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Macro-Summmary. of everything

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McMaster University

o Market failure- situation in which a market left on its own fails to allocate resources efficiently  Causes:  externality, the impact of one person’s actions on the well-being of a bystander  E.g. pollution  Market power- ability of a single person (or small group of people) to unduly influence market prices (i.e. monopoly)  E.g. if there is only one well in a town  Government needs to promote equity o E.g. welfare systems, healthcare, etc. How the Economy as a Whole Works Principle #8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services  Almost all variation in living standards between countries is attributable to differences in countries’ productivity  Productivity- the quantity of goods and services produced from each hour of a worker’s time  Nations with more goods and services produced per unit of time high standard of living  Growth rate of productivity= growth rate of average income  Examples of implications: o Increasing min. wage more produced higher standard of living o More competition from Japan less produced income growth slows  Policy makers need to find ways to boost productivity to indirectly improve standard of living, education, health, etc. Principle #9: Prices Rise When the Government Prints Too Much money  Inflation- an increase in the overall level of prices in the economy  high inflation leads to increased costs for society, so economic policy makers try to keep it at a low level  inflation is often caused by the growth in the quantity of money- when a government creates large quantities of the nation’s money, the value of the money falls Principle #10: Society Faces a Short-Run Tradeoff between Inflation and Unemployment  reasons for why governments produce more money (“short -term injections”) n the first place o more money stimulates spending more demand for goods and services o higher demand encourages firms to increase quantity of goods and services they produce and hire more workers to produce the goods and services o more hiring lower unemployment  Leads to short-run tradeoff between inflation and unemployment- economic policies push inflation and unemployment in opposite directions  Business cycle- the irregular and largely unpredictable fluctuations in economic acitivity, as measured by the production of goods and services or the number of people employed 3
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