Economics Final Exam Review Directions: The following packet will be used as your final exam review guide. We will be working on these the last few class days. Complete the questions with as much detail as possible. Unit 1 Introduction to Economics 1. Define Scarcity2. Explain the difference between a want and a need. 3. Explain the difference between a good and a service. 4. Explain the difference between scarcity and shortage. 5. Name and define the 3 factors of production. a.
b.
c. 6. Name and define the 2 categories of capital. a.
b. 7. Who are entrepreneurs? 8. Define trade-offs and opportunity cost. a.
b. 9. State a decision you recently made and label the trade-off and opportunity cost of that decision. 10. Explain the “guns or butter” argument from an economic standpoint. 11. What does it mean to think on the margin? 12. What is a production possibilities graph and what benefits does it have? a. b.
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13. Use the space provided to draw and label a production possibilities graph. Be sure to label the production possibilities frontier.
14. What does it mean to work efficiently? 15. What is the law of increasing costs? 16. How does technology affect the production possibilities curve? 17. What is an economic system? 18. Name and explain the 3 economic questions. a. b. c. 19. Define factor payments. 20. Define and explain the following goals of the U.S. economy. a. Efficiency b. Freedom c. Security d. Equity e. Growth f. Full Employment g. Stability (p. 68) 21. Name and fully explain the 4 economic systems. a.
b.
c.
d. 2
22. Explain the concept of specialization.
23. Identify the transactions made within the product and factor markets. a. Product b. Factor 24.Use Adam Smith’s concept of the invisible hand to explain how self interest and competition work together to help run a free market economy. a. self interest b. Competition 25. Explain the concept of consumer sovereignty. 26. Explain the concept of authoritarian government within a centrally planned economy. 27. Why do centrally planned economies often have problems meeting consumer needs? 28. What are the limits of a laissez faire economy? 29. Provide 3 examples of places that currently implement a mixed economy. a. b. c. 30. Explain how mixed economies balance between centrally planned and market economies. 31. What does it mean to privatize a business? 32. What is an interest group? 33. How does OSHA protect health, safety, and well-being? 34. Explain the purpose of the FDA and EPA a. b. 35. What is the poverty threshold? 36. What is the welfare system designed to do? 37. Explain the difference between cash transfers and in-kind benefits. a. b. 3
38. What are market failures? 39. Define the following 2 terms, which apply to public goods a. non-excludable b. mutually beneficial 40. Give two examples of products, which the private sector would not provide a. b. 41. What is a free rider? 42. Define and give one example of both positive and negative externalities. a. Positive externalitiesEx. b. Negative externalitiesEx. 43. Define macroeconomics and microeconomics. a.
b.
44. What is the business cycle? 45. How does technology help with production? 46. How does the government help provide consumers with more choices? Unit 2 How Markets Work 1. What is the law of demand? 2. Which two behavior patterns effect the law of demand? Describe them. a. b. 3. What is a demand curve?
4. Name 2 limits of a demand curve. a. b. 4
5. Explain the concept of ceteris paribus. 6. Explain the following factors, which influence demand a. Income b. Utility or consumer expectations c. Population d. Complements e. Substitutes 7. Define elastic and inelastic a. b. 8. What is total revenue? 9. How does a product’s elasticity often effect a business firm’s pricing policies? 10.What is the law of supply? 11. How does price affect supply? 12. What is a supply curve? 13. Explain elasticity of supply. 14. How is elasticity of supply in the short run different from elasticity of supply in the long run? a. Shortb. Long15. What does the marginal product of labor demonstrate? 16. What are increasing marginal returns, diminishing marginal returns, and negative marginal returns? a. b. c. 17. Explain the concepts of variable, marginal, fixed, and total cost a. b. c. d. 5
18.When marginal revenue increases above marginal cost due to increased prices, what should businesses do in regards to production? 19. When marginal revenue goes below marginal cost, what usually occurs within a business? 20. What happens to supply if the cost of inputs (raw materials, machinery, labor, etc…) increases? 21. Why is it that increased technology often lowers production costs? 22. What are subsidies? 23. Why would governments choose to provide subsidies to businesses or markets? 24. What is an excise tax? 25. How would an anticipated price for the next month (July) affect current supply in June? 26. What is equilibrium? 27.What market conditions occur to create excess demand? 28. What market conditions occur to create excess supply? 29. How does minimum wage effect both prices and the demand for labor? a. b. 30. How does decreased production cost effect prices? 31a. What is a shortage? 31b. What is a surplus? 32. How so prices act as both incentive and signals? 33. What is supply shock? 34. What is the purpose of rationing? 35. How does the black market effect the economy? 36. What was Adam Smith’s main point discussed within his book The Wealth of Nations? 37. What are spillover costs? 38. Name and describe the four conditions for perfect competition a. b. 6
c. d. 39. Name and describe the barriers to entry which lead to perfect competition a. b. 40. Provide information on the following characteristics of perfect competition: a. Number of firms b. Variety of goods c. Barriers to entry d. Control over prices e. Use of non-price competition f. Common examples of products sold in a perfectly competitive market 41. Define a pure monopoly 42. What is economy of scale? 43. How is a natural monopoly different from a pure monopoly? 44. Provide information on the following characteristics of monopolies: a. Number of firms b. Variety of goods c. Barriers to entry d. Control over prices e. Use of non-price competition f. Common examples of products sold in a monopoly 45. What is a patent and how do they encourage monopolies. 46. How does the law of demand effect price under monopolies? 47. Explain the concept of falling marginal revenue. 48. Provide information on the following characteristics of monopolistic competition: a. Number of firms b. Variety of goods c. Barriers to entry d. Control over prices e. Use of non-price competition f. Common examples of products sold in a monopolistic competition 49. What is non-price competition? 50. Why are prices under monopolistic competition typically higher than those under perfect competition? 51. Provide information on the following characteristics of oligopolies: a. Number of firms 7
b. c. d. e. f.
Variety of goods Barriers to entry Control over prices Use of non-price competition Common examples of products sold in an oligopoly
52. Define the following terms: a. Price war b. Collusion c. Price fixing d. Cartels 53. What is predatory pricing? 54. What is a trust? 55. Why would the government wish to create anti-trust laws? 56. What are mergers? Unit 3 Business and Labor 1. What is a business organization? 2. Provide 3 characteristics and an example of a sole proprietorship a. b. c. ex. 3. Name and describe the 5 advantages of sole proprietorships a. b. c. d. e. 4. Name and describe the 3 main disadvantages of sole proprietorships (not including lack of fringe benefits). a. b. c. 8
5. Name and describe the three types of partnerships. a. b. c. 6. Name and describe the 4 main advantages of partnerships. a. b. c. d. 7. Name and describe the 2 main disadvantages of partnerships. a. b. 8. Provide 4 characteristics and an example of a corporation. a. b. c. d. ex. 9. Name and describe the 4 main advantages of corporations. a. b. c. d. 10. Name and describe the 4 main disadvantages of corporations. a. b. c. d. 9
11. Name and describe the 3 forms of corporate combinations a. b. c. 12. What is a multinational corporation? 13. Name the 2 advantages of multinationals a. b. 14. Name the 2 disadvantages of multinationals a. b. 15. What is a franchise? 16. Give 5 positive and 4 negative characteristics of franchises (notes) pos a. b. c. d. e. neg. a. b. c. d. 17. Name and explain the 3 types of cooperatives a. b. c. 18. Name and explain the 5 types of nonprofit organizations (include service providing groups). a.
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b. c. d. e. 19. What is a labor union? 20. What tactics did unions often employ to improve pay and working conditions? 21. Explain the difference between blue and white collar workers. a. b. 22. What is collective bargaining?
23. Which three options can be taken when a contract is about to expire? a. b. c. 24. Which factors affect the supply and demand for labor?
25. Name and describe the 4 skill levels for labor. a. b. c. d. 26. What is affirmative action? 27. How does the number of jobs in the service sector affect jobs in the manufacturing industry? 28. What are the learning and screening effect? a. b. 29. Describe the change in earnings of the average American worker over the last 20 years. 11
30. Explain why this is happening. Unit 4 Money, Banking, and Finance 1. What is money? 2. Name and describe each of the three uses of money: a. b. c. 3. Name and describe each of the six characteristics of money: a. b. c. d. e. f. 4. Name and describe each of the three sources of money’s value a. b. c. 5. What is a bank? 6. What is a national bank? 7. Describe what happens during a bank run? 8. What were greenbacks? 9. Describe the gold standard: 10. What is the Federal Reserve System and when was it established? 11. What is a central bank? 12. What are Federal Reserve Notes? 13. What is the FDIC and what function does it perform? 14. What is the money supply? 12
15. Define liquidity: 16. List and describe four examples of liquid assets that are components of M1: a. b. c. d. 17. What does M2 money consist of? 18. What are money market mutual funds? 19. Describe each of the following services, functions, and terms related to banks: a. Storing Money: b. Saving Money: c. Loans: d. Fractional Reserve Banking: e. Default: f. Mortgages: g. Credit Cards: h. Interest: i. Principal: j. Simple interest: k. Compound interest: 20. What are certificates of deposit (CDs)? 21. How do banks profit? 22. Describe each of the following financial institutions: a. Commercial banks: b. Savings and Loan associations c. Savings banks d. Credit Unions e. Finance companies 13
23. Discuss the various ways that electronic banking has changed the banking system: 24. What is investment? 25. How does investing contribute to the free enterprise system? 26. Define each of the following terms: a. Financial system b. Financial asset c. Financial intermediary d. Mutual fund e. Portfolio f. Prospectus g. Return 27. What is diversification (why do people diversify their investments)? 28. How do the financial system & financial intermediaries unite savers and borrowers? 29. Identify the trade-offs between risk, return, and liquidity. 30. What is a bond? (use glossary) 31. What are the characteristics of a bond as financial asset? 32. Define each of the following terms: a. coupon rate b. maturity c. par value d. yield 33. For each bond: identify what each one is, who issues it, and the level of risk. a. Savings bonds b. Treasury bonds, bills, and notes c. Municipal bonds d. Corporate bonds e. Junk bonds 14
34. What is the Securities and Exchange Commission? 35. What are capital markets? 36. What are money markets? 37. What are primary markets? 38. What are secondary markets? 39. Describe each of the following terms: a. share b. equities c. dividends d. capital gain e. capital loss f. stock split (why does a stock split) g. stockbroker h. brokerage firm i. stock exchange j. NYSE k. NASDAQ-AMEX l. OTC Market m. Futures n. Options o. Call option p. Put option q. Bull market r. Bear market s. The Dow t. S&P 500 15
u. Great Crash of 1929 v. Speculation Unit 5 Measuring Economic Performance 1. What is national income accounting? 2. Define GDP and explain how it is calculated? 3. What are intermediate goods? 4. What is the difference between durable and nondurable goods? (Give examples) 5. What is the expenditure approach? 6. What is the income approach? 7. What is the difference between nominal and real GDP? 8. List and describe the four limitations of GDP: a. b. c. d. 9. What is GNP? 10. How is GDP different from GNP? 11. What is depreciation? 12. What is the price level? 13. What is aggregate supply? 14. What is aggregate demand? 15. What is the business cycle? 16. List and describe the four phases of the business cycle: a. b. c. d. 17. What is a recession? 16
18. What is a depression? 19. What is stagflation? 20. List and describe the four main factors that affect the business cycle: a. b. c. d.
21. What are leading indicators? 22. What is the basic measure of a nation’s economic growth rate? 23. What is the best measure of a nation’s standard of living? 24. What is real GDP per capital? 25. What is capital deepening and how does it contribute to economic growth? 26. What is saving? 27. What is the savings rate? 28. How does saving lead to capital deepening? 29. How does each of the following affect capital accumulation? a. population growth b. government c. foreign trade 30. What is technological progress and what does it lead to?
31. List and describe the four causes of technological progress a. b. c. d. 32. Name and describe the four basic kinds of unemployment: a. 17
b. c. d. 33. What are the five major causes of structural unemployment? 34. How is the unemployment rate calculated? 35. What is meant by the term full employment? 36. What does it mean to be underemployed? 37. What is a discouraged worker? 38. How does “very low unemployment” occur and what can it lead to? 39. What is inflation? 40. What is purchasing power and how is it impacted by inflation? 41. What is a price index and how is one used? 42. What is the CPI? 43. What is the market basket? 44. What is the inflation rate and how is it calculated? 45. Identify and describe the three main types of inflation: a. b. c. 46. Identify and describe the three theories for the cause of inflation a. b. c. 47. What is the wage-price spiral? 48. What are the effects of inflation on: a. Purchasing power b. Income c. Interest rates 18
49. What is a fixed income? 50. What is deflation? 51. Explain what the poverty threshold (poverty line) is: 52. What is the poverty rate? 53. Identify and describe five main causes of poverty a. b. c. d. e. 54. What is income distribution? 55. What is the Lorenz curve? 56. Explain two factors that contribute to the income gap in America? 57. The wealthiest 20% of American households earned as much income as the other 80% combined. In the last two decades, is this income gap getting larger or smaller? 58. Describe three of the government programs used to combat poverty a. b. c. Unit 6 Government and the Economy 1. What is a tax? 2. What is revenue? 3. Where does the government get the power to tax? 4. What is a tax base? 5. Describe each of the following tax bases: a. individual income tax b. sales tax c. property tax d. corporate income tax 19
6. Describe and provide an example of each of the three tax structures: a. proportional tax b. progressive tax c. regressive tax 7. Describe the four characteristics of a good tax: a. b. c. d. 8. Explain the two methods of determining the fairness of a tax: a. Benefits-received principle b. Ability-to-pay principle 9. What is the incidence of a tax? 10. Who bears the burden of a tax if demand is relatively elastic? 11. Who bears the burden of a tax if demand is relatively inelastic? 12. What percentage of Federal revenue comes from individual income taxes? 13. Why is the federal income tax a “pay-as-you-earn system?” 14. Define the following terms: a. withholding b. tax return c. taxable income d. personal exemptions e. deductions 15. What percentage of federal tax revenues come from corporate income taxes? 16. What does FICA stand for and what does it fund? 17. What is Social Security and what does it provide? 18. What is Medicare and what does it provide? 19. What are unemployment taxes and what do they provide? 20
20. Describe each of the following types of taxes: a. excise b. estate c. gift d. import (tariffs) 21. What is a tax incentive? 22. What is one way that taxes are used to encourage & discourage behavior? (examples) 23. What is mandatory spending? 24. List examples of mandatory spending programs: 25. What is discretionary spending? 26. List examples of discretionary spending programs: 27. What are entitlements? 28. Are entitlements mandatory or discretionary spending programs? 29. What is Medicaid? 30. What potential problems may the country face due to future entitlement spending? 31. What is the largest category of discretionary spending? 32. Name and describe the two types of budgets states have: a. b. 33. Unlike the federal government, states are required to do have what type of operating budget? 34. Briefly describe the main state spending categories: a. education b. public safety c. highways and transportation d. public welfare e. arts and recreation f. administration 21
35. What does it mean to be tax exempt? 36. What is the primary source of revenue for states? 37. Briefly describe each of the following state taxes (remember that not all states charge each of these taxes): a. sales tax b. state income tax c. corporate income tax d. business tax e. real property tax f. personal property 38. What is the main source of tax revenue for local governments? 39. What is a tax assessor? 40. What is fiscal policy? 41. What is the federal budget? 42. What is a fiscal year? When does the federal government’s fiscal year run? 43. Describe each of the four basic steps in the federal budget process: a. Spending proposals b. In the executive branch c. In Congress d. In the White House 44. Define each of the following: a. OMB b. CBO c. Appropriations bill 45. What are expansionary fiscal policies? 46. What are contractionary fiscal policies? 47. Why does government use expansionary policy? 48. Name the 2 categories of expansionary policies and describe how the effects that each has on the economy: a. 22
b. 49. Why does government use contractionary policy?
50. Name the 2 categories of contractionary policies and describe how the effects that each has on the economy: a. b. 51. Describe each of the following limits of fiscal policy: a. difficulty of changing spending levels b. predicting the future c. delayed results d. political pressures e. coordinating fiscal policy 52. What is classical economics? 53. What problem with classical economics was highlighted by the Great Depression? 54. What is productive capacity? 55. Why did Keynes feel the Great Depression was continuing? 56. What did Keynes feel the government needed to do to get the country out of the Depression? 57. What are demand-side economics? 58. What are Keynesian economics? 59. What are the two opposing problems of the macroeconomy? 60. What did Keynes feel the government should do to avoid recessions/depressions? 61. What should the government do to control inflation? 62. What is the multiplier effect? 63. What are automatic stabilizers? 64. What are supply-side economics? 65. How do supply-side economics differ from Keynesian economics? 66. What does the Laffer curve illustrate? 23
67. What is “at the heart” of the supply-side argument? 68. Briefly describe the use of fiscal policy in each of the following times in American History: a. World War II b. Kennedy Administration c. Supply-side policies in the 1980s 69. What is the basic tool of fiscal policy? 70. Define each of the following: a. balanced budget b. budget surplus c. budget deficit 71. What actions can the government take when it runs a budget deficit? 72. What are the dangers of creating money? 73. What are the dangers of borrowing money? 74. What do US Savings Bonds allow people to do? 75. What are: treasury bills: treasury notes: treasury bonds: 76. What is the national debt? 77. What is the difference between deficit and debt? 78. How do we measure the national debt? 79. Name and describe the two main problems that arise from the national debt: a. b. 80. Define the crowding-out effect: 81. Briefly discuss each of the following issues related to deficit and debt reduction: a. Difficulties with debt reduction (p. 407) b. Balanced budget amendment c. Future of fiscal policy 24
82. What is the nations central bank? Does the government control it? 83. Who owns the Federal Reserve system? 84. What is the Board of Governors? 85. Define monetary policy: 86. What are the Federal Reserve Districts (how many are there)? 87. What is the FAC and what functions does it perform? 88. What is the FOMC and what functions does it perform? 89. List the functions the Federal Reserve System performs: a. b. c. d. 90. Describe the manner in which the Fed serves the government: 91. Describe the manner in which the Fed serves banks: 92. What is check clearing? 93. What is a bank holding company? 94. What does it mean that the Fed is the “lender of last resort” for banks? 95. What is the federal funds rate? 96. What is the discount rate? 97. How does the Fed regulate the banking system? 98. How does the Fed regulate the money supply? 99. Why do people hold money (name and describe each)? a. b. c. d. 100. What is money creation? 25
101. How do banks create money? (explain the process) 102. What is the RRR? 103. What is the money multiplier (also include the formula)? 104. What is the actual money multiplier estimated to be in the US? 105. Describe the 3 tools the Fed has for adjusting the amount of money in the economy: a. Reserve Requirements (reducing and increasing)
b. Discount Rate (reducing and increasing) c. Open market operations (bond purchases and bond sales)
106. What is the prime rate? 107. Which monetary policy tool is the most important and most widely used? 108. Briefly describe the use of monetary policy tools (p. 429) 109. What is monetarism? 110. What is the cost of having money? 111. How is the market for money like any other market? 112. What do lower interest rates encourage and why? 113. What is easy money policy and when will the Fed use it? 114. What is tight money policy and when will the Fed use it? 115. Discuss why timing is important in enacting monetary policy 116. What are inside lags? Describe the two reasons they occur. 117. What are outside lags? How do outside lags differ for fiscal and monetary policy? 118. What is the danger of using easy money policy to get the economy out of recession? 119. What is the danger of using tight money policy to cool inflation? 120. Briefly describe each of the following policies and their downsides: a. Interventionist: b. Laissez-faire:
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