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Chapter Review Chapter 1: Macroeconomics and the Economic Perspective

  1. The three major goals of macroeconomic policy are high and sustainable economic growth, full employment, and low inflation.
  2. Economics is the study of how individuals, firms, and gov¬ ernments within our society make choices. Choices and therefore trade-offs are unavoidable, because desired goods, services, and resources are inevitably scarce.
  3. Economists study how individuals, firms, and governments within our society make choices by focusing on incentives. People respond to changes in incentives by altering the decisions they make.
  4. Exchange occurs in markets. Voluntary exchange can benefit both parties.
  5. Making choices requires information. Limited or imperfect information can interfere with incentives and affect the ability of the private market to ensure an efficient use of society’s scarce resources.
  6. The incomes people receive are determined by the market economy. Concerns over the equitable distri¬ bution of wealth and income in the economy lead to government programs that increase income equality.
  7. The United States has a mixed economy, one in which there is a mix of public and private decision making. The economy relies primarily on the private interaction of individuals and firms to determine how resources are allocated, but government plays a large role as well. A central question for any mixed economy is the balance between the private and public sectors.
  8. The term market is used to describe any situation where exchange takes place. In the U.S. market economy, individuals, firms, and government interact in product markets, labor markets, and capital markets.
  9. The two major branches of economics are microeconomics and macroeconomics. Microeconomics focuses on the behavior of the firms, households, and individuals that make up the economy. Macroeconomics focuses on the behavior of the economy as a whole.
  10. A correlation exists when two variables tend to change together in a predictable way. However, the simple existence of a correlation does not prove that one factor causes the other to change. Additional outside factors may be influencing both.
  11. Positive economics is the study of how the economy works. Disagreements in positive economics center on the appropriate model of the economy or market and the quantitative magnitudes characterizing the models.
  12. Normative economics deals with the desirability of various actions. Disagreements in normative economics center on differences in the values placed on the various costs and benefits of different actions.
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