"A"-mazing Terms
The increase of the value of a currency in terms of another currency
Appreciation
A factory pollutes a river as a byproduct of its production process. This pollution harms local fisheries downstream. What economic term describes this situation?
A negative externality (The social cost of production exceeds the private cost)
The spending multiplier is equal to this.
What is 1/MPS or 1/(1-MPC)?
John has a part-time job and has to decide between working an extra hour for $15 or attending a concert with his friends, which he values at $20. What is John's opportunity cost if he chooses to attend the concert?
$15
Given the production possibilities frontier (PPF) for a country is bowed outwards, explain what this shape indicates about the opportunity cost and the allocation of resources. Would you produce more capital or consumer goods? (2 parter)
The increasing opportunity cost, showing that resources are not perfectly adaptable for the production of both goods. You would produce more capital good as it would allow for better production in the future.
The ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources.
Absolute Advantage
A new park is built in a neighborhood, providing beauty and space that benefits everyone in the community. However, no one can be excluded from enjoying the park, even if they don't contribute to its upkeep. What kind of good is this, and what problem might surface?
A public good, leading to the free-rider problem
Discount Rate, FedFund Rate, Open market operations, Reserve ratio.
A student has 5 hours to allocate between studying economics and working. Studying for 1 hour increases the student’s score by 5 points, while working for 1 hour earns the student $10. If the student values 1 point on their exam score as equivalent to $3, how should they allocate their time?
The student should study for 3 hours (15 points worth $45) and work for 2 hours (earning $20)
Blueland's PPF shifts backwards. Give a cause and implications for this economy.
(Determine if answered correctly) Example: Loss of resources due to natural disasters, war, or loss of capital
The word that covers the "total" of something, it even has its name on a graph!
Aggregate
A firm is the only provider of a lifesaving medication. Due to its market power, the firm sets prices significantly higher than marginal cost, leading to allocative inefficiency. What type of market failure is this?
A monopoly
On an AS AD graph, the equilibrium point is in front of the LRAS causing an inflationary graph. Explain what happens using monetary policy to increase the nomInterest Rate.
The higher nominal interest rate will lead to a decrease in the quantity of investment demanded. As investment spending decreases, aggregate demand decreases, which brings the economy out of an inflationary gap and back to equilibrium.
Calculate the price elasticity of demand if the price of a good increases from $10 to $12, and the quantity demanded decreases from 100 units to 80 units.
-1
% chance in qDem/ % change in price =
-0.2/0.2
In a perfectly competitive market, explain why firms produce at the point where price equals marginal cost in the long run.
Firms are price takers and producing where price equals marginal cost maximizes profit
The point where quantities of goods and services produced are those that people value most highly.
Allocative Efficiency
Farmers in a region use a shared water source for irrigation. As more farmers draw water, the source depletes faster, reducing the availability for everyone. This overuse is not accounted for in their private decisions. What type of market failure is occurring
Tragedy of the Commons
How does expansionary fiscal policy effect loanable funds?
It increases in gov spending or reduces taxes which causes a gov budget deficit and results in the government taking out loans.
Calculate the unemployment rate if the total labor force is 200 million and the number of unemployed individuals is 30 million.
15%
unempRate = (unemployed/ labor force) * 100
A monopolistically competitive firm in the long run is in equilibrium. Describe the firm's price, average total cost, and what happens to economic profit.
Firm's price = ATC which results in zero economic profit. That as well as free entry and exit of firms leads economic profit to zero
The net income for a company or revenue minus expenses
Accounting Profit
An innovative company invests heavily in research and development, creating new technologies that benefit other firms and industries. However, the company cannot capture all the benefits of its innovation, leading to underinvestment. What type of market failure is this?
A positive externality
Explain the difference between expansionary and contractionary fiscal policy and give an example of each policy.
Expansionary fiscal policy = increasing gov spending or decreasing taxes to boost AD (stimulus packages). Contractionary fiscal policy = decreasing gov spending or increasing taxes to reduce AD (raisng int rates )
Aryanland's CPI increases from 120 to 126 in one year. Calculate the inflation rate for that year.
5%
((CPI New - CPI Old) / CPI Old) * 100
In an oligopolistic market, two firms agree to collude and set prices. In a prisoners dilemma explain why this agreement might not work.
The agreement is unstable due to incentives to cheat and undercut the competitor, leading to potential price wars and reduced profits