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greater than the intersection amount, the consumption function lies below the 45° angle line, indicating that consumption is less than disposable income. The distance between the two lines is the amount of saving. The 45° angle line is illustrated on the graph in Example 4 below: Example 4: Consumption (000s) $35 - 30 - 25 - 20 - 15 - 10 - Dissaving 5- 0 45° 0 5 10 15 20 25 30 35 Disposable Income (000s) C Saving Notice on the graph above that consumption and disposable income are equal at $20,000. The Total Expenditures Curve According to Keynesian theory, spending drives the economy. The level of Total Expenditures determines the level of total output (Real GDP). An increase in Total Expenditures will cause an increase in Real GDP. A decrease in Total Expenditures will cause a decrease in Real GDP. A Total Expenditures curve (TE) shows the relationship between Total Expenditures and Real GDP. Total Expenditures consists of four types of spending; consumption, investment, government purchases, and net exports. In deriving a Total Expenditures curve, the following assumptions are made: 1. Consumption is directly related to Real GDP. If Real GDP increases, consumption will increase. If Real GDP decreases, consumption will decrease. The rate of change in consumption is the marginal propensity to consume. 2. The levels of investment, government purchases, and net exports are all unrelated to the current level of Real GDP. Other factors cause these types of spending to increase or decrease (see the explanation in Chapter 6). An increase or a decrease in the current level of Real GDP will not cause a change the level of investment, government purchases, or net exports. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Keynesian Economic Theory 8 - 4
Example 5: Assume that the table below shows the amount of consumption, investment, government purchases, and net exports at different levels of Real GDP. Notice that consumption is directly related to Real GDP and increases with the level of Real GDP. The MPC is .60. The levels of investment, government purchases, and net exports are all unrelated to the current level of Real GDP. Thus, investment, government purchases and net exports are unchanged by changes in current Real GDP. Total Expenditures (TE) is the sum of consumption, investment, government purchases, and net exports. All dollar amounts on the table are in billions. Real GDP Consumption Investment Gov’t Purchases Net Exports TE $18,000 $12,500 $2,800 $3,400 $-500 $18,200 18,100 12,560 2,800 3,400 -500 18,260 18,200 12,620 2,800 3,400 -500 18,320 18,300 12,680 2,800 3,400 -500 18,380 18,400 12,740 2,800 3,400 -500 18,440 18,500 12,800 2,800 3,400 -500 18,500 18,600 12,860 2,800 3,400 -500 18,560 18,700 12,920 2,800 3,400 -500 18,620 18,800 12,980 2,800 3,400 -500 18,680 18,900 13,040 2,800 3,400 -500 18,740 19,000 13,100 2,800 3,400 -500 18,800 The graph below illustrates the relationship between Real GDP and Total Expenditures (TE). $18.9 - 18.8 - 18.7 - 18.6 - 18.5 - Total Expenditures 18.4 - (Trillions of dollars) 18.3 - 18.2 - 18.1 - 18.0 - Z N $18.0 18.1 18.2 18.3 18.4 18.5 18.6 18.7 18.8 18.9 19.0 FOR REVIEW ONLY - NOT FOR DISTRIBUTION Real GDP (Trillions of dollars) TE 8 - 5 Keynesian 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
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___ 12. Assuming a market originall
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$8 - 7 - 6 - 5 - Price 4 - 3 - 2 -
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Chapter 4 Inflation and Unemploymen
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Computing the Rate of Inflation The
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Full Employment Though unemployment
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3. Cyclical unemployment - due to d
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During the Great Depression, the ec
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Page 85 and 86: Answer questions 8. and 9. based on
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Page 89 and 90: Chapter 5 Measuring Total Output: G
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Page 95 and 96: Example 17: In “An International
Page 97 and 98: The simple circular flow diagram be
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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
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Page 117 and 118: Chapter 7 Classical Economic Theory
Page 119 and 120: Notice that the investment demand c
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Page 123 and 124: Example 6B: When the economy is in
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Page 131 and 132: Chapter 8 Keynesian Economic Theory
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Page 137 and 138: Notice on the graph on the previous
Page 139 and 140: According to Keynesian theory, a ch
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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
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Page 161 and 162: Chapter 10 Money, Money Creation, a
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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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Page 179 and 180: Chapter 11 The Federal Reserve Syst
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Page 183 and 184: 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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