PRINCIPLES OF MACROECONOMICS 2026
THEORY AND APPLICATION EXAM
◉ Which of the following trade-offs does the production possibilities
frontier illustrate? Answer: A. If an economy wants to increase
equality, then it must sacrifice efficiency in production.
B. Once an economy has reached the efficient points on its
production possibilities frontier, the only way of getting more of one
good is to get less of the other.
C. For Economy A to consume more of one good, it must completely
give up consuming the other good.
D. For Economy A to produce and consume goods, it must sacrifice
equal distribution of income.
◉ When can two countries gain from trading two goods? Answer:
When one country can produce a product at a lower opportunity
cost than the other country, while the other country can produce a
different good at a lower opportunity cost than the first country.
◉ Economics is the study of: Answer: how society manages its
scarce resources.
◉ Budget Constraints Answer: limits to the amount of money that is
available to spend.
,◉ A budget constraint can be written as a Answer: line: Budget =
(Good1$ x QuantityOfGood1) + (Good2$ x QuantityOfGood2)
◉ Production Possibilities Frontier (PPF) Answer: A curve showing
the maximum attainable combinations of two products that may be
produced with available resources and current technology.
◉ The law of diminishing returns Answer: as additional increments
of resources are added to a certain purpose, the marginal benefit
from those additional increments will decline.
◉ Productive Efficiency Answer: means that there can by no more
goods made using the available resources and tools. This can be
shown on any point on the PPF curve.
◉ What are the 3 shifters of the PPC? Answer: 1. change in resource
quantity or quality
2. change in technology
3. change in trade
◉ Product market Answer: anywhere were goods and services are
sold
,◉ resource market Answer: a market in which resources of
production are sold from households to businesses.
◉ Transfer payments Answer: government payments to businesses
or households designed to meet a specific objective
◉ What are the 4 resources sold in the resource market? Answer:
land, labor, capital, and entrepreneurship
◉ What are the 4 kinds of income that households get from the
resource market? Answer: Rent, Wages, Interest, and profit
◉ Factor payments Answer: the income people receive in return for
supplying factors of production
◉ Physical capital Answer: the human-made objects used to create
other goods and services
◉ Human capital Answer: the knowledge and skills a worker gains
through education and experience
◉ Comparative advantage Answer: when one country can produce
more of a good for less than another country.
, ◉ When does a country gain from trade? Answer: When they can get
a resource for a lower opportunity cost than if they made it.
◉ Demand Answer: The need or want for a buyer to have a good and
having the ability to pay for it.
◉ Quantity demanded Answer: the amount of a good that buyers are
willing and able to purchase
◉ The law of demand Answer: consumers buy more of a good when
its price decreases and less when its price increases.
◉ Demand Schedule Answer: a table that shows the quantity
demanded at each price of a good.
◉ Demand Curve Answer: a graph that draws out the demand
schedule for a good.
◉ Supply Answer: The amount of goods a seller is willing and able to
sell and the price they are willing to sell it at.
◉ Supply Schedule Answer: a table that shows the relationship
between the price of a good and the quantity supplied
THEORY AND APPLICATION EXAM
◉ Which of the following trade-offs does the production possibilities
frontier illustrate? Answer: A. If an economy wants to increase
equality, then it must sacrifice efficiency in production.
B. Once an economy has reached the efficient points on its
production possibilities frontier, the only way of getting more of one
good is to get less of the other.
C. For Economy A to consume more of one good, it must completely
give up consuming the other good.
D. For Economy A to produce and consume goods, it must sacrifice
equal distribution of income.
◉ When can two countries gain from trading two goods? Answer:
When one country can produce a product at a lower opportunity
cost than the other country, while the other country can produce a
different good at a lower opportunity cost than the first country.
◉ Economics is the study of: Answer: how society manages its
scarce resources.
◉ Budget Constraints Answer: limits to the amount of money that is
available to spend.
,◉ A budget constraint can be written as a Answer: line: Budget =
(Good1$ x QuantityOfGood1) + (Good2$ x QuantityOfGood2)
◉ Production Possibilities Frontier (PPF) Answer: A curve showing
the maximum attainable combinations of two products that may be
produced with available resources and current technology.
◉ The law of diminishing returns Answer: as additional increments
of resources are added to a certain purpose, the marginal benefit
from those additional increments will decline.
◉ Productive Efficiency Answer: means that there can by no more
goods made using the available resources and tools. This can be
shown on any point on the PPF curve.
◉ What are the 3 shifters of the PPC? Answer: 1. change in resource
quantity or quality
2. change in technology
3. change in trade
◉ Product market Answer: anywhere were goods and services are
sold
,◉ resource market Answer: a market in which resources of
production are sold from households to businesses.
◉ Transfer payments Answer: government payments to businesses
or households designed to meet a specific objective
◉ What are the 4 resources sold in the resource market? Answer:
land, labor, capital, and entrepreneurship
◉ What are the 4 kinds of income that households get from the
resource market? Answer: Rent, Wages, Interest, and profit
◉ Factor payments Answer: the income people receive in return for
supplying factors of production
◉ Physical capital Answer: the human-made objects used to create
other goods and services
◉ Human capital Answer: the knowledge and skills a worker gains
through education and experience
◉ Comparative advantage Answer: when one country can produce
more of a good for less than another country.
, ◉ When does a country gain from trade? Answer: When they can get
a resource for a lower opportunity cost than if they made it.
◉ Demand Answer: The need or want for a buyer to have a good and
having the ability to pay for it.
◉ Quantity demanded Answer: the amount of a good that buyers are
willing and able to purchase
◉ The law of demand Answer: consumers buy more of a good when
its price decreases and less when its price increases.
◉ Demand Schedule Answer: a table that shows the quantity
demanded at each price of a good.
◉ Demand Curve Answer: a graph that draws out the demand
schedule for a good.
◉ Supply Answer: The amount of goods a seller is willing and able to
sell and the price they are willing to sell it at.
◉ Supply Schedule Answer: a table that shows the relationship
between the price of a good and the quantity supplied
