Mid Term Exam

How does the study of economics depend on the phenomenon of scarcity? Society has limited resources and cannot produce all the goods and services people desire. Economics is the study of how society manages its scarce resources. For example: A person has $100 and that is all the resources they had for the week they would use economics to manage their resources. Needless to say without scarcity economics would not exist. 2. Explain why an economy’s income must equal its spending. If our economy’s spending is more than its income we would fall into a financial crisis.Every transaction within the economy has a seller and every dollar spent by a consumer is a dollar earned by the supplier. Proper income to spending ratio balances itself out. 3. What is the difference between the GDP deflator and the Consumer Price Index? The GDP deflator is what is produced domestically and the Consumer Price Index is what is purchased by consumers. A Consumer Price Index is based off a fixed rate for the year and the GDP compares the price of things being currently produced. For example my wife’s Le Creuset cook wear is made in France.The Le Creuset cook wear is not a part of the United States GDP yet she purchased it in the United States which makes it show up on the Consumer Price Index but not the GDP deflator. 4. Explain how higher savings leads to a higher standard of living. The more money an individual saves generally turns into more purchasing of goods. Once those goods are purchased the standard of living increases. Once this happens the standard of living depends on the ability to produce goods and services and the individual saves up more money to maintain a higher standard of living.


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