econ chapter 9/10 test study guide

if inflation rises unexpectedly by 5%, would a state government that had recently borrowed money to pay for a new highway benefit or lose?

they would benefit because they could repay the loan in less valuable money than what they would have originally paid for it

how do economists use a basket of goods and services to measure the price level?

they take the prices of all of the most commonly bought goods and services for a typical consumer, then they examine how that price changes over a period of time

what is the difference between the price level and the rate of inflation?

the price level is the actual price of a basket of goods and services at one time, while the rate of inflation is the percentage change in the price level across that basket of goods and services over time

over the last century, during what periods was the u.s. inflation rate highest and lowest? why?

u.s. inflation was highest during the periods after WWI, WWII, and in the 1970s, with the highest being in 1917. it was high after war because the destruction war causes drives investment in a country, which is more money circulating. it was lowest during the depression of 1920-21, the Great Depression of the 1930s, the recession of 1980-82, and during the recession of 2008-09, with the lowest being in 1921. it was low because there was not a lot of money circulating in the economy which meant that people did not have enough money to buy things, and there was not as much investment and consumption.

inflation rates, like most statistics, are imperfect measures. can you identify some ways that the inflation rate for fruit does not perfectly capture the rising price of fruit?

the rate may overstate the cost because it does not consider substitutes because of the substitution bias, which in this case means that people may choose to buy fruits that would cost less. because of this variety, one fruit may not be as impacted by inflation and cost less, so consumers will choose that one. additionally, many fruits are imported, so that may impact the price

why do you think the u.s. experience with inflation over the last 50 years has been so much milder than in many other countries?

i think one reason it has been milder is that the u.s. has measures to inhibit inflation from rising too high, such as the governmental policy of increasing interest rates. this policy decreases borrowing and thus the amount of money circulating in the economy, which can help with inflation

who in an economy is the big winner from inflation?

borrowers are the big winners from inflation because when they pay back their loans, they pay in less valuable money than what they originally borrowed; the government is one of the biggest borrowers in an economy

if inflation rises unexpectedly by 5%, indicate for each of the following whether the economic actor is helped, hurt, or unaffected:
a) a union member with a COLA wage contract
b) someone with a large stash of cash in a safe deposit box
c) a bank lending money at a fixed rate of interest
d) a person who is not due to receive a pay raise for another 11 months

a) unaffected
b) hurt
c) hurt
d) hurt

rosalie the retiree knows that when she retires in 16 years, her company will give her a one-time payment of $20,000. however, if the inflation rate is 6% per year, how much buying power will that $20,000 have when measured in today's dollars? hint: start by calculating the rise in the price level over 16 years.

20,000 x (1 - 0.06)^16 = $7,431.50

state whether each of the following events involves a financial flow to the mexican economy or a financial flow out of the mexican economy (explain your reasoning):
a) mexico imports services from japan
b) mexico exports goods to canada
c) u.s. investors receive a return from past financial investments in mexico

a) outflow of financial capital because they are paying japan for the products
b) flow into the mexican economy because they are being paid for their products
c) outflow of financial capital because they are paying back the u.s.

what determines the size of a country's trade deficit

a country's trade deficit is determined by a country's level of private (individuals, businesses) and public (government) savings and the amount of domestic investment

both the united states and global economies are booming. will u.s. imports and/or exports increase?

both because a booming will increase the demand for goods in general, so imports and exports will increase. american consumers will want to buy goods from other countries and, conversely, other countries will want to buy goods from the u.s. because a booming economy means these countries are producing well

if a nation is in recession, what are the key determinants?

declining GDP or total output of an economy, a rising level of unemployment, low inflation or even deflation, low consumer confidence, more business failures than success stories, potentially higher interest rates

if imports exceed exports, is it a trade deficit or a trade surplus? what about if exports exceed imports?

if imports exceed exports, it is a trade deficit; if exports exceed imports, it is a trade surplus

does a trade surplus mean an overall inflow of financial capital to an economy, or an overall outflow of financial capital? what about a trade deficit?

a trade surplus means an overall inflow of capital because in exchange for your exports, other countries are giving you money. a trade deficit means an overall outflow of capital because you are giving other countries money for their products that you are importing

what three factors determine whether a nation has a higher or lower share of trade relative to its GDP?

the size of an economy, its geographic location, and its history of trade patterns

does a trade surplus help to guarantee strong economic growth?

it does not necessarily guarantee strong economic growth, but it can help create employment and bring an inflow of financial capital. however, whether or not it leads to economic growth depends mainly on a country's governmental policies regarding the economy and how a country uses its capital to invest or buy from other countries. every country's situation is specific, so there is no certainty that a trade surplus creates growth

if a country is a big exporter, is it more exposed to global financial crisis?

i think they are exposed to global financial crises because trade is an international thing. there is potential for them to lose a big chunk of their income if another country decides not to import their products. however, i think they are less exposed to these kinds of crises than big importers, since they likely are more dependent on other countries for their products. if an exporter suddenly cannot export their goods because of things like war or governmental policy, then that importing country has to find a new exporter or make those products themselves

why do nations trade?

nations trade because it is the most efficient way to get products. it makes more sense for a country that does not have the resources or capacity to create a product at a low opportunity cost to have that product imported from a country that specializes in it. using comparative advantage is the most beneficial for everyone because when countries specialize, the world output increases, so there is overall more product because of maximized production at the least opportunity cost

is international trade good or bad? please explain this by explaining ricardo's absolute and comparative advantage theory

international trade is a good thing because it allows countries to widen their markets and have access to more varieties of goods and services that may not be available in their country. it is good for consumers because international trade encourages competition and competitive pricing, meaning that consumers often get lower prices as brands try to attract more consumers. according to ricardo's theory, nations benefit from trade and gain an advantage when they focus on producing for the lowest opportunity cost (comparative advantage) and/or what they can make the most of (absolute advantage) using their factors of endowment. economically, global trade is good because it is cheaper when countries specialize, and we just trade our products instead of splitting our resources to make everything ourselves

do you think mercantilism is good or bad? support your claim

i think mercantilism is bad because it reduces trade between countries. the idea of mercantilism is to reduce a country's imports and increase their exports to make them wealthier. for consumers, mercantilism is especially bad because there is not as much competition and thus not as much variety in the products they can choose from, so overall this can make these goods and services more expensive or scarce if the country cannot produce a product efficiently

what is the output when a country decides not to specialize, when they specialize, and when they decide to trade?

the world output is less when a country chooses not to specialize because it is not efficiently using its resources to produce what they have a comparative or absolute advantage in. the world output is greater when a country chooses to specialize because it is efficiently using its resources to its advantage. the world output is greatest when both countries are specialized and trading because they each are focusing on their comparative or absolute advantage in the production of their goods and services, so it creates the most economically efficient way to produce