Chapter 01 Flashcards
Macroeconomics
Study of the forces that influence the economy as a whole.
Real GDP (Gross Domestic Product)
It measures the total income of everyone in the economy (adjusted for the level of prices).
Inflation rate
It measures how fast prices are rising.
Unemployment rate
It measures the fraction of the labor force that is out of work.
Recession
A sustained period of falling income.
Depression
A very severe recession (sustained period of falling income).
Deflation
Periods of falling prices.
Model
A simplified representation of reality, often using diagrams or equations, that shows how variables interact.
Exogenous variables
The variables that are given for a model. Variables that are independent of the model’s solution.
Endogenous variables
Variables that a model tries to explain. Dependent variables.
Market clearing
A model that assumes that prices freely adjust to equilibrate supply and demand.
Flexible prices
Prices that adjust quickly to equilibrate supply and demand.
Sticky prices
Prices that adjust sluggishly and therefore, do not always equilibrate supply and demand.
Microeconomics
The study of how households and firms make decisions and how these decisionmakers interact in the marketplace.
________________ is the study of the economy as a whole. It focuses on on issues such as economic growth, inflation, and unemployment.
________________ is the study of the economy in the small. It focuses on the individual firm, industry, or consumer.
Macroeconomics
Microeconomics
__________________ measures the total income of everyone in the economy.. A period in which this measure is falling is called a(n) __________________ if the decline is small, and a ___________________ if the decline is severe.
Real GDP
recession
depression
During depressions, many people lose their jobs, so _____________________ rises substantially.
unemployment
An increase in the general level of prices is called ________________.
inflation
Economists construct _______________ to assist them in understanding the real world.
models
One purpose of an economic model is to show how the __________________ variables affect the _________________ variables, where the former come from outside the model and the latter are determined within the model.
exogenous
endogenous
With regard to prices, most macroeconomists believe that _______________________ is a rerasonable assumption for studying long-run issues but that ____________________ is a better assumption for studying short-run issues.
price flexibility
price stickiness
Models that exhibit price flexibility are examples of __________________ models.
market-clearing
If real GDP is growing rapidly, which of the following is most likely to occur?
a. a recession
b. a depression
c. higher unemployment
d. inflation
inflation
The variable that is likely to be exogenous in a model that explains production in a small firm within a large industry is the:
a. amount of output produced by the firm.
b. price of the firm’s inputs.
c. number of workers hired by the firm.
d. amount of machinery employed by the firm.
b. the price of the firm’s inputs.
All of the following are reasons why wages and/or prices may be sticky in the short-run EXCEPT:
a. long-term labor contracts often set wages in advance for up to three years.
b. many firms leave their product prices unchanged for long periods of time in order to prevent current customers from “shopping around.”
c. it is costly for firms to print new price lists and advertise frequently changing prices.
d. firms are already charging the highest prices people will pay, so there is no reason to change them.
d. firms are already charging the highest prices people will pay, so there is no reason to change them.
The market in which the assumption of continuous market-clearing seems to be LEAST applicable is the:
a. stock market.
b. market for wheat.
c. labor market.
d. market for U.S. Treasury bonds.
c. labor market
Formula for percentage change in Q.
100 x (Q1 - Q0)/Q0
Ex. Q1 = 120, Q0= 100
Answer to Example:
100 x (120 - 100)/100
100 x (20/100)
100 x .20 = 20%
