Econ 201 – Flashcard Answers

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individual consumer surplus

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the net gain to an individual buyer from the purchase of a good. It is equal to the difference between the buyer's willingness to pay and the price paid.

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quantity demanded, how it relates to price

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actual amount consumers are willing to buy at a price. as P falls, Q rises

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shift of the demand curve

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change in quantity demanded at any given price, the ENTIRE CURVE MOVES -number of buyers, income, price of related goods, tastes, expectations

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change in the demand

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this describes a movement along the demand curve, not the entire curve shifting

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substitutes

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inc. in price in one good leads to inc. demand for the other ex: muffins and donuts

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complements

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inc. in price of one good leads to dec. in demand for other good ex: peanut butter and jelly

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normal good

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rise in income increases demand for a good

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inferior good

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rise in income decreases the demand for a good

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quantity supplied

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actual amount of a good or service people are willing to sell at some specific price

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supply curve and how it relates to the quantity supplied

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shows the relationship between quantity supplied and price, inc. price, inc. quantity

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shift of the supply curve, and what causes this?

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change in the quantity supplied of a good or service at any given price, SHIFT OF ENTIRE CURVE -input price, prices of related goods or services, technology, expectations, number of producers

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equilibrium price

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(market clearing price) quantity of good demanded equals quantity of good supplied, where they intersect

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surplus

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quantity supplied exceeds the quantity demanded, occurs when the price is above equilibrium, drives price level down to equilibrium

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shortage

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quantity demanded exceeds the quantity supplied, when price is BELOW equilibrium, drives price up

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an increase in demand ___ equilibrium price and ___ e quantity

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increases, increases

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increase in supply ___ e price and ____ e quantity

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decreases, increases

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decrease in supply ___ e price and ___ e quantity

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increases, decreases

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what happens when the demand and supply curve shift simultaneously in opposite directions?

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the change in equilibrium price is predictable, but equilibrium quantity is not

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what happens when the demand and supply curve shift simultaneously in the same direction?

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change in equilibrium quantity is predictable, change in equilibrium price is not

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macroeconomics is the study of _____

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the behavior of the economy as a whole, and how its different from the sum of its parts

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If goods A and B are substitutes, a decrease in the price of good B will __ demand for good A

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decrease

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If the demand for tires goes down when the price of gas goes up, then tires and gas are:

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complements

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Assuming that desktop computers are normal goods, which of the following will NOT increase demand for desktop computers? -inc in the incomes of computer users - price of notebook computers inc - very large computer company going out of business -cool new computer games that can only be played on desktop computers

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-very large computer company going out of business

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If the price of a commodity increases, you can expect the quantity supplied to ___

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increase.

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A leftward shift of a supply curve is caused by a ___ in cost of an input

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increase

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If the supply and demand curves intersect at $47, then any price above that would result in:

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a surplus

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For consumers, pizza and hamburgers are substitutes. A rise in the price of a pizza causes _____ in the equilibrium price of a hamburger and _____ in the equilibrium quantity of hamburgers.

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rise, increase

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Consider two competing motorcycle manufacturers, Harley-Davidson and Honda. If Harley-Davidson raises the price of its motorcycles, we can expect: a ___ shift in the demand curve for Hondas, and __ prices for Hondas

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rightward, increase,

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An increase in supply with no change in demand will lead to _____ in equilibrium quantity and _____ in equilibrium price.

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increase, decrease

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A decrease in demand and a decrease in supply will lead to _____ in equilibrium quantity and _____ in equilibrium price.

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decrease, an indeterminate change

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macroeconomics studies

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general prices of the whole economy and how high/low prices are relative to the market as a whole, focus on Keynesian economic theory

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Keynesian economics believes that a depressed economy is the result of ____, which can be mitigated by

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inadequate spending, government spending

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2 policies for government intervention:

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monetary policy, fiscal policy

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monetary policy

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uses changes in the QUANTITY of money to alter interest rates, which in turn affect the level of OVERALL spending

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fiscal policy

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changes in taxes and government spending to affect overall spending.

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self regulating economy

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describes an economy in which problems such as unemployment are resolved without government intervention, through the working of the invisible hand, and in which government attempts to improve the economy's performance would be ineffective at best, and would probably make things worse.

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recessions also called

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contractions, periods of economic downtown when output and employment are falling

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expansions also called

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recoveries, periods of economic upturn when output and employment are rising. when an economy isnt in a recession, it is normally in an upward trend (expanding)

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business cycle

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short-run alternation between recessions and expansions

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business cycle peak

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point at which the economy turns from expansion to recession

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business cycle trough

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point where economy turns from recession to expansion

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long run economic growth

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sustained upward trend in the economy's output over time

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why is long run economic growth important?

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fundamental to many economic questions today, responses to key policy questions (like government programs), higher standards of living, crucial for poorer countries

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long run growth per capita is key to

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higher wages and a rising standard of living

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inflation

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rise in overall level of prices

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delfation

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falling in overall level of prices

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inflation and deflation are closely related to:

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the business cycle

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when the economy is depressed and jobs are hard to find inflation tends to: when the economy is booming, inflation tends to:

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decrease, increase

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in the long run, overall level of prices are mainly determined by changes in the ____

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money supply

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price stability occurs when

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the overall level of price sis changing slowly or not at all

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an open economy is

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an economy that trades goods and services with other countries

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trade deficit

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value of goods and services bought from foreigners is more than value of goods it sells to them imports>exports

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trade surplus

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value of goods and services bought from other countries is less than value it sells to them exports>imports

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how would macroeconomics explain what determines whether a country is in trade surplus or trade deficit?

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decisions about investment spending and savings. investment in goods like machinery and factories that are used to produce goods

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countries with high investment spending relative to savings run trade ____

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deficits

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countries with low investment spending relative to savings run trade ____

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surplus

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The view that the government should take an active role in the macroeconomy dates to:

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the Great Depression

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The central mission of modern macroeconomics is to prevent: shortages. high gas prices. a deep recession like the Great Depression. surpluses.

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a deep recession like the Great Depression

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Keynesian economics stressed: -the self-correcting power of free markets. -that the Depression should run its course to bring down the high cost of living. -the importance of total spending. -the long run.

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importance of total spending

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If during several months the economy is simultaneously increasing its levels of output and employment, then the economy is in a(n):

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expansion

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An economic expansion in the United States is typically associated with a(n):

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falling unemployment rate

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Long-run growth is the sustained upward trend in:

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aggregate output per person over several decades

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Which of the following statements is TRUE? -Long-run growth models and business cycle models are the same. -The level of saving is important for long-run growth. -Since World War II, the economy of Argentina has grown faster than the economy of Canada. -In the past century, the population of the United States has grown faster than output.

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the level of saving is important for long-run growth

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If workers' nominal wages have risen by 50% over a 10 years and prices have increased by 40% in that same period, then we can safely conclude that the amount of goods and services workers can buy has:

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increased

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The relation between a country's level of saving and investment: (choose 1) -has often been used to correct a trade deficit but not a trade surplus. -does not affect an open economy. -affects its trade balances. -pertains to trade surpluses only.

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affects its trade balances

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If wages grew at 5% last year and average prices grew at 3%, then the average worker: is better or worse off?

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is better off

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The annual percentage change in the aggregate price level is negative when there is:

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deflation

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Deflation encourages people to hold onto cash or invest?

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hold onto cash rather than invest

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Inflation affects people adversely because: (choose 1) -nominal income falls. -the budget deficit increases. -it causes money to lose its value over time. -purchasing power tends to increase.

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it causes money to lose its value over time

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what indicates a countrys economic growth and if it is advanced?

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national income and product accounts, more reliable the accounts the more economically advanced the country

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national accounts

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keep track of the flows of money between different sectors of the economy -spending of consumers, sales of producers, business investment spending, government purchases, etc

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circular flow diagram connects what 4 sectors of the economy and through what type of markets?

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households, firms, government, and the rest of the world. through factor markets (factors of production, labor, raw materials, etc), markets for goods and services, and financial markets

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money travels from firms to households through?

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wages, profit, interest and rent via factor markets

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when do households have disposable income and where is it used?

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after paying taxes to the government and receiving government transfers, it goes to private savings and consumer spending via financial markets

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money travels from governments and households to firms through?

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market for goods and services

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gross domestic product

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value of all final goods and services in US

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consumer spending

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household spending on goods and services, most households derive the bulk of their income from wages earned by selling labor and human capital

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stock

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share in the ownership of a company held by a shareholder. how households derive additional income

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bonds

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borrowing in the form of an IOU that pays interest, profits distributed to shareholders known as dividends, and the interest payments on bonds held by bondholders

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government transfers

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payments by the government to individuals for which no good or service is provided in return ex: social security benefits and unemployment insurance payments

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disposable income

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money households have left after paying taxes and receiving government transfers

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private savings

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equal to disposable income minus consumer spending, disposable income that is not spent on consumption

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financial markets

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banking stock and bond markets which channel private savings and foreign lending into investment spending, government borrowing and foreign borrowing

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government borrowing

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total amount of funds borrowed by federal, state and local governments in the financial markets,

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government purchases of goods and services

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total purchases by federal, state and local governments including everything from military spending on ammunition to local public school supplies

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how does the rest of the world participate in the US economy?

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-exports (we export US goods to other countries) -imports (goods purchased from other countries by the US) -lending by foreigners to borrowers in the US, and purchases by foreigners of shares of American stock,

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inventories

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stocks of goods and raw materials held to facilitate business operations

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investment spending

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spending on productive physical capital such as machinery and construction of buildings and changes to inventories

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why are changes to inventories included in investment spending?

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they change the ability of a firm to make future sales, form of investment

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intermediate goods and services

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goods that are inputs for production of final goods and services, bought from one firm to another

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aggregate spending

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SUM OF CONSUMER SPENDING, investment spending, government purchases of goods and services, and exports minus imports, TOTAL SPENDING ON DOMESTICALLY PRODUCED FINAL GOODS AND SERVICES

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3 ways to calculate the GDP

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1. adding up total value of all final goods and services produced 2. adding up spending on all domestically produced goods and services 3. adding up total factor income earned by households from firms in the economy

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value added and why its important

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value added= difference between the value of its sales and value of intermediate goods and services it purchases from other businesses -its important because it accounts for the value of intermediate goods so as not to double count it in GDP

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aggregate output

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economy's total quantity of output of final goods and services

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real GDP

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total value of all final goods and services produced in the economy during a given year, calculated using the prices of a selected base year

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nominal GDP

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value of al final goods and services produced in the economy during a given year, calculated using the prices current in the year in which the output is produced

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chained dollars

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method of calculating changes in the GDP using the average between the growth rate calculated using an early base year and the growth rate calculated using a late base year

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GDP per capita

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GDP divided by the size of the population; it is equivalent to the average GDP per person.

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aggregate price level

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measure of the overall prices in the economy

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US statistics on GDP are always expressed using

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chained dollars

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market basket

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hypothetical set of consumer purchases of goods and services, used to measure average price changes in overall price level

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price index in a given year

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(cost of a market basket in a given year/cost of market basket in a base year)x100

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inflation rate

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(price index yr 2-price index yr 1/price index yr 1)x100 annual percent change in an official price index

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consumer price index CPI

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measures the cost of the market basket of a typical urban American family, most widely used measure of aggregate price level, and used to measure inflation

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producer price index

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wholesale price index, tracks changes in the prices of goods and purchased by producers containing raw commodities such as steel, electricity, coal, etc

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why is PPI considered an early warning signal of changes in the inflation rate?

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because commodity producers are relatively quick to change prices when they perceive a change in overall demand for their goods

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GDP deflator

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for a given year is 100 times the ratio of nominal GDP to real GDP in that year.

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The circular-flow diagram illustrates all of the following in the U.S. economy EXCEPT: -the purchase and sale of factors of production. -flows of money. -growing income inequality. -flows of goods and services.

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-growing income inequality

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Goods that are produced in a particular period but NOT sold in that period:

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end up in inventory and are included in investment

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The equation that breaks GDP down by the four sources of aggregate spending is:

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GDP = C + I + G + X - IM.

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Enchanté Inc., a designer clothing company, buys $400 worth of silk and $30 worth of accessories to produce each dress. If the value added by Enchanté is equal to $200, then according to the value-added approach, the price of the designer dress should be:

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630

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A country's exports minus its imports during a period are:

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net exports

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The dollar value of final goods and services only is counted in GDP because:

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if we counted the value of all goods, we would count inputs, like the value of steel in a new automobile, more than once.

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A country's GNP:

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is the total factor income earned by residents of a country. total value of goods produced by a country during one year, equal to GDP PLUS net income from foreign sources (citizens abroad)

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why is GDP not necessarily a good measure of the economy?

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some of the increase in the value of GDP over time represent increases in the prices of goods, instead of increase in OUTPUT

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Explain what is meant by shoe leather costs of inflation.

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Shoe-leather costs are the increased costs of transactions caused by inflation. When there is a severe inflation, people tend to withdraw their deposits in banks more frequently, making them spend more time on transactions.

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What are some reasons a firm might choose to pay efficiency wages, above the market clearing wage?

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Higher wages than necessary are likely to lead workers to work harder and to attract more productive workers in the labor market.

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full employment

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Full employment is when actual unemployment is equal to natural unemployment, which means only frictional and structural unemployment

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Explain why, when inflation is higher than expected, borrowers gain at the expense of lenders.

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The purchasing power of money that borrowers repay is lower, so their real wealth will get higher, while lenders' real wealth will get lower.

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unemployment

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total number of poeple who are actively looking for work but arent currently employed

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why is the unemployment rate significant?

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good indicator of how easy or difficult it is to find a job given the current state of the economy

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discouraged workers

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nonworking people who are capable of working but have given up looking for a job given the state of the job market unemployment rate does not include discouraged workers

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marginally attached workers

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not included in unemployment rate or work force would like to be employed and have looked for a job in the past, currently not looking

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jobless recovery

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otherwise called a growth recession, is a period in which the real GDP growth is positive but unemployment rate is still rising

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frictional unemployment

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unemployment due to the time workers spend in job search

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structural unemployment

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more people are seeking jobs in a particular labor market then there are jobs available at the current wage rate, even when the economy is at the peak of the business cycle

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