Questions and Answers
Economics may best be described as?
What can be best described as the study of the economy as a whole?
Macroeconomics
What does a production possibilities curve show?
Max amount of 2 goods that can be produced assuming full use of resources.
What does a point inside a production possibilities curve illustrate?
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What is opportunity cost best defined as?
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What are the two general types of economic systems that exist today?
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What does the demand curve show the relationship between?
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What does the law of supply indicate?
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When is a market in equilibrium?
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What are the two major virtues of the market system?
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Which of the following is a fundamental characteristic of the market system?
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What is the major source of tax revenue for the Federal Government?
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What are the three most important sources of Federal tax revenue from descending importance?
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What is the largest category of Federal spending?
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What is a progressive tax?
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Who is the United States' most important trading partner in terms of dollar volume?
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A good should be produced in that nation where?
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What are the primary benefits of international trade?
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What are protective tariffs?
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What are import quotas?
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What is the primary economic advantage of the European Union to its members?
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What is the North American Free Trade Agreement?
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What does GDP exclude?
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What is nominal GDP?
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What does real GDP refer to?
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What is a price index?
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How can economic growth best be defined?
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What is a recession?
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What is the natural rate of unemployment?
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What does the labor force include?
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What type of unemployment is associated with recessions?
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Why is inflation considered undesirable?
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Fiscal policy is primarily carried out by?
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What is an appropriate fiscal policy for a recession?
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What is an appropriate fiscal policy for severe demand-pull inflation?
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What is the basic policy-making body of the U.S. system?
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What are the three main tools of monetary policy?
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Which action by the Fed would cause the money supply to increase?
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Study Notes
Economics Overview
- Economics is the social science focused on effectively utilizing scarce resources to maximize satisfaction of human wants.
Macroeconomics
- Macroeconomics examines the entire economy rather than individual markets.
Production Possibilities Curve
- The production possibilities curve illustrates the maximum output of two goods that can be produced with full resource utilization.
- Points within the curve indicate underutilization of resources, commonly associated with unemployment.
Opportunity Cost
- Opportunity cost represents the value of the next best alternative forgone when one product is sacrificed to produce another.
Economic Systems
- Major economic systems include market systems, where decisions are driven by consumer demand, and command systems, where central authority dictates production.
Demand and Supply
- The demand curve illustrates the inverse relationship between price and quantity demanded.
- The law of supply states that higher prices incentivize producers to offer more goods.
Market Equilibrium
- Equilibrium in a market occurs when the quantity supplied matches the quantity demanded.
Market System Virtues
- Two key advantages of the market system are efficient resource allocation and the promotion of economic freedom.
Fundamental Characteristics
- Property rights are essential to the function of a market system.
Tax Revenue Sources
- Federal government tax revenue is primarily generated from personal income taxes, followed by payroll taxes and corporate income taxes.
Federal Spending
- The largest portion of federal spending is allocated to pension and income security.
Tax Structure
- A progressive tax system imposes higher rates on individuals with greater income.
International Trade
- Canada is the United States' most significant trading partner by dollar volume.
- Goods should be produced where domestic opportunity costs are lowest.
- International trade offers benefits such as efficient resource use and improved living standards.
Trade Barriers
- Protective tariffs are taxes on imported goods, while import quotas set maximum limits on product imports.
European Union Benefit
- The European Union provides economic advantages through reduced trade barriers, allowing for production economies.
North American Free Trade Agreement
- NAFTA creates a free trade zone among Canada, Mexico, and the U.S.
GDP Considerations
- Gross Domestic Product (GDP) excludes the market value of unpaid domestic work.
- Nominal GDP represents the sum of monetary transactions involving final goods and services.
- Real GDP is adjusted for changes in price levels, indicating true economic growth.
Economic Growth and Recession
- Economic growth is characterized by an increase in real GDP or GDP per capita.
- A recession occurs when real domestic output declines.
Unemployment Types
- The natural rate of unemployment reflects the level when the economy operates at potential output.
- Cyclical unemployment is associated with economic downturns or recessions.
- The labor force comprises employed individuals and actively seeking unemployed persons.
Inflation and Fiscal Policy
- Inflation negatively impacts income and wealth distribution.
- Fiscal policy, primarily executed by the federal government, adjusts tax rates to regulate the economy.
- To combat recession, a decrease in tax rates is beneficial, whereas an increase is appropriate during severe inflation.
Monetary Policy
- The basic policy-making body in the U.S. is the Board of Governors.
- Three primary monetary policy tools are open market operations, reserve ratio adjustments, and discount rates.
- Purchasing government bonds by the Federal Reserve increases the money supply.
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