1.3

Question 1

model

Answer 1

simplified representation in the real world (assumptions are used)

Question 2

production possibility curve model (PPC) =

Answer 2

production possibility frontier (PPF)

Question 3

PPC

Answer 3

shows the maximum combinations of goods and services a country can produce in a specific period of time, using all of its resources and the available technology in the most efficient way

Question 4

production possibilities

Answer 4

all points on the curve

Question 5

potential output =

Answer 5

potential growth

Question 6

potential output

Answer 6

a change in economy, caused an increase in the maximum amount of goods that can be produced

Question 7

reasons for potential growth

Answer 7

1. an increase in the quantity of factors of production
2. an increase in the quality of factors of production
3. an improvement of technology

Question 8

constant opportunity cost

Answer 8

factors of production can produce any of the 2 goods indistinctly as they are equally well suited for both goods, so factor of production can be transferred proportionally

Question 9

non-parallel shift in PPC

Answer 9

technology change favoring the production of good x increases the production of that good proportionately more

Question 10

in order for economy to produce somewhere on the PPC curve:

Answer 10

1. all resources must be fully employed
2. all resources must be used efficiently

Question 11

economic growth

Answer 11

increases in the quantity of output produced in an economy over a period of time

Question 12

the circular flow of income model

Answer 12

a model that illustrates the interactions between economic agents in an economy; helps us understand how an economy works, shows that in any given time period, the value of output is equal to total income garanted in producing that output = expenditures made to purchase that output

Question 13

assumptions about a closed economy with two sectors

Answer 13

1. households own all the factors of production
2. firms produce all goods and services
3. there is no government
4. there are no other countries to trade with (closed economy)
5. there are no banks or commercial institutions

Question 14

draw a closed economy with 2 sectors model

Answer 14

…

Question 15

circular flow of income states

Answer 15

everything that goes around, comes around

Question 16

how do firms pay household for production

Answer 16

land - rent
labour - wages
capital - interest
entrepreneurship - dividents

Question 17

consumer expenditure =

Answer 17

household expenditure

Question 18

consumer expenditure

Answer 18

the total amount of money spent on goods and services

Question 19

costs of production

Answer 19

payments that firms make to buy factors of production

Question 20

revenues

Answer 20

the payments that firms receive by selling goods and services

Question 21

national income =

Answer 21

national output = national expenditure

Question 22

what are the sectors of open economy

Answer 22

households, firms, government, financial institution, foreign countries

Question 23

assumptions of an open economy with 5 sectors

Answer 23

1. households own the factors of production
2. firms produce goods and services
3. government collects taxes to provide public and merit goods to society
4. there are foreign countries, that both produce goods and services that they export to other countries, and consume goods and services that they import
5. there are financial institutions where households can save their income and from which firms can take out loans to make investments and grow their businesses

Question 24

draw an open economy with 5 factors model

Answer 24

…

Question 25

leakages =

Answer 25

withdrawals

Question 26

leakages

Answer 26

flows of money that leave the economy as savings, taxes and imports

Question 27

injections

Answer 27

enter the economy as investments, government spendings, exports

Question 28

economy in equilibrium

Answer 28

leakages = injections (economy doesn’t grow)

Question 29

transfer payments

Answer 29

payments made by the government that are not in exchange for goods and services and therefore do not increase national output (pensions, child support, unemployment benefits)

Question 30

investment

Answer 30

capital spending by firms

Question 31

imports

Answer 31

goods and services produced in other countries and purchased by domestic buyers - leakages