[ECON 203] - Midterm Exam Guide - Everything you need to know! (43 pages long)

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7 Feb 2017

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Western Kentucky University
ECON 203
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Chapter 1
1. Economics- study of wants in a world of scarce resources. Macroeconomics looks at a global
scale, while microeconomics looks at a more local scale.
2. Mixed economy is best. It is important to be able to make your own decisions, such as in a free
market economy, and it is nice to have the government take care of some things, like in a
command economy. However, too much of either, especially command economy, is detrimental.
It would be preferable to have a free market economy over a command economy.
3. Fiscal policy- Congress and the President: control for taxes and government spending while
monetary policy is controlled by the federal reserve and handles money supply
4. Hayek thought that planning is best done by individuals who know their own tastes and
preferences, while Keynes thought that the government could better direct the economy to meet
the wants of the society. Long run is more important, because it is, after all, the long run.
5. Economic freedom is positively correlated with per capita income because the more decisions
people can make with their own money, the more they are going to want to spend it.
Chapter 2
1. GDP counts the total market goods and services produced within a country in a given year.
Measure of production (Consumption + Investment + Government Spending + Net Exports)
a. GNP= total market value produced by a countries companies in a given year (inside or
outside the country)
2. 5 of the 10 poorest countries in the world: Zimbabwe, Eritrea, Congo, Burundi, Liberia
3. Real per capita GDP is not a perfect indicator of wellbeing because it doesn’t take into account
changes in leisure, environmental quality, personal health, natural disasters, wars, capital
depreciation, liberty, and price levels.
a. Environment: people aren’t going to be too happen with things are dumped into rivers,
even if it increases GDP
b. Liberty: GDP decreased after slavery ended, but is that really a bad thing?
c. Natural disasters- GDP increases because we have to build stuff, but really it is overall
quite terrible. {broken window fallacy}
4. 1992: Nominal GDP 4, GDP deflator 100; 2000: Nominal GDP 6, GDP deflator 170
a. Real GDP changed how much between 1992 and 2000?
i. Real GDP = Nominal GDP / GDP deflator * 100
1. RGDP 1992: 4 / 100 = 4% RGDP 2000: 6 / 170 = 3.5% So RGDP
actually decreased by .5%
5. Economic growth is important because we have to meet the basic needs of humans, and then
cover all their wants and desires.
6. It will take 48 years for the GDP to double if the growth rate is 1.5% (72 / 1.5)
7. Purchase of American made corn by a consumer in Canada- Export
a. Production of a Toyota Investment
b. Purchase of new home- Investment
c. Payment of $300 to a welfare recipient- not counted in GDP because it is a transfer
8. GDP is not a perfect measure of production because it fails to account for nonmarket activity,
unreported incomes, and activity that happens on the black market
a. Non market activity- babysitting, server tips, yard sales don’t generate sales receipt or
wage data
b. Black market- not reported to government when there is actually quite a bit of activity
going on
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i. These imperfections may affect comparisons between countries because one
country could meticulously report all the data, while another doesn’t devote
nearly that many resources, but has more economic activity occurring.
9. GDP per capita varies so greatly across countries because there could be large levels of income
inequality, or the people might be more productive in less time.
Chapter 3
1. Extensive economic growth- economy produces greater levels of output due to increased number
of resources entering the economy- finds new natural resources, increases size of labor force,
builds more factories
a. Intensive economic growth- growth caused by an increase in productivity (an increase in
output per input) Workers become more skilled, new tech is invented, entrepreneurs find
more efficient ways to do things
2. Large natural resources deposits-harmful or helpful? It depends. They can be key sources of
conflict when property rights aren’t protected. Without laws, it actually becomes dangerous. Also
if countries don’t use them, or overuse them, it hurts future generations.
3. 3 government policies that would allow for more extensive use of natural resources
a. Using the natural resources- drilling for the oil.
b. Property rights- don’t overuse them, allow them to regenerate
c. Don’t incentivize them at the wrong time- don’t subsidize ethanol so the corn farmers can
make more money
4. Property rights- clearly defining who owns what natural resource. They are important to the use
of resources, because without them, civil war could evolve. Also private individuals have
incentive to maximize their wealth creation over time.
5. Government policies that discourage work
a. Policies that lower the cost of child rearing- women don’t work as much, but men work
b. Immigration laws-when you don’t allow high skilled immigrants in, we don’t get their
c. Access to healthcare- sick people work less. The Affordable Healthcare Act cut jobs by
2.5 million, so poor government design of health care programs is bad.
d. Jailing people who really don’t need to be in jail- it’s expensive to house a prisoner, and
they forgo current and probably future consumption.
6. Government policy changes that would allow for a larger US workforce
a. Lower minimum wages- allows less skilled workers to earn some money.
b. Less generous social safety net- people don’t want to work if they are getting paid for not
c. Mandatory retirement ages- let people work until they die if they want.
7. USA has the highest corporate income tax rate in the OECD. Ireland has the lowest. The
corporate income tax rate influence capital formation because people aren’t going to want to build
here if they lose such a large portion of their money, and they go to Ireland.
8. Capital is important to wealth creation because the production of goods and services is only
possible with capital, which is only possible with savings.
9. Saving plays a role in capital creation because you can only generate capital if you have a surplus,
which turns out to be savings. Public debt affects private capital accumulation because less
money is available for saving- it’s all going to pay off large amounts of debt.
Chapter 4
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