Economics Chapter 26 Flashcards

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Questions and Answers

What is economic investment?

The purchase of buildings and machinery that can be used to produce goods and services in the future.

What is the purely financial investment?

The value of the shares the company sold to help finance the economic investment.

How does investment as defined by economists differ from investment as defined by the general public?

Economic investment refers to the purchase of machinery, whereas financial investment refers to the purchase of financial assets.

If firms expected the future returns for an investment to be very low, what would they do?

Invest less. Signup and view all the answers

Because price stickiness only matters in the short run, economists are comfortable using just one macroeconomic model for all situations.

False Signup and view all the answers

Why do shocks to the economy force people to make changes?

Their actual income would likely differ from their previous expected income. Signup and view all the answers

If an economy has sticky prices and demand unexpectedly increases, what would you expect the economy's real GDP to do?

Increase. Signup and view all the answers

If an economy has fully flexible prices and demand unexpectedly increases, what would you expect the economy's real GDP to do?

Remain the same. Signup and view all the answers

What are flexible prices?

Prices that adjust quickly to equilibrate supply and demand. Signup and view all the answers

If the demand for a firm's output unexpectedly decreases, what would you expect its inventory to do?

Increase or remain the same, depending on whether prices are sticky. Signup and view all the answers

Why is there a trade-off between the amount of consumption today and in the future?

To increase consumption in the future, households must save, thus providing funds for investment. Signup and view all the answers

What is typically associated with a higher saving rate?

Higher investment rates and higher rates of growth. Signup and view all the answers

What role do banks and other financial institutions play?

They help allocate resources to the most productive investments. Signup and view all the answers

What ultimately limits the amount of investment?

Saving. Signup and view all the answers

What does it suggest if prices for airline tickets change on average about once per month?

Airline ticket prices are relatively flexible. Signup and view all the answers

Why are high rates of unemployment a concern to economists?

There is lost output that could have been produced if the unemployed had been working. Signup and view all the answers

If real GDP increases by 5 percent while the population increases by 7 percent, what happens to output per person?

Output per person necessarily decreases. Signup and view all the answers

If prices of goods and services quickly adjusted to demand shocks, what would firms find easier?

Firms would find it easier to produce at their optimal output rates. Signup and view all the answers

What guarantees that more goods and services are being produced by an economy?

Real GDP. Signup and view all the answers

Study Notes

Economic Investment

Economic investment involves purchasing buildings and machinery for future production of goods and services.
Distinction exists between economic investment and purely financial investment; financial investment relates to the value of shares sold to finance economic investment.

Investment Understanding

Economists differentiate economic investment (buying machinery) from financial investment (buying financial assets).
Firms reduce investments if they expect low future returns.

Economic Shocks and Price Stickiness

Shocks impact the economy by altering actual income, which may diverge from expected income.
In economies with sticky prices, unexpected increases in demand lead to an increase in real GDP.

Flexible Prices

In an economy with flexible prices, real GDP remains stable despite demand increases, as prices adjust rapidly to balance supply and demand.

Inventory and Consumption

A decrease in demand for a firm's output may lead to an increase in inventory, influenced by price stickiness.
There is a consumption trade-off; future consumption increases require current savings to fund investments.

Savings and Investment Rates

Higher saving rates tend to correlate with higher investment rates, contributing to economic growth.

Role of Financial Institutions

Banks and financial institutions play a crucial role in efficiently allocating resources for productive investments.

Limits to Investment

The potential amount of investment in an economy is ultimately constrained by the levels of savings available.

Price Flexibility in Airlines

Airline ticket prices are adjusted on average once per month, indicating their relatively flexible nature.

Unemployment Concerns

High unemployment rates pose a concern since they result in lost potential output that could have been realized if the unemployed were working.

GDP and Population Trends

When real GDP rises by 5% while the population increases by 7%, the output per person declines.

Pricing and Production

If prices adjust rapidly to demand shocks, firms can more easily produce at optimal output levels.

Real GDP

An increase in real GDP signifies an economy producing more goods and services. Nominal GDP can fluctuate due to changing prices, whereas real GDP accounts for these fluctuations by focusing solely on actual output volume.

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Description

Test your knowledge on key terms and definitions from Economics Chapter 26. This quiz includes concepts like economic investment and financial investment, crucial for understanding economic principles. Perfect for students looking to reinforce their understanding of these concepts.