Business chap 2

mixed economies

Economies that embody elements of both planned and market-based economic systems.

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Federal Deposit Insurance Corporation (FDIC)

A federal agency that insures deposits in banks and thrift institutions for up to $250,000 per customer, per bank.

economy

A financial and social system of how resources flow through society, from production, to distribution, to consumption.

monopolistic competition

A market structure with many competitors selling differentiated products. Barriers to entry are low.

pure competition

A market structure with many competitors selling virtually identical products. Barriers to entry are quite low.

oligopoly

A market structure with only a handful of competitors selling products that can be similar or different. Barriers to entry are typically high.

consumer price index (CPI)

A measure of inflation that evaluates the change in the weighted-average price of goods and services that the average consumer buys each month.

producer price index (PPI)

A measure of inflation that evaluates the change over time in the weighted-average wholesale prices.

contraction

A period of economic downturn, marked by rising unemployment and falling business production.

deflation

A period of falling average prices across the economy.

inflation

A period of rising average prices across the economy.

recovery

A period of rising economic growth and employment.

Explain and Evaluate the Free Market System and Supply and Demand

Capitalism, also known as the free market system, is based on private ownership, economic freedom, and fair competition. In a capitalist economy, individuals, businesses, or nonprofit organizations privately own the vast majority of enterprises. As businesses compete against each other, quality goes up, prices remain reasonable, and choices abound, raising the overall standard of living. The interplay between the forces of supply and demand determines the selection of products and prices available in a free market economy. Supply refers to the quantity of products that producers are willing to offer for sale at different market prices at a specific time. Demand refers to the quantity of products that consumers are willing to buy at different market prices at a specific time. According to economic theory, markets will naturally move toward the point at which supply and demand are equal: the equilibrium point.

monetary policy

Federal Reserve decisions that shape the economy by influencing interest rates and the supply of money.

Analyze the Impact of Fiscal and Monetary Policy on the Economy

Fiscal policy and monetary policy refer to efforts to shape the health of the economy. Fiscal policy involves federal government taxation and spending decisions designed to encourage growth and boost employment. Monetary policy refers to decisions by the Federal Reserve that influence the size of the money supply and the level of interest rates. Both the federal government and the Federal Reserve attempted to play a pivotal role in mitigating the impact of the recent financial crisis and establishing a framework for recovery via fiscal and monetary policy. These tools can also help sustain economic expansions.

fiscal policy

Government efforts to influence the economy through taxation and spending.

Explain and Evaluate Planned Market Systems

In planned economies, the government—rather than individual choice—plays a pivotal role in controlling the economy. The two main types of planned economies are socialism and communism. While planned economies are designed to create more equity among citizens, they tend to be more prone to corruption and less effective at generating wealth than market-based economies.

M2 money supply

Includes all of M1 money supply plus most savings accounts, money market accounts, and certificates of deposit.

Describe the Trend toward Mixed Market Systems

Most of today's nations have mixed economies, falling somewhere along a spectrum that ranges from pure planned at one extreme to pure market at the other. Over the past 30 years, most major economies around the world have moved toward the market end of the spectrum, although recently—in the wake of the global financial crisis—the United States has added more planned elements to the economy.

Discuss Key Terms and Tools to Evaluate Economic Performance

No single measure captures all the dimensions of economic performance, but each measure yields insight. Gross domestic product (GDP): Unemployment rate: Business cycle: Inflation rate: Productivity:

commercial banks

Privately owned financial institutions that accept demand deposits and make loans and provide other services for the public.

open market operations

The Federal Reserve function of buying and selling government securities, which include treasury bonds, notes, and bills.

productivity

The basic relationship between the production of goods and services (output) and the resources needed to produce them (input) calculated via the following equation: output/input = productivity.

demand curve

The graphed relationship between price and quantity from a customer demand standpoint.

supply curve

The graphed relationship between price and quantity from a supplier standpoint.

unemployment rate

The percentage of people in the labor force over age 16 who do not have jobs and are actively seeking employment.

Unemployment rate:

The percentage of the labor force reflecting those who don't have jobs and are actively seeking employment.

business cycle

The periodic contraction and expansion that occur over time in virtually every economy.

Business cycle:

The periodic expansion and contraction that occur over time in virtually every economy.

equilibrium price

The price associated with the point at which the quantity demanded of a product equals the quantity supplied.

privatization

The process of converting government-owned businesses to private ownership.

demand

The quantity of products that consumers are willing to buy at different market prices.

money

anything accepted as a medium of exchange

M1 money supply

includes all currency plus checking accounts and travelers check

gross domestic product (GDP) (GDP)

The total value of all final goods and services produced within a nation's physical boundaries over a given period of time.

Gross domestic product (GDP):

The total value of all goods and services produced within a nation's physical boundaries over a given period of time.

expansion

A period of robust economic growth and high employment.

disinflation

A period of slowing average price increases across the economy.

reserve requirement

A rule set by the Fed, which specifies the minimum amount of reserves (or funds) a bank must hold, expressed as a percentage of the bank's deposits.

economic system

A structure for allocating limited resources

hyperinflation

An average monthly inflation rate of more than 50 percent.

communism

An economic and political system that calls for public ownership of virtually all enterprises, under the direction of a strong central government.

recession

An economic downturn marked by a decrease in the GDP for two consecutive quarters.

socialism

An economic system based on the principle that the government should own and operate key enterprises that directly affect public welfare.

capitalism

An economic system—also known as the private enterprise or free market system—based on private ownership, economic freedom, and fair competition.

depression

An especially deep and long-lasting recession.

Define Economics and Discuss the Evolving Global Economic Crisis

Economics—the study of how people, companies, and governments allocate resources—offers vital insights regarding the forces that affect every business on a daily basis. Understanding economics helps businesspeople make better decisions, which can lead to greater profitability, both short-term and long-term. Macroeconomics is the study of broad economic trends. Microeconomics focuses on the choices made by smaller economic units, such as individual consumers, families, and businesses. In September 2008, the United States economy plunged into a deep economic crisis. The banking system hovered on the edge of collapse, property values plummeted, and home foreclosure rates soared. Massive layoffs put more than a million Americans out of work. By the end of the year, the stock market had lost more than a third of its value. To prevent total financial disaster, the federal government and the Federal Reserve intervened in the economy at an unprecedented level by bailing out huge firms that faced total collapse. In early 2009, Congress passed a colossal economic stimulus package, designed to turn around the economy and position the United States for long-term economic growth. In mid-2010, the economy began a painfully slow turnaround, although unemployment remained stubbornly high through 2012 with uncertain prospects for a full recovery.

Inflation rate:

The rate at which prices are rising across the economy. The government tracks the consumer price index and the producer price index.

discount rate

The rate of interest that the Federal Reserve charges when it loans funds to banks.

productivity:

The relationship between the goods and services that an economy produces and the inputs needed to produce them.

economics

The study of the choices that people, companies, and governments make in allocating society's resources.

money supply

The total amount of money within the overall economy.