WGU C719 Macroeconomics Exam Study Guide

The value of the best alternative that is sacrificed to obtain something you want is a/an - Opportunity cost Choice curve - What is a graph that shows the various combinations of choices an individual can make with the resources available? straight line curve - The assumption that all resources are alike will produce a alike - A curved production possibilities curve (PPC) changes the assumption that resources are the law of increasing opportunity costs - What explains how the production of larger amounts of one good leads to an increase in the sacrifice of the alternative good? human wants - An outward shift of the production possibilities curve (PPC) increases the economy's capacity to respond to ceteris paribus assumption "all else being equal." - What is the most important assumption in economic models? rational - Economists assume people are self-interested behavior - This behavior consists of people trying to get the most of something they want (to maximize some goal) out of available resources land, labor, capital and entrepreneurship - The four factors of production are capital resources - Plants, equipment, and machinery are examples of physical or human capital increases - Capital increases only when the activity of combining the other productive resources to produce goods and services, taking risks, and introducing new methods and new products (innovation.) - What is entrepreneurship? the reward for innovation, risk taking, and organization - What is profit? What to produce? How to produce? For whom to produce? - What are the three basic economic questions? 1. Traditional economy 2. Command (or planned) economy 3. Market economy - What are the three broad types of economies? answers the basic economic questions by tradition, or custom (Haiti banana farmers) - Traditional economy answers the basic economic questions through central command and control (Soviet Union, China, North Korea and Cuba) - Command (or planned) economy relies on incentives and the self-interested behavior of individuals to direct production and consumption through market exchanges (America) - Market economy a blend of tradition, command, and market economies (Most modern industrial countries have this) - Mixed economy Public Goods (Sunsets & Lighthouses) - A good that is nonrival in consumption and not subject to exclusion is called a(n) Public Bads (Pollution, Global Warming, Animal Extinction) - What are negative effects that have an impact on everyone to some degree? Excludables - Goods that nonpayers, or free riders, *CAN* be kept from consuming Positive Externalities (Public Education) - Spillover benefits to third parties are called Pollution. It's a negative externality because it has spillover costs to third parties. - What is an example of a negative externality? who will value them the most - The goal of an economy is for the goods and services to go to the people Market prices - Which of the following is the most successful method to allocate sweaters in Macroland? a pure public good - Getting a mandated vaccination that protects you, but also protects others, would be considered too many public bads and too few public goods. - In the absence of government intervention, there will be both Veterans' benefits. They are transfer payments because they are income and they are disbursed without work being done. - Which of the following is an example of a transfer payment? The redistribution function is financed at the federal level and implemented at the state and local levels. - In the United States, the redistributive function of the government is carried out mainly by Stabilization (The Government cutting taxes to end a recession) - What function of the government promotes price stability and full employment? A Circular Flow Model (describes a mixed economy) - What is a visual picture of the relationships between the resource market, in which income is earned, and the product market, in which income is used to purchase goods and services? Defining and Enforcing property rights - What is the most basic function of the government in a market economy? The existence of public bads The presence of external effects The existence of public goods (NOT the basic instability of the economy) - The following are justifications for the allocation function of the government Demand curve - The relationship between the quantity demanded at the price applied is the Quantity demanded - When price changes, there is an opposite change in what? People will buy less of it - All else being equal (ceteris paribus), as the price of a good or service increases, 1. the tastes of the group demanding the good or service 2. the size of the group demanding the good or service 3. the income and wealth of the group demanding the good or service 4. the prices of other goods and services 5. expectations about future prices or income - The nonprice determinants of demand are: Individual demand curves - The market demand curve is found by adding up the Normal good (meat, you might eat hamburger when you have less money, but you'll still eat steak if you earn a little more money) - What is a good for which demand increases as income increases, ceteris paribus? Inferior good (ramen noodles) - What is a good for which demand falls when income rises? Complementary goods (cereal and milk, lamps and light bulbs) - What are goods that are jointly consumed? Substitute goods (orange juice & apple juice, Coke & Pepsi, Reebok & Adidas) - What are goods that replace each other? decrease the demand of the other (if the price of cream cheese goes up, people will eat less bagels) - If two goods are complements, a rise in the price of one will increase the demand for the other (if the price of mountain dew goes up, people will buy mellow yellow to replace it) - If two goods are substitutes, a rise in the price of one will at lower prices - With all else held constant, suppliers usually will supply less of a good or service increase (because it's more profitable to produce and sell the good when you're charging more) - As prices rise, the quantity supplied will Market supply curve - What is the sum of all of the individual supply curves? price and quantity supplied - A supply curve has a positive relation between *quantity* supplied - When price changes, one should expect a change in price and quantity - The two variables on a supply curve are 1. the state of technology 2. the prices of the productive resources 3. the number of suppliers 4. expectations about the future, and 5. the prices of related goods - A change in one of the ceteris paribus conditions will cause the entire supply curve to shift. The most important of these are: A change in the price affects quantity supplied, not supply. - How does a change in quantity supplied differ from a change in supply? Supply shifts upward and to the left - With ceteris paribus conditions remaining constant, suppose the price of cement goes up in the United States. What happens in the market for new homes? Market forces will drive the price down (When the supply curve shifts to the right, the new equilibrium has greater quantity and lower prices) - What is most likely to happen if the supply of coffee shifts to the right, and the price has not yet changed to a new price? quantity supplied by producers (This equilibrium price is also called the market-clearing price) - Market equilibrium occurs at that price for which quantity demanded by consumers is equal to quantity supplied and the quantity demanded are equal - Equilibrium occurs at a price for which the 1. Quantity demanded is negatively related to price 2. Quantity supplied is positively related to price - The Theory of Price Formation is based on 2 propositions prices will rise - When the quantity demanded exceeds the quantity supplied, prices will fall - When the quantity demanded is less than the quantity supplied, price is at equilibrium - When the quantity demanded equals the quantity supplied, False (If there is a shortage of coffee in the market, the price will rise because the sellers will raise the price to make more profit since it's hard to get) - True or false. If there is a shortage of coffee in the market, the price of coffee will drop. False (If there is surplus of coffee in the market, the price will drop because the sellers will drop the price to get rid of their coffee because it's taking up space) - True or false. If there is a surplus of coffee in the market, the price of coffee will rise. False (Quantity supplied is more than quantity demanded, so the market is not in equilibrium) - True or false. If the quantity demanded for pizza is 100 and the quantity supplied is 120, and the pizza is sold at a fair price, the market for pizza is in equilibrium. The price will rise ( If there is more demand than supply of strawberries, this provides an incentive to the sellers to raise the price of strawberries. Thus, the price of strawberries will rise) - If the quantity demanded for strawberries is more than the quantity supplied, what will happen to the price of strawberries? different people may pay different prices for the same good or service - The existence of transactions costs means that answering the basic economic questions (The primary functions of prices are to inform, direct, and motivate consumers and firms) - Prices play a central role in a market system in allocating scarce resources and price - Ceteris paribus, as applied in demand theory, means holding constant all factors that affect demand except one price levels at a certain time period - Demand is the relationship between quantities demanded and quantity demanded and demand, when the whole set of price and quantity change - When price changes, there is an opposite change in increases and when the price of gasoline decreases - The demand curve for cars will shift upward when income increase their supplies, and consumers decrease their demands - With increased prices for cars, producers supplied, and there is a negative relationship between quantity demanded - There is a positive relationship between price and quantity a market-clearing price (equilibrium price) - When quantity supplied equals quantity demanded, there is False - True or false. When quantity supplied equals quantity demanded, there is an excess of quantity supplied fall, and the equilibrium quantity will increase - When the supply of a product increases, but the demand for the product remains unchanged, the equilibrium price of the product will Unit 3 - Unit 3 Full employment - This embodies the highest amount of skilled and unskilled labor that could be employed within an economy at any given time The help wanted index - This is an indicator of strength or weakness in the national labor markets. It provides information on how many positions need to be filled. True - True or false. When there is full employment, the number of job seekers is approximately equal to the number of job vacancies. False - True or false. Full employment means that everyone in the population is employed. Frictional unemployment (approx. 3-4% of the labor force) Frictional unemployment is chosen by the workers. Frictional unemployment would generally be classed as voluntary unemployment because workers are choosing to remain unemployed rather than get the first job that comes along. - Short-term unemployment is called Structural unemployment (available workers do not match the jobs in terms of skills or location) - A mismatch of workers and jobs is commonly known as Cyclical unemployment (an auto worker being laid off during a recession) - This occurs during periods of slow economic growth or during periods of economic contraction unemployment period - A period of 18 months of job searching is considered an True - True or false. Each period of unemployment is a lost opportunity to develop skills and experience that may make a worker more valuable to an employer. True If a business wants to expand, but there are no workers available to hire, the only way the expanding business can get a new employee is to "steal" the employee away from the existing employer, which can be done by offering higher pay or benefits. - True or false. Unemployment allows for growth in the economy. False The system of income distribution in a market economy is very dependent on employment. If people do not have jobs, they do not earn income. - True or false. The system of income distribution in a market economy is not dependent on employment. Inflation Workers who take higher-paying jobs have more money, but more goods and services aren't being produced, which leads to inflation. - The policy of stealing employees away from jobs by offering them higher salaries doesn't lead to more production for the economy. Instead, this policy just rearranges what is produced and leads to False One way of defining full employment is to identify some level of unemployment as normal (acceptable or desirable) and only be concerned about unemployment in excess of that amount. - True or false. Full employment means that everyone in the population is employed or even that 100% of those who are able are willing to take a job. True Full employment does not mean that everyone in the population is employed or even that 100% of those who are able are willing to take a job. - True or false. By definition, an economy is at full employment when 93%-94% of those who want to work are employed. True By this definition, an economy is at full employment when 93%-94% of those who want to work are employed. - True or false. A situation in which all available labor resources are being used in the most economically efficient way is full employment. False Besides actively looking for a job, a person must also not currently have a job. - True or false. The unemployment rate is defined as the percentage of the labor force that is actively looking for a job. 7.64% Unemployment rate = (unemployed worker/labor force/)*100 = {11,844 ÷ (143,060 + 11,844)}*100 = 7.64%. - In a certain year, 143,060 of a country's residents were employed and 11,844 were unemployed. Under the formal definition for being unemployed, what is the unemployment rate for that year? 8750 Unemployment rate = (unemployed worker/labor force/)*100. This means, 3.5 = (unemployed worker/250000)*100 = 8750 - If the unemployment rate is 3.5% and the labor force is 25,0000, what is the number of unemployed workers? unemployment rate=Unemployed workersLabor force×100 - What is the formula to calculate the unemployment rate? those who are working and those who are actively seeking work. - The labor force consists of discouraged workers (not calculated in labor force #'s) - People who have looked for work in the past 6 months, but NOT in the past 4 weeks, are called False The presence of discouraged workers may cause the unemployment rate to be understated. This is because discouraged workers are those who were seeking employment, but have given up and stopped looking, so they are not included in unemployment calculations. - True or false. The presence of discouraged workers may cause the unemployment rate to be overstated. Part-time workers who are working fewer hours than they would like and discouraged workers - Which types of workers might cause unemployment to be understated? Unreported legal workers and reported illegal workers (These problems result from the inability of the BLS (Bureau of Labor Statistics) to verify the truthfulness of the information provided by respondents.) - Two types of workers that cause unemployment to be overstated are The labor force participation rate measures the fraction of the adult population that is employed or actively seeking work. The labor force participation formula is Labor Force/Working age population X100 - What is the labor force participation rate? True When their wives work more men have the option of leaving the workforce and still having their families provided for - True or false. As women entered the labor force, male participation declined partially due to the increased safety net for married men. True When people leave the labor force, they still consume goods and services, and it is up to the remaining workers to create these goods and services - True or false. A declining labor force participation rate means fewer workers are supporting an increasing number of non-workers. False Total labor supply *does* affect the unemployment rate over longer periods - True or false. Total labor supply does not affect the unemployment rate over longer periods. 71.43% Labor force participation rate = (labor force/working age population) * 100 = (250000/350000) * 100 = 71.43% - If the labor force is 250,000 and the working-age population is 350,000, what is the labor force participation rate? labor force participation rate The labor force participation rate measures the fraction of the adult population that is employed or actively seeking work - An indicator that is helpful in sorting out the relative importance of changes in total demand for labor and total labor supply is the The current CPI is a measure of the average of the prices paid by consumers for a fixed market basket of consumer goods and services. The market basket is based on the consumption of the typical urban family of four. - What is the consumer price index (CPI)? People's taste and consumption habits change with the introduction of new goods or trends or changes in prices and the basket should be revised more often - What is one of the criticisms of the CPI? it fails to consider the effects of new products in the marketplace The CPI does not adjust the basket when new products are introduced that will shift consumption from one good to another - The CPI tends to overstate the true inflation rate because change in the price index. The percentage change in the CPI from one year to the next is the inflation rate. - The measure of inflation is the spend or borrow money - Deflation is bad for the economy because when people start anticipating falling prices, they are less willing to increases the real value of money - Falling prices worsens the position of debtors because it it causes an unintended and often undesirable redistribution of income and wealth - One reason why governments try to restrain inflation is because unanticipated - Redistribution is more likely to occur when inflation is the average of all prices is declining - Deflation is the situation in which People who hold real assets and the government. When inflation increases, the value of real assets increases, making it more profitable to hold them. The government also is a winner because tax revenue increases. - Who is most likely to be a winner during times of inflation? Creditors When inflation decreases, the value of the dollar increases, making the loan more profitable. - An unexpected reduction in inflation would tend to benefit which of the following? losses for creditors and gains for debtors. When inflation is unanticipated interest rates are not adjusted for inflation and loans have lower interest rates. - Unanticipated positive inflation will create inflation rises the same as the forecast expected, then inflation is fully anticipated. - Fully anticipated inflation occurs when inflation is often unanticipated, and therefore comes as a surprise to individuals in the economy - Most of the problems caused by inflation are caused by the fact that the inflation is unanticipated - For most people, the problems of inflation are caused by the fact that the GDP (real output) declines for two successive quarters - The United State is in a recession if contraction. This means that the economic activity has slowed down. - A war in the Middle East that affects the U.S. stable economy could cause a inflation - During the Great Recession (2007 to 2009), the United States experienced increasing unemployment and a low rate of major macroeconomic variables to move together in a predictable way In theory, major macroeconomic variables move together in a predictable way - Over time, there is a tendency for fluctuations in aggregate measures of economic output or income. - Economists use the phrase "business cycle" when discussing increase, the price level will increase, and the unemployment rate will decrease. During an expansionary phase, price level and real income will increase while unemployment will decrease. - During the expansionary phase of the business cycle, it is likely that real income will peaks and troughs - The turning points of the business cycle are called Peak, recession, trough, expansion - In sequence, what are the four phases of the business cycle? The Great Depression () - The longest contractionary period in the U.S. was 10.8% (occurred in October 1982) - Since WWII the highest unemployment rate during a downturn was employment and inflation - What are the two major characteristics that governments look at when determining the health of their economies? Very large, if many foreign citizens are employed within a country Output produced by foreign citizens working within a country is counted in GDP, but is not counted in GNP - The difference between GDP and GNP is likely to be what? Cars produced at a Japanese-owned factory located in Detroit GDP includes the value of output produced by a foreign-owned plant located within the U.S - Which would be counted in GDP, but not in GNP? True (we stopped using GNP in 1991) - True or false. In the United States, gross domestic produce (GDP) is currently the most widely used measure of total output. $90,000 GDP includes the value of the final good, which includes the value added at each stage of production, or $20,000 + $30,000 + $40,000. - Dannon purchased plastic containers for $20,000 and fruit for $30,000, and then added $40,000 in value by producing individual yogurts. Based on this data, Dannon's activities caused GDP to increase by how much? False Most output is from the business sector, the government produces roughly 20% of GDP in the United States - True or false. Most U.S. output is produced by the government sector, including federal, state, and local government entities. consumer durables, nondurables, and services - Consumption expenditures are divided into False Consumption expenditure includes expenditures on consumer durables, nondurables, and services - True or false. Consumption expenditure refers to spending on goods, but not services. fixed investment (plants and equipment), residential construction, and changes in inventory Investment occurs when someone starts a new business or grows an existing business. Investment activities include building factories or stores, purchasing equipment, and adding inventory. Residential construction is also counted as an investment. - Gross private domestic expenditures include False Investment expenditure refers to the purchase of plant and equipment, residential construction, and changes in inventory. - True or false. If John uses his savings to purchase stock in Coca-Cola, he is making an investment expenditure as defined in the national income accounts. True Transfer payments are income payments to individuals who provide no goods or services in exchange, such as Social Security or welfare - True or false. The value of government expenditure included in GDP is smaller than the true amount spent by government, because it does not include transfer payments. True The calculation for GDP adds exports and subtracts imports; these two operations are often combined and the difference between them (net exports) is reported - True or false. When net exports are negative, imports exceed exports households, business, firms, the government, or foreign entities The sum of spending by the four buying sectors is GDP - Everything that is produced in a year must be purchased by GDP= C + I + G + (X - M) - Which is the correct formula for GDP? False GDP=C+I+G+(X-M), so GDP falls if the last term is negative - True or false. A negative value for net exports causes GDP to increase True National income consists of wages, rent, interest, profit, and proprietors' net income; business owners deduct wages and other expenses from revenue and the amount that is left becomes profit or income to the proprietor (owner) of the business - True or false. In the process of producing GDP, income is generated NNP (net domestic product) GNP includes gross private domestic investment, but NNP includes net private domestic investment. The difference between gross and net private domestic investment is depreciation, or the value of capital that has been used up, worn out, or become obsolete - GNP minus depreciation is NI (national income) Several adjustments have been made to convert GDP to NI and measure only income payments to resources - The income earned by resources is called GDP (gross domestic product) GDP is output produced on U.S. soil and includes production by foreign-owned businesses and foreign workers - The total market value of all final products produced within a country during a given time period is all final products produced by a nation's citizens during a given time period GNP is output produced by U.S. resources, whether production happens in the United States or in a foreign country - GNP (gross national product) is the total market value of Depreciation of capital equipment Correct. Depreciation is the difference between GNP and NNP - Which is not one of the major differences between NI (national income) and PI (personal income)? False Disposable income is the income the household sector has left after taxes. DI can be spent on consumption or saved - True or false. Disposable income is the income households earned before income taxes are deducted False PI is the amount of income households receive and NI is the amount of income households earn - True or false. The amount of income households receive is equal to the amount of income households earn the purchase of imported goods, like wine from countries like Italy, France, or Spain Leakages occur when income is received, but not spent directly on purchases from domestic firms - An example of a leakage from the income stream is investment spending by business firms Injections are additions to the circular flow that represent spending not paid for out of resource income - An example of an injection into the income stream is True Think of a bathtub; if a lot of water is being drained, but only a little is being added, the water level falls - True or false. If leakages are greater than injections, the size of the income flow will shrink borrow funds in the credit market to cover the deficit - When government spends more than the revenue it takes in, it must True Government taxes and borrowing are leakages from the income flow - True or false. Government takes funds out of the stream by taxing households and by borrowing in the credit market imports Purchases of imports are flows out of the stream (leakages) - Purchases from foreign firms are exports Exports are injections into the income stream - Goods and services sold to foreign buyers are A baker purchasing flour to use an an ingredient for cookies to be sold to the baker's customers The value of the final product (cookies) includes the value of intermediate products like flour (nothing illegal or "under the table") - Which of the following activities is counted as part of GDP? True If Emily pays a childcare provider, this is considered a market transaction and is counted in GDP. If Emily cares for her son herself, this is a non-market transaction and is not counted in GDP - True or false. If Emily puts her son into the local daycare, GDP increases. If she stays home and cares for her son, GDP does not increase It probably does not make a big difference in year-to-year comparisons within a country Changes from one year to the next are not likely to be significant - Which of the follow accurately describes the types of production not included in GDP and how the non-included production affects GDP and the economy True If an accountant trades services with a dentist, production has increased for both of these individuals, yet this would not be reflected in GDP because GDP excludes barter transactions - True or false. The omission of barter, or "under-the-table," transactions understates GDP GDP may be overstating the increase in well-being Although there is more output, the reduction in leisure time causes the quality of life to fall - If rising GDP comes at the expense of leisure time, False Unless a specific feature can be separated out and assigned a price tag, GDP accountants have no good way of correcting for quality improvements - True or false. If the price of a washing machine increases because of an improvement in durability, GDP should not reflect this change An outbreak of the SARS virus leading to large increase in the production of health care products to prevent SARS The production of preventive health care products would increase GDP. Citizens would be better off if there was no virus and the resources used to produce these healthcare products could be used to produce something else - What is an example of a non-economic condition that would increase GDP but not the standard of living? True - True or false. Although GDP is used as a proxy for living standards or economic well-being, there are reasons why GDP is not a perfect proxy It will lead to a higher living standards Even if the reduced crime rate had no effect on GDP, people prefer living safely - Macroland's crime rate has dropped significantly and is expected to stay low for the foreseeable future. What effect will this have on the economy? True In the short run, destruction can increase GDP because of the rebuilding that occurs. In the long run, it does not create economic growth because of the broken window fallacy, which you learned about in module 1 - True or false. A hurricane that destroys businesses can have a positive effect on GDP decrease Fewer fruits and vegetables are produced, which decreases GDP. This increases the price, leading households to buy less and puts farm workers out of work. Both effects decrease the standard of living - EPA regulations that prevent irrigation of farms in order to protect the smelt fish cause the GDP and standard of living to True Non-economic conditions in the country can have both negative and positive effects on GDP - True or false. Non-Economic conditions can affect the economy both positively and negatively more important in developed countries than in less developed countries In developed countries, families are more likely to purchase services like cleaning, child care, and repairs - Market transactions are it is likely that living standards are improving more in country A, but this may not be the case It is possible that living standards are improving more in country B, yet GDP is not reflecting this because of omitted transactions, changes in leisure, or inaccurate data - If GDP is growing at a faster rate in country A than in country B, False Each country develops its own methods for computing national statistics, although the methods are very similar - True or false. GDP and price indexes are computed the same way in all countries Total spending has doubled, but part of this increase reflects higher prices Increases in GDP reflect both higher output and higher prices - In the United States, GDP is about twice as large now as it was 20 years ago. What does this indicate? True Many changes have occurred over the past 20 years, such as the introduction of new products. These changes are not always reflected in GDP estimates - True or false. Comparing current GDP with last year's GDP provides more accuracy than comparing current GDP with GDP 20 years ago False There are many reasons why GDP growth may not exactly coincide with individual well-being, including income distribution and economic bads - True or false. If China's economy is growing at a faster rate than Canada's economy, people living in China are better off than people living in Canada has not been adjusted for inflation - Real GDP has been adjusted for inflation and nominal GDP This is calculated as follows: (real GDP for year 2 − real GDP for year 1) divided by (real GDP for the year 1) 100 = 2.8% - In the first year, the real GDP for a population of 200 people is $50,000 and in the second year, the real GDP for a population of 202 people is $51400. The growth rate of the real GDP from year 1 to year 2 is changes in the price level Nominal GDP is adjusted for changes in the price level to arrive at real GDP - Real GDP is a measure of the value of economic output adjusted for True When real GDP is calculated, the increase in the price level is removed - True or false. A higher price level causes an increase in nominal GDP, but not an increase in real GDP Real GDP per capita for the year for a population of 50,000 and the real GDP of 5,000,000 is 100. Real GDP/capita = Real GDP/Population = 5,000,000/50,000 = 100 - Real GDP per capita for the year for a population of 50,000 and the real GDP of 5,000,000 is changes in nominal GDP reflect changes in both output and product prices Nominal GDP is adjusted for changes in the price level to arrive at real GDP - Real GDP is a more accurate measure of output than nominal GDP because False Technological change increases productivity and is associated with economic growth - True or false. Economic growth is not associated with technological changes the credit market The credit market is the broad market for companies looking to raise funds through debt issuance. The credit market encompasses both investment-grade bonds and junk bonds, as well as short-term commercial paper. Economic growth cannot be measured by the credit market - Economic growth can not be measured by True Aggregate income is the component of GDP, which is the measure of a country's economic growth - True or false. Aggregate income could be measured to calculate economic growth about 3.3% The overall (compounded) rate of growth from 1950 to 2011 has been about 3.3% per year - For the United States, the average rate of growth from 1950 to 2011 has been Depreciation - What is the decrease in the capital stock that results from wear and tear and obsolescence? Higher income This enables consumers to enjoy more goods and services, as well as better standards of living - Which of the following are benefits of economic growth? Lower government borrowing Economic growth creates higher tax revenues and there is less need to spend money on benefits, such as unemployment - What is one benefit of economic growth? A deficit on the current account Increased economic growth tends to cause an increase in spending on imports, causing a deficit on the current account - What is one of the costs of economic growth? True With higher output firms tend to employ more workers creating more employment - True or false. Lower unemployment is a benefit of economic growth False Increased economic growth will lead to increased output and, therefore, increased pollution and congestion. This will cause health problems such as asthma, reducing the quality of life - True or false. Environmental cost is a benefit of economic growth **Aggregate Demand** - **Aggregate Demand** a negative slope - Economists generally believe that the aggregate demand curve has False A market demand curve relates to a particular good or service, while aggregate demand relates to all goods and services combined - True or false. A market demand curve is the same as an aggregate demand curve A family's purchase of a durable good, such as a new refrigerator Consumption expenditure includes spending on consumer durables as well as services and nondurables - Which of the following is an example of consumption expenditure, which is one of the components of aggregate demand (AD)? True Money that is spent on maintaining a household is considered a consumer's expenditure. Examples could include food, gas, and clothing - True or false. A family spending on electricity is a consumer's expenditure Price level The aggregate demand curve represents the total quantity of all goods and services demanded by the economy at different price levels - The vertical axis of the aggregate demand curve represents the aggregate demand The aggregate demand curve is the total planned expenditures in an economy - The total of all planned expenditures in the entire economy is lower exports Higher domestic prices mean that a country's exports become more expensive to foreigners, so the quantity demanded falls - Aggregate demand is downward-sloping because a higher price level leads to True The aggregate demand curve, like the demand curves for individual goods, is downward sloping - True or false. There is an inverse relationship between the price level and the quantity demanded of real GDP Declines If the prices increase, purchasing power is reduced - As the price level rises, the purchasing power of financial assets owned by households True As the domestic price level rises, foreign‐made goods become relatively cheaper, so that the demand for imports increases - True or false. As the domestic price level rises, the demand for imports increases higher interest rates Borrowing usually falls when interest rates go up, so the quantity demanded is reduced - Higher price levels are associated with True When the price level increases the economy will move up and to the left on the aggregate demand curve - True or false. If the price level increases net exports, assets, government spending and household wealth all decrease **Aggregate Supply** - **Aggregate Supply** aggregate supply - The total amount of goods and services that firms are willing to sell at a given price level during a specific time period in an economy is called the aggregate supply curve - the relationship between the quantity of total real output supplied and the price level when all other factors influencing production plans are held constant is called the input prices remain constant As the price of good X rises, sellers' per unit costs of providing good X do not change - The supply curve for an individual good is drawn under the assumption that Government spending Government spending is a part of aggregate demand - Which of the following is not a component of aggregate supply? True Aggregate supply represents the ability of an economy to deliver goods and services to meet demand - True or false. Aggregate supply is defined as the total amount of goods and services (real output) produced and supplied by an economy's firms over a period of time True Traded goods are the components of aggregate supply - True or false. Goods and services for export, such as chemicals, entertainment, and financial services, are also a key component of aggregate supply - True or false. Many private firms, such as those in construction, IT, and pharmaceuticals, rely on contracts to supply to the public sector is positive At higher price levels across the economy, firms expect that they can sell their final products at higher prices - The relationship between price level and aggregate supply True When costs go up as firms attempt to increase output, the aggregate supply (AS) curve is upward-sloping - True or false. The slope of the aggregate supply curve depends on how costs change when firms change the level of production or quantity of output supplied False Firms decide how much to produce by comparing their selling prices with their costs of production, and production costs depend, among other things, on input prices - True or false. Firms often do not purchase inputs at prices that stay fixed for considerable periods of time True If the wage of a labor remains the same, the improvement in technology will decrease business costs and improve profitability because the output per hour of work is increased - True or false. If wages do not change, improvements in productivity stemming from improved technology will decrease business costs, improve profitability, and encourage more production Businesses purchasing more raw materials may be given volume discounts Volume discounts result in a lower cost of materials, so this does not help explain why costs increase with output - Generally, when firms increase output using existing resources, higher costs lead to higher prices, resulting in an upward-sloping supply curve. Which explanation does not help to explain why costs tend to increase with output? 1. If firms are using machines and tools more, they wear out faster and break down more often 2. When more entrepreneurs are trying to start or expand businesses, there is greater competition for loans, so interest rates rise 3.In order to raise production with given resources, some labor has to work overtime at higher pay - Give some reasons why costs tend to increase with output? vertical A fixed real output level and a variable price level imply a vertical aggregate supply curve - If changes in the price level have no effect on real output, aggregate supply is Classical region - The composite aggregate supply is vertical in the Keynesian region - The composite aggregate supply is horizontal in the between the Classical & Keynesian regions - The composite aggregate supply is upward-sloping in The government increases personal income taxes When the government increases personal income taxes, consumers' spending plans will decrease as they have less disposable income - Which of the following would cause aggregate demand to decrease? True Net exports are one of the components of aggregate demand. If they decrease, aggregate demand will shift left - True or false. A decrease in net export spending caused by an appreciation of the U.S. dollar would cause the aggregate demand curve to shift to the left influences spending plans When consumers change their spending plans, aggregate demand will shift - An event that causes the aggregate demand curve to shift inward or outward is one that increases total planned real spending An increase in aggregate demand means the curve has shifted to the right - An aggregate demand curve shifts to the right when any non-price-level factor True A change in the price level does not cause a shift of the aggregate supply curve - True or false. A change in the price level will not shift the aggregate supply curve Decreased input prices A decrease in input prices makes it cheaper to produce goods and increases aggregate supply - Which of the following will cause an increase in aggregate supply? A decrease in labor supply If there is less input of production, aggregate supply will decrease - Which of the following decreases aggregate supply? any non-price-level factor decreases the total cost of production - An aggregate supply curve shifts to the left when aggregate supply curve is horizontal Graphically, if aggregate supply is horizontal, shifts in aggregate demand can only affect the output level - If aggregate demand and nominal GDP increase while the price level is constant, one would conclude that the True An increase in taxes causes a decrease in aggregate demand. The new equilibrium will show a fall in output and increase in the price level - True or false. If taxes increase and the aggregate supply curve is upward sloping, then output falls and the price level increases "P" rises (When the aggregate demand shifts to the right, the new equilibrium will be at a higher price level) and "Y" rises (When the aggregate demand shifts to the right, the new equilibrium will be at a higher real output) - If aggregate demand increases and the aggregate supply curve is upward sloping and unchanged, recession - One possible result of a fall in aggregate demand coupled with a stable short-run aggregate supply is a(n) The price level falls, but the effect on real output cannot be determined If both curves shift in opposite directions, in general, we cannot determine the real output without knowing the extent of the shifts - If the aggregate supply curve shifts to the right and the aggregate demand curve shifts to the left, what happens to the price level and real output? False Since the aggregate supply curve is horizontal, there will be no impact on the price level that remains constant - True or false. A shift of the aggregate demand curve to the right will have the greatest impact on the price level if the aggregate supply curve is horizontal True By extending the equilibrium line from the AD/AS graph to the production function graph, you can identify the level of employment - True or false. The aggregate supply and demand curves, taken together, determine the price level and the level of real output. Adding an aggregate production function also indicates the level of employment Production function A production functions shows how much a firm can produce with the inputs available - The relationship between the inputs employed by a firm and the maximum output that it can produce with those inputs is the firmʹs True The aggregate production function shows the relationship between the total real output and the inputs available - True or false. The aggregate production function shows how much total real output can be produced by various amounts of labor, given the amount of capital and available technology True Capital and technology are the ceteris paribus factors that will cause a shift of the production function when they change - True or false. An increase in capital or an improvement in technology will shift the aggregate production function positive and decreasing Every additional worker will produce less output than the previous one with the resources avail - The relationship between the number of workers and output, with a fixed amount of capital, is aggregate production function The relationship between real output and labor is represented by the aggregate production function - The amount of real output that can be produced by various amounts of labor can be represented by a(n) fall When aggregate supply shifts to the right, real output will increase, but the price level will decrease - If an attempt is made to use aggregate supply to increase output, prices should True By extending the AD/AS equilibrium to the production function, you can determine the level of employment and unemployment at every level of real output - True or false. Aggregate supply and demand combined with the aggregate production function determine not only the price level and real output, but also the level of employment and, by extension, the level of unemployment Prices and wages are flexible According to Classical economists, both prices and wages are flexible - What did Classical economists assume? enough to purchase all the goods and services produced According to Classical economists, production is the source of demand - According to the Classical model, the income generated by production is all wages and prices are flexible Classical economists assume that prices and wages are flexible - The Classical model uses the assumption that intersect at the point of full employment Classical economists assume that AD/AS intersect at full employment - In the Classical model, aggregate demand and aggregate supply will True The intersection of aggregate demand and aggregate supply determines the equilibrium values for price level and real output - True or false. Equilibrium values of the price level, and real output is determined by the intersection of aggregate supply and aggregate demand horizontal Keynes assumed that aggregate supply was horizontal in the short run, or at least very flat in the short run Keynes assumed that AS is horizontal only on the short run because prices are "sticky" - Keynes challenged the classical school during the Great Depression. He suggested that the aggregate supply curve could be spend (According to Keynes, through spending and taxing the government can affect the aggregate demand curve) and tax people in order to shift aggregate demand to the right, increasing output and employment. (According to Keynes, the government should increase aggregate demand to increase output and employment) - According to Keynes, the government should use its power to prices are sticky Keynes assumed that prices were sticky - A key component of the Keynesian model is that horizontal For Keynes, SRAS is horizontal in the short run - The Keynesian short-run aggregate supply (SRAS) curve is prices to fall, according to classical economists, and unemployment to increase, according to Keynes For Classical economists, the SRAS is upward sloping and a decrease in aggregate demand will cause a fall in prices. For Keynes, a decrease in aggregate demand will only cause an increase in unemployment, since SRAS is assumed to be horizontal and the shift will have no impact on prices - A decrease in aggregate demand will cause True Classical economists assumed that the market is self-regulating and that no government intervention is necessary - True or false. The Classical theory claims that most government economic policies are ineffective, ill timed, or downright harmful, and that the market system works best in macroeconomics, as well as microeconomics, when left alone employment Classical economists assumed that the economy always tended back to a full employment equilibrium - Classical economists thought that the economy tended naturally toward full vertical Classical economists assumed that the aggregate supply curve is vertical because prices will adjust so that output is always at full employment - The Classical aggregate supply curve was self-regulate Classical economists believed that the market self-regulated and tended back to full employment - The Classical school advocated a laissez-faire approach. That means no government intervention, as the market will True Keynes advocated government intervention to bring the economy back to equilibrium by shifting aggregate demand while Classical theorists believed the market selfregulated - True or false. Keynes challenged the classical school during the Great Depression. He advocated government intervention in the form of fiscal policy to shift aggregate demand A decrease in taxes A decrease in taxes generally does not cause a leftward shift of the aggregate demand curve - Which of the following will not cause a leftward shift in the aggregate demand curve? downward sloping - The aggregate demand curve is has various shapes, based on the differing economic theories - The aggregate supply curve Unit 4: Economic Theory and Fiscal Policy - Unit 4: Economic Theory and Fiscal Policy long-run view of the economy and believes that the economy will self heal if given time. It also believes that supply is the driving force of the economy. - Classical theory takes a short-run view of the economy and does not argue that the economy will self-heal. Keynesian theory views aggregate supply as horizontal so it does not worry a great deal about changes in the price level or inflation. It also believes that demand is the driving force of the economy. - Keynesian theory takes a government spending or tax policy passed specifically to affect the economy when it is not at full-employment equilibrium. Fiscal policy is influenced by both Classical and Keynesian economic theory - Fiscal policy is 1. Deficit spending 2. Debt by the government - What are major issues in both political and economic discussions? the government was a drastically smaller part of the economy than it is today and therefore had much less impact on it. This smaller size influenced his theory - Keynes developed his theory at a time when