Midterm Review Items: “And will you succeed? Yes! You will, indeed!
(98 and 3/4 percent guaranteed.)
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How scarcity and choice are central to the study of economics
The importance of opportunity cost in individual choice and decision making
The difference between positive economics and normative economics
When economists agree and why they sometimes disagree
What makes macroeconomics different from microeconomics
What a business cycle is and why policy makers seek to diminish the severity of business cycles
How employment and unemployment are measured and how they change over the business cycle
The definition of aggregate output and how it changes over the business cycle
The meaning of inflation and deflation and why price stability is preferred
How economic growth determines a country’s standard of living
Why models—simplified representations of reality—play a crucial role in economics
That sometimes a very simple model can be a powerful way of explaining important economic
concepts.
How the production possibilities model helps economists think about the trade-offs every economy
faces.
How the production possibilities model helps us understand three important aspects of the real
economy: efficiency, opportunity cost, and economic growth.
How trade leads to gains for an individual and for national economies.
The important distinction between absolute advantage and comparative advantage.
How comparative advantage leads to gains from trade in the global marketplace.
What a competitive market is and how it is described by the supply and demand model.
What the demand curve is.
The difference between movements along a demand curve and changes in demand.
The factors that shift a demand curve.
Learn what the supply curve is.
The difference between movements along a supply curve and changes in supply.
The factors that shift a supply curve.
How supply and demand curves determine a market's equilibrium price and equilibrium quantity.
In the case of a shortage or surplus, how price moves the market back to equilibrium.
How equilibrium price and quantity are affected when there is a change in either supply or demand.
How equilibrium price and quantity are affected when there is a simultaneous change in both supply
and demand.
The meaning of price controls, one way government intervenes in markets.
How price controls can create problems and make a market inefficient.
Why economists are often deeply skeptical of attempts to intervene in markets.
 Who benefits and who loses from price controls, and why they are used despite their well-known
problems.
 The meaning of quantity controls, another way government intervenes in markets.
 How quantity controls create problems and can make a market inefficient.
 Who benefits and who loses from quantity controls, and why they are used despite their wellknown
problems.
 How economists use aggregate measures to track the performance of the economy.
 The circular flow model of the economy.
 What gross domestic product, or GDP, is and the three ways of calculating it.
 The difference between real GDP and nominal GDP.
 Why real GDP is the appropriate measure of real economic activity.
 How unemployment is measured.
 How the unemployment rate is calculated.
 The significance of the unemployment rate for the economy.
 The relationship between the unemployment rate and economic growth.
 The three different types of unemployment, frictional, structural, cyclical, and their causes.
 The factors that determine the natural rate of unemployment.
 The economic costs of inflation
 How inflation creates winners and losers
 Why policy makers try to maintain a stable rate of inflation
 The difference between real and nominal values of income, wages, and interest rates
 The problems of deflation and disinflation
 How the inflation rate is measured.
 What a price index is and how it is calculated.
 The importance of the consumer price index and other price indices.
 The nature of the multiplier, which shows how initial changes in spending lead to further changes.
 The meaning of the aggregate consumption function, which shows how current disposable income
affects consumer spending.
 How expected future income and aggregate wealth affect consumer spending
 The determinants of investment spending.
 Why investment spending is considered a leading indicator of the future state of the economy.
 How the aggregate demand curve illustrates the relationship between the aggregate price level and the
quantity of aggregate output demanded in the economy.
 How the wealth effect and interest rate effect explain the aggregate demand curve’s negative slope.
 What factors can shift the aggregate demand curve.
 How the aggregate supply curve illustrates the relationship between the aggregate price level and the
quantity of aggregate output supplied in the economy.
 What factors can shift the aggregate supply curve.
 Why the aggregate supply curve is different in the short run than in the long run.