Macroeconomics, Carol Hogan, University of Michigan - Deaborn, Review Questions

Describe an economic model. How are theories and models used in economics?

An economic model is a simplified representation of a real situation that is used to better understand real-life situations. It is a mathematical version of an idea.

List the seven determinants of demand (or exogenous factors of demand). Recall, we added "wealth" to this list. Explain/demonstrate how a change in each determinant of demand (exogenous factor of demand) will cause the demand curve to shift to the right. ...shift to the left.

1. Income Increases (N) Income Decreases (Inf.) 2. Wealth Increases (N) Wealth Decreases (Inf.) 3. More Popular 4. Price of Substitute Increases 5. Price of Complement Decreases 6. Number of Consumers Increases 7. Expected Future Price Increases

What is an economic disincentive? Give an example of a disincentive.

An economic disincentive is a penalty or cost for a certain behavior to discourage it. An example is taxes.

What is an economic incentive? Give an example of an incentive.

An economic incentive is a reward to encourage a certain behavior. An example is that some colleges lower the prices of their classes after the student has signed up for more than 12 credit hours. This is an incentive for students to take more classes.

What are the two reasons why an economy would find itself at an interior point? Are these interior points efficient? Why or why not?

An economy would find itself at an interior point because of a downturn in the economy or governmental intervention. These interior points are not efficient. They are not efficient because all resources are not being used, thus can cause unemployment because of underproduction.

How do the terms "increase in demand" and "decrease in demand" relate to shifts in the demand curve?

An increase in demand means that the demand curve shifts to the right. A decrease in demand means the demand curve shifts to the left.

Which points in this commodity space are both feasible and efficient?

Points in the commodity space that are both feasible and efficient are points on the PPF curve.

What is the one endogenous factor of demand?

Px is one endogenous factor of demand. The price per unit of x is an endogenous factor of demand.

When do we move along the demand curve? When do we shift the demand curve?

We move along the demand curve when Px changes. We shift the demand curve when income or wealth increases or decreases.

What are the six main features of a capitalist (market-driven) economy?

1. Freedom of Choice 2. Self-Interest 3. Competition 4. Free or Private Enterprise 5. Private Property 6. Specialization

What three goals do all economists try to achieve?

1. Full Employment 2. Stable Prices (It is difficult for consumers to make decisions if prices are not stable) 3. Economic Growth

What are the three fundamental questions any economy must answer?

1. What will be produced? 2. How? (Will they be hand made or made in a factory assembly line?) 3. Distribution? (Who gets what?)

Present and describe the flow of funds in the circular flow model. Present and describe the flow of goods and services in this model. Present and describe the flow of factors of production and economic payments in this model.

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What does "ceteris paribus" mean? How do economists use ceteris paribus?

Ceteris paribus means other conditions staying the same. It is used to monitor one variable's influence on another.

Describe the program used in Chicago. What were the results of this program?

In Chicago students were paid based on their grades. The program helped students get better grades and attend classes more.

Describe the program used in Dallas. What were the results of this program?

In Dallas second-graders were paid every time they read a book. The program helped boost the children's reading-comprehension test scores through to the next year when they had stopped paying them.

Describe the program used in New York. What were the results of this program?

In New York students were paid based on the scores they got on standardized tests. The program seemed to have no effect on test scores.

Describe the program used in Washington D.C. What were the results of this program?

In Washington D.C., students were paid according to attendance, behavior, and grades. The program helped those who had behavioral problems, raising their test scores by an amount that was equivalent to five extra months in school.

What does "increasing opportunity costs" mean? Why is this second production possibilities frontier drawn concave (bowed toward the origin)? What do we know about the adaptability of factors of production in this situation?

Increasing opportunity cost means that as you continue to increase production of one good, the opportunity cost of producing the next unit increases. This PPF is drawn concave because the opportunity cost and slope is not constant. The curve gets steeper and steeper. Factors of production are not perfectly adaptable in this situation.

What determines the negative slope of the demand curve?

Law of demand.

How is the "law of large numbers" used in macroeconomics?

Law of large numbers means that larger sample sizes will result with more accurate outcomes. It is used in macroeconomics to see the most common reaction people have to economic action. (Behavioral Average)

How does macroeconomic analysis differ from microeconomic analysis?

Macroeconomics analysis is "large" and is looking at the whole economy as one big group. Microeconomic analysis is "small" and is looking at specific parts of the economy.

Can the economy reach an exterior point today? Why or why not? Is an exterior point feasible today?

No, the economy can not reach an exterior point today. There are not enough factors of production to do so. An exterior point is not feasible, only points on the PPF curve and below it are feasible.

Which of these cities/programs had the biggest impact? Why was this program so successful? Which of these programs had no perceptible effect? Why?

Dallas had the biggest impact. It was so successful because the students had a lot of control over their outcomes. This is what made the Chicago and Washington D.C. programs work better too. The program in New York had no perceptible effect. This was because students didn't know how to affect their standardized test scores. The timing of the reward was also flawed.

What is demand?

Demand refers to the number of units of a good or service consumers are willing and able to purchase at various prices over a given period of time.

What is the difference between a normal good and an inferior good? How does a change in income affect each type of good?

Normal goods are things that people want. They are things that people want to buy if they have the money. Inferior goods are things that people don't really want. They are bought when it is needed to save money, etc. An increase in income means an increase in normal goods and decrease of inferior goods. A decrease in income means a decrease in normal goods and increase of inferior goods.

What would cause an economy to move to an interior point, compared to what would cause the entire production possibilities curve to shift inward?

For an economy to move to an interior point, it means that there are resources not being used. When the entire PPF shifts inward, it means that the resources have actually decreased.

What would cause the production possibilities frontier to shift outward? ...inward?

For the PPF to shift outward there would need to be an increase in factors of production or improved technology. For the PPF to shift inward there would need to be a decrease in factors of production or a reversion back to old technology.

What does "opportunity cost" mean? What is a trade-off, and how does that help define opportunity cost?

Opportunity cost is what needs to be given up to receive something else. A trade-off is sacrificing something to achieve some product or experience.

Which points in this commodity space are feasible, but not efficient?

Points in the commodity space that are feasible, but not efficient are points below the PPF curve.

Which points in this commodity space are not feasible?

Points in the commodity space that are not feasible are exterior points.

Graphically, present the "law of demand" and state the "law of demand" verbally.

Px = Price per unit of x QDX = Quantity demanded of x "There exists a negative or inverse relationship between the Px and QDX, ceteris paribus." Px —> QDX Decrease in Px —> Increase in QDX Increase in Px —> Decrease in QDX

What is "marginal analysis" or saying that decisions are made "on the margin?"

Saying that decisions are made "on the margin" means that we are looking at the changes that happen when there is an incremental change of one. This could be building one more house or laying off one more employee.

What does the production possibilities frontier (curve) represent?

The PPF represents production possibilities by ending up with a set of points.

Who was the author of The Wealth of Nations? When was this published? Did the author believe an individual's self-interest could ever work to better the entire society? What phrase described this idea?

The author of The Wealth of Nations was Adam Smith. It was published in 1776. Yes, Smith thought that an individual's self-interest could work to better the entire society. The phrase he used was the "invisible hand." The meaning behind this was that everyone made their own decisions, but no one gets left behind.

Describe capitalist (market-driven), command, and traditional types of economies. How are economic decisions made in each type of economy? Who owns or controls the majority of the nation's factors of production in each case?

A capitalist (or market driven) economy is the kind that the U.S. has. Most factors of production are privately owned. Most questions are answered in markets (Like if things are being sold out or if they are going on sale because they are not selling.) In a command (or socialism, communism) economy, most factors of production are owned by the central government. Most questions are answered by the central government. A traditional economy is the kind that North Korea has. It is very similar to a command economy. The difference is that instead of factors of production being owned by the government, they are ruled by a specific family, religion, or military. Most questions are also answered by a specific family, religion, or military.

What is the difference between "demand" and "quantity demanded"?

A change in quantity demanded represents a movement along the current demand curve, while a change in demand represents a shift in the entire demand curve.

What is the difference between a capital good and a consumer good?

A consumer good is a good that fulfills needs and wants that can be obtained at stores. Capital goods are tangible and are not given by nature. They are constructed, like factory machines.

What is the difference between a good and a service?

A good is tangible, while a service is not. Goods include products and actual physical things. Services could be buying a ticket to see an entertainment service or things that are not tangible like physical things that can be held.

What is the difference between a "positive" and a "normative" statement?

A positive statement contains no opinion. It is stated as fact. Two conflicting positive statements can always be solved. A normative statement contains opinions. Two conflicting normative statements can never be solved.

What is the difference between an endogenous and an exogenous factor of demand?

An endogenous factor of demand changes the position on the demand curve. An exogenous factor of demand shifts the demand curve.

What is the difference between an endogenous variable and an exogenous variable? Which of these variables is "inside" our economic model? Which of these variables is "outside" our economic model?

An endogenous variable is the variable that is being used in ceteris paribus. It is "inside" our economic model. An exogenous variable is all the variables that are not staying the same and are not being monitored in ceteris paribus. It is "outside" our economic model.

What is the difference between an entrepreneur and a laborer?

An entrepreneur takes on a lot of risk. They put their own money into their investments and have to accept the fact that they could lose it all. A laborer is told what to do for the most part and is taking on no risk, like losing money. They are usually being paid by their employer.

What is the difference between an "increase in demand" and an "increase in quantity demanded"? What is the difference between a "decrease in demand" and a "decrease in quantity demanded"?

An increase in demand is a shift in the demand curve while an increase in quantity demanded is a shift along the demand curve. A decrease in demand is a shift in the demand cure while a decrease in quantity demanded is a shift along the demand curve.

How does an economy's present choice between capital (to produce goods in the future) and consumer goods (goods for the present) impact its future economic growth? Graphically, present a production possibilities frontier where an economy is producing both consumer goods (horizontal axis) and capital goods (vertical axis). Graphically, show how the difference in outward shift (and economic growth) in a country that produces more capital goods differs from a country that produces fewer capital goods.

Economic choices can affect its outward shift later in the future. If an economy invests in more capital goods than consumer goods in the present, then in the future these will lead to a bigger outward shift. A bigger investment in consumer goods also result with an outward shift, but not one that is as big as if the economy chooses more consumer goods than capital goods.

What is economics? 22-55

Economics is a social science that studies the production, distribution, and consumption of goods and services.

In general, what did educators conclude about incentive programs based on this study? How can these incentive programs be structured so they are more successful? Explain.

Educators concluded that incentive programs need to be centered around who they are targeting. Some incentives that help motivate economically disadvantaged students may not help motivate those students that are not economically disadvantaged.

Define efficiency. Define equity. Which of these is normative? Which is positive? Can these two goals be reached simultaneously? Explain.

Efficiency is taking all opportunities to make some people better off without making other people worse off. Equity is a condition in which everyone gets their "fair share." It is more normative with opinions. It is what people think is fundamentally fair.

What determines the position of the demand curve?

Exogenous factors.

What is the "fallacy of composition?"

Fallacy of composition means that what is good for an individual is not always good for the group.

What are the four categories of factors of production (also called "economic resources")? Give an example of each type of factor of production (We are ignoring the book's category of "human capital" and have added the more traditional category of "entrepreneurship" instead.).

The four categories are land, capital, labor, and entrepreneur. An example of land is anything that is a natural resource, which could be actual physical land, animals, or anything given to us by nature. An example of capital is something that has been created by man, like a car. An example of labor is something that is given instruction, could be a CEO or someone in a factory. An example of an entrepreneur is people that are risk takers, invent things, or invest in stock.

Present the circular flow model. What are the different markets in this model? What two groups are present in this model? Recall, we used a more detailed model in class, naming the four specific flows of funds in the model.

There are two different markets. They are markets for goods & services and factor markets. The two groups present in this model are households and firms. Funds from households to markets for goods & services are called: Consumption Funds from markets for goods & services to firms are called: Business Revenue Funds from firms to factor markets are called: Business Cost Funds from factor markets to households are called: Household Income

From the Independent Reading: Educators have tried to offer cash rewards to students in some schools.What are these educators attempting to accomplish? In the Fryer study, which schools were targeted? Why? What four cities were chosen to test cash rewards?

These educators are trying to improve student's academic performance in school. The schools that were targeted were ones that had students from disadvantaged backgrounds. This was because they wanted to help these students that had poor attendance, high dropout rates, and had low standardized test scores. The four cities chosen were New York, Chicago, Washington D.C., and Dallas.

What does "constant opportunity costs" mean? Why is this first production possibilities frontier drawn as a straight line? What do we know about the adaptability of factors of production in this situation?

When opportunity cost is constant, it means that the cost of each additional unit of one product in terms of another product remains the same. A straight line means that the opportunity cost is constant as production of different goods is changing. Factors of production (resources) are perfectly adaptable in this situation.

Is an exterior point feasible in the future? Explain. What would need to happen to reach an exterior point in the future?

Yes, an exterior point can be feasible in the future. This could only happen if the PPF shifts outward enough to reach this exterior point. For this to happen there would need to be an increase in factors of production or an improvement in technology.