Macroeconomics Flashcards

Questions and Answers

What does economics fundamentally deal with?

Scarcity

What is the term for the loss of potential gain from other alternatives when one alternative is chosen?

Opportunity Cost

Which principle of economics is illustrated by a tax on gasoline encouraging people to drive smaller, more fuel-efficient cars?

People respond to incentives

What tradeoff exists between a clean environment and a higher level of income?

Laws that reduce pollution raise costs of production and reduce incomes Signup and view all the answers

What are trade-offs?

Involves a sacrifice that must be made to get a certain product or experience Signup and view all the answers

According to the circular flow diagram, how does Suzy participate as a worker?

In the markets for factors of production exchanging labor for income Signup and view all the answers

What makes the circular-flow diagram unusual among economic models?

Does not involve mathematics Signup and view all the answers

What causes a PPF (Production Possibilities Frontier) to shift outward?

There is a technological improvement Signup and view all the answers

When is a PPF represented as a straight line?

The rate of trade-off between the two goods being produced is constant Signup and view all the answers

When is a PPF bowed outward?

The rate of trade-off between the two goods being produced depends on how much of each good is being produced Signup and view all the answers

What can a country that currently does not trade with other countries benefit by?

Not restricting trade Signup and view all the answers

What does comparative advantage refer to?

Always exports Signup and view all the answers

What does absolute advantage refer to?

Always imports Signup and view all the answers

Real GDP is defined as the yearly production of final goods and services valued at?

Constant prices Signup and view all the answers

Nominal GDP is defined as the yearly production of final goods and services valued at?

Current prices Signup and view all the answers

How is the GDP deflator calculated?

The ratio of current prices to constant prices x 100 (ex. 57%) Signup and view all the answers

What is the Inflation Rate formula?

(CPI year 2 - CPI year 1) / CPI year 1 x 100 Signup and view all the answers

What does the nominal interest rate usually refer to?

Usually given Signup and view all the answers

What is the formula for real interest rate?

= Nominal interest rate - Inflation rate Signup and view all the answers

What does the intersection of nominal & real interest rates show?

Shows interest rates rise & fall Signup and view all the answers

What happens to the real interest rate when the nominal rate increases followed by a period of deflation?

Increase nominal rate then period of deflation Signup and view all the answers

Study Notes

Fundamental Concepts in Economics

Economics fundamentally deals with scarcity, the limited availability of resources to meet unlimited wants.
Opportunity cost refers to the potential gains lost when one alternative is selected over others.

Economic Incentives and Trade-offs

A tax on gasoline serves as an incentive, encouraging consumers to opt for smaller, more fuel-efficient cars.
Trade-offs exist when laws that reduce pollution lead to increased production costs, which can lower overall income.
Trade-offs involve sacrifices made to acquire certain goods or experiences.

Circular Flow Diagram Insights

In the circular flow diagram, individuals like Suzy, who delivers flowers, engage in labor markets, trading their work for income.
The circular-flow diagram is distinctive because it does not involve mathematics, focusing on concepts instead.

Production Possibilities Frontier (PPF)

A PPF can expand outward due to technological advancements, indicating increased production capabilities.
A linear PPF signifies a constant trade-off rate between two produced goods.
A bowed-outward PPF illustrates a varying trade-off rate, influenced by the quantity of each good produced.

Trade and Economic Advantages

A nation that does not engage in international trade could benefit from lower trade restrictions.
Comparative advantage means a country will always export goods in which it has a relative efficiency.
Absolute advantage indicates a country’s need to import goods due to its lack of efficiency in those areas.

Understanding GDP

Real GDP measures the production of final goods and services at constant prices, adjusting for inflation.
Nominal GDP reflects the value of production at current prices without inflation adjustments.
The GDP deflator is calculated by dividing current prices by constant prices and multiplying by 100, providing insights into inflation (e.g., 57% deflator).

Inflation and Interest Rates

The inflation rate is calculated as ( \frac{\text{CPI year 2} - \text{CPI year 1}}{\text{CPI year 1}} \times 100 ).
The nominal interest rate is typically the rate quoted in financial contexts.
The real interest rate formulates as the nominal rate minus the inflation rate, indicating the actual purchasing power of earnings.
The intersection of nominal and real interest rates reflects trends in how interest rates fluctuate in response to economic changes.

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Description

Test your knowledge of key concepts in Macroeconomics with these flashcards. Each card features a fundamental term along with its definition, covering essential principles like scarcity and opportunity cost. Perfect for students looking to reinforce their understanding of economic principles.