Macroeconomics Review for Final Exam

If depreciation equals $32 billion, GNP equals $230 billion, and national income is $215 billion, then what is the Net National Product?

$198 billion

Nominal Income formula

(Real income*CPI)/100

real income formula

(nominal income/CPI) x 100

Command Economy

ALL economic decisions are made by the government

Difference between comparative advantage and absolute advantage.

Absolute advantage is the ability to produce a good using fewer inputs than another producer, while comparative advantage is the ability to produce a good at a lower opportunity cost than another producer, which is more important for trade.

demand

Consumer willingness and ability to buy products

What Factors increase supply?

Favorable natural conditions for production, a fall in input prices, improved technology, lower taxes/less costly management

contractionary fiscal policy

Fiscal policy used to decrease aggregate demand or supply. Deliberate measures to decrease government expenditures, increase taxes, or both. Appropriate during periods of inflation.

marginal analysis

analysis that involves comparing marginal benefits and marginal costs

the law of diminishing returns

as additional increments of resources are added to producing a good or service, the marginal benefit from those additional increments will decline

Market economies are based on private enterprise, which means

economic decision-making happens through markets

mixed market economy

economic system that combines both private ownership and government ownership of the means of production

If the price of cars falls, are carmakers likely to make ___________.

fewer cars

interior good

good or service whose demand decreases when a consumer's income increases and demand increases when income decreases

normal good

good or service whose demand increases when a consumer's income increases and demand decreases when income decreases

Complement goods

goods or services that are used together because the use of one enhances the use of the other

substitute goods

goods or services that can be used in place of one another

What Factors increase demand?

taste shift to greater popularity, the population is likely to buy the rise, income rises, price of substitutes rise, price of complements falls, future expectations encourage buying

What Factors decrease demand?

taste shifts to lesser popularity, the population likely to buy the drops, income drops, price of substitutes fall, price of complements rise, future expectations discourage buying

absolute advantage

the ability to produce a good using fewer resources than another producer

Marcus is considering which college major to choose. In taking a rational approach Marcus should consider______

the benefit each major will bring and the cost of the degree

Law of Supply

the common relationship that a higher price leads to a higher quantity supplied of a certain good or service and a lower price leads to a higher quantity supplied, while all other variables are held constant

marginal cost

the difference (or change) in cost of a different choice

marginal benefit

the difference (or change) in what you receive from a different choice

What are the consequences of the government setting a binding price ceiling?

the government keeps the price low, businesses wont produce enough goods to satisfy the market. This results in an insufficient supply , creating a shortage in those goods.

Because of ________ if a city government decides to spend money on beautifying its downtown and attracting tourism to its city when no money has been devoted to those efforts before, then gains in tourism may be significant.

the law of diminishing returns

shortage (excess demand)

the quantity demanded is greater than the quantity supplied; occurs at prices below the price equilibrium

Surplus(excess supply)

the quantity demanded is less than the quantity supplied; occurs at prices above the price equilibrium

If the Consumer Price Index was 186.5 at the end of last year and 179.8 at the end of this year, the country experienced which of the following?

A deflation rate of 3.59

Countries with free-market economies include

Hong Kong, Singapore, New Zealand, and the United States.

If a market starts in a surplus , how much must the price change before the market is in equilibrium?

If a market starts in a surplus the price must fall to reach equilibrium

Michael is the owner of a steel refinery in Pittsburgh, PA. In October the price for a ton of steel was $400, which increased to $600 by November. According to the law of supply, what would be a rational response by Michael to this change in market price for steel?

If price increases, so should the output so hire additional workers to increase output

how do surpluses cause the price to move towards equilibrium

In response to the lower price, consumers will increase their quantity demanded, moving the market toward an equilibrium price and quantity.

The operations vice president is adjusting the production quantities for the upcoming month of March for the coal company. last month the price of a ton of coal was $45, and in February it increased to $64 per ton. according to the law of supply, what would be a rational response of the VP of operations in adjusting his coal output with the change in the market price?

Increase output and hire more workers.

Is the AD-AS model based on Keynesian Economics or Neoclassical Economics?

Keynesian Economics

if a decrease in the price of MP3 players decreases the demand for CD Players, this means that

MP3 players and CD players are substitute goods

supply

The amount of goods available

how do shortages cause the price to move towards equilibrium

Once producers raise the product price, your product's quantity demanded will drop until equilibrium is reached.

In a Keynesian cross diagram, what name is given to the distance between an output level that is below potential GDP and the level of potential GDP?

Recessionary gap

After the success of the Apollo space program, in the mid-1970s NASA budget cuts results in a decrease in the number of jobs for aerospace engineers. This was an example of ______.

Structural Unemployment

What is Phillips Curve tradeoff?

The Phillips curve shows the inverse trade-off between rates of inflation and rates of unemployment. If unemployment is high, inflation will be low; if unemployment is low, inflation will be high.

Cocoa nibs from Nigeria last year was supplied at $9 per 10 pounds. This year the demand has increased and that same supply of Nigerian cocoa nibs is priced at $12 per 10 pounds. What will most likely happen to supply of Nigerian cocoa nibs this year?

The supply of Nigeria cocoa nibs will increase this year.

California last summer was devastated by wildfires that have now created mudslides with the winter rain. This winter highway 1 was closed for weeks as they removed the mud. Because of the closed main road, milk was in greater demand but short on supply. The government put a temporary price ceiling on the cost of milk at $4. If the equilibrium for milk was at $7, what do you think was the result of the price ceiling?

There was a greater demand than supplied and people will sell milk in black market at higher price.

What Factors decrease supply?

Unfavorable natural conditions for production, a rise in input prices, declined technology, higher taxes/more costly management

Two countries are trying to decide which product should have an increased production. Both Canada and Costa Rica produce coffee and corn, but it is easier for Canada to raise corn than grow coffee. Costa Rica easily grows coffee, but has a more difficult time growing corn. In comparison with Costa Rica, Canada has_________

a comparative advantage with corn.

positive statement

a factual claim about how the world actually works and can be tested, or rejected

demand curve

a graph of the relationship between the price of a good and the quantity demanded

supply curve

a graphic representation of the relationship between price and quantity supplied of a certain good or service, with price on the vertical axis and quantity on the horizontal axis

price ceiling

a legal maximum price for a product

price floor

a legal minimum price for a product

AD-AS model

a macroeconomic model that explains price level and output through the relationship of aggregate demand and aggregate supply.

market economy

a market in which the government does not intervene in any way and supply goods and services based on demand

Law of Demand

a price increase leads to a lower quantity demanded and price decrease leads to a higher quantity demanded, while all other variables are held constant

productive efficiency

a situation in which a good or service is produced at the lowest possible cost

Making an economically rational decision requires

considering the prospective benefits and costs to oneself

The economy moves between recession(high unemployment) and inflation problems. According to the Keynesian economic view, during a briskly productive economy which causes inflation and prices to rise, Contractionary fiscal policies should be used. These types of policies include___________

decreased government spending and tax increases

What is the difference between demand and quantity demanded

demand refers to the curve and quantity demanded refers to the (specific) point on the curve.

What is full employment on the ppf graph

on the line/frontier

allocative efficiency

how well the mix of goods being produced reflects consumers' wants

A budget constraint model differs from production possibilities model in that, typically

in the budget constraint, the trade off between the 2 products is constant while in thee ppf it increases because of diminishing returns

According to Laffer curve what would be the impact of tax rates on tax revenues?

increasing tax rates will first increase revenues until the graph peaks and then will decrease revenues

What do contractionary fiscal policies result in?

leads to a decrease in aggregate demand and results in lower economic output and lower inflation.

Competitive markets

markets that have many buyers and sellers so that no single buyer or seller can influence the price

unemployment rate formula

number of unemployed/(unemployed and employed) x 100

What happens when demand decreases

price decreases, quantity decreases.

What happens when supply increases?

price decreases,quantity increases

What happens when supply decreases?

price increases, quantity decreases

What happens when demand increases?

price increases, quantity increases.

If demand decreases and supply remains constant, what happens to the market equilibrium?​

quantity and price both fall

A price floor is inefficient because

resources are over-allocated(distributed) to produce an item in a quantity greater than what the consumers are demanding

how do rising tax rates affect tax revenue over time according to the laffer curve?

revenue increases then it decreases after it peaks

normative statement

statement which describes how the world should be

What do you think will happen to a market with a excess supply

there will be a increase in quantity demanded

rational expectations

when making decisions, individual agents will base their decisions on the best information available and learn from past trends.