Macroeconomics Chapters 1-5 Test Questions

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Scarcity
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A situation in which unlimited wants exceed the limited resources available to fulfill those wants
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Economics
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The study of the choices people make to attain their goals, given their scarce resources.
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Economic Model
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A simplified version of reality used to analyze real-world economic situations
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Market
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A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.
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Three Economic Assumptions
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1) People are rational 2) People respond to economic incentives 3) Decisions are made at the margin
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Marginal Analysis
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Analysis that involves comparing marginal benefits and marginal costs
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Trade-off
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The idea that, because of scarcity, producing more of one good or service means producing less of another good or service.
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Opportunity Cost
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The highest-valued alternative that must be given up to engage in an activity.
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1) What goods & services will be produced? 2) How will they be produced? 3) Who will receive the goods & services?
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Three Economic Problems
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Centrally Planned Economy
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An economy in which the government decides how economic resources will be allocated.
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Market Economy
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An economy in which the decisions of households and firms interacting in markets allocate economic resources
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Mixed Economy
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An economy in which most economic decisions result from the interaction of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources.
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Productive Efficiency
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A situation in which a good or service is produced at the lowest possible cost
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Allocative Efficiency
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A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
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Voluntary Exchange
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A situation that occurs in markets when both the buyer and seller of a product are made better off by the transaction.
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Equity
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The fair distribution of economic benefits.
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Economic Variable
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Something that can have different values, such as the incomes of doctors.
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1) Economic growth 2) Full employment 3) Economic efficiency 4) Price-level stability 5) Economic freedom 6) Equitable distribution of income 7) Economic security 8) Reasonable balance of trade
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Economic Goals
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Positive Analysis
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Analysis concerned with what is; focuses on facts
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Normative Analysis
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Analysis concerned with what ought to be; incorporates value judgments
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Microeconomics
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The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
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Macroeconomics
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The study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.
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Production Possibilities Frontier (PPF)
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A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.
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Economic Growth
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The ability of the economy to increase the production of good and services.
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Trade
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The act of buying and selling.
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Absolute Advantage
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The ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resources.
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Comparative Advantage
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The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other competitors.
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Product Market
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A market for goods- such as computers-or services- such as medical treatment.
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Factor Market
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A market for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability.
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Factors of Production
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The inputs used to make goods and services.
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Circular- Flow Diagram
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A model that illustrates how participants in markets are linked.
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Free Market
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A market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed.
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Entrepreneur
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Someone who operates a business, bringing together the factors of production- labor, capital, ad natural resources- to produce goods and services.
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Property Rights
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The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.
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Perfectly Competitive Market
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A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.
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Demand Schedule
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A table that shows the relationship between the price of a product and the quantity of the product demanded.
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Quantity Demanded
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The amount of a good or service that a consumer is willing and able to purchase at a given price.
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Demand Curve
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A curve that shows the relationship between the price of a product and the quantity of the product demanded.
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Market Demand
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The demand by all the consumers of a given good or service
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Law of Demand
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The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of product rises, the quantity demanded of the product will decrease.
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Substitution Effect
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The change in the quantity demanded of a a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes.
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Income Effect
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The change in the quantity demanded of a good that results form the effect of a change in the good’s price on consumers’ purchasing power.
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Ceteris Paribus (“all else equal”) Condition
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the requirement that when analyzing the relationship between two variables – such as price and quantity demanded – other variables must be held constant
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Normal Good
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A good for which the demand increases as income rises and decreases as income falls
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Inferior Good
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A good for which the demand increases as income falls and decreases as income rises
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Substitutes
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Goods and services that can be used for the same purpose.
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Complements
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Goods and services that are used together.
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Demographics
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The characteristics of a population withe respect to age, race, and gender.
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Quantity Supplied
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The amount of a good or service that a firm is willing and able to supply at a given price.
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Supply Schedule
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A table that shows the relationship between the price of a product and the quantity of the product supplied.
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Supply Curve
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A table that shows the relationship between the price of a product and the quantity of the product supplied.
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Law of Supply
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The rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.
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Technological Change
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a positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs
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Market Equilibrium
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A situation in which quantity demanded equals quantity supplied.
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Competitive Market Equilibrium
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A market equilibrium with many buyers and many sellers.
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Surplus
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A situation in which quantity supplied is greater than quantity demanded
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Shortage
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A situation in which the quantity demanded is greater than the quantity supplied
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Price Ceiling
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A legally determined maximum price that sellers may charge
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Price Floor
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A legally determined minimum price that sellers may receive.
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Consumer Surplus
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The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays.
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Marginal Benefit
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The additional benefit to a consumer from consuming one more unit of a good or service
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Marginal Cost
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The additional cost of producing one more unit of a good or service.
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Producer Surplus
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The difference between the lowest price a firm is willing to accept for a good/service and the price actually received.
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Economic Surplus
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The sum of consumer surplus and producer surplus.
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Deadweight Loss
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The redaction in economic surplus resulting from a market not being in competitive equilibrium.
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Economic Efficiency
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A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum
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Black Market
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A market in which buying and selling take place at prices that violate government price regulations.
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Tax Incidence
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The actual division of the burden of a tax between buyers and sellers in a market.
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Heath Care
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Goods and services, such as prescription drugs, consolations with a doctor, and surgeries, that are intended to maintain or improve a person’s health.
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Health Insurance
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A contract under which a buyer agrees to make payments, or premiums, in exchange for the provider agreeing to pay some or all of the buyer’s medical bills.
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Fee-for-service
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A system under which doctors and hospitals receive a separate payment for each service they provide
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Single-Prayer Health Care System
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A system, such as the one in Canada, in which the government provides health insurance to all of the country’s residents.
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Socialized Medicine
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A health care system under which the government owns most of the hospitals and employs most of the doctors
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Asymmetric Information
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A situation in which one party to an economic transaction has less information than the other party
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Adverse Selection
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The situation in which one party to a transaction takes advantage of knowing more than the other party to the transaction.
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Principal-Agent Problem
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A problem caused by an agent pursuing his own interests rather than the interests of the principal who hired him.
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Moral Hazard
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The actions people take after they have entered into a transaction worse off.
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Patient Protection and Affordable Care Act (ACA)
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A problem caused by agents pursing their own interests rather than the interests of the principals who hired them.
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Market- Based Reforms
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Changes in the market for health care that would make it more like the markets for other goods and services.

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