Econ 102 SI Test Review Answer Key
Definitions
Price Controls-Legal restrictions on how low or high a price can go.
Price Ceiling-Price control where price is not allowed to go above a certain point.
Price Floor-Price control where price is not allowed to go below a certain point.
Black Market-Market inspired by binding price controls where goods are bought and sold
illegally
Quota-Upper limit on the quantity that can be bought or sold
Wedge-Price controls and quotas cause the price sellers receive to be lower than what buyers pay
Quota Rent-Difference between demand and supply price when there is a quota
GDP-Gross Domestic product, measure of the value of all goods and service produced in an
economy
Household-person or group of people that share their income
Firm-organization that produces goods and services for sale
Factors of Production-resources needed to produce goods
Disposable Income-Income after taxes
Private Savings-Consumer income minus spending
Financial Markets-markets which channel savings into investment
Exports-goods produced here that are sold to another country
Imports-goods produced in another country but purchased here
Aggregate Spending-sum of consumer spending, investment spending, government purchases,
and exports minus imports
Business Fixed Investment-spending on equipment that firms will use to produce other goods
Residential Fixed Investment-spending on housing units by owners and landlords
Inventory Investment-change in value of a firms inventories
Capital-the factor of production that investment is concerned with
Substitutes- If a pair of goods are substitutes, then a rise in the price of one good will lead to a
rise in demand for the other good
Complements-If a pair of goods are complements, then a rise in price of one good will lead to a
decrease in demand for another good.
Short Answer
What effect do price controls have on a market? Are they generally considered by
Economists to have a positive effect on the efficiency of the economy? Explain.
Will create a wedge between supply and demand, creating inefficiency.
Explain the fairness vs. efficiency debate.
It is more fair if everyone has an opportunity to purchase a good at a lower price, but more
efficient if those who value it most are able to purchase it when desired.
What do the national accounts do?
Keep track of the flow of funds to different parts of the economy
What is the significance of disposable income?
It signifies consumption, which is by far the largest part of our economy and affects GDP the
most.
What is the difference between stocks and flows?
A stock is a quantity measured at a point in time, whereas a flow is measured per unit of time
Circle which of the following are included in GDP
1.
2.
3.
4.
5.
6.
7.
8.
Domestically produced final goods and services
Inputs
Used goods
New construction of structures
Intermediate goods and services
Changes to inventories
Financial assets such as stocks and bonds
Foreign produced goods and services
Explain the difference between real and nominal GDP, and why one is more useful than the
other.
Nominal GDP is measured using a given year’s price and quanitity, whereas real GDP is
measured using a base years price with another years quantity. Real GDP can be compared to
other years to measure growth.
What measure is used to show price changes? What is the formula for this measure?
Consumer Price Index. 100 * Cost of basket in time period/cost of basket in base period
What is the difference between a decrease in supply and a decrease in the quantity
supplied?
A decrease in supply means the supply curve shifts, whereas a decrease in the quantity supplied
is just a move along the supply curve.
What can cause a change in supply or demand?
Any change that is not a price change.
Calculate numerical answers to the following problems
Graph and show numerically the equilibrium for the following supply and demand curves.
D=50-2P
S=5P
What is the minimum that a price floor could be in this economy and still be binding?
Consider the following quantities and prices in this one good economy.
Year
1909
1910
1911
Price
20
25
35
Quantity
50
45
55
Calculate nominal GDP for every year. Then calculate real GDP using 1909 as the base
year. What information does this tell you about the economy?
Suppose a given basket of goods that is commonly purchased among consumers cost about
$65 in 2009, and if you were to purchase it today it would cost you about 85$. Calculate the
CPI and the inflation using 2009 as your base year.
100*85/65=130.77=CPI
Which means it is a 30.77 inflation rate