Macroeconomics Exam 1 PDF

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Macroeconomics , Exam 1 Notes, Chapter 1, Chapter 3, Chapter 5...

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Chapter 1: Limits, Alternatives, and Choices Important Questions: ❏ What is Economics? ❏ What is the “Economic Way of Thinking?” ❏ Why study Economics? ❏ What do Economists do? What is Economics? ❏ Economics: A social science concerned with using scarce resources to obtain the maximum satisfaction of the unlimited material wants of society ❏ It’s all about choices and exceeding productive capacity Choice and Decision Making: ❏ Cost-Benefit Analysis: Process of examining costs and benefits of available alternatives and arriving at a decision ❏ PACED Decision-Making Process: ❏ (1) Identify Problem ❏ (2) Identify Alternatives ❏ (3) Identify Criteria ❏ (4) Evaluate Alternatives ❏ (5) Make A Decision The Economic Perspective: ❏ Think like an economist ❏ Key Features: Scarcity and choice, Purposeful behavior, and Marginal analysis ❏ Scarcity and Choice ❏ Resources are scarce and choices must be made ❏ Opportunity Cost: ❏ Purposeful Behavior ❏ Rational self-interest, individuals & utility, firms & profit, and desired outcomes ❏ Marginal Analysis ❏ Considerations: Marginal benefit and marginal cost ❏ Marginal = Extra ❏ Marginal Benefit: ❏ Marginal Cost: Theories, Principles, and Models: ❏ Scientific Method: 1. Observe 2. Formulate a hypothesis 3. Test hypothesis 4. Accept, reject, or modify hypothesis 5. Continue to test hypothesis (if needed) ❏ Economic Principles: ❏ Generalizations: ❏ Other-Things-Equal Assumption:

❏ Graphical Expression: Microeconomics and Macroeconomics: ❏ Microeconomics: Study of individual units that make up the economy ❏ Macroeconomics: Study of the economy as a whole or aggregate Individual’s Economic Problem: 1. Limited income 2. Unlimited wants 3. A budget line ❏ Attainable and unattainable options ❏ Trade-offs and opportunity costs ❏ Make the best choice possible 4. Change in income Society’s Economic Problem: ❏ Scarce resources include 1. Land: All natural resources used in the production process a. Land, forests, mineral and oil deposits, water resources 2. Labor: All physical and mental talents of available workers for use in production of g/s 3. Capital: All manufactured aids used in producing g/s a. Factories, equipment, tools, supplies, storage, transportation 4. Entrepreneurship: Ability to take risks in order to start new businesses, to introduce new products, improve management techniques, and improve processes a. Entrepreneurial Ability: Take initiative, make decisions, innovates, and take risks Production Possibilities Model: ❏ PP Model: Illustrates production choices ❏ Assumptions include full employment, fixed resources, fixed technology, 2 goods

Law of Increasing Opportunity Costs: ❏ As production of a good increase, opportunity cost of producing an additional unit rises ❏ Optimal Allocation: Unemployment, Growth, and the Future: ❏ Unemployment limits how much can be produced ❏ Production will be at a point inside the PPC ❏ Moving toward full employment will increase output A Growing Economy: ❏ More resources

❏ Improved resource quality ❏ Technological advances

Chapter 3: Demand, Supply, and Market Equilibrium Markets: ❏ Interaction between buyers and sellers ❏ Markets may be: 1. Local 2. National 3. International ❏ Price is discovered in the interactions of buyers and sellers Demand: ❏ Schedule or curve ❏ Amounts consumers are willing and able to purchase at a given price ❏ Other things equal ❏ Individual demand ❏ Market demand Law of Demand: ❏ Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls ❏ Reason: Inverse relationship

Changes in Demand:

Determinants of Demand: ❏ Change in consumer taste and preferences ❏ Change in income ❏ Normal goods ❏ Inferior goods ❏ Change in number of buyers ❏ Change in prices of related goods ❏ Complements ❏ Substitutes ❏ Changes in consumers’ expectations ❏ Future prices ❏ Future income Changes in Quantity Demanded: ❏ Change in demand is a shift of the demand curve ❏ Change in quantity demanded is a movement from one point to another point on a fixed demand curve Supply: ❏ Schedule or curve ❏ The amount producers are willing and able to sell at a given price ❏ Individual supply ❏ Market supply Law of Supply: ❏ Other things equal, as the price rises, the quantity supplied rises, and as the price falls, the quantity supplied falls ❏ Reason: Price acts as an incentive to producers ; at some point, cost will rise

Determinants of Supply: ❏ Change in resource prices ❏ Change in price of other goods ❏ Change in technology ❏ Change in taxes and subsidies ❏ Change in producer expectations ❏ Change in number of sellers Changes in Quantity Supplied: ❏ Change in supply is a shift in the supply curve ❏ Change in the quantity supplied represents a movement along a supply curve Market Equilibrium: ❏ Equilibrium occurs where the demand curve and supply curve intersect ❏ Surplus and shortage ❏ Rationing function of prices ❏ Efficient allocation: ❏ Productive efficiency ❏ Allocative efficiency Rationing Function of Prices: ❏ Ability of competitive forces of D+S to establish a price at which selling and buying decisions are consistent Changes in Demand and Equilibrium:

Changes in Supply and Equilibrium:

Complex Cases: (Double Shifts) ❏ Complexity increases under certain circumstances: ❏ When both supply and demand change ❏ Price and quantity changes less certain Price Controls: ❏ Gov. uses as an attempt to transfer income or correct proceed market failure instead of letting market determine prices ❏ Price Ceiling: Set maximum price (below equilibrium price) ❏ Set to enable consumers to purchase g/s deemed essential ❏ Ex: Controlled rent to make housing affordable for poor ❏ Price ceilings usually create shortages and may spawn black markets ❏ Price Floor: Set minimum price (above market price) ❏ Set when markets don’t adequately reward suppliers of g/s ❏ Ex: Minimum wages and farm commodity price supports ❏ Price floors create surplus b/c suppliers willing to create greater quantity than consumers’ demand at that price Price Floors and Ceilings: ❏ What’s the intent behind the policy and equilibrium forces? ❏ Price floors intended to stop prices from falling ❏ Price ceilings intended to stop prices from rising

Chapter 7: Aggregate Demand & Aggregate Supply Aggregate Demand: ❏ AD Curve: Shows the total demand for final g/s over range of price levels at a particular

point in time ❏ Determinants of AD: (C + I + G + Xn) ❏ Change in consumer spending ❏ Change in investment spending ❏ Change in government spending ❏ Change in net export spending ❏ Real GDP desired at each price level ❏ Inverse relationship Determinants of AD: (C + I + G + Xn) ❏ C: Consumer wealth, consumer expectations, household indebtedness, personal taxes ❏ I: Real interest rates, expected returns (expected business conditions, technology, degree of excess capacity, business taxes) ❏ G: Change in government spending ❏ Gov spending increases ❏ AD increases (only if interest rates + tax rates don’t change) ❏ More transportation projects ❏ Gov spending decreases ❏ AD decreases ❏ Less military spending ❏ Xn: National income abroad, exchange rates (dollar depreciation/appreciation) Aggregate Supply: ❏ AS Curve: Shows total production of final g/s at range of price levels at a particular point in time ❏ Total real output produced at each price level ❏ Relationship depends on time horizon ❏ Immediate short run ❏ Short run ❏ Long run

Determinants of AD: ❏ Change in input prices/expectations ❏ Change in productivity ❏ Change in legal/institutional environment ❏ Collectively position AS curve ❏ Changes raise/lower per-unit product costs Input Prices: ❏ Domestic resource prices ❏ Labor ❏ Capital ❏ Land ❏ Prices of important resources ❏ Imported oil ❏ Exchange rates

Productivity: ❏ Increases in productivity reduce costs, decrease in productivity increases costs ❏ Productivity = total output / total inputs ❏ Per-Unit Product Cost = total input cost / total output Legal-Institutional Environment: ❏ Legal changes alter per-unit costs of output ❏ Taxes and subsidies ❏ Extent of government regulation Equilibrium:

The Multiplier Effect: ❏ Shifts in AD embody an “initial change” in spending ❏ Price levels and average wage levels are becoming more flexible downward ❏ Multiplier = Change in real GDP / Initial change in spending...