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ECON 1010 (Macroeconomics): Final Exam Study Guide

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ECON 1010
Steven Edwards

o Market failure- situation in which a market left on its own fails to allocate resources efficiently ƒ Causes: ƒ externality, the impact of one person’s actions on the well-being of a bystander N E.g. pollution ƒ Market power- ability of a single person (or small group of people) to unduly influence market prices (i.e. monopoly) N E.g. if there is only one well in a town N 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 N Almost all variation in living standards between countries is attributable to differences in countries’ productivity N Productivity- the quantity of goods and services produced from each hour of a worker’s time N Nations with more goods and services produced per unit of timeÆ high standard of living N Growth rate of productivity= growth rate of average income N Examples of implications: o Increasing min. wageÆ more producedÆ higher standard of living o More competition from JapanÆ less producedÆ income growth slows N 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 N Inflation- an increase in the overall level of prices in the economy N high inflation leads to increased costs for society, so economic policy makers try to keep it at a low level N 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 N reasons for why governments produce more money (“short -term injections”) n the first place o more money stimulates spendingÆ more demand for goods and services o higher demandÆ encourages firms to increase quantity of goods and services they produce and hire more workers to produce the goods and services o more hiringÆ lower unemployment N Leads to short-run tradeoff between inflation and unemployment- economic policies push inflation and unemployment in opposite directions N 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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