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Questions and Answers
In a society where individuals follow the economic decision rule, which outcome is most likely?
In a society where individuals follow the economic decision rule, which outcome is most likely?
What assumption underlies the economic decision rule?
What assumption underlies the economic decision rule?
The Invisible Hand Theorem is founded on which assumption?
The Invisible Hand Theorem is founded on which assumption?
What was Adam Smith's view on market-based economic systems?
What was Adam Smith's view on market-based economic systems?
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What key argument is presented in Adam Smith’s The Wealth of Nations?
What key argument is presented in Adam Smith’s The Wealth of Nations?
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According to the Invisible Hand Theorem, what is a likely result of the market system?
According to the Invisible Hand Theorem, what is a likely result of the market system?
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In the context of the Invisible Hand Theorem, which statement is true?
In the context of the Invisible Hand Theorem, which statement is true?
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Which statement describes the relationship between resource scarcity and allocation?
Which statement describes the relationship between resource scarcity and allocation?
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If you make decisions as assumed by economists, what is perceived as less than the marginal benefit of being a 'sales bro/gal' in Texas?
If you make decisions as assumed by economists, what is perceived as less than the marginal benefit of being a 'sales bro/gal' in Texas?
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Which word or phrase best explains what determines the average price and quantity sold per week of the iPhone 15?
Which word or phrase best explains what determines the average price and quantity sold per week of the iPhone 15?
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Which statement best summarizes the Invisible Hand theory?
Which statement best summarizes the Invisible Hand theory?
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Why is the term price system often used to describe the market system?
Why is the term price system often used to describe the market system?
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In the United States, which primarily determines how cars are produced?
In the United States, which primarily determines how cars are produced?
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Which of the following could be an outcome from spontaneous order?
Which of the following could be an outcome from spontaneous order?
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What does a rational individual choose based on a given opportunity cost?
What does a rational individual choose based on a given opportunity cost?
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Which of the following is not one of the three economic questions faced by all societies?
Which of the following is not one of the three economic questions faced by all societies?
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Professor Bowles suggested that your educational experience is likely to be more successful if approached through which framework?
Professor Bowles suggested that your educational experience is likely to be more successful if approached through which framework?
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Which of the following will not cause a shift of the PPC outward?
Which of the following will not cause a shift of the PPC outward?
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What occurs as a result of Laissez Faire policies?
What occurs as a result of Laissez Faire policies?
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For two states to benefit from specialization and trade, which is required?
For two states to benefit from specialization and trade, which is required?
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Why do farmers in Idaho produce potatoes instead of oranges?
Why do farmers in Idaho produce potatoes instead of oranges?
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If the production possibility curve shows decreasing marginal opportunity costs, what shape would it likely have?
If the production possibility curve shows decreasing marginal opportunity costs, what shape would it likely have?
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Under which condition does the principle of increasing marginal opportunity cost not apply?
Under which condition does the principle of increasing marginal opportunity cost not apply?
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What has primarily contributed to economic growth in the last 200 years?
What has primarily contributed to economic growth in the last 200 years?
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What benefit does trade provide to countries that specialize their production based on comparative advantage?
What benefit does trade provide to countries that specialize their production based on comparative advantage?
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Which factor contributes to higher wages in the U.S. compared to Mexico?
Which factor contributes to higher wages in the U.S. compared to Mexico?
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Given an hourly wage of $16 in the U.S. and $4 in Mexico, where should production be located for efficiency?
Given an hourly wage of $16 in the U.S. and $4 in Mexico, where should production be located for efficiency?
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What primary factor led to an increase in average income per capita starting around 1750?
What primary factor led to an increase in average income per capita starting around 1750?
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By driving interest rates up, the Federal Reserve is trying to shift the:
By driving interest rates up, the Federal Reserve is trying to shift the:
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What term best describes a U.S. economy increasingly controlled by a small group in a resource allocation role?
What term best describes a U.S. economy increasingly controlled by a small group in a resource allocation role?
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Which system is characterized by critical importance placed on individual freedom?
Which system is characterized by critical importance placed on individual freedom?
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Along a given Short Run Aggregate Supply Curve (SAS), the Price level (P) is ________ and Wages (W) are ________.
Along a given Short Run Aggregate Supply Curve (SAS), the Price level (P) is ________ and Wages (W) are ________.
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Which thinkers supported a society based on markets and representative government?
Which thinkers supported a society based on markets and representative government?
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As the price level (P) increases along the SAS curve, what happens to profits?
As the price level (P) increases along the SAS curve, what happens to profits?
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What effect does an increase in P have ceteris paribus?
What effect does an increase in P have ceteris paribus?
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Markets are effective in producing goods efficiently because they:
Markets are effective in producing goods efficiently because they:
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If wages (W) increase, what is the most likely consequence?
If wages (W) increase, what is the most likely consequence?
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Private property is a significant element of which economic system?
Private property is a significant element of which economic system?
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The SAS is most likely to shift to the right if:
The SAS is most likely to shift to the right if:
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In terms of American institutions, which economic and political systems are aligned with Locke and Smith respectively?
In terms of American institutions, which economic and political systems are aligned with Locke and Smith respectively?
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In 'The Wealth of Nations', what did Adam Smith advocate for?
In 'The Wealth of Nations', what did Adam Smith advocate for?
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Which of the following factors will not shift the long-run aggregate supply curve right?
Which of the following factors will not shift the long-run aggregate supply curve right?
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If the economy is in an inflationary gap, what is likely to happen eventually?
If the economy is in an inflationary gap, what is likely to happen eventually?
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What did John Locke argue regarding individual rights?
What did John Locke argue regarding individual rights?
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A market economy typically results in efficient production because:
A market economy typically results in efficient production because:
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What would the Federal Reserve likely do if the economy is experiencing an inflationary gap?
What would the Federal Reserve likely do if the economy is experiencing an inflationary gap?
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Compared to the market system, what is a characteristic of both feudalism and mercantilism?
Compared to the market system, what is a characteristic of both feudalism and mercantilism?
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In 2022, most economists placed some blame for the inflation rate on:
In 2022, most economists placed some blame for the inflation rate on:
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Households in an economy are primarily found on which side of the goods and factor markets?
Households in an economy are primarily found on which side of the goods and factor markets?
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Which statement is not consistent with the law of supply?
Which statement is not consistent with the law of supply?
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Graphically, a change in price causes:
Graphically, a change in price causes:
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If the price in a market is above its equilibrium level, there will be a:
If the price in a market is above its equilibrium level, there will be a:
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When quantity supplied is greater than quantity demanded, prices tend to:
When quantity supplied is greater than quantity demanded, prices tend to:
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A decrease in equilibrium price and a decrease in equilibrium quantity is most likely the result of:
A decrease in equilibrium price and a decrease in equilibrium quantity is most likely the result of:
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Which of the following is not associated with Keynesian economics?
Which of the following is not associated with Keynesian economics?
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Classical economics would argue:
Classical economics would argue:
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Which contributed to the development of Keynesian economics?
Which contributed to the development of Keynesian economics?
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A machinist who loses her job due to imports and cannot find another job due to the lack of jobs for machinists would most likely be classified as which type of unemployment?
A machinist who loses her job due to imports and cannot find another job due to the lack of jobs for machinists would most likely be classified as which type of unemployment?
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Which of the following is the most likely cause of cyclical unemployment?
Which of the following is the most likely cause of cyclical unemployment?
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Following which economic event did inflation become a problem?
Following which economic event did inflation become a problem?
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The total labor force is 100,000 out of a possible working-age population of 300,000. The total number of unemployed is 5,000. What is the unemployment rate?
The total labor force is 100,000 out of a possible working-age population of 300,000. The total number of unemployed is 5,000. What is the unemployment rate?
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The General Theory supported __________ ; Wealth of Nations argued _________.
The General Theory supported __________ ; Wealth of Nations argued _________.
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The business cycle consists of several stages or phases. Which is the accurate sequence?
The business cycle consists of several stages or phases. Which is the accurate sequence?
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Who ultimately determines what to produce in a market economy?
Who ultimately determines what to produce in a market economy?
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Which is an example of the government fulfilling its role as an actor in the economy?
Which is an example of the government fulfilling its role as an actor in the economy?
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What is a role of the government as a referee in the U.S. market-based economy?
What is a role of the government as a referee in the U.S. market-based economy?
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Which of the following logically follows a cause-and-effect relationship?
Which of the following logically follows a cause-and-effect relationship?
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What economic justification does the U.S. government have for producing public goods?
What economic justification does the U.S. government have for producing public goods?
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According to Professor Bowles, what is a major consequence of the development of the market system in Europe?
According to Professor Bowles, what is a major consequence of the development of the market system in Europe?
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Which concept is directly related to John Locke's views on individuals being free and equal?
Which concept is directly related to John Locke's views on individuals being free and equal?
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In a Mercantilist system, what primarily determines production?
In a Mercantilist system, what primarily determines production?
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In the market system, how do prices inform consumer purchasing decisions?
In the market system, how do prices inform consumer purchasing decisions?
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What happens to labor demand as it becomes more scarce in a market system?
What happens to labor demand as it becomes more scarce in a market system?
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What is a likely implication of increasing prices of new cars?
What is a likely implication of increasing prices of new cars?
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When consumer incomes increase, what is expected to happen to the demand for normal goods?
When consumer incomes increase, what is expected to happen to the demand for normal goods?
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According to the law of supply, what happens when the price of a good increases?
According to the law of supply, what happens when the price of a good increases?
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If the price of gas decreases, what is the expected outcome?
If the price of gas decreases, what is the expected outcome?
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Which of the following options describes the effectiveness of the invisible hand in a market economy?
Which of the following options describes the effectiveness of the invisible hand in a market economy?
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What does Robinson Crusoe produce annually in his one-person economy?
What does Robinson Crusoe produce annually in his one-person economy?
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What is a likely outcome if Robinson Crusoe breaks one fishing pole during the year?
What is a likely outcome if Robinson Crusoe breaks one fishing pole during the year?
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Which represents an economy's overall output or income?
Which represents an economy's overall output or income?
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Which equation correctly represents GDP?
Which equation correctly represents GDP?
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What is the NDP calculation for the economy if GDP is $290 trillion and depreciation is $15 trillion?
What is the NDP calculation for the economy if GDP is $290 trillion and depreciation is $15 trillion?
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What can be the effect of a recession in Europe on U.S. exports?
What can be the effect of a recession in Europe on U.S. exports?
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If nominal GDP doubles while prices also double, what happens to real GDP?
If nominal GDP doubles while prices also double, what happens to real GDP?
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What happens to the aggregate demand curve if the U.S. dollar depreciates against the Mexican Peso?
What happens to the aggregate demand curve if the U.S. dollar depreciates against the Mexican Peso?
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Which component is NOT included in Aggregate Income?
Which component is NOT included in Aggregate Income?
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What is the price index (GDP deflator) when nominal GDP is $10 trillion and real GDP is $5 trillion?
What is the price index (GDP deflator) when nominal GDP is $10 trillion and real GDP is $5 trillion?
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Which option would likely shift the aggregate demand curve to the right?
Which option would likely shift the aggregate demand curve to the right?
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What defines inflation?
What defines inflation?
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Study Notes
Economic Decision Rule
- Individuals choose the option that benefits them the most.
Invisible Hand Theorem
- This theory depends on individuals being rational and self-interested in their choices.
Adam Smith
- Adam Smith, author of "The Wealth of Nations", believed that a market-based economic system is superior to mercantilism for national wealth.
- He argued that a market system promotes efficient production of goods and results in the right mix of goods being produced.
Invisible Hand Theorem
- The market system operates based on individual choices and competition.
- The market system will produce goods people want and demand efficiently.
Scarcity
- Scarcity of resources leads to rationing, a mechanism to distribute scarce goods.
Law of Demand
- As price increases, the quantity demanded decreases.
Law of Supply
- As price increases, the quantity supplied increases.
- The supply of a good will increase if there’s new technology, input cost reduction, or more businesses enter the market.
- The supply of a good will decrease if there is less technology, input cost increase, or if less businesses enter the market.
Market System
- The market system uses prices to allocate resources and determine the quantity of goods produced.
Trade
- The market system allows for voluntary trade based on comparative advantage.
- Trade increases efficiency in the distribution of goods.
Opportunity Cost
- Opportunity Cost is the value of the best alternative foregone.
- Rational individuals maximize their benefits by choosing the option with the lowest opportunity cost.
Laissez-Faire
- Laissez-Faire policies promote specialization and trade.
- They lead to gains for both individuals and the economy.
Production Possibility Curve (PPC )
- The PPC illustrates the potential production combination of goods that an economy can produce with given resources.
- An outward shift in the PPC means increased production potential, often resulting from better technology, more labor, or more capital resources.
Comparative Advantage
- When a country specializes in producing goods with a lower opportunity cost, they gain a comparative advantage.
- This specialization and subsequent trade can benefit both countries involved.
Market-Based Economy
- In a market-based economy, the government acts as a referee for fair play, enforcing contracts and property rights.
- The government also provides public goods, promotes competition, and tackles issues like fraud and corruption.
Mercantilism
- Mercantilism characterized economies where the government controlled production, trade, and resources to generate wealth.
Socialism
- Socialism emphasizes collective ownership and government control over production and resources, typically with the goal of a more equitable distribution of wealth.
Market System and Price System
- The market system heavily relies on prices to communicate information about supply and demand.
- Prices determine the quantity of goods purchased, the jobs workers choose, and what firms produce.
Labor Market
- Labor is a key factor of production.
- The price of labor, known as the wage rate, is determined by the supply and demand for labor.
- When labor becomes scarcer, the price of labor, the wage, is likely to increase.
Surplus and Shortage
- A surplus occurs when the quantity supplied exceeds the quantity demanded.
- A shortage occurs when the quantity demanded exceeds the quantity supplied.
- In a functional market system, surpluses and shortages tend to be temporary as prices adjust to balance the supply and demand.
Changes in Demand
- A decrease in the price of a substitute good will cause a decrease in demand for the original good.
- An increase in consumer income will cause an increase in demand for normal goods but a decrease in demand for inferior goods.
Changes in Supply
- An increase in the cost of production will decrease the supply of a good.
- An improvement in technology used for production can increase the supply of a good.
Market Equilibrium
- Market equilibrium is achieved when the quantity supplied equals the quantity demanded at a specific price.
- When the current price is above the equilibrium price, a surplus results.
- When the current price is below the equilibrium price, a shortage results.
Government Role in the Market System
- The government has an important role in regulating the market system to ensure fairness and prevent negative externalities.
- The government typically regulates markets by setting basic rules, enforcing contracts, preventing fraud, and providing public goods.
Role of Enlightenment Ideas
- Enlightenment ideas of individual freedom and reason played a key role in the development and adoption of the market system.
- The market system is built upon the concept that individual freedom allows for rational choices that contribute to social wealth.
Key Figures in Market Economy
- John Locke's ideas about individual rights and freedom provided a philosophical foundation for the development of market systems.
- Adam Smith further developed the theory of the free market, advocating for limited government intervention and allowing the market to dictate production and distribution of goods.
Price System and the Market
- Prices change based on changes in supply and demand
- Prices help to allocate resources
- Prices help to answer the question of what to produce
Supply and Demand
- Better technology causes an increase in supply, leading to lower prices
- A change in the price of a good causes a change in quantity demanded
- Quantity supplied of a good is directly related to the good's price
- A change in price causes a movement along a given supply curve, not a shift
- If the price is above the equilibrium level there will be a surplus and downward pressure on price
- When quantity supplied is greater than quantity demanded, prices tend to fall
- The phrase "price system" is often used to describe the market system
- A decrease in equilibrium price and a decrease in equilibrium quantity is most likely the result of a decrease in demand
Classical Economics
- Classical economics was interested in economic growth
- Classical economics was also interested in technological innovation
Keynesian Economics
- Keynesian economics is most interested in recessions
- Keynesian economists suggest that the best response to a recession is to increase aggregate demand with higher government spending
- The Great Depression contributed to the development of Keynesian economics
- Keynesian economics is focused on the short run and the idea that markets do not always clear quickly
- Keynesian economics argues that markets do not always clear
Unemployment
- The 2008 Financial Crisis resulted in the loss of more full-time jobs than the COVID pandemic
- A machinist who loses her job due to imports and cannot find another job due to the lack of available jobs would likely be classified as having structural unemployment
- Technological innovation and competition from imports are causes of structural unemployment
- A recession is the most likely cause of cyclical unemployment
- The COVID pandemic resulted in the fastest recovery of unemployment to its pre-event level
Inflation
- Inflation became a problem following the COVID pandemic
- The 2024 Financial Crisis is the most recent event to which inflation can be attributed
Economic History
- John Maynard Keynes wrote The General Theory while Adam Smith wrote Wealth of Nations
- The General Theory supported the idea that the labor market would not clear quickly
- Wealth of Nations argued in favor of the "invisible hand" theory
- The business cycle consists of several stages or phases; recession, peak, trough, upturn.
GDP
- GDP represents an economy’s output or income
- GDP is the market value of an economy's production of final goods and services
- GDP is equal to Aggregate Income
- GDP = C + I + G + (X - M)
- NDP (Net Domestic Product) is GDP less depreciation
Price Indexes and Inflation
- The GDP Price Deflator is used to calculate real GDP from nominal
- Inflation is the percentage change in a price index
Aggregate Demand
- Aggregate Demand (AD) = C + I + G + (X - M)
- An increase in government spending shifts the AD curve to the right
- A decrease in exports, as a result of a recession in a major trading partner, shifts the AD curve to the left.
- A depreciation of the U.S. Dollar against foreign currencies shifts the AD curve to the right
- The U.S. government responded to the COVID-19 recession with increased spending and lower interest rates
- The Federal Reserve’s decision to raise interest rates is an attempt to shift the AD curve left
Short Run Aggregate Supply (SAS)
- The SAS curve assumes that input prices are fixed
- An increase in the price level (P), while wages are fixed, causes an increase in profits and a shift up the SAS curve
- An increase in wages causes a decrease in profits and a shift left of the SAS curve
Long Run Aggregate Supply (LAS)
- The LAS curve assumes that all inputs are fully employed
- Factors that shift the LAS curve to the right include:
- An increase in the size of the labor force
- Improvements to institutional arrangements
- Increases in productivity
Recessions and Inflation
- An economy in an inflationary gap will experience rising input costs which, in turn, will cause output to fall and move the economy down the SAS curve.
- The Federal Reserve can help to solve an inflationary gap by raising interest rates
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Description
Test your understanding of key economic principles such as the Invisible Hand Theorem, the Law of Demand and Supply, and the role of scarcity. This quiz covers fundamental concepts introduced by Adam Smith and how individual choices impact market outcomes. Challenge yourself to apply these theories and increase your economic literacy.
