Macroeconomics Midterm Review - Spring 2026 - Goldhammer, Rutgers-NB

What is scarcity?

It's the situation in which resources are limited relative unlimited wants.

What is a resource in economics?

Anything that can be used to produce something else.

What does opportunity cost mean?

The value of the next best alternative that must be given up to obtain something.

What is a trade-off?

A comparison of the costs and benefits of different choices.

What is a marginal decision?

A decision about whether to do a little more or little less of an activity.

What is marginal analysis?

The study of decisions made by comparing marginal benefits and costs.

What is an incentive?

Anything that motivates people to change their behavior.

Why do economists believe people respond to incentives?

Because individuals try to exploit opportunities to make themselves better off.

What are gains from trade?

The increase in consumption possibilities that result from specialization and exchange.

What is specialization?

When individuals focus on producing goods or services they are relatively better at producing (increases total production and consumption).

What is equilibrium in economics?

A situation where no individual has an incentive to change their behavior.

What is economic efficiency?

A situation where all opportunities to make people better off have been exploited.

What is equity in economics?

The concept of fairness in the distribution of economic resources.

Why are efficiency and equity often in conflict?

Policies that promote fairness often reduce economic efficiency.

What is market failure?

A situation in which markets fail to produce efficient outcomes.

Why might governments intervene in markets?

To improve welfare when markets fail to achieve efficiency?

Why is one person's spending another person's income?

Because the money spent by buyers becomes revenue for sellers.

What causes recessions according to basic macro principles?

When overall spending in the economy falls short of productive capacity.

What causes inflation?

When overall spending exceeds the economy's productive capacity.

What is economic growth?

An increase in the economy's ability to produce goods and services over time.

What is the economy's potential?

The total amount of goods and services the economy can produce.

What is an economic modeL?

A simplified representation of a real situation used to better understand economic behavior.

What is the "other things equal" assumption?

The assumption that all other relevant factors remain unchanged.

What is the Production Possibilities Frontier (PPF)?

A graph showing the maximum combinations of two goods an economy can produce.

What does a point on the PPF represent?

Efficient production using all available resources.

What does a point inside the PPF represent?

Inefficient production with unused resources.

What does a point outside the PPF represent?

An unattainable production level with current resources.

What does the slope of a PPF represent?

Opportunity cost.

What is increasing opportunity cost?

The principle that producing more of one good increases the opportunity cost of producing additional units.

Why is a PPF usually curved?

Because resources are not equally suited to producing all goods.

What is economic growth on a PPF graph?

An outward shift of the production possibilities frontier.

What are the four main factors of production?

1) Land

2) Labor

3) Physical Capital

4) Human Capital

What is technology in economics?

The technical means used to produced goods and services.

What is comparative advantage?

The ability to produce a good at a lower opportunity cost than others.

What is absolute advantage?

The ability to produce more of a good using the same resources.

Why do countries specialize according to comparative advantage?

Because it allows them to gain from trade and increase total production.

What is barter?

The direct exchange of goods and services without using money.

What is the circular-flow diagram?

A model that shows the flow of goods, services, and money in the economy.

What is a household in economics?

A person or group that shares income.

What is a firm?

An organization that produces goods or services for sale?

What is positive economics?

Economic analysis that describes how the economy works.

What is normative economics?

Economic analysis that prescribes how the economy should work.

What is a competitive market?

A market with many buyers and sellers where no individual can influence the price.

What is the supply and demand model?

A model that explains how prices and quantities are determined in competitive markets.

What is supply?

The relationship between price and the quantity sellers are willing to sell.

What is a supply schedule?

A table showing the quantity supplied at different prices.

What is a supply curve?

A graph showing the relationship between price and quantity supplied.

What is quantity supplied?

The amount of a good producers are willing and able to sell at a given price.

What causes a shift in the supply curve?

Changes in:

1) Input prices

2) Technology

3) Expectations

4) The prices of related goods or services

5) The number of sellers

What happens when supply increases?

The supply curve shifts right.

What happens when supply decreases?

The supply curve shifts left.

What is demand?

The relationship between price and the quantity consumers are willing to pay.

What is a demand schedule?

A table showing quantity demanded at different prices.

What causes a shift in the demand curve?

Changes in:

1) The price of related goods or services

2) Income

3) Tastes

4) Exceptions

5) The number of consumers

What causes a movement along the demand and supply curve

A change in the price of a good.

What is a substitute good?

A good that can replace another good in consumption.

What is a complement good?

A good that is consumed together with another good.

What is a normal good?

A good whose demand increases when income increases.

What is an interior good?

A good whose demand decreases when income increases.

What is market equilibrium?

The point where quantity demanded = quantity supplied.

What is equilibrium price?

The price at which the market clears.

What is equilibrium quantity?

The quantity bought and sold at the equilibrium price.

What is a surplus?

A situation where quantity supplied exceeds quantity demanded.

What is a shortage?

A situation where quantity demanded exceeds quantity supplied.

What is international trade?

Exchange of goods and services across national borders.

What is hyperglobalization?

A period of extremely high levels of international trade.

What assumption does the Ricardian model make about opportunity costs?

Opportunity costs are constant.

What shape does the PPF have in the Ricardian model?

A straight line.

What is autarky?

A situation in which a courtly does not trade with our countries.

What determines prices in autarky?

Domestic supply and demand.

What are the 3 main sources of comparative advantage?

1) Climate differences

2) Factor endowments

3) Technology differences

What is factor abundance?

The relative supply of a factor of production in a country.

What is factor intensity?

The measure of how much of a factor is used to produce a good compared with other factors.

What does the Heckscher-Ohlin model state?

Countries export goods that intensively use abundant factors and import goods that use scare factors.

How does international trade affect factor prices?

Trade increases demand for abundant macros and decreases demand for scarce factors.

What is increasing returns to scale?

A situation in which productivity increases as output increases.

How can increasing returns to scale lead to international trade?

Production becomes concentrated in a few countries that export globally.

What is the world price?

The price at which a good can be bought or sold in international markets.

What happens to domestic prices when imports enter a market?

Prices falls to the world price.

How do imports affect consumer and producer surplus?

Consumers gain surplus, while producers lose surplus.

What happens to domestic prices when a country exports a good?

Domestic prices rise to the world price.

How do exports affect consumer and producer surplus?

Producers gain surplus while consumers lose surplus.

What is a tariff?

A tax levied on imported goods.

What effect does a tariff have on domestic markets?

It raises prices, reduces consumption, increases domestic production, and reduces trade.

What is deadweight loss from a tariff?

Lost economic efficiency due to reduced mutually beneficial trade.

What is an import quota?

A legal limit on the quantity of a good that can be imported.

How do import quotas differ from tariffs?

Quota rents go to license holders (typically foreigners) instead of government revenue.

What is the national security argument for protectionism?

Countries need domestic production of crucial goods for defense.

What is the infant industry argument?

New industries need temporary protection to develop.

What is offshore outsourcing?

Hiring workers in another country to perform tasks.

What is macroeconomics?

The study of the behavior and performance of the economy as a whole.

How does macroeconomics differ from microeconomics?

Microeconomics studies individual markets while macroeconomics studies the entire economy.

What is the paradox of thrift?

When individuals try to save more during downturns, total spending falls and the economy slows.

Why does macroeconomic behavior differ from individual behavior?

Because collective outcomes can differ from individual intentions.

What is monetary policy?

Policy that changes the money supply to influence overall economic activity.

What is fiscal policy?

Government use of taxes and spending to influence overall economic activity.

Who was John Maynard Keynes?

An economist who argued that government intervention can stabilize economic downturns.

What is the business cycle?

The short-run alternation between economic expansions and recessions.

What is a recession?

A period of declining economic activity and rising unemployment.

What is an expansion?

A period of rising output and employment.