C719 - Macroeconomics - Study Guide Questions V2The followin, Lecture notes of Accounting

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C719 - Macroeconomics - Study Guide Questions V The following questions are developed as a study aid for C719 - Macroeconomics. They cover important concepts in each competency. After reading the material for each competency, use these questions to reinforce your understanding and review further as necessary. There is no answer key; however, your Course Instructor will be happy to go over these with you. You can download a Word version of these questions at the bottom of the page. Competency 1: The Economic Way of Thinking Module 1

1. What is scarcity in economics and how does it influence choices?
   1. Scarcity is the inability to satisfy everyone’s wants; it affects choices made by individuals and businesses in the face of unavailability of unlimited resources. Without scarcity, there is no need to make choices about which needs/desires to satisfy
2. Define Opportunity Cost.
   1. The full value of the next best alternative that is not selected. Example: cost of going to a football game includes the value of what is given up in order to attend. The opportunity cost of attending the game consists of both the price of the ticket and the difference in your test grade that three more hours of studying would have produced.
3. How does the Production Possibilities Frontier (PPF) (also called as Production Possibilities Curve (PPC)) illustrate the concept of trade-offs? 1. Production Possibilities Curve is society’s choice curve; it shows the various outpout combinations of two goods or groups of goods that can be produced in an economy with the available resources. The PR line shows the limits of attainable combinations. Any point on that line is attainable and acceptable. Outside of the line in the negative space of the graph are unattainable points. Points that fall within the PR line, but not on it are attainable, but the resources are not being used to their full capacity.
4. How do we describe points (1) On the PPF (2) Inside the PPF, and (3) Beyond the PPF in terms of production efficiency? 1. Attainable and resources used well – the trade-off between one good and another is constant 2. Attainable, but resources not being used to full advantage 3. Unattainable
5. If a country produces cars and computers, and if the technology for producing cars improves, how does this change affect production possibility curve? How do we demonstrate overall economic growth for a country using the PPC? 1. The maximum combination of outputs, given resources, and technology is an efficient production point. By improving tech in production, the production possibilities curve will shift outward. 2. As a society moves along a production possibilities curve and produces larger and larger amounts of one good, the sacrifices of the alternative good become larger and larger, which illustrates increasing opportunity costs. 3. As labor becomes more skilled and productive and as producers acquire new machines and plants embodying the latest technology, the production possibilities curve shifts outward. Module 2
6. Explain how various economic systems allocate goods and services. a. Traditional Economy – answers basic economic questions by tradition or custom; not usually highly sophisticated; production methods and distribution of goods/services are determined based on how things have been done in the past b. Command economy – a.k.a. planned econ; answers basic econ questions based on command and control; a central planning authority makes all decisions regarding what and how to produce; think North Korea and Cuba (formerly Soviet Union and China) c. Market economy – relies on incentive and self-interested behavior of individuals to direct production and consumption through market exchanges; consumers determine what is produced; supplies determine how to produce

2. What are the three basic economic questions that any society must answer. a. What goods and services will be produced and in what quantities? b. How will they be produced? (That is, what methods of production and combinations of inputs will be used? c. For whom will they be produced? (That is, who gets what share of the goods and services produced.)
3. Given the same resources, Company A can produce 20 shirts or 2 comforters in a month, and Company B can produce 40 shirts or 10 comforters in a month. a. Which company has the absolute advantage in the production of shirts? Why? Company B, because they can produce more in a month than company A. b. Which company has the comparative advantage in the production of comforters? Why? c. Which company should specialize in producing shirts? Why? d. Which company should specialize in producing comforters? Why?
4. What are the benefits of specialization and trade?
5. Describe the interactions (illustrated by the Circular Flow Diagram) of firms and households in the goods market, and in the factors market. a. The circular flow model provides an overview of the central concerns of micro and macro econ. It is a visual picture of the relationships between the resource market, in which income is earned, and the product market, in which income is used to purchase goods and services. Often used to describe a mixed economy in which the market is the primary source of decisions.
6. Identify the four resources (factors of production). What is the income paid to each resource for its role in producing goods and services? Module 3
7. What is the law of demand?
8. What does the slope of the demand curve signify?
9. Explain the difference between shift of the curve (change in demand) vs a movement along the curve (change in quantity demanded).
10. Identify the factors that shift the demand curve.
11. If price of a book increases, what happens to its quantity demanded? Demand?
12. What is the slope of the supply curve? What does it tell us about the relationship between price and quantity supplied?
13. Explain the difference between a change in supply vs. change in quantity supplied.
14. Identify the factors that shift the supply curve.
15. How does a market eliminate shortages?
16. Assume that a market is in equilibrium at P1 and Q1, and the demand curve shifts to the left. Draw a graph to show the new equilibrium point with the new equilibrium price (P2) and quantity (Q2). Explain the process of how the market moves from the first equilibrium to the second. Competency 2: Macroeconomic Measurements and Theories Module 4
17. Define labor force. How is unemployment rate calculated? What are its limitations?
18. Labor Force – to bein the labor force, you must be 16+ years old, non-institutionalized, working or actively looking for work (in the last 4 weeks)
19. Unemployment rate = Unemployed workers / labor force x 100% (in this equation, the labor force is the sum of employed workers and unemployed workers)
20. Define the three types of unemployment? What does it mean when the economy is at full- employment?
21. Frictional – this is when there are new entrants into the labor force searching for jobs and/or when other workers are between jobs. Finding a job takes time and during that time a person will be unemployed. This calls for better information and employment services

2. Structural – a mismatch of the skills or location of unemployed workers and the skills required by, or location of, available jobs; IOW: whenever the number of available workers and jobs do not match in terms of skills or location. This is also caused by technological obsolescence. This lasts longer than frictional, because it takes longer for workers to retrain or relocate to match available jobs. This implies a need for retraining and assistance in relocating.
3. Cyclical – relates to the declines in the level of aggregate output. Major policy concern in macroecon. Workers are laid off because of a fall in demand generally or specifically for the products they produce. Occurs during a recession or periods of slow economic growth/periods of economic contraction
4. Full employment means that the number of job seekers is approximately equal to the number of job vacancies.
5. Explain the different components of the business cycle.
6. How do we define economic recession or expansion?
7. Define inflation and deflation.
8. What is the consumer price index? How is it used to calculate the inflation rate?
9. Identify three limitations in the CPI measure.
10. Identify two parties that may gain because of inflation. Module 5
11. Define Gross Domestic Product (GDP).
12. GDP is the total market value of all final goods and services produced within a country during a given period of time. It is calculated on a per capita basis to give a snapshot of a country’s economic development
13. Adding consumption spending by households (C), investment spending by business (I), purchases of goods and services by government (G), and spending by the foreign sector, or net exports (X−M), gives this formula for GDP.
14. GDP = C + I + G + (X – M)
15. Explain the (1) expenditure method and (2) income method used to calculate GDP?
16. Expenditure method – more common way of reporting GDP, by the buyers rather than the sellers. Basic assumption behind this mode is that everything produced is sold to someone. Four buyers: households, firms, government, foreign sector.
17. Income method – National income (NI) is earned by the resources—land, labor, capital, and entrepreneurship. Consists of wages, rent, interest, profit, and proprietors’ net income. All income generated in producing GDP must be accounted for in some way or another. NI is sum of rent, wages & salaries, interest, and profits. In a very simple economy, all the value of final goods and services produced (GDP) would become payments to resources. GDP, which measures the flow in the product market of the circular flow diagram, and NI, which measures the flow in the resource market, would be identical. The actual economy is not so simple, requiring some adjustments to convert GDP to NI.
18. Must calculate depreciation to get NDP (Net Domestic Product)
19. NDP = GDP - Depreciation
20. List three shortcomings of GDP?
21. Only counts activity that takes place in legal formal market (so nothing illegal, no self- production like cutting your own grass, or production not done in established market such as hiring 13 year old neighbor to babysit)
22. Does not take into account side effects of production, such as pollution and resource depletion or better health from using exercise equipment at fitness club
23. Not a measure of emotion or of society’s condition
24. How does nominal GDP differ from real GDP?
25. Nominal GDP is in current dollars and not corrected for inflation. Real GDP has been adjusted for inflation.
26. Explain how we can calculate economic growth using real GDP.
27. Real GDP per capita = Real GDP / Population
28. As a nation’s population grows, output has to grow just to keep per capita output and income from falling. Countries that have had either high levels of economic growth or

have grown for long periods of time have higher standards of living than countries that have not grown.

3. Economic growth can lead to income inequality, resource depletion, pollution. Module 6
4. Define aggregate demand (AD). Why is the AD curve negatively sloped?
5. Aggregate demand is the total demand for final goods and services in an economy at a given time and price level. It is the sum of all goods and services in the economy that will be purchased at all possible levels. Similar to expenditure approach to determine GDP.
6. Equation is: AD = C + I + G + (X – M)
7. The slope of the aggregate demand curve implies that higher prices have anegative effect on planned purchases of real output. Dollar spending (P x Y) may be higher if P is sufficiently higher, but Y will be lower. People tend to be reluctant to buy as much real output at higher price levels as they do at lower ones.
8. What are the factors that shift the AD curve?
9. Define aggregate supply (AS).
10. Total amount of goods and services that firms are willing to sell at a given price level during a specific period of time in an economy. The total amount of goods and services (real output) produced and supplied by an economy’s firms over a period of time.
11. The aggregate supply curve (AS) is the relationship between the quantity of total real output supplied and the price level when all other factors influencing production plans are held constant. These other factors include the costs of inputs used to produce the good or service, and government regulations regarding production. With these factors held constant, when the price level rises, the quantity of real GDP supplied increases, and when the price level falls, the quantity of real GDP supplied falls.
12. What is the slope that is generally accepted for the short-run AS curve? Why?
13. Upward. As firms in general try to produce more output with given resources, some labor has to work overtime at higher pay, driving up costs and prices. Firms are working capital harder, competition for scarce resources increases. All of these cost increases will be reflected in higher prices.
14. What does the AS curve look like under (1) Classical and (2) Keynesian views.
15. Classical – it is vertical. This indicates that output does not respond at all to changes in price level. Price level can vary, but the changes will have no effect on real output. A fixed real output level and a variable price level imply a vertical aggregate supply curve.
16. Keynesian – it is horizontal. Suggests that during periods when large amounts of resources are unemployed, AS could be horizontal. It would be possible for firms to increase both individual and aggregate output without driving the price level about P 0. The could produce more simply by putting unemployed resources to work. This implies the economy is inside its production possibilities curve, because there is unemployed labor (and other resources) willing to work at present wage.
17. What are the factors that shift the AS curve?
18. An increase or decrease in the amount of productive resources available. Change in technology. Special factors: political scandals, wars, terrorist attacks, or natural disasters. Policy actions.
19. Explain what happens to the equilibrium output and price level when (1) AD increases, (2) AD decreases, (3) short-run AS increases, (4) short-run AS decreases. It will help if you will draw these graphs. Module 7
20. Identify and explain three main ideas of Classical economic theory.
21. What is the formula for aggregate expenditure?
22. Describe the main principles of Keynesian economic theory.
23. Contrast Classical and Keynesian theories regarding the government's response to an economic downturn.

5. Define Marginal Propensity to Consume (MPC) and Marginal Propensity to Save (MPS)?
6. Explain how to calculate the expenditure multiplier (1) using MPC, and (2) using MPS?
7. Use the expenditure multiplier to calculate the change in AD that would result from a $ million increase in government spending if the MPC = 0.8. How would the same change in spending affect AD if the MPC = 0.95? Competency 3: Federal Budget and Fiscal Policy Module 8
8. What are the goals of fiscal policy?
9. Who conducts fiscal policy?
10. Describe the tools of fiscal policy.
11. What are “Automatic Stabilizers” and why are they used? Give 2 examples.
12. How does the change in taxes affect aggregate demand?
13. How does a change in government spending affect aggregate demand?
14. What is discretionary spending?
15. What fiscal action(s) would be taken if inflationary pressures were present in the economy? What effect would these actions have on the economy? Use the ADAS model to explain.
16. What fiscal actions would be taken if the economy were in a recession? What effect would these actions have on the economy? Use the ADAS model to explain.
17. Compare progressive, regressive and proportional taxes.
18. Explain the permanent income hypothesis.
19. List and define the fiscal policy lags.
20. List and define the two types of crowding out? Module 9
21. How does the government finance its deficits?
22. What do we mean if we say the government has a “Balanced Budget”?
23. Explain the difference between a federal budget deficit and the national debt.
24. Explain the pros and cons of being able to run a federal budget deficit.
25. Explain the economic effects of the national debt (three questions). Competency 4: Money, Financial Markets, and Monetary Policy Module 10
26. Describe characteristics that are desirable for something to serve as money.
27. What are the three vital functions that money is expected to perform?
28. What is fiat money? How is it different from commodity money?
29. Define M1 and M2. If you transfer $100 cash to the checking account with your bank, what is the change in M1? M2?
30. Explain why the Money Demand curve is downward sloping. (Hint: what is the relationship between the interest rate and quantity of money demanded?)
31. Explain factors that shift the Money Demand curve.
32. Why is the Money Supply curve vertical?
33. Explain factors that shift the Money Supply curve.
34. Draw the money market (supply and demand for money) and show the effects of an increase in the money supply on the equilibrium interest rate and quantity of money. Module 11
35. What is the primary function of a bank?
36. Name at two each of (1) assets and (2) liabilities for commercial banks.
37. What are Bank Reserves (BR)? How are required reserves and excess reserves related to total bank reserves?
38. What is the Required Reserve Ratio? Why do banks not lend out all of their reserves?
39. Define the Money Multiplier. What does it indicate?

6. If Bank A currently has $750,000 in total reserves and $5 million in deposits, and the required reserve ratio is 10%, how much more can the bank lend out?
7. What are the three primary functions of the Federal Reserve System?
8. Explain how an Open Market Purchase changes Reserves and the Monetary Base.
9. What is the Federal Funds Rate? What is the Discount Rate? Which one is typically higher and why? Module 12
10. What are the goals of monetary policy?
11. Who conducts monetary policy?
12. What are the Classical and Keynesian views of monetary policy?
13. What are the inside and outside lags for monetary policy.
14. Name two difficulties with the implementation of monetary policy.
15. What is the monetary policy instrument currently used by the Fed?
16. Explain how the Fed can lower the federal funds rate.
17. Describe the impact of an Open Market Purchase on the economy, and explain why the Fed would want to conduct this type of policy.
18. Based on the graph below, what economic problem is the economy facing? Explain the monetary policy that could be used to address this problem and the final effects on price level and output. Competency 5: Economic Growth and Development Module 13
19. Identify and explain three reasons why the AS curve will be upward sloping in the short-run.
20. What is the effect of a decrease in oil prices on the ADAS market? Draw an ADAS graph and show the impact.
21. What is the short-run impact of an increase in AD on prices and GDP? Draw an ADAS graph and show this.
22. What is the long-run impact of an increase in AD on prices and GDP? Show this on the graph above.
23. Explain why the AS curve will be vertical in the long-run.
24. Identify three sources of economic growth that will shift the long-run AS curve. How will this impact the short-run AS curve?
25. According to supply-side economists, how do regulations impact AS?
26. What arguments do supply-side economists use to suggest that tax reductions increase AS? What is the effect of a temporary increase in the marginal tax rate on the AS curve? Module 14
27. Identify three characteristics of developing countries.
28. List four things that governments can do to support economic growth.

Competency 6: International Trade Module 15

1. What are the benefits of specialization and trade?
2. Which group of workers are harmed by trade and why?
3. What is NAFTA? Why would countries enter into trade agreements?
4. What is a tariff? How is it different from a quota?
5. How does the imposition of a tariff or a quota impact the domestic market? Identify all the gainers and losers.
6. Identify the arguments against free-trade.
7. What is foreign direct investment?
8. How does foreign direct investment affect economic growth?