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Midterm 1: Thursday, October 6th, 2016 11:00-12:15 Bring 4-function calculator!! The first exam covers Chapters: 1, 2, 4, 10 and 11 Exam questions are drawn from: Lectures; Non-Aplia problem sets; Aplia problem sets. In general, you will not be tested on material in the textbook unless it has been covered in one of these three ways. Chapters 1 and 2 The Key Method of Economics --Systematic observation and measurement An interpretation of data: we measure rates, observed over time the government budget de-fect, income inequality, how income has grown --Formulation of a hypothesis We do this by using a model, can be simple or complex; going to college and pursuing a de-gree can come out at income inequality --Test the Hypothesis We do this with new data and assess it...then we either reject or fail to reject If there is a rejection then we modify --Modification or rejection of the hypothesis **exactly like the scientific method** NOTE: THE METHOD OF ECONOMICS IS THE SCIENTIFIC METHOD Economics is a Social Science What are some other alternative models/guesses for the recent rise in income inequality in the US? -globalization: jobs being outsourced overseas, only people at top benefiting from the growth, closing shops in the United States (this would only benefit owners) -deregulation: loosening of laws and therefore easier for the big guys to get more mon-ey -cost of living vs. taxes: could try figuring out inflation, what are taxes, how does infla-tion and taxation affect different groups of people -technology: sometimes known as "skill biased technological change"; those who are not technologically skilled are not given those advantages --Microeconomics vs Macroeconomics
-Micro: small; studies the individual household, business firm or market, impor-tant crucial MICRO decisions on your life, individual markets (like housing market, stock market, oil market) -Macro: the BIG picture; studies the entire US economy; unemployment reces-sions, expansions, rapid growth, inflation, monetary policy (tools government can use to con-trol the money supply), fiscal policy (tax spending policies, etc...) --Positive and Normative Economics * -positive: descriptive, describing income shares, growth, education impacts, etc...; it makes a claim about how the world is --ex. "minimum wage laws CAUSES unemployment" (speaking like a sci-entist and making a claim) -normative: prescriptive (aka doing something about it); it claims about how the world SHOULD be; differences in views and so prescriptive statements are different --ex. "the government SHOULD raise the minimum wage" Economics uses models to understand complex reality --simplifies the world so we can understand it; helps us ignore what's unimportant and focus on what IS important --all models are "wrong", but some models are useful: models are a HUGE simplifica-tion, but some give us understanding TEN PRINCIPLES OF ECONOMICS (7 ARE MENTIONED IN LECTURE) Principle 1: People face trade offs --this means that we can't always get everything we want/like, and will have to sacrifice one over the other --we live in a world of limits and have to make choices due to scarcity-ex: you start making choices as soon as you wake up in the morn-ing; do i get up or sleep inPrinciple 2: The cost of something is what you give up to get it (opportunity cost) --opportunity costs will vary from person to person because people value things differently and costs are ultimately subjective ex: going to college--> benefits include getting an education and better opportunities, but costs are tuition and especially TIME --be aware of the opportunity costs that accompany each possible decision total costs=explicit costs vs. implicit costs total costs=explicit costs vs. opportunity costs efficiency vs. equality --efficiency means getting the MOST out of our resources --equality means distributing our prosperity more equally to our society **the two often come in conflict, one becomes the other's OC, and therefore reduces incentives**Principle 3: Rational people think at the margin"the edge"
--rational people understand that life is hardly ever this or that, black or white, but rather a mixture or shades of gray; not one extreme or the other when mak-ing a decision -rational people make decisions by comparing marginal costs vs marginal benefits (marginal change) if MB>MC, then a rational person would want more of that if MB<MC, then a rational person would do less if MB=MC, then a rational person is fine with the circumstances --this is also known as the optimal stopping point (optimality point)--Principle 4: People respond to incentives -many policies change costs or benefits people face, therefore altering incentive-benefits are like rewards; costs are like punishments --therefore, people decide according to marginal benefits and costs --ex. when oil prices rise, quantity demanded of oil falls (law of demand); people decide to drive hybrids, drive less, take public transportation, etc... NOTE: not all people respond to every incentive all the time Principle 5: Trade can make everyone better off --rather than have one country beat the other in trade, it benefits both (or multi-ple) sides/countries --it allows an individual or a country to specialize in what they are best at (whether it be sewing, farming, etc) --by trading, people can buy a greater variety of goods and services at a lower cost Principle 6: Markets are usually a good way to organize economic activity --many countries have developed market economies, rather than a central plan-ner controlling everything --although decentralized and self-interest decisions, has proven to successful in organizing government activity --"invisible hand" helps guide economy Principle 7: Governments can sometimes improve market outcomes --needs to enforce rules that are key to market economics in order for the "invis-ible hand" to work --must encourage institutions to enforce property rights over the things we pro-duce, by means of laws, police, courts ex. A restaurant won't serve meals unless they know that they will get paid before customer leaves Principle 8: a country's standard of living depends on its ability to produce goods and services --variation in living standards (like annual income and luxuries) are based on a country's productivity
--the larger the quantity of goods and services produced, the higher the stan-dard of living --the growth of a nation's productivity determines the growth rate of its average income --productivity influences public policy Principle 9: prices rise when the government prints too much money --too much money printed = inflation--the larger the quantity of money that is circulating, the larger the decrease in value of the money Principle 10: society faces a short-run trade off between inflation and unemployment --an increase in money printed leads to an increase in overall spending, aka an increase in demands for goods and services --an increase in demands causes firms to raise prices, but also encourages firms to hire more workers to meet those demands --hiring more workers = lower unemployment --keep in mind this is SHORT-RUN: that means changes in policies that affect un-employment and inflation are within 1-2 year periods CHAPTER 4 Market Forces of Demand and Supply: basic work tool of economists Markets and Competition --markets: group of buyers and sellers of a good or service -this can be in an actual marketplace, online, etc... --assume that these markets are in perfect competition-goods are exactly the same from market to market -many buyers and sellers: businesses competing for $, and the buyer competing with others to buy that good --we cannot affect the market individually --sellers are forced to sell at market price **we assume no government intervention** DEMANDQuantity Demanded (QD) --amount of goods buyers are willing/able to purchase at a particular price --it is a particular point on the demand curve Law of Demand: when price (P) of a good rises, quantity demanded (QD) falls, other things equal --it is an inverse relationship b/w price and quantity demanded Individual Demand and Market Demand --market demand is the horizontal sum of quantities demanded by all buyers
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School: New York University
Course: Intro to Macroeconomics
Professor: Gerald McIntyre
Term: Fall 2016
Tags: Macroeconomics, Macro, and Economics
Name: Macroeconomics Midterm 1 Study Guide
Description: These notes are basically a compilation of the past four weeks of notes (a little less extensive though)...Aplia readings are incorporated into these notes. Combining these notes with the practice from both Aplia and non-Aplia problems should put you in good place for the exam.