Fundamentals
Unlimited wants but limited resources
What is scarcity?
Will price floors cause a shortage or surplus in the market?
What is a surplus?
A general rise in prices as measured by the CPI
What is inflation?
The Federal Reserve's attempt to control the money supply in an effort to stabilize the economy
Who benefits from an increase in minimum wage?
Minimum wage workers who have a job
Heather has a gift card to Macy's. She wants to be a a pair of shoes, a purse, a dress, and a bathing suit (listed in order of preference). However, she doesn't have enough money to buy everything, so she chooses to buy a pair of shoes. What is her opportunity cost?
What is a purse?
Is the demand for gasoline elastic or inelastic. Why?
Gasoline is fairly inelastic. For most people, it is a necessity, nondurable, and there are only a few substitutes.
Identify and describe TWO types of unemployment?
Structural: skills don't match needs of market
Frictional: temporary due to personal changes such as moving
Cyclical: related to the contractionary/recessionary phase of the business cycle
What does the FOMC do for the Federal Reserve?
Create policies regarding the buying and selling of government securities
Why is the stock market a risky investment?
There is no guarantee you will get any of your money back
Identify and describe the two markets in the circular flow diagram.
What is a factor market and a product market?
Factor Market: households sell factors of production to businesses in exchange for money.
Product Market: businesses sell goods & services to households in exchange for money.
Explain what would happen to the demand for soccer balls if the price of soccer balls increased.
Demand would not change. Quantity demanded would decrease due to a change in price.
List and explain THREE reasons an item would be excluded from GDP.
second hand sales to avoid double counting
purely financial transactions because no goods or services are being exchanged
government transfer payments because no goods or services are being exchanged
underground economy because it cannot be tracked due to lack of reporting
nonmarket transactions because it cannot be tracked
Describe the problem with America's budget.
The U.S. hasn't been able to agree on a budget in years. They engage in deficit spending regularly which adds to the alarming national debt. As a result of having no budget, the government periodically experiences shut downs.
Why are mutual funds safer than buying stocks?
Mutual funds diversify your investment making them safer
Explain the difference between a market, command, and traditional economy.
Market: consumers & producers answer the three basic economic questions through supply and demand.
Command: the government answers the three basic economic questions.
Traditional: custom & tradition dictate how a society will answer the three basic economic questions.
What will happen to demand or supply of frozen yogurt if the price of ice cream increases? Be sure to explain which way the curve would shift and why.
Demand will increase and shift to the right due to a change in the price of a substitute good.
List and describe FOUR benefits of economic growth
Enlarges the tax base because employment is higher & wages are higher so the gov generates more revenue
Solves domestic problems because the gov generates more revenue so that they can offer more services to people in need
Raises the standard of living because employment and wages are higher so people can afford to buy more goods & services
Helps other nations by loaning more money from the higher government revenue and serving as a role model for other nations
Identify and describe the THREE types of taxes.
Progressive Tax: higher taxes on higher incomes
Regressive Tax: higher taxes on lower incomes
Proportional Tax: everyone pays same percent of income in taxes
Why do countries trade?
So they can specialize in production and then trade for the goods & services they need and want. Increases global production.
Explain what a PPF curve illustrates. Be sure to include a description of the various points on the PPF curve (efficient, inefficient, and currently impossible).
A PPF curve illustrates opportunity cost by highlighting that resources are scarce and societies have to choose how to make best use of their resources. A point inside the curve is inefficient meaning they can produce more of both goods by employing resources. A point on the curve is efficient because they have an opportunity cost of one good if they want to increase production of the other good. A point outside the curve is currently impossible because they don't have enough resources.
What will happen to equilibrium price and quantity of chocolate if producers expect the price of chocolate to increase in February? Why?
Equilibrium price would increase and quantity would decrease due to a decrease in supply as a result of changing producer price expectations.
Identify and describe all FIVE parts of the business cycle
Peak: expansion has topped out due to increasing inflation. People's spending habits change and as a result, the economy begins to shift to a recession.
Trough: the recession/depression has ended and the economy will begin to recover
Expansion: GDP is increasing, unemployment decreases, and inflation rises
Recession: GDP growth slows or declines, unemployment increases, and inflation slows or deflation occurs
Trendline: ideal, slow, steady growth of the economy
How would you respond to the following scenario using monetary & fiscal policy tools: Unemployment is rising as business growth slows.
Monetary
Reserve Requirement: decrease
Discount Rate: decrease
Open Market Operations: buy
Fiscal
Taxes: decrease
Government Spending: increase
Explain the difference between comparative and absolute trade advantages.
Comparative = when you can make something at a lower opportunity cost than another country (make it more efficiently)
Absolute = when you can produce more of something than another country