EC201 – Macroeconomics, Spring 2012
Study Guide for Exam 1
MULTIPLE CHOICE (40 @2 pts each)
Chapter 1
- Define economics
- Three important assumptions: know what they are and what they mean
- Budget constraint: Attainable and unattainable combinations
- Positive vs. normative statements; macroeconomics vs. microeconomics
- Scarcity: what it is and what impacts does it have?
- Opportunity costs (define, recognize, and calculate)
- Factors of production
- Production possibilities curve
o What is it? What does it show? Why is it shaped the way it is?
o The law governing it
o Identify points on, under, and beyond PPC (attainable, unattainable, optimum, non-optimum)
o Can the curve move/shift outward? Under which conditions?
Chapter 2
- Characteristics of market economies (focus on the role of the market and the government)
- Characteristics of competition in the market economy
- Command vs. market system
- Five fundamental questions and how the market economy answers them
Chapter 3
- Law of demand; Law of supply
- Demand determinants: know them; be able to identify them
o Including: Substitute vs. complement, normal vs. inferior goods
- Supply curve (S): shape, direction, significance
- Supply determinants: know them; be able to identify them
- Equilibrium: know what it is and be able to identify it
o Know what shortage/surplus is
- Shifts in Demand; Shifts in Supply
- More on equilibrium and how policies could affect it (price ceiling/price floor)
Chapter 4
- Households income (the breakdown of where they come from) and expenditures (the breakdown of how
households spend their income)
- Legal types/forms of businesses
o Include the advantages and disadvantages of the corporation as a form of business
- The roles of government in a market economy
- Include the roles that government pay in case of market failures (i.e., externalities, spillovers, public
goods)
Chapter 5
- Comparative advantage, specialization, and terms of trade (ch.5, p. 96-98)
o Be able to identify absolute and comparative advantages and calculate opportunity cost
Chapter 23
- Two topics of macroeconomics and three goals of macroeconomics
- Modern economic growth: what it is, what started it, its effects.
- Short-run output fluctuations; prices are “sticky” in the short run. Why?
ESSAY (2 @10 pts each)
1. Explain how, in market economy, society’s quest in managing scarcity by making optimum choices via market
transactions lead to attempt to achieve efficiency. Also, explain the link between achieving efficiency and one
of the three goals of macroeconomics. (10 points)
*Hint* Breakdown the question by explaining each important economic terms:
a. What is scarcity? Why does it necessitates choice?
b. What is a market economy? How does it cope with/manage scarcity?
c. What are market transactions and how can it lead to efficiency? (*Hint: Supply & demand, price as a
signaling mechanism, equilibrium)
d. What is efficiency anyway? What are the two kinds of efficiency?
e. Explain one of the three goals of macroeconomics in your own words. How can having an efficient market
lead to fulfilling this goal?
2. Consider the following information:
A national café chain began selling their gourmet coffee beans at supermarkets. The company sold 2 million
lbs of coffee beans the in 2008 at $10/lb. In 2009, the price rose to $12/lb and it sold 3 million lbs of coffee
beans. By the third year in 2010, the company sold a whopping 5 million lbs at $14/lb.
The information above seems to be in conflict with the law of demand. How could this be? Is the law of
demand violated in this case or are there external factors/determinants in play? (10 points)
*Hint* Consider the following:
a. What does the law of demand say?
b. Is there a difference between a change (increase/decrease) in quantity demanded (Qd) vs. a change in
demand (D)?
c. What ‘external’ factors/determinants (aside from price) that could have influenced the increase in sales of
coffee beans? Use one of the examples from the list of demand determinants.
d. Link everything together and tell me a narrative about it.
e. It may help if you make a rough graph depicting this (don’t worry about the details and measurements if
you choose to graph).