MACRO-ECON EXAM III

Scarcity

the limited nature of society’s resources

Economics

the study of how society manages it’s scarce resources

All decisions involve

trade-offs

The constant tradeoff in society is between

efficiency vs. equality

Rational people think at the

margin

incentive

something that induces a person to act

Trade makes everyone better off

True

Market

a group of buyers and sellers

Market Economy

allocates resources through the decentralized decisions of many households and firms as they interact markets

Market Failure

when the market fails to allocate society’s resources efficiently

Exports

goods produced domestically and sold abroad

Imports

goods produced abroad and sold domestically

Absolute Advantage

the ability to produce more of a good

Competitive Market

a market with many buyers and sellers, in which the sellers have no effect on price. ; price takers

Quantity Demanded

amount of a good that buyers are willing and able to purchase

Law of Demand

quantity demanded falls when the price of the good rises, other things equal

What is a Demand Curve Shifter ?

components that cause the demand curve to shift left (down) or right (up)

An example of a Demand Curve Shifter

Income

What is a Supply Curve Shifter ?

components that cause the supply curve to shift left (up) or right (back)

Why do supply curves slope up ?

when price of a good is low, only suppliers who can produce the good for a very small cost and still profit will produce the good. As price rises, goods are then produced by suppliers who have a higher cost of good.

An example of a Supply Curve Shifter

Technology

GDP stands for

Gross Domestic Product

What is GDP ?

Gross Domestic Product is the measure of the total income of everyone in the economy.

Simplify the Circular-Flow Diagram

a system that includes households and firms, and details the processes that both cycle through and provide to the other. Households control the factors of production, and buy and consume goods and services. Firms buy/hire factors of production and use them to produce goods and services.

The Components of GDP consist of

Consumption, Investment, Government Purchases, and Net Exports

Net Exports =

Exports (EX) - Imports (IM)

Nominal GDP

Gross Domestic Product that does not account for inflation (uses current prices)

Real GDP

Gross Domestic Product that accounts for inflation (uses prices of base year)

GDP Deflator

100 x nominal gdp / real gdp

Inflation Rate

year 2 = 100 x GDP Def. (yr 2) - GDP Def. (yr 1) / GDP Def. (yr 1)

How can we indicate the average persons standard of living ?

Real GDP per capita

Marginal Benefit

the additional happiness or value that a consumer recieves from consuming one more unit of a good or service

Quantity values are always to placed on the

x-axis of the graph

Price values are always to be placed on the

y-axis of the graph

Describe goods that are substitutes

goods that are used in place of each other

Describe goods that are complements

goods that are usually bought together

Describe goods that are unrelated

goods that have no correlation to each other and are unchanged by the effects of the other goods

WTP is

a consumers willingness to pay

What are the four factors of production ?

Land, Labor, Capital, and Entreprenuership

Oppurtunity Cost

what you are giving up when you make a certain decision

Comparative Advantage

the ability to produce a good at a lower oppurtunity cost than another producer

Equation for per unit oppurtunity cost

Units lost / Units gained

Final Good

a good purchased by the final user and is not included in the production of another good.

Intermediate Goods

goods used in the production of other goods and services

The Circular-Flow Diagram shows that total expenditure should equal

total income

The Circular-Flow Diagram shows that all sources of income are owned by

households

Inventory is apart of Investment and therefore included in GDP

True

Consumer Price Index is

the measure of the typical consumers cost of living

How do we calculate CPI

1. fix the “basket” = BLS surveys consumers annually to determine what’s in the typical consumers “shopping basket”

2. find the prices = BLS collects data on the prices of all the goods found in the basket

3. compute the basket’s cost = the total cost of the consumers basket

4. choose a base year and compute the index

5. compute the inflation rate, the % change in the CPI from the preceding period

Who is BLS

The Bureau Labor of Statistics

CPI Formula is

100 x Cost of basket in current year / Cost of basket in base year 

The CPI Basket contains (household)

housing, transportation, food, and beverages

The CPI Basket contains (external)

medical care, recreation, education, and communication

The CPI Basket contains (miscellaneous)

Apparel, Energy, and other

Substitution Bias is an issue with CPI and occurs when

consumers sub towards goods that become relatively cheaper which lessens the effects of price increases, which is not included in the CPI

Introduction of New Goods is an issue with CPI and occurs when

new goods increase variety and makes each dollar more valuable since preferences can be met better by more options, which is not accounted for in CPI

Unmeasured Quality Change is an issue with CPI and occurs when

improvements in the quality of goods in the basket over time increase the value of each dollar, BLS attempts to account for this but misses some, therefore the CPI overstates

Imported consumer goods are excluded from the GDP Deflator 

True

Referring to the basket, the CPI uses a fixed basket, and the GDP deflator uses basket of 

currently produced goods and services 

In terms of capital goods and spending, it is included in the GDP Deflator (if produced domestically) and is

excluded from the CPI

Inflation makes it easier to compare dollar amounts from different times 

false 

nominal interest rate

the interest rate that is not corrected for inflation

real interest rate

the interest rate that is corrected for inflation

interest rate 

the rate of growth in the dollar value of a deposit or debt

Real Interest Rate = 

nominal interest rate - inflation rate

Productivity 

a country’s standard of living is defined by its ability to produce goods and services 

Y, in terms of productivity stands for

real GDP

L, in terms of productivity

quantity of labor

K, in terms of productivity

physical capital used to produce goods and services

K / L

capital per worker

When capital is reduced productivity of the average worker increases

false, it decreases

An increase in K / L causes an increase in

Y / L

Y / L

output per worker

Technological Knowledge

society’s understanding of the best ways to produce goods and services

Human capital (H) is

the knowledge and skills workers acquire through education, training, and experience

When we reduce consumption we increase

saving

to raise capital per worker the government can encourage Foreign Direct 

Investment

A foreign portfolio investment is a 

capital investment financed with foreign money but operated by a domestic resident 

The 4 Institutions of Economic Growth are

a. Property Rights

b. Honest Government 

c. Political Stability 

d. A dependable legal system

Inward Oriented Policies 

aim to raise living standards by avoiding interaction with other countries

Outward Oriented Policies

promote integration with the world economy

Knowledge is a public good that allows information to be shared freely, increasinng the productivity of many 

true

Policies that promote Research & Development are

patent laws, tax incentives, direct support for private sector, and grants for basic research at university

Financial System

the group of institutions that helps match the saving of one person with the investment of another 

What is a bond ?

a certificate of indebtedness

What is a stock ?

a claim to partial ownership in a firm

A bond is identified by

a. date of maturity or loan repayment

b. yield, or interest rate

c. principal, amount originally borrowed

Term, Credit Risk, and Tax Treatment are all characteristics of

bonds

Selling stock to raise capital is

equity finance

Selling bonds to raise capital is

debt finance

Financial Intermediaries

institutions through which savers can indirectly provide funds to borrowers (banks)

Private Saving

income that is not used for consumption or paying taxes = Y - T - C

Public Saving

tax revenue - government spending = T - G

Budget Surplus

an excess of tax revenue over government spending

= T - G

Budget Deficit

a shortfall of tax revenue from government spending

= G - T

National Saving 

private saving + public saving 

= (Y - T - C) + (T - G)

Investment is the purchase of new capital and in econ we disregard the purchase of bonds and stocks as investment

true

A supply demand model of the financial system helps us understand 

how the financial system coordinates saving and investment + how government policies and other factors affect saving, investment, and interest rates

Investment is not a key factor when it comes to economic growth 

false

What reduces the economy’s growth rate and future standard of living

Budget Deficits