Economics Final Exam Review
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Transcript of Economics Final Exam Review
What is Economics?
Unit 1 – What is Economics?
Unit 1 – What is Economics?
Unit 1 - What is Economics?Basic
Economic Questions
What, how, for whom to produce
Command Economy
GOVERNMENT answers the
basic questions
Market Economy
WE answer basic questions
WE own the factors of
production
Unit 1 – What is Economics?
Adam Smith & the invisible hand• We are all rationale
humans who act in our OWN SELF INTEREST
• Our decisions help make the economy efficient
Supply and Demand
Unit 2 – Supply and Demand Law of Demand - ↑ P, ↓ Q-d // ↓ P, ↑ Q-d
Shifts in Demand Curve (entire curve left or right) Consumer income Consumer taste Price of complement goods & substitute goods
Movement ALONG the Demand Curve Change in PRICE of a product
Unit 2 – Supply and Demand Law of Supply - ↑ P, ↑ Q-s // ↓ P, ↓ Q-s
Shifts in Supply Curve (entire curve left or right) Technology Number of Sellers Cost of inputs Future expectations …
Movement ALONG the Supply Curve Change in PRICE of a product
Unit 2 – Supply and Demand Demand Elasticity – how responsive will you be to the change in
the price of a product?
ELASTIC DEMAND – “stretchy” – very responsive Examples?
LUXURY GOODS – things you don’t have to have right now…
INELASTIC DEMAND – “not stretchy” – buying habits unchanged Examples?
MILK – things you must have for survival
Law of Diminishing Marginal Utility Donut / Candy simulation
Unit 2 – Supply and Demand Be able to analyze the following on a S & D Graph
Equilibrium (price and quantity), Shortages, Surpluses Shifts in supply curve (upward sloping curve)
INCREASE = Rightward shift DECREASE = Leftward shift
Shifts in demand curve (downward sloping curve) INCREASE = Rightward shift DECREASE = Leftward Shift
MOVEMENT along curves (due to a change in PRICE)
Unit 2 – Supply and Demand Government Intervention – prevents our market
systems from going back to equilibrium Price Ceilings- major drawbacks? Price Floors- major drawbacks?
Business Organization and Investment
Unit 3 – Business Organizations & Investment
Stock - issued by corporations to obtain funds for growth
Reading Stock Quotations 52 week high and low closing price = next day’s opening price
Bonds – “borrowing money” from the people Government Bonds = SAFEST form of investment
Unit 3 – Business Organizations & Investment
Types of Business Organizations Sole Proprietorship
Easiest to form Most Common
Corporation Largest sales volume Limited Liability Other characteristics?
Entrepreneurship – starting your own business VERY RISKY but can be very rewarding too!
Unit 3 – Business Organizations & Investment
Monopoly:“Mono” – one Sole producer /seller of a good or service
The Macroeconomy
Unit 4 - Macroeconomy
GDP
• Preferred by economists because it measures what is produced WITHIN OUR BORDERS with our domestic resources
Real GDP v. Nominal GDP
• Real – measured in “constant dollars’ • Not distorted by inflation• Allows us to determine how much production changes overtime
• Nominal – measured in “current dollars’• Distorted by inflation
Unit 4 - MacroeconomyConsumer Price
Index (CPI)
Types of Inflation
MAIN CONSEQUENCE of
INFLATION
• Market basket of goods/services WE typically buy• Used to measure inflation
(changes in price level overtime)
• Demand – pull • Wage-price spiral
• Hurts your purchasing power … what you can buy with a dollar• Ex – Inflation rate of 15%, salary
increase of 5% … you lose purchasing power
Unit 4 - MacroeconomyPhases of the Business Cycle
• Expansion = increasing GDP• Recession = declining GDP for 2+ quarters• Peak = GDP at its highest • greatest level of production & employment
• Trough = GDP at its lowest
Index of Leading Indicators – predicts changes in the business cycle 12-15 months in advance• Ex – turns up 12-15 months before EXPANSION• Ex – turns down 12-15 months before RECESSION
Managing theNation’s economy
Unit 5 – Managing the Nation’s Economy
Taxes Progressive – increased tax rate as income rises
Income tax - % paid in tax rises as you make more money Regressive – decreased tax rate as income rises
Sales Tax - % paid in tax will be greater for those with lower incomes
Proportional – same tax rate regardless of income All pay 15% tax
Ability-to-Pay Principle: those with “the ability to pay” the tax should be the ones who pay it
Unit 5 – Managing the Nation’s Economy
Deficit Spending – government spends more than it is receiving in revenue PROBLEM – contributes to the inflationary spiral
Crowding-Out Effect – deficit spending by the government “crowds” other corporations out of the market Government sells bonds (loans) to finance the deficit + we are
more likely to buy their bonds because they are safer We stop buying corporate bonds + corporations are “crowded-
out” of the market.
Unit 5 - Managing our Nation’s Economy
Aggregate Supply / Aggregate Demand Curves Y-axis Price Level X-axis GDP Shifts in the curve tell us about P-O-E in our economy
Price, Output, Employment
Fiscal Policy – changes in G & T to shift AD To fight “inflation” = decrease AD = causes unemployment
ACTION: ↓ G & ↑ T
To fight “unemployment” = increase AD = causes inflation ACTION: ↑ G & ↓ T
Unit 5 – Managing the Nation’s Economy
Supply-Side Policy – “best of both worlds” TAX CUTS to increase Aggregate Supply! Action: ↑ in AS (rightward shift)
↑ in PL (fights inflation) ↑ in GDP (fights unemployment)
Unit 5 – Managing the Nation’s Economy
Money M1 – money as a medium of exchange - cash, checks,
debit M2 – money as a store of value – M1 + savings accounts
Fractional Reserve Banking – banks must keep a “fraction” of all deposits in reserves (RR = 10%) The rest goes into ER – can be loaned out / used in
OMO
Unit 5 – Managing the Nation’s Economy
Most important function of the Federal Reserve: Controlling Money Supply
Loose MP – stimulates the economy (↓ IR, ↑ MS) When interest rates go down, the quantity-demanded of
loans will increase because it is less costly to borrow*interest rates represent the cost of borrowing
Tight MP – slows the economy (↑ IR, ↓ MS) When interest rates go up, the quantity-demanded of loans
will decrease because it is too costly to borrow
Unit 5 – Managing the Nation’s Economy
Using Tight and Loose MP, the Fed can control money supply in four ways – each way will help achieve the goals of increasing/decreasing MS & IR
↓ FFR, ↓ DR, ↓ RR, Fed buying bonds = ↓ IR and ↑ MS When the fed “buys bonds”, more money goes into the banks
ER + allows them to make more loans…thus, money supply expands
↑ FFR, ↑ DR, ↑ RR, Fed selling bonds = ↑ IR and ↓ MS When the fed “sells bonds”, less money is in the banks ER
because they used that money to buy the bonds…thus, money supply contracts
Unit 5- Managing Our Nation’s Economy