Econ in the Real World
What is the difference between nominal GDP and real GDP?
Nominal GDP measures output using current prices; real GDP adjusts for inflation.
What are the three functions of money?
Medium of exchange, store of value, unit of account.
What is “price elasticity of demand”?
A measure of how sensitive quantity demanded is to a change in price.
What are the key characteristics that differentiate perfect competition from monopolistic competition?
In perfect competition, products are identical and firms are price takers. In monopolistic competition, products are differentiated and firms have some price-setting power.
A country is experiencing rapid capital inflows due to high interest rates. What is a likely short-term effect on its currency value, and why?
The currency will likely appreciate because higher interest rates attract foreign investors seeking better returns, increasing demand for the domestic currency.
What does a Phillips curve compare?
An inverse relationship between inflation and unemployment (short-run).
What is the purpose of a central bank’s reserve requirement for commercial banks?
To ensure banks hold a fraction of deposits, limiting excessive lending.
When a product’s demand is inelastic, what happens to total revenue if the price increases?
The total revenue increases.
Why do firms in an oligopoly often avoid price wars and instead engage in non-price competition?
Because each firm’s pricing decisions significantly impact the others, price wars can be mutually destructive, so firms compete through branding, features, or advertising instead.
What is a currency peg, and why might a country use one?
Fixing a currency’s value to another (like the USD) to stabilize trade and inflation.
How can unemployment stay high even during economic recovery?
Discouraged workers stop looking for jobs or structural unemployment persists.
What happens to the money supply when the Fed buys bonds?
It increases.
What is the difference between a change in demand and a change in quantity demanded?
Change in demand = shift of the curve; change in quantity demanded = movement along the curve.
What is the Nash Equilibrium in the context of an oligopoly?
A situation where no firm can benefit by changing its strategy while the others keep theirs unchanged; often used to analyze firm behavior in strategic settings like collusion or competition.
What is “purchasing power parity” (PPP), and how is it used?
It compares currencies based on the cost of identical goods in different countries.
What is the “natural rate of unemployment”?
The rate of unemployment that exists even in a healthy economy due to frictional and structural factors.If both supply and demand increase, what happens to equilibrium quantity?
Why might a central bank pursue a tight monetary policy?
To slow down inflation and prevent overheating of the economy.
What’s an example of a government-imposed price floor and its likely effect?
Minimum wage; it can create a surplus of labor (unemployment).
Why does a natural monopoly occur, and what is an example?
A natural monopoly occurs when a single firm can supply the entire market at a lower cost than multiple firms due to high fixed costs and economies of scale (e.g., electricity or water utilities).
How can a country’s attempt to maintain a fixed exchange rate lead to contractionary monetary policy, and what is the economic tradeoff?
To maintain a fixed exchange rate when the domestic currency is under pressure to depreciate, a country may raise interest rates to attract foreign capital. This tightens the money supply (contractionary policy), which can reduce inflation but also slow economic growth and increase unemployment
A new study shows coffee improves health. What happens to the demand curve for coffee, and what’s the effect on equilibrium price?
The demand curve shifts right; equilibrium price increases.
What is “monetary neutrality”?
The idea that changes in the money supply only affect nominal variables, not real output, in the long run.
A government imposes a per-unit tax on a good with highly inelastic demand. Who bears most of the tax burden and why?
Consumers bear most of the tax burden because inelastic demand means quantity demanded doesn’t change much with price, so producers can pass most of the tax onto consumers in the form of higher prices.
A monopolist faces a downward-sloping demand curve and produces where marginal revenue equals marginal cost. Explain why its price is higher than marginal cost and what this implies about allocative efficiency.
A monopolist sets price above marginal cost because it maximizes profit where MR = MC, not where P = MC.
How can a country manipulate its currency to boost exports?
By devaluing its currency to make exports cheaper and more competitive abroad.