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Example 2C: Assume the same facts as Example 2A, except that Wenona’s now has to pay an interest rate of 9% to finance the investment. Should Wenona’s make the investment? Rate of return = $900,000 ÷ $12,000,000 = .075 or 7.5% Since the expected rate of return (7.5%) is less than the interest rate (9%), no, Wenona’s should not make the investment. As seen in the examples above, the two factors that affect investment spending are: a. Expectations about future returns. If businesses become more optimistic about future returns, investment spending will increase. If businesses become more pessimistic about future returns, investment spending will decrease. b. Interest rates. If interest rates decrease, investment spending will increase. If interest rates increase, investment spending will decrease. 3. Government purchases. The amount of government purchases is determined through the political process. Example 3: If the federal government decides to increase military spending, or if state governments decide to provide more funding for education, or if local governments decide to increase funding for police and fire protection, government purchases will increase. 4. Net exports. Net exports (exports minus imports) will change if there is a change in foreign Real GDP or if there is a change in the exchange rate for a nation’s currency. More specifically; a. A change in foreign Real GDP. Net exports will increase if there is an increase in foreign Real GDP. If U.S. trading partners experience economic growth, they will consume more U.S. exports. Conversely, net exports will decrease if there is a decrease in foreign Real GDP. If U.S. trading partners experience economic recession, they will consume less U.S. exports. Example 4A: The largest trading partner for the U.S. is Canada. If the Canadian economy is growing rapidly, Canadian demand for U.S. exports will increase. If the Canadian economy falls into recession, Canadian demand for U.S. exports will decrease. b. A change in the exchange rate for a nation’s currency. The exchange rate is the value of one nation’s currency in terms of another nation’s currency. For example, on November 12, 2014, one U.S. dollar would exchange for 1.129 Canadian dollars. If the exchange rate for the U.S. dollar depreciates (decreases relative to other currencies), U.S. exports will be cheaper and imports to the U.S. will be more expensive. Thus, net exports will increase if the exchange rate for the dollar depreciates. If the exchange rate for the U.S. dollar appreciates (increases relative to other currencies), U.S. exports will be more expensive and imports to the U.S. will be cheaper. Thus, net exports will decrease if the exchange rate for the dollar appreciates. Example 4B: If the U.S. dollar depreciates versus the Canadian dollar, U.S. exports to Canada would increase and U.S. imports from Canada would decrease. If the U.S. dollar appreciates versus the Canadian dollar, U.S. exports to Canada would decrease and U.S. imports from Canada would increase. FOR REVIEW ONLY - NOT FOR DISTRIBUTION Another factor that can affect aggregate demand is the money supply. In the long run, aggregate demand tends to be closely related to the money supply. The money supply will be discussed in later chapters. 6 - 3 The Aggregate Market
Aggregate Supply In the aggregate market, the supply side of the market is called aggregate supply. Aggregate supply – the quantity supplied of all goods and services at different price levels. In looking at aggregate supply, we make a distinction between short-run aggregate supply and long-run aggregate supply. For now, we focus on short-run aggregate supply. The short-run aggregate supply curve (SRAS) indicates a direct relationship between the price level and the quantity supplied of Real GDP. This direct relationship results in an upward sloping SRAS curve as illustrated on the graph below. (For an explanation of why the SRAS curve is upward sloping, see the appendix at the end of the chapter.) Price Level Shifts in the SRAS Curve Real GDP SRAS Remember from Chapter 3 that the determinant of supply for a good is the cost of production. A change in the cost of producing a good causes a shift in the supply curve for that good. Likewise, the determinant of short-run aggregate supply is the overall costs of production. The short-run aggregate supply curve shifts in response to changes in the overall costs of production in the economy. An increase in the overall costs of production will cause a decrease in short-run aggregate supply (SRAS curve shifts to the left). A decrease in the overall costs of production will cause an increase in short-run aggregate supply (SRAS curve shifts to the right). The overall costs of production will change due to the following factors. Thus, these four factors cause the SRAS curve to shift: 1. Wage rates. Labor costs are usually the largest single cost of production. An increase in wage rates in the economy will increase the overall costs of production and thus will decrease SRAS. A decrease in wage rates will increase SRAS. Example 5A: The economy falls into a severe recession with high unemployment. Workers find that they must accept lower wage rates to find employment. The decreasing wage rates cause the SRAS curve to shift to the right. 2. Prices of nonlabor inputs. Nonlabor inputs are all inputs to production other than labor. An increase in the prices of nonlabor inputs (e.g. rent, utilities, insurance, fuel, etc.) will increase the overall costs of production and thus will decrease SRAS. A decrease in the prices of nonlabor inputs will increase SRAS. FOR REVIEW ONLY - NOT FOR DISTRIBUTION The Aggregate Market 6 - 4
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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
Page 56 and 57: Chapter 3 Demand, Supply, and Equil
Page 58 and 59: . For inferior goods, income and de
Page 60 and 61: The same information can be placed
Page 62 and 63: Not only does a free market elimina
Page 64 and 65: $7 - 6 - 5 - S 3 S1 S 2 Price 4 - 3
Page 66 and 67: Example 17: The graph below illustr
Page 68 and 69: Questions for Chapter 3 Fill-in-the
Page 70 and 71: ___ 12. Assuming a market originall
Page 72 and 73: $8 - 7 - 6 - 5 - Price 4 - 3 - 2 -
Page 74 and 75: Chapter 4 Inflation and Unemploymen
Page 76 and 77: Computing the Rate of Inflation The
Page 78 and 79: Full Employment Though unemployment
Page 80 and 81: 3. Cyclical unemployment - due to d
Page 82 and 83: During the Great Depression, the ec
Page 84 and 85: Appendix: Think Like an Economist -
Page 86 and 87: Answer questions 8. and 9. based on
Page 88 and 89: ___ 25. The extension of unemployme
Page 90 and 91: Chapter 5 Measuring Total Output: G
Page 92 and 93: 5. Leisure. Leisure time is by defi
Page 94 and 95: The U.S. is a high per capita GDP c
Page 96 and 97: Example 17: In “An International
Page 98 and 99: The simple circular flow diagram be
Page 100 and 101: ___ 3. Which of the following would
Page 102 and 103: 2. Explain what nonproduction trans
Page 104 and 105: Chapter 6 The Aggregate Market The
Page 108 and 109: Example 5B: The price of crude oil
Page 110 and 111: Price Level Real GDP SRAS AD 2 AD 1
Page 112 and 113: Appendix: Why the Aggregate Demand
Page 114 and 115: ___ 3. DEF Company can invest in ne
Page 116 and 117: 2. List and explain the two factors
Page 118 and 119: Chapter 7 Classical Economic Theory
Page 120 and 121: Notice that the investment demand c
Page 122 and 123: Long-Run Equilibrium If Real GDP is
Page 124 and 125: Example 6B: When the economy is in
Page 126 and 127: Laissez-faire If the economy is sel
Page 128 and 129: ___ 5. According to Say’s Law: a.
Page 130 and 131: 3. On the graph below, draw an aggr
Page 132 and 133: Chapter 8 Keynesian Economic Theory
Page 134 and 135: Example 2B: The graph below illustr
Page 136 and 137: Example 5: Assume that the table be
Page 138 and 139: Notice on the graph on the previous
Page 140 and 141: According to Keynesian theory, a ch
Page 142 and 143: “The General Theory” also inclu
Page 144 and 145: ___ 8. If the consumption function
Page 146 and 147: 3. If the MPC is .667, and investme
Page 148 and 149: Chapter 9 Fiscal Policy The basic e
Page 150 and 151: Keynesian Fiscal Policy Theory and
Page 152 and 153: Example 5A: The federal government
Page 154 and 155: The Laffer Curve What will happen t
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Appendix: The Importance of Incenti
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___ 4. A decrease in government exp
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2. Explain what automatic stabilize
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Chapter 10 Money, Money Creation, a
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Example 4B: The castaways on Gillig
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Looking at the balance sheet below,
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Demand-side One-shot Inflation Exam
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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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