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?
Signup and view all the answers
What are trade-offs?
Signup and view all the answers
According to the circular flow diagram, how does Suzy participate as a worker?
Signup and view all the answers
What makes the circular-flow diagram unusual among economic models?
Signup and view all the answers
What causes a PPF (Production Possibilities Frontier) to shift outward?
Signup and view all the answers
When is a PPF represented as a straight line?
Signup and view all the answers
When is a PPF bowed outward?
Signup and view all the answers
What can a country that currently does not trade with other countries benefit by?
Signup and view all the answers
What does comparative advantage refer to?
Signup and view all the answers
What does absolute advantage refer to?
Signup and view all the answers
Real GDP is defined as the yearly production of final goods and services valued at?
Signup and view all the answers
Nominal GDP is defined as the yearly production of final goods and services valued at?
Signup and view all the answers
How is the GDP deflator calculated?
Signup and view all the answers
What is the Inflation Rate formula?
Signup and view all the answers
What does the nominal interest rate usually refer to?
Signup and view all the answers
What is the formula for real interest rate?
Signup and view all the answers
What does the intersection of nominal & real interest rates show?
Signup and view all the answers
What happens to the real interest rate when the nominal rate increases followed by a 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.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
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.