Macroeconomics Midterm

Question 1

What are the three key economic ideas?

Answer 1

People are rational
People respond to incentives
Optimal decisions are made at the margin.

Question 2

Due to ______, we sometimes have to produce less of one thing to produce more of another. This is called ______.

Answer 2

scarcity; trade-off.

Question 3

What are the three types of markets?

Answer 3

Centrally planned markets (government explicity controls the who, what, how of the economy)

Market economies (households and firms answer the who, what, how)

Mixed economies (some central planning and some market control; most countries use mixed economies)

Question 4

What is opportunity cost?

Answer 4

The value of something we must give up to engage in an activity.

Question 5

What are the three fundamental questions every society must face?

Answer 5

What goods and services will be produced?
How will the goods and services be produced?
Who will receive the goods and services produced?

Question 6

Differntiate normative and positive analysis.

Answer 6

Positive analysis is concerned about what is;

Normative analysis is concerned about what should be.

Question 7

What is macroeconomics?

Answer 7

The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.

Question 8

A demand curve shows the relationship between the _____ and the _____.

Answer 8

price of a good; quantitiy of the good demanded at each price.

Question 9

An increase in demand shifts the demand curve to the _____; a decrease in demand shifts the demand curve to the _____.

Answer 9

right; left.

Question 10

What is the formula for calculating change in real GDP?

Answer 10

% change = [(Year 2 - Year 1)/Year 1] x 100

Question 11

What is PPF?

Answer 11

Production Possibilities Frontier - a cruve showing the maximum attainable combination of two products that may be produced using finite resources and current technology.

Question 12

Choosing the best point on the PPF is called ____ _____.

Answer 12

allocative efficiency

Question 13

Which of the following would not be included in final consumption when calculating GDP using the expenditure​ approach?

a) house
b) refrigerator
c) clothing
d) automobile

Answer 13

A) house

Question 14

How can economic growth produce a shift in the PPF?

Answer 14

increase of economic resources availability and technological change that increases production quantity.

Question 15

What is ceteris paribus

Answer 15

The assumption that all other variables are constant when analyzing the relationship between two variables - such as price and quantity demanded.

Question 16

When price falls, quanity demanded will rise. This is known as the ____ __ _____.

Answer 16

Law of Demand.

Question 17

Demand curves slope _____.

Answer 17

downwards

Question 18

When does a demand curve shift?

Answer 18

When there is a change in something other than price that affects demand.

Question 19

When price rises, quantity supplied increases. This is known as the ___ __ ______.

Answer 19

Law of Supplies.

Question 20

A movement along the supply curve is ______.

Answer 20

a change in quantity supplied

Question 21

A shift in the supply curve is ______.

Answer 21

a change in supply

Question 22

When quantity demanded equals quantity supplied, this is called _____ ______.

Answer 22

market equilibrium (or competitive market equilibrium if there are many buyers and sellers).

Question 23

Supply curves slope _____.

Answer 23

upwards

Question 24

In order for a successful free market, governments must provide which services?

Answer 24

Protection of Private Property

Enforcement of Contracts and Property Rights

Question 25

What are the two methods used to measure GDP?

Answer 25

Expenditure approach (measures GDP by adding up all the different types of expenditures in the economy)

Income approach (measures GDP by adding up all income received by the owners of factors of production)

Question 26

How does one calculate GDP via the Income approach?

Answer 26

Compensation of Employees + Gross Operating Surplus + Gross Mixed Income + Taxes Minus Subsidies

Question 27

How does one calculate GDP via the expenditure approach?

Answer 27

Consumption (C) + Investments (Y) + Government Spending (G) + Net Exports (Nx)

or Y = C + I + G + Nx, where Y = GDP

Question 28

GDP deflator is calculated by:

Answer 28

(Nominal GDP/Real GDP) x 100