still high, prices ill increase because youre trying to get less demanders

oil prices increased sharply, inflation increased because

cost push inflation

an economy is facing moderate output growth but with significantly high inflation rates. the federal reserve can either take which of the following policy actions to address the problem a. decrease the income tax rate b. decrease the federal funds rate c. decrease the required reserve ratio d. decrease the money supply

d. decrease the money supply

an eocnmy is facing moderate output grouwh but high inflaiton rates, gov can take what action

decrease money supply

difference between deficit and debt

deficit- surplus and deficit budget deficit- when you spend more money than you have so you borrow form other places which puts you in debt to pay for budget deficit

what is difference between government debt and personal debt

government never really pays back debt

the qauntity theory of money says

it would increase price level and leave real gdp unchanged because

price ceiling

price ceiling is the line BELOW equilibrium on the graph. it is the MAXIMUM price of something. price ceiling represents a SHORTAGE.

price floor

price floor is the line ABOVE equilibrium on the graph. MINIMUM price of something. a price floor represents a SURPLUS.