Macroeconomics Final Exam

What does macroeconomics study?

Macroeconomics studies the economy as a whole, focusing on aggregate measures like GDP, inflation, and unemployme

What is scarcity?

Scarcity means resources are limited while wants are unlimited, which forces individuals and societies to make choices.

What is opportunity cost?

Opportunity cost is the value of the next-best alternative that must be given up when a choice is made.

What is diminishing marginal utility?

Diminishing marginal utility means that each additional unit of a good provides less additional satisfaction than the previous one.

Why do demand curves slope downward?

Demand curves slope downward because of the substitution effect, the income effect, and diminishing marginal utility.

What is the difference between movement along a demand curve and a shift of the demand curve?

A movement along the demand curve is caused by a change in price, while a shift of the demand curve is caused by changes in factors like income, tastes, or prices of related goods.

What factors shift demand?

Demand shifts due to changes in income, tastes, expectations, number of buyers, and prices of substitutes or complements.

What does the law of supply state?

The law of supply states that when the price of a product increases, the quantity supplied also increases.

What is producer surplus?

Producer surplus is the difference between the actual price received by sellers and the minimum price they would be willing to accept.

What does the production possibilities curve (PPC) show?

The PPC shows the maximum possible combinations of two goods that can be produced using available resources and technology.

What causes the PPC to shift outward?

The PPC shifts outward when resources increase, technology improves, or productivity rises.

What are the key characteristics of a market system?

A market system is characterized by private property, competition, self-interest, and the use of prices to allocate resources.

What does the circular flow model describe?

The circular flow model describes how households provide resources to firms and buy goods, while firms buy resources and sell goods.

What is the principal-agent problem?

The principal-agent problem occurs when an agent (such as a manager) pursues goals that differ from those of the principal (such as an owner).

What are public goods?

Public goods are non-rival and non-excludable, meaning people cannot be excluded from using them, and one person’s use does not reduce availability for others.

Why aren’t intermediate goods counted in GDP?

Intermediate goods are not counted in GDP to avoid double-counting since their value is included in the price of final goods.

What happens to economic profits in competitive markets over time?

In competitive markets, economic profits attract new firms, which increases supply and drives profits to zero in the long run.

What is GDP?

GDP is the total market value of all final goods and services produced within a country in one year.

What is nominal GDP?

Nominal GDP measures GDP using current prices and includes the effects of inflation.

What is real GDP?

Real GDP measures GDP using constant prices and removes the effects of inflation to reflect actual output.

What is the natural rate of unemployment?

The natural rate of unemployment includes only frictional and structural unemployment and represents the full-employment level.

What type of unemployment rises during recessions?

Cyclical unemployment increases during recessions.

Why might the official unemployment rate understate true unemployment?

It may understate unemployment because discouraged workers who stop looking for work are not counted as unemployed.

What are the three functions of money?

Money functions as a medium of exchange, a unit of account, and a store of value.

What does M1 include?

M1 includes currency, coins, and checkable deposits.

What system do modern banks use?

Modern banks operate using fractional reserve banking, where they keep only a portion of deposits on hand.

How do banks create money?

Banks create money by lending out their excess reserves.

What are the main tools of monetary policy?

The main tools are open-market operations, the discount rate, and reserve requirements.

What is the federal funds rate?

The federal funds rate is the interest rate banks charge each other for overnight loans.

What is expansionary monetary policy?

Expansionary monetary policy increases the money supply to lower interest rates and stimulate GDP.

What is fiscal policy?

Fiscal policy is the use of government spending and taxes to influence economic activity.

What is expansionary fiscal policy?

Expansionary fiscal policy increases government spending or decreases taxes to boost GDP.

What is the marginal propensity to consume (MPC)?

The MPC is the fraction of additional income that a person spends.

What is the marginal propensity to save (MPS)?

The MPS is the fraction of additional income that a person saves and is equal to 1 minus the MPC.

What is a budget deficit?

A budget deficit occurs when government spending exceeds government revenues.

What is the public debt?

Public debt is the total accumulation of past budget deficits.

Why does aggregate demand slope downward?

Aggregate demand slopes downward because of the real-balances effect, the interest-rate effect, and the foreign-purchases effect.

What shifts aggregate supply to the right?

Aggregate supply shifts right due to lower production costs, improved technology, or higher productivity.

What is equilibrium GDP?

Equilibrium GDP occurs where aggregate demand equals aggregate supply.

What are net exports?

Net exports are the value of exports minus the value of imports.

What is a trade surplus?

A trade surplus happens when a country’s exports exceed its imports.

Why are prices sticky in the short run?

Prices are sticky in the short run because of wage contracts, menu costs, and other rigidities.