Principles of Macroeconomics Final

There is a demand curve showing the price and quantity of Pepsi. If the price of Coca-Cola increases, how will it affect the demand curve of Pepsi?

The curve will shift right

Define equilibrium

The spot where supply and demand are equal

To say that a price ceiling is non-binding is to say that the price ceiling is _________.

Above equilibrium price

If a price floor is not binding, then _________.

The price is above the price floor

True/False - Something that induces a person to act is called an incentive

True

True/False - A group of buyers and sellers are known as an economy

False, they are called a market

The price of juice and apple juice both rise by 20%. Which good does quantity demanded drop the most? Why?

Apple juice drops the most because there are more substitutes to apple juice than there are to juice.

If there is a surplus of loanable funds, __________.

The quantity loanable funds supplied is greater than the quantity loanable funds demanded, and the interest rate is above the equilibrium.

What happens to supply and demand when the market is facing a surplus?

Price decreases

True/False - The adult population is 16 and older.

False, the adult population is 20 and older

What is the equation for unemployment rate? U-rate =

(\# of unemployed/labor force) * 100

What is the labor force participation rate equation? LFPR =

(labor force/adult population) * 100

What is the equation for GDP? Y =

C + I + G + NX

What is the Law of Demand?

* When the price of a good rises, the quantity demand falls.
* When the price of a good falls, the quantity rises.

Which direction does the demand curve slope?

Downward

What are the demand curve shifters?

1. # of buyers
2. Income
3. Price of related goods
4. Tastes
5. Expectations

What are the two components of Income when shifting the demand curve?

Normal goods and inferior goods

What are normal goods?

Goods that consumers demand more of when their incomes rise

When a normal good is being examined, which direction does the demand curve shift?

The demand curve shifts to the right

What are inferior goods?

Goods that consumers demand less of when their incomes rise

When an inferior good is being examined, which direction does the demand curve shift?

The demand curve shifts to the left

What are the two components of prices of related goods?

Substitutes and complements

What are substitute goods?

Goods that can be replaced by another

With substitute goods, an increase in price of one good leads to __________.

An increase in demand of the other good.

What are complement goods?

Goods that are used together

With complement goods, an increase in the price of one good leads to ___________.

A decrease in demand for the other good.

What is quantity demand?

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

What is quantity demand on a graph?

The good is on one of the axes of the graph.

What is demand on a graph?

The original good is not on the graph, but the other good it is affecting is on the graph.

If the variable causing demand to change is measured on one of the axes, ___________.

you move along the demand curve.

If the variable that's causing demand to change does not appear on either axis, __________.

The demand curve shifts.

What is the equation for quantity demanded? Qd =

a - bp

What is the Law of Supply?

* When the price of a good rises, the quantity supplied of the good rises.
* When the price of a good falls, the quantity supplied of the good falls.

Which direction does the supply curve slope?

Upward

What are the supply curve shifters?

1. Input prices
2. Technology
3. # of sellers
4. Expectations

If the variable causing supply to change is measured on one of the axes, _________.

You move along the supply curve.

If the variable that's causing supply to change does not appear on either axis, __________.

The supply curve shifts.

What's the equation for quantity supplied? Qs =

a + bp

What is the equation for equilibrium?

Qd = Qs

What is a surplus?

Excess supply

When there is a surplus, quantity supplied is __(greater than or less than)__ quantity demanded.

Greater

What is a shortage?

Excess demand

When there is a shortage, quantity supplied is __(greater than or less than)__ quantity demanded.

Less

What is elasticity?

A measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

What is price elasticity of demand?

How much the quantity demanded of a good responds to a change in the price of that good

What is the short equation for price elasticity?

% change in Q/% change in P

What is the equation for % change?

\[(end value - start value)/midpoint] * 100

What is the long equation for price elasticity?

{(Q2 - Q1)/[(Q2 + Q1)/2]}/{(P2 - P1)/[(P2 + P1)/2]}

When demand is elastic, _________.

E \> 1

When demand is inelastic, _________.

E < 1

When demand is unit elastic, _________.

E = 1

When demand is perfectly inelastic, _________.

E = 0

When demand is perfectly elastic, _________.

E = infinity

What does the demand curve look like when it is perfectly inelastic?

What does the demand curve look like when it is perfectly elastic?

What is the equation for Total Revenue? TR =

P*Q

When supply is elastic, __________.

E \> 1

When supply is inelastic, __________.

E < 1

When supply is unit elastic, __________.

E = 1

When supply is perfectly elastic, __________.

E = infinity

When supply is perfectly inelastic, __________.

E = 0

What is a price ceiling?

The legal maximum on the price at which a good can be sold.

What is a price floor?

The legal minimum price at which a good can be sold.

When there is a binding price ceiling, there becomes a __________.

shortage

When there is a binding price floor, there becomes a ___________.

labor surplus

What is tax incidence?

How the burden of a tax is shared among market participants.

What is willingness to pay (WTP)?

The maximum amount a buyer will pay for a good.

What is consumer surplus?

The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

What is the equation for consumer surplus? CS =

WTP - P

What is total consumer surplus?

The area below the demand curve and above the price.

What is willingness to sell (WTS)?

The lowest price accepted by a seller for one unit of a good or service.

What is producer surplus?

A measure of the benefit sellers receive from participating in a market.

What is the equation for total surplus? TS =

CS + PS

Which section of the graph is consumer surplus?

A

Which section of the graph is producer surplus?

F

Which section of the graph is tax revenue?

B & D

Which section of the graph is the dead weight loss?

C & E

What does C stand for in GDP?

Consumption

What does I stand for in GDP?

Investment

What does G stand for in GDP?

Government spending

What does NX stand for in GDP?

Net exports

What is GDP?

The market value of all final goods and services produced within a country in a given period of time.

A GDP definition breakdown:

\
GDP is **the market value** of all final goods and services produced within a country in a given period of time

\
What does the bolded section mean?

* Goods are valued at their market prices
* All goods measured in the same units (e.g., USD)
* Things that don’t have market value are excluded (e.g., housework you do for yourself)

A GDP definition breakdown:

\
GDP is the market value **of all** final goods and services produced within a country in a given period of time

\
What does the bolded section mean?

* GDP includes all items produced in the economy and sold legally in markets
* GDP excludes most items produced and sold illicitly
* It also excludes most items that are produced and consumed at home
* E.g. GDP includes veggies bought at a grocery store but not veggies grown in a home garden

A GDP definition breakdown:

\
GDP is the market value of all **final** goods and services produced within a country in a given period of time

\
What does the bolded section mean?

GDP only includes final goods, not intermediate goods

A GDP definition breakdown:

\
GDP is the market value of all final **goods and services** produced within a country in a given period of time

\
What does the bolded section mean?

GDP includes tangible goods (e.g., food, mountain bikes) and tangible services (e.g., dry cleaning, concerts, haircuts).

A GDP definition breakdown:

\
GDP is the market value of all final goods and services **produced** within a country in a given period of time

\
What does the bolded section mean?

* GDP includes currently produced goods not goods produced in the past
* E.g. when Ford produces and sells a new car, the value of the car is included in the GDP. But when I sell my 2014 Ford Focus to my cousin for $4,000, the value of the used car is not included in GDP

A GDP definition breakdown:

\
GDP is the market value of all final goods and services produced **within a country** in a given period of time

\
What does the bolded section mean?

GDP measures the value of production that occurs within a country’s boarders, whether done by its own citizens or by foreigners located there.

A GDP definition breakdown:

\
GDP is the market value of all final goods and services produced within a country **in a given period of time**

\
What does the bolded section mean?

Usually a year or a quarter (3 months)

Final goods

Goods intended for the end user

Intermediate goods

Used as components or ingredients in the production of other goods

True/False - purchasing a home is part of consumption

False, it falls under investment

True/False - "Investment" means the purchase of financial assets like stocks and bonds

False

True/False - Government purchases does NOT include transfer payments (i.e. Social Security or unemployment insurance benefits)

True

What is the equation for net exports? NX =

exports - imports

Nominal GDP

Values output using current prices

What is the equation for Nominal GDP?

(P \* Q) + (P \* Q)

True/False - Nominal GDP is corrected for inflation

False

Real GDP

Values output using the prices of a base year

What is the equation for Real GDP?

(Pby \* Qcy) + (Pby \* Qcy)