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Principles of Macroeconomics - Chapter 2

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What do economists use as a substitute for a laboratory when applying the scientific method.

Give an example.
Natural experiments offered by history.

An example is the war in the middle east which interrupted the flow of crude oil, causing oil prices to skyrocket around the world.
What is the Circular-Flow diagram?
The circular flow diagram is a visual model of the economy. It includes only two types of decision-makers: households and firms.
In the Circular-flow diagram, what role do firms play?
Firms produce and sell goods and services. Firms hire and use factors of production.
In the circular-flow diagram, what role do households play?
Households buy and consume goods and services. Households own and sell factors of production.
In the circular-flow diagram, what are factors of production?
Factors of production include labor, land and capitol ( buildings and machines ).
In the circular flow diagram, what are the two markets in which households and firms interact?
The market for goods and services and the market for factors of production.
What does the inner loop of the circular flow diagram represent?
The flow of inputs and outputs. Inputs and outputs are the use of factors of production and goods and services.
What does the outer loop of the circular flow diagram represent?
The flow of dollars
In the circular flow diagram, in what form do dollars flow from firms to households?
Dollars flow from firms to households as income ( wages ), rent ( use of land & capital ), and profit ( paid to owners of firms who are members of households ).
What is the production possibilities frontier?
The production possibilities frontier is a graph that shows various combinations of output that the economy can produce given the constraints of raw material and production technology.
What is an efficient outcome?
An efficient outcome is one in which the economy is getting all it can from the scarce resources it has available.
In the production possibilities frontier, what characterizes an efficient outcome?
An efficient outcome is represented by a point that lies on the production possibilities frontier ( rather than inside the frontier ).
In the production possibilities frontier, what characterizes an inefficient outcome?
An inefficient outcome is represented by a point that lies inside the production possibilities frontier.
What is microeconomics?
Microeconomics is the study of how households and firms make decisions and how they interact in specific markets.
What is macroeconomics?
Macroeconomics is the study of economy wide phenonoma.
How is "positive analysis" different from "normative analysis" ?
Positive analysis consists of descriptive statements that say how the world is. Normative analysis consists of prescriptive statements that tell how the world ought to be.
In addition to facts, what is needed to evaluate normative statements?
Evaluating normative statements involves values as well as facts.
What is the Council of Economic Advisers?
The Council of Economic Advisers consists of three members and a staff of several dozen economists. Its only duties are to advise the president and to write the annual "Economic Report of the President"
What do economists at the Department of the Treasury do?
Economists at the Department of the Treasury help design tax policy.
What do economists at the Department of Labor do?
Economists at the Department of Labor analyze data on workers and those looking for work in order to help formulate labor-market policies.
What do economists at the Department of Justice do?
Economists at the Department of Justice help enforce the nation's antitrust laws.

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