Review Sheet Define opportunity (real) cost.

The cost of an item or activity in the terms of what was given up. The next best alternative, what would you be doing instead? Everything in life costs something. There is no such thing as a free lunch Ex. Going to college (even on scholarship) costs time/wages

3. How are the 3 basic questions (What/How/Who) answered in each of the three systems? Traditional - discourage new ideas, little change, things are done how ancestors did it What - Tradition/Customs How - Tradition/Customs Who - Tradition/Customs Command - Dictator/King/Queen What - Central Authority How - Central Authority Who - Central Authority Market - Capitalism, economic and social arrangements which allow individuals acting in their own self-interest to buy/sell goods/services in the market place and this activity in turn answers the three questions. What - Consumers Sovereignty How - Business Who - Productivity, $ votes = buying products rich get more votes bigger say

4. Contrast a market and command economy (state/comment on/explain 8 differences) Market Decentralized No overall economic plan Individuals Consumer/Business Much Freedom/Very Little Gov Difference Centralization Planning Interests/Values Individual Freedom/Gov. Command Centralized - Central Authority Detailed plans In theory - Society Real Life - Gov. Leaders Much Gov control

control Much risk No workNo food Satisfy self(individual) In theory much fierce competition Not possible Small weak gov/small business Noneno one to look out for public health/morals/safety (Too) Limited No planning mistakes b/c no plans Very Fast You get rewarded according to productivity 6. Price Floors and Ceilings

Control Risk/Security Personal Incentive Satisfaction Competition Large Projects Protection Gov Power Planning Mistakes Response to Change Reward Basis

Lots of security Lack of incentive Gov Gov run monopoly Possible b/c gov controls all resources Much in theory (Too) Powerful Make mistakes - very costly Very Slow Equity

7. What is demand? What is supply? Be able to put D and S on a graph and find equilib price Supply - A schedule of amounts of a product sellers are willing to offer for sale at all possible prices during the same time period. Demand - A schedule of the amounts of a product buyers are able and willing to buy at all possible prices during the same time period.

8. What is change in demand? Supply? State/explain 3 reasons for each change in D/S 9. Using a chart with Supply/Demand curves, demonstrate what happens to the equilibrium price and quantity traded when the supply or demand changes. 10. State the law of supply and why its true. 11. State the law of demand and why its true.

12. What is change in demand? Explain 2 causes for it

13. What is change in supply? Explain 2 causes for it

14. Explain C + I + F + G =GDP. Define GDP C: Consumers (70%) - 3 things we buy: durable goods (2+yrs), nondurable goods, services I: Gross Private INVESTMENT (10%) NonGov investing 3 types 1. plant/equip 2. residential construction 3. inventory changes F: Foreign Trade (5%) Exports/imports add/subtract them G: Government Spending (20%) GDP: Gross Domestic Product is the dollar value of all FINAL goods and services produced in a country in a year. 15. Explain why a higher GDP does not necessarily mean people are better off and/or happier GDP measures quantity not quality also doesnt measure fairness (Really Rich/Really poorno medium), doesnt measure ethics. Doesnt take into account: Leisure time Pollutionmore output can mean more environmental destruction How do we measure happiness? Not by dollar value/stuff

16. Distinguish between nominal GDP and real GDP; also between current $ and constant $. Which may be used for year to year comparisons? Why?

17. What is added together to obtain the market rate of interest?

18. Define fiscal policy. Who controls it? What are 2 weapons? How would each be employed to fight a recession? How would each be employed to fight inflation due to too much demand? How would weapons work to achieve the desired results? 19. Define monetary policy. Who controls it? In a recession, what would the FED do with bonds buy or sell? How would this activity help stop a recession? In a time of inflation, what should the FED do with bonds and how would that activity help end inflation? 20. Name 3 factors which give value to money then explain how each affects the value of $

1. Faith in U.S. Economy 2. People are willing to accept it 3. Faith in the existing Gov legal tender. Faith the Gov will keep money relatively scarce *Faith gives your money value 21. Distinguish between M and M. M: Cash + Transactions deposits (Checking Accounts/Maybe Savings Accounts) more liquid M: M + traditional savings accounts + small CDs + money market mutual funds 22. Name and explain the three functions of money. 1. Medium of exchange Goods/Services $ Goods/Services - it facilitates trade Eliminates barter system Allows specialization/big projects 2. Store of value what you have today = what you have tomorrow 3. Measure of Value: Use $ to measure relative worth, a unit of account 23. How does money get into the system; that is, explain how money is created. The people/bank create money (with in rule made by the fed). When loans are made money is created 24. What are the four goals that all theories (fiscal, monetary, supply side) want to achieve? 1. Full Employment 2. Max Output 3. Stable Prices 4. Economic Growth 25. Name and be able to list the three ideas Supply Side economists would support and explain how each once would achieve the supply side goals. 26. Name the four stages of a business cycle and 2 characteristics of the upswing and 2 of the downswing. Explain 2 reasons why business cycles occur. Stages: Upswing - Expansion/Recovery 1. Full Employment 2. Inflation (2-3%) Downswing - Contraction 1. Layoffs/Unemployment 2. Deflation

Trough - Low Peak - High Reasons: 1. Psychological: If you think prosperity you act accordingly (spending) you get prosperity and the opposite. Consumer confidence 2. Money (Loans) If available People spend=ProsperityIf notThings slow down 3. Inventions/New Ideas: New idea people invest 4. Lack of consumer spending - Have enough stuff 27. Taxes: 2 principles for fairness Define each, give examples, and a problem with each. Ability to pay: those more able to pay should pay more. Ex. Property tax Problem: 2 people with the same income dont necessarily have the same ability to pay. Benefit Principle: you benefit, you pay. Ex. Toll roads, gas tax Problem: sometimes it is difficult to determine who benefits and how much they benefit police, fire you cant determine it Three classes of taxes - define each, give examples, which hits the poor, which hits the rich? Progressive: As your income increases your tax rates increases Ex. Federal Income Tax Proportional: Pay the same % tax rate regardless of income (flat rate tax) Ex. MI Income Tax --------> hits the poor Regressive: As your income increases your % tax rate decreases Ex. Property Tax, Lotto Tax, Soc. Sec. Tax How can the payer of a tax not bear the burden of the tax? Explain and give examples Shifting the burden - the party that pays the tax tries to pass on the burden to another party. For example: Homeowner: owner pays tax owner bears burden Landlord: landlord pays tax raises rent renter bears burden Store Owner: pays property tax raises prices customers bear burden What is an excise tax? Explain the effect on output.

An excise tax is a type of tax charged on non-essential consumer goods produced within the country, for example Cigarettes/Alcohol. The manufacturer pays the tax but in the long run the consumer bears the cost. People still buy the product and just pay a higher price.

28. National Debt: How much debt do we have? $11 Trillion (Soon to be 12) Explain why total debt is not as important as the income/debt ratio. The issue is not the size it is the ability to pay it off. Wealthability to pay To whom do we owe the debt? We owe most of the debt to ourselves (internal debt 78% {Banks 10%, State/Local Govs 8%, about is owed to different sectors of fed. Gov}) and 22% is foreign debt. Why shouldnt we go bankrupt? 1. Gov can always print more money hyperinflation 2. Raise taxes 3. Refinance the debt -U.S. is a superpower the dollar is a store of value this works as long as people trust/have faith in the country/dollar. Why doesnt a huge national debt (except external debt) place a burden on future generations? 1. Future generations have debt but they also hold the bonds pay to themselves they inherit the debt but also get the assets (other than the 22% of foreign debt) 2. Opportunity costs - build a highway pay later but cant get/use concrete now. Name and explain 4 real problems with a large national debt. 1. Debt service: interest payments on our debt- 11T 9 cents of every tax dollar paid to fed Gov $ higher taxes or fewer Gov programs. 2. A big debt changes the mixture of output in our country - Gov is able to buy more more public goods/fewer private goods. 3. Higher interest rates because the extra $11T of demand for loans/money is in higher demand less investment by private companies. 4. External debt - deficit balance of trade: we import more than we export which creates a negative balance of trade. Problem because pay for imports with exports

Distinguish between debt and deficit. Deficit: An Annual budget shortage. Debt: Total we owe Chapter 16 text review sheet # 2,3,4,5,6,7,8,10,11,12,13,14 29. Inflation Define inflation, CPI, COLA, and hyperinflation: Inflation: When the average levels of prices go up in turn the value of the dollar falls CPI: Consumer Price Index - Products reviewed by typical people in 80 cities across the U.S. 2 in MI Detroit/Naples COLA: Cost of living adjustment - An annual adjustment in wages to offset a change (usually a loss) in purchasing power, as measured by the Consumer Price Index. Hyperinflation: Extremely high inflation rates. Value of $ goes down very fast. Explain how various groups are winner and losers. During inflation Winners: Flexible income, Debtor Losers: Fixed income, Creditor, Country as a whole Explain how inflation affects behaviors of consumers, savers, investors, and businesses. Inflation causes more spending and less savings banks have less to loan less investments Also people make speculative investments (expect price to go up, hold, sell) not productive investments (producing things) Define demand-pull inflation and cost-push inflation; give an example and a solution for each Demand-Pull Inflation: there is too much demand and output cant keep up so prices go up. In other words there are too many dollars chasing too few goods/services. (Need full employment for this to happen) Ex: More Gov spending, easy credit, Gov transfer program all lead to too much demand Problem: Too much demand Solution: The FED must adjust the amount of money in the system and adjust the interest rates to decrease the demand. They will raise the interest rates and decrease the amount of money in the system. This will cause people to have less money so they wont spend as much (therefore decreasing demand) and also fewer people will take out

money due to the high interest rates (also decreasing the demand). These will help to stop inflation. Cost-Pull Inflation: Higher production costs are passed on to the consumer in the form of higher prices. Ex: Inflationary Psychology/the wage price spiral, Gov regulationsCompliance costs Problem: Too much demand Solution: What happens to the value of money with inflation? The value of money goes down as inflation goes up. It loses it dollar value