Macroeconomics Principles Test 1

Scarcity

Limited nature of society’s resource.

Economics

Study of how society manages its scarce resources.

Macroeconomics

Study of aggregate (total) effects on the national and global economy of the choices of households, firms, and governments that are made.

Principle 1

People face trade-offs. To get something, we have to give up something else.

Principle 2

The cost of something is what you gave up to get. Opportunity cost.

Principle 3

Rational people think at the margin. Marginal changes; small incremental adjustments. Take action if: Marginal benefits>marginal costs.

Principle 4

People respond to incentives. If there is a higher price, buyers consumer less, sellers produce more.

Principle 5

Trade can make everyone better. Trade allows each person to specialize in the activities they do best, which allows for a better variety of goods/services.

Principle 6

Markets are usually a good way to organize economic activity.

Invisible hand

Households interacting in markets.

Corollary Government Intervention

Prevents the invisible hand’s ability to coordinate decisions of households that make up the economy.

Principle 7

Governments can sometimes improve market outcomes. Governments enforce rules and maintain institutions, which promotes efficiency and equality and avoids market failure and disparities in economic well-being.

Principle 8

A country’s standard of living depends on its ability to produce goods and services.

Principle 9

Prices rise when the government prints too much money - Inflation

Principle 10

Society faces a short-run trade-off between inflation and unemployment.

Monetary injections

Lower unemployment, stimulate level of spending and demand for goods/services.