Macroeconomics - Study Guide with the answers. PDF

Preview

Summary

Study Guide with the answers....

Description

C719 (Macroeconomics) Study Guide Questions The following questions are developed as a study aid for the C719 (Macroeconomics) Course of Study. They cover important concepts in each competency. The questions are not comprehensive but are only designed to serve as an indicator of your preparedness take the C719 assessment. After reading material for each competency, use these questions to reinforce your understanding and review further as necessary.

Competency 1: The Economic Way of Thinking Module 1 1. Describe how economics is related to scarcity, trade-offs, and opportunity costs. Scarcity is the inability to satisfy everyone’s wants, it is a fundamental economic problem in a world with limited resources. With limited resources there is a trade off in production depending on what is most efficient to be produced. This is determined with opportunity costs whichever opportunity costs the least to produce or how much does the trade-off cost you. 2. How does scarcity influence choices? It makes a person choose between wants and needs and prioritize your needs. 3. Define Opportunity Cost. Denotes the full value of the next best alternative that is not selected. It determines the true cost of choices as it includes the dollar outlay (the other goods you could have purchased) but also the value of the next best alternative. Including time cost + other sacrifices you might have made. What you give up in order to do something else is the opportunity cost of that choice.

4. How does the Production Possibilities Frontier (PPF) (also called as Production Possibilities Curve (PPC)) illustrate the concept of trade-off? Because the PPF is based on two products or two groups of products, you cannot efficiently use your resources to produce both. Your efficiency in the production of one product will be greater than the other. There is a trade-off when you determine what product that you want to specialize in as you will give up the production of the product that you are the least efficient in producing to produce more of the product that you are more efficient in producing. This is the trade-off.

5. How do we describe points (1) On the PPF (2) Inside the PPF, and (3) Beyond the PPF in terms of production efficiency? (1) Points on the PPF are considered to be efficient and attainable. (2) Points inside the PPF are considered to be inefficient but attainable (3) Points beyond the PPF are considered to be unattainable and inefficient. 6. If a country produces cars and trucks and if the technology for producing cars improves, how does this change affect production possibility curve? It shifts to the right. How do we demonstrate overall economic growth for a country using the PPC? An outward shift of the PPC.

Prod Poss Curve various Opp Costs

Technological change & PPC

Shift of production: economic growth

Module 2 1. Explain how various economic systems allocate goods and services. a. Tradition: Allocation of goods and services are by rules or by custom b. Command (planned) all allocation of goods and services is determined by central command – usually government. c. Market: Allocation of goods and services is by property rights. 2. What are the three basic economic questions that any society must answer. I. What mix of goods and services is to be produced? II. How will we choose what combination of goods and services? III. For whom are we producing the goods and services? Who and how much? 2. Describe how economic systems are classified into three main types based on how they answer basic economic questions. a. Tradition: Cultural rules answer the three economic questions. b. Command: Government or central command determines the answers for the people in the economy c. Market: The people ‘vote’ consumers determine the answers in the Market economy. 4. Given the same resources, if Company A produces 20 shirts or 2 comforters in a month and Company B produces 40 shirts or 10 comforters in a month, then a. Which company has the absolute advantage in the production of shirts? Company B b. Which company has the comparative advantage in the production of comforters? Company A c. Which company should specialize in producing shirts? Company B d. Which company should specialize in producing comforters? Company A 4. Use the theory of comparative advantage to analyze the benefits of specialization and trade. a. Using the comparative advantage will determine which product you should specialize in for trade as it will be more efficient for your production for both groups to determine which would be more beneficial for them to specialize in. *Opportunity Cost of Unit A = Number of Good B Number of Good A 5. Use the circular flow diagram to show the relationships between firms, households, and markets. a. Firms and households interact with two types of markets: Resource and Product. Households provide the resources of land, labor and capital to the firms, firms use this land labor and capital to produce products, firms pay wages for the labor to the households, firms provide products, households purchase the products made by the firm providing the resources of interest and profit. 6. Identify the four resources (factors of production) and the income paid to each resource for its role in producing goods and services. a. Land, labor, capital and entrepreneurship. These are paid out in incomes of Rent, Wages, interest and profits.

Market Resources

Market leakage

Market with Government

Market with imports and exports

Module 3 1. What is the law of demand? a. States that the quantity demanded of a good or service in a given time period is negatively related to its price. b. All else constant, consumers will purchase more of a good or service at a lower price than at a higher price. 2. What does the slope of the demand curve signify? a. Price that consumers are willing and able to pay for a quantity over a period of time.

3. Explain the difference between shift of a curve (change in demand) vs. movement along a curve (change in quantity demanded). a. A shift of a curve is a change in demand for a reason other than price. Say you are selling oranges and a study states that eating oranges will extend your life by 15 years. Then there is a sharp increase in the demand for your oranges. b. Movement along the demand curve or a change in quantity demanded would be caused by a surplus of oranges that you are selling at a lower price. Movement along this curve was entirely due to a change in the price.

4. If price of a book increases, what happens to its quantity demanded? The quantity demanded will drop as consumers will not want to pay the price . Demand? The demand will drop. 5. Identify three factors that shift the demand curve.  Tastes of the group demanding the service or the good changes  The size of the group demanding the good or service changes  The income/wealth of the group demanding the good or service changes.  The prices of other goods and services (substitutes) changes  Expectations about future prices or income changes 6. What is the slope of the supply curve? What does it tell us about the relationship between price and quantity supplied? As prices rise the quantity supplied by the supplier will rise. Vice Versa as the price decreases the quantity supplied by the supplier will reduce. 7. Identify three factors that affect supply. Identify the factor that affects quantity supplied. a. Factors that shift the supply curve: b. State of technology c. Prices of the productive resources d. Number of suppliers e. Expectations about the future f. Prices of related goods

I nt hemar k etf orc r eam c hees e,ani nc r eas ei nt hepr i c eofc r e am c hees ewi l l dec r eas et hequant i t ydemandedofc r eam c hees ef r om Q1t oQ2.Thi s i nc r eas ei npr i c ec aus esamov e mental ongt hedemandc ur v ef orcr eam c hees ef r om poi ntAt opoi ntB.I nt hemar k etf orbagel s ,ani nc r eas ei nt hepr i c e ofc r eam c hees e,whi c hi sacomp l ement ar ygood,wi l l dec r e as edemandf orbagel s , t huss hi f t i ngt hedemandc ur v ef orbagel st ot hel ef tf r om D1t oD2. Ther ef or e,att hes amepr i c eP1,f ewerbagel swi l l bedemandedbec auseoft hec hangei nt hepr i c eofac ompl ement ar ygood.



There are two exceptions to the law of supply: When there is no time to produce more units (ie paintings by Picasso) or when a unique supplier no longer exists quantity supplied will not change or respond to this. Second exception is the occasion in which increased volume causes the price per unit to fall (ie Software company increases its output of a certain program, its cost per unit generally falls. Lower costs may be passed on to the consumer.

7. Explain the difference between change in supply vs. change in quantity supplied. a. When there is a change in one of the factors that affect supply will cause a change in supply. If the price of a product goes up, the supplier will change the quantity of the supply by supplying more of the product. The change in supply due to improvement in technology will allow the supplier to produce more of the product causing a change in supply. Or if there is a natural disaster like a tornado which wipes out the majority of the resources for production, this would cause a decrease in supply.

Asuppl ycur vef orani ndi vi dual( orfir m)showshowmuchofagoodwi l l beoffer edf orsal eatv ar i ous pr i ces .

Changesi nacet er i spar i buscondi t i oncancauset hesuppl ycur vet oshi f t .A changet hatcauses mor et obesuppl i edateachpr i cei sani ncr easei nsuppl yandi sr epr esent edbyt her i ght war dshi f t f r om S0 t oS1.A changet hatcausest hesuppl yt odecr easei sr epr esent edbyal ef t war dshi f tf r om S0 t oS2.

8. How does a market eliminate shortages? a. It raises the price of the supply that is in shortage which will decrease the demand for it. 9. Assume that a market is in equilibrium at E1 and the demand curve shifts to the left. Draw a graph to show the new equilibrium point E2. Explain the process of price adjustment (use the surplus/shortage explanation) as the market equilibrium changes from E1 to E2. a. A consumer may want to buy a product at $2 but will not be able to find much at that price because the producer may want to charge $4 for the product. The consumer will search for more of the product at $2 but will be unable to find it and will not purchase the goods at $4 so the unpurchased product will become a surplus as more producers produce the goods. The price may fall to $3 and more consumers are willing and able to buy the product for$3 so they have equilibrium or market-clearing price.

Atequi l i br i um,t heamountconsumer swi sht opur chasei sequalt ot heamountsuppl i er swi sht osel l .Thepr i ce est abl i shedatequi l i br i um i scal l edt hemar k et cl ear i ngpr i ce.Atpr i cesabov et hemar ket cl ear i ngpr i ce,quant i t y suppl i ed ex ceeds quant i t y demanded.Atpr i ces bel ow t he mar k et cl ear i ng pr i ce,quant i t y demanded exceeds quant i t ysuppl i ed.

Ani ncr easei ndemandf r om D t oD causest heequi l i br i um pr i cet or i sef r om P t oP andt hequant i t ysuppl i edt o 0

1

0

1

he i ncr easef r om Q t oQ.Adecr easei ndemandf r om D t oD causest heequi l i br i um pr i cet of al l f r om P t oPandt 0

1

0

2

0

quant i t ysuppl i edt of al l f r om Q t oQ. 0

2

Competency 2: Macroeconomic Measurements and Theories Module 4 1. Define labor force. Explain how unemployment rate is calculated and its limitations. a. Labor force includes: i. 16 years or older ii. Non-institutionalized (not in the military, jail, or long-term care facility) iii. Working or actively looking for work *Unemployment rate = Unemployed workers x100% Labor force

2

Limitations of unemployment calculation are due to not taking into consideration the underemployed – those working part-time as they could not find full time work or not taking into consideration the discouraged workers who have looked for work but have been unsuccessful and give up looking for a period of 4 weeks before studies are performed. 2. What are the three types of unemployment? Which two of these always exist under any economic conditions?  Frictional: New entrants into the workforce or people between jobs  Structural: People who lose their jobs and do not have the skills to seek a job that is currently in demand. A mis-match of skills.  Cyclical: workers are laid off because of a fall in demand generally or specifically for certain products they produce.  Structural and Frictional are the two types that exist under any economic conditions. 2. Explain effects of unemployment. Cost of Unemployment a. It is wasteful as the unemployed workers are not productive impacting the economy. These folks could be producing goods and services. b. The system of income distribution in a market economy is dependent on employment. The people working end up supporting the people who are not working in unemployment, food stamps and other welfare payments. People out of work for long periods of time suffer from depression, addiction, and can lead to other social problems such as spousal and child abuse. c. Unemployment is costly to the unemployed worker as it may impact future earnings by loss of experience gained and skill development. Benefits of Unemployment a. There needs to be some amount of unemployment to have skilled workers available to businesses or firms that are expanding otherwise they would have to resort to stealing employees from other businesses or firms. b. Stealing employees does not lessen unemployment, it only rearranges what is produced and leads to inflation as now more workers have more money. But the same amount of goods and services are still being produced. Then businesses can bid up prices due to the increase of demand due to the increase of income. 3. Explain the different components of the business cycle. a. In the 19th century the repeated pattern of ups and downs in output, employment and prices was termed the business cycle. Expansion Phase: Output increases, prices rise rapidly, and unemployment falls. Productivity increases as the economy emerges from the trough of a recession. Firms have kept some workers on during the recession but not used them fully. As sales increase, firms employ these workers more fully and productivity rises. As expansion continues, new and less experienced workers are hired. Then the increase in both productivity and output starts to slow, although employment continues to rise. With the Expansion phase is the upturn of the cycle. The down turn cycle is called a recession in which production and output slows and continues for a period of two consecutive quarters. Unemployment increases, and income falls until the lower turning point, the trough, when output reaches its lowest level. A complete cycle is from peak to peak or trough to trough. 4. How do we define economic recession or expansion using GDP? a. Gross domestic product would change during a recession where people aren’t spending as much to an expansion when people start spending more. This would be reflected in the GDP with outputs. Increase in outputs during an expansion would indicate a drop in unemployment and vice versa for recessions.

5. Identify one-time period of depression and one-time period of stagflation in the U.S. economic history. a. One time period of Depression was The Great Depression 1929-1939 b. One time period of stagflation happened from 1980-1982. Stagflation: The economy is stagnant (not growing) but there is also inflation at the same time. 6. Define inflation and deflation. a. Inflation: A continued rise in the general, or average, level of prices. b. Deflation: A decrease in the general price level of goods and services. It occurs when the inflation rate falls below 0% which is a negative inflation rate. Inflation reduces the real value of money over time; conversely, deflation increases the real value of money. Deflation is indirectly related to unemployment. 7. Explain the relationship between the consumer price index and the inflation rate. *Inflation rate(pi) = (CPI t – CPI t-1)/CPI t x 100 *Real wage t = nominal wage t x100 CPI t a. Inflation is a continued rise in the general or average level of prices. The inflation rate or CPI consumer price index/cost-of-living index is the percentage of change from year to year or the percentage of increase. *CPI t = expenditures on market basket in year t x 100 Expenditures on market basket in base year Base year is always 100 8. Identify four limitations in the CPI measure. a. The Market Basket used to calculate the CPI is fixed or changed very infrequently on the basis of extensive consumer surveys. It becomes more inaccurate over time. b. The CPI measures changes in the average price of a representative market basket of goods and services used by a typical family of four. The closer your household is to this typical family the more accurate the inflation rate is to the rate of your experience. If your household is not close it will not be accurate. c. If your household consumes those goods and services in about that proportion, then the CPI will reflect your cost of living but if you spend greater than average amounts on medical care and housing (considerable increases) and less than average on clothes and furniture (prices have increased slowly) than your personal price index will rise more rapidly. d. CPI cannot take into consideration the changes in household purchasing when the price of goods change rapidly since it is only updated every two years. 9. Identify two parties that may gain because of inflation. a. Borrowers due to inflation the money will be worth less – lenders would be required to demand larger interest rates to cover the loss of purchasing power. Unanticipated inflation redistributes the money from the lender to the borrower. b. The government also stands to gain during times of inflation as state and federal income taxes tend to rise faster than the inflation rate. Taxpayers will be in higher tax brackets. – increased revenues. Module 5 1. Define Gross Domestic Product (GDP). a. GDP is the total market value of all final goods and services produced within a country during a given time period. b. GNP differs from GDP in counting all production by the resources owned by a nation’s citizens rather than all production that takes place inside its boarders. c. GDP defines its scope according to location – so if a foreign company produces in the US it is counted with the GDP. It does not account for output in US companies with their plants in other countries.

d. GNP defines its scope according to ownership - If it is a foreign company it is not included nor for resident aliens. 2. Explain the (1) expenditure method and (2) income method used to calculate GDP? (1) Expenditure method basic assumption is that this approach to measuring GDP is that everything that is produced is also sold to someone. Goods that are not sold must be added to the inventory. Business inventories are stocks of goods held by firms from which they can make sales to meet demand. Changes to these inventories are counted as sales of output to the business sector. (2) GDP = C(Consumptions by households) + I(Investment by business) + G(Purchases of goods and services by the government) + (X(exports) – M(imports). Imports must be subtracted and Exports added. NI National income is income earned by the resources – land labor capital and entrepreneurship. All the income generated in the producing GDP must be accounted for in some way or another 2. List four shortcomings of GDP? a. It only includes activity that places in the legal formal market b. A number of kinds of production is not included in GDP. Do it your self. Omission of non-market production. Bartering c. If people are working more than 40 hours to maintain their GDP then it is artificially inflated. Reduction in quality of life does not appear in GDP assuming that work is considered a negative and leisure time a...