Economics Semester Exam Study Guide Answers

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What makes an economy efficient
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Using resources in such a way to maximize the production or output of goods and services.
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A factory building is an example of which factor of production?
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Physical Capital
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What are the three economic questions?
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What goods and services are produced? How are goods and services produced? Who consumes the good and services?
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As far as economic systems are concerned, describe the economy of the United States
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Mixed economy, but geared more towards free-market.
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What is the Main incentive to sell a product?
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Making profit on sales.
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Why is legal equality important?
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Guaranteeing all people the same legal rights will maximize the use of human capital
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What are the characteristics of a public good?
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-impractical and inefficient to have consumers pay for good or service individually. -impractical and inefficient to exclude those who did not pay from using the good or service.
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What are the three main outcomes policymakers try to achieve to protect the economy?
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-High Employment -Steady Growth -Stable Prices
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Why does the government promote the use of technology?
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To make the economy stronger and more efficient.
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What is it called when a consumer is both willing and able to purchase a good or service?
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Demand
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What is the law of demand?
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As price rises,quantity demanded falls, as prices fall, quantity demanded rises.
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What is it called when the government uses some tool other than money to allocate goods?
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Rationing.
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Describe a natural monopoly.
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a market that runs most efficiently when one large firm supplies all of the output.
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Why are manufacturing jobs being outsourced?
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Labor is cheaper in other parts of the world.
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What does it mean to say that corporate shareholders have limited liability?
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An LLP limits partners’ risk of losing their personal assets to only their own acts and to the acts of the people under their supervision.
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Give some examples of representative money.
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An IOU note
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What are mortgage loans used to purchase?
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Houses and property.
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What characteristics of money does a coin have that larger and heavier objects do not?
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It is portable.
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What gives fiat money its value?
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The government
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When Russian sellers refused to exchange using the ruble what characteristic of money did this currency lack?
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Store of Value
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How are savers and borrowers linked within financial institutions?
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A saver puts many in the bank and a borrower borrows money from the bank.
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What types of products are used in calculating US GDP?
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Final goods and services
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What types of things would the government do to implement expansionary fiscal policy?
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Increase government spending and cutting taxes.
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What causes a shortage? And be able to give an example.
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A sudden increase in market demand. (Price Ceiling. Binding. Below equilibrium price)
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What is the main characteristic of a centrally planned economy?
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The government answers the key economic questions.
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What makes a money market mutual fund risky?
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Pools the savings of many individuals and invests this money in a variety of stocks, bonds, and other financial assets.
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What is the main characteristic of a savings bond?
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Low denomination bond issued by the US Government.
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What do local governments use to finance the building government facilities?
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State grants.
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What is a good investment to utilize to reduce the risk of losing everything?
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Bond
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What is the main advantage of investing in a junk bond?
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They are high yield.
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What is the difference between a bull and bear market?
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-Bull Market: A steady rise in the stock market over a period of time -Bear Market: A steady drop or stagnation in the stock market over a period of time
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Why is it important to utilize both the income and the expenditure approach to calculating GDP?
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Between the two, they can get more accurate figures.
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What is the difference between real and nominal GDP?
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-The nominal GDP measures a country’s production of final goods and services at current prices. -Real GDP measures a country’s production of all final goods and services at fixed historical prices.
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What is the difference between gross income and disposable income?
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Total income vs income after taxes.
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What is an example of a positive external shock to aggregate supply?
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Good weather leads to an unusually productive harvest for corn farmers.
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Identify the limitations of GDP.
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Limitations of GDP include nonmarket activities, the underground economy, negative externalities, and the quality of life.
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How do economists predict changes in the business cycle?
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They look for changes in leading indicators.
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Define underemployed and be able to recognize an example.
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Working at a job for which one is over-overqualified or working part-time when full-time work is desired.
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What happens when your income stays the same but inflation continues to rise?
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It forces consumers to make tradeoffs. If the price continues to rise but your income does not, eventually you will not be able to buy as much gas because your real income, or purchasing power, has dropped. The real income effect forces out to make a trade off in your gas purchases. Substitution effect is when the price of one item is different from another but the items are basically the same.
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Why do rural areas have high poverty rates?
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Not a lot of access to a variety of jobs.
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Define “working poor” and give an example.
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When someone is working, but is still below the poverty line.
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Where does the government taxing power come from?
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The Constitution.
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Define the four types of unemployment and be able to recognize an example of each.
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• Frictional • Seasonal • Structural • Cyclical
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What is used to show how prices change overtime?
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Price Index
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Define poverty.
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The state of being extremely poor.
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What is the benefits-received principle?
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Benefits-received principle is when a person should pay based on the level of benefits he or she expects to receive. The ability-to-pay principle is when people should pay taxes according to their ability to pay.
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Define regressive tax.
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A tax for which the percentage of income paid in taxes decreases as income increases.
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Compare and contrast gift tax and estate tax.
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Estate- a tax on the estate, or total value of money and property, of a person who has died Gift- a tax on money or property that one living person gives to another.
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What are the characteristics of a good tax?
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•Characteristic 1: A tax system should be fair, a tax system should be flexible •Characteristic 2: Tax laws should be clear and simple •Characteristic 3: Taxes should be collected when most people can pay •Characteristic 4: Taxes should be stable. Taxpayers should know in advance how much they owe.
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Define progressive tax.
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A tax for which the percentage of income paid in taxes increases as income increases.
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Define Means-Tested program
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A method for determining whether someone qualifies for a financial-assistance program
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Why are Social Security and Medicare spending expected to increase further in the near future?
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The baby boomer generation will qualify for both programs.
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Why did classical economics fail in the Great Depression?
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Did not address how long it would take for the market to return to the equilibrium.
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Why does the government not create more money to avoid debt?
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Creating more money will cause the dollar’s value to decrease and will cause inflation.
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How does politics influence fiscal policy?
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It is a tool used to expand or slow government growth.
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How did the Great Depression bring about a shift in philosophy towards fiscal policy?
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To combat the Depression, government shifted from classical to Keynesian economic thought.
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What is one possible consequence of the time it takes new fiscal policy to affect the economy?
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By the time the change takes effect, the economy might be moving in the opposite direction.
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What is supply-side economics?
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A body of economic theory that argues for a focus on the expansion of the long run supply curve. Usually associated with arguments in favor of less government (taxes and spending) as a solution to macroeconomic difficulties.
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Why does the Federal Reserve System have a high degree of political independence?
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It is run by banks.
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Why did Congress pass the Federal Reserve Act?
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To respond to banking problems caused by the panic of 1907.
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What is a bank examiner?
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A financial professional, a species of auditor, who has the task of making sure that banks, savings and loans, credit unions and similar financial institutions, and their branches, are operating legally and ethically.
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Which is the Federal Reserve’s biggest customer?
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The US Government.
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63. Why does the Fed control the money supply?
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Because people at the time believed that if the government was running the bank, the federal government would have too much power.
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If economists predict that the economy is facing a long recession, what would the Fed be most likely to do?
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Introduce an easy money policy.

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