Macroeconomics Study Guide

Question 1

What is the name of the book written by Adam Smith? What economic system was described in this book?

Answer 1

Wealth of Nations. Capitalism.

Question 2

Describe how a command economy works

Answer 2

Communism. An economic system where property and business are owned by the government. The government makes choices about producing and pricing. The consumers have no choice.

Question 3

Describe how a market economy works.

Answer 3

An economic system where businesses and property are privately owned. The price and amount of goods traded are based on supply and demand and has little government regulation.

Question 4

What is an entrepreneur? Who are some examples of entrepreneurs?

Answer 4

The founder of a business. Someone who assumes the risk of organizing resources to produce goods and services. Someone who sees an opportunity to make money and takes it. Steve Jobs, Elon Musk, Bill Gates.

Question 5

Under what circumstances can the government seize property through the use of eminent domain?

Answer 5

If it’s for public use (projects like roads or bridges)

Question 6

Define “scarcity.”

Answer 6

Resources are always limited compared with the number and variety of wants people have.

Question 7

What is the difference between producers and consumers?

Answer 7

Producers are the people who make goods. Consumers are people who buy goods and services.

Question 8

Define “competition.”

Answer 8

When different businesses compete for consumers’ money such as Walmart v. Target or Microsoft v. Apple.

Question 9

How can a business determine their profit?

Answer 9

A business can determine their profit by totaling the money left over after all expenses have been paid.

Question 10

What is the market price?

Answer 10

The price at which buyers and sellers agree to trade. Demand and supply meet.

Question 11

What is the role of the government in a market economy?

Answer 11

To protect property rights

Question 12

What is the law of demand?

Answer 12

Buyers will demand more products when they can buy them at lower prices. They will purchase fewer products when they must purchase them at higher prices.

Question 13

What is the law of supply?

Answer 13

Businesses will provide more products when they can sell them at higher prices. They will provide fewer products when they must sell those goods at lower prices

Question 14

Define “income.”

Answer 14

The money received in payment for goods and services (rent, wages, interest).

Question 15

Under what circumstances are Americans unable to purchase or sell any product of their choosing?

Answer 15

If it’s against the law or there are government limitations.

Question 16

In general, why is the United States able to take advantage of a great deal of economic success?

Answer 16

There is an abundance of natural resources. Rights to private enterprise (non-government controlled businesses). People are free to make their own choices. The government is limited in its ability to interfere with the economy.

Question 17

How do property rights differ between command and market economies?

Answer 17

In command economies (communism), all property is owned by the government. All property rights are confiscated. In market economies, property rights are a very important factor.

Question 18

List and define the three ways in which businesses are owned in a market economy.

Answer 18

A sole proprietorship is a business owned by an individual. A partnership is owned by multiple people. A corporation is a business that is separate from the people who own it and legally acts as a single person.

Question 19

What are the three types of resources necessary for producers to be successful?

Answer 19

Labor, land, and capital

Question 20

What is the difference between human and physical capital? Why does the government invest in both types of capital?

Answer 20

Human Capital is the knowledge and skills a person uses to produce goods and services. Physical Capital is the human made goods used to produce other goods and services. The government invests in both types of capital to promote economic growth, stability, and fairness.

Question 21

What are the possible effects of a government’s investment in human capital?

Answer 21

Human capital contributes to the output of businesses in America. Output= profit! Better-trained and more educated workers lead to more output per hour for each worker. As the United States moves toward a service oriented economy, human capital is increasingly important to economic growth.

Question 22

What are the possible effects of a government’s investment in physical capital?

Answer 22

With more physical capital each worker can be more productive and efficient per hour of work. More physical capital will lead to more output, or economic growth. Many tools will produce goods faster and more efficiently than humans. Three main benefits: more time, more education that can be applied to other devices, more productivity.

Question 23

What are the possible effects of a government’s investment in both physical and human capital?

Answer 23

Investing in human and physical capital also leads to higher wages. As workers increase output per hour, they become more valuable to their employers. Also employers will demand more workers, giving more people jobs, and increasing economic growth.

Question 24

Why do corporations sell stocks?

Answer 24

Corporations sell stocks to make large amounts of money. These stocks are shares of the corporation, resulting in profit for the people who invest. The money earned from the stocks can then be transported into growing and supporting the corporation.

Question 25

What do most nations use as their economic system?

Answer 25

Market economy

Question 26

Why do private individuals and businesses invest in capital?

Answer 26

Increased output, economic growth, higher wages

Question 27

Describe eminent domain

Answer 27

The government pays the market price for someone’s property. The person can challenge it in court.

Question 28

What are property rights?

Answer 28

Property rights are that individuals have the exclusive right to sell their possessions with limited government interference.