final exam Flashcards
1
Q
What is the total output (GDP) demanded at different price levels by different groups
A
Aggregate demand
GDP= C + I + G + (X-M)
2
Q
Why might the aggregate demand curve slopes down because higher prices
A
Lower consumption by household
lower investment by firms
lower net exports
3
Q
What are the AD curve shift factors or ‘shocks’
A
Consumer confidence
business cycles in foreign countries
government policy responds to shocks
4
Q
How can government policies effect AD curve
A
Monetary policy
Fiscal policy
5
Q
What is monetary policy
A
Money supply
interest rates
6
Q
What is fiscal policy
A
Government spending
Taxes
7
Q
What is the total output produced at different price levels by different groups
A
Aggregate supply
8
Q
Aggregate supply slopes upwards (short-run)
A
Upwards in the short-run
(As the price level for outputs rises, with the price of inputs remaining fixed, firms have an incentive to produce more to earn higher profits)
9
Q
Aggregate supply slopes vertical (long run)
A
Vertical at potential GDP or full-employment output
Determined by the economy’s stocks of labor, capital, and natural resources, and on the level of technology
10
Q
LRAS Curve
A
Policy does not shift LRAS
Real shocks can shift LRAS
-Tech
-weather
-war
-disease
11
Q
Aggregate supply slopes which way in the short run?
A
Upwards, firms have an incentive to produce more to earn higher profits
12
Q
T/F economics is the study of how society allocates its plentiful resources.
A
True
13
Q
T/F economic growth causes a production possibilities frontier to shift upwards or outward to the right
A
True
14
Q
T/F If a country can make more of a product per hour than another, then they cannot gain from trading with the other country.
A
False, countries can always gain from trade
15
Q
T/F consumer surplus measures the benefit to buyers from participating in a market
A
True
16
Q
T/F a legal minimum on the price of a good is a price ceiling
A
False
17
Q
T/F Prices controls are inefficient because they result in lost gains from trade
A
True
18
Q
What is the limited nature of society’s resources?
A
Scarcity
19
Q
What is incentive?
A
Something that induces a person to act
20
Q
What is opportunity cost
A
whatever must be given up in order to obtain some item
21
Q
What is efficiency?
A
The property of society getting the most it can from its scare resources
22
Q
What is a visual model of the economy that shows how dollars flow through markets among households and firms?
A
Circular-flow diagram
23
Q
What is a graph that shows the combinations of output that the economy can possibly produce given the available resources and technology?
A
Production possibilities frontier (PPI)
24
Q
What does the PPI illustrate
A
Efficiency
Trade- offs
opportunity cost
unemployment of resources
25
What is the ability to produce a good using fewer inputs than another producer does
absolute advantage
26
what is comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
27
Are gains from trade based on comparative advantage or aboslute?
Comparative
28
What is the principle of comparative advantage?
each good should be produced by the country/person with a comparative advantage in producing that good
29
What is a market in which there are so many buyers and so many sellers that each has a negligible impact on the market
Competitive market
30
What is a demand curve?
a graph that shows how the quantity of a good demanded depends on the price
31
What is the amount of good that buyers are willing and able to purchase?
Quantity demanded
32
What is the Law of demand
Other things equal, as the price of the good falls, the quantity demanded rises and vice versa. Therefore the demand curve slopes downwards
33
Which way does a demand curve increase on a graph
Right
34
Which way does a demand curve decrease on a graph
Left
35
What are the determinants of demand?
income
the price of substitutes and complements
tastes
expectations
and the number of buyers
36
What shows how the quantity of a good supplied depends on the price
Supply curve
37
What is quantity supplied
the amount of a good that producers are willing and able to sell
38
What is the law of supply?
As the price of a good falls, the quantity supplied falls and vice versa. Therefore the supply curve slopes upward.
39
Determinants of supply
Input prices
technology
expectations
the number of sellers
40
What is the intersection of supply and demand curves called
Market equilivrium
41
What is surplus
When the market price is above the equilibrium price.
42
What is a shortage
When the market price is below the equilibrium price
43
What three steps are used to analyze how any event influences a market
Decide whether the event shifts the supply or demand curve
Decide which direction the curve shifts
compare the new equilibrium with the initial equilibrium
44
What is willingness to pay (consumer)
the maximum amount that a buyer will pay for a good
45
What equals buyers willingness to pay for a good minus the amount they actually pay? (consumer)
Consumer surplus
46
How can consumer surplus be computed?
By finding the area below the demand curve and above the price
47
What is willingness to sell (producer)
The minimum amount that a seller will accept for their goods
48
What is producer surplus
equals the amount sellers receive for their goods minus their willingness to accept.
49
How can producer surplus be computed?
by finding the area below the price and above the supply curve
50
Is the allocation of resources that maximizes a total surplus (sum of consumer and producer)
Efficient
51
What is price ceiling?
A legal maximum on the price at which a good can be sold
52
If the price ceiling is below the equilibrium price is it binding?
Yes, and if the quantity demanded exceeds the quantity supplied
53
What is a price floor?
A legal minimum on the price at which a good can be sold
54
if the price floor is above the equilibrium price is the price floor binding?
Yes
55
T/F price controls on goods reduce the welfare of buyers and sellers of the goods.
True
56
T/F price controls have deadweight losses because they decrease the quantity traded and shrink the size of the market below the level that maximizes total surplus
True
57
What is GDP?
The market value of all final goods/ services produced withing country in a given period of time
58
What is GNP
The market value of all final goods/ services produced by U.S residents no matter where they live
59
What does GDP per capita measure
The wealth of population
60
What does GDP growth measure
the direction of an economy
61
T/F GDP is a perfect measurement of the average persons standard of living.
False
62
How do you calculate nominal GDP?
quantity * price (year 1) + quantity * price (year 2)
63
how do you calculate growth rate (nominal)
100(year 2 - year 1)/ year 1
64
GDP = C + I + G + (X - M)
The equation for spending
65
GDP= S(P*Q)
The equation for production
66
GDP= W + i + R + Pr
the equation for income
67
What is nominal GDP
Values output using current prices at the time of sale (not corrected for inflation)
68
What is real GDP
Values output using the prices of a base year (is corrected for inflation)
69
What does the GDP deflator measure?
the overall level of prices
70
100 (Nominal/real)
GDP Deflator
71
How can an economys inflation rate be measured?
by computing the percentage increase in the GDP deflator from one year to the next
72
T/F A country's standard of living depends on its ability to produce goods and services
True, it depends on productivity (the avg quantity of good/ services produced per unit of labor input
73
T/F the determinants of productivity are physical capital, human capital, technological knowledge, and natural resources
True
74
What public policies encourage economic growth
Promote savings and investment
promote investment from abroad
invest in education
invest in health and nutrition
enhance property rights and political stability
free trade
research and development
population growth
75
T/F a economy's rate of productivity growth is closely linked to the growth rate of GDP per capita
True
76
T/F inflation is the avg change in prices or in the price level (some prices go up while others go down)
True
77
How do you calculate inflation rate
(P2-P1/P1)100
78
Are price indexes used to measure inflation?
Yes, Consumer price index (CPI), GDP deflator, and Producer price index (PPI)
79
How do you calculate the inflation rate using the GDP deflator
(GDP D Y2- GDP D Y1/ GDP D Y1) * 100
80
How is CPI calculated?
Fix the basket
Find the prices
compute the baskets cost
choose a base year and compute the index
81
What are the problems with CPI?
Substitution bias
introduction of new goods
unmeasured quality change
82
What is included in CPI but excluded from GDP Deflator?
Imported consumer goods
83
What is included in GDP deflator but excluded from CPI
Capital goods
84
T/F CPI uses fixed basket while GDP Deflator uses basket of currently produced goods and services
True
85
What is the cost of inflation
Confuses price signals
redistributes wealth across income groups
interacts with taxes
makes long-term planning difficult
unbalances the financial sector
86
T/F real interest rate is corrected for inflation but nominal is not
True
87
Real interest rate =
Nominal interest rate- inflation rate
88
What is the unemployment rate of a labor force?
the % of the labor force without a job
89
How do you find unemployment rate?
Un/ LF *100
90
What is the Labor force participation rate?
the % of the adult non institutionalized civilian population either working or looking for work
91
how do you find the labor force participation rate
LF/ Pop * 100
92
T/F the unemployment rate measures the 'hidden unemployment (underemployment, part-time, discouraged workers)
False
93
What are the three types of unemployment?
Frictional, structural, cyclical
94
A student who just graduated from college but hasnt found a job yet is considered to be
frictionally unemployed
95
a freightliner employee that got laid off because of the recession of 2007-2009 is considered
Cyclically unemployed
96
People who lost their jobs as hand-drawn animators because of the popularity of computer generated 3D animation are considered
structurally unemployed
97
What is the normal rate of unemployment around which the actually unemployment rate fluctuates
Natural unemployment rate
98
What does the natural unemployment equal
structural unemployment + frictional unemployment
99
What are three public policies to address unemployment
Government employment agencies
public training programs
unemployment insurance
100
Aggregate supply slopes which way in the long run?
Vertical, at potential GDP of full-employment output
101
What does LRAS stand for?
Long Run Aggregate Supply
102
What does SRAS stand for?
Short Run Aggregate Supply
103
What ways might SRAS shift as a result of change?
Price of inputs/ factors of production, regulations
104
T/F countries specialize based on absolute advantage
false
105
T/F economic growth means that a country can produce more of all the goods
True
106
T/F as income goes up people buy more of an inferior good, therefore increasing its demand
False
107
T/F a binding price floor causes a surplus and is inefficient
true
108
Name four things that can cause shifts in the AD
Consumption, investment, govt spending, net exports (x-m)
109
Name four things that cause shifts in SRAS
Productivity, input prices, nominal wages, expectations about prices or inflation
110
Name four things that can shift LRAS
Capital changes, labor changes, technological changes, changes in natural resources
111
What is any asset that people are generally willing to accept in exchange for goods and services
Money
111
T/F the existence of money makes trading much easier and allows specialization
True
112
T/F without money you would have to barter
True
113
What is medium of exchange?
Money is acceptable to a wide variety of parties as a form of payment for goods and services
114
What is unit of account?
Money is the yardstick people use to post prices and record debts
115
What is store of value?
Money allows people to defer consumption till a later date by storing value
116
What are the two different kinds of money?
Commodity and Fiat money
117
What is commodity money?
The form of a commodity with intrinsic value. Ex; gold coins, cigarettes in POW camps
118
What is Fiat money?
Money without intrinsic value, used a money because of gov't decree
119
T/F the quantity of money available in the economy is called the money supply
True
120
Paper bills and coins in the hands of the public is known as
Currency
121
Balances in bank accounts that depositors can access on demand is
Demand desposits
122
What are the three categories of money supply in the US?
Monetary base, M1, and M2
123
Currency and reserves at the central bank (federal reserve) is?
Monetary base
124
Banks are only required to hold only a portion of the money deposited with them as reserves is?
Frictional Banking
125
What is the reserve ratio?
Fraction of deposits held on reserve (how liquid banks want to be)
Reserve ratio = bank reserves/total deposits
126
What is money multiplier?
how much money supply changes as reserves change (lowering the reserve ratio increases the money multiplier)
mm = 1/reserve ratio
127
What is the difference between M1 and M2
M1 is MB + checking and savings accounts, while M2 is all of M1 + other savings deposits
128
Suppose $100 is added to the monetary system and the reserve ratio is 10%
= 100* 1/0.10
= 100* 10
= 1,000
129
Suppose $100 is added to the monetary system and the reserve ratio is 20%
= 100 * 1/0.20
= 100 * 5
= 500
130
T/F when banks gain reserves, they make new loans, and the money supply expands
True, same is said when the banks lose reserves
131
Deposite $5,000, RRR is 15%
= 5000 * 1/.15
=
132
What is the required reserve formula
initial deposit/ Required reserve ratio
133
What is the loanable amount formula
Initial deposit - required reserve amount
134
how do you find the total change in money supply?
Initial deposit * money multiplier
135
What is the central bank?
An institution that oversees the banking system and regulates the money supply
136
The central bank of the US is known as?
The Federal Reserve (Fed)
137
What is monetary policy?
The setting of the money supply by policymakers in the central bank.
138
What does the central bank of the US include?
District banks
Federal Reserve Board of Governors
Federal Open Market Committee (FOMC)
139
T/F the Fed maintains the bank account of the US treasury and manages govt borrowing
True
140
T/F Large private banks do not keep accounts at the Fed, nor can they borrow from the Fed
False
141
T/F The Fed controls the money supply, keeps inflation/ unemployment low and stable, and encourages growth
True
142
What 3 policy tools can the Fed use to change the money supply
Reserve requirements
Discount rate
Open market operations (quantitative easing)
143
What is reserve requirements?
The amount that banks must hold when they receive a deposit
144
