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Example 5B: The price of crude oil increases by 40%. The increase in the price of this nonlabor input will cause an increase in the overall costs of production and a decrease in SRAS. 3. Productivity. Productivity is measured by the output produced per unit of input. When productivity increases, more output can be produced with the same amount of input, or the same amount of output can be produced with less input. Either way, an increase in productivity decreases the overall costs of production and thus increases SRAS. A decrease in productivity increases the overall costs of production and thus decreases SRAS. Example 5C: Between 1987 and 2012, U.S. labor productivity increased in 56 out of the 57 detailed manufacturing industries studied by the Bureau of Labor Statistics. The greatest productivity growth (an increase of 15.6% per year) occurred in semiconductors and electronic components manufacturing. Unit labor costs in semiconductors and electronic components manufacturing fell by 11.2% percent per year. 4. Supply shocks. Unusual events that affect the overall costs of production are called supply shocks. An adverse supply shock (e.g. unusually bad weather) will increase the overall costs of production and thus will decrease SRAS. A beneficial supply shock (e.g. unusually good weather) will decrease the overall costs of production and thus will increase SRAS. Example 5D: Unusually poor weather for growing corn caused U.S. corn yields per acre to decrease by 29% in 1988 compared to 1987. As a result, corn prices increased by 31%. Unusually favorable weather caused corn yields per acre to increase by 13% in 2004 compared to 2003. As a result, corn prices decreased by 15%. Short-Run Equilibrium: Putting AD and SRAS Together The interaction of aggregate demand and short-run aggregate supply determines short-run equilibrium in the economy. Short-run equilibrium will determine the price level and Real GDP for the economy, as illustrated on the aggregate market graph in Example 6. Example 6: Price Level Real GDP SRAS The graph in Example 6 does not show the unemployment rate. But we can make assumptions about changes in the unemployment rate based on changes in Real GDP. If Real GDP increases, we would expect the unemployment rate to fall. More output would require more workers. If Real GDP decreases, we would expect the unemployment rate to rise. Less output would require fewer workers. FOR REVIEW ONLY - NOT FOR DISTRIBUTION AD 6 - 5 The Aggregate Market
Changes in AD and SRAS Changes in aggregate demand and short-run aggregate supply will result in a new equilibrium. The price level, Real GDP, and the unemployment rate will change. The table below shows the four possible changes in AD and SRAS, and the effect of each change on the price level, Real GDP, and the unemployment rate. Then each of the four possible changes is discussed and illustrated on graphs. Change Price Level Real GDP Unemployment Rate AD increases increases increases decreases AD decreases decreases decreases increases SRAS increases decreases increases decreases SRAS decreases increases decreases increases 1. Increase in AD. An increase in AD is caused by an increase in Total Expenditures. Total Expenditures consists of consumption, investment, government purchases, and net exports. The factors that cause an increase in each of the components of Total Expenditures were discussed earlier in the chapter. If AD increases, the economy will reach a new short-run equilibrium at a higher price level and a greater quantity of Real GDP. This is illustrated on the aggregate market graph below. The increase in Real GDP will cause the unemployment rate to decrease. Price Level Real GDP SRAS AD 1 AD 2 2. Decrease in AD. A decrease in AD is caused by a decrease in Total Expenditures. The factors that cause a decrease in each of the components of Total Expenditures were discussed earlier in the chapter. If AD decreases, the economy will reach a new short-run equilibrium at a lower price level and a lesser quantity of Real GDP. This is illustrated on the aggregate market graph on the next page. The decrease in Real GDP will cause the unemployment rate to increase. FOR REVIEW ONLY - NOT FOR DISTRIBUTION The Aggregate Market 6 - 6
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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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Page 64 and 65: $7 - 6 - 5 - S 3 S1 S 2 Price 4 - 3
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Page 68 and 69: Questions for Chapter 3 Fill-in-the
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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
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Page 82 and 83: During the Great Depression, the ec
Page 84 and 85: Appendix: Think Like an Economist -
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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 106 and 107: Example 2C: Assume the same facts a
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
Page 156 and 157: 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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