ECON MIDTERM 2

1. What is a price ceiling?

A government-imposed maximum price that sellers are legally allowed to charge.

2. Where is a binding price ceiling set?

Below the market equilibrium price

3. What happens when a price ceiling is set below equilibrium?

A shortage occurs because quantity demanded exceeds quantity supplied

4. What are the six effects of a price ceiling?

Shortages, rationing, reduced quantity received by consumers, lower quality, corruption, and increased market value.

5. Why does a price ceiling create a shortage?

The lower price increases quantity demanded and decreases quantity supplied.

6. What is rationing?

shortage is not fulfilled, gov’t and businesses find a way to ration fairly

7. Why can price ceilings reduce product quality?

Sellers have less incentive or money to maintain quality.

8. Why can price ceilings create corruption?

People may use connections, favoritism, or illegal payments to obtain goods.

9. What happens to the market value of a good when a shortage occurs?

Its value may increase because demand exceeds supply.

10. What is rent control?

A government-imposed maximum price landlords can charge for rental housing.

12. What happens when rent control is set below equilibrium?

A shortage of rental housing occurs.

13. Why does rent control create a rental housing shortage?

Quantity demanded exceeds quantity supplied.

14. What happens to housing quality under rent control?

Housing quality may decrease because landlords have less incentive to maintain properties

15. Why might landlords stop renting their properties?

They may earn less revenue and decide renting is no longer worthwhile.

16. What are condo conversions?

When landlords or developers convert rental properties into condominiums.

17. How does rent control reduce options for renters?

There are fewer rental properties available, making it harder to find housing.

How do you calculate a surplus?

Quantity supplied − Quantity demanded.

19. What is positive analysis?

Examining what happens as a result of an economic policy without expressing an opinion.

20. What is a value judgment?

An opinion about whether an economic outcome is good or bad.

21. What is the minimum wage?

The lowest hourly wage an employer is legally allowed to pay covered workers.

22. What type of price control is minimum wage?

A price floor in the labor market.

31. What is labor-market equilibrium?

The point where labor supply equals labor demand

What does labor-market equilibrium determine?

The equilibrium wage and quantity of labor.

33. What are price controls?

Government-imposed legal limits on the prices charged for goods, services, or labor.

34. What is a minimum wage in the labor market?

A price floor.

35. What happens when minimum wage increases?

Labor supplied increases while labor demanded decreases

36. What happens when a minimum wage is set above equilibrium?

A surplus of labor (unemployment) can occur.

What is the law of one price?

The same goods tend to sell for approximately the same price in the same geographic market

What is arbitrage?

buying smth small and selling it at a higher prices in a geographical market

Speculation

buying smth small and selling it a higher price Over Time

44. What is the overall effect of arbitrage?

Prices in different markets move closer together.

What is mercantilism?

An economic theory that views national wealth as a fixed amount of money and favors exports over imports.

According to mercantilism, what is wealth?

Money is wealth.

According to mercantilism, is wealth fixed or unlimited?

Wealth is fixed in amount.

What is a zero-sum trade?

One country's gain is viewed as another country's loss, with no net increase in wealth

How does mercantilism view exports?

Exports are good because they bring money into the country.

50. How does mercantilism view imports?

Imports are bad because money leaves the country to pay for foreign goods.

How does mercantilism view trade?

As a form of economic competition or war between countries.

What does "beggar thy neighbor" mean?

A country tries to improve its own economy at another country's expense.

53. How does mercantilism view free trade?

It views free trade negatively because it allows foreign competition and imports.

What are exports?

Goods and services produced domestically and sold to other countries.

What are imports

goods + services produced at home and sold in foreign countries

What are three major concerns people have about free trade?

Jobs, trade imbalances, and wages.

What is a trade imbalance?

difference between the monetary value of a country's exports and imports.

Trade Deficit

monetary value of a countrys goods and services exceeds the total value of exports over a specific period of time.

Who mathematically formalized the symmetry theory in 1986?

Abba Lerner.

66. What is a current account?

An account that records international transactions involving goods, services, income, and transfers.

How are imports recorded in the current account?

As negative values.

How are exports recorded in the current account?

As positive values.

What is the relationship between the current account and capital/financial account in your lecture model?

they add up to zero

71. What are the four main ways to invest?

Equity, debt, real estate, and cash holdings.

Equity?

Investing by purchasing ownership in something, such as a company

What are the two types of equity?

Passive equity and active equity.

What is passive equity?

Ownership where the investor has no reasonable prospect of influencing how the company is run.

What is active equity?

Ownership where the investor has a reasonable prospect of influencing how the company is

What is a debt investment?

Lending money to another person, company, or government in exchange for repayment.

What is real estate investment?

Investing in fixed property, such as houses, factories, or land.

What is a cash holding?

Keeping money in a bank account rather than investing it in another asset.