Economics Final Exam Review

What is economics?

***the study of how individuals, families, businesses, and societies use limited resources to fulfill their unlimited wants***

Why are all goods and services scarce?

**All resources are scarce**

1. What are the factors of production?

.***resources used to make all goods and services- Land***

* ***Labor***
* ***Capital***
* ***Entrepreneurship *****
* ***Technology******

1. What are the three key economic questions?  

 ***All the nations in the world need to decide how to answer three questions about the production and distribution of goods.***


1. ***What goods and services should be produced?***
2. ***How will the goods be produced?***
3. ***For whom the goods be produced?***

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__***Traditional***__

 ***a system in which economic decisions are based on* __*CUSTOMS*__ *that have been handed down from generation to generation***

__***Command-***__

***is a system in which the* __*GOVERNMENT*__ *controls the factors of production and makes all their decisions about their use***

__***Free Market***__

***is a system that the* __*INDIVIDUALS*__ *control the factors of production, and make all decisions about their use***

What is demand?

***a consumer is able and willing to buy a good or service***

1. According to the law of demand, what happens as prices go down?

***the lower the price, the more consumers will buy***

1. According to the substitution effect what happens as prices goes down?

 ***as the price of good rises, people will substitute other products***

1. What does it mean when the demand for a product is inelastic?  Identify two examples of goods that are inelastic, give at least one reason why?

A ***price increase does not have a significant impact on buying habits.***

***life-saving medicine – necessity***

****Gatorade – luxury, substitutes***

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1. According to the law of supply how do producers react to a higher price?

***produce more***

1. How does technology affect supply?

***increase supply***

When does a surplus exist?

***when there is a greater supply of a good than people want to buy***

When does a shortage exist?

***Consumers cannot find enough of a popular new toy in stores***

1. What does it mean when a market is in equilibrium?

***quantity supplied and quantity demanded are equal***

1. What is a price ceiling?  Identify an example of a price ceiling?

***A government-set maximum price that can be charged for a good or service – rent control***

Explain why the following items are not included in GDP

***counting an item such as a used car would cause double counting since it was already recorded in its new state.***

Intermediate Goods

***GDP only counts final foods, a good sold to its final user, like a hamburger.  If they counted intermediate goods like the bun when it is bought by the restaurant you would be double counting or counting some goods more than once.***

Underground Economic Activities

***activities for which there are no records, illegal and off the books jobs***

1. Why is GDP the most important measure in National Income Accounting?

 ***It measures the overall growth and health of the economy***

1. What is the inflation rate?

***the percentage change in prices over time***

How does inflation affect people’s purchasing power?

***the same amount of money buys fewer goods and services***

What is a market basket?

***typical goods and services for an urban household, used to determine CPI***

What is a business cycle?

***period of economic growth followed by economic contraction***

What are the four phases of the business cycle?

* ***Peak***
* ***Contraction***
* ***Trough***
* ***Recovery/Expansion***

1. What is the lowest point in a business cycle?  What is the highest?  Label the graph with the four phases.

What is a recession?

***a period when real GDP falls for at least six months***

***Seasonal Unemployment***

*occurs because the demand is higher or lower depending on time of year a farm worker loses his job after the harvest.*

***Structural*** **Unemployment**

*occurs because people skills do not match job opportunities*

**Frictional Unemployment**

*Transitional- moving from one job to another or entering the job market*

**Cyclical Unemployment**

*Caused by contractions of the business cycle, Getting laid off because a company is forced to downsize*

What is the main difference between seasonal unemployment and structural unemployment?

***Seasonal Unemployment occurs because of schedules, whereas structural occurs because people lack skills.***

Define inflation rate.

***expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation's currency***

1. According to demand pull theory what is responsible for inflation?

***Demand for goods and services exceed supply.***

According to cost push theory, what is responsible for inflation?

***Producers raise prices to meet increased costs****.*

Identify five characteristics any item should have for people to easily use it as money.

* ***Durability***
* ***Portable***
* ***Stable Value***
* ***Limited Supply (scarce)***

Why is it important for money to be durable?

***it must be able to withstand wear and tear of use***

What is bartering? 

***nstead of paying rent, you clean the house for the owner***

1. Representative Money

***backed by a valuable item such as gold***

Commodity Money

***is made out of a valuable item such as gold***

1. Fiat Money

***is only backed by government decree***

1. Who formulates the federal budget and how is it approved?

**Formulated by Congress and the White House**

***Approved by the president**

1. Who owns the Federal Reserve?  Why doesn’t the federal government own it?

**member banks**

1. Why would the Fed use a tight money policy?  What is the result of a money policy that is too tight?

* **to control inflation**
* **slow down the economy**

1. How does fractional reserve banking create more money in the economy?

 **to use some deposits to make loans**