Economic Concepts

Question 1

Law of Demand

Answer 1

• higher prices reduce the demand for an item and lower prices increases the demand for an item.
• there is an inverse relationship between the price consumers are willing to pay for an item and the amount they are willing to purchase.
• The demand curve slopes down and to the right, indicating that as a price drops, the quantity demanded will increase.

Question 2

Elastic

Answer 2

• a small price change causes a rather large change in the amount purchased.
• common with goods that have many substitutes.
• Perfect elasticity results in a horizontal demand curve.

Question 3

Inelastic

Answer 3

• a large price change may not cause much of a change in the quantity demanded.
• there are not many substitutes.
• Perfect in-elasticity is represented by a demand curve the is vertical.

Question 4

Second law of demand

Answer 4

• time has the greatest effect of elasticity.
• when the price of a product increases, consumers will reduce their consumption more in the long run than in the short run.
• the demand for goods is more elastic in the long run than in the short run.

Question 5

Factors causing a shift in the demand curve

Answer 5

• changes in consumer income (consumers will buy more if they have more money)
• Changes in the price of related goods. The price of substitute goods influences demand. If the price of one good rises, the demand for the other good will rise.
• Changes in consumer expectations. If the price is expected to rise in the future, the consumer will buy more now.
• Changes in the number of consumers in the market. When cities increase, there are more people affecting demand.
• Demographic changes.
• changes in consumer tastes and preferences.

Question 6

Law of Supply

Answer 6

• a higher price will increase the supply of a good.
• there is a direct relationship between the price of a good and the amount of the good supplied in the market place.
• the supply curve slopes up and to the right

Question 7

Change in quantity supplied

Answer 7

• represented as a movement along the supply curve.

- it is the willingness of producers to offer a good at different prices.

Question 8

Factors resulting in a shift of the supply curve

Answer 8

• factors that increase the opportunity cost of producing a good will discourage production and shift the supply curve inward and to the left.
• Changes in resource prices
• changes in technology
• Natural disasters and political disruptions

Question 9

Income elasticity

Answer 9

• the sensitivity of demand to change in consumer income.
• a inferior good has negative income elasticity which means when income increases, the quantity demanded decreases. When income decreases, the quantity demanded increases.
• a normal good has positive income elasticity.

Question 10

Expansionary Fiscal Policy

Answer 10

• reducing taxes
• increasing government spending

-results in higher GDP and higher price levels

Question 11

Restrictive Fiscal Policy

Answer 11

• decreasing spending
• increasing taxes

-will slow the economy down

Question 12

3 ways the Federal Reserve uses monetary policy to influence the money supply

Answer 12

1) increasing or decreasing the reserve requirements
2) increasing or decreasing the discount rate
3) Open market operations

Question 13

Leading Economic Indicators

Answer 13

• Housing starts
• orders for durable goods
• changes in consumer sentiment

Question 14

Coincident Economic Indicators

Answer 14

• unemployment rate
• level of industrial production
• corporate profits

Question 15

Lagging economic indicators

Answer 15

• prime rate
• changes in CPI
• Average duration of unemployment

Question 16

GDP

Answer 16

GDP = C + G + I + NX
C is equal to all private consumption, or consumer spending, in a nation’s economy, G is the sum of government spending, I is the sum of all the country’s investment, including businesses capital expenditures and NX is the nation’s total net exports, calculated as total exports minus total imports (NX = Exports - Imports).

Question 17

Mid-contraction to trough

Answer 17

• interest rates are down
• inflation is down
• value of stocks and bonds increase
• value of real estate and gold decrease

Question 18

Trough to mid-expansion

Answer 18

• interest rates are down
• inflation is down
• unemployment decreases
• capacity utilization increases
• capital spending increases
• corporate earnings increase
• stocks and bonds increase
• real estate and gold decrease

Question 19

Mid-Expansion to Peak

Answer 19

• Interest rates increase
• inflation increase
• labor productivity decrease
• capacity utilization increase
• stocks and bonds decrease
• real estate and gold increase

Question 20

Peak to mid-contraction

Answer 20

• interest rates increase
• inflation increase
• corporate profits decrease
• capital spending decrease
• unemployment increase
• stocks and bonds decrease
• real estate and gold increase