WGU-C719 (Western Governors University) Macroeconomics Exam Study Guide Latest Updated Graded A+

The value of the best alternative that is sacrificed to obtain something you want is a/an - ANSWER Opportunity cost What is a graph that shows the various combinations of choices an individual can make with the resources available? - ANSWER Choice curve The assumption that all resources are alike will produce a - ANSWER straight line curve A curved production possibilities curve (PPC) changes the assumption that resources are - ANSWER alike What explains how the production of larger amounts of one good leads to an increase in the sacrifice of the alternative good? - ANSWER the law of increasing opportunity costs An outward shift of the production possibilities curve (PPC) increases the economy's capacity to respond to - ANSWER human wants What is the most important assumption in economic models? - ANSWER ceteris paribus assumption "all else being equal." Economists assume people are - ANSWER rational This behavior consists of people trying to get the most of something they want (to maximize some goal) out of available resources - ANSWER self-interested behavior The four factors of production are - ANSWER land, labor, capital and entrepreneurship Plants, equipment, and machinery are examples of - ANSWER capital resources Capital increases only when - ANSWER physical or human capital increases What is entrepreneurship? - ANSWER the activity of combining the other productive resources to produce goods and services, taking risks, and introducing new methods and new products (innovation.) What is profit? - ANSWER the reward for innovation, risk taking, and organization What are the three basic economic questions? - ANSWER What to produce? How to produce? For whom to produce? What are the three broad types of economies? - ANSWER 1. Traditional economy 2. Command (or planned) economy 3. Market economy Traditional economy - ANSWER answers the basic economic questions by tradition, or custom (Haiti banana farmers) Command (or planned) economy - ANSWER answers the basic economic questions through central command and control (Soviet Union, China, North Korea and Cuba) Market economy - ANSWER relies on incentives and the self-interested behavior of individuals to direct production and consumption through market exchanges (America) Mixed economy - ANSWER a blend of tradition, command, and market economies (Most modern industrial countries have this) A good that is nonrival in consumption and not subject to exclusion is called a(n) - ANSWER Public Goods (Sunsets & Lighthouses) What are negative effects that have an impact on everyone to some degree? - ANSWER Public Bads (Pollution, Global Warming, Animal Extinction) Goods that nonpayers, or free riders, *CAN* be kept from consuming - ANSWER Excludables Spillover benefits to third parties are called - ANSWER Positive Externalities (Public Education) What is an example of a negative externality? - ANSWER Pollution. It's a negative externality because it has spillover costs to third parties. The goal of an economy is for the goods and services to go to the people - ANSWER who will value them the most Which of the following is the most successful method to allocate sweaters in Macroland? - ANSWER Market prices Getting a mandated vaccination that protects you, but also protects others, would be considered - ANSWER a pure public good In the absence of government intervention, there will be both - ANSWER too many public bads and too few public goods. Which of the following is an example of a transfer payment? - ANSWER Veterans' benefits. They are transfer payments because they are income and they are disbursed without work being done. In the United States, the redistributive function of the government is carried out mainly by - ANSWER The redistribution function is financed at the federal level and implemented at the state and local levels. What function of the government promotes price stability and full employment? - ANSWER Stabilization (The Government cutting taxes to end a recession) What is a visual picture of the relationships between the resource market, in which income is earned, and the product market, in which income is used to purchase goods and services? - ANSWER A Circular Flow Model (describes a mixed economy) What is the most basic function of the government in a market economy? - ANSWER Defining and Enforcing property rights The following are justifications for the allocation function of the government - ANSWER The existence of public bads The presence of external effects The existence of public goods (NOT the basic instability of the economy) The relationship between the quantity demanded at the price applied is the - ANSWER Demand curve When price changes, there is an opposite change in what? - ANSWER Quantity demanded All else being equal (ceteris paribus), as the price of a good or service increases, - ANSWER People will buy less of it The nonprice determinants of demand are: - ANSWER 1. the tastes of the group demanding the good or service 2. the size of the group demanding the good or service 3. the income and wealth of the group demanding the good or service 4. the prices of other goods and services 5. expectations about future prices or income The market demand curve is found by adding up the - ANSWER Individual demand curves What is a good for which demand increases as income increases, ceteris paribus? - ANSWER Normal good (meat, you might eat hamburger when you have less money, but you'll still eat steak if you earn a little more money) What is a good for which demand falls when income rises? - ANSWER Inferior good (ramen noodles) What are goods that are jointly consumed? - ANSWER Complementary goods (cereal and milk, lamps and light bulbs) What are goods that replace each other? - ANSWER Substitute goods (orange juice & apple juice, Coke & Pepsi, Reebok & Adidas) If two goods are complements, a rise in the price of one will - ANSWER decrease the demand of the other (if the price of cream cheese goes up, people will eat less bagels) If two goods are substitutes, a rise in the price of one will - ANSWER increase the demand for the other (if the price of mountain dew goes up, people will buy mellow yellow to replace it) With all else held constant, suppliers usually will supply less of a good or service - ANSWER at lower prices As prices rise, the quantity supplied will - ANSWER increase (because it's more profitable to produce and sell the good when you're charging more) What is the sum of all of the individual supply curves? - ANSWER Market supply curve A supply curve has a positive relation between - ANSWER price and quantity supplied When price changes, one should expect a change in - ANSWER *quantity* supplied The two variables on a supply curve are - ANSWER price and quantity A change in one of the ceteris paribus conditions will cause the entire supply curve to shift. The most important of these are: - ANSWER 1. the state of technology 2. the prices of the productive resources 3. the number of suppliers 4. expectations about the future, and 5. the prices of related goods How does a change in quantity supplied differ from a change in supply? - ANSWER A change in the price affects quantity supplied, not supply. With ceteris paribus conditions remaining constant, suppose the price of cement goes up in the United States. What happens in the market for new homes? - ANSWER Supply shifts upward and to the left What is most likely to happen if the supply of coffee shifts to the right, and the price has not yet changed to a new price? - ANSWER Market forces will drive the price down (When the supply curve shifts to the right, the new equilibrium has greater quantity and lower prices) Market equilibrium occurs at that price for which quantity demanded by consumers is equal to - ANSWER quantity supplied by producers (This equilibrium price is also called the market-clearing price) Equilibrium occurs at a price for which the - ANSWER quantity supplied and the quantity demanded are equal The Theory of Price Formation is based on 2 propositions - ANSWER 1. Quantity demanded is negatively related to price 2. Quantity supplied is positively related to price When the quantity demanded exceeds the quantity supplied, - ANSWER prices will rise When the quantity demanded is less than the quantity supplied, - ANSWER prices will fall When the quantity demanded equals the quantity supplied, - ANSWER price is at equilibrium True or false. If there is a shortage of coffee in the market, the price of coffee will drop. - ANSWER False (If there is a shortage of coffee in the market, the price will rise because the sellers will raise the price to make more profit since it's hard to get) True or false. If there is a surplus of coffee in the market, the price of coffee will rise. - ANSWER False (If there is surplus of coffee in the market, the price will drop because the sellers will drop the price to get rid of their coffee because it's taking up space) True or false. If the quantity demanded for pizza is 100 and the quantity supplied is 120, and the pizza is sold at a fair price, the market for pizza is in equilibrium. - ANSWER False (Quantity supplied is more than quantity demanded, so the market is not in equilibrium) If the quantity demanded for strawberries is more than the quantity supplied, what will happen to the price of strawberries? - ANSWER The price will rise ( If there is more demand than supply of strawberries, this provides an incentive to the sellers to raise the price of strawberries. Thus, the price of strawberries will rise) The existence of transactions costs means that - ANSWER different people may pay different prices for the same good or service Prices play a central role in a market system in allocating scarce resources and - ANSWER answering the basic economic questions (The primary functions of prices are to inform, direct, and motivate consumers and firms) Ceteris paribus, as applied in demand theory, means holding constant all factors that affect demand except one - ANSWER price Demand is the relationship between quantities demanded and - ANSWER price levels at a certain time period When price changes, there is an opposite change in - ANSWER quantity demanded and demand, when the whole set of price and quantity change The demand curve for cars will shift upward when income - ANSWER increases and when the price of gasoline decreases With increased prices for cars, producers - ANSWER increase their supplies, and consumers decrease their demands There is a positive relationship between price and quantity - ANSWER supplied, and there is a negative relationship between quantity demanded When quantity supplied equals quantity demanded, there is - ANSWER a market-clearing price (equilibrium price) True or false. When quantity supplied equals quantity demanded, there is an excess of quantity supplied - ANSWER False When the supply of a product increases, but the demand for the product remains unchanged, the equilibrium price of the product will - ANSWER fall, and the equilibrium quantity will increase Unit 3 - ANSWER Unit 3 This embodies the highest amount of skilled and unskilled labor that could be employed within an economy at any given time - ANSWER Full employment This is an indicator of strength or weakness in the national labor markets. It provides information on how many positions need to be filled. - ANSWER The help wanted index True or false. When there is full employment, the number of job seekers is approximately equal to the number of job vacancies. - ANSWER True True or false. Full employment means that everyone in the population is employed. - ANSWER False Short-term unemployment is called - ANSWER Frictional unemployment (approx. 3-4% of the labor force) Frictional unemployment is chosen by the workers. Frictional unemployment would generally be classed as voluntary unemployment because workers are choosing to remain unemployed rather than get the first job that comes along. A mismatch of workers and jobs is commonly known as - ANSWER Structural unemployment (available workers do not match the jobs in terms of skills or location) This occurs during periods of slow economic growth or during periods of economic contraction - ANSWER Cyclical unemployment (an auto worker being laid off during a recession) A period of 18 months of job searching is considered an - ANSWER unemployment period True or false. Each period of unemployment is a lost opportunity to develop skills and experience that may make a worker more valuable to an employer. - ANSWER True True or false. Unemployment allows for growth in the economy. - ANSWER True If a business wants to expand, but there are no workers available to hire, the only way the expanding business can get a new employee is to "steal" the employee away from the existing employer, which can be done by offering higher pay or benefits. True or false. The system of income distribution in a market economy is not dependent on employment. - ANSWER False The system of income distribution in a market economy is very dependent on employment. If people do not have jobs, they do not earn income. The policy of stealing employees away from jobs by offering them higher salaries doesn't lead to more production for the economy. Instead, this policy just rearranges what is produced and leads to - ANSWER Inflation Workers who take higher-paying jobs have more money, but more goods and services aren't being produced, which leads to inflation. True or false. Full employment means that everyone in the population is employed or even that 100% of those who are able are willing to take a job. - ANSWER False One way of defining full employment is to identify some level of unemployment as normal (acceptable or desirable) and only be concerned about unemployment in excess of that amount. True or false. By definition, an economy is at full employment when 93%-94% of those who want to work are employed. - ANSWER True Full employment does not mean that everyone in the population is employed or even that 100% of those who are able are willing to take a job. True or false. A situation in which all available labor resources are being used in the most economically efficient way is full employment. - ANSWER True By this definition, an economy is at full employment when 93%-94% of those who want to work are employed. True or false. The unemployment rate is defined as the percentage of the labor force that is actively looking for a job. - ANSWER False Besides actively looking for a job, a person must also not currently have a job. In a certain year, 143,060 of a country's residents were employed and 11,844 were unemployed. Under the formal definition for being unemployed, what is the unemployment rate for that year? - ANSWER 7.64% Unemployment rate = (unemployed worker/labor force/)*100 = {11,844 ÷ (143,060 + 11,844)}*100 = 7.64%. If the unemployment rate is 3.5% and the labor force is 25,0000, what is the number of unemployed workers? - ANSWER 8750 Unemployment rate = (unemployed worker/labor force/)*100. This means, 3.5 = (unemployed worker/)*100 = 8750 What is the formula to calculate the unemployment rate? - ANSWER unemployment rate=Unemployed workersLabor force×100 The labor force consists of - ANSWER those who are working and those who are actively seeking work. People who have looked for work in the past 6 months, but NOT in the past 4 weeks, are called - ANSWER discouraged workers (not calculated in labor force #'s) True or false. The presence of discouraged workers may cause the unemployment rate to be overstated. - ANSWER False The presence of discouraged workers may cause the unemployment rate to be understated. This is because discouraged workers are those who were seeking employment, but have given up and stopped looking, so they are not included in unemployment calculations. Which types of workers might cause unemployment to be understated? - ANSWER Part-time workers who are working fewer hours than they would like and discouraged workers Two types of workers that cause unemployment to be overstated are - ANSWER Unreported legal workers and reported illegal workers (These problems result from the inability of the BLS (Bureau of Labor Statistics) to verify the truthfulness of the information provided by respondents.) What is the labor force participation rate? - ANSWER The labor force participation rate measures the fraction of the adult population that is employed or actively seeking work. The labor force participation formula is Labor Force/Working age population X100 True or false. As women entered the labor force, male participation declined partially due to the increased safety net for married men. - ANSWER True When their wives work more men have the option of leaving the workforce and still having their families provided for True or false. A declining labor force participation rate means fewer workers are supporting an increasing number of non-workers. - ANSWER True When people leave the labor force, they still consume goods and services, and it is up to the remaining workers to create these goods and services True or false. Total labor supply does not affect the unemployment rate over longer periods. - ANSWER False Total labor supply *does* affect the unemployment rate over longer periods If the labor force is 250,000 and the working-age population is 350,000, what is the labor force participation rate? - ANSWER 71.43% Labor force participation rate = (labor force/working age population) * 100 = (/) * 100 = 71.43% An indicator that is helpful in sorting out the relative importance of changes in total demand for labor and total labor supply is the - ANSWER labor force participation rate The labor force participation rate measures the fraction of the adult population that is employed or actively seeking work What is the consumer price index (CPI)? - ANSWER The current CPI is a measure of the average of the prices paid by consumers for a fixed market basket of consumer goods and services. The market basket is based on the consumption of the typical urban family of four. What is one of the criticisms of the CPI? - ANSWER People's taste and consumption habits change with the introduction of new goods or trends or changes in prices and the basket should be revised more often The CPI tends to overstate the true inflation rate because - ANSWER it fails to consider the effects of new products in the marketplace The CPI does not adjust the basket when new products are introduced that will shift consumption from one good to another The measure of inflation is the - ANSWER change in the price index. The percentage change in the CPI from one year to the next is the inflation rate. Deflation is bad for the economy because when people start anticipating falling prices, they are less willing to - ANSWER spend or borrow money Falling prices worsens the position of debtors because it - ANSWER increases the real value of money One reason why governments try to restrain inflation is because - ANSWER it causes an unintended and often undesirable redistribution of income and wealth Redistribution is more likely to occur when inflation is - ANSWER unanticipated Deflation is the situation in which - ANSWER the average of all prices is declining Who is most likely to be a winner during times of inflation? - ANSWER People who hold real assets and the government. When inflation increases, the value of real assets increases, making it more profitable to hold them. The government also is a winner because tax revenue increases. An unexpected reduction in inflation would tend to benefit which of the following? - ANSWER Creditors When inflation decreases, the value of the dollar increases, making the loan more profitable. Unanticipated positive inflation will create - ANSWER losses for creditors and gains for debtors. When inflation is unanticipated interest rates are not adjusted for inflation and loans have lower interest rates. Fully anticipated inflation occurs when - ANSWER inflation rises the same as the forecast expected, then inflation is fully anticipated. Most of the problems caused by inflation are caused by the fact that - ANSWER inflation is often unanticipated, and therefore comes as a surprise to individuals in the economy For most people, the problems of inflation are caused by the fact that - ANSWER the inflation is unanticipated The United State is in a recession if - ANSWER the GDP (real output) declines for two successive quarters A war in the Middle East that affects the U.S. stable economy could cause a - ANSWER contraction. This means that the economic activity has slowed down. During the Great Recession (2007 to 2009), the United States experienced increasing unemployment and a low rate of - ANSWER inflation Over time, there is a tendency for - ANSWER major macroeconomic variables to move together in a predictable way In theory, major macroeconomic variables move together in a predictable way Economists use the phrase "business cycle" when discussing - ANSWER fluctuations in aggregate measures of economic output or income. During the expansionary phase of the business cycle, it is likely that real income will - ANSWER increase, the price level will increase, and the unemployment rate will decrease. During an expansionary phase, price level and real income will increase while unemployment will decrease. The turning points of the business cycle are called - ANSWER peaks and troughs In sequence, what are the four phases of the business cycle? - ANSWER Peak, recession, trough, expansion The longest contractionary period in the U.S. was - ANSWER The Great Depression () Since WWII the highest unemployment rate during a downturn was - ANSWER 10.8% (occurred in October 1982) What are the two major characteristics that governments look at when determining the health of their economies? - ANSWER employment and inflation