Benchmark #3 Study Guide
1. If one nation’s currency depreciates relative to another nation’s currency, explain who would benefit and how.
Example: If the U.S. dollar depreciates relative to the Japanese yen, the Japanese can buy goods and
services cheaper from Americans. Therefore, it increases the United States’ exports.
2. Explain trade barriers and list different kinds of trade barriers. Trade barriers are to help domestic producers.
Examples of trade barriers are tariffs, quotas, and an embargo.
3. What do protectionists believe? They are for trade barriers to help domestic producers.
4. Who is responsible for Monetary policy? The Federal Reserve
5. Explain the phases of the business cycle and what occurs in the economy at each phase. Peak,
contraction/recession, trough, and expansion. At the peak, GDP is at its highest and unemployment is low , At
the contractionary phase, unemployment is getting higher and GDP is declining. If GDP declines for six
consecutive months, the nation is in a recession.
6. Give examples of transfer payments. Social Security checks, Government scholarships, unemployment
compensation, welfare.
7. Explain how the Federal Reserve would use the three tools to prevent inflation. Open market operations – sell
bonds; The Discount Rate – they would increase the discount rate; the Reserve Requirement – they would
increase the reserve requirement
8. Explain how the Federal Reserve would use the three tools to prevent a recession. Open Market Operations –
they would buy bonds; The discount rate – they would decrease the discount rate; and The Reserve requirement
– they would decrease the discount rate.
9. Explain the difference between a sole proprietorship, a partnership and a corporation. Sole proprietorship –
owned by one person; Partnership – Owned by two or more people ; Corporation – a separate entity
10. Explain types of natural monopolies. Public utilities
11. What is the difference between a natural monopoly and a technological monopoly. Natural monopolies are
regulated by the government – cannot raise prices without approval. An example of a technological monopoly is
a patent. If someone invents something, no one can copy the product.
12. How do you calculate the unemployment rate? Number of people in the workforce/ those unemployed (those in
the workforce are those who have jobs and those who are actively looking for jobs. The discouraged worker is
not included in the unemployment rate.
13. How do you calculate Consumer Price Index? Current market basket of goods/previous years market basket of
goods X 100
14. How do you calculate GDP? Consumer spending + Investment spending + Government spending + (Exports –
Imports)
15. What is the difference between an oligopoly, a monopoly, monopolistic competition, and pure competition?
Oligopoly – a few large firms in the market; monopoly – no competition (one product); monopolistic
competition – much competition, many products, barriers fairly low; Perfect competition – one product,
unlimited competition
16. What is the Federal Deposit Insurance Company and what purpose do they serve? Insures accounts at your
bank for up to $250,000.
17. What is the difference between a command economy, a mixed economy and a market economy? Command
economy – government makes the decisions; mixed economy – some government intervention; market
economy, the individuals make the decisions regarding what to produce, etc.)
18. Explain the difference between frictional unemployment, structural unemployment, and cyclical unemployment.
Give examples of each. –
Structural - occurs when the skills of the labor force do not match those that employers need. For example,
factory workers are unemployed because the factories they used to work in have closed or they are unemployed
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because they have been replaced by machines/computers. It also includes when one becomes unemployed
because they business has moved elsewhere.
Frictional unemployment occurs when people decide not to take a particular job because they are looking for a
better job that suits their talents, needs, and desires. Or, when they graduate from school and are looking for a
job.
Cyclical – Occurs because of a downturn in the economy – Cyclical unemployment occurs during recession.
Who is hurt and who is helped when inflation occurs? Those who save are hurt; banks are hurt because they
have loaned low interest loans and now the interest rate is up; Those who have a Cost of Living Adjustment
would not be hurt because the COLA off-sets the inflation.
What are important factors in a nation’s rate of growth? Specialization, an educated workforce, efficient use of
resources.
What is the difference between fiscal policy and monetary policy? – Fiscal policy – government. The tools of
fiscal policy are taxes and government spending. If the concern in the economy is inflation, the government will
increase taxes and reduce government spending; If the concern in the economy is a recession, the government
will cut taxes and increase government spending. Monetary Policy – The Federal Reserve. The tools of monetary
policy are open market operations, the discount rate, and the reserve requirement. If the concern is inflation,
the Federal Reserve will Sell bonds, increase the discount rate, and increase the reserve requirement; If the
concern is a recession, the Federal Reserve will buy bonds, lower the discount rate and lower the reserve
requirement.
If the opportunity costs of producing goods are the same in two countries, will they trade? No
What is the comparative advantage? Which country is giving up the least to produce (opportunity costs)
What is absolute advantage? Who can produce the most given the same amount of resources?
What is the difference between a trade surplus and a trade deficit? A trade surplus is when you are exporting
more than you are importing; A trade deficit is when you are importing more than you are exporting.
What is the difference between a budget deficit and a budget surplus? A budget deficit is when the government
spends more than they receive in revenues. A budget surplus is when the government spends less then it
bringing in.
What is the national debt? When the government has a budget deficit, it adds to the national debt and the
national debt continues year after year until the government pays it down.
What is a cost of living adjustment? When inflation increases and you receive a raise to off-set the percentage of
inflation. For example, inflation increases by 4% and you receive a 4% raise.
When will the Federal Reserve buy government securities (bonds) and when will they sell government securities
(bonds)? The Federal Reserve will buy bonds when they are concerned about a recession and sell bonds when
they are concerned about inflation.
Explain opportunity costs. When you make a decision, what are you giving up?
Why does every economic decision involve an opportunity cost? Because we have unlimited wants and scarce
resources
What is the fundamental economic problem facing all nations? scarcity
What important factor affects consumer spending? Consumer income
What is the difference between simple interest and compound interest? Simple interest, you only earn interest
on the principle; Compound interest, you earn interest on the principle plus interest.
The FDIC will insure bank accounts up to what amount? $250,000
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Example of compound interest - $100.00 compounded quarterly (you must first divide the interest rate by 4 .10/4 = .024
Year
1
Beginning
balance
$100.00
Rate 10%
Qtr 1
Qtr 2
Qtr 3
Qtr 4
.025
$2.50
$2.56
$2.625
(2.63)
$2.69
For each quarter, make sure you add the interest earned to the principle and then multiply by .025.
Review the research you completed in the computer lab over WTO, NAFTA, ASEAN, GATT, and EU
Ending
Balance
$110.38