1. Economics is the study of how people try to satisfy their needs through the careful use of scarce resources. 2. Public goods are goods or services whose benefits are available to everyone and are paid for collectively, such as highways, national defense, police, fire services. 3. Real GDP is the gross domestic product after adjustments for inflation, which measures economic growth.

1. Economics
Final Exam Review

2. Goods or services whose benefits
are available to everyone and are
paid for collectively
• Public goods- ex. Highways, national defense,
police, fire, etc.
Ch. 7

3. The study of how people try to satisfy
their needs through the careful use of
scarce resources
Economics
1.1

4. Gross domestic product after
adjustments for inflation
• Real GDP
12.1

5. A “strong” market with the prices
moving up for several months or years
in a row
• Bull Market
11.5

6. The condition of not having enough
resources to produce all the things
people want
Scarcity
1.2

7. The cost of the next-best alternative
use of money, time, or resources
when one choice is made rather than
another
• Opportunity cost 1.7

8. The situation in which some necessities
have little value while some non-necessities
have a much higher value is
known as
a. paradox of value
b. opportunity cost
c. trade-offs
d. economic interdependence
• A 1.3

9. The study of economics is important because it enables
us to
a. describe our standard of living.
b. increase our consumption of
consumer goods
c. become better decision makers.
d. determine what goods ought to be produced.
• C 1.5

10. Alternative choices made by
consumers in the marketplace
• Trade-offs 1.7

11. A popular model used to illustrate the concept
of opportunity cost is
a. the production possibilities frontier.
b. the paradox of value.
c. entrepreneurship.
d. the factors of production.
• A 1.8

12. What are the four factors of
production?
• Land, labor, capital, entrepreneurs 1.9

13. Personal income minus individual
taxes
• Disposable income
12.3

14. When firms that produce the same kind of
product join forces.
• Horizontal merger
3.1

15. What three economic questions must
every society answer?
1. What to produce
2. How to produce
3. For whom to produce
1.10

16. Characteristics of a traditional
economy
• Economic activities based on ritual, habit or
custom
• Little innovation
• Everyone knows what role to play

17. The purpose of government in a command
economy is to
a. ensure the availability of consumer products.
b. encourage entrepreneurs.
c. make major economic decisions.
d. promote economic freedom.
• B 2.1

18. Which group of people ultimately determines
the products that a free enterprise economy
produces?
a. Congress
b. local government
c. property owners
d. consumers
• D 2.2

19. Characteristics of the American
economy
• Economic freedom
• Private property rights
• Voluntary exchange
• Profit motive
• Competition

20. What is the role of an
entrepreneur in a free enterprise
economy
• Organize land, capital and labor for profit
• Accept the risk of loss
• Decide how to produce
• Are innovators and catalysts
2.5

21. What is the role of the government
in a free enterprise economy?
• Protector, provider and regulator of economic
and social goals
• Large consumer in economy
2.5

22. What is the role of consumers in a
free enterprise economy?
• Decide what is produced by how they spend
their money
• Spur development of new products by
changing wants
2.5

23. If a modest price increase has little or no effect, the
demand for the product is
a. Complementary
b. Inelastic
c. Elastic
d. Unit elastic
• B
4.4

24. When companies involved in different stages of
manufacturing or marketing join together
• Vertical Merger
3.2

25. Advantages of a sole
proprietorship
• Owned and run by a single owner
• Easy to set up
• Owner earns all profits

26. Part of economic theory that deals
with behavior and decision making
by individual units.
• Microeconomics
4.1

27. The quantity demanded varies inversely with
the price of a product.
• The Law of Demand
4.2

28. Which statement reflects the inverse relationship
between quantity demanded and price?
a. As the price goes up, quantity demanded goes
down
b. As the price goes down, quantity demanded goes
down
c. As the supply goes up, the price goes up.
d. As the supply goes up, the demand goes down.
• A
4.6

29. The customers will have a tendency to replace a
more costly item with a less costly item
• Substitution Effect
4.3

30. The principle that more will be
offered for sale at higher prices
than at lower prices
• The Law of Supply
5.1

31. The amount offered for sale at a
given price
• Quantity supplied
5.10

32. A market structure with many
well-informed and independent
buyers and sellers who exchange
identical products
• Perfect Competition
7.1

33. The change in the amount offered
for sale when the prices change
• Change in quantity supplied
5.10

34. Only one seller for a particular
product
• Monopoly
7.4

35. A few very large sellers dominate
the industry
• Oligopoly
7.4

36. The supply and demand for a worker’s skills and
services determine the wage or salary
• Market theory of wage determination
8.2

37. Percentage of income paid in taxes
stays the same regardless of
income- ex. Medicare
• Proportional tax
5.9

38. Percentage of income paid in taxes
goes up as income goes up- ex.
Individual income tax
• Progressive tax
9.5

39. Percentage of income paid in taxes
goes down as income goes up- ex.
Sales tax
• Regressive tax
9.5

40. A point in time when real GDP
stops declining and begins to
expand
• Trough
13.3

41. To estimate elasticity, we look at
the amount a consumer will spend
on a product at a particular price
• Expenditure test

42. Economic policies designed to
stimulate the economy by
increasing production
• Supply-side policies
15.7

43. A country’s ability to produce more
of a given product than another
country can produce
• Absolute Advantage
16.1

44. A country’s ability to produce a
given product relatively more
efficiently than another country by
doing it at a lower opportunity cost
• Comparative Advantage
16.2

45. An agreement signed in 1993 to
reduce tariffs and increase trade
among the U.S., Canada and
Mexico
• NAFTA
16.7

46. The most important source of
income for the federal government
• Individual income tax

47. The measure of stock market
performance based on 30
representative stocks
• The Dow Jones Industrial Average
11.4

48. Advantages of a mutual fund
• Less risky
• Allows investor to diversify

49. State of the economy with large
numbers of unemployed people,
declining incomes, overcapacity in
manufacturing plants and economic
hardship.
• Depression
13.1

50. Committee that has 12 voting
members and makes decisions
about the level of interest rates
• FOMC- Federal Open Market Committee
14.7

51. Programs that automatically
provides benefits to offset a
change in people’s incomes- ex.
Medicaid, welfare
• Automatic stabilizers
15.6

52. The use of government spending
and revenue collection measures
to influence the economy
• Fiscal Policy
15.5

53. The first stage of economic
development during which the
economy is stagnant
• Primitive Equilibrium
17.3

54. The fourth stage of economic
development where the makeup of
the country’s economy changes and
income is growing faster than
population
• Semi development
17.3

55. The dollar value of all final goods,
services, and structures produced
within a country’s national borders
during a one-year period
• Gross Domestic Product
12.1

56. Costs that remain the same
regardless of level of production or
services offered
• Fixed Costs
5.3

57. Production costs that change when
production levels change
• Variable costs
5.4

58. The sum of fixed costs and variable
costs
• Total Cost
5.5

59. Extra cost of producing one
additional unit of production
• Marginal Cost
5.7

60. Extra revenue from the sale of one
additional unit of output
• Marginal revenue
5.7

61. This organization determines
monetary policy by increasing or
decreasing the money supply.
• The Federal Reserve System
14.1

62. Gross domestic product measure
in current prices, unadjusted for
inflation
• Nominal GDP
12.1

63. Institution that channels savings to
investors
• Financial intermediary
• 11.2

64. A fund that collects and invests
income until payments are made
to eligible recipients
• Pension fund
Ch. 11

65. A firm that makes loans directly to
consumers and specializes in buying
installment contracts from merchants
who sell on credit
• Finance Company
Ch. 11

66. A “mean” or “nasty” market with
the prices of equities falling
sharply
Bear Market
11.5

67. Four factors one should consider when
investing
1. Consistency- The amount invested is not as
important as investing on a regular basis
2. Simplicity- Stick with what you know! Ignore any
investment that seems too complicated. If it seems too
good to be true it probably is!!
3. The Risk-Return Relationship- Consider the level of
risk you are willing to tolerate.
4. Investment Objectives- Consider your reason for
investing. Are you trying to cover living expenses or
saving for retirement?
11.6

68. Tax-deferred investment and savings plan that
acts as a personal pension fund for employees.
Employees authorize regular payroll deductions.
The money from all employees is pooled and
invested in mutual funds or other investments.
• 401(k) Plan
11.3

69. Tax on an imported product
designed to protect less-efficient
domestic producers
• Protective Tariff
16.6

70. Tax placed on imp0rted goods to
raise revenue
• Revenue Tariff
16.6

71. When revenues received from
exports exceed spending on
imports.
• Trade surplus
16.4

72. When spending on imports
exceeds revenues received from
exports
• Trade deficit
16.3

73. Functions of the Fed
• Maintaining the money supply
• Regulating and supervising banks
• Preparing consumer legislation
• Serving as the federal governments bank
14.8

74. Actions by the Federal Reserve
System to expand or contract he
money supply
• Monetary Policy
14.2

75. Monetary policy that results in
lower interest rates and greater
access to credit
• Easy money policy
14.4

76. 3 functions of money
• Medium of exchange
• Measure of value
• Store of value
14.6

77. 4 possible causes of the business
cycle
1. Changes in capital expenditures- Businesses expand because they
anticipate future growth then cut back on expansions and layoffs and
cutbacks may occur.
2. Innovation and Imitation- A business innovates and gains an edge
on the competitor, the competitor then copies the innovation, an
investment boom follows, eventually economic activity will slow down.
3.Monetary Policy Decisions- Interest rates are low and loans are easy to get,
the economy is stimulated by the loans, then the increased demand for loans
causes interest rates to rise, new borrowers are discouraged and the level of
economic activity will decline.
4. External Shocks- Increases in oil prices, wars, and international conflict
can have a negative or positive affect on the economy. 13.9

78. 4 causes of inflation- 13.8

79. A statistical series that tracks monthly changes
in prices paid by urban
consumers for a representative “basket” of
goods and services.
• Consumer Price Index (CPI)
13.7

80. What is excluded from the GDP?
• Intermediate Products Goods used to make other products
already counted in the GDP Replacement tires- NOT the tires
on your new car
• Secondhand Sales No new production is created Used cars,
homes, etc.
• Nonmarket Transactions They are so difficult to measure and
do not generate expenditures in the market Homemakers,
mowing own lawn, etc.
• Underground Economic Transactions They are difficult to
measure and are not socially acceptable Gambling, drug
trade, income not reported to IRS.
12.4

81. Hypothesis that the supply of money
directly affects the price level over the
long run
• Quantity theory of money
14.3

82. 5 largest federal government
expenditures
• Social Security
• National defense
• Income security
• Medicare
• Health
10.7

83. 4 ways in which government spending
can impact the economy
• Resource Allocation
• Redistributing Income
• Increasing the Tax burden
• Competing with the private sector
10.6

84. Advantage of Value Added Tax
• Hard to avoid
• Incidence widely spread
• Easy to collect
9.6

85. Advantage of Flat Tax
• Easy
• Close most tax loopholes