College-Level Examination Program (CLEP) Economics Flashcards

24 sample cards from the Economics deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. What is Gross Domestic Product (GDP)?

   GDP is the total market value of all final goods and services produced within a country's borders in a given time period.

2. State the expenditure approach formula for GDP.

   GDP = C + I + G + (X − M), where C is consumption, I is investment, G is government spending, and (X − M) is net exports (exports minus imports).

3. What is the difference between nominal GDP and real GDP?

   Nominal GDP is measured in current prices; real GDP is adjusted for inflation using constant base-year prices, allowing comparison of actual output across time.

4. How is the unemployment rate calculated?

   Unemployment rate = (number of unemployed ÷ labor force) × 100, where the labor force = employed + unemployed (people willing and able to work and actively seeking jobs).

5. Name the three types of unemployment and which two make up the natural rate.

   Frictional (between jobs), structural (skills/job mismatch), and cyclical (due to recession). Frictional plus structural unemployment make up the natural rate of unemployment.

6. What is inflation, and how is the CPI used to measure it?

   Inflation is a sustained rise in the general price level. The Consumer Price Index (CPI) tracks the price of a fixed market basket of goods; the inflation rate is the percentage change in the CPI between periods.

7. Distinguish demand-pull from cost-push inflation.

   Demand-pull inflation results from excess aggregate demand bidding up prices; cost-push inflation results from rising production costs (e.g., higher wages or oil prices) shifting aggregate supply leftward.

8. What does the aggregate demand (AD) curve show, and why is it downward sloping?

   AD shows total quantity of real output demanded at each price level. It slopes downward due to the wealth effect, the interest-rate effect, and the net-exports (foreign-purchases) effect.

9. What is the difference between short-run and long-run aggregate supply?

   Short-run aggregate supply (SRAS) slopes upward because some input prices (like wages) are sticky. Long-run aggregate supply (LRAS) is vertical at full-employment (potential) output, independent of the price level.

10. What is a recessionary (deflationary) gap?

    A recessionary gap exists when short-run equilibrium real GDP is below full-employment (potential) GDP, associated with high cyclical unemployment.

11. What is the spending multiplier formula?

    Spending multiplier = 1 ÷ (1 − MPC) = 1 ÷ MPS, where MPC is the marginal propensity to consume and MPS is the marginal propensity to save.

12. What are the functions of money?

    Money serves as a medium of exchange, a unit of account (measure of value), and a store of value.

13. What does the M1 money supply include?

    M1 includes currency in circulation, checkable (demand) deposits, and other liquid deposits/traveler's checks—the most liquid forms of money.

14. What is the money multiplier, and how is it calculated?

    The money multiplier is the maximum amount the money supply can increase per dollar of new reserves; it equals 1 ÷ the required reserve ratio.

15. What are the three main tools of the Federal Reserve's monetary policy?

    Open market operations (buying/selling government securities), changing the discount rate, and changing the reserve requirement (plus paying interest on reserves).

16. How does expansionary monetary policy work?

    The Fed increases the money supply (e.g., buying bonds, lowering the discount or reserve requirements), which lowers interest rates, increases investment and consumption, and raises aggregate demand to fight recession.

17. What is the difference between fiscal policy and monetary policy?

    Fiscal policy is the government's use of taxation and spending (set by Congress and the President) to influence the economy; monetary policy is the central bank's (the Fed's) control of the money supply and interest rates.

18. What is contractionary fiscal policy and when is it used?

    Contractionary fiscal policy decreases government spending and/or raises taxes to reduce aggregate demand; it is used to combat inflation in an overheated economy.

19. What is the crowding-out effect?

    Crowding out occurs when government borrowing to finance deficit spending raises interest rates, which reduces (crowds out) private investment and consumption.

20. Compare a command economy, a market economy, and a mixed economy.

    A command (centrally planned) economy has the government deciding production and prices; a market (capitalist) economy lets private individuals and supply/demand decide; a mixed economy combines markets with government intervention—most real economies are mixed.

21. What is the principle of comparative advantage as the basis for international trade?

    Nations gain from trade by specializing in goods they can produce at the lowest opportunity cost and trading for others, increasing total world output and consumption.

22. What is the difference between a tariff and a quota?

    A tariff is a tax on imported goods that raises their price; a quota is a legal limit on the physical quantity of a good that can be imported. Both protect domestic industries and reduce trade.

23. What is the difference between the balance of trade and the balance of payments?

    The balance of trade is the difference between a country's exports and imports of goods/services; the balance of payments is the broader record of all economic transactions (current account plus capital/financial account) between a country and the rest of the world.

24. What is economic growth, and what are its main sources?

    Economic growth is a sustained increase in real GDP (often per capita) over time, shown as a rightward shift of the PPC or LRAS. Its main sources are increases in the quantity and quality of resources—labor, capital, natural resources—and improvements in technology and productivity.

What this deck covers

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