Economics

Question 1

How does a price increase affect supply?

Answer 1

When the prices of an item increases supply increases- because more sellers are willing to sell.

Question 2

What is a supply curve shift?

Answer 2

When supply changes due to something other than price.

Question 3

What are the characteristics of a positive supply curve shift (shift right)?

Answer 3

Supply increases at each price point

Higher Equilibrium GDP

Number of sellers increases - market can get flooded

Examples: Government subsidies or technology improvements that decrease costs for suppliers

Question 4

What are the characteristics of a negative supply curve shift (shift left)?

Answer 4

Supply decreases at each price point

Lower Equilibrium GDP

Cost of producing item increases

Examples: Shortage of gold- so less gold watches are made; wars or crises in rice-producing countries means there is less rice on the market

Question 5

How does price affect the demand for an item?

Answer 5

When the prices of an item increases- demand for it decreases.

Question 6

What is a Demand Curve Shift?

Answer 6

When demand changes due to something other than price.

Question 7

What is a Positive Demand Curve Shift (Shift Right)?

Answer 7

When demand increases at each price point

Price of substitutes go up - price of beef rises- so people buy more chicken

Future price increase is expected - War in Middle East- people go out and buy gas

Market expands - i.e. people get new free health care plan- demand at clinic rises

Expansion - more spending increases equilibrium GDP

Question 8

What is a Negative Demand Curve Shift (Shift Left)?

Answer 8

Demand decreases at each price point.

Price of complement goes up - price of beef goes up- less demand for ketchup

Boycott - Company commits social blunder- consumers boycott

Consumer income rises - Demand for inferior goods drops as people have more money to spend

Consumer tastes change

Contraction - less spending decreases equilibrium GDP

Question 9

What is the Marginal Propensity to Consume?

Answer 9

How much you spend when your income increases

Calculate: Change in Spending / Change in Income

Question 10

What is the Marginal Propensity to Save?

Answer 10

How much you save when income increases

Calculate: Change in Savings / Change in Income

Also equals 1 - Marginal Propensity to Consume

Question 11

How is the multiplier effect calculated?

Answer 11

(1 / 1-MPC) x Change in Spending

Question 12

How does increased spending by consumers and the government affect the demand curve?

Answer 12

As spending by consumers or the government increases- the demand curve increases (shifts right).

Question 13

How does spending change due to the multiplier effect?

Answer 13

The increase in demand ends up being larger than the amount of additional income spent in the economy due to the multiplier effect.

One consumer spends money- which:
*Increases the income of a business
*Increases the income of a vendor
*Increases income of employees
*Increases tax revenue

Question 14

How is Price Elasticity of Demand calculated?

Answer 14

% Change in Quantity Demand / % Change in Price

Question 15

Under elastic demand- how does price affect revenues?

Answer 15

Price increases- Revenue decreases

Price decreases- Revenue increases

Question 16

What conditions would indicate Elastic Demand?

Answer 16

Many substitutes (luxury items)
Considered elastic if elasticity is greater than 1
10% drop in demand / 8% increase in price : 1.25 (Elastic)

Price increases- Revenue decreases
Price decreases- Revenue increases

Question 17

How does revenue react to price under Inelastic Demand?

Answer 17

Price increases- Revenue increases

Price decreases- Revenue decreases

Question 18

What conditions would indicate Inelastic Demand?

Answer 18

Few substitutes (groceries- gasoline)
Considered inelastic if coefficient of elasticity is less than 1
5% drop in demand / 10% increase in price : .5 (inelastic)

Price increases- Revenue increases
Price decreases- Revenue decreases

Question 19

What is Unitary Demand?

Answer 19

Total revenue will remain the same if price is increased

Considered unitary if coefficient of elasticity : 1

Question 20

How is Income Elasticity of Demand calculated?

Answer 20

% Change Quantity Demanded / % Change in Income

Normal goods greater than 1 (demand increases more than income)

Inferior goods less than 1 (demand increases less than income)

Question 21

What conditions occur under periods of inflation?

Answer 21

Interest rates increase
Reduced demand for loans
Reduced demand for houses- autos- etc.
Value of bonds and fixed income securities decrease
Inferior good demand to increase
Foreign goods more affordable than domestic
Demand for domestic goods decrease

Question 22

What happens under Demand-Pull inflation?

Answer 22

Overall spending increases

Demand increases (shifts right)

Market equilibrium price increases

Question 23

What happens under Cost-Push inflation?

Answer 23

Overall production costs increase
Supply decreases (shifts left)
Market equilibrium price increases

Note: Demand-Pull and Cost-Push Inflation BOTH result in market equilibrium price to increase

Question 24

What is the Equilibrium Price?

Answer 24

The price where Quantity Supplied : Quantity Demanded

Question 25

What is Optimal Production?

Answer 25

When Marginal Revenue : Marginal Cost

Question 26

What is the result of a Price Floor?

Answer 26

Causes a surplus if above equilibrium price.

Question 27

What is GDP (Gross Domestic Product)?

Answer 27

The annual value of all goods and services produced domestically at current prices by consumers- businesses- the government- and foreign companies with domestic interests Included: Foreign company has US Factory Not included: US company has foreign factory

Question 28

What is included under the income approach for calculating GDP?

Answer 28

Sole Proprietor and Corp Income Passive Income Taxes Employee Salaries Foreign Income Adjustments Depreciation

Question 29

What is included under the Expenditure Approach for calculating GDP?

Answer 29

Individual Consumption Private Investment Government Purchases Net Exports

Question 30

What is Nominal GDP?

Answer 30

Measures goods/services in current prices.

Question 31

For what is a GDP Deflator used?

Answer 31

Used to convert GDP to Real GDP

Question 32

What is Real GDP?

Answer 32

Nominal GDP / GDP Deflator x 100

Question 33

What is Gross National Product (GNP)?

Answer 33

Like GDP; Swaps foreign production. US Firms overseas are included- Foreign firms domestically are not included

Question 34

What is the Consumer Price Index (CPI)? How is it applied?

Answer 34

Price of goods relative to an earlier period of time- which is the benchmark. Year 1 : 1.0 ((CPI Current - CPI Last) / CPI Last) * 100

Question 35

How is disposable income calculated?

Answer 35

Personal Income - Personal Taxes

Question 36

How is Return to Scale calculated?

Answer 36

% Increase in output / % Increase in input Greater than 1 : Increasing returns to scale Less than 1 : Decreasing returns to scale

Question 37

When is the economy in Recession?

Answer 37

When GDP growth is negative for two consecutive quarters.

Question 38

What is a Depression?

Answer 38

A prolonged- severe recession with high unemployment rates No requisite period of time for the economy to officially be in a depression

Question 39

What are the stages of the Economic Cycle?

Answer 39

Peak (highest) Recession (decreasing) Trough (lowest) Recover (increasing) Expansion (higher again)

Question 40

What are leading indicators?

Answer 40

Conditions that occur before a recession or before a recovery Example: Stock Market or New Housing Starts

Question 41

What are lagging indicators?

Answer 41

Conditions that occur after a recession or after a recovery Examples: Prime Interest Rates- Unemployment

Question 42

What are coincident indicators?

Answer 42

Conditions that occur during a recession or during a recovery Example: Manufacturing output

Question 43

Which people are included in the calculation of unemployment?

Answer 43

Only people looking for jobs

Question 44

What is Cyclical Unemployment?

Answer 44

GDP doesn't grow fast enough to employ all people who are looking for work Example: People are unemployed in 2010 because there aren't enough jobs available due to the economy

Question 45

What is Frictional Unemployment?

Answer 45

People are changing jobs or entering the work force. This is a normal aspect of full employment. Example: A recent college graduate is looking for a job

Question 46

What is Structural Unemployment?

Answer 46

A worker's job skills do not match those necessary to get a job so they need education or training Example: A construction worker wants to work in an office- so they quit their job and get computer training

Question 47

How does inflation relate to unemployment?

Answer 47

High Unemployment : Low Inflation (Vice Versa)

Question 48

What is the Discount Rate?

Answer 48

The rate a bank pays to borrow from the Fed.

Question 49

What is the Prime Rate?

Answer 49

The rate a bank charges their best customers on short-term borrowings.

Question 50

What is the Real Interest Rate?

Answer 50

Inflation-adjusted interest rate

Question 51

What is the Nominal Rate?

Answer 51

Rate that uses current prices

Question 52

What is the Risk-Free Rate?

Answer 52

Rate for a loan with 100% certainty of payback. Usually results in a lower rate. US Treasuries are an example.

Question 53

What is included in the M1 money supply?

Answer 53

Currency- Coins- and Deposits

Question 54

What is included in the M2 money supply?

Answer 54

Highly liquid assets other than currency- coins or deposits

Question 55

What is Deficit Spending?

Answer 55

Increased spending levels without increased tax revenue. Lower taxes without decrease in spending Gamble that the multiplier effect will take over and boost economy

Question 56

How can the Fed control the money supply?

Answer 56

By buying and selling the government's securities.

Question 57

How does the Fed control economy-wide interest rates?

Answer 57

By adjusting the discount rate charged to banks

Question 58

What is a Tariff?

Answer 58

A tax on imported goods

Question 59

What is a quota?

Answer 59

A limit on the number of goods that can be imported

Question 60

How do international trade restrictions affect domestic producers?

Answer 60

They are good for domestic producers. Demand curve shifts right Fewer substitutes They can charge higher prices

Question 61

How to international trade restrictions affect foreign producers?

Answer 61

They are bad for foreign producers Demand curve shifts left Fewer buyers They must charge lower prices

Question 62

How do international trade restrictions affect foreign consumers?

Answer 62

They are good for foreign consumers Supply curve shifts right Goods purchased at lower prices in the foreign markets

Question 63

How do international trade restrictions affect domestic consumers?

Answer 63

They are bad for domestic consumers Supply curve shifts left Fewer goods bought due to higher prices

Question 64

What is Accounting Cost?

Answer 64

Explicit (Actual) cost of operating a business Implicit costs are opportunity costs

Question 65

What is Accounting Profit?

Answer 65

Revenue - Accounting Cost

Question 66

What is Economic Cost?

Answer 66

Explicit + Implicit Cost

Question 67

What is Economic Profit?

Answer 67

Revenue - Economic Cost