Macro Test 1 Notes Part 1

Principle #1: We Can’t Have Everything We Want

Due to scarcity, choices involve trade-offs and decisions must be made.

Trade-offs

Alternatives that must be given up when choosing one option over another.

Principle #2: Supply and Demand Determine Prices and Output

Market prices and quantities are determined by the forces of supply and demand.

Shortages and Surpluses

Situations in markets where the supply does not meet demand (shortage) or exceeds it (surplus).

Principle #3: Capitalism Generates Wealth

A free-market economy allocates resources through decentralized decisions made by households and firms.

Invisible Hand

A term coined by Adam Smith to describe the self-regulating nature of the marketplace.

Principle #4: Capitalism Can Fail

Markets can fail without the necessary government institutions, leading to excessive inequality.

Principle #5: Stimulate Economies During Recessions

Governments can implement tax cuts, spending increases, or increase the money supply to stimulate the economy.

Inflation

The rate at which the general level of prices for goods and services is rising.

Principle #6: Too Much Money Causes Inflation

An excessive money supply chasing the same amount of goods can lead to inflation.

Real Value vs. Nominal Value

Real value refers to purchasing power, while nominal value is the face value of money.

Principle #8: Beware of a Rising National Debt

Running budget deficits leads to a growing national debt with higher interest payments.

Deficit

The amount by which spending exceeds revenue over a particular period.

Principle #9: Worker Productivity is Key to Long-Term Growth

Increasing productivity through investments in education and infrastructure is crucial for economic growth.

Capital

Financial assets or resources used to fund investments.

Principle #10: International Trade and Immigration Benefit our Economy

International trade promotes economic benefits, and immigration helps to mitigate labor shortages.

Protectionism

Economic policy of restraining trade between countries through tariffs and quotas.