Econ 2030 Final Exam
Whose real wealth (table 7.3) declined in the 1990s? Who else might have lost real income or wealth? Who gained as a result of inflation?
During the 1990s, the nominal prices of stamps and gold fell resulting in a decline in wealth. During this same period, the nominal values of bonds, and silver rose, but prices rose a bit more, causing their real values to fall. People who owned stocks, diamonds, oil, houses and farmland all saw increases in their wealth as the nominal values of these assets.
See page 161, If a macroeconomic outcome is undesirable (specifically, unemployment and/or inflation is too high), what would a Classical economist suggest our government do.
Economy will self adjust over time through flexible wages and prices. Based on Say's Law: Supply creates its own quantity demanded.
What's the real cost of the food in the "free lunch" cartoon on page 6?
Even if there is no charge, the preparation requires the use of scarce resources. The cost of the lunch is the best alternative use of that land, labor, and capital. In addition, the value of the patron's time is a 'cost' he must pay for the lunch.
How is the United States trade deficit affected when demand or supply for dollars shifts?
Exports - Imports < $0 - trade deficits. Can either positively or negatively effect trade deficits.
See page 161, If a macroeconomic outcome is undesirable (specifically, unemployment and/or inflation is too high), a Keynesian economist suggest our government do?
Fiscal policies to influence aggregate demand (Taxation or government spending).
What can the government do to correct a public good market failure?
Fiscal policy: 1. Change in taxation 2. Change in government spending Monetary policy: 1. Change in money supply (buying and selling treasury bonds) High unemployment = lower rates to cash bonds. 2. Change in interest rates (determined by the FED) Federal funds rate: rate at which the U.S. Fed. banks borrow from each other.
What is an opportunity cost?
Forgone benefits of the next best alternative. EX: Class v. Sleep.
Productive efficiency
Full utilization of economic resources (not being wasteful, max amount used). Test: The nation/state/firm cannot produce one more unit of Good A without sacrificing production of Good B. In her example: College had to make a sacrifice = efficient.
On the basis of the News on page 432, how do U.S. furniture manufacturers feel about NAFTA? How about farmers?
Furniture = don't like, shrinkage of jobs due to trade barriers falling. Farmers however, do like jobs because massive job growth due to trade barriers falling.
What is the "GDP gap"? - relate to the PPC?
GDP gap refers to the disparity between an economy's actual total output and its potential total output. GDP gap = Potential GDP - Actual GDP.
Why is it important to know how much output is being produced? Who uses such information?
GDP tells us how much output is being produced, and what is being produced. By comparing previous data, we can see what trends are occurring in our economy. Economists and politicians use such information to verify policies are working properly or to correct problems before they get too bad.
Who gains and who loses from nontariff barriers to Mexican trucks (p.430) What made President Obama offer renewed negotiations?
Gains: U.S. security/people Loses: Mexico/people in the US who exports goods (2.4 billion) President Obama offered new negotiations in order to help the United States gain back what was lost.
Goods with external costs are
Goods with external costs are Overproduced
What would have happened to shrimp prices and consumption if the government had prohibited price increases after the BP oil spill? (p.58)
If government had prohibited price increases after the B.P. oil spill, despite a decrease in supply, the price of shrimp would not be able to rise, possibly leading to blackmarkets or other similar items
If everyone seeks a free ride, what mix of output will be produced in figure 4.2? Why would anyone voluntarily contribute to the purchase of public goods like flood control or snow removal?
If public goods were marketed like private goods, everyone would wait for someone else to pay. Some out of kindness of their hearts, may be willing to contribute in order to help other people that they know or to benefit themselves personally.
How might rapid inflation affect college enrollments?
If the price of a college education rises faster than other prices, then enrollment likely will fall. However, higher prices alone will not decrease enrollment if other prices rise equally.
How do changes in the value of the U.S. dollar affect foreign enrollments at U.S. colleges?
If the value of the U.S. dollar increases (other currency depreciates), the demand for college at the U.S. decreases for foreign enrollments as the price increases greatly.
Allocative efficiency
Implies optimizing society's wants and needs. Productive efficiency is required for Allocative efficiency.
What is M2?
Includes all of M1 and savings accounts, cd's (Under 100,000), Money market mutual funds (Treasury bonds).
What is a price ceiling?
Legally established maximum price; by law, price cannot rise above the price ceiling.
What is a price floor?
Legally established minimum price; by law, price cannot fall below the price floor Only binding/ effective when set above Price Equilibrium (pe)
Pure Capitalism
Limited government intervention Markets and prices Self interest Private property/freedom of choice Competition
Suppose a lawyer can type faster than any secretary. Should a lawyer do her own typing? Can you demonstrate the validity of your answer?
No, the layer should not do her own typing because the secretaries have a comparative advantage in typing (their opportunity cost is less of that of a lawyer).
Given various prices and quantities of goods/ services in different years, how do you calculate nominal and real GDP?
Nominal: Find current prices x amount produced. Real: Use the base year for Real GDP x amount produced.
What is the difference between positive and normative analysis?
Normative analysis: incorporates subjective judgments about what ought to be done. Positive Analysis: Focuses on objective statements
What is the connection between North Korea's missile program and its hunger problem?
North Korea missile program v. hunger problem. = Guns v. Butter argument. A nation (North Korea) chooses what to produce. Defense v. civilian goods. Decide what balance fits the nations needs best.
What does it mean to be outside the PPC?
Not currently obtainable given current circumstances. Can be obtained through a shift in PPC or trade.
Why is aggregate demand downward-sloping?
Real balances effect Foreign trade effect Interest rate effect
What is the multiplier? How is it calculated?
Refers to the increase in final income arising from any new injection of spending. 1/ 1- MPC
What are some factors that will cause the demand or supply curve for dollars to shift?
Relative income changes Relative Price changes Changes in product availability Relative interest rate changes Speculation
What are some factors that will cause the supply curve for dollars to shift?
Relative income changes Relative Price changes Changes in product availability Relative interest rate changes Speculation
Why do rich people have a higher marginal propensity to save than poor people?
Rich people have a lower MPC and thus a higher MPS. Additional income amounts are not entirely spent.
How do you find "potential GDP"? - relate to the PPC
See Quiz 6
Why does the existence of a positive or negative externality create a market failure?
Suggests that the interaction between buyers and sellers (market mechanism)/ market participants, leads the market to a suboptimal level of trade. In other words, there's something wrong with QE.
What does it mean for a market to fail?
Suggests that the interactions between buyers and sellers (market mechanism)/market participants, leads the market to a suboptimal level of trade. In other words, there's something wrong with Qe.
What does the supply curve for dollars represent (who is supplying the dollars)?
Supply curve of dollars = US consumers who want to buy foreign goods and servies. Imports.
What kind of measures can a nation (or state) take to protect itself against trade?
Tariffs, exports, Imports, etc. All of these things allow a nation to either restrict or limit the overall trade.
What is fiscal restraint and when might our government exercise fiscal restraint?
Tax hikes or spending cuts intended to reduce (shift) aggregate demand. Can increase or decrease transfer payments. Only used when economy is expanding too fast. Budget cuts Tax Hikes Reduced Transfers
Why are the AD shortfall and AD excess larger than their respective GDP gaps? Are they ever the same size as the GDP gap?
The AD shortfalls and excesses are larger than their respective GDP gaps because of the impact changing prices have on aggregate quantity demanded. Only in the case where AS is horizontal will the GDP gaps be equal to the AD shortfall and excess
How did Samsung's unveiling of the Galaxy S5 affect the demand for the S4 (p. 51). What determinants of demand changed? How did Walmart's price cut compensate?
The Galaxy S5 decreased demand for the S4. Here, technological advancement which is an input of demand, has changed. The second determinant that changed is the availability of substitute products. Walmart's price cut will increase demand for the Galaxy S4; this price cut will increase quantity demanded by an amount that is sufficient enough to increase the total market revenue for the S4.
What can the government do to correct this type of market failure (one brought on by externalities?)
1. Achieve allocative efficiency = not at optimal levels for society. 2. Promote equity/fairness - based on values to reallocate resources. 3. Maintain Macroeconomic stability (productive efficiency) = high unemployment. 4. Create economic growth = goal to have 3% economic growth (US pop grows @ 3%). Increase resources, and/or improve quality.
What are the costs of low inflation?
1. Creates unemployment Government actions, profit squeeze (Profit (TT) = Total Rev - Total cost)
Why is the demand for dollars downward-sloping?
The demand for dollars is downward-sloping because holders of yen will be less willing to buy dollars the more expensive they are in terms of yen.
Why is the demand for money downward sloping?
The demand for money is a schedule (or curve) showing the quantity of money demanded at alternative prices. Meaning, the quantity of money people are willing and able to hold (demand) increases as interest rates fall.
What are the steps that take place when moving from one equilibrium to another?
1. Demand down, (Shifts L). 2. At old Pe (equilibrium price = $16), a surplus exists. 3. Due to a surplus there's a downward shift in price. 4. Price down, quantity demanded up (Law of Demand). Price down, quantity supplied down (Law of Supply). 5. As Qd and Qs change, there's movement along the demand and supply curves. 6. Movement continues until Qd = Qs (new equilibrium).
Potential measurement problems with GDP
1. Legal but unreported income (babysitting, Lawnmowing). Illegal and unreported (drugs) - understates productivity. 2. Nonmarket activities: Jam for lawn mowing/tutoring = understates. Childcare (Stay at Home). 3. Negative externalities (Green economists = declining resources) = overstating. 4. GDP per capita (US v China population) 5. Leisure
What are the costs of high unemployment?
1. Lost productivity (Okun's Law) - GDP Gap (potential - actual). 2. Potentially increases discouraged workers 3. Social/human costs 4. Less taxes collected by government (lead to deficits that increase debt, can force government to reallocate (opp. cost). 5. High unemployment breeds higher unemployment. 6. Bargaining power shifts towards employers (Lower wages, benefits, employees may be mistreated, small reasons to fire someone).
What are the potential measurement problems with calculating the CPI?
1. New products not accounted for due to old base year ('82, '84). 2. Quality adjustments (subjective) - bring price down. 3. Doesn't include many types of taxes (only sales is captured) 4.Substitution (Diet coke v. Diet pepsi, even if not how we buy). 5. Owner's equivalent rent - 100k house, what you can earn by renting. 6. "Core" rate (excludes food and energy). Non core rate = what we assume is included. non core = 2.7%, core = 2.2%
What are the costs of high inflation?
1. Randomly redistributed income and wealth 2. Social tension/social concerns 3. Money illusion 4. Prices can lose their signaling ability 5. Shortened time horizons/uncertainty. 6. Hyperinflation.
Why would a decline in the value of the dollar prompt foreign manufacturers such as BMW to build production plants in the United States?
BMW can produce cars at a lower cost in the United States when the dollar falls in value. From BMW's point of view, it can purchase materials at lower dollar costs and sell the cars in Germany at the higher mark value. The gap between mark-denominated revenues and dollar-denominated costs widens which means profit widens.
Who gained and who lost from the price changes in table 7.2? What happened to the price of breakfast?
The gainers were the producers of goods that experienced higher prices (bananas, bread, busing, etc.). The consumers of those products were losing as prices climbed. The producers who lost are those producing goods that are falling in price (cars, eggs, computers, etc.).
In Figure 3.8, why is the organ demand curve downward sloping rather than vertical?
The law of demand applies, there is an inverse relationship between the price and the quantity demanded. Higher prices = fewer people can afford to buy organs, lower prices = more can afford to buy.
Domestic producers often base their demands for import protection on the fact that workers in country X are paid substandard wages. Is this a valid argument for protection?
This is a valid argument for protection. Domestic producers are depending on Country X for their product. There might be other countries producing the same product as Country X, but at a cheaper rate. This, along with other factors like a fluctuating exchange rate, may cause Country X to decrease the worker's wages in order to retain some profit for their business.
Fiscal policy
The use of government taxes and spending to alter macroeconomic outcomes. Can be a change in government spending on transfer payments, taxes, or spending on g/s
The manuscript for this book was typed for free by a friend? Had I hied a secretary to do the same job, GDP would have been higher, even thought the amount of output would have been identical. Why is this?
This is because of the way the GDP is calculated. As it was done by a friend, it is considered a nonmarket activity, and aw such, is understated in the GDP.
The WorldView on page 63 explains why gasoline prices rose in 2014. What will bring prices down?
U.S. abundance of oil, improvement of relations with another oil rich country other than Russia. Lack of oil spills.
Goods with external benefits are
Underproduced
See page 161, If a macroeconomic outcome is undesirable (specifically, unemployment and/or inflation is too high), supply-side economist suggest our government do?
Use of fiscal or monetary to influence aggregate supply.
What are the costs of low unemployment?
We lose benefits with the natural rate of unemployment. 1. Costly in that we lose the benefits associated with seasonal, frictional, and structural unemployment. 2. Costly in that it creates inflationary pressure.
Why would farmers rather store their output than sell it during period of hyperinflation? How does this behavior affect prices?
When prices are rising rapidly, wealth can be preserved by holding products rather than currency, this creates artificial shortages, which worsens the inflationary problem.
The non-price level determinants that will shift aggregate demand
CIGX
Should the firefighters have saved the house in the News? What was the justification for their belated intervention?
County enforcing its policy only for the residents that paid the annual fee of $75. If a resident did not pay, then he did not purchase the right to consume the service of the firefighters. That is the reason why the firefighters should not have saved the house of which its owner did not pay the fee.
Identify some problems associated with the use of fiscal policy.
Crowding out: Less credit available to finance consumption and investment. Time Lags: A delay between an economic action and a consequence. Pork Barrel Politics: Describes a process that legislators use to obtain funding from a central government to finance projects benefiting the legislatures local constituents.
No actor can have ____ comparative advantages
both
U-4 Unemployment
# of unemployed + Discouraged workers / Civilian Labor Force x 100
U-6 Unemployment
# of unemployed + discouraged workers +marginally unattached+underemployed/CLF
U-5 Unemployment
# of unemployed + discouraged workers +marginally unattached/CLF x 100
Okun's Law
1 percent more unemployment results in 2 percent less output.
U-3 Unemployment
4.7%, # of unemployed/CLF in the United States
How do changes in aggregate demand and or/ aggregate supply create a business cycle?
A business cycle describes changes in the demand-side of the economy as measured by GDP. GDP does not remain constant and changes due to economic and non economic reasons creating the different phases within a business cycle.
Gross Domestic Product (GDP)
A measurement of the monetary value of all final goods and services produced within the U.S. in a given time period. Measure how productive we are with scarce economic resources, every 3 months (quarterly) grow by 3%. Measures productivity.
Expenditure approach and components
A method to calculate real GDP C = Consumer G/S (Consumer spending) I = Investment goods (Firm spending) G = Govt spending on G/S X = Net exports (exports - imports)
Be able to define and calculate absolute advantage.
A nation is better at production with respect to lower input costs. Nation with lower input costs = absolute advantage.
What is a secondary rationing device and when is a secondary rationing device necessary?
A rationing device is something that is used to determine who gets what out of a set of scarce resources. I Usually price, but often needed when normal market outcomes (or price) cannot be used due to out of market outcomes (government intervention of ceilings or floors). Only needed for binding price ceiling EX: Those with kids, those who pay extra (bribes), rolling blackouts.
Income approach
Alternate way to calculate GDP - not used by us.
What is the specific market failure justification for government spending on: A. Public universities, B. Health care, C. Trash pickup, D. highways, E. Police, F. Solar energy? Would a purely private economy produce any of these services?
A. If it was no subsidized by the government, education would only be limited to those who are able to afford it. Loans and grants would not otherwise be available and would lead to the reduction of human capital in society. B. Only those who would be rich enough would be entitled to a longer lifespan. This is not efficient because more lives would be lost than saved if healthcare was not available to all as a public good. C. If a trash disposal system was run by the market rather than the government, only those who would be able to afford trash removal would be able to dispose of it. Trash would be everywhere, bad for society. D. Drivers who couldn't afford to pay to use highways would be stuck on localized streets and cause mass traffic and chaos. E. Only those who could afford the protection of police would be safe. Police lower crime rates for everyone, not just those able to pay. F. Only people who could afford to use solar energy could use it, those who cannot afford solar energy are still burning fossil fuels and ruining the air/atmosphere. A purely private economy would not produce any of these services because these are all public goods. People in purely private economies only look out for their own best interests and do not necessarily think about what is the most efficient outcome for the public.
How might a nation's production possibilities be affected by the following?: A. New Solar Technology B. An increase in Immigration C. An increase in military spending D. An increase in college attendance.
A. Might be able to produce more energy/expand PPC. B. Product more/PPC. C. Decrease PPC/ move it to spending it more on military, less on other goods. D.Increase in possible PPC upon graduation, decrease.
Why should taxpayers subsidize public colleges and universities? What external benefits are generated by higher education
All citizens in a state or in a country benefit from the positive externalities of education. We all benefit through innovation as research results are widely disseminated. An educated population also makes for better citizens in terms of better informed voting. In addition, leaders are developed who can promote an environment for further growth
Define business cycles
Alternating periods of economic growth and contraction. Measured by real GDP
Foreign trade effect
As our price levels rise, look to other nations and their goods and services to buy
Interest rate effect
As price levels rise, ind, firms need to borrow money to spend. If they do, interest rates go up, discourages spending, QAD goes down.
Real balances effect
As prices rise, the purchasing power of a dollar goes down.
COLA (Cost of living adjustment)
Automatic adjustments of nominal income to the rate of inflation.
Know the components of the consumption function
Autonomous consumption = a Marginal Propensity to consume = b Disposable Income = Yd C = a + bYd
If Israel's "Iron Dome" is so effective, why doesn't a private company produce it and sell its services directly to consumers?
Because the "Iron Dome" is a public good with good benefits, it is already under produced. There is no good way to charge for protection, as how can one exclude a person from being protected while living in Israel.
What is a positive externality?
Benefits of a market activity borne by a third party; the difference between the social and private benefits of a market activity.
What makes a price floor or price ceiling effective/binding?
Binding/effective: preventing the market from reaching its normal outcome Price floor: Set above PE Price ceiling: Set below PE.
What happens to aggregate demand when transfer payments and the taxes to pay them both rise by the same amount?
Both policies have the identical fiscal impact and will most likely cancel each other out. However, the key point to discuss is the difference in the distributional impact. Almost certainly, taxes will be mildly progressive while the transfer payments theoretically should favor the poor. If the poor have higher MPCs, there may be a net stimulus effect of the program. Nevertheless, the lower saving rate may offset the increase in saving due to increased income; there is some uncertainty about the long-run impact on investment and economic growth due to the lower saving rate.
What is a negative externality?
Costs of a market activity borne by a third party; the difference between the social and private costs of a market activity.
Why do we use models in the study of economics?
Ceteris Paribus: The assumption of nothing else changing. Economy is too vast and too complex otherwise, focus on basic relationships and models provide simplifications / isolate basic principles. Errors can be made, but for the most part, is accurate.
Determinants of demand
Change in consumers' incomes - Normal good/service - Inferior good/service Change in consumer's tastes/preferences Change in the price of a related good/service - Substitute good/service - Complementary good/service Change in consumers future expectations (Hurricane, Sale at Kroger next week). Change in # of consumers Change in exchange rate.
Two types of government spending
Change in government spending on G/S - direct effect Government spending on transfer payments - indirect
Determinants of supply
Change in price of resources/change in production costs - Taxes/subsidies Change in technology/productivity Change in producer's future expectations Change in # of producers
What are the four components of "what" gets produced in the U.S.?
Consumption - 11.6 billion 2/3 of U.S. Investment - 2.8 billion Government spending - 2.9 billion Net Exports - 522 billion
Why is the demand for dollars downward sloping (who is demanding the dollars)?
Demand curve of = represents foreign countries/ foreigners who want to buy U.S. goods and services. Exports
What are the potential measurement problems with the unemployment rate?
Discouraged workers -understates Underemployed - understates Phantom unemployed - overstates Different calculations (U3 - U6) - understates
Law of demand
Does not always hold, but generally: Price goes up, quantity demanded decreases. Price goes down, quantity demanded increases.
Law of Supply
Does not always hold, but generally: Price goes up, quantity supplied increases. Price goes down, quantity supplied decreases.
What does it mean for the dollar to appreciate?
Dollar appreciates when the USD buys more of another countries currency. Original: 0.9 Euros for every 1 USD. New (appreciated): 1.1 Euros for Every 1 USD
What does it mean for the dollar to depreciate?
Dollar depreciated when the USD buys less of another countries currency. Original: 0.9 Euros for every 1 USD. New (depreciated): 0.7 Euros for every 1 USD.
Why is frictional unemployment deemed desirable?
Helps individuals to gain work experience Improve the productive efficiency of labor (on PPC) Creates job movement/pathways to a career.
Who gains and who loses from rising house prices?
Home owners gain - rising house prices make the real value of the wealth of home owners rise. Wealth effects of rising house prices make home owners better off. Those looking to buy a house lose - as they will not have to pay a higher price to buy a house. The price effects of rising house prices will make home buyers worse off.
In our story of Tom, the student confronted with a web design assignment, we emphasized the great urgency of his desire for web tutoring. Many people would say that Tom had an "absolute need" for web help and therefore was ready to "pay anything" to get it. If this were true, what shape would his demand curve have? Why isn't this realistic?
If Tom did have an "absolute demand" for web design as his demand curve for web design would be a vertical line. He would be willing to pay any price for web design help. This is an unrealistic situation because Tom would not pay just anyprice for web design help. His income is limited thus limiting the price he is able to pay. The value of the web design services and passing the course is limited. Tom also desires other goods and wouldn't be willing to spend all his income on web design help
Has the tariff on Chinese solar panels affected you or your family? (p.426) Who has been affected?
Increased the price on once cheap solar panels/tariffs. Therefore if I or my family bought them, they would be closer or even more expensive then U.S. solar panels. Chinese and American manufacturers have been affected from both sides, Chinese= decline in sales/profitability. American = increase.
What is inflation?
Inflation is an increase in the average level of prices of goods and services.
What are the four categories of economic resources?
Land (natural resources). Labor (Human capital, education, skill sets). Capital (Tools, machines, buildings). Entrepreneurship (Idea people, Bill Gates).
What is M1?
Measurement of money supply in the U.S. measured monthly. Includes: Cash, checking account, and travelers checks.
See page 161, If a macroeconomic outcome is undesirable (specifically, unemployment and/or inflation is too high), a monetarist economist suggest our government do?
Monetary policy to influence aggregate demand.
Real GDP
Monetary value of all final g/s produced in the US in a given period based on base year (constant) prices.
Nominal GDP
Monetary value of all final g/s produced in the US in a given period based on current prices.
Why might more reliance on markets rather than government be desirable? When and how might it be undesirable?
More reliance on markets rather than governments might be desirable because price signals and responses may do a better job of reaching an equilibrium than the government ever could. Sometimes, the government might be needed in order to reach a better/more just equilibrium.
How will changes in demand and/ or supply affect equilibrium price and quantity?
Moves equilibrium price and quantity if one of the qualities, if not, and simply a change in price = no change at all.
How do you calculate Net Domestic Product? Why is NDP an important measurement and how does it relate to the production possibilities curve?
Net domestic product = GDP - Depreciation Or C + I + G + X - depreciation Or C + (I - depreciation) + G + X. NDP is related to the PPC because it shows the amount society can consume without hurting productivity. >0 = Increasing our stack of physical capital 0 = Maintaining our capital stock. <0 = Decreasing our physical capital
If gross investment is not large enough to replace the capital that depreciates in a particular year, is net investment greater or less than zero? What happens to our production possibilities?
Net investment is less than zero. The capital stock is being depleted since there is not enough depreciation to cover up what is used up in the course of the year. Our production possibilities diminish (shifts in toward the origin) as the stock of capital equipment diminishes.
Why might Fourth of July fireworks be considered a public good? Who should pay for them? What about Airport Security?
No one would pay for a celebration of our nation's independence out of his or her pocket, Fourth of July fireworks are often put on by localities and paid for with tax dollars - making them a public good. They are seen by all, even those who may not pay taxes and are considered "free-riders." Similarly, airport security is also a public good as it is utilized by everyone at the airport. Public goods often give the appearance of being "free" but most of us know they are multi-billion dollar industries employing thousands of workers for the general welfare of the populace - or the 'greater good.' Both public goods are and should be paid for with tax dollars
Are people worse off when the price level rises as fast as their income? Why do people often feel worse in such circumstances?
Not necessarily. It really depends on that person's consumption bundle. The inflation rate is a composite rate of inflation that no individual actually faces. Everyone faces some other rate of inflation depending on the mix of goods and services that they purchase. If the bundle that they purchase consists of goods and services for which the price increases are less than the average rate of inflation, their real incomes will increase. If their bundle consists of goods and service for which the price increases are more than the rate of inflation, their real incomes will decrease. Also, the CPI does not completely adjust for changes in consumption patterns nor for changes in quality. If prices increase due to changes in quality, consumers may actually be better off, but real income calculations would suggest they are worse off.
What does it mean to be inside the PPC?
Not productively efficient or allocatively efficient. Forgoing the opportunity of producing (and consuming) additional output.
Why does a public good create market failure?
Once the product has been provided, it is virtually impossible or very expensive for the firm to exclude anyone from enjoying the product's benefits, even non players. EX: Roads, drinking fountains, parks, education.
Who would go to college in a completely private (market) college system? How does government intervention change this FOR WHOM outcome?
Only the upper echelon, due to the high cost/last of government funding. Government intervention = makes it more affordable for all.
What opportunity costs did you incur in reading this chapter? If you read another chapter today, would your opportunity cost (per chapter) increase?
Opportunity cost is what you must give up to get the next best alternative. Opportunity costs include the things you could have done with your time instead of reading this chapter. The most desired activity you give up is the value of the opportunity cost. As you first begin to read, you first give up the alternative activities that have the least value to you. As you spend more time studying, you begin giving up activities that have increasing value to you. EX: First hour studying = No TV show. Second hour of studying = No Video Games.
What are the opportunity costs of developing wind farms to generate "clean" electricity? Should we make the investment?
Opportunity cost: More energy not spent on other alternative products/current ways to obtain energy.
Can we continue to produce more output every year? Is there a limit?
Our ability to produce output is determined by our resources, our capital investment, our technology, and our human capital investment. To be able to produce more output every year, one or several of these factors need to increase every year. Given that there are always potential technological improvements and capital investments, there is no reason to believe that we cannot continually improve our productive capabilities.
If smoking generates external costs, should smoking simply be outlawed? How about cars that pollute?
Our society must balance external cost issues with personal choice. Consequently, governmental bodies have taken action to discourage smoking (via taxes) and protect the rights of non-smokers (by limiting smoking in public places.) Such action acts as a compromise between the rights of smokers and non-smokers. Another economic consideration is the employment in the tobacco industry. To completely outlaw smoking would result in a significant rise in unemployment in that industry. Similar issues apply to the car pollution. However, transportation is an economic necessity. To outlaw polluting cars would create a serious problem unless adequate public transportation systems were in place - and they pollute as well! Governmental bodies address this issue by regulating the make-up of gasoline and emission devices on vehicles. Again, it is a compromise between external costs and economic necessity.
Four phases of a business cycle
Peak, contraction (recession/depression), trough, expansion
Social Demand
Personal benefits and acknowledging the externality
Market demand
Personal benefits.
What is an exchange rate?
Price for which the currency of a country can be exchanged for another country's currency.
GDP in 1981 was 2.96 trillion. It grew to 3.07 trillion in 1982, yet the quantity of output actually decreased. How is this possible?
Prices rose in 1982 by an amount that offset the decline in output. Because nominal GDP reflects changes in both prices and output, it can go up even if real GDP, which reflects only output, goes down.
Social Supply
Production costs and acknowledging the externality.
Market Supply
Production costs.
What is a public good?
Products for which both of the following critera hold. Nonrival: One person's use/consumption of the product does not preclude another's use/ consumption of the product. Nonexcludable: Once the product has been provided, it is virtually impossible or very expensive for the firm to exclude anyone for enjoying the product's benefits, even non players. EX: roads, drinking fountain, city parks.
Why is aggregate supply upward-sloping?
Profit effect: Focuses on fixed production costs Cost effect: Focuses on variable production costs.
Pure Command Socialism
Public ownership Centralized decision making Economic planning Allocation by command
Difference between change in demand and supply and change in quantity demanded and quantity supplied
Qd, Qs, only a change in price Demand, Supply, Change in determinants.
How can you tell if the economy is in equilibrium? How could you estimate the real GDP gap?
Several indicators help identify when the economy seems to be moving toward a new equilibrium. If the new equilibrium is below the existing real output, inventories should be rising, capacity utilization should be falling, order backlogs should be falling, the rate of inflation should be falling, wage rate increases should be slowing, interest rates should be falling, and the unemployment rate should be rising. If the new equilibrium is above the existing real output, many of these measures should be reversed. The GDP gap can be estimated in many ways. One of the simplest is to find the average real GDP per employee and then find the percentage of the labor force that is unemployed. The difference between the current unemployment rate and the unemployment rate at full employment can be multiplied by the number of people in the labor force, which in turn can be multiplied by the average real GDP per employee. This measure of lost GDP should also be a surrogate for the GDP gap
Why do people expect inflation to heat up when the unemployment rate approaches 4%?
Some economists estimate that the amount of frictional unemployment existing in the economy is about 4 percent. At this level of unemployment, it becomes very difficult for businesses to find qualified people to hire. To encourage workers to accept an employment offer, they must pay more than the worker is currently earning with another employer. This causes upward pressure on wages and costs, leading to inflation
Disposable income is either -
Spent or saved Yd = C + S
What three purposes does "money" serve?
Standard of value Medium of exchange Store of value
Why does the PPC have the shape that it does?
The PPC has can have two shapes. Straight line (decreasing left to right). Law of increasing marginal opportunity cost does not hold. And there is no specialization. Concave/curved (decreasing left to right). Law of increasing marginal opportunity cost holds, and there is specialization of resources.
Be able to define and calculate comparative advantage
The ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.
What does the production possibilities curve represent?
The alternative combinations of final goods and services that could be produced in a given time period with all available resources and technology.
Quantity demanded
The amount of a good or service that consumers are both willing and able to buy at a specific price (point on the curve).
Demand
The amount of a good or service that consumers are both willing and able to buy at every possible price (the whole curve).
Quantity supplied
The amount of a good or service that firms are both willing and able to offer for sale at a specific price (point on the curve).
Supply
The amount of a good or service that firms are both willing and able to offer for sale at every possible price (the whole curve).
How does the curve shift on a PPC?
The curve shifts on a PPC due to economic growth (An increase in output (real GDP); an expansion of production possibilities. As people grow older (new workers), as technology advances, economic growth occurs. Therefore, with more resources or better technology production possibilities increase.
Aggregate supply
The total quantity of output producers are willing and able to supply at alternative price levels in a given time period.
The shortage in the organ market (Figure 3.8) requires a nonmarket rationing scheme. Who should get the available (q of a) organs? Is this fairer than the market-driven distribution?
The people who need the organs the worst should be the ones who get the available organs first. The list should be put in order of greatest need for organs to least need for organs, with the ones needing it worse being given priority over those who need them least. This would be fairer than the market-driven distribution. The market-driven distribution seems to give priority to those who are wealthier.
When Obama was campaigning for president in 2008, he proposed more government spending paid for with higher taxes on "the rich". What impact would those options have on macro equilibrium?
The proposal calls for a balanced budget as more government spending will be financed through higher taxes on the rich. The aggregate demand in the economy will rise by the multiple amount of the rise in the government spending which will be more than the amount by which there will be fall in the Aggregate demand due to rise in the taxes. As we know, that in the case of the balanced budget the equilibrium income will rise by the amount of the government spending. Thus, this policy will lead to rise in the aggregate demand and will thus, lead to increased level of equilibrium income. It will also improve Gini coefficient of the economy through redistribution of income from rich to the poor.
Economics
The study of how any society best allocates its scarce economic resources.
Why is the supply of dollars upward-sloping?
The supply of dollars to the foreign exchange market is upward-sloping because an increase in the number of yen offered for each dollar makes Japanese goods, services, and assets more attractive to US buyers.
Aggregate demand
The total quantity of output (real GDP) demanded at alternative price levels in a given period, ceteris paribus. Slopes down because of : real balances effect, foreign trade effect, and interest rate effect.
Aggregate quantity demanded
The total quantity of output as measured in real GDP that all consumers (Ind, firms, gov, and foreigners) buy at a specific price level.
Aggregate quantity supplied
The total quantity of output as measured in real GDP that all producers (Ind, firms, gov, and foreigners) produce at a specific price level.
How do households dissave? Where do they get the money to finance their extra consumption? Can everyone dissave at the same time?
When their consumption exceed their incomes. These consumption that surpass income can be financed by two sources: credit and past incomes, also known as savings. When a house dissaves it can either borrow money from financial institutions such as banks, or it can spend money that was previously saved. Everyone cannot dissave at the same time because banks would not have enough money to fund everybody's excessive consumptions if everybody is borrowing and not saving.
Why are scalpers able to resell tickets to the Final Four basketball games at such high prices (p.61).
When tickets are sold initally at below equilibrium prices, a market shortage is created. Scalpers resell tickets at prices closer to equilibrium, reaping a profit in The process
How do you find equilibrium price and quantity?
Where Quantity Demanded = Quantity Supplied.
Would it be advantageous to borrow money if you expected prices to rise? Would you want a fixed-rate loan or one with an adjustable interst rate?
Yes, because as prices rise (and incomes) rise, the real cost of the borrowed money will decline. Say you borrow $100 at 5 percent interest. In one year, you must repay $105. If prices rise by 10 percent during that year, the real value of the $105 you repay will be only $95.45. You will have borrowed $100 worth of purchasing power for $95.45. A fixed-rate loan would be the most desirable loan to have because the real value of the loan will go down.
Is it possible for unemployment rates to increase at the same time that the number of employed persons is increasing? How?
Yes, the labor force population can increase. Therefore, the number of people classified as unemployed can increase, even if those employed increase as well.
If all prices increased at the same rate (no relative price changes), would inflation have any redistributive effects?
Yes, there are three re distributive effects from inflation: Price effects, income effects and wealth effects. Even in all prices increase at the same rate, not all the incomes would be keeping pace. Some income will increase by more than the rate of inflation while others will increase by less.
With respect to the demand for college enrollment, which of the following would cause (1) a movement along the demand curve or (2) a shift of the demand curve? a. An increase in incomes b. Lower tuition c. More student loans d. An increase in textbook prices
a. College enrollment is considered to be a normal good, an item where as income increases the demand for the product increases. As incomes increase, more people are able to purchase a college education and the demand for college education increases, shifting to the right b. Tuition is the price of a college education. As tuition decreases, the price of a college education decreases causing an increase in the quantity demanded of college education, a movement down and along the demand curve for college education. c. When more student loans become available, more people can afford to purchase a college education and the demand curve for a college education increases shifting to the right. d. Textbooks are considered to be a complement in consumption for a college education. In other words, these are items that are often consumed together. As the price of textbooks increase, the quantity of textbooks demanded decreases. As students purchase fewer textbooks, the demand for college education decreases shifting the demand curve to the left
If more teenagers stay in school longer, what happens to a. production possibilities? b. unemployment rates?
a. The production-possibilities decline as students take longer to enter the labor force. b. The unemployment rates may actually appear to fall since students are not part of the labor force until they leave school.
