Macro Exam #1 Chapter 2 – Flashcards

a visual model of the economy that shows how dollars flow through the markets among the households and firms

In the factors of production market, households sell the use of their labor, land, and capital to the firms in the markets of factors of production. The firms then use that to produce goods and services. In other words, firms use money, labor, or land that we, households, give, to use for buying inputs for the factors of production market. The goods and services produced are then consumed by households. The firms use some of the revenue they receive through production to pay for the factors of production such as wages of their workers. In other words, the households spend the money they receive in wages to buy goods and services produced by firms.

Economists try to address their subject with a scientist's objectivity. They approach the study of the economy in much the same way a physicists approaches the study of matter and a biologist approaches the study of life by devising a theory, collecting data, and then analyzing these data in an attempt to verify or refute their theories.

In the market for goods and services my family purchase items for the household such as food, clothing, funiture, and entertainment. In the market for factors of production my husband works at ernst in young as an employee and submits his services to them. They in turn provide services for other households and firms.

Government and internatioal trade.

An outcome is efficient if the economy is getting all it can from scarce resources it has available. . When the economy is using its resources efficiently, it cannont increase the production of one good without reducing the production of the other.

Macroeconomics and Microeconomics.

Microeconmics is the study of how households and firms make decisions and how they interact in specific markets.

Macroeconomics is the study of economy-wide phenomena, including inflation, unemployment, and economic growth.

two reasons: 1. Economist may disagree about the validy of alternative positive theories about how the world works; 2. Economist may have different values and, therefore, different normative views about what public policy should try to accomplish.

claims that attempt to describe the world as it is

claims that attempt to prescribe how the world should be

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

if the economy gets all that it can from the scarce resources it has available; points on the curve

if the point is under the curve (inside)

page 24 referencing figure 2 In point E, producing an additional car will mean a substantial loss of computer output. The opportunity cost is high, and the frontier is steep.

a. a mechanical machine that replicates the functioning of the economy

a. households are sellers, and firms are buyers

b. feasible, but not efficient

Because resources are scarce, not every conceivable outcome is feasible. With the resources it has, the economy can produce at any point on or inside the production possibilities frontier, but it cannot produce at points outside the frontier.

c. move the economy along the production possibilities frontier. the production possibilities frontier is a graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and production technology. In this case, the trade-off between producing hot dogs and hamburgers doesn't change, because resources remain the same. However, the consumption point along the production possibilities frontier has changed, because consumers now prefer to consume more hot dogs. This is represented by a movement along the production possibilities frontier to a point with more hot dog production and less hamburger production.

d. the influence of the government budget deficit on economic growth This is a macroeconomic issue

Law X will reduce national income. Positive statements are descriptive; they make a claim about how the world is. However, normative statements are prescriptive; they make a claim about how the world ought to be. Therefore, in this case, the only positive statement is law X will reduce national income because it states what will happen if something is done rather than what should be done.

it tells you the opportunity cost of one good in terms of the other

not all resources are equally good at producing a product; the opportunity cost varies

a. Micro b. Macro c. Macro d. Micro e. Macro

The statement that society faces a short-run tradeoff between inflation and unemployment is a positive statement. It deals with how the economy is, not how it should be. Since economists have examined data and found that there is a short-run negative relationship between inflation and unemployment, the statement is a fact, thus it is a positive statement.

The statement that a reduction in the rate of growth of money will reduce the rate of inflation is a positive statement. Economists have found that money growth and inflation are very closely related. The statement thus tells how the world is, and so it is a positive statement.

The statement that the Federal Reserve should reduce the rate of growth of money is a normative statement. It states an opinion about something that should be done, not how the world is.

The statement that society ought to require welfare recipients to look for jobs is a normative statement. It doesn't state a fact about how the world is. Instead, it is a statement of how the world should be and is thus a normative statement.

The statement that lower tax rates encourage more work and more saving is a positive statement. Economists have studied the relationship between tax rates and work, as well as the relationship between tax rates and saving. They have found a negative relationship in both cases. So the statement reflects how the world is, and is thus a positive statement.