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# Holt 7525-9 S15_IT

## Equilibrium Real GDP In

Equilibrium Real GDP In Example 5, what is the actual (equilibrium) Real GDP? In Keynesian theory, equilibrium Real GDP occurs where Total Expenditures equals Real GDP (total production). On the table in Example 5, equilibrium occurs at \$18,500 billion. But why does equilibrium Real GDP occur where Total Expenditures and Real GDP are equal? If Total Expenditures were greater than Real GDP, producers would be selling more than they were producing. Thus, inventories would decrease. This would signal producers to increase production. Production (Real GDP) would increase until it was equal to TE. If TE were less than Real GDP, producers would be producing more than they were selling. Thus, inventories would increase. This would signal producers to decrease production. Production (Real GDP) would decrease until it was equal to TE. Equilibrium Real GDP and the 45° Angle Line Remember the 45° angle line we used earlier in the chapter to help locate the equilibrium between consumption and disposable income? We can use the same approach to identify equilibrium Real GDP. If we add a 45° angle line to the Total Expenditures graph, the Total Expenditures curve will intersect the 45° angle line at the level of Real GDP where Total Expenditures and Real GDP are equal. See Example 6 below: Example 6: \$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 - 45° 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 Keynesian Economic Theory 8 - 6

Notice on the graph on the previous page that the Total Expenditures curve intersects the 45° angle line at \$18,500 billion. This is equilibrium Real GDP. Ideal Total Expenditures Ideally, equilibrium Real GDP will occur at Natural Real GDP. If Natural Real GDP is \$18,500 billion and equilibrium Real GDP is \$18,500 billion, then the economy is in long-run equilibrium. There is no recessionary gap or inflationary gap. The economy is at full employment. But is there any guarantee that there will be exactly the right amount of Total Expenditures in the economy to achieve Natural Real GDP? According to Keynesian theory, there is no guarantee. The level of Total Expenditures may not be the level that will cause the economy to achieve Natural Real GDP. The graph in Example 7 below shows three possible levels of Total Expenditures. TE 1 is less than the ideal level of Total Expenditures and would result in a recessionary gap. (Real GDP is less than Natural Real GDP.) TE 2 is more than the ideal level of Total Expenditures and would result in an inflationary gap. (Real GDP is greater than Natural Real GDP.) TE 3 is the ideal level of Total Expenditures and results in Natural Real GDP. Example 7: Total Expenditures 45° A Change in Total Expenditures Real GDP TE 2 TE 3 TE 1 Q N In Example 5 earlier in the chapter, equilibrium Real GDP was \$18,500 billion. What if one of the components of Total Expenditures changes? What will happen to Real GDP? Example 8: Assume the same facts as in Example 5, except that investors become more optimistic about future returns and investment spending increases by \$120 billion (from \$2,800 billion to \$2,920 billion). The table on the next page shows the amount of consumption, investment, government purchases, net exports, and Total Expenditures at different levels of Real GDP. All dollar amounts on the table are in billions. FOR REVIEW ONLY - NOT FOR DISTRIBUTION 8 - 7 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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Appendix: Think Like an Economist -

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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 115 and 116: 2. List and explain the two factors
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• Page 119 and 120: Notice that the investment demand c
• Page 121 and 122: Long-Run Equilibrium If Real GDP is
• 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 139 and 140: According to Keynesian theory, a ch
• Page 141 and 142: “The General Theory” also inclu
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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
• 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
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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
• Page 185 and 186: 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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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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Other Benefits of Free Internationa

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Example 6: The graph below illustra

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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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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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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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Study Guide for Chapter 27 Chapter

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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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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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Study Guide for Chapter 30 Chapter

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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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“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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