Macroeconomics Study Guide Exam 1 – Flashcards
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The limited nature of resources (we can only have so much)
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Scarcity
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How people decide what to buy, how much to work, save, and spend
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Economics
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You have to give up something to get something else
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Principle 1: People Face Tradeoffs
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You go to a party the night before an exam instead of studying
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Example of "People Face Tradeoffs"
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Making a decision involves comparing costs and benefits
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Principle 2: The Cost of Something is What You Give Up to Get It
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Whatever must be given up to maintain a cost Example: Seeing a movie costs for how much TIME you spend there
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Opportunity Cost:
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Example: Is paying for an extra year of college worth the small amount of extra salary you would get?
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Principle 3: Rational People Think at the Margin
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Something that makes people act
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Incentive:
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Example: If gas prices rise people will respond by purchasing hybrid cars
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Principle 4: People Respond to Incentives
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Example: U.S. is good with technology, and China is good with farming--everyone is good at different things, so if we trade everyone will have the best products around.
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Principle 5: Trade Can Make Everyone Better Off
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A group of buyers and sellers
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Market:
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The interactions between buyers and sellers determine prices
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Principle 6: Markets Are Usually a Good Way To Organize Economic Activity
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When governments get involved in the economy, they are usually doing something to help costs in the longrun
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Principle 7: Governments Can Sometimes Improve Market Outcomes
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When a market fails to use society's resources efficiently
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Market Failure:
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Ex. A large country going into a poor one and giving 50 cent wages Technology improves the standard of living
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Principle 8: A Country's Standard of Living Depends on It's Ability to Produce Goods and Services
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Increases in the general level of prices
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Inflation:
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More the government produces the greater the inflation rate
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Principle 9: Prices Rise when the Government Prints Too Much Money
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Inflation and Unemployment push in opposite directions
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Principle 10: Society Faces a Short-Run Tradeoff Between Inflation and Unemployment
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Efficient: A B C Not: D
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In the PPF provided, which points are efficient? Not efficient?
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Attainable: A B C D Not: E
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In the PPF provided, which points are attainable? Not attainable?
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Economic growth would need to occur -New Tech etc. (That would move the curved line up so that it goes through point E)
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Tell how you could produce point E on the PPF Provided
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We produce a good and sell it elsewhere
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Exports
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Goods produced abroad and sold domestically
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Imports
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The ability to produce a good using fewer inputs than another producer
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Absolute Advantage
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Whoever has the lower opportunity cost
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Comparative Advantage
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Examining additional costs and benefits of an activity
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Marginal Analysis
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The most you're willing to pay
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Marginal Benefit
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Relationship of all prices and quantity demanded from that price
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Demand
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Price
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________ cannot change demand
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Price
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All factors can change the demand curve except _______.
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As price rises, quantity demanded also rises Vice Versa
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Demand Schedule
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Quantity demanded increased
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What happened between the red and blue lines?
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Right
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If demand shifts positively, the demand curve will shift to the ___________.
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Rise, More
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A ___________ in consumer income can cause _________ goods to be bought
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Coke and Pepsi. If coke gets too expensive consumers will substitute pepsi
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Example of a substitute
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Fudge and Ice Cream example
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Example of complements
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Price
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A change in _________ will not change supply
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Relationship between all prices and quantity
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Supply
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Right
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If demand shifts positively, the demand curve will shift to the __________.
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Left
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If demand shifts negatively the demand curve will shift to the __________.
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If the price of a product increases, you supply more. If the cost decreases, you supply less.
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Law of Supply
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It shifts right (positively)
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What happens to the supply curve in the number of firms increases?
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If shifts right (positively)
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What happens to the supply curve when technological progress occurs?
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What consumers are willing to buy
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Demand
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Excess quantity demanded over quantity supplied (so, more is wanted than can be supplied)
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Shortage
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Shortage
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Buyers cannot purchase what they desire at the current price is an example of a
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Increase
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When there is a shortage prices will _________
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Have to charge more and higher more workers
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How can you fix a shortage?
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Excess quantity supplied over quantity demanded (so, more is supplied than there is needed)
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Surplus
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Surplus
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Sellers cannot sell what they desire at the current price is an example of a
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Decrease
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When there is a surplus prices will __________.
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Consumers and Suppliers are in agreement
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Equilibrium
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Surplus, Fall
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If 55 cars are demanded and 70 are produced, this is a __________ and prices will ___________.
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Maximum price charged legally
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Price Ceiling
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-Shortages -People do illegal things such as scalping tickets
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Consequences of a Price Ceiling
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A legal minimum that prices can be
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Price Floors
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-Surplus (because sellers cannot find enough buyers) -Example: Airline fares under regulation
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Symptoms of Price Floors
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Floors
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Price (Floors or Ceilings) get expensive
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Micro: Individual Decision making units & how they behave Macro: Behavior of entire economies
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Micro vs Macro
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1. Price Levels 2. Production 3. Unemployment
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3 things you study in Macro:
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Combining many individual markets
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Aggregation
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Add together the value of hot dogs and computers
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Example of aggregation
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Macro
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Aggregation is more important for (micro/macro)
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Together
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During economic fluctuations, aggregations are important because markets move ____________
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Macro: Size of the pie Micro: What kind of pie and who eats it
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Pie analogy for Micro vs. Macro
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Right
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Inflation occurs when demand shifts _________
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Left
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Deflation occurs when demand shifts _________
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Deflation
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No increase in demand =
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Demand
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In a healthy economy, when both demand and supply shift, which shifts more?
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Inflation
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_____________ hurts savings
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A period of time where the total output of the economy declines
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Recession
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Production falls and people lose jobs
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What happens to production and jobs during a recession?
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Left
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During a recession, the demand curve shifts _______
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Both aggregate demand and supply curves shift right
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Economic Growth occurs when
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No, only final products are. So, the entire Ford F-150 would be
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Is the steering wheel for a Ford F-150 part of GDP?
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2 quarters
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A recession is claimed when declines happen over how long?
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4-5% (new tech comes out)
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Healthy unemployment rate
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Recession
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What term can be used to describe a period where the total outputs of jobs decline?
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Economic
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___________ growth occurs when aggregate supply and demand shift right
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1. War 2. Natural disasters
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Two examples of things that could cause GDP to rise?
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you can't compare wages or prices from different time periods
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Real GDP states that _______________.
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Ex. That an $8.50 wage today is equal to a $1 wage in 1910
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What does Nominal GDP show?
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Above: Economic Booms Below: Recessions, Wars, Panics
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Figure 5 in Chapter 5 shows the GDP for the U.S. since 1870. The middle line represents 0. What occurs when the GDP goes above 0? Below?
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Demand
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When inflation occurs. _______ shifts right
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Supply
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When deflation occurs, ______ shifts right
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Demand shifted right
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The following graph is an example of inflation because ________.
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More government spending occurred
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Why did general prices increase during WWI and WWII?
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If GDP is above 0, inflation. If it's below, deflation.
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In the GDP Graph, how do you know when inflation or deflation is happening?
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Inflation that occurs if the economy is growing slowly or in a recession
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Stagflation
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Less
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If you have $1 and inflation occurs, is your dollar worth less or more?
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Demand for single product, while aggregate demand is a collection of all products in an entire nation
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Demand vs Aggregate Demand
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Demand shifts left
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What happens to the supply and demand graph during stagflation?
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Loans that banks trade put pressure on interest rates
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Federal Reserve Impact
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If you have bad credit, you can buy a Dodge Stratus with a 24% interest rate and it will be the same as buying a $20,000 car with a 0% interest rate
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Example of Federal Reserve Impact
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Property Rights
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What is 1 reason some countries cannot become global?
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1. Raise Taxes 2. Lower interest rates
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How to fix inflation
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Government programs designed to prevent or shorten recessions and to stop inflation
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Stabilization Policy
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TOTAL supply of goods and services that a national economy produces
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Aggregate Supply
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TOTAL demand for final goods in an economy
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Aggregate Demand
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Amount of output a worker produces in an hour
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Labor Productivity
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productivity
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Raising ________ will improve that standard of living
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Potential would be a linear line through the red--real GDP is rarely constant
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Potential vs Real GDP
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Looking for work in the last 4 weeks
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In order to be considered in the unemployment rate, what do you have to be doing?
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People Unemployed/Labor Force
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Unemployment Equation
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Not maximizing resources
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What causes GDP to fall?
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No income, hunger, psychological impacts
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Negatives of unemployment:
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Everyone that holds a job, including part time workers
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Employed
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People not currently working; actively looking for a job in the past 4 weeks
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Unemployed
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Not looking for work at all
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Out of Labor Force
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Unemployed person that gives up looking for work
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Discouraged Worker
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Involuntary part-time or loss of overtime
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Disguised Unemployment
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Changing jobs because you're moving, hated your boss, etc. Healthy
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Frictional Unemployment
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Laid off
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Structural Unemployment
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Rises during recessions, has to do with decline of economy
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Cyclical Unemployment
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They rise
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When demand shifts right, what happens to prices?
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Doesn't motivate people to look for jobs
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What is a con to having higher unemployment benefits?
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Economic growth, rise in technology. Inflation.
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What causes "real wages" to rise?
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No, firms must pay the market rate. (Giving raises to keep up with inflation).
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Does high inflation hurt the worker?
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2%
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Suppose you get a 5% increase in your wage, but inflation rises by 3%. How much of a raise did you actually get?
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Someone who is unemployed and is relying on savings
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Who does inflation hurt?
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Pure: Less realistic; basically everything would inflate by 10% Real World: Different products increase in price differently. You may think inflation hurt you if you only buy 1 thing but it increased a lot vs. other products.
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Pure Inflation vs. Real-World Inflation
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Inflation
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Lenders and Borrowers may get hurt by ____________.
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Real Interest Rate + Rate of Inflation
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How to find Nominal (Total) Interest Rate:
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Over time inflation will occur, and they will lose out on the interest
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If a bank lends you $100,000 with 0% interest, why do they lose?
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Nominal Interest Rate - Expected Inflation
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How to find Real Interest Rate:
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6%
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If the bank gave you a 3% interest rate and they expected inflation to increase 3% over the time it takes you to pay back your loan, what is your interest rate?
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2%- They win 4%- You win
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If the bank gave you a 3% interest rate and they expected inflation to increase 3% over the time it takes you to pay back your loan, but inflation only actually rises 2%, who wins? What about 4%?
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4%-1%= 3%
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In 2013, mortgage rates were 4% with a 1% inflation. Find the real interest rate.
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Caused by rapidly printing money
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What is hyper-inflation?
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3%/year
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Healthy inflation rate
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Technology
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Labor Productivity will rise as __________________ improves.
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Workers being more happy and productive
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Workforce Quality
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More people need to get a higher education. Education helps firms.
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In order for labor productivity to increase, what needs to occur?
