Cumulative Exam

Question 1

Variables that SHIFT the Demand Curve

Answer 1

• Tastes/Preferences of Consumers
• Price of Related Goods
• Income of Consumers
• Number of Buyers
• Expectations for Future

Example: A tax that increases the price of a good.

Question 2

What causes a change along the demand curve?

Answer 2

A change in the price of a good leads to movement along the demand curve (for that good).

Question 3

Variables that SHIFT the Supply Curve

Answer 3

• Technology
• Input Prices
• Expectations for Future
• Price of Related Goods
• Number of Sellers

Question 4

Effect of Surplus

Surplus = Excess Supply

Answer 4

The downward pressure on the price of a good/service increases the quantity demanded and decreases the quantity supplied for that good/service.

Question 5

Production Possibilities Frontier (PPF)

Answer 5

A graphical representation of the various combinations of output a country/economy can produce.

Question 6

Absolute Advantage

Answer 6

The ability to produce a good/service with fewer inputs than another producer.

Question 7

Comparative Advantage

Answer 7

The ability to produce a good/service at a lower opportunity cost than another producer.

Question 8

What is the PPF limited by?

Answer 8

• Knowledge/Technology
• Available Resources

Question 9

What are the criteria for a straight PPF graph?

Answer 9

• Constant Opportunity Costs
• Homogenous Resources

Question 10

What are the criteria for a curved PPF graph

Answer 10

• Variable Opportunity Costs
• Heterogenous Resources

Heterogenous Resources: Different resources are best suited for different tasks.

Question 11

How does an increase in available resources impact the PPF?

Answer 11

The PPF shifts outward.
(The economy can produce more of both goods.)

The slope of the PPF is unchanged, so the resulting PPF is parallel to the original PPF.

Question 12

How does a decrease in available resources impact the PPF?

Answer 12

The PPF shifts inward.
(The economy will produce less of both goods.)

The slope of the PPF is unchanged, so the resulting PPF is parallel to the original PPF.

Question 13

How does an improvement in technology impact the PPF?

Answer 13

The PPF shifts outward and the slope increases.
(The economy can produce more of that good and produces that good more efficiently).

The slope of the PPF increases with respect to the affected good.

Question 14

How does a loss of technology impact the PPF?

Answer 14

The PPF shifts inward and the slope decreases.
(The economy will produce less of that good and produces that good less efficiently).

The slope of the PPF decreases with respect to the affected good.

Question 15

r

Answer 15

Real Interest Rate

Real Interest Rate: The interest rate after adjusting for inflation.

Question 16

i

Answer 16

Nominal Interest Rate

Nominal Interest Rate: The interest rate before adjusting for inflation.

Question 17

Capital

Answer 17

K

Question 18

Labor

Answer 18

L

Question 19

Total Income

Answer 19

Y

Question 20

Inflation Rate

Answer 20

π

Question 21

P

Answer 21

• Price
• Price Level

Question 22

Profit

Answer 22

π

Question 23

Real GDP

Answer 23

Y

Question 24

Price Level

Answer 24

A measure of the current level of prices in an economy.

Question 25

Real Variables

Answer 25

Variables that neutralize/negate the effects of inflation.

Question 26

CP Index vs. GDP Deflator

Answer 26

* The **CPI** is based on what consumers purchased. * The **GDP deflator** is based on what the economy produces.

Question 27

What does the *growth* in the GDP Deflator value indicate?

Answer 27

Inflation Rate

Question 28

Demand Shocks

Answer 28

* Changes in Spending * Changes in Money Supply * Changes in Taxation Levels * One-Time Changes in Price

Question 29

m

Answer 29

Marginal Propensity to Consume (MPC) ## Footnote **MPC:** The percentage of each new dollar of income that is spent in the economy.

Question 30

Tax Rate | (Tax Burden)

Answer 30

T

Question 31

How does *increasing* the price level impact the real money supply?

Answer 31

The real money supply ***decreases***. ## Footnote As prices in the economy *increase*, the purchasing power of money *decreases*, which results in a ***decrease*** in the real money supply.

Question 32

How does an *increase in price level* affect the LM curve?

Answer 32

The **LM curve** shifts to the **left**. ## Footnote An increase in *price level* causes the purchasing power of money to *decrease*, which *decreases* the real money supply and (as a result) *increases* the real interest rate.

Question 33

How does a *decrease in price level* affect the LM curve?

Answer 33

The **LM curve** shifts to the **right**. ## Footnote A *decrease* in price level causes the purchasing power of money to *increase*, which *increases* the supply of real money in the economy and *decreases* the real interest rate.

Question 34

How does an *increase in real interest rate* affect the LM curve?

Answer 34

The **LM curve** shifts to the **left**. ## Footnote An *increase* in real interest rates causes people to convert investments to interest-bearing assests, which *decreases* the available money supply in the economy and *decreases* the demand for liquid money.

Question 35

How does a *decrease in real interest rate* affect the LM curve?

Answer 35

The **LM curve** shifts to the **right**. ## Footnote A *decrease* in real interest rates causes people to convert interest-bearing assets to investments, which *increases* the available money supply in the economy and *increases* the demand for liquid money.

Question 36

How does an *increase in GDP* affect the LM graph?

Answer 36

The **LM curve** shifts to the **right**. ## Footnote An *increase* in GDP causes people to make more purchases, which *increases* the demand for real money and *increases* the amount of real money in the economy.

Question 37

Why is the LM curve upward-sloping?

Answer 37

* As the GDP of the economy *increases*, the income of households *increases*, which results in an *increased* demand for liquid cash for purchases. * As the GDP of the economy *increases*, the available money supply in the economy *increases* since consumers are making *more* purchases. * The real interest rate must *increase* to balance the *increase* in real money demand that results from an *increase* in the economy's GDP.

Question 38

How does a *decrease* in money supply impact the real interest rate?

Answer 38

The real interest rate **increases**. ## Footnote The real interest rate is the *cost* of borrowing money; when there is *less* money in the economy, the money becomes *scarce*, which *increases* the cost of borrowing that money.

Question 39

How does a *rise in prices* impact the IS-LM graph?

Answer 39

The **LM curve** shifts **left**, as the quantity of *real* money in the economy decreases due to *lower* purchasing power.

Question 40

How does a *decrease in exports* impact the IS-LM graph?

Answer 40

The **IS curve** shifts to the **left**. ## Footnote The *decrease* in exports causes the spending in the economy to *decrease*, which results in a *decrease* in money demand and a *decrease* in real interest rate.

Question 41

Why does the *aggregate demand curve* shift downward?

Answer 41

* As the price level *increases*, the real money supply *decreases*, real interest rate *increases*, the level of consumption *decreases*, and the total GDP *decreases*. * As the price level *decreases*, the real money supply *increases*, the real interest rate *decreases*, the level of consumption *increases*, and the total GDP *increases*.

Question 42

Open Market Operations

Answer 42

The Federal Reserves buys/sells government bonds to private commerical banks (in an effort to increase/decrease the money supply). ## Footnote * The Federal Reserve *decreases* the money supply by ***selling*** bonds to private banks. * The Federal Reserve *increases* the money supply by ***buying*** bonds from private banks.

Question 43

Why does the money supply *decrease* when the Federal Reserve *sells* bonds?

Answer 43

When the FR *sells* a government bond to a private banks, it is *removing* money from the bank in return for the bond. ## Footnote By extracting money from private banks, the FR is taking money out of the economy and decreasing the money supply.

Question 44

Why does the money supply *increase* when the Federal Reserve *buys* bonds?

Answer 44

When the FR *buys* a government bond from a private bank, it is giving money to the bank in return for the bond. ## Footnote By adding to the money supply of the bank, the FR is increasing the quantity/supply of money in the total economy.

Question 45

Normal Good

Answer 45

A good that individuals buy/demand *more* of as their income *increases*. ## Footnote The demand of a normal good is *directly correlated* to the income of the buyer.

Question 46

Inferior Good

Answer 46

A good that individuals buy/demand *less* of as their income *increases*. ## Footnote The demand of an inferior good is *inversely proportional* to the income of the buyer.