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revex1f05 - Economics 2020 Review for First Exam Dr...

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Economics 2020 Review for First Exam Dr. Patricia Duffy
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ECON 2020 Information about EXAM 1 The Exam will Not be Scaled!
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Test Format Multiple Choice Questions worth 3 pts. each. (I haven't finalized the exam yet. There will be 20 to 25 of these.) Fill-in-the-blank questions Short Answers -- Math problems and/or Graphs with Explanations (see the homework)
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TEST COVERS The test covers chapter 1-4a in the text book. Material from chapter 4 is limited to the work we have covered in class. This material is included in your PowerPoint notes for Chapter 3 – elasticities.
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Material from Chapters 1 and 2 What is the difference between microeconomics and macroeconomics? What is monetary policy? What is fiscal policy? What are the three economic functions (goals) of government? What means does the government use to achieve those goals?
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1776. Adam Smith introduces a new paradigm -- the notion of individual choice shaping market transactions. (Invisible Hand) This new paradigm emancipated trade and industry from the “shackles of feudal aristocracy.” Modern Economics
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Three Economic Functions of Government Increase Efficiency: Promote competition, Curb externalities, Provide public goods. Promote Equity: Tax and expenditure programs to redistribute income. Foster macroeconomic Stability: Reduce unemployment and control inflation via monetary and fiscal policy.
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What are specific policies to promote equity? progressive taxation -- higher rates for higher incomes. transfer payments (such as food stamps or cash welfare payments) minimum wage laws
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Policies to promote stability Raising the interest rate to curb inflation Lowering the interest rate to combat a recession Using counter-cyclical fiscal policy : tax cuts or spending increases to combat a recession; building surpluses in times of prosperity.
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Policies to increase efficiency Anti-trust regulations Labeling laws (provides information to consumers) Providing public goods (examples: schools, parks, libraries, public health) Passing regulations to eliminate externalities or to compensate losers for them.
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What are Externalities? Externalities are costs or benefits accruing to individuals who are outside the market.
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What are Public Goods? Public goods are goods that provide positive externalities and/or which are not used up by one consumer. The government normally provides public goods because private producers have a hard time collecting fees from all those who benefit.
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Production Possibilities Frontier What is it? How is it increased? How is it decreased? What does it mean to be "on the PPF"?
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The Production Possibilities Frontier “Guns and butter” example. Possibilities Butter (mil lb) Guns (1000s) A 0 15 B 1 14 C 2 12 D 3 9 E 4 5 F 5 0
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Guns and Butter PPF 0 5 10 15 20 0 1 2 3 4 5 6 Butter Guns A B C D E F
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How does a nation turn guns into butter???
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