Macroeconomics Test 1 Test Questions – Flashcards
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When the amount people desire exceeds the amount available
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What is meant by scarcity?
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The cost of an alternative that must be forgone in order to pursue a certain action
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What is meant by opportunity cost?
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Unlimited wants / Limited resources
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What is the formula for economics?
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Q = f(k,l)
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What is the Cobb-Douglas Production Function?
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Capital=High ratio of capital to labor used in production (more tech)
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What is meant by capital-intensive production? Labor-intensive production?
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Adam Smith
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Who is the author of the Wealth of Nations?
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1776
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When was the Wealth of Nations published?
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Promotes general welfare. Self-regulating behavior of the marketplace
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What is meant by the "invisible hand'?
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Outcomes that are not the ones intended by a purposeful action
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What is meant by unintended consequences?
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Plumbing, and McDonalds manager. No two nations that owns a mcdonalds has ever gone to war, shows that those who trade with each other helps relationship
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What were the two most noble professions discussed in class? Why were these considered to be the most noble?
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1. Scarcity is inescapable 2. Risk is unavoidable 3. Therefore, all persons must make decisions 4. Incentives matter 5. People generally act in their own self-interest 6. There is often more than one way to produce things 7. Voluntary exchange is mutually advantageous 8. It is wealth, not poverty, which has causes 9. Public policies have primary effect & secondary effects 10. In the end, economic laws tend to prevail
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Give an example for each of the Ten Fundamental Principles of Economics
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How people use their scarce resources to satisfy their unlimited wants
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What is a defnition of economics?
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Allocation = How resources are scarce are delivered by producers Production = Process of combining inputs in order for consumption
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What is meant by allocation? Production?
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Subjective and value based (opinions)
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What is meant by normative economics?
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Objective and fact based (must be able to test)
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What is meant by positive economics?
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Macro = Whole economy Micro = Working of the economy (individual markets)
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How does micro differ from macro?
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...
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What are the levels of micro?
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house hold business government
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What are the sectors of macro?
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The total of something Macroeconomics
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What is meant by "aggregate"? Which branch of economics uses this term?
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Land, Labor, Capital and Entrepeneurship
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What are the four factors of production?
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Rent, wage, interest, profit
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What are the payments to the four factors of production?
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Compensation Rent
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What is the largest part of national income? Smallest?
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What to Produce How to produce Who gets it
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What are three questions all economic systems must answer?
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Market, Command, Traditional and Mixed
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What are the four types of economics systems?
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Describes the income between producers and consumers
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What is meant by a circular flow diagram?
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Efficiency, equity, freedom, growth, security and stability.
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What are the six economic warnings?
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Time-series = Sequence of data points, measured by successive points in uniform time intervals Cross-secontional = Stats collected from different parts of the poulation during the same period
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What is meant by time-series data? Cross-sectional data?
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Error of assuming what is true of a member is true for the group as a whole
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What is the fallacy of composition?
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Correlation = Relationship between two or more things which change can be described mathamatically Causation = The act of causing "cause and effect"
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How does correlation differ from causation?
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What is meant by "shaving with Ockham's razor"?
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Refers to the economy. Assume economy only makes two goods, only way to increase more product in one would to be to decrease one of the other.
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What is meant by the "guns and butter" metaphor?
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Opportunity cost of switching goods remains constant
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What does the slope of a PPF represent
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An increase or decrease in capital goods and consumer goods
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What does the shape of a PPF represent?
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As a production of a product increases, the cost to produce(resources) an additional unit increases as well. As you use more of a good, what used to make it becomes more scarce
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What is meant by the law of increasing opportunity cost? Why does this happen?
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Inside:Not efficient (resource wasted0 Outside: Super effiecient On: Effiecient
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What does it mean to be operation INSIDE, OUTSIDE, or ON the PPF?
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Productive: Producing goods for the lower cost Allocative: Price equals marginal cost of production, optimal distribution
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How does allocative efficiency and productive efficiency relate to a PPF?
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"After this therefore because of this" Perceiving that just becasue A is before B that A is the cause of B
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What is meant by post hoc ergo propter hoc?
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Consumer: Goods and services for personal use Capital: Raw materials used to produce products
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How do consumer goods and capital goods differ?
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The country will experience future economic growth. The country will decline because of less production and too much consumer goods
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Over time, what happens if a nation devotes more of its production to capital goods? Consumer goods?
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Bad = Anything with negative value to consumer Good = Material that satisfies human wants and provides utility
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What is the opposite of an economic "good"? "Bad"?
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1) Various quantities 2) Of a good or service 3) Which a consumer 4) Is both willing and able 5) To purchase 6) Various prices 7) Per unit of time, 8) Ceteris paribus (everything else being equal)
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What is the definition of demand? (8 parts)
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1) Various quantities 2) Which a seller 3) Which a consumer 4) Is both willing and able 5) To sell 6) Various prices 7) Per unit of time, 8) Ceteris paribus
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What is the definition of supply? (8 parts)
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Q^d=f(P) (Price change along the curve) Shift is from Non-Price parameter Q^s=f(P)
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Write out the demand function. Supply function
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Income, Advertising, Price of Other Goods, Number of Buyers, Expectation of buyers, Tastes/preferences Price of Inputs, Technology, Weather, Number of sellers, Expectation of sellers, taxes, subsidies
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What are the non-price parameters of demand?What are the non-price parameters of supply?
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Price increase, D decrease If its a good non-price paramter shifts Demand to right If price increase Q increases When non price parameter changes, shift changes
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Using demand function, demonstrate what happens when price changes and what happens when a non-price parameter changes. Then supply function
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When price change is movement, when non-price parameter changes it causes shift
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How does a "movement along a curve" differ from a "shift"?
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Price
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What causes a "movement along a curve" (demand or supply)?
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Non-Price parameters
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What causes a "shift" (demand or supply)?
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...
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List which direction each of the non-price parameters of demand shifts the demand curve
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List which direction each of the non-price parameters of supply shifts the supply curve
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Q Demanded is greater then Q Supplied Q Supplied is greater then Q Demanded
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What is meant by shortage? Surplus?
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Below = Shortage Above = Surplus Equilibrium = Right on
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What happens in a market graph if a price is BELOW, ABOVE and AT EQUILIBRIUM?
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1) Identitfy old equilibrium 2) Identity shift 3) Identify new equilibrium
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What are the three steps of "comparative statics"?
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Lowest possible price When it's above the equilibrium Minimum Wage
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What is meant by a price floor? When is it effective? What is the effect? Give an example
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Maximum Price When it's below the equilibrium Rent Control
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What is meant by a price ceiling? When is it effective? What is the effect? Give an example
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In same direction = Price same, Q demanded and Q supplied increases Opposite = Q stays same, P goes up. D inc, S dec.
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In terms of equilibrium price and equilibrium quantity, what happens when supply and demand shift in the same direction? Opposite directions?
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Output Price Employment
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What are the three main variables of macro?
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GNP GDP Output CCI CPI GDP Deflator Price Unemployment rate Employment
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What are the six main measures of these three main variables?
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Fairs = Output + Price Predict presidential elections Okuns = Output + Employment Change in output = 3% - 2 * % change unemployment
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What is meant by Fair's Model? Okun's Law? The Phillips Curve? The Full Employment Act of 1946?
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GDP is Local GNP is National
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How does GDP differ from GNP?
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Nominal = Not adjusted for inflation (uses current year) Real = Adjusted for inflation (Nominal / Real) * 100
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How does nominal GDP differ from real GDP? Use a simple two-good formula to show the difference
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How does CPI differ from the GDP deflator and how are the two similar?
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CPI = More predictable GDP = More accurate
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What are the strangths and weaknesses of CPI? GDP deflator?
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GDP Deflator = Nominal/Real
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What three formulas can be used to demonstrate the algebraic relationships among the GDP Deflator, Nominal GDP, and Real GDP?
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Give an example of an item contained in GDP but not from GNP
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Give an example of an item contained in GNP but not from GDP
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Magnitude = Rate of Change Rate of CHange = Adjusting
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What is the difference between majnitude and rate of change?
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(CPInew-CPIold) / CPIold
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How can the inflationg rate be calculated using CPI?
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100 or 1
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What is CPI in the base year?
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Inflation
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What is known when Nominal GDP increases over time?
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Output
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What is known when Real GDP increases over time?
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...
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What is the formula for the unemployment rate?
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What does one need to do to be considered part of the U.S. Labor Force?
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...
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What are the three types of unemployment?
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...
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What is meant by cyclical, frictional, structural, and seasonal unemployment? Give examples of each
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What is meant by "underemployed"?
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What is the meant by the natural rate of unemployment (Un)?
