11 - Macroeconomics Flashcards
This deck helps interpret key economic measures (GDP, unemployment, inflation) to address economic issues. It explores money, financial institutions, personal finance, socioeconomic inequalities, and the effects of trade, interdependence, and specialization on the U.S. economy.
1
Q
Explain:
choice and scarcity
A
- Economics is based on the choices that consumers and producers make with regards to resources that are finite. These affect the supply of resources and the demand for those resources.
- Scarcity means that there is not enough supply of a resource at zero price to meet an unlimited demand from consumers.
2
Q
Explain:
How does the concept of opportunity cost influence decision-making in both individual and business contexts?
A
- Influences decision-making by requiring individuals and businesses to consider the value of the next best alternative that is sacrificed when making a choice.
- Neglecting opportunity costs can lead to suboptimal decisions, resulting in missed opportunities and potential long-term inefficiencies.
3
Q
Explain:
What is the production possibility curve and what causes it to shift outwards?
A
- Describes how resources can be more efficiently utilized to produce two products. Production along the curve is the most efficient production.
- An increase in the resources needed will cause the production possibilities curve to shift outward.
4
Q
Explain:
production possibility frontier graph
A
- Represents production combinations where resources are fully utilized.
- Shows the production possibilities of an economy and indicates productive efficiency when points are on the curve.
The PPF illustrates scarcity and opportunity costs. Points inside the curve show underutilized resources. The curve can shift due to changes in resource availability, such as capital, labor, and technology, or advancements in these areas. Using the PPF helps businesses and economies allocate resources effectively.
5
Q
Explain:
demand schedule
A
- Table that shows the quantity of a good or service that consumers are willing and able to purchase at various prices over a certain period of time.
- Provides a clear representation of the relationship between price and quantity demanded, holding other factors constant (ceteris paribus).
As price decreases, the quantity demanded generally increases, illustrating the law of demand, which states that, all else being equal, there is an inverse relationship between price and quantity demanded.
6
Q
Explain:
Similarity between a supply schedule and a market supply schedule.
A
- Supply schedule: shows the quantity supplied by a company at each price level. Typically, as price increases, the company will supply more goods. It can be used to graph the supply curve for the company.
- Market supply schedule: shows the quantity supplied at each price level for the entire market of a particular good. It works similarly to a supply schedule for a company in that there are typically more goods supplied as price increases. The market supply schedule can be used to produce a market supply curve.
7
Q
Describe:
Downward sloping on a demand curve.
A
As price decreases, demand will increase.
Quantity is on the x-axis and price is on the y-axis, creating a downward sloping demand curve.
8
Q
Identify:
3 reasons a demand curve is downward sloping.
A
- Income effect
- Substitution effect
- Diminishing marginal utility
Income effect - illustrates the impact of purchasing power on the demand curve.
Substitution effect - illustrates the impact of cheaper alternatives on the demand curve for a particular product.
Diminishing marginal utility - illustrates that as more of a product is consumed, its value decreases.
9
Q
Describe:
supply curve and shifters
A
- Shows the relationship between the price of a product and the quantity a company is willing to produce at that price.
- Typically upward-sloping because higher prices incentivize increased production.
- The shifters that can cause the slope to bend or flatten are:
- Increase in the price of inputs
- Technological advancements
- More competition
- Better alternatives
- Natural disasters
- Producer expectations
10
Q
Define:
market equilibrium
A
Price at which the quantity demanded equals the quantity supplied.
When the demand and supply curves intersect, market equilibrium is achieved. A surplus exists when the quantity supplied exceeds the quantity demanded, creating downward pressure on prices. A shortage exists when the quantity demanded exceeds the quantity supplied, creating upward pressure on prices.
11
Q
Explain:
supply and demand
A
- When demand decreases, supply will also decrease due to the lack of demand it is to support. The price of a product will also drop due to the decline in value.
- When demand increases, the price will rise as the good/service in question becomes more valuable. Quantity naturally also increases as it captures the rise in demand.
- When supply is high and demand is satisfied, demand tends to decrease. If consumers find little utility in a product, their demand for it naturally decreases.
12
Q
Explain:
consumer price index
A
- Measurement of a basket of consumer goods and services from different sectors of the market and their average price over a period of time.
- Used to measure inflation because it examines goods and services from different sectors of the country.
13
Q
IdentifY:
Aspects included in consumer price index.
A
- Food
- Housing
- Transportation
- Clothing
- Medical care
- Recreation
- Other goods
14
Q
Explain:
Difference between GDP and CPI.
A
- GDP is the total monetary value of all goods and services produced within a country’s borders in a specific period, usually a year or a quarter. It is a broad measure of a nation’s overall economic activity.
- CPI measures the average change over time in the prices paid by urban consumers for a basket of goods and services. It is an indicator of inflation and the cost of living.
15
Q
Explain:
GDP deflator and CPI.
A
- The GDP deflator is calculated by dividing the nominal GDP by the real GDP.
- CPI is calculated by getting the revenue of a fixed basket of goods for two time periods (the base year) and computing the percentage change.
16
Q
Explain:
Difference between nominal and real GDP.
A
- Nominal GDP is the overall value of goods and services produced in a nation.
- Real GDP is the same value but adjusted for inflation over the reporting period.
- Nominal GDP is calculated by adding the major sectors of the economy: consumer spending, government spending, investments, and net exports. Real GDP adjusts this sum for inflation over the reporting period.
17
Q
Describe:
multiplier effect
A
- Refers to the phenomenon where an initial injection of spending into the economy leads to a greater overall increase in national income and output than the original amount spent.
- Central to Keynesian economics and helps explain how changes in spending can have a magnified impact on economic activity.
18
Q
Explain:
cost push inflation
A
- Process by which goods and services become more expensive because the cost to produce them becomes more expensive.
- This type of inflation lies on the supply side of the economy.
- It occurs as a result of increased input costs.
When the cost of capital such as labor and raw materials rise, the producer has to compensate for it by raising their price.
19
Q
Explain:
How does persistent inflation impact long-term economic growth and income inequality in a developed economy?
A
- Persistent inflation can erode purchasing power, leading to slower economic growth as consumers and businesses face higher costs.
- Can also exacerbate income inequality, as lower-income households are disproportionately affected by rising prices, while wealthier individuals may benefit from inflation-protected assets.
20
Q
Define:
equation of exchange
A
This shows how money supply, the velocity of money, and price level relate to each other.
It is written as MV = PY, where
M stands for the money supply,
V stands for velocity of money,
P stands for the average price level in the economy, and
Y stands for the real GDP of the economy.
21
Q
Explain:
How do you calculate the unemployment rate?
A
Calculated by dividing the number of unemployed individuals by the sum of employed and unemployed individuals, then multiplying by 100%.
22
Q
Identify:
3 types of unemployment
A
- Frictional
- Cyclical
- Structural
Frictional: It is caused by individuals being fired, laid off, or seeking alternative employment in the marketplace. It could also be the time between leaving an old job and starting a new one.
Cyclical: It is caused by the current state of an economy at any given time. For example, if the economy is doing well, cyclical unemployment will be low and vice versa.
Structural: It is caused by changes in the overall structure or dynamics of the economy, such as demographic shifts, technological advancements, or changes in the organizations of industries.
23
Q
Explain:
How are price levels, GDP, and real output related?
A
- Price levels reflect the average prices of goods and services in an economy. When price levels rise, it can affect the purchasing power of money, influencing overall economic activity.
- GDP measures the total value of goods and services produced in an economy. It can be measured in nominal terms, which includes current price levels, or in real terms, which adjusts for changes in price levels (inflation or deflation) to reflect true economic output.
- Real output (or real GDP) represents the actual quantity of goods and services produced, adjusted for changes in price levels. It provides a clearer view of economic growth by isolating the effects of inflation or deflation from GDP.
24
Q
Explain:
business cycle
A
- It describes the changes in the economy in regular patterns. The patterns are generally classified into the growth and decline of the economy.
- The business cycle occurs in four phases:
1. expansion
2. recession/contraction
3. peak
4. trough
25
# Define:
recession
A period of economic contraction lasting for two to four quarters, or one half to a full year, following a peak business cycle.
26
# Explain:
Importance of **Phillips Curve**.
Shows an inverse relationship between **unemployment** and **inflation**, where an increase in one typically correlates with a decrease in the other.
## Footnote
The curve shifts to account for expectations of future inflation. This relationship holds in the short-term, but in the long-run, unemployment does not predict the level of inflation.
27
# Define:
financial asset
Any asset a company or individual has that is not physical and has a **value based on a contractual agreement**.
## Footnote
Types:
1. **Cash** - is liquid and is usually found in electronic form.
2. **Stocks** - are part ownership in a company.
3. **Bonds** - are a large agreed upon sum of money lent as an IOU.
28
# Explain:
time value of money
Reflects the principle that **money today is worth more** **than the same amount in the future** due to its potential earning capacity.
29
# Identify:
3 different **value perspectives** in the time value of money.
1. Future value
2. Present value
3. Net present value
## Footnote
**Future value** (FV) is the result of the change in money's value over time, based on the percentage of interest earned per period or purchasing power lost due to inflation.
**Present value** (PV) is the value of today's money in consideration of its future potential, positive or negative, and is discounted as it is moved backward in time.
**Net present value** (NPV) is a comparison between the gains and losses of an investment project and a fixed, compound interest investment to determine feasibility of the project.
30
# Explain:
money demand
* The portion of **wealth** people choose to hold **in the form of cash** or checking accounts instead of other assets that may yield an income.
* It represents the relationship between the **quantity of money** people want to hold and the **factors that determine that quantity**.
## Footnote
Economists illustrate this using the demand curve for money, which is downward sloping and shows the quantity of money demanded at each interest rate.
31
# Explain:
money market graph
* Depicts the **supply and demand for money**, where the vertical axis represents the interest rate and the horizontal axis represents the quantity of money.
* The **equilibrium point**, where the money supply (usually controlled by the central bank) intersects with money demand, determines the prevailing interest rate in the economy.
32
# Explain:
How does the **Federal Reserve** control the money supply?
By **increasing or reducing interest rates** for lending, which in turn increases or reduces the amount of money in circulation.
## Footnote
The Federal Reserve and the system it operates under are not owned by anyone. The reserve system was created as a **central banking authority** to regulate the financial system in the United States.
33
# Identify:
**5 functions** of the **Federal Reserve System**.
1. Ensuring the stability of the financial system.
2. Handling monetary policy.
3. Supervising financial institutions.
4. Protecting consumers.
5. Fostering safety in the payment systems.
34
# Explain:
**Difference** between nominal and real interests rates.
* The **nominal interest rate** is the interest rate that is presented in advertising as offers from financial institutions for their products.
* The **real interest rate** is the nominal interest rate adjusted for inflation. This interest rate will accurately calculate the interest accrued or owed when the inflation rate is considered.
## Footnote
The **nominal interest rate can be calculated** by adding the inflation rate to the real interest rate.
That is, n = r + i, where n is the nominal rate, r is the real rate and i is the inflation rate.
35
# Explain:
hyperinflation
* Extremely **rapid and out-of-control increase in prices**, often exceeding 50% per month, leading to a severe decline in the value of a currency.
* Typically **occurs** when a **country prints excessive amounts of money** to pay off debts or finance deficits, overwhelming the economy's ability to absorb it.
* Result is a **loss of confidence in the currency**, causing prices to soar, savings to erode, and the economy to destabilize.
36
# Explain:
How does the government use **fiscal policy**?
* By **adjusting its levels of spending and taxation** to influence the economy.
* During a **recession**, it may **increase spending or cut taxes** to stimulate demand and boost economic growth.
* Conversely, **to curb inflation** during an overheated economy, the **government might reduce spending or raise taxes** to decrease overall demand.
37
# Explain:
How does **fiscal policy** affect **unemployment**?
* The government uses fiscal policy through taxation and spending policies to **influence unemployment and the overall state of the economy.**
* Lowering tax rates on businesses and individuals can reduce unemployment by putting more money into the hands of consumers, leading to **increased spending and demand.**
38
# Explain:
progressive taxation
* **Tax rate increases as the taxpayer's income increases**, meaning higher-income earners pay a larger percentage of their income in taxes.
* This system is **designed to reduce income inequality** by placing a greater tax burden on those with higher incomes while providing relief to those with lower incomes.
* The goal is to ensure that the **tax system is fair** and that wealthier individuals contribute more to public finances.
## Footnote
The **marginal tax rate** is the amount of tax paid on every additional dollar of income earned.
An earner's total income tax owed divided by the total income earned is called the **average tax rate**.
39
# Identify:
3 types of taxes
1. A **progressive tax** - gets higher and higher as a percentage the more income someone earns.
2. A **regressive tax** - is if an individual pays a lower tax rate the higher their income.
3. A **proportional tax** - is when everyone pays the same percentage of income taxes.
40
# Explain:
automatic stabilizers
* Economic **policies and programs**, like unemployment benefits and progressive taxes, **that automatically adjust to counteract economic fluctuations** without the need for new government intervention.
* During a **recession**, they *increase government spending* or reduce taxes, providing a boost to demand, while during an **economic boom**, they *decrease spending or increase taxes*, helping to cool down the economy.
## Footnote
These mechanisms help stabilize income and consumption levels, thereby smoothing out the business cycle.
41
# Explain:
Difference between **fiscal** and **monetary** **policy**.
* **Fiscal policy** uses strategies that address government spending and taxation and is controlled by the government.
* **Monetary policy** is the approach to handle money supply in an economy by the central bank.
## Footnote
Fiscal policy and monetary policy are both approaches to ensuring economic stability.
42
# Explain:
supply-side economics
Macroeconomic **theory** that argues for **improving economic growth** by increasing aggregate supply **through policies like tax cuts and reductions in government regulation**.
43
# Identify:
Characteristics of **market economy**.
* Limited government involvement: The government's role is limited to providing stability, security, and basic regulation.
* Private ownership.
* Freedom of choice.
* Competition.
* Dependence on the forces of demand and supply to determine prices and shape market activities.
44
# Explain:
foreign exchange rates
* Represent the **value of one currency in terms of another**, determining how much one currency can be exchanged for another.
* These rates fluctuate based on factors like economic stability, interest rates, inflation, and market speculation.
45
# Explain:
How does **fiscal and monetary policy** affect the **exchange rate**?
* Policies can affect a country's economic stability and **investor confidence**.
* **Expansionary fiscal policy** (increased government spending or tax cuts) can **lead to higher inflation** and **weaken the currency**, while contractionary fiscal policy can strengthen it.
## Footnote
**Expansionary monetary policy** (lower interest rates or increased money supply) tends to depreciate the currency, whereas **contractionary monetary policy** (higher interest rates or reduced money supply) generally leads to currency appreciation.
46
# Explain:
How do **exchange rate fluctuations** affect **international trade**?
* Exchange rate fluctuations **alter the cost of goods and services between countries**.
* **Currency appreciation makes exports more expensive** and imports cheaper, which can reduce demand for domestically produced goods and services.
## Footnote
When a country's **currency depreciates**, its **exports become cheaper** and more competitive abroad, while imports become more expensive, potentially boosting domestic industries.
47
# Explain:
trade balance
* **Difference** between a country's **imports** and **exports**.
* Provides insight into a nation's economy and can indicate **currency valuation**.
* Calculated by **subtracting the value of imports from exports**.
48
# Describe:
balance of payment
* Statement of the **inflow and outflow** of goods, services, and assets, which serves as a **check and balance** for an economy's stability.
* Surplus or deficit requires more in-depth analysis to find ways to **stabilize the economy**.
## Footnote
The formula for the balance of payment is: Balance of Payment = Balance of Current Account + Balance of Financial Account.
49
# Identify:
**2 types** of balance of payments.
1. Current Account
2. Financial Account
## Footnote
**Current Account** - comprises the inflow and outflow of **goods and assets**.
**Financial Account** - comprises the inflow and outflow of **international money transactions**. There is a small subgroup under this Financial Account and that is the **Capital Account**.
50
# Identify:
Different parts of the **World Bank**.
* The **World Bank** consists of **two different institutions**:
1. International Bank for Reconstruction and Development
2. International Development Association
* The **World Bank Group** consists of the World Bank and three other institutions:
1. The International Finance Corporation
2. The Multinational Investment Guarantee Agency
3. The International Centre for Settlement of Investment Disputes
51
# Describe:
The International Monetary Fund
| (IMF)
* Global organization established in 1944 to **promote international monetary cooperation, financial stability, and economic growth**.
* Provides financial assistance, policy advice, and technical support to member countries facing economic difficulties, helping to **stabilize economies and prevent financial crises.**
* **Monitors global economic trends** and works to reduce poverty by fostering economic stability and sustainable growth.
52
# Explain:
3 **functions** of **money**.
* **Medium of Exchange**: Money facilitates the exchange of goods and services. It eliminates the inefficiencies of a barter system, where goods and services are directly traded.
* **Unit of Account**: Money provides a common measure of value. It allows us to compare the value of different goods and services.
* **Store of Value**: Money can be held and used to purchase goods and services in the future. It preserves wealth over time.
53
# Explain:
Why do **people rely** on **financial institutions**?
* **Save Money**: Banks and credit unions offer various savings accounts and certificates of deposit to help individuals save for future goals.
* **Borrow Money**: Banks and credit unions provide loans for various purposes, such as buying a home, car, or education.
* **Invest Money**: Financial institutions offer investment products like stocks, bonds, and mutual funds, allowing individuals to grow their wealth over the long term.
54
# Explain:
Why do **financial institutions** **rely** on **people**?
* **Deposit Money**: Deposits provide funds that institutions can lend out to borrowers.
* **Pay Fees**: Individuals pay fees for various services, such as account maintenance, ATM withdrawals, and loan processing.
55
# Identify:
3 motives for making financial decisions.
1. **Short-term Needs**: Paying for immediate expenses like rent, utilities, and groceries.
1. **Long-term Goals**: Saving for retirement, buying a home, or funding a child's education.
1. **Risk Tolerance**: The willingness to take on financial risk in pursuit of higher returns.
56
# Explain:
Why are **income** and **debt** important factors that influence financial decisions?
* Income: The amount of money earned **affects the ability to save, invest, and spend**.
* Debt: The amount of debt and the interest rate on that debt can significantly influence **financial well-being**.
57
# Explain:
What is the difference between **socioeconomic differences** and **inequalities** in terms of macroeconomics?
* **Socioeconomic differences**: These are **disparities between individuals or groups** based on factors like income, education, occupation, and social status.
* **Socioeconomic inequalities**: These are **unfair or unjust differences in the distribution of resources** and opportunities.
58
# Explain:
4 causes of **socioeconomic inequalities**.
1. **Economic Systems**: Unequal distribution of wealth and power
2. **Historical Factors**: Exploitation and unequal power dynamics can have lasting effects (example: colonialism).
3. **Policy Choices**: Regressive tax systems can exacerbate inequality.
4. **Globalization**: Global competition can lead to job losses in certain sectors.
59
# Explain:
4 solutions to **socioeconomic inequalities**.
1. **Progressive Taxation**: Implementing tax policies that redistribute wealth from the wealthy to lower-income individuals.
1. **Social Safety Nets**: Providing government programs to support those in need, such as unemployment benefits, food assistance, and affordable housing.
1. **Investment in Education**: Ensuring equal access to quality education for all.
1. **Labor Market Regulations and Anti-Discrimination Laws**: Protecting workers' rights and promoting equality through fair labor practices and anti-discrimination legislation.
