first exam macro 2/26/25

Circular Flow Model

Shows the flow of goods, services, and money between households and businesses.

Roles in Circular Flow:

Households provide factors of production and consume goods/services.

Businesses produce goods/services and pay households for resources.

Household Income Sources:

Wages, rent, interest, and profits from providing resources.

Economic Systems:

Command-and-Control: Government controls resources and production (e.g., North Korea, Cuba).

Market System: Decentralized decision-making based on supply and demand.

Market System Answers:

What to produce? Goods that generate profit.

Who gets goods/services? Based on ability/willingness to pay.

Factors of Production: Land, labor, capital, entrepreneurship.

Capital in Economics: Physical tools, machinery, and buildings used for production.

Macroeconomics Focus:

GDP, unemployment, inflation, business cycles.

Business Cycle:

Shows expansion, peak, contraction, and trough.

Real GDP

Measures total economic output adjusted for inflation.

Nominal vs. Real GDP

If prices double but output remains the same, Nominal GDP doubles while Real GDP remains unchanged.

Inflation

A rise in the general price level over time.

Concerns About Inflation

Reduces purchasing power and distorts economic decisions.

Recession Indicators

Decline in GDP, rising unemployment, reduced consumer spending.

Durable vs. Non-Durable Goods

Durable Goods: Long-lasting (e.g., cars, appliances).

Non-Durable Goods: Short-term use (e.g., food, clothing).

Intermediate Goods

Used in production (e.g., flour in bread-making).

Largest Spending Component

Consumption

Smallest Spending Component

Net Exports.

Government Spending Exclusions

Transfer payments (Social Security, welfare).

Imports in GDP Calculation

Subtracted because they are not domestically produced.

The four factors of production are

land, labor, capital, and entrepreneurial ability.

You should decide to go to a movie

if the marginal benefit of the movie exceeds its marginal cost.

The study of economics is primarily concerned with

choices that are made in seeking the best use of resources.

The opportunity cost of constructing a new public highway is the

value of other goods and services that are sacrificed in order to construct the new highway.

In the simple circular flow model,

businesses are sellers of final products.

A decrease in supply, holding demand constant, will cause

higher prices and a smaller quantity sold.

The price of pork may increase as a result of

an increase in the cost of producing beef.

A market is in equilibrium

if the amount producers want to sell is equal to the amount consumers want to buy.

A surplus of a product will arise when price is

above equilibrium, with the result that quantity supplied exceeds quantity demanded.

In situations of sticky prices and negative demand shocks, we would expect firms to

build up inventories before reducing production.

Which of the following is most closely related to recessions?

negative real growth in output.

Prices tend to be sticky because

firms are worried that frequent price changes would annoy consumers.

The three statistics that are the main focus for those measuring macroeconomic health are

real GDP, inflation, and unemployment.

GDP excludes

social security payments from government.

The largest component of total expenditures in the United States is

personal consumption

Nominal GDP has generally risen more rapidly than real GDP since World War II in the United States, suggesting that

the general price level has increased.

The two ways of looking at GDP are the

expenditures approach and income approach.

In comparing GDP data over a period of years, a difference between nominal and real GDP may arise because

the price level may change over time.