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Example 5A: Assume that Natural Real GDP is $18,500 billion. Equilibrium Real GDP (where AD and SRAS intersect) is only $18,000 billion. The economy is in a recessionary gap. The unemployment rate will be higher than the natural unemployment rate. The graph below illustrates this recessionary gap situation. Price Level Q N $18000B $18500B Real GDP SRAS If Real GDP is greater than Natural Real GDP, the economy is in an inflationary gap. Example 5B: Assume that Natural Real GDP is $18,500 billion. Equilibrium Real GDP is $19,000 billion. The economy is in an inflationary gap. The unemployment rate will be lower than the natural unemployment rate. The graph below illustrates this inflationary gap situation. Price Level Q N $18500B $19000B Real GDP AD SRAS FOR REVIEW ONLY - NOT FOR DISTRIBUTION AD Classical Economic Theory 7 - 4
Long-Run Equilibrium If Real GDP is equal to Natural Real GDP, the economy is in long-run equilibrium. Example 5C: Assume that Natural Real GDP is $18,500 billion. Equilibrium Real GDP is $18,500 billion. The economy is in long-run equilibrium. The unemployment rate will be the natural unemployment rate. The graph below illustrates long–run equilibrium. Price Level Automatically Closing a Recessionary Gap Q N $18500B Real GDP SRAS If the economy is in a recessionary gap, as in Example 5A on page 7-4, Real GDP is less than Natural Real GDP. Because the quantity of total output is less than the quantity that results in the natural unemployment rate, the unemployment rate will be higher than the natural unemployment rate. There is a surplus of labor in the labor market. The surplus of labor will cause wage rates in the economy to fall. In Chapter 6, we saw that the determinant of short-run aggregate supply is the overall costs of production. One of the factors that will change the overall costs of production is wage rates. When the economy is in a recessionary gap, the surplus of labor will cause wage rates to fall. The decrease in wage rates will reduce the overall costs of production, shifting the SRAS curve to the right. As the SRAS curve shifts to the right, equilibrium Real GDP will increase, and the unemployment rate will fall. As long as the unemployment rate is greater than the natural unemployment rate, wage rates will continue to fall and the SRAS curve will continue to shift to the right. When Real GDP equals Natural Real GDP, the unemployment rate will be equal to the natural unemployment rate, and the economy will be in long-run equilibrium. According to classical economic theory, this adjustment from a recessionary gap to Natural Real GDP is automatic and requires no government intervention. The graph in Example 6A on the next page illustrates closing a recessionary gap. FOR REVIEW ONLY - NOT FOR DISTRIBUTION AD 7 - 5 Classical Economic Theory
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PRINCIPLES OF ECONOMICS JEFF HOLT S
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Principles of Economics, 6th Editio
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16. Study Guide for Chapter 7 17. C
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11. Appendix: Book Review - “The
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20. Appendix: The NCAA Cartel 21. S
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Introduction: A Brief History of U.
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In the twentieth century, per capit
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Appendix: The 35 Largest National E
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Multiple Choice: ___ 1. The Jamesto
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2. Describe the economic cost of th
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Chapter 1 Scarcity and Choices The
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Example 5B: At the end of 1982, the
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Example 11: When Cindy quits her jo
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consequences may result in failure
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An upward sloping curve (as in Exam
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In making decisions, humans tend to
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5. ______________________ _________
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___ 13. If the value of one variabl
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Y Point X Y A 0 1 B 3 3 C 6 5 D 9 7
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Chapter 2 Trade and Economic System
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Example 4B: The following quantitie
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1. An increase in the quantity of r
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3. For whom to produce? This is det
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The graph below illustrates the shi
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The two primary economic systems ar
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___ 12. The capitalist vision sees
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___ 25. According to the book “Ca
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Chapter 3 Demand, Supply, and Equil
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. For inferior goods, income and de
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The same information can be placed
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Not only does a free market elimina
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$7 - 6 - 5 - S 3 S1 S 2 Price 4 - 3
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Example 17: The graph below illustr
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Questions for Chapter 3 Fill-in-the
Page 69 and 70: ___ 12. Assuming a market originall
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Page 73 and 74: Chapter 4 Inflation and Unemploymen
Page 75 and 76: Computing the Rate of Inflation The
Page 77 and 78: Full Employment Though unemployment
Page 79 and 80: 3. Cyclical unemployment - due to d
Page 81 and 82: During the Great Depression, the ec
Page 83 and 84: Appendix: Think Like an Economist -
Page 85 and 86: Answer questions 8. and 9. based on
Page 87 and 88: ___ 25. The extension of unemployme
Page 89 and 90: Chapter 5 Measuring Total Output: G
Page 91 and 92: 5. Leisure. Leisure time is by defi
Page 93 and 94: The U.S. is a high per capita GDP c
Page 95 and 96: Example 17: In “An International
Page 97 and 98: The simple circular flow diagram be
Page 99 and 100: ___ 3. Which of the following would
Page 101 and 102: 2. Explain what nonproduction trans
Page 103 and 104: Chapter 6 The Aggregate Market The
Page 105 and 106: Example 2C: Assume the same facts a
Page 107 and 108: Example 5B: The price of crude oil
Page 109 and 110: Price Level Real GDP SRAS AD 2 AD 1
Page 111 and 112: Appendix: Why the Aggregate Demand
Page 113 and 114: ___ 3. DEF Company can invest in ne
Page 115 and 116: 2. List and explain the two factors
Page 117 and 118: Chapter 7 Classical Economic Theory
Page 119: Notice that the investment demand c
Page 123 and 124: Example 6B: When the economy is in
Page 125 and 126: Laissez-faire If the economy is sel
Page 127 and 128: ___ 5. According to Say’s Law: a.
Page 129 and 130: 3. On the graph below, draw an aggr
Page 131 and 132: Chapter 8 Keynesian Economic Theory
Page 133 and 134: Example 2B: The graph below illustr
Page 135 and 136: Example 5: Assume that the table be
Page 137 and 138: Notice on the graph on the previous
Page 139 and 140: According to Keynesian theory, a ch
Page 141 and 142: “The General Theory” also inclu
Page 143 and 144: ___ 8. If the consumption function
Page 145 and 146: 3. If the MPC is .667, and investme
Page 147 and 148: Chapter 9 Fiscal Policy The basic e
Page 149 and 150: Keynesian Fiscal Policy Theory and
Page 151 and 152: Example 5A: The federal government
Page 153 and 154: The Laffer Curve What will happen t
Page 155 and 156: Appendix: The Importance of Incenti
Page 157 and 158: ___ 4. A decrease in government exp
Page 159 and 160: 2. Explain what automatic stabilize
Page 161 and 162: Chapter 10 Money, Money Creation, a
Page 163 and 164: Example 4B: The castaways on Gillig
Page 165 and 166: Looking at the balance sheet below,
Page 167 and 168: Demand-side One-shot Inflation Exam
Page 169 and 170: 4. Inflation increases uncertainty
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life; it came into existence not by
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calculated by using the potential d
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___ 12. If the required-reserve rat
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4. Referring to the balance sheet f
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Chapter 11 The Federal Reserve Syst
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5. After Bank X sells the $300,000
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Low Mortgage Interest Rates Mortgag
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Relaxed Standards for Mortgage Loan
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The Bursting of the Housing Bubble
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On February 17, 2009, the federal g
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Fed policies caused short-term inte
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___ 10. The Fed’s most important
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___ 25. In response to the recessio
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Chapter 12 Monetary Policy The basi
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2. A change in aggregate demand (AD
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Monetarist Transmission Mechanism C
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3. Borrowers do not have to seek ou
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Appendix: Book Review - “The Age
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Questions for Chapter 12 Fill-in-th
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___ 16. The primary source of incom
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7. According to Alan Greenspan, wha
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Chapter 13 Taxes, Deficits, and the
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Example 5: In 2015, Taxpayer A had
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of $5 and a quantity of 10 units. T
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The complexity of the tax law also
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the current government spending and
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cut of 1964. The top rate was lower
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___ 6. Federal excise taxes: a. are
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3. How would eliminating the loopho
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Chapter 14 Economic Growth The basi
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2. Labor. Labor can contribute to e
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estricting international trade (e.g
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An improvement in technology (e.g.
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The table below shows the economic
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will increase both Real GDP and per
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___ 8. Which of the following is co
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___ 26. The opinion that economic g
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Chapter 15 Less Developed Countries
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Example 8: Countries A, B, C, and D
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Obstacles to Economic Development f
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c. Restrictions on international tr
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Appendix: Book Review - “The Powe
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Example 25: In Brazil, about half t
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Study Guide for Chapter 15 Chapter
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___ 13. Among the counterproductive
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4. List four ways that governments
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Chapter 16 International Trade The
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Other Benefits of Free Internationa
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Example 6: The graph below illustra
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competitive disadvantage. But dumpi
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is only 25% as productive as before
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Smith was skeptical of government a
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___ 4. For Country X, what is the o
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___ 18. Frédéric Bastiat’s “P
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4. On the graph below: (1) What is
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Chapter 17 Elasticity We are often
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Example 4A: What is price elasticit
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Example 5A: Gertie’s Gas and Go i
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Example 10A: When the price of Good
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Example 13B: On the graph below, su
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$7 - 6 - 5 - Price 4 - 3 - 2 - 1 -
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In the long run, would the deadweig
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___ 7. The factors that determine w
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3. a. Which price (or prices) from
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Chapter 18 Utility The basic econom
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Nonetheless, society generally assu
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Example 9: Capital City operates a
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Marginal rate of substitution - the
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The diamond-water paradox is the ob
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Complete the table below to answer
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4. The graph below shows indifferen
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Chapter 19 The Firm The basic econo
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than contributing to team productio
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1. Difficulty in raising large amou
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Corporations also use self-financin
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Example 24: A blacksmith who produc
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For financing needs, proprietorship
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___ 13. Corporations: a. are comple
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5. List two things that the absence
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Chapter 20 Production and Costs The
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In Example 5B, Birdwell finds that
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variable cost initially decreases,
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Quantity TC MC AFC AVC ATC 0 240 X
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If the scale of operation is increa
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average total cost. Average fixed c
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___ 11. Concerning the cost curves:
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5. Complete the following cost tabl
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Chapter 21 Perfect Competition The
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Even though a perfect competitor ca
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Example 6C: This example builds on
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At what price will there be neither
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Appendix: Perfect Competition in th
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Multiple Choice: ___ 1. A perfect c
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___ 17. Perfect competition: a. req
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Answers for Chapter 21 Fill-in-the-
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Chapter 22 Monopoly Of the four mar
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3. Exclusive ownership of an essent
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maximizing quantity (4 units) creat
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$22 - 20 - 18 - 16 - 14 - Deadweigh
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2. Negotiating, beginning at a high
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Legal barriers are created by gover
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___ 8. The slope of the demand curv
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Price Quantity 3. List some of the
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Chapter 23 Monopolistic Competition
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For Percomp (the perfect competitor
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Example 7A: The graph below represe
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Example 9: The Organization of the
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Example 12 illustrates the dilemma
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its current price and quantity. The
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___ 14. Game theory: a. is a method
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Answers for Chapter 23 Fill-in-the-
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Chapter 24 Factor Markets The basic
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$ $240 - 200 - 160 - 120 - 80 - 40
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Since producers will attempt to equ
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2. Differences in nonmoney aspects
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were his strikeouts, walks, and hom
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___ 3. To maximize profits, a produ
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___ 19. According to the book, “M
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Multiple Choice: 1. a. 8. c. 15. d.
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Chapter 25 Labor Unions The primary
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The elasticity of demand for union
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Example 4A: Assume that the graph b
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Notice from the graph in Example 6
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Wage Factory A Quantity of Labor S
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As a cartel, a labor union faces a
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___ 10. For a monopsony: a. there i
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3. The graph below represents a lab
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Chapter 26 Interest, Present Value,
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An increase in expected rates of re
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An asset is valuable because we exp
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Example 13B: General Ordnance prove
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Appendix: Present Value Table One f
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___ 4. An increase in expected rate
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Problems: 1. List and explain the t
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Chapter 27 Market Failure The basic
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External Benefit If a market genera
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Example 2: To encourage the consump
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$100 - 90 - 80 - MSC 70 - $ 60 - 50
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A common good is nonexcludable. Non
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___ 5. What government policy would
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4. Based on the information on the
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Chapter 28 Public Choice and Govern
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Candidates and the Median Voter Mod
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Example 8: According to State and F
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Example 10: When Elvis Presley was
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4. Pessimistic bias. This is the te
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___ 5. An elected official will: a.
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2. If a certain policy will yield s
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Chapter 29 Government Regulation of
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underproduction is the amount that
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micromanagement results in business
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market. They may agree with their c
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Questions for Chapter 29 Fill-in-th
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___ 10. The public interest theory
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4. List the four types of costs imp
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Chapter 30 Agriculture and Health C
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weather may cause bumper crops. Bad
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Security and Rural Investment Act o
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Example 12: From 1960 to 2013, the
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1. NHI would provide universal heal
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d. Insurance providers are not allo
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Answer questions 7. through 10. by
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___ 21. If there were no individual
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Chapter 31 Income Distribution and
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Income is more equally distributed
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over a typical career is the accumu
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Ideal Income Redistribution The ide
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Poverty - a family whose income fal
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Appendix: Income Inequality around
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How is this story an analogy for th
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___ 2. In 2013, the Lowest Income 6
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Problems: 1. Explain the two primar
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Absolute advantage - when one natio
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Fiat money - money by government de
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Nonrivalrous good - a good for whic
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Absolute advantage, 16-9 Absolute e
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“Company town”, 25-6 Comparativ
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Eli Lilly and Company, 22-1 Emergen
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Houston, Texas, 15-10 Human capital
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Market, 3-1, 3-8-9 Market basket, 4
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Political bias, 9-4, 12-7 Political
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Short run production, 20-2-3 Short-
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Upturns, 9-4 USDA, 27-9, 30-1-2, 30
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