Final+Exam+Macro+Test+Review

Key Economic Concepts Review

Scarcity

• True or False: Goods and services are scarce because the resources used to make them are scarce. True

  • Explanation: Scarcity arises because resources (land, labor, capital) are limited.

Utility and Marginal Utility

• True or False: Total utility will increase, although at a decreasing rate, as long as marginal utility is positive. True

  • Explanation: Total utility increases with consumption but at a declining rate as each additional unit consumed provides less satisfaction.

Consumer Price Index (CPI)

• True or False: The Consumer Price Index (CPI) and the inflation rate are the same. False

  • Explanation: CPI measures the average change over time in prices paid by consumers for a basket of goods and services; the inflation rate is the rate of change of the CPI.

Choices and Scarcity

• True or False: The reason we must make choices is because everything we value is scarce. True

  • Explanation: Scarcity forces individuals and societies to make choices about resource allocation.

Autarky and Consumption Possibilities Curve

• True or False: A nation operating under autarky has a consumption possibilities curve that is greater than its production possibilities curve. False

  • Explanation: Under autarky, a nation cannot import or export goods, limiting its consumption to what can be produced domestically.

Aggregate Demand and Supply

• True or False: Increasing aggregate demand in the upsloping portion of the aggregate supply curve will result in inflation as well as increased output. True

  • Explanation: Higher demand can lead to increased output and prices when supply is inelastic.

Economic Systems

• True or False: All economic systems must answer the same three questions: What to produce? How to produce? For whom to produce? True

  • Explanation: Regardless of the system, these foundational questions guide resource allocation.

Inflation Types

• True or False: Cost-Push inflation is more serious than demand-pull inflation because it results in stagflation. True

  • Explanation: Cost-push inflation can lead to stagnant growth and high unemployment, a situation termed stagflation.

Negative Externalities

• True or False: A company that produces a product with negative externalities is likely to overproduce that product. True

  • Explanation: Firms often ignore external costs, leading to overproduction from a social welfare perspective.

GDP Measurement

• True or False: The expenditures approach to GDP captures the four business firm expenses in the circular flow – rent, wages, interest, and profit. False

  • Explanation: It captures consumption, investment, government spending, and net exports.

Tax Multipliers

• True or False: The tax multiplier has a larger impact on the economy than the spending multiplier. False

  • Explanation: Generally, the spending multiplier has a greater multiplier effect compared to tax changes.

Government Spending and MPC

• True or False: If there is a recessionary gap of $500 billion and an increase of $100 billion in spending fills that gap, the marginal propensity to consume is 50%. True

  • Explanation: MPC = Change in consumption / Change in income; in this case, it's $100 billion / $500 billion = 0.5.

Macroeconomic Goals

• True or False: The three goals of the macroeconomy are full employment, price stability, and economic growth. True

  • Explanation: These goals guide macroeconomic policy decisions.

Price Controls

• True or False: When the government imposes price ceilings or floors, efficiency will be reduced. True

  • Explanation: Price controls often lead to surpluses or shortages, distorting market efficiency.

Tax Incidence

• True or False: Tax incidence refers to who bears the burden of a tax. True

  • Explanation: It impacts consumers or producers depending on elasticity.

Government as Buyer

• True or False: In the circular flow, the government competes with firms for resources in the factor market. True

  • Explanation: Government demands labor and resources just like firms do.

Private Property and Command Economy

• True or False: Private property ownership is foundational to the functioning of a command economy. False

  • Explanation: Command economies typically do not emphasize private ownership; resources are state-owned.

Public Goods

• True or False: Public goods are both rival and excludable. False

  • Explanation: Public goods are non-rival and non-excludable; they cannot be withheld from any individual.

Specialization and Trade

• True or False: To gain from trade, the partner with the lower opportunity cost should specialize. True

  • Explanation: Specialization according to comparative advantage leads to more efficient production and gains from trade.

Supply and Demand Changes

• True or False: Changes in supply cause changes in demand. False

  • Explanation: Changes in demand can affect supply but not vice versa.

Automatic Stabilizers

• True or False: Unemployment insurance is an automatic stabilizer reducing business cycle severity. True

  • Explanation: It provides financial support during downturns.

Federal Reserve and Liquidity

• True or False: When the Federal Reserve buys securities, it increases liquidity, not decreases it. False

  • Explanation: Buying securities injects money into the economy, thus increasing liquidity.

Nominal GDP and National Income

• True or False: If nominal GDP increases by 1.5%, we know both national income and output have increased. False

  • Explanation: Nominal GDP can increase due to inflation, not necessarily due to a rise in real output.

Money Supply and Interest Rates

• True or False: If the money supply increases, interest rates will drop, leading to increased investment spending. True

  • Explanation: Increased money supply generally lowers interest rates, stimulating investment.

GDP Definition

• True or False: GDP includes all three critical parts to the definition: currency value of all final goods/services produced. True

  • Explanation: This is the standard definition of GDP.

Money Supply Designation

• True or False: M3 is the most liquid money supply designation. False

  • Explanation: M1 is more liquid than M3 as it includes physical currency.

Reasons for Money Demand

• True or False: We want more money for inflation or greater output. True

  • Explanation: High demand for money often arises from inflationary pressures or increased economic activity.

Spending Multiplier

• True or False: If people spend 90% of a change in income, the spending multiplier is -10. False

  • Explanation: The multiplier = 1/(1-MPC), so here it would be 10, not -10.

Tax Principles

• True or False: A progressive income tax is based on the benefits received principle. False

  • Explanation: It is based on the ability-to-pay principle, where tax rates increase with income.

Lorenz Curve and Gini Coefficient

• True or False: The Lorenz Curve represents deviation from income equality across quintiles. True

  • Explanation: It visually represents income distribution.

• True or False: A Gini-coefficient of 0.66 shows more inequality than 0.33. True

  • Explanation: Higher Gini coefficients indicate greater income disparity.

Okun’s Law

• True or False: Okun’s law states a 1% increase in unemployment correlates with a 2-4% GDP decrease. True

  • Explanation: It reflects the opportunity cost of higher unemployment on economic output.

Fiscal Policy

• True or False: Government fiscal policy can be contractionary or expansionary. True

  • Explanation: It depends on whether the government is increasing or decreasing spending/taxes.

Types of Unemployment

• True or False: All types of unemployment increase during a recession. True

  • Explanation: Economic downturns typically increase structural, cyclical, frictional, and seasonal unemployment.

RINTE Variables

• True or False: RINTE variables are non-price determinants of demand. True

  • Explanation: They help explain shifts in the demand curve.

Household vs Business Goals

• True or False: Households seek utility maximization; firms seek profit maximization. True

  • Explanation: These are fundamental motivations for each economic entity.

Economic Surplus

• True or False: Total economic surplus can be calculated as the triangular area inside demand and supply curves. True

  • Explanation: It represents the total welfare for consumers and producers.

Price Floor Effects

• True or False: A price floor causes a chronic shortage when set below equilibrium. False

  • Explanation: It would lead to a surplus, not a shortage.

Technological Improvements

• True or False: An improvement in technology decreases equilibrium price and increases quantity. True

  • Explanation: Better technology lowers production costs, reducing prices and increasing output.

Cross-Price Elasticity

• True or False: A negative cross-price elasticity indicates complements. True

  • Explanation: As the price of one good rises, the demand for its complement decreases.

Specialization in Trade

• True or False: The efficient trading partner should specialize and trade resources. True

  • Explanation: This promotes a more efficient allocation of resources globally.

Price Elasticity of Demand

• True or False: The simplest method to calculate price elasticity is by dividing percent change in price by the percent change in quantity demanded. False

  • Explanation: Elasticity is calculated as the percent change in quantity demanded divided by the percent change in price.

Decision Making in Economics

• True or False: Decisions are made considering sunk costs. False

  • Explanation: Economic decision-making should ignore sunk costs.

Positive Externalities

• True or False: Governments can encourage production of positive externalities with subsidies. True

  • Explanation: Subsidies can incentivize production of goods with societal benefits.

Inelastic Demand and Taxation

• True or False: Inelastic demand means sellers bear more tax burden. False

  • Explanation: Inelastic demand suggests consumers are less sensitive to price changes and thus bear more of the tax burden.

Simultaneous Changes in Demand and Supply

• True or False: Simultaneous demand and supply increases yield uncertain effects on equilibrium price. True

  • Explanation: Price may rise or fall depending on the magnitude of shifts.

Substitute Goods and Market Response

• True or False: A storm destroying coffee crops will increase the price of tea. True

  • Explanation: The reduction in coffee supply will shift demand towards tea, increasing its price.

Diminishing Marginal Utility

• True or False: Each additional identical good yields less satisfaction than the previous. True

  • Explanation: This principle underlies consumer choice theory.

Rational Decision Making

• True or False: Rational decision-makers act only when marginal benefits exceed marginal costs. True

  • Explanation: This principle drives optimal decision-making.

Production Possibilities Curve

• True or False: Producing on the curve means efficiency can yield more of one good. True

  • Explanation: Operating on the curve indicates full resource utilization.

Fiscal Policy Pronunciation

• True or False: How do you pronounce government Fiscal Policy? (Not a true or false question)

Motivation to Succeed

• True or False: Finish strong! You've got this! (Motivational statement)