Introduction

Question 1

Micro vs. macro?

Answer 1

Microeconomics focuses on individual decision-making by individuals, firms, and governments and tries to predict and explain their choices and outcomes.

Whereas macroeconomics focuses on the structure and performance of economics and tries to predict and explain causal links between aggregate variables.

Question 2

normative analysis

Answer 2

Normative analysis tries to evaluate outcomes and states that are desirable

Question 3

social objective

Answer 3

A social objective is an objective that in principle is shared by social consensus.

Question 4

economic growth

Answer 4

expansion of output over time. Economic growth is the growth in the economic standards of living that occurs over substantial periods of time

Question 5

labor productivity

Answer 5

Labor productivity is the output produced per unit of labor input.

Question 6

business cycle

Answer 6

Business cycles are the short-run fluctuations in GDP, including recessions and booms

Question 7

Recession

Answer 7

A recession is the period of time when actual output in an economy falls below potential output and has not yet started to recover.

Question 8

boom

Answer 8

boom is the period of time when actual output in an economy raises well above potential output.

Question 9

depression

Answer 9

depression is an extremely severe recession that is marked by rising unemployment.

Question 10

unemployment rate

Answer 10

unemployment rate measures the number of people who are unemployed as a fraction of the labor force.

unemployed/total labor force

Question 11

inflation

Answer 11

Inflation is the change in the aggregate price level of an economy. price level can affect individuals’ purchasing power and therefore their standards of living

Question 12

deflation

Answer 12

Deflation is a negative rate of inflation and implies a decline of the aggregate price level in an economy.

Question 13

hyperinflation

Answer 13

Hyperinflation describes extraordinarily high rates of inflation, such as 100% or more per year.

Question 14

fiscal policy

Answer 14

Fiscal policy refers to government spending and taxation and is determined by the government

Question 15

monetary policy

Answer 15

Monetary policy refers to the growth of the money supply and is in most countries determined by central banks.

Question 16

Classical Approach

Answer 16

Adam Smith/invisible hand.

Individuals conduct their economic activities according to their best interests and if there are free markets in
which individuals interact, then the overall economy achieves efficient economic outcomes under
specific conditions.

After an exogenous shock, wages and prices adjust quickly and the markets return to an equilibrium in which quantities demanded equal quantities supplied.

Therefore, limited role for govt.

Question 17

Keynesian Approach

Answer 17

Great Depression observations. persistent unemployment occurred because wages and prices adjust slowly (“sticky wages” and “sticky prices”).

Wages and prices are slow to adjust to economic shocks.

Therefore, govt should intervene (..e., by increasing the demand for goods and services through fiscal and/or monetary policies

Question 18

inflation rate

Answer 18

percentage increase in avg level of prices over 1 year

Question 19

positive vs. normative analysis

Answer 19

positive - examines the economic consequences of a policy but doesn’t address the question of whether those consequences are desirable

normative - tries to determine whether policy SHOULD be used

Question 20

stagflation

Answer 20

high unemployment + high inflation