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Law of Demand
other things equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded of the good rises.
Variables that SHIFT the demand curve
1. Income (normal and inferior goods)
2. Price of related goods (substitutes and complements)
5. Number of buyers
Two goods are complements when a decrease in the price of one good
increases the demand for the other good
If muffins and bagels are substitutes, a higher price for bagels would result in a(n)
increase in the demand for muffins
What is not held constant in a demand schedule?
If American cheese and cheddar cheese are substitutes, what would increase the demand for cheddar cheese?
an increase in the price of American cheese
Law of Supply
other things equal, when the price of a good rises, the quantity supplied of the good also rises, and then the price falls, the quantity supplied falls as well.
What is not held constant in a supply schedule?
price of the good
A dress manufacturer recently has come to expect higher prices for dresses in the near future. We would expect
the dress manufacturer to supply fewer dresses now than it was supplying previously.
make a claim about out the world is; *descriptive*
make a claim about how the world ought to be; prescriptive.
"Universal health care would be good for U.S. citizens" --Normative or Positive Statement?
What would happen to the equilibrium price and quantity of lattes if consumers' incomes rise and lattes are a normal good?
both the equilibrium price and quantity would increase.
An economy's production possibilities frontier is also its consumption possibilities frontier...
when the economy is self-sufficient
the ability to produce a good using fewer inputs than another producer.
The opportunity cost of one item....
is what we give up to get that item.
the ability to produce a good at a lower opportunity cost than another producer.
Although it is possible for one person to have a __________ advantage in both goods, it is impossible for one person to have a __________ advantage in both goods.
possible to have an absolute advantage; impossible to have a comparative advantage
Suppose Jim and Tom can both produce two goods: baseball bats and hockey sticks.
The market demand curve
is the sum of all individual demand curves.
Nominal GDP is is GDP measured at _______ prices.
Real GDP is GDP measured at ________ prices.
___________ is the percentage increase in the general price level, usually measured in terms of what?
Inflation rate; CPI
Consumer Price Index (CPI)
a measure of the overall cost of the goods and services bought by a typical consumer.
What are the four determinants of productivity?
1. human capital
2. physical capital
3. technological knowledge
4. natural resources
real interest rate equals
nominal interest rate-inflation rate
nominal interest rate equals
real interest rate + inflation rate
Inflation hurts _________ and helps _________.
inflation hurts lenders and helps borrowers.
In the financial system, which financial market has the highest potential for return?
stock market because highest risk
If the government is spending more than it is collecting in taxes, what is this called?
a budget deficit; T - G < 0
In the LF market, who supplies loanable funds? Who demands loanable funds?
supplies = savers; demands = investors (borrowers)
The higher the interest rate in the LF market, the _________ the quantity of LF supplied. The lower the interest rate in the LF market, the ________ the quantity of LF demanded.
greater; because higher interest rates encourages savings; quantity ^
In the market for loanable funds, the interaction of the demand for, and supply of, loanable funds determines the equilibrium level of _________.
real interest rate
Other things the same, an increase in the budget deficit....
shifts the supply of loanable funds left, so the interest rate rises.
Suppose that Congress were to institute an investment tax credit. What would happen in the market for loanable funds?
the demand for loanable funds would shift right
Other things the same, a higher interest rate induces people to....
save more, so the supply of loanable funds slopes upward.
If the supply of loanable funds shifts to the right, then the equilibrium interest rate...
falls and the quantity of loanable funds rises.
A nation's standard of living is measured by its
real GDP per person
The claim that increases in the growth rate of the money supply increase nominal interest rates but not real interest rates is known as the
Shoeleather cost refers to
resources used to maintain lower money holdings when inflation is high.
money multiplier =
1/R....where R represents the reserve ratio for all banks in the economy.
The natural unemployment rate includes
both frictional and structural unemployment
traveler's checks, demand deposits, currency
Which type of money has intristic value?
Savings deposits are included in
M2 not M1
If the Fed sells government bonds to the public, then reserves ________ and the money supply _________.
To increase the money supply, the Fed could
decrease the reserve requirement
The discount rate is the interest rate that..
the Fed charges banks for loans.
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