GED Social Studies Microeconomics and Macroeconomics Summary

Equilibrium is the point where the supply curve and the demand curve cross. Here, S and D1 cross at 50 units and $5. At that price, buyers want to buy exactly as many units as sellers want to sell.

Wrong choices

• $4: At $4, the quantity demanded on D1 (60 units) is more than the quantity supplied (40 units), so it is not equilibrium.
• $6: $6 is where supply meets the dashed line D2, not D1.
• $7: At $7, the quantity supplied (70 units) is more than the quantity demanded on D1 (30 units), so it is not equilibrium.

Inflation is a general increase in prices across the economy. When prices rise, the same amount of money buys fewer goods and services, so money loses purchasing power. The opposite, a general fall in prices, is called deflation.

Wrong choices

• A general fall in prices over time: A general fall in prices is deflation.
• A rise in the number of people without jobs: More people without jobs is rising unemployment.
• A rise in the total amount a country produces: Growth in what a country produces is GDP growth.

Read both lines at $7:

1. Supply line S reaches $7 at 70 units, so sellers offer 70 units.
2. Demand line D1 is at $7 at 30 units, so buyers want 30 units.
3. Surplus = 70 - 30 = 40 units.

When the price is above equilibrium, sellers offer more than buyers want, and the extra is a surplus.

Wrong choices

• A shortage of 70 units: 70 is the quantity supplied at $7, not a shortage. At this price there is extra, not too little.
• A surplus of 20 units: Check the graph again: at $7, supply is 70 units and demand is 30 units, so the gap is 40, not 20.
• A shortage of 40 units: A shortage happens when buyers want more than sellers offer. At $7, sellers offer more than buyers want.

Fiscal policy is the government's use of taxing and spending to affect the economy. Congress and the President decide it. Monetary policy is different: the Federal Reserve, the central bank, changes interest rates and the money supply.

Wrong choices

• Monetary policy: Monetary policy is run by the Federal Reserve through interest rates and the money supply, not by Congress through taxes and spending.
• A tariff: A tariff is a tax on imported goods.
• Deregulation: Deregulation means removing government rules on businesses.

Gross domestic product (GDP) adds up the market value of all final goods and services produced within a country, usually over a year. A rising GDP usually means the economy is growing. A falling GDP for a period of time is a sign of a recession.

Wrong choices

• The total amount of money the government spends: Government spending is one part of GDP, not the whole thing.
• The value of a country's exports minus its imports: Exports minus imports is the trade balance, which is only one part of GDP.
• The total amount of money people keep in banks: Bank deposits are savings, not a measure of what the country produces.

A tariff is a tax on goods brought in from other countries. It makes imports more expensive, which protects businesses at home that make the same goods. But companies and consumers who buy those goods end up paying more.

Wrong choices

• Imported steel becomes cheaper for U.S. buyers: A tariff is a tax on imports, so imported steel becomes more expensive, not cheaper.
• U.S. steel makers lose business to foreign steel makers: The tariff makes foreign steel cost more, which helps U.S. steel makers compete.
• Steel prices in the United States are not affected: Because imported steel costs more, steel prices in the U.S. tend to rise.

First find the old equilibrium: S and D1 cross at $5 and 50 units. Then find where S and D2 cross: at $6 and 60 units. So when demand increases (the curve shifts right), both the equilibrium price and the equilibrium quantity rise.

Wrong choices

• The price stays at $5, and the quantity rises to 60 units: At $5, buyers on D2 want 70 units but sellers offer only 50, so $5 is no longer the equilibrium.
• The price falls to $4, and the quantity rises to 60 units: When demand increases, the equilibrium price goes up, not down.
• The price rises to $6, and the quantity stays at 50 units: With D2, supply equals demand at 60 units, not 50. At $6 sellers supply 60 units.

When the Federal Reserve raises interest rates, loans for homes, cars, and businesses cost more. People and businesses borrow and spend less. Lower demand helps slow price increases, which is why the Fed raises rates to fight inflation. This is monetary policy.

Wrong choices

• Unemployment always falls right away: Slower spending can lead businesses to hire fewer workers, so unemployment may rise, not fall.
• Borrowing becomes cheaper, so people take out more loans: Higher interest rates make loans cost more, not less.
• Government spending rises automatically: The Federal Reserve does not control government spending. Congress does.