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Macroeconomics Key Concepts and Principles

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  • What type of system uses prices to provide signals about resource allocation?

    A market system uses prices to signal resource allocation to individuals.

  • What assumption underlies economic theory regarding choices?

    Choices are affected by incentives.

  • Why do trade-offs exist in the production of goods and services?

    Because society has only a limited amount of productive resources.

  • What is the difference between scarcity and shortage?

    Scarcity is always present due to limited resources; shortages are usually temporary.

  • Which of the following is NOT an economic resource: entrepreneurship, money, physical capital, or land?

    Money is not an economic resource; it is a medium of exchange.

  • What is human capital?

    The accumulation of skills, training, and education of workers.

  • An irrigation system installed on a farm is an example of which factor of production?

    Physical capital.

  • What does the production possibilities curve (PPC) show?

    All possible combinations of two goods that can be efficiently produced with given resources.

  • What causes the PPC to bow outward?

    The law of increasing opportunity cost.

  • What is comparative advantage?

    When a person can produce a good at a lower opportunity cost than another.

  • Why do people specialize?

    Specialization usually increases productivity.

  • What does it mean if an economy operates inside the PPC?

    Resources are being inefficiently utilized.

  • What is the law of demand?

    As price decreases, quantity demanded increases, ceteris paribus.

  • What is market demand?

    The total quantities demanded by all consumers at given prices.

  • If Sarah buys less fish but more beef stew after a raise, what can be inferred about these goods?

    Fish is an inferior good and beef stew is a normal good for Sarah.

  • What causes a rightward shift of the demand curve?

    An increase in expected future price of the good, among other factors.

  • What happens to demand for good A if the price of substitute good B increases?

    Demand for good A increases.

  • What is the labor force defined as?

    The sum of the employed and unemployed individuals.

  • What type of unemployment is a lifeguard out of work in winter?

    Seasonal unemployment.

  • What is full employment?

    The unemployment level when normal frictional unemployment is accounted for.

  • What is deflation?

    A sustained decrease in the average price level of goods and services.

  • How are the rate of inflation and purchasing power of money related?

    They are inversely related.

  • In the circular flow model, total income equals what?

    The total monetary value of all final goods and services produced.

  • How is the Consumer Price Index (CPI) calculated?

    By comparing the cost of a market basket of goods in the current year to the base year.

  • What is the real interest rate if nominal rate is 7% and expected inflation is 3%?

    Real interest rate = nominal rate - inflation rate = \(7\% - 3\%\) = 4%.

  • What happens during a recession?

    Incomes fall and unemployment increases.

  • What is an expansion in the business cycle?

    A period when overall business activity is rising.

  • What does GDP measure?

    The total market value of all final goods and services produced within a country in a year.

  • What is the formula for GDP using expenditure approach?

    GDP = Consumption + Investment + Government Spending + Net Exports (Exports - Imports).