Midterm Macroeconomics

circular flow diagram

a visual model of the economy that shows how dollars flow through markets among households and firms

positive analysis

analysis concerned with what is

normative analysis

analysis concerned with what ought to be

.If toast and butter are complements, then which of the following would increase the demand for toast? a. a decrease in the price of toast b. a decrease in the price of butter c. an increase in the price of butter d. Both a) and b) are correct

b

individual supply curve

illustrates the relationship between quantity supplied and price for an individual producer

nominal interest rate

the interest rate as usually reported without a correction for the effects of inflation

Law of Supply

Tendency of suppliers to offer more of a good at a higher price

Principle 2 (How people make decisions)

The cost of something is what you give up to get it

Efficiency

The percentage of the input work that is converted to output work

Economics

The study of how people seek to satisfy their needs and wants by making choices

supply curve

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

production possibilities frontier

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

competitive market

a market in which there are many buyers and many sellers so that each has a negligible impact on the market price

economic model

a simplified version of reality used to analyze real-world economic situations

6.Refer to Figure 2-1. Which arrow represents the flow of spending by households? a. A b. B c. C d. D

A

demand scheudle

a table that shows the relationship between the price of a good and the quantity demanded

supply schedule

a table that shows the relationship between the price of a good and the quantity supplied

CPI

(consumer price index) a measure of the overall cost of the goods and services bought by a typical consumer

Factors that shift the demand curve

1. income 2. price of related goods 3. expectations of future prices 4. number of buyers 5. tastes and preferences

shifts in supply curve

1. input prices 2. technology 3. expectations 4. number of sellers

One thing economists do to help them understand how the real world works is a. make assumptions. b. ignore the past. c. try to capture every aspect of the real world in the models they construct. d. All of the above are correct.

A

Which is the most accurate statement about trade? a. Trade can make every nation better off. b. Trade makes some nations better off and others worse off. c. Trading for a good can make a nation better off only if the nation cannot produce that good itself. d. Trade helps rich nations and hurts poor nations.

A

Monopoly

A market in which there are many buyers but only one seller.

Oligopoly

A market structure in which a few large firms dominate a market

perfectly competitive market

A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.

Economics is the study of a. production methods. b. how society manages its scarce resources. c. how households decide who performs which tasks. d. the interaction of business and government.

B

One way to characterize the difference between positive statements and normative statements is as follows: a. Positive statements tend to reflect optimism about the economy and its future, whereas normative statements tend to reflect pessimism about the economy and its future. b. Positive statements offer descriptions of the way things are, whereas normative statements offer opinions on how things ought to be. c. Positive statements involve advice on policy matters, whereas normative statements are supported by scientific theory and observation. d. Economists outside of government tend to make normative statements, whereas government-employed economists tend to make positive statements.

B

Refer to Figure 2-1. Which arrow represents the flow of goods and services? a. A b. B c. C d. D

B

Refer to Figure 4-4. Which of the following would cause the demand curve to shift from Demand B to Demand C in the market for DVDs in the United States? a. a decrease in the price of DVDs b. a decrease in the price of DVD players c. a change in consumer preferences toward watching movies in movie theaters rather than at home d. a decrease in the number of people in the United States

B

Principle 4: People Respond to Incentives

Because rational people make decisions by comparing costs and benefits, they respond to incentives.

A market includes a. buyers only. b. sellers only. c. both buyers and sellers. d. the place where transactions occur but not the people involved.

C

Refer to Figure 2-1. Which arrow represents the flow of land, labor, and capital? a. A b. B c. C d. D

C

Refer to Figure 2-5. If this economy devotes all of its resources to the production of sweaters, then it will produce a. 0 sweaters and 200 soccer balls. b. 180 sweaters and 125 soccer balls. c. 300 sweaters and 0 soccer balls. d. 300 sweaters and 200 soccer balls.

C

Refer to Figure 4-4. Which of the following would cause the demand curve to shift from Demand A to Demand B in the market for golf balls in the United States? a. a decrease in the price of golf balls b. an increase in the price of green fees c. an expectation by buyers that their incomes will increase in the very near future d. a change in consumer tastes away from golf and toward tennis

C

The president of the United States receives tax policy advice from economists in the a. Federal Reserve. b. Department of Justice. c. Department of the Treasury. d. Congressional Budget Office.

C

The production possibilities frontier is a graph that shows the various combinations of output that an economy a. should produce. b. wants to produce. c. can produce. d. demands

C

The supply of a good or service is determined by a. those who buy the good or service. b. the government. c. those who sell the good or service. d. both those who buy and those who sell the good or service

C

GDP is not a perfect measure of well-being; for example, A)GDP incorporates a large number of non-market goods and services that are of little value to society. B) GDP places too much emphasis on the value of leisure. C) GDP fails to account for the quality of the environment. D) All of the above.

C. GDP fails to account for the quality of the environment

.In a perfectly competitive market, at the market price, buyers a. cannot buy all they want, and sellers cannot sell all they want. b. cannot buy all they want, but sellers can sell all they want. c. can buy all they want, but sellers cannot sell all they want. d. can buy all they want, and sellers can sell all they want

D

A competitive market is a market in which a. an auctioneer helps set prices and arrange sales. b. there are only a few sellers. c. the forces of supply and demand do not apply. d. no individual buyer or seller has any significant impact on the market price

D

In a market economy, supply and demand are important because they a. play a critical role in the allocation of the economy's scarce resources. b. determine how much of each good gets produced. c. can be used to predict the impact on the economy of various events and policies. d. All of the above are correct.

D

Refer to Figure 2-1. Which arrow represents the flow of income payments? a. A b. B c. C d. D

D

i = r + pi

Fisher equation

Principle 6: Markets are usually a good way to organize economic activity

Government officials are central planners - allocate economy's scarce resources - what goods were produced - how much was produced - who produced/ consumed these goods/ services

GDP

Gross Domestic Product- the total market value of all final goods and services produced annually in an economy

Inflation equation

Inflation rate = growth rate of money supply - growth rate of real GDP

GDP deflator

Nominal GDP/Real GDP x 100

Principle 5: Trade can make everyone better off

Rather than being self-sufficient, people can specialize in producing one good or service and exchange it for other goods

Principle 3: Rational People Think at the Margin

Rational people systematically and purposefully do the best they can to achieve their objectives, given the available opportunities.

Adam Smith

Scottish economist who wrote the Wealth of Nations a precursor to modern Capitalism. "No Free Lunch" invisible hand guiding the market

Principle 1: People Face Trade-offs

To get something that we like, we usually have to give up something else that we also like. Making decisions requires trading off one goal against another.

For most students, the largest single cost of a college education is a. the wages given up to attend school. b. tuition, fees, and books. c. room and board. d. transportation, parking, and entertainment.

a

In the simple circular-flow diagram, who consumes the goods and services that firms produce? a. households only b. firms only c. both households and firms d. neither households nor firms

a

Pizza is a normal good if the demand a. for pizza rises when income rises. b. for pizza rises when the price of pizza falls. c. curve for pizza slopes upward. d. curve for pizza shifts to the right when the price of burritos rises, assuming pizza and burritos are substitutes.

a

Suppose the state of Massachusetts passes a law that increases the tax on alcoholic beverages. As a result, residents in Massachusetts start purchasing their alcohol in surrounding states. Which of the following principles does this best illustrate? a. People respond to incentives b. Rational people think at the margin c. Trade can make everyone better off d. Markets are usually a good way to organize economic activity

a

The circular-flow diagram is a a. visual model of the economy. b. visual model of the relationships among money, prices, and businesses. c. model that shows the effects of government on the economy. d. mathematical model of how the economy works.

a

The demand for a good or service is determined by a. those who buy the good or service. b. the government. c. those who sell the good or service. d. both those who buy and those who sell the good or service.

a

The term "invisible hand" was coined by a. Adam Smith. b. David Ricardo. c. Karl Marx. d. Benjamin Franklin

a

When computing the opportunity cost of attending a concert you should include a. the price you pay for the ticket and the value of your time. b. the price you pay for the ticket, but not the value of your time. c. the value of your time, but not the price you pay for the ticket. d. neither the price of the ticket nor the value of your time

a

market supply curve

a graph of the quantity supplied of a good by all suppliers at different prices

demand curve

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

A decrease in quantity demanded a. results in a movement downward and to the right along a demand curve. b. results in a movement upward and to the left along a demand curve. c. shifts the demand curve to the left. d. shifts the demand curve to the right.

b

. A movement upward and to the left along a demand curve is called a(n) a. increase in demand. b. decrease in demand. c. decrease in quantity demanded. d. increase in quantity demanded

c

.If muffins and bagels are substitutes, a higher price for bagels would result in a(n) a. increase in the demand for bagels. b. decrease in the demand for bagels. c. increase in the demand for muffins. d. decrease in the demand for muffins

c

An increase in the price of a good will a. increase supply. b. decrease supply. c. increase quantity supplied. d. decrease quantity supplied

c

Central planning refers to a. markets guiding economic activity. Today many countries that had this system have abandoned it. b. markets guiding economic activity. Today many countries that did not have this system have implemented it. c. government guiding economic activity. Today many countries that had this system have abandoned it. d. government guiding economic activity. Today many countries that did not have this system have implemented it.

c

Refer to Figure 4-4.Which of the following would cause the demand curve to shift from Demand C to Demand A in the market for DVDs? a. an increase in the price of DVDs b. a decrease in the price of DVD players c. a change in consumer preferences toward watching movies in movie theaters rather than at home d. an expectation by buyers that their incomes will increase in the very near future

c

The adage, "There is no such thing as a free lunch," means a. even people on welfare have to pay for food. b. the cost of living is always increasing. c. people face tradeoffs. d. all costs are included in the price of a product

c

he outer loop of the circular-flow diagram represents the flows of dollars in the economy. Which of the following does not appear on the outer loop? a. Wages b. Income c. Capital d. Rent

c

Role of Assumptions

can simplify the complex world and make it easier to understand

Law of Demand

consumers buy more of a good when its price decreases and less when its price increases

Components of GDP

consumption, investment, government purchases, and net exports

.In 2008, the average American earned about $47,000 while the average Nigerian earned about $1,400. Which of the following statements is likely? a. The average American purchases more televisions than the average Nigerian. b. The average American has better nutrition and healthcare than the average Nigerian. c. The average American has a longer life expectancy than the average Nigerian. d. All of the above are correct

d

In a certain economy, toys and greeting cards are produced, and the economy currently operates on its production possibilities frontier. Which of the following events would allow the economy to produce more toys and more greeting cards, relative to the quantities of those goods that are being produced now? a. The economy experiences economic growth. b. There is a technological advance in the toy industry, but the greeting card industry experiences no such advance. c. There is a technological advance in the greeting card industry, but the toy industry experiences no such advance. d. All of the above are correct.

d

Refer to Figure 4-4. Which of the following would cause the demand curve to shift from Demand A to Demand B in the market for oranges in the United States? a. a freeze in Florida b. a technological advance that allows oranges to ripen faster c. a decrease in the price of apples d. an announcement by the FDA that oranges prevent heart disease

d

individual demand curve

illustrates the relationship between quantity demanded and price for an individual consumer

Refer to Figure 4-4. Which of the following would cause the demand curve to shift from Demand C to Demand A in the market for tennis balls in the United States? Demand A Demand B Demand C Quantity Price a. an increase in the price of tennis balls b. a decrease in the price of tennis racquets c. an expectation by buyers that their incomes will increase in the very near future d. a decrease in the number of people in the United States under age 70

d

The phenomenon of scarcity stems from the fact that a. most economies' production methods are not very good. b. in most economies, wealthy people consume disproportionate quantities of goods and services. c. governments restrict production of too many goods and services. d. resources are limited.

d

When the price of a good or service changes, a. the demand curve shifts in the opposite direction. b. the supply curve shifts in the opposite direction. c. the supply curve shifts in the same direction. d. there is a movement along a given supply curve.

d

inefficiency

getting less output from inputs that, if devoted to some other activity, would produce more output

Principle 9: Prices rise when the government prints too much money

inflation increase in overall level of process in economy Causes for large/ persistent inflation: growth in quantity of money

Principle 8: A country's standard of living depends on its ability to produce goods and services

large differences in living standards among countries as they evolve created differences in productivity

real interst rate

nominal interest rate - inflation rate

2 roles economists play

scientists and policy advisors

Principle 10: Society faces a short-run trade-off between inflation and unemployment

short-run effects of monetary injection stimulates the overall level of spending (higher demand for goods and services) Firms- raise price; hire more workers; produce more goods/ services lower unemployment

quantity demanded

the amount of a good that buyers are willing and able to purchase

quantity supplied

the amount of a good that sellers are willing and able to sell

market demand

the demand by all the consumers of a given good or service

Great Moderation

the period from 1985 to 2007 when the US economy experienced relatively small fluctuations and low inflation. Reduction in volatility that most macroeconomic aggregates

equilibrium price

the price that balances quantity supplied and quantity demanded

Real GDP

the production of goods and services valued at constant prices

Nominal GDP

the production of goods and services valued at current prices

equilibrium quantity

the quantity supplied and the quantity demanded at the equilibrium price

Scaricty

the state of being scarce or in short supply; shortage.

Macroeconomics

the study of economy-wide phenomena, including inflation, unemployment, and economic growth

Microeconomics

the study of how households and firms make decisions and how they interact in markets

Principal 7: Governments can sometimes improve market outcomes

we need a government to - enforce rules and maintain institutions - Promote efficiency to avoid market failure - promote equality to avoid disparities in economic well being - property rights- ability of an individual to own and exercise control over scarce resources - market failure- situation in which the market on its own fails to produce an effect allocation of resources

opportunity cost

whatever must be given up to obtain some item

excess demand: upward pressure on the price level

when quantity demanded is more than quantity supplied

excess supply: downward pressure on the price level

when quantity supplied is more than quantity demanded