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3 main questions of macroeconomics

-What is produced?
-How is it produced?
-Who gets it when it is produced?

Production Possibilities Curve (PPC)

If all resources are used than we are located on the line. If not all resources are used than we are below the curve.

How can we increase the PPC?

-New Technology
-New Resources
-Increase in Productivity

What graph is the PPC similar too?

Long Run Aggregate Supply

What is Demand?

the amount of a good or service you're willing and able to buy at different prices

What is the Law of Demand?

inverse relationship between price and quantity.
-As Price level increases, Quantity decreases

Things that shift the entire Demand curve:

1)Tastes and Preferences
2)Related Goods
3)Income (of consumers)

What are Related Goods?

complements & substitutes

What is Supply?

Your willingness and abilitity to sell a productive at different prices

What is the Law of Supply?

Direct Relationship between Price and Quantity

Things that shift the entire Supply curve:

1)Natural and Manmade Phenomenon
2)Input Cost
5)Profitability of alternate goods in supply
6)Profitability of goods in joint supply

What is a natural phenomenon?


what is a manmade phenomenon?


what is an example of goods in joint supply?

beef and leather: came from the same cow

What is surplus?

The greater price of an item when compared to the equilibrium price

What is shortage?

The smaller price of an item when compared to the equilibrium price

Price Ceiling

Govenment intervention. Price can not rise above the Price Ceiling

Examples of Price Ceiling

Rent Control

What does the Price Ceiling create?

a shortage

What does a shortage create?

a blackmarket

What is a Price Floor?

Price can not go below the price floor

Example of Price Floor

minimum wage

What does a price floor create?


Gross Domestic Product (GDP)

the total dollar value of all goods and services produced in a country in 1 year

Gross National Product (GNP)

the total dollar value and all goods and services produced by a country in 1 year

Where does GDP come from?

within the country. Anything made within the country

Where does GNP come from?

the entire world. Anything made by American companies both inside and outside the country.

The consumer equation of GDP


Nominal GDP

total dollar amount

Real GDP

adjusted for inflation

Equation to find real GDP


Problems (Short comings) w/ GDP

1) underground economy (black market)
2)improved quality
3) More leisure time


increase the average price level


decrease the average price level


Falling infaltion rate (prices are still increasing, just at a slower rate)

Types of Inflation

1) Cost-push (supply side)
2) Demand-pull (demand side)


cost of production leads to a price level increase


Too many dollars chasing too few goods; increase in demand for goods increases the price level

Types of Unemployment


Inflation rate

(CPI2-CPI1/CPI1) * 100

labor force

employed + unemployed (does not include those institutionalized or in the military)


ACTIVELY seeking work


working, not seeking for employment

Seasonal unemployment

agriculture, tourism

Frictional unemployment

between jobs

Structural unemployment

because of changes in technology

Cyclical unemployment

Business cycle layoffs

True/ False
individuals who argue for in increase in government spending as the best use of the budget surpluses justify this option in part based on its beneficial effect on household incomes and consumption in the economy


Between 1980 and 1995, the public debt

increased as a percentage of GDP

Foreign individuals and institutions hold about what percentage of the public debt?

22 percent

The public debt as a percentage of GDP rose to over 100 percent during...


The public debt is the sum of all previous...

budget deficits minus any budget surpluses of the Federal Government

Functional finance is the view that the primary purpose of Federal finance is to stabilize the economy, and that the problems associated with consequent deficits or surpluses are of secondary importance


The crowding- out effect from government borrowing to finance the public debt is reduced when

public investment complements private investment

Even if the social security surpluses are excluded from the projected bedget surpluses form 2000 to 2010, the accumulated surpluses are still projected to be

$3 billion

a major reason that a public debt cannot bankrupt the Federal Government is because

the public debt can easily be refinanced

Incurring an internal debt to finance a war does not pass the cost of the war on to future generations because

the opportunity cost of wartime expenditures was borne by the generation that lived during the war

Which was a concern with the Federal deficit and the public debt in the first half of the 1990's

the absolute size of Federal deficits and public debt had increased substantially

The size of recent annual Federal budget surpluses may be overstated because they include items such as the social security surplus


A large public debt will not bankrupt the Federal government because it can refinance the debt or increase taxes to pay it


A cyclically balanced budget philosophy would call for what during a period of high inflation

higher taxes and less government spending

Historically, growth of the public debt has been primarily caused by the deficit financing of wars and recession


An increase in the public debt will

increase the inequity in the distribution of income

A major problem with a cyclically balanced budget is

the upswings and downswings of the business cycle may not be of equal magnitude or duration

One important consequence of the public debt in the United States is that

it transfers a portion or real output to foreign nations

Assume that the multiplier is 2. If the amout of saving done at full employment increased by $12 billion and the amount of private borrowing increased by $5 billion then to maintain full employment, the public debt would have to increase by

$7 billion

Before the Great Depression, the budget philosphy that was most generally accepted was

an annually balanced budget

True/ False
Over 95 percent of the total public debt is held by banks and private individuals


What is Velocity of money?

the number of times per year the average dollar is spend on final goods and services

According to the classical economic theory, the reason that firms do not change production behavior when the price level decreases is because:

input costs would fall along with product prices to leave real profits and output unchanged.

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