Macroeconomics
An economic model:
is a simplified version of reality used to understand real-world economic conditions.
Spaghetti and lasagna are substitutes. Holding all other things constant, this means that if the price of spaghetti increases, the demand for:
lasagna will increase.
The paradox of thrift implies that:
families may end up worse off by saving than if they had acted more "irresponsibly" by consuming.
The total value of all ____ goods and services produced in the economy in a given year, calculated using the prices current in the year in which the output is produced, is ____ GDP.
final; nominal
Market equilibrium occurs when:
there is no incentive for prices to change in the market, quantity demanded equals quantity supplied, and the market clears.
If the United States imposes an import quota on Portuguese port, the result in the short run is likely to be _____ profits for American wine producers and _____ profits for Portuguese port producers.
higher; lower
Assuming everything else stays the same, an increase in the price of smartphones will __________ of smartphones.
increase the quantity supplied
Point A in the diagram represents a production situation that is:
inefficient
Sabrina has gone out to lunch three times this week. She has some extra money, so she decides to go out to lunch a fourth time. Which economic principle does this statement BEST represent? - "How much" is a decision at the margin. - There are gains from trade. - The true cost of something is its opportunity cost. - Choices are necessary because resources are scarce.
"How much" is a decision at the margin.
In 2019, consumer spending was $15,000, investment spending was $4,000, and net exports were -$500. GDP in 2019 was $22,000, government purchases of goods and services were _____.
$3,500
Suppose a price floor is set at $7. At this price, consumer surplus is equal to _____, and producer surplus is equal to _____.
$32; $40
Production Possibilities Schedule I. If the economy produces two planes per period, it can also produce, at most, _____ trains per period. Table: Production Possibilities Schedule I Alternatives A B C D E F Planes Produced. 0 1 2 3 4 5 Trains Produced. 30 28 24. 18. 10 0
24
Cetris peribus
A Latin phrase meaning "other things equal" or in plain terms all things remaining constant.
At which of the following stages is the unemployment rate likely to be highest?
At the very start of an economic recovery because at the beginning of recovery the economy is at its most depressed state in the cycle and the unemployment rate will be at its highest.
Who in the economy is hurt during a recession? How?
Corporations that see lower profits Workers who lose their jobs, along with their families Workers who keep their jobs but experience lower or stagnant wages
The market is in equilibrium at point C. Suppose most people drink peach juice in the afternoon with champagne. What will be the new equilibrium point in the peach juice market if a law banning alcohol passes?
D
How did Milton Friedman alter the consensus that had developed in the aftermath of the Great Depression on how the economy should be managed?
He observed that booms, as well as busts, need to be managed to reduce volatile swings in the business cycle.
Which statement(s) is/are FALSE? I. Quantity controls set below the market equilibrium quantity drive a wedge between the demand price and the supply price of the good. II. The difference between the demand price and the supply price at the quota limit is consumer surplus. III. Quantity controls have no undesirable side effects.
II & III
What three measures of the economy tend to move together during the business cycle?
Industrial output Inflation Employment
The United States has been consistently and, on the whole, increasingly importing more goods than it has been exporting. One of the countries it runs a trade deficit with is China. Which of the following statements are valid possible explanations of this fact? Explain.
Investment spending in the United States is high relative to its level of savings.
Why do we care about the value of the long-run growth rate of real GDP relative to the value of the growth rate of the population?
Living standards on average can only rise if GDP grows faster than population.
Suppose that the stock market rises significantly over the next year, making investors wealthier and more optimistic about the economy while raising the overall level of consumption. Is this increase in consumer confidence a microeconomic or a macroeconomic issue?
Macroeconomic
In an attempt to promote renewable energy, the President and Congress approve an annual rebate to those who install solar panels on their roofs. What type of economic policy would this represent?
Neither fiscal nor monetary policy (not a macroeconomic issue)
Of all the points in the diagram, ________ represents a situation where the opportunity cost of producing one more unit of Good X is highest.
Point A
Suppose that Snowboardland imposes a tariff on all winter clothing imported from Skiland. Who would benefit from this tariff and who would lose?
Producers of winter clothing in Snowboardland would benefit but consumers would lose.
Net cost margin
Sleep or go to class, additional benefit exceed additional cost.
Which of the following is a macroeconomic issue?
South Park experiences an economic boom from increased tourism.
When cost goes down
Supply goes up
Which type of economist would be least supportive of attempts to build a new high-speed railway network by raising taxes on gasoline?
a classical economist
Saying that an unemployment rate of 8% is too high is:
a normative statement.
Given that people usually exploit opportunities to make themselves better off, which of the following policies is MOST likely to reduce road congestion in Los Angeles (the worst traffic city in America)? - an increase in the price of bus fare to and from the city - a toll road that requires each car to pay a congestion fee to enter the city center - a limited number of free parking passes for the first 100 who arrive prior to 6 A.M. - allowing electric cars to ride in the reserved bus lanes
a toll road that requires each car to pay a congestion fee to enter the city center
Inflation is:
an increase in the overall level of prices.
The law of demand states that, other things equal, as the price:
decreases, the demand curve will shift to the right.
The central mission of modern macroeconomics is to prevent:
deep recessions, like the Great Depression.
When demand goes down
price goes down
Producer surplus
the difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives
Which way do they/ the economy move during an upturn?
they rise
Which of the following is an example of monetary policy?
A rise in short-term interest rates
The consumer price index measures the cost of the _____ of a family of ____ living in a typical U.S. city.
consumption; four
Shortage
A situation in which quantity demanded is greater than quantity supplied. Increase of buyers, less sellers, and upward pressure as change in price goes higher
Surplus
A situation in which quantity supplied is greater than quantity demanded. Decrease of buyers, increase of sellers, and downward pressure on products price lower
Tarrif
A tax on imported goods
Fairness or equity
Equal share of resources
A market where no single buyer or seller can influence the price is a:
competitive market.
You decide whether to eat one more slice of cheesecake based on how hungry you feel. Which economic principle does this statement BEST represent?
"How much" is a decision at the margin.
Suppose the demand equation is given by P = 100 - 2Q, and the supply equation is given by P = 20 + 2Q. If the quantity bought and sold under a price ceiling is Q = 10, what is the price ceiling?
$40
Keynesian economist
- advocates raising taxes so government can support education and social programs - John Maynard Keynes - During Great Depression - lead to development of macroeconomics
Classical economist
- believes economy benefits when market leads consumers and producers (free market) with little government involvement - prior to Great Depression
There are several factors leading to expect a recession is looming such as
- higher costs for intermediate and final goods. - increased interest rates. - the impact of the trade war. - NOT HIGHER TAXES
Monetarist economist
- supports policies that stabilize price and keep interest rates low to make investing more attractive - Milton freedman - control money supply/ influence inflation and interest rates
How do economists in the United States determine when a recession begins and when it ends?
A panel of experts from the National Bureau of Economic Research assesses several economic indicators.
Use Table: The Production Possibilities for Large Tractors and Petroleum. Both the United States and Venezuela will gain from trade if one tractor trades for _____ barrels of oil.
1,500
In the United States, government spending accounts for approximately _____% of GDP.
17
What is the percentage change in industrial production for Greece from 2007 to 2009? From 2007 to 2018? Round each answer to one place after the decimal. 2007: 100 2009: 86.5 2018: 78
2007-2009: −13.5% 2007-2018: −22%
Some people believe that the government should guarantee its citizens a basic standard of living by raising the minimum wage, providing housing assistance to the poor, and offering health care coverage to everyone. What type of economist is most likely to favor this view?
A Keynesian economist
Price ceiling
A legal maximum on the price at which a good can be sold
Price floor
A legal minimum on the price at which a good can be sold
Quota
A limit placed on the quantities of a product that can be imported
Suppose a report on CNN says that the United States is heading into a recession. As a result, Bert's family, as well as many other like-minded families and individuals, reduces their spending and instead fills up their savings accounts for potential hard times. A). As a result of this behavior, B). In macroeconomics, this result is known as
A. the economy is actually harmed, since there is a sharp decease in consumer spending. B. the paradox of thrift.
Absolute advantages
Abundance of resources some countries enjoy over others
A decrease in efficiency means that an economy has: A). decreased the equity of its distribution of goods and services B). made more people worse off without making others better off. C).decreased the incentives of its citizens to follow their own self-interest. D). reduced its opportunity costs.
B). made more people worse off without making others better off.
Number of Units Produced in 1 Hour: Cars Computers Brazil. 10 5 India 1 4 The table above shows the production possibilities for two countries. Brazil has an absolute advantage in producing _____________.
Both cars and computers
Number of Units Produced in 1 Hour: Cars. Computers Brazil 10 5 India 1 4 The table above shows the production possibilities for two countries. Brazil has a comparative advantage in producing _____________, and India has a comparative advantage in producing ________.
Brazil - cars ( 1 car =2 computers) India - computers ( 1 computer =4 cars)
Why do we consider a business cycle expansion different from long-run economic growth?
Business cycle expansions produce growth of real GDP, whereas the long-run growth rate determines whether living standards increase or not.
If Isabella drives to a Kansas City, 120 miles from Manhattan, Kansas (home of Kansas State University) to do her back-to-school shopping, this will: A). help Isabella's community because Isabella's shopping in the big city leaves more goods for the other small-town residents to buy. B). hurt the city because Isabella will take the goods that she purchases back home to her small town. C). hurt Isabella's community because Isabella's spending will be income for people in the large city. D). help the city because people from small towns usually buy things that people in big cities don't want.
C. Hurt Isabella's community because Isabella's spending will be income for people in the large city.
The demand curve for meals at a local Chick-fil-A will shift to the left if:
Chick-fil-A offers a free sandwich to people who sign up for their new rewards app.
Fed government policies are
Fiscal and monetary policies
According to the ______ theory, a country has a comparative advantage in a good whose production is intensive in the factors that are abundantly available in that country.
Heckscher-Ohlin
Which of the following statements describes efficiency? I. A situation in which producers make the highest profits possible. II. A situation in which we cannot produce more of one good without producing less of another good. III. A situation in which we produce the goods and services that people value most highly. - I only - II and III - I and II - I, II, and III
II and III
Fiscal Policies
Involves using taxes in government spending to shape economic conditions. - legislated by Congress and signed into law by president - because of different opinions intense policy debate occur and make it difficult to come to a consensus
Monetary policies
Involves using the money supply to change interest rates, to increase or decrease consumption, and investment. - controlled by Central Bank of a country in this case US federal reserve system, most of the time is an independent agency which means no votes or public opinion
Before the Great Depression, the conventional wisdom among economists and policy makers was that the economy is largely self-regulating. a. Is this view consistent or inconsistent with Keynesian economics? Explain.
It is inconsistent with Keynes's conclusion that government intervention in the economy was necessary to maintain full employment.
Suppose everyone in a small town decided to save more and spend less. How will this affect an economy? (In macroeconomics, this is called the paradox of thrift.) - It will decrease the overall level of income, since one person's spending is someone else's income. - It will increase the overall level of income, since other groups will spend more. - It will cause the prices of many goods to increase. - It will have no impact, since a small town makes up a small portion of an economy.
It will decrease the overall level of income, since one person's spending is someone else's income.
Suppose that for every cupcake that Jack bakes, he gives up producing two brownies. And for every brownie that Jill bakes, she gives up producing 3 cupcakes. According to comparative advantage, what should Jack and Jill be producing?
Jack should bake brownies and Jill should bake cupcakes
Consumer desire variety
Jaylands trades gems with its other neighborhood rubiyana and jade land ends up with more gems to trade with Agriland
It takes Juan 1 hour to wash a car and 2 hours to wax it. Maria, on the other hand, takes 1 hour to wash a car and half an hour to wax it. If they divide the work, _______ would specialize in washing since his/her opportunity cost is _________ for that activity.
Juan; lowest
Mexico exports clothing to the United States, and the United States exports heavy equipment to Mexico. Proponents of the Heckscher-Ohlin model would explain this pattern of trade by noting that:
Mexico has a relatively large endowment of factors of production used in making clothing, while the United States has a relatively large endowment of factors of production used in making heavy equipment.
In the circular-flow diagram, the value of household income (the sum of wages, dividends, interest, rental income, and transfer payments) equals the sum of:
consumer spending, private saving, and household tax payments.
Contrast the response of policy makers during the 2007-2009 recession to the actions of policy makers during the Great Depression. What would have been the likely outcome of the 2007-2009 recession if policy makers had responded in the same fashion as policy makers during the Great Depression?
The Great Recesssion may have approached the severity of the Great Depression.
Specialization in production was the starting point for Adam Smith in: - Free to Choose. - Das Kapital. - The Wealth of Nations. - The General Theory.
The Wealth of Nations.
When one person saves more, that person's wealth is increased, meaning that they can consume more in the future. But when everyone saves more, everyone's income falls, meaning that everyone must consume less today. Which of the following explains this seeming contradiction?
The combined effect of individual decisions can have results that are very different from what any one individual intended.
What effect did the Great Depression have on conventional wisdom?
The enormity of the Great Depression demonstrated that the economy was not necessarily self-regulating, and that government intervention would at times be necessary.
The circular-flow diagram ignores a number of real-world complications in the interest of simplicity. Which of the following factors is ignored?
The flows of money between participants.
Invisible hand principle
The tendency of market prices to direct individuals pursuing their own interests to engage in activities promoting the economic well-being of society.
When the Chicago city manager receives complaints that the municipal courts are not fully accessible to individuals with disabilities, she responds that the $1 million improvement needed to address the problem will not happen because "that money could be spent building lavatory space for people with disabilities." Which economic principle does this statement BEST represent? - When markets don't achieve efficiency, government intervention can improve society's welfare. - "How much" is a decision at the margin. - Markets move toward equilibrium. - The true cost of something is its opportunity cost.
The true cost of something is its opportunity cost.
The actions of individuals in an economy can compound upon one another, leading to outcomes that magnify the actions of individuals. This can be summarized using which phrase?
The whole is greater than the sum of its parts.
Total surplus
consumer surplus + producer surplus
The law of demand
consumers buy more of a good when its price decreases and less when its price increases
When the economy experiences shortfalls or excesses of spending, government policies can be used to address the imbalances. Which statement does NOT address such imbalances, realized during the coronavirus pandemic? - The federal government provided cash payments to workers unemployed due to pandemic. - The government reduced taxes to help workers. - Congress passes a $4 trillion relief package for workers and businesses affected by the coronavirus pandemic. - There is fear of recession and uncertainty about the future in a post COVID-19 reality.
There is fear of recession and uncertainty about the future in a post COVID-19 reality.
What is the current goal of policy makers in managing the economy?
To reduce the magnitudes of booms and busts
How do other countries determine whether or not a recession is occurring?
Two consecutive quarters of contraction of GDP indicates a recession, and two consecutive quarters of growth indicates a recovery.
The Market for Pineapples in Brazil. If Brazil trades based on comparative advantage, and the world price is D, then Brazil has _____ in the production of pineapples.
a comparative advantage
In a situation in which there are technological improvements, we generally see
a shift in the production possibility frontier outward.
An increase in price and an ambiguous change in quantity are MOST likely caused by:
a shift to the left of the supply curve and a shift to the right of the demand curve.
If the opportunity cost of producing either of two goods is constant, the production possibility frontier is:
a straight line.
Which factor is MOST likely to shift the supply curve for milk to the left?
a tax on each gallon of milk produced
If an economy is efficient: - resources are still available to produce specific consumer goods that are more desirable. - all opportunities to make people better off without making other people worse off have been exploited. - prices are the lowest they can possibly be. - all goods are produced at their maximum price and quality.
all opportunities to make people better off without making other people worse off have been exploited.
Monetary and fiscal policies
are used to reduce the severity of recessions.
For the past several months, per capita output has grown more and more slowly, and unemployment has fallen, but both trends appear to have leveled off. Where in the business cycle is the economy?
at a peak
Price Controls in the Market for Strawberries. An effective price floor would be at price _____, and a _____ would result from the difference between quantities _____.
b: surplus; f and e
A price floor often results in:
black markets, or underground transactions in the good.
Dreamliners and Small Jets. On this figure, points A, B, E, and F indicate:
combinations of dreamliners and small jets that society can produce, using all of its factors efficiently.
A trade-off involves weighing
costs and benefits
Assuming everything else stays the same, an increase in the price of laptop computers will __________ of laptop computers.
decrease the quantity demanded
If a demand curve is downward sloping, a decrease in supply with no change in demand will lead to a(n) _____ in the equilibrium quantity and a(n) _____ in the equilibrium price.
decrease, increase
The United States can produce whiskey domestically, but it can also export whiskey if the world price is higher than the domestic price. If the United States exports whiskey, consumer surplus will _____, producer surplus will _____, and total surplus will ________.
decrease; increase; increase
Intermediate goods are NOT counted in GDP because:
doing so would result in double counting.
An economy has achieved _____ if it has not passed up any opportunities to make some people better off without making others worse off.
efficiency
The national accounts do NOT keep track of:
exchange rates.
Production possibility frontier
illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given quantity produced of the other
At the current market price in the market for smartphones, the quantity of buyers is larger than the quantity of sellers. Given this situation, we can expect the market price of smartphones to:
increase
If workers' nominal wages have risen by 50% over 10 years, and prices have increased by 40% during that period, then we can safely conclude that the goods and services workers can buy have:
increased in quantity
Trade can be beneficial to an economy because:
it enables more goods and services to be obtained at a lower opportunity cost.
If a country runs a trade surplus, its investment spending is probably:
low relative to its savings.
If a market is in equilibrium: - it must be because the government has intervened in the market. - no individual will be better off doing something different. - the equilibrium will persist unless the government intervenes. - there are opportunities for some people to make themselves better off.
no individual will be better off doing something different.
Suppose you are trying to understand the effect that an increase in the price of grapes will have on the market for wine. An effective model to determine this effect is one that evaluates the change in the price of grapes on the market quantity of wine assuming:
no other change takes place.
When a market begins to engage in international trade:
producers in the exporting industry may be better off.
Law of Supply
producers offer more of a good as its price increases and less as its price falls
Advocates of trade barriers suggest that trade restrictions are needed for national security, job creation, and to:
protect new producers until they become more established.
The Fed has the power to slow the economy down by
raising interest rates
Which of the following topics would be studied in macroeconomics?
recessions
Prior to the Great Depression, most economists believed that the economy was Had society known at the time of the selected event what it knows now about the macroeconomy, what course of action might federal policymakers have taken?
self regulating decreased taxes, supported decreased interest rates, or both
Recessions tend to be _____, and expansions tend to be _____.
short, long
A binding minimum wage will MOST likely lead to a situation where:
some unskilled workers have a difficult time finding a job.
If a government price floor of $1.10 is imposed on this market, inefficiency will result in the form of a _____ of _____ gallons of milk.
surplus; 3
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
absolute advantage
the ability to produce a good using fewer inputs than another producer
Consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it
Macroeconomics focuses on:
the economy as a whole
The view that the government should take an active role in managing the economy dates from:
the great depression
A sushi chef prepares a California roll for a customer. Which of the following factors is physical capital? - the sushi chef - the ingredients used to prepare the dish - the knife use to cut the sushi - the skills the sushi chef has acquired that enables him to perform this feat
the knife use to cut the sushi
A shift of the demand curve for fried chicken would NOT be caused by a change in:
the price of fried chicken.
Macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and economic growing
Microeconomics
the study of how households and firms make decisions and how they interact in markets
Aminah has a calculus exam tomorrow. However, a free lecture by one of her favorite authors is taking place this evening. Aminah decides to attend the lecture instead of studying for her exam. Aminah's opportunity cost of attending the lecture is: - the time spent getting to the lecture. - not relevant, since no money is involved. - the time spent listening to the lecture. - the transportation and time cost of getting to the lecture itself plus the reduction in her calculus exam grade as a result of not studying tonight.
the transportation and time cost of getting to the lecture itself plus the reduction in her calculus exam grade as a result of not studying tonight.
Suppose one parent picks up their child from day care, while the other parent stays home to make dinner. This is an example of the principle that: - markets usually lead to efficiency. - government policies can change spending. - markets move toward equilibrium. - there are gains from trade.
there are gains from trade.
Efficiency
using resources in such a way as to maximize the production of goods and services
A normative statement is a statement regarding:
what should be.
Which of the following is a microeconomic topic? - the effect of the budget deficit on the rate of interest - reasons why a consumer buys more cheese - what the government will do to address unemployment - reasons why inflation is rising
what the government will do to address unemployment
Opportunity cost
whatever must be given up to obtain some item
You can spend $300 on either a pair of new Air Jordan sneakers or a new skateboard. If you choose to buy the Air Jordans, the opportunity cost is: - both the $300 and your enjoyment of the new skateboard. - $300. - impossible to determine. - your enjoyment of the new skateboard.
your enjoyment of the new skateboard.