Economic Concepts

Question 1

To manage growth and attempt to prevent both an accelerated expansion and contraction, what two general methods does the government use to regulate the level of economic activity?

Answer 1

“Loosening” fiscal and monetary policy refers to a strategy to promote economic expansion.

“Tightening” fiscal and monetary policy refers to a strategy for economic contraction.

Question 2

Which indexes are measures of inflation?

Answer 2

Consumer Price Index (CPI)

Producer Price Index (PPI)

Question 3

List the three primary tools the Fed uses to influence the money supply and interest rates.

Answer 3

1. Raising or lowering the reserve requirement that banks must hold
2. Raising or lowering the discount rate which is the interest rate charged to banks for loans received from the Fed
3. Engaging in open market operations, which includes buying and selling government securities by the Fed

Question 4

The price at which quantity supplied equals quantity demanded is considered what?

Answer 4

Equilibrium

Question 5

What determines a good or service’s price elasticity?

Answer 5

How demand for a good or service may change in response to a price increase

Question 6

List the four phases of the business cycle.

Answer 6

1. Expansion phase
2. Peak phase
3. Contraction or recession phase
4. Trough phase

Question 7

What are “complements”?

Answer 7

Goods that are different in purpose but typically consumed together

Question 8

Name some of the causes of a shift in the demand curve.

Answer 8

Government lowers taxes

Consumers decrease their savings rate

Incomes increase

Question 9

When does the income effect occur?

Answer 9

As a result of prices changing at a greater rate than income

Question 10

The demand curve depicts what two factors?

Answer 10

Price and quantity demanded

Question 11

What two tools does Congress have to exercise fiscal policy?

Answer 11

The power to tax

The power to spend

Question 12

List the two reasons why, when the price of a good or service increases, consumers will tend to buy less.

Answer 12

Substitution effect

Income effect

Question 13

Are necessities considered elastic or inelastic?

Answer 13

Inelastic

Question 14

Define “supply and demand.”

Answer 14

Supply is the quantity of a good or service that producers are willing to offer at a certain price. Demand tells us how much of a good or service buyers are willing to buy at a certain price.

Question 15

Which government entity conducts U.S. monetary policy?

Answer 15

The Federal Reserve Board (The Fed)

Question 16

Differentiate between “Gross Domestic Product (GDP)” and “Gross National Product (GNP).”

Answer 16

GDP is the total value of all goods and services produced within the United States over the course of a year (regardless of ownership).

GNP is the total value of goods and services produced by U.S. residents’ labor and property (regardless of where produced).

Question 17

The supply curve depicts what two factors?

Answer 17

Price and quantity supplied

Question 18

When does the substitution effect occur?

Answer 18

When consumers are faced with rising prices and choose to purchase a similar, but lower priced, product or service instead

Question 19

What’s the difference between a depression and a recession?

Answer 19

Recession = GDP declining for 6 consecutive months (i.e., 2 quarters)

Depression = GDP declining for 18 months (i.e., 6 consecutive quarters)

Question 20

What is an “exchange rate”?

Answer 20

The price of a country’s currency within the context of another country’s currency

Question 21

Define “substitutes.”

Answer 21

Goods that provide something similar