Economics Review Flashcards

Flashcards for reviewing economics concepts.

What does GDP measure?

GDP measures economic activity and is often used to assess the health of an economy.

What is the difference between Real GDP and Nominal GDP?

Nominal GDP is the total value of goods/services at current prices, without adjusting for inflation. Real GDP is adjusted for inflation.

How is CPI used to calculate inflation?

CPI is used to calculate inflation by comparing the current year's CPI to the previous year's CPI.

What happens to the tax rate as income increases in a Progressive Tax System?

In a Progressive Tax System, the tax rate increases as income increases.

What happens to the tax rate as income increases in a Regressive Tax System?

In a Regressive Tax System, the tax rate decreases as income increases.

What does Public Choice study?

Public choice studies how government decisions are made and the role of voters, politicians, and bureaucrats in shaping public policy.

How do Special Interest Groups Affect Democracy and Elections?

Special interest groups exert influence on government decisions through lobbying, campaign contributions, and other forms of persuasion.

Define Rational Ignorance.

Rational ignorance refers to the decision to remain uninformed about a topic because the costs of obtaining the information outweigh the potential benefits.

Why are Special Interest Groups NOT Rationally Ignorant?

Special interest groups are not rationally ignorant because they have a vested interest in influencing policy and are willing to spend resources to gain information and lobby for their cause.

Define Moral Hazard.

Moral hazard occurs when one party takes risks because they do not have to bear the full consequences of their actions.

What does the Efficient Markets Hypothesis (EMH) state?

The Efficient Markets Hypothesis (EMH) states that asset prices reflect all available information, meaning it is impossible to consistently achieve higher returns than the market average.

What are the primary causes of economic growth?

Primary causes of economic growth include increases in physical capital, human capital, technological innovation, and improvements in institutions and policies.

What is the difference between a Normal Good and an Inferior Good?

Normal goods are goods whose demand increases as income increases. Inferior goods are goods whose demand decreases as income increases.

How are interest rates affected by the supply and demand of loanable funds?

When the demand for loanable funds increases, interest rates rise, and when supply increases, interest rates fall.

How are Marginal Costs different from Average Costs?

Marginal cost is the additional cost of producing one more unit of output. Average cost is the total cost divided by the number of units produced.

How does political stability affect economic growth and quality of life?

Political stability is important for fostering investment, trade, and long-term planning. It generally leads to higher economic growth and a higher quality of life by reducing uncertainty and risk.

What is the formula for calculating Nominal Spending Growth?

Nominal spending growth = Real GDP growth + Inflation rate.

How do Institutions affect Incentives?

Institutions shape incentives by establishing rules and norms that guide individual and collective actions.

What is the Peltzman Effect?

The Peltzman effect refers to the idea that people may take more risks when they feel protected by safety regulations or policies.

Explain 'There are no solutions, only trade-offs.'

This statement reflects the idea that every decision involves sacrificing one thing for another. There is no perfect solution, only trade-offs between competing interests or outcomes.

Explain Opportunity Cost.

Opportunity cost is the value of the next best alternative that you give up when making a decision.

What is the difference between a Recession and a Depression?

A recession is a period of economic decline with two consecutive quarters of negative GDP growth. A depression is a more severe and prolonged economic downturn.

Explain Human Capital

Human capital refers to the skills, knowledge, and experience owned by individuals that can be used to create economic value.

What is a Bank Run?

A bank run occurs when many depositors rush to withdraw their money from a bank at the same time due to fears that the bank will become insolvent.

Explain Creative Destruction

Creative destruction is the process by which new innovations replace outdated technologies or products, leading to the decline of established industries.

What are some benefits and disadvantages of Passive Investing compared to Active Investing?

Passive investing has low fees and less risk of underperforming the market, but may not maximize returns. Active investing has potentially higher returns, but higher fees and risk of underperforming.

How is the steady state level of capital calculated?

The steady state level of capital in the Solow growth model occurs when the amount of capital per worker is constant over time. It's calculated by setting net investment equal to zero.

What is a Middleman?

A middleman is an intermediary who buys and sells goods or services between producers and consumers.

What is the role of a bank in the loanable funds market?

Banks act as intermediaries in the loanable funds market, where they collect deposits and lend out money to borrowers. They influence interest rates and the allocation of funds in the economy.

Explain Comparative Advantage.

Comparative advantage refers to the ability of an individual, business, or country to produce a good or service at a lower opportunity cost than others.

Why Might Inflation Be Painful to Stop?

Stopping inflation may involve reducing government spending, raising interest rates, or reducing the money supply. These measures can lead to higher unemployment and reduced economic growth.

Define Inflation.

Inflation is the rate at which the general level of prices for goods and services rises, leading to a decrease in purchasing power.

Define Unemployment. What Are the Different Kinds of Unemployment?

Unemployment is the condition of being jobless and actively seeking work. Types of unemployment: Frictional, Structural, and Cyclical.

Why Might We NOT Want the Unemployment Rate to Be Zero?

Zero unemployment is unrealistic and undesirable because frictional and structural unemployment are natural parts of a healthy economy.

How Do You Finance Debt?

Debt can be financed by borrowing money through loans, issuing bonds, or taking out lines of credit. Repayment is made over time with interest.

How does a business finance debt?

Businesses finance debt through bank loans, corporate bonds, or issuing equity (e.g., selling stocks) to raise capital.

How Does the Government Finance Debt?

The government finances debt by issuing bonds, borrowing from domestic and foreign lenders, or through deficit spending.

What is the Difference Between the Marginal Tax Rate and the Average Tax Rate?

Marginal tax rate is the rate paid on the next dollar of income. Average tax rate is the total tax paid divided by total income.

Know How to Identify a Median Voter.

The median voter is the person whose preferences are in the middle of a political spectrum.

Why Do Businesses Provide Quality Goods and Services, Apart from Regulation?

Businesses provide quality goods and services to attract customers, build a good reputation, and maximize profits.

Who Said 'It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.' What Does It Mean?

This quote is from Adam Smith. Individuals act based on self-interest, which, in a competitive market, can lead to positive outcomes for society.

List factors that can cause the Supply Curve to Shift.

Changes in input prices, technological advancements, government regulations, expectations about future prices and Number of suppliers.

List factors that can cause the Demand Curve to Shift.

Changes in income, Changes in tastes and preferences, Prices of related goods, Expectations about future prices and Population changes.

List factors that can cause the Short-Run Aggregate Supply Curve to Shift.

Changes in input prices, Changes in productivity, and Supply shocks.

List factors that can cause the Long-Run Aggregate Supply Curve to Shift.

Changes in capital stock, Technological progress, Changes in labor force participation and Improvements in education or health .

List factors that can cause the Aggregate Demand Curve to Shift.

Changes in consumer spending, Changes in investment spending, Changes in government spending and Changes in net exports.

What is Crowding Out?

Crowding out refers to the reduction in private sector spending that occurs when the government increases its spending and finances it by borrowing more.

What Does it Mean to Say That 'A Price is a Signal Wrapped Up in an Incentive'?

Prices act as signals in a market, conveying information about the scarcity or abundance of goods. Prices incentivize producers and consumers to adjust their behavior.

What Are Open Market Operations?

Open market operations refer to the buying and selling of government securities by a country's central bank to control the money supply.

What is the Difference Between Cutting-Edge Growth and Catch-Up Growth?

Cutting-edge growth refers to growth driven by innovations in developed economies. Catch-up growth refers to growth in less-developed economies that occurs when they adopt technologies from developed countries.

What is the Money Multiplier?

The money multiplier is the ratio of the amount of money the banking system creates relative to the amount of new reserves. The formula is 1 / Reserve Ratio

What Does Conditional Convergence Mean? Explain.

Conditional convergence refers to the idea that poorer economies will grow faster than richer economies, but only if they have similar institutions, policies, and other structural factors.

Write the Quantity Theory of Money Equation. Explain Each Variable.

M×V=P×Y where M = Money supply, V = Velocity of money, P = Price level and Y = Output or real GDP

What is the Federal Reserve?

The Federal Reserve (Fed) is the central bank of the United States. It controls monetary policy, including setting interest rates and regulating the money supply.

What Incentives Face Elected Officials?

Elected officials often face incentives to act in ways that help them get re-elected.

What is the Difference Between Instrumental Voting and Expressive Voting?

Instrumental voting is voting with the expectation of influencing the outcome of an election. Expressive voting is voting to express one's preferences or beliefs.

What Does Milton Friedman Think About Inflation?

Milton Friedman believed that inflation is always and everywhere a monetary phenomenon. He argued that inflation occurs when the money supply grows faster than the economy's output.

How Does Monetary Policy Influence Aggregate Demand?

Monetary policy influences aggregate demand by affecting interest rates and the money supply. Lower interest rates encourage borrowing and investment, boosting aggregate demand, while higher interest rates do the opposite.

What is the Difference Between Scarcity and a Shortage?

Scarcity refers to the fundamental economic problem that arises because resources are limited. Shortage refers to a situation where the quantity demanded exceeds the quantity supplied at a specific price.

What is Consumer Surplus? What is Producer Surplus?

Consumer surplus is the difference between what consumers are willing to pay and what they actually pay. Producer surplus is the difference between what producers receive and the minimum amount they are willing to accept.

Buyers Compete Against .

Sellers

Sellers Compete Against .

Other Sellers.

Where Does the Money to Subsidize a Market Come From?

The money to subsidize a market typically comes from taxpayer funds.

Identify Complementary Goods. Identify Substitute Goods.

Complementary goods are goods that are often used together. Substitute goods are goods that can replace each other.

What is the Rule of 70?

The Rule of 70 is a formula used to estimate the number of years it takes for a quantity to double given a fixed annual growth rate. Years to Double = 70 / Annual Growth Rate.

Why Does It Take Congress a Long Time to Pass Legislation?

It takes Congress a long time to pass legislation due to political disagreements, the need to negotiate compromises, the complexity of issues, and the lengthy deliberation process.

What is Fiscal Policy?

Fiscal policy refers to the government's use of taxation and spending to influence the economy.

How Do You Diversify Investments?

Diversification involves spreading your investments across various asset classes and sectors to reduce risk.

How would you label the X and Y axis on a Supply and Demand curve?

X-axis: Quantity. Y-axis: Price.