Economic foundations
What is the economic problem caused by unlimited wants and limited resources?
Scarcity
What two forces interact to determine prices in a market?
Supply and demand.
What does GDP measure?
The market/monetary value of all final goods and services produced within a country's borders during a given period.
Which two branches of government control fiscal policy, according to the presentation?
Legislative and executive branch
Which institution controls monetary policy in a country?
The central bank.
What is the value of the next-best option you give up when making a choice?
Opportunity cost.
What happens to the equilibrium price when demand increases and supply remains constant?
The equilibrium price increases.
What does GDP per capita tell us?
A country's GDP divided by its population; it measures average economic output per person.
What three main variables does fiscal policy use?
Government spending, taxes, and public debt.
What is an interest rate?
The cost of borrowing money.
What is the difference between absolute advantage and comparative advantage?
Absolute advantage means producing more with the same resources, or using fewer inputs. Comparative advantage means producing at a lower opportunity cost.
What is the main characteristic of perfect competition regarding the power of individual firms to set prices?
Individual firms are price takers and cannot influence the market price.
What is the difference between nominal GDP and real GDP?
Nominal GDP uses current prices, while real GDP adjusts for price changes (inflation)
What type of fiscal policy is used during a recession to increase economic activity?
Expansionary fiscal policy.
What is the main difference between expansionary and restrictive monetary policy?
Expansionary policy encourages borrowing and spending; restrictive policy discourages borrowing and spending to help control inflation.
Country A can produce 20 cars or 100 tons of wheat. Country B can produce 30 cars or 90 tons of wheat. Which country has the comparative advantage in cars?
Country B. Its opportunity cost per car is 3 tons of wheat, compared with 5 tons for Country A.
A market has the following functions: Qd = 1800 - 60P and Qs = 300 + 40P. Calculate the equilibrium price and equilibrium quantity.
Set (Qd = Qs): (1800 - 60P = 300 + 40P). Equilibrium price: (P = 15). Equilibrium quantity: (Q = 900).
A country has 600 unemployed people and an economically active population of 12,000. What is its unemployment rate?
(600 / 12,000) \times 100 = 5%.
A country has high inflation and strong consumer demand. Should the government increase or decrease spending/taxation to help control inflation?
Decrease government spending. It can also increase taxes to reduce disposable income and aggregate demand.
A central bank wants to reduce high inflation by selling government bonds. How can this action help achieve its goal?
Selling bonds withdraws money from circulation, reducing the money supply and helping reduce spending and inflationary pressure.
Two countries can both produce cars and wheat. Why can specialization and trade benefit both countries, even if one country is better at producing both goods?
Because they can specialize in the goods for which they have a comparative advantage and trade to obtain other goods at a lower opportunity cost.
A new technology reduces production costs for smartphone manufacturers. Assuming demand remains constant, explain what happens to supply, equilibrium price, and equilibrium quantity.
Supply increases, the equilibrium price decreases, and the equilibrium quantity increases.
A country's nominal GDP is $660 billion and its real GDP is $600 billion. Calculate its GDP deflator and explain what the result means.
(660 / 600) times 100 = 110.
The price level of domestically produced final goods and services is 10% above the reference level represented by a deflator of 100.
During a recession, the government cuts public spending to balance its budget. Explain why this decision could make the recession worse.
Lower government spending reduces aggregate demand. This can reduce production and employment, further lowering GDP and worsening the recession.
A country faces a recession, high unemployment, and low inflation. The central bank lowers interest rates and buys government bonds. Explain how these two actions can help the economy recover.
Lower interest rates make borrowing cheaper. Buying government bonds increases money in circulation. Together, these measures can encourage investment and consumption, increasing aggregate demand, production, and employment.