Economics Concepts: Surplus, GDP, and Inflation
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Questions and Answers

What is the formula for calculating the unemployment rate?

  • Labour Force / Employed Population X 100
  • Unemployed / Working Age Population X 100
  • Unemployed / Labour Force X 100 (correct)
  • Labour Force Participation Rate / Active Jobs X 100

Which type of unemployment occurs as a result of economic fluctuations?

  • Frictional Unemployment
  • Seasonal Unemployment
  • Cyclical Unemployment (correct)
  • Structural Unemployment

What does the Core Consumer Price Index (CPI) exclude?

  • Durable goods
  • Consumer goods
  • Capital goods
  • Food and energy (correct)

The GDP deflator compares the current year's prices to those of which year?

<p>A selected base year (B)</p> Signup and view all the answers

Which among the following is included in the labor force?

<p>People actively looking for work (D)</p> Signup and view all the answers

Which of the following best describes the Natural Rate of Unemployment (NRU)?

<p>The unemployment rate when the economy is at full employment (C)</p> Signup and view all the answers

What is the primary purpose of calculating the Consumer Price Index (CPI)?

<p>To assess the overall price level for consumer goods and services (A)</p> Signup and view all the answers

What components make up the formula for Aggregate Demand (AD)?

<p>C + I + G + (X - M) (B)</p> Signup and view all the answers

What does the aggregate demand (AD) curve illustrate?

<p>The relationship between price levels and the quantity of output demanded (A)</p> Signup and view all the answers

Which factor leads to a rightward shift in the aggregate demand (AD) curve?

<p>Increase in consumer confidence (B)</p> Signup and view all the answers

What effect does a decrease in price levels have on consumer spending, according to the wealth effect?

<p>Consumers feel richer and spend more (A)</p> Signup and view all the answers

Which of the following factors does NOT impact aggregate demand?

<p>Wage levels (C)</p> Signup and view all the answers

What is indicated by a steep aggregate supply (AS) curve above potential output?

<p>A large increase in price is required for increased output (A)</p> Signup and view all the answers

Which of the following factors would decrease aggregate demand (AD)?

<p>Decrease in foreign incomes (A)</p> Signup and view all the answers

What impact do higher interest rates typically have on borrowing?

<p>Discourage borrowing and spending (B)</p> Signup and view all the answers

Which of the following best describes the foreign trade effect on aggregate demand?

<p>Lower local prices reduce exports and increase imports (A)</p> Signup and view all the answers

How is consumer surplus calculated?

<p>Total benefit minus consumer expenditure (B)</p> Signup and view all the answers

What does producer surplus represent?

<p>The difference between the market price and the highest price sellers are willing to accept (C)</p> Signup and view all the answers

Which of the following is included in the calculation of GDP?

<p>Government purchases of goods and services (B)</p> Signup and view all the answers

What is the formula for calculating Real GDP?

<p>Nominal GDP divided by GDP deflator (A)</p> Signup and view all the answers

Which statement is true about perfect competition?

<p>There is easy entry and exit in the market (C)</p> Signup and view all the answers

What does the income approach to GDP account for?

<p>Wages, rent, and profit from production (D)</p> Signup and view all the answers

What is the definition of per capita GDP?

<p>Real GDP divided by population (B)</p> Signup and view all the answers

What does marginal cost refer to in production?

<p>The additional cost of producing one more unit of a product (B)</p> Signup and view all the answers

What primarily causes short-run changes in aggregate supply?

<p>Variations in input prices (A)</p> Signup and view all the answers

Which of the following is a key characteristic of an economic expansion?

<p>Increased consumer spending (A)</p> Signup and view all the answers

What occurs during a contraction phase of the business cycle?

<p>Falling investment levels (B)</p> Signup and view all the answers

What indicates a recessionary gap in the economy?

<p>Equilibrium output is below potential output (A)</p> Signup and view all the answers

Which factor can cause a leftward shift in short-run aggregate supply?

<p>Rising oil prices (A)</p> Signup and view all the answers

What is a characteristic of an inflationary gap?

<p>Increased pressure on prices (A)</p> Signup and view all the answers

Which type of policy is primarily controlled by the central bank?

<p>Monetary policy (A)</p> Signup and view all the answers

What typically happens to unemployment during an economic expansion?

<p>It falls as businesses hire more workers (D)</p> Signup and view all the answers

What is the primary goal of expansionary fiscal policy?

<p>To stimulate the economy during recessions (D)</p> Signup and view all the answers

Which of the following best describes contractionary monetary policy?

<p>Raises interest rates to reduce inflation (B)</p> Signup and view all the answers

What does the multiplier effect illustrate in fiscal policy?

<p>The increase in AD from initial government spending (D)</p> Signup and view all the answers

What do chartered banks provide that near banks typically do not?

<p>Wide range of financial services (B)</p> Signup and view all the answers

In a recession, what action is typically taken through expansionary monetary policy?

<p>Lower interest rates (A)</p> Signup and view all the answers

Which of the following best describes the fractional reserve system?

<p>Banks keep some deposits as reserves and lend out the rest. (D)</p> Signup and view all the answers

How is the money multiplier calculated?

<p>One divided by the desired reserve ratio (A)</p> Signup and view all the answers

What is the marginal propensity to consume (MPC)?

<p>The change in consumption divided by change in income (D)</p> Signup and view all the answers

What does excess reserves refer to in banking?

<p>Reserves held beyond the desired level (C)</p> Signup and view all the answers

Which of the following does NOT describe a function of money?

<p>Increase in consumption (D)</p> Signup and view all the answers

What component makes up M2 in the measurement of money supply?

<p>M1 plus non-chequable deposits (C)</p> Signup and view all the answers

What does the term 'marginal propensity to withdraw' (MPW) indicate?

<p>The change in total withdrawals relative to change in income (B)</p> Signup and view all the answers

Which of the following is a primary function of deposit-taking institutions?

<p>Lend funds to borrowers using deposited funds (A)</p> Signup and view all the answers

Which of the following factors does not shift the demand for money curve?

<p>Interest rate (D)</p> Signup and view all the answers

What is the desired reserve ratio in a bank?

<p>The optimal fraction of deposits a bank would retain as reserves (A)</p> Signup and view all the answers

What is one way commercial banks create money?

<p>By lending out excess reserves (B)</p> Signup and view all the answers

Flashcards

Consumer Surplus

The difference between the total benefit a consumer receives from a product and the total amount they spend on it.

Producer Surplus

The difference between the price received for a product and the lowest price a producer would be willing to sell it for.

Marginal Benefit

The extra benefit received from consuming one more unit of a product.

GDP (Gross Domestic Product)

The total value of all final goods and services produced within a country in a given year.

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Consumption Goods

Goods bought for immediate use or enjoyment.

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Investment

Goods bought for future use.

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Real GDP

GDP adjusted for inflation using a base year.

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Nominal GDP

GDP calculated using current market prices.

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Inflation

A sustained increase in the general price level of goods and services in an economy over a period of time.

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CPI

Consumer Price Index; A measure of the average change in prices paid by consumers for a basket of consumer goods and services.

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GDP Deflator

A measure of the price level of all new, domestically produced, final goods and services in an economy.

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Labor Force

The total number of people who are either employed or actively seeking employment.

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Unemployment Rate

The percentage of the labor force that is unemployed.

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Frictional Unemployment

Temporary unemployment experienced by people who are between jobs or entering the workforce for the first time.

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Aggregate Demand (AD)

The total demand for goods and services in an economy at a given overall price level.

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Natural Rate of Unemployment (NRU)

The rate of unemployment that exists when the economy is at full employment, excluding frictional and structural unemployment.

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AD Curve

A curve showing the relationship between the overall price level and the quantity of output demanded in an economy. It slopes downward.

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Wealth Effect

When prices fall, consumers feel wealthier and spend more because their money buys more goods and services.

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Interest Rate Effect

Lower prices lead to lower interest rates, which encourages borrowing and spending.

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Foreign Trade Effect

When prices rise in a country, its exports become more expensive, and imports cheaper, decreasing net exports.

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Shifters of AD

Factors that cause the AD curve to shift to the right (increase) or left (decrease).

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Aggregate Supply (AS)

The total amount of goods and services that producers are willing and able to supply at different price levels.

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Shifters of AS

Factors that cause the AS curve to shift to the right (increase) or left (decrease).

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Expansionary Fiscal Policy

Government actions aimed at stimulating the economy during a recession by increasing spending or decreasing taxes.

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Contractionary Fiscal Policy

Government actions to slow down an overheating economy by decreasing spending or increasing taxes.

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Expansionary Monetary Policy

Central bank actions to stimulate economic growth by lowering interest rates or increasing the money supply.

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Contractionary Monetary Policy

Central bank actions to control inflation by raising interest rates or decreasing the money supply.

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Multiplier Effect

The amplified impact of initial government spending or tax changes on the overall economy; each dollar spent or saved ripples through the economy.

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Marginal Propensity to Consume (MPC)

The proportion of an additional dollar of income that is spent on goods and services.

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Marginal Propensity to Withdraw (MPW)

The proportion of an additional dollar of income that is withdrawn from the circular flow (savings, taxes, imports).

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Medium of Exchange

A function of money allowing for the trade of goods and services without barter.

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Deposit Takers

Financial institutions that accept deposits from savers and lend these funds to borrowers, holding cash reserves to meet withdrawal demands.

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Chartered Banks

Deposit takers authorized by federal charter to offer a wide range of financial services, like checking accounts, loans, and credit cards.

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Near Banks

Deposit takers that are not chartered and have more specialized services, like trust companies, mortgage loan companies, and credit unions.

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Components of Money Supply

Includes currency (bills and coins) and deposits (bank accounts).

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Fractional Reserve System

Banks keep a fraction of deposits as reserves and lend out the remaining portion.

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Reserve Ratio (RR)

The proportion of deposits that banks hold as reserves, calculated as reserves divided by deposits (R/D=RR).

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Short-Run Aggregate Supply

The total amount of goods and services that firms are willing and able to produce at various price levels in the short run, assuming that input prices (like wages and raw materials) are fixed.

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Long-Run Aggregate Supply

The total amount of goods and services that firms are willing and able to produce at various price levels in the long run, assuming that all factors of production (including capital, labor, and technology) are fully employed.

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What shifts Short-Run AS?

Changes in input prices, like wages, raw materials, or energy costs, can shift the short-run aggregate supply curve. For example, a decrease in oil prices would allow firms to produce more at each price level, shifting the SRAS curve to the right.

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What shifts Long-Run AS?

Changes in resource supply (like labor or raw materials) and productivity (improvements in technology or processes) can shift the long-run aggregate supply curve. For example, an increase in the number of skilled workers would allow firms to produce more at each price level, shifting the LRAS curve to the right.

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Expansionary Phase

A period of economic growth characterized by increasing economic activity, higher production, rising GDP, falling unemployment, increased consumer spending, and rising investment.

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Contractionary Phase

A period of economic decline characterized by slowing economic activity, lower production, falling GDP, rising unemployment, reduced consumer spending, and lower investment.

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Recessionary Gap

A situation where the equilibrium output of an economy falls short of its potential output. This gap implies that the economy is operating below its full capacity and is associated with an unemployment rate above the natural rate.

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Inflationary Gap

A situation where the equilibrium output of an economy exceeds its potential output which occurs when actual output exceeds full-employment output. This gap implies that the economy is overheated and is associated with an unemployment rate below the natural rate and increased pressure on prices.

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Study Notes

Consumer Surplus

  • Consumer surplus is calculated by subtracting consumer expenditure from total benefit.
  • Consumer expenditure is the market price multiplied by the quantity purchased.

Producer Surplus

  • Producer surplus is the difference between the price a seller received and their willingness to sell.
  • In the example provided, a seller would be willing to sell a unit for 20,butthemarketpriceis20, but the market price is 20,butthemarketpriceis60. The producer surplus for that first unit is $40.
  • Marginal cost/benefit equals supply and demand.
  • Producer surplus can be calculated using the formula 1/2BH or BH/2 from a graph.

GDP

  • GDP is the dollar value of final goods and services produced within a country in one year.
  • Expenditure method calculates GDP by adding up all spending on goods and services (C+I+G+(X-M)).
  • GDP excludes intermediate goods, used goods, and financial transactions.

Inflation

  • Inflation is an increase in the price level over a period of time.
  • Two ways to calculate inflation are using the Consumer Price Index (CPI) and GDP deflator.
  • Inflation rate = (CPI in Year 2 - CPI in Year 1) / CPI in Year 1 * 100
  • CPI is a measure of overall price level for consumer goods and services that tracks the cost of living.
  • CPI is calculated by summing up the price changes for a basket of goods weighed by their importance to a typical household.
  • Core CPI excludes volatile items like food and energy.
  • GDP deflator compares prices in the current year to those in a base year.
  • It includes all goods and services produced in an economy, including capital goods.
  • GDP deflator = Nominal GDP / Real GDP * 100

Labour Force

  • The labor force includes employed and unemployed people.
  • Unemployment rate is calculated by dividing unemployment by the labor force.
  • The unemployment rate includes those who are unemployed but looking for work.

Four Types of Unemployment

  • Frictional Unemployment: Temporary between jobs, or a first time job seeker.
  • Structural Unemployment: Mismatch between workers and jobs due to structural economic changes.
  • Cyclical Unemployment: Due to economic fluctuations.
  • Seasonal Unemployment: Due to seasonal changes in job markets.

Aggregate Demand

  • Aggregate demand is the total quantity of goods and services demanded in an economy, at a given price level.
  • It slopes downward due to wealth effect, interest rate effect, and foreign trade effect.
  • Shifts in AD are caused by changes in consumption, investment, government spending, and net exports.

Aggregate Supply

  • Aggregate supply is the total quantity of goods and services producers are able to supply.
  • AS curve becomes steep above potential output because a larger price increase is required to increase output.
  • Short-run changes in aggregate supply are caused by changes in input prices.
  • Long-run changes in aggregate supply are caused by changes in resource supply and productivity.
  • Business cycles include phases of expansion and contraction.
  • Key characteristics of expansionary phases include: rising GDP, falling unemployment, and increased consumer spending.
  • Key characteristics of contractionary phases include: falling GDP, rising unemployment, and reduced consumer spending.
  • A recessionary gap is when equilibrium output is below potential output.

Short-Run Aggregate Supply (Shifters)

  • Input Costs: Changes in wages, raw material prices, or energy costs impact the AS curve.
  • Productivity: Improved technology or processes shift the AS curve right. Natural disasters or unexpected events shift AS left.

Stabilization Policies

  • Fiscal policy involves changes in government spending and taxes to influence Aggregate Demand.
  • Monetary Policy involves changes in interest rates and money supply to influence Aggregate Demand.

Multiplier Effect

  • Fiscal policy's initial spending leads to increased spending by many people.
  • MPC represents the change in consumption relative to a change in income.
  • MPW represents the effect of a change in income on withdrawals.
  • Multiplier = 1 / (1 - MPC)

Money

  • Money serves as a medium of exchange, unit of account, and store of value.
  • Money demand is the amount of money people want to hold at any time.
  • Determinants of money demand include: interest rates, real GDP, and price level.

Money Supply

  • Money supply consists of currency and bank deposits.
  • Commercial banks create money through lending.
  • Fractional reserve banking means banks keep a fraction of deposits as reserves and use the rest for loans.
  • The reserve ratio divides reserves by total deposits.
  • Money multiplier = 1/reserve ratio
  • Changes in money supply depend on change in excess reserves and money multiplier.

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Test your understanding of key economic concepts such as consumer surplus, producer surplus, GDP, and inflation. This quiz covers formulas, calculations, and fundamental definitions that are essential for grasping economic principles. Perfect for students studying introductory economics.

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