Questions and Answers
What is a characteristic of oligopolistic firms in terms of product differentiation?
Which of the following models is used to understand the competitive forces that determine the level of competition and profitability in an industry?
What is a scenario in which two firms simultaneously make decisions that result in a worse outcome for both firms than if they had made different decisions?
Which of the following is a type of market structure characterized by two dominant firms?
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Which of the following models is used to analyze the strategic interaction between firms in an oligopolistic market?
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What is the characteristic of a dominant firm in a price-leadership model?
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What is the key feature of a game theory strategy?
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What is the result of moving from a monopolist to Cournot duopolists in the Cournot model?
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What type of game is characterized by a payoff matrix where both players have a dominant strategy?
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What is the term for a market structure with two firms?
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In a single play of the airline game, what is the dominant strategy for British Airways if Lufthansa Airlines prices at $600?
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What is the primary goal of a tit-for-tat strategy in a repeated game?
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What is the primary outcome of a multiple-player game that results in a prisoner's dilemma?
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What is the necessary condition for oligopoly to exist in a market?
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What is the typical outcome of concentration in a market, according to the oligopoly model?
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What is the primary purpose of horizontal differentiation in a monopolistically competitive market?
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According to researchers in behavioral economics, what is the effect of too much choice on purchases?
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What is the purpose of a commitment device in the context of consumer behavior?
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What is the primary characteristic of vertical differentiation?
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What is one of the roles that advertising plays in product differentiation?
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What occurs when existing firms in a monopolistically competitive industry experience a decline in demand due to the entry of new firms?
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Which of the following is an example of a commitment device in the context of monopolistic competition?
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What is the main difference between horizontal and vertical product differentiation?
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Which of the following is a potential benefit of product differentiation in monopolistic competition?
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What is the relationship between the equilibrium of a monopolistically competitive firm and its average total cost curve?
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What is a key difference between the demand curve of a monopolistic competitor and that of a perfectly competitive firm?
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In the short run, a monopolistically competitive firm will produce up to the point where:
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What is a characteristic of monopolistic competition in the long run?
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What is the result of the MR curve of a monopolistic competitor?
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What is the goal of a monopolistically competitive firm in the short run?
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What is the primary purpose of households supplying funds to the money market?
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Who borrows from the money market to finance new facilities?
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What is the term for the financial instruments that give the holder a share in the firm's ownership?
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What is the term for the portion of a firm's profits that the firm pays out each period to its shareholders?
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What is the government's policy concerning taxes and spending?
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What is the term for the tools used by the Federal Reserve to control short-term interest rates?
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Who coordinates borrowing and lending in the money market?
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What is the term for the promissory notes issued by the federal government when it borrows money?
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Who borrows from and lends to the money market?
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What is the primary purpose of the money market?
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What is the difference between national income and personal income?
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What is the percentage of disposable personal income that is saved, according to Table 21.5?
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What is the amount of disposable personal income, according to Table 21.5?
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What is the amount of personal income taxes, according to Table 21.5?
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What is the amount of personal saving, according to Table 21.5?
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What is the difference between personal income and disposable personal income?
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What is the main difference between Gross National Product (GNP) and Net National Product (NNP)?
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What is the purpose of subtracting depreciation from Gross National Product (GNP) to obtain Net National Product (NNP)?
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What is the term for the error that occurs in data measurement when calculating national income accounts?
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What is the relationship between national income and household income?
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What is the formula to calculate Gross Domestic Product (GDP) in terms of Gross National Product (GNP)?
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What is the purpose of the statistical discrepancy in the calculation of national income accounts?
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What is the percentage of corporate profits in the national income of 2017?
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What is the total amount of national income in 2017?
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What is the percentage of compensation of employees in the national income of 2017?
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What is the amount of rental income in the national income of 2017?
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What is the amount of net interest in the national income of 2017?
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What is the percentage of indirect taxes minus subsidies in the national income of 2017?
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What is the amount of surplus of government enterprises in the national income of 2017?
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What is the percentage of net business transfer payments in the national income of 2017?
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What is the effect of unanticipated inflation on debtors and creditors?
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What is the result of administrative costs associated with anticipated inflation?
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What happens to borrowers and lenders when prices are falling unanticipatedly?
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What is the relationship between interest rates and anticipated inflation?
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What is the difference between output growth, per-capita output growth, and productivity growth?
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What is the primary reason why the costs of unemployment are not evenly distributed across the population?
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What is the difference between the Consumer Price Index (CPI) and Producer Price Indexes (PPIs)?
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What is the primary consequence of inflation?
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What is the purpose of the Consumer Price Index (CPI) market basket?
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What is a characteristic of cyclical unemployment?
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What is the name of the measure that tracks the average change in prices of a fixed basket of goods and services purchased by households?
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What is the term for a person who is not looking for work because they do not want a job or have given up looking?
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What is the formula for calculating the labor force?
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What is the term for the ratio of the number of people unemployed to the total number of people in the labor force?
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Which of the following is NOT a category of people when measuring unemployment?
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What is the marginal propensity to consume (MPC) equal to?
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What is the relationship between the marginal propensity to consume (MPC) and the marginal propensity to save (MPS)?
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What is the change in consumption for every $100 increase in income, according to the consumption function C = 100 + 0.75Y?
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What is the value of aggregate saving when aggregate income is $800, according to the saving function derived from the consumption function in Figure 23.3?
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What is the equation for the aggregate saving (S)?
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What is the meaning of the triple equal sign (º) in the equation S º Y - C?
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At what level of income does consumption equal income, according to Figure 23.3?
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What does the upward slope of the aggregate consumption function indicate?
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What is the relationship between income and consumption in the simple consumption function C = 100 + 0.75Y?
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What is the value of consumption when income is zero, according to the consumption function C = 100 + 0.75Y?
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What is the term used to describe the combined total of goods and services produced and income received by all factors of production in a given period?
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What is the relationship between consumption and income, as described by Keynes?
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What is the term used to describe the relationship between consumption and income for an individual household?
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When thinking about aggregate output, what is important to keep in mind?
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What is the term used to describe the total quantity of goods and services produced in an economy in a given period?
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What is the primary argument against the claim that cheap foreign labor makes competition unfair?
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What is the deadweight loss or excess burden resulting from the tariff?
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What is the primary argument for protecting industries in areas where a country has a comparative disadvantage?
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What is the primary purpose of imposing penalties on high-polluting products, according to some environmental groups?
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What is the primary argument for protecting national security?
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What is the primary goal of aiding victims of free trade constructively?
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What is the main advantage of comparative advantage over absolute advantage in international trade?
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What is the primary effect of a tariff on international trade?
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What is the primary goal of a country's trade policy?
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What is the effect of a trade surplus on a country's exchange rate?
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What is the primary difference between the Corn Laws and the theory of comparative advantage?
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What is the primary effect of trade barriers on international trade?
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What is the primary argument in favor of providing protection to infant industries?
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Which of the following best describes the trend in trade openness across the world from 1980 to 2005?
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According to the theory of comparative advantage, what is the outcome of free international trade?
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What is the primary reason why economists favor free trade?
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What is the effect of tariffs on trade openness?
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What is the relationship between trade barriers and real incomes?
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What is the primary goal of international trade policies?
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What is the effect of reducing trade barriers on the standard of living?
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What happens to the price of U.S.-made goods and services to British buyers when the price of pounds rises?
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What is the result of an excess demand for pounds in the foreign exchange market?
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According to the purchasing-power-parity theory, what happens to the currencies of countries with high inflation rates?
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What is the equilibrium exchange rate in the foreign exchange market?
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What happens to the exchange rate when there is an excess supply of pounds in the foreign exchange market?
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What is the law of one price, according to the purchasing-power-parity theory?
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What happens to the supply of pounds when U.S. interest rates rise relative to British interest rates?
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What is the effect of a higher price level in the United States on the demand for imports from Britain?
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What is the result of an appreciation of the pound vis-à-vis the dollar?
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What is the effect of exchange rate changes on the economy?
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What is the likely outcome when the British see U.S. goods getting more expensive?
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What is the result of an increase in the price of pounds?
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What is the likely effect of a high inflation rate abroad on U.S. import prices?
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What is the term for the process by which a domestic price increase in one country can 'feed back' on itself through export and import prices?
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What type of exchange rate is determined by the unregulated forces of supply and demand?
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What happens to the quantity of pounds demanded when the price of pounds falls?
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What is the likely effect of a depreciation of the domestic currency on the trade balance?
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What is the term for the temporary deterioration of the trade balance following a depreciation of the domestic currency?
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What is the primary factor that determines the price level in an open economy?
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What is the likely effect of an appreciation of the domestic currency on import prices?
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Study Notes
Oligopoly Models
- A cartel is a group of firms that makes joint price and output decisions to maximize joint profits.
- Tacit collusion occurs when price- and quantity-fixing agreements among producers are implicit.
- The Price-Leadership Model is a form of oligopoly in which one dominant firm sets prices and all the smaller firms in the industry follow its pricing policy.
- The Cournot Model is a duopoly model, where two firms make output decisions to maximize their profits.
Game Theory
- Game theory analyzes the choices made by rival firms, people, and governments when they are trying to maximize their own well-being while anticipating and reacting to the actions of others in their environment.
- A dominant strategy is a strategy that is best no matter what the opposition does.
- The Nash equilibrium is a result where each player is doing the best they can given what the other is doing.
Oligopoly
- Oligopoly is a form of industry structure characterized by a few dominant firms.
- Products may be homogenous or differentiated.
- Oligopolists compete with one another not only in price but also in developing new products, marketing, and advertising.
- The Five Forces model helps us understand the five competitive forces that determine the level of competition and profitability in an industry.
Repeated Games
- A tit-for-tat strategy is a repeated game strategy in which a player responds in kind to an opponent's play.
Prisoner's Dilemma
- A multiple-player game can result in a classic prisoners' dilemma, where collusion if it could be enforced would result in an optimal outcome but where dominant strategies result in a suboptimal outcome.
- To break this dilemma, we pass laws that allow government to become a player.
Oligopoly and Economic Performance
- Concentration in a market leads to pricing above marginal cost and output below the efficient level, except with the contestable-markets model.
- The only necessary condition of oligopoly is that firms are large enough to have some control over price.
Product Variety and Firm Differentiation
- In well-working markets, product variety reflects consumer taste heterogeneity, gains from coordination, and cost economies due to standardization.
- In monopolistically competitive industries, many firms produce different products, driven by consumer taste differences, lack of need for coordination, and modest scale economies.
Types of Product Differentiation
- Horizontal differentiation: products differ in ways that make them better for some people and worse for others.
- Vertical differentiation: products have differences that make them better than rivals from everyone's perspective.
Behavioral Economics and Choice
- Researchers in behavioral economics find that people highly value some choice, but too much choice can reduce purchases.
- Commitment devices: individuals take actions to control their behavior in the future, such as buying gym memberships to incentivize workouts.
Advertising and Product Differentiation
- Advertising informs people about real product differences and creates or contributes to product differentiation by creating brand images.
- Product differentiation reduces the elasticity of demand facing a firm.
Monopolistic Competition in the Short Run
- A profit-maximizing monopolistically competitive firm behaves like a monopolist in the short run, with marginal revenue not equal to price.
- The firm chooses the output/price combination that maximizes profit.
Monopolistic Competition in the Long Run
- Entry and exit are easy in the long run, with profits providing an incentive for new firms to enter and firms that suffer losses can go out of business.
- As new firms enter, demand curves of existing firms shift to the left, pushing marginal revenue down, until profits are eliminated.
Economic Efficiency and Resource Allocation
- Monopolistic competition is efficient, but has two problems:
- Firms hold down production and charge a price above marginal cost to maintain market power.
- The equilibrium is to the left of the low point on the average total cost curve, preventing realization of all economies of scale.
- Product differentiation can lead to new products, improvements, and greater variety, counteracting these problems.
Introduction to Macroeconomics
- Macroeconomics deals with the economy as a whole, focusing on the determinants of total national income, aggregates such as aggregate consumption and investment, and the overall level of prices.
- Macroeconomics examines the behavior of all households and firms together, known as aggregate behavior.
- Sticky prices are prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded.
Macroeconomic Concerns
- Three major concerns of macroeconomics are:
- Output growth
- Unemployment
- Inflation and deflation
Output Growth
- The business cycle refers to the cycle of short-term ups and downs in the economy.
- Aggregate output is the total quantity of goods and services produced in an economy in a given period.
- An expansion or boom is the period in the business cycle from a trough up to a peak during which output and employment grow.
- A contraction, recession, or slump is the period in the business cycle from a peak down to a trough during which output and employment fall.
- A depression is a prolonged and deep recession.
Figure 20.1: A Typical Business Cycle
- The economy expands as it moves from the trough to the peak.
- The economy is in recession when it moves from a peak down to a trough.
Figure 20.2: U.S. Aggregate Output (Real GDP), 1900–2017
- The periods of the Great Depression and World Wars I and II show the largest fluctuations in aggregate output.
Unemployment
- The unemployment rate is the percentage of the labor force that is unemployed.
- The existence of unemployment implies that the aggregate labor market is not in equilibrium.
Inflation and Deflation
- Inflation is an increase in the overall price level.
- Hyperinflation is a period of very rapid increases in the overall price level.
- Deflation is a decrease in the overall price level.
The Components of the Macroeconomy
- The macroeconomy consists of four broad groups:
- Households
- Firms
- The government
- The rest of the world
- Households and firms make up the private sector, the government is the public sector, and the rest of the world is the foreign sector.
The Circular Flow Diagram
- The circular flow diagram shows the flows in and out of the sectors in the economy.
- Transfer payments are cash payments made by the government to people who do not supply goods, services, or labor in exchange for these payments.
Figure 20.3: The Circular Flow of Payments
- Households receive income from firms and the government, purchase goods and services from firms, and pay taxes to the government.
- Firms receive payments from households and the government for goods and services, pay wages, dividends, interest, and rents to households and taxes to the government.
- The government receives taxes from firms and households, pays firms and households for goods and services, and pays interest and transfers to households.
The Three Market Arenas
- The three market arenas are:
- The goods-and-services market
- The labor market
- The money (financial) market
- Households, firms, the government, and the rest of the world interact in these market arenas.
The Goods-and-Services Market
- Households and the government purchase goods and services from firms in the goods-and-services market.
- Firms purchase goods and services from each other and also supply to the goods-and-services market.
- The rest of the world buys from and sells to the goods-and-services market.
The Labor Market
- Households supply labor, and firms and the government demand labor in the labor market.
- Labor is also supplied to and demanded from the rest of the world.
The Money Market
- Households supply funds to the money market in the expectation of earning income.
- Households also demand (borrow) funds from this market to finance various purchases.
- Firms borrow to build new facilities in the hope of earning more in the future.
- The government borrows by issuing bonds, and the rest of the world borrows from and lends to the money market.
The Role of the Government in the Macroeconomy
- Fiscal policy refers to government policies concerning taxes and spending.
- Monetary policy refers to the tools used by the Federal Reserve to control short-term interest rates.
National Income Accounts
- Net national product (NNP) is the total product of a nation minus the value required to maintain its capital stock, which is its gross national product (GNP) minus depreciation.
- Statistical discrepancy refers to data measurement errors.
GDP, GNP, NNP, and National Income
- In 2017, the GDP of the US was $19,390.6 billion.
- The GNP was 19,607.4billion,whichistheGDPplusreceiptsoffactorincomefromtherestoftheworld(19,607.4 billion, which is the GDP plus receipts of factor income from the rest of the world (19,607.4billion,whichistheGDPplusreceiptsoffactorincomefromtherestoftheworld(934.7 billion) minus payments of factor income to the rest of the world ($717.9 billion).
- The NNP was 16,572.7billion,whichistheGNPminusdepreciation(16,572.7 billion, which is the GNP minus depreciation (16,572.7billion,whichistheGNPminusdepreciation(3,034.7 billion).
- National income was 16,607.7billion,whichistheNNPplusthestatisticaldiscrepancy(−16,607.7 billion, which is the NNP plus the statistical discrepancy ( -16,607.7billion,whichistheNNPplusthestatisticaldiscrepancy(−35.0 billion).
Personal Income and Saving
- Disposable personal income, or after-tax income, is personal income minus personal income taxes.
- Personal saving is the amount of disposable income left after total personal spending in a given period.
- The personal saving rate is the percentage of disposable personal income that is saved.
- In 2017, the personal income was 16,427.3billion,disposablepersonalincomewas16,427.3 billion, disposable personal income was 16,427.3billion,disposablepersonalincomewas14,379.0 billion, and personal saving was $485.9 billion.
- The personal saving rate in 2017 was 3.4%.
Components of National Income
- In 2017, the components of national income were:
- Compensation of employees: 62.1% of national income
- Proprietor's income: 8.3% of national income
- Rental income: 4.5% of national income
- Corporate profits: 13.0% of national income
- Net interest: 3.5% of national income
- Indirect taxes minus subsidies: 7.6% of national income
- Net business transfer payments: 1.0% of national income
- Surplus of government enterprises: -0.1% of national income
Inflation and Purchasing Power
- Inflation by itself does not necessarily reduce one's purchasing power.
The Costs of Inflation
- Inflation may change the distribution of income, with anticipated inflation having small effects and unanticipated inflation having large effects.
- Actual inflation that is higher than anticipated benefits debtors, while inflation that is lower than anticipated benefits creditors.
- Administrative costs and inefficiencies may occur even with anticipated inflation.
- Interest rates tend to rise with anticipated inflation, and high interest rates increase the opportunity costs of holding cash outside banks.
Deflation
- If falling prices are unanticipated, borrowers gain at the expense of lenders, and those on fixed pensions gain at the expense of governments and firms paying those pensions.
Long-Run Growth
- Output growth refers to the growth rate of the entire economy's output.
- Per-capita output growth refers to the growth rate of output per person in the economy.
- Productivity growth refers to the growth rate of output per worker.
- Cyclical unemployment is above frictional plus structural unemployment.
The Costs of Unemployment
- The costs of unemployment are not evenly distributed across the population and are difficult to quantify.
- Social consequences of unemployment can be severe, such as those experienced during the Depression of the 1930s.
Inflation and Deflation
- The consumer price index (CPI) is a price index computed each month by the Bureau of Labor Statistics using a bundle that represents the typical urban consumer's purchases.
- Producer price indexes (PPIs) measure prices that producers receive for products at all stages in the production process.
Measuring Unemployment
- Employed individuals are those who work for pay, either for someone else or in their own business, or work without pay for 15 or more hours per week in a family enterprise.
- Unemployed individuals are those who are not working, are available for work, and have made specific efforts to find work during the previous 4 weeks.
- Not in the labor force refers to individuals who are not looking for work because they do not want a job or have given up looking.
- Labor force is the number of people employed plus the number of unemployed.
- Unemployment rate is the ratio of the number of people unemployed to the total number of people in the labor force.
The Keynesian Theory of Consumption
- The aggregate consumption function shows the level of aggregate consumption at each level of aggregate income.
- The upward slope of the aggregate consumption function indicates that higher levels of income lead to higher levels of consumption spending.
Equation for Consumption Curve
- The equation for a straight-line consumption curve is C = a + bY.
- The marginal propensity to consume (MPC) is the fraction of a change in income that is consumed, or spent.
Aggregate Saving (S)
- Aggregate saving (S) is the part of aggregate income that is not consumed.
- The equation for aggregate saving is S = Y - C, which is an identity.
Marginal Propensity to Save (MPS)
- The marginal propensity to save (MPS) is the fraction of a change in income that is saved.
- MPC + MPS = 1.
Example of Consumption Function
- The equation C = 100 + 0.75Y represents a simple consumption function.
- In this function, consumption is 100 at an income of zero, and for every 100 increase in income, consumption rises by 75.
Deriving the Saving Function
- The saving function can be derived from the consumption function using the equation S = Y - C.
- A 45° line can be used to compare consumption and income graphically.
Aggregate Output and Equilibrium Output
- Aggregate output is the total quantity of goods and services produced in an economy in a given period.
- Aggregate income is the total income received by all factors of production in a given period.
- In any given period, there is an exact equality between aggregate output (production) and aggregate income.
- The term aggregate output (income) (Y) is used to remind us of this equality.
Tariff and Deadweight Loss
- The government collects revenue equal to the gray shaded area in panel (b)
- The loss of efficiency has two components: consumers paying higher prices and marginal producers being drawn into textiles and away from other goods, resulting in inefficient domestic production
- The triangle labeled ABC in panel (b) is the deadweight loss or excess burden resulting from the tariff
Argument for Protectionism
- Protection saves jobs: foreign competition costs Americans their jobs, and victims of free trade can be aided constructively without forgoing the gains from trade
- Some countries engage in unfair trade practices, and free trade may be the best solution when everybody plays by the rules
- Cheap foreign labor makes competition unfair, but wages in a competitive economy reflect productivity, and trade flows according to comparative advantage
- Protection safeguards national security: even if we acknowledge another country’s comparative advantage, we may want to protect our own resources
Additional Arguments for Protectionism
- Protection discourages dependency: protecting industries in areas where a country has a comparative disadvantage may prevent trading relationships that might lead to political dependence
- Environmental concerns: some environmental groups argue that free trade policies may harm the environment, and by imposing penalties on high-polluting products, the prices of goods imported this way would reflect the harm that those products cause
- Protection safeguards infant industries: a young industry may need temporary protection from competition from the established industries of other countries to develop an acquired comparative advantage
International Trade and Comparative Advantage
- Trade surplus: a situation when a country exports more than it imports
- Trade deficit: a situation when a country imports more than it exports
- Corn Laws: tariffs, subsidies, and restrictions enacted by the British Parliament in the early 19th century to discourage imports and encourage exports of grain
- Theory of comparative advantage: Ricardo’s theory that specialization and free trade will benefit all trading partners (real wages will rise), even those that may be absolutely less efficient producers
Absolute and Comparative Advantage
- Absolute advantage: an advantage in the production of a good enjoyed by one country over another when it uses fewer resources to produce that good than the other country does
- Comparative advantage: an advantage in the production of a good enjoyed by one country over another when that good can be produced at a lower opportunity cost (in terms of other goods that must be forgone) than it could be in the other country
Trade Openness and Economic Consensus
- Trade openness across the world has increased, with rapid reductions in tariffs in the last 25 years, especially in emerging and developing markets
- According to the theory of comparative advantage, all countries benefit from specialization and trade: free international trade raises real incomes and improves the standard of living
- Although protectionists argue for the protection of workers from foreign competition, it is unlikely to cause net job loss in an economy as workers are absorbed into expanding sectors over time
The Supply of Pounds in the Foreign Exchange Market
- When the price of pounds rises, British buyers can obtain more dollars for each pound, making U.S.-made goods and services appear less expensive to them.
- This increases the quantity of pounds supplied.
The Market for Foreign Exchange
- The equilibrium exchange rate occurs when the quantity demanded of a foreign currency equals the quantity supplied.
- Appreciation of a currency occurs when its value rises relative to another currency.
- Depreciation of a currency occurs when its value falls relative to another currency.
Factors That Affect Exchange Rates
- Purchasing power parity (PPP) theory states that exchange rates are set so that the price of similar goods in different countries is the same.
- A high rate of inflation in one country relative to another puts pressure on the exchange rate, causing the currency of the high-inflation country to depreciate.
Exchange Rates Respond to Changes in Relative Prices
- When the price level in one country increases, imports from another country become relatively less expensive, increasing the demand for the other country's currency.
- The supply of the other country's currency shifts to the left, resulting in an appreciation of the currency.
Relative Interest Rates
- When interest rates in one country rise relative to another, the supply of the other country's currency shifts to the right, causing its currency to depreciate.
- The demand for the other country's currency shifts to the left, further depreciating the currency.
The Effects of Exchange Rates on the Economy
- The level of imports and exports depends on exchange rates, income, and other factors.
- Changes in exchange rates affect the levels of imports and exports, which in turn affect real GDP and the price level.
Import and Export Prices and the Price Feedback Effect
- The price feedback effect occurs when a domestic price increase in one country drives up prices in other countries, further increasing the price level in the first country.
The Open Economy with Flexible Exchange Rates
- Floating, or market-determined, exchange rates are determined by the unregulated forces of supply and demand.
- Exchange rates adjust to changes in the economy, affecting the levels of imports and exports.
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Description
This quiz covers the concept of oligopoly models, including the collusion model, cartel, and tacit collusion in microeconomics.