Q1. Is the following topic a concern of microeconomics or macroeconomics?

• Explaining why the U.S. Recession of 2008-2009 was accompanied by price deflation. Macroeconomics

• Explaining why the price of wheat is related to the price of ethanol. Microeconomics

• Predicting the impact of a large increase in number of business school graduates on the salaries of entry level jobs in corporations. Microeconomics

• Predicting what would happen to the levels of U.S. employment and unemployment if the United States invades Canada and Greenland. Macroeconomics

Background

Topic: Scope and Method of Economics

This question tests your understanding of the distinction between microeconomics (individual markets, firms, and households) and macroeconomics (aggregate economy, national issues).

Key Terms:

• Microeconomics: Study of individual markets, firms, and consumer behavior.

• Macroeconomics: Study of the economy as a whole, including issues like inflation, unemployment, and GDP.

Step-by-Step Guidance

1. Read each example carefully and identify whether it deals with individual markets or the aggregate economy.

2. Recall that macroeconomics focuses on broad issues like recessions, unemployment, and national price levels.

3. Microeconomics focuses on specific markets, prices, and individual decision-making.

4. For each example, ask: Is this about a single market or about the whole economy?

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Q2. Is the following statement positive or normative?

• Lower personal income tax rates will lead to more consumer spending. Positive

• College graduates earn higher incomes than high school dropouts. Positive

• New York State should raise income tax rates on New Yorkers who earn more than 1 million dollars per year. Normative

Background

Topic: Positive vs. Normative Economics

This question tests your ability to distinguish between statements that describe what is (positive) and what ought to be (normative).

Key Terms:

• Positive Economics: Objective statements that can be tested or verified.

• Normative Economics: Subjective statements involving value judgments or opinions.

Step-by-Step Guidance

1. Read each statement and ask: Is it describing a fact or making a recommendation?

2. Positive statements are testable and factual; normative statements express opinions or what should be done.

3. Look for words like "should" or "ought"—these often indicate normative statements.

4. For each statement, decide if it is positive or normative based on these criteria.

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Q3. Robinson Crusoe's Production Possibilities Frontier (PPF)

• A. Draw Crusoe's PPF if he works 8 hours per day, takes 1 hour to catch 2 fish, and 1 hour to grab 1 coconut.

• B. Can Crusoe catch 8 fish and grab 12 coconuts? no

• C. What is the relative price of fish in terms of coconuts in part A?

• D. Draw his PPF if Crusoe doubles his climbing skills (can grab 2 coconuts per hour) but does not improve his fishing skills.

• E. How does the relative price of fish in terms of coconuts change in part D?

Background

Topic: Scarcity, Choice, and Production Possibilities Frontier

This question tests your understanding of opportunity cost, trade-offs, and how changes in productivity affect the PPF and relative prices.

Key Terms and Formulas:

• Production Possibilities Frontier (PPF): Shows all possible combinations of two goods that can be produced given resources and technology.

• Opportunity Cost: The value of the next best alternative foregone.

• Relative Price: The price of one good in terms of another.

Step-by-Step Guidance

1. Calculate Crusoe's maximum output for each good if he spends all 8 hours on one activity.

2. For fish:

3. For coconuts:

4. Draw the PPF with fish on one axis and coconuts on the other, connecting the two endpoints.

5. To check if Crusoe can catch 8 fish and grab 12 coconuts, calculate the hours required for each and see if the total exceeds 8 hours.

6. Set up the opportunity cost calculation: How many coconuts must be given up to catch one more fish?

7. For part D, recalculate maximum coconuts if Crusoe can grab 2 coconuts per hour:

8. Update the PPF and recalculate the opportunity cost and relative price.

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Q4. Market for Macroeconomics Textbooks: Demand and Supply

• A. What was the equilibrium price and quantity of Macro textbooks in 1973? Why?

• B. At what set of prices would there have been an excess Supply for Macro books in 1973?

• C. What happened to the equilibrium price and quantity of Macro books between 1973 and 1974 when demand decreased?

• D. Show how the situation changed in part C on the graph.

Background

Topic: Demand and Supply, Market Equilibrium

This question tests your understanding of how market equilibrium is determined and how shifts in demand affect price and quantity.

Key Terms and Formulas:

• Equilibrium Price: The price at which quantity demanded equals quantity supplied.

• Excess Supply: Occurs when quantity supplied exceeds quantity demanded at a given price.

• Demand Curve: Shows the relationship between price and quantity demanded.

• Supply Curve: Shows the relationship between price and quantity supplied.

Step-by-Step Guidance

1. Identify the intersection point of the demand and supply curves to find equilibrium price and quantity.

2. Excess supply occurs at prices above equilibrium; check where quantity supplied is greater than quantity demanded.

3. When demand decreases (students avoid economics), the demand curve shifts left.

4. Predict how this shift affects equilibrium price and quantity (both should decrease).

5. On the graph, show the new demand curve and the new equilibrium point.

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Q5. Measuring National Income & Output: GDP and GNP

• A. Indicate with an X which items are counted in which categories: U.S. GDP, U.S. GNP, Belgian GDP, Belgian GNP.

• B. Calculate nominal GDP for year 1 and year 2, and determine if it rose or fell. Did real GDP rise, fall, or stay the same?

Background

Topic: National Income Accounting

This question tests your understanding of how GDP and GNP are calculated and the difference between nominal and real GDP.

Key Terms and Formulas:

• GDP (Gross Domestic Product): Value of all goods and services produced within a country's borders.

• GNP (Gross National Product): Value of all goods and services produced by a country's citizens, regardless of location.

• Nominal GDP: GDP measured at current prices.

• Real GDP: GDP measured at constant prices (adjusted for inflation).

Step-by-Step Guidance

1. For each item, determine if it is produced within the country (GDP) or by citizens (GNP).

2. Fill in the table with Xs for each category based on the definitions.

3. For nominal GDP, multiply quantity by price for each good in each year and sum the results.

4. Compare nominal GDP for year 1 and year 2 to see if it rose or fell.

5. For real GDP, use base year prices (e.g., year 1 prices) and multiply by quantities for each year.

6. Compare real GDP between years to determine if it rose, fell, or stayed the same.

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Q6. Employment, Unemployment, and Prices

• A. Fill in the labor force participation rate, employment rate, and unemployment rate for 2023, 2024, and 2025. Explain the "Discouraged Worker Effect".

• B. Define Consumer Price Index, inflation, and deflation.

Background

Topic: Labor Market Statistics and Price Indices

This question tests your ability to calculate labor market rates and understand price indices and inflation/deflation.

Key Terms and Formulas:

• Labor Force Participation Rate:

• Employment Rate:

• Unemployment Rate:

• Discouraged Worker Effect: When people stop looking for work, they are no longer counted as unemployed, which can lower the unemployment rate.

• Consumer Price Index (CPI): Measures average change in prices paid by consumers for goods and services.

• Inflation: Sustained increase in the general price level.

• Deflation: Sustained decrease in the general price level.

Step-by-Step Guidance

1. For each year, use the formulas to calculate labor force participation rate, employment rate, and unemployment rate.

2. Plug in the values from the table for each year.

3. For the "Discouraged Worker Effect," observe how a decrease in labor force affects the unemployment rate.

4. Define CPI, inflation, and deflation using the key terms above.

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