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Unformatted text preview: Macro Final Review Background and Micro 1. How do economists measure the value of anything?-market price is determined by supply (reflecting costs and scarcity) and demand (reflecting tastes) 2. What determines the price and quantity of any good or service?-the intersection of the supply/demand graph (shifts/movements) 3. What is opportunity cost and why is there new free lunch?-opportunity cost - what you give up to get something-there is no free lunch because everything has its own opportunity costs 4. What does the invisible hand mean, and why does it suggest laissez-faire?-invisible hand - self-guided interest, no government involvement, free market-laissez-faire - hands off 5. What are the three questions answered by any economics systems and how are they answered under a market-based system?-What - determined by dollar votes of consumers in their daily purchase decisions (demand) -How - determined by competition among producers (goal is to keep costs at minimum, profit maximizing)-For whom - supply and demand in the markets for factors of production 6. What is the difference between capitalism, som, communism?-Capitalism - self-guided interest, decisions made by firms, limited government control, market systems-Som - means of production (other than labor) should be owned by community-Communism - complete government control, state owns and controls means of production, particularly industrial capital 7. What is the definition of Microeconomics? Macroeconomics? Economics?-Microeconomics - how people, firms, households, make decisions-Macroeconomics - the aggregate of microeconomic principles interacting causing fluctuations in the economy as a whole (unemployment, price level, output, foreign trade, etc.) 1 Circular Flow and National Income Accounts and Other Measurements 1. 2 Important points of the Circular flow model.-Flow of final products - spending -Flow of total costs or incomes of inputs - received by workers-(both approaches yield exactly the same measure of GDP) 2. What are 5 key points in the definition of GDP?- C onsumption (largest component, 2/3 of GDP in recent years) - spending on: durable goods (automobiles), nondurable goods (food), services (medical care)- I nvestment - consists of the addition to the nation’s capital stock of buildings, equipment, software, and inventories during a year, etc.-Gross investment is NOT adjusted for depreciation, which measures the amount of capital that has been used up in a year-NET investment = gross investment - depreciation- G ov. spending - some are consumption-type goods (food, military), some are investment-type (schools, roads)-excludes transfer payments (payments to individuals that are not made in exchange for goods or services supplied - unemployment insurance, veterans’ benefits, old-age/disability payments)-taxes - must take them into account when using the earnings or cost approach to GDP -(Y-T) = (Income - taxes) = disposable income (when goes up, consumption goes up)...
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