Alyson King's Macroeconomics Review

Alyson King's Macroeconomics Review - Macroeconomics Review...

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Macroeconomics Review 10 Principles of Economics: 1. People face tradeoffs Give up one thing to gain another “Guns and Butter” 2. The cost of something is what you give up to get it Opportunity cost i. Whatever must be given up to obtain some item 3. Rational people think at the margin Marginal changes: small incremental adjustments to a plan of action A rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost 4. People Respond to Incentives The effects of a good’s price on the behaviours of buyers and sellers in a market is crucial for understanding how the economy allocates scarce resources 5. Trade Can Make Everyone Better Off By trading with others, people can buy a greater variety of goods and services at a lower cost 6. Markets are Usually a Good Way to Organize Economic Activity Market economy: an economy that allocates resources thru decentralized decisions of many firms and households as they interact in markets for goods and services 7. Governments Can Sometimes Improve Market Outcomes 2 reasons for a govnt to intervene: i. To promote efficiency ii. To promote equity 8. A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services Productivity: the quantity of goods and services produced from each hour of a worker’s time 9. Prices Rise When the Government Prints Too Much Money In almost all cases of large/persistent inflation, the reason is growth in the quantity of money 10. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment Increasing the amount of money in the economy stimulates the overall level of spending, thus the demands for goods and services. More hiring means lower unemployment Economic Models
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They omit many details to allow us to see what’s truly important They are built with assumptions Circular Flow Diagram: Shows the dollar flow through markets among households and firms Firms produce goods and services using inputs, such as labour, land, capital,etc. o Called factors of production Households own the factors of production and consume all the goods and services that firms produce Households and firms interact in 2 types of markets: o Markets for goods and services (households are buyers, firms are sellers) Households buy the outputs from the firms o Markets for the factors of production (households are sellers, firms are buyers) Households provide the inputs the firms use to produce goods/services Inner loop represents the flows of inputs and outputs Outer loop represents the corresponding flow of dollars PPF (Production Possibilities Frontier) Graphs: A graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology An outcome is said to be efficient if the economy is getting all it can from the scarce resources it has available Positive vs. Normative Analysis:
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