busn chapter 2

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.

natural monopoly

A market structure with one company as the supplier of a product because the nature of that product makes a single supplier more efficient than multiple, competing ones. Most natural monopolies are government sanctioned and regulated.

Monopoly

A market structure with one producer completely dominating the industry, leaving no room for any significant competitors. Barriers to entry tend to be virtually insurmountable.

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.

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.

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.

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.

monetary policy

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

fiscal policy

Government efforts to influence the economy through taxation and spending

M2 money supply

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

In the context of the fundamental principles of a free market system, which of the following statements is true of the equilibrium price?

It refers to the price at the point where the supply curve and the demand curve intersect.

commercial banks

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

budget deficit

Shortfall that occurs when expenses are higher than revenue over a given period of time

open market operations

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

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.

business cycle

The periodic contraction and expansion 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.

demand

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

supply

The quantity of products that producers are willing to offer for sale at different market prices.

discount rate

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

Macroeconomics

The study of a country's overall economic dynamics, such as the employment rate, the gross domestic product, and taxation policies.

Microeconomics

The study of smaller economic units such as individual consumers, families, and individual businesses.

economics

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

federal debt

The sum of all the money that the federal government has borrowed over the years and not yet repaid.

The government in the town of Rodenham has granted exclusive rights to a few telecommunications companies to operate in specific geographic areas. The companies have to provide their services in the areas allotted to them, and no company is allowed to extend its services to the areas allotted to its competitors. This system has been put in place because it would be inconvenient for each company to build its own infrastructure in all areas. The given scenario exemplifies:

a natural monopoly

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

expansion

a period of robust economic growth and high employment

economic system

a structure for allocating limited resources

Hyperinflation

an average monthly inflation rate of more than 50%

Socialism

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

money

anything that serves as a medium of exchange, a unit of account, and a store of value

When the Fed sells securities, _____.

banks cut back on the loans

In 1982, the total expenditure of the government of Kargenia, a European country, exceeded its revenue by a substantial amount. This forced the government of Kargenia to borrow funds to meet its legal obligations. In this scenario, the government of Kargenia incurred a _____ in 1982.

budget deficit

Danny is a citizen of Finiz, a North American country. He is able to run his handicraft business without any intervention from the government because Finiz has an economic system that encourages private ownership. He is able to make independent decisions for his business and has the freedom to decide the prices of his products. In this scenario, Finiz most likely has a _____.

capitalist economy

In the context of economic systems, the two key phases of a business cycle are:

contraction and expansion

The country of Trevanvia goes through a period of recession, which leaves a large number of people unemployed due to extensive layoffs by companies. The companies use the strategy of job termination to cut down their costs and reduce their output as the people are now more cautious with their spending. In the given scenario, the layoffs exemplify _____.

cyclical unemployment

During an especially difficult year of weakening financial conditions, the government of Geriva, a European nation, borrows money to meet its financial obligations. However, once the borrowed amount reaches a certain limit, the government is not allowed to borrow more money. If this was to happen in the United States, it could be said that this is because the government has hit the _____.

debt ceiling

Rolliand Bank is going through a financial crisis. Therefore, it takes a loan from the Federal Reserve. The bank has to repay the loan within a year, and it also has to pay a monthly interest of 6% to the Fed. In this case, the 6% interest rate that the Fed charges from Rolliand Bank is the _____.

discount rate

A(n) _____ is a structure for allocating limited resources.

economic system

mixed economy

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

Larry is part of the Board of Governors that manages U.S. monetary policy. He has been elected by the President to serve a single 14-year term. In addition to setting the monetary policy, he is responsible for extending banking services to commercial banks. In this scenario, Larry is most likely part of the _____.

federal reserve

The country of Ukanturk has been facing an economic downturn for two consecutive years. To revive the financial condition of the country, its government tries to influence the economy through taxation and spending decisions that are designed to encourage growth and increase employment. In this scenario, the government of Ukanturk is implementing its _____.

fiscal policy

M1 money supply

includes all currency plus checking accounts and traveler's checks

_____ is a market structure with just a single producer completely dominating the industry.

monopoly

budget surplus

overage that occurs when revenue is higher than expenses over a given period of time

In its role as a regulator, the Fed:

oversees mergers and acquisitions.

A giant telecommunications company that was previously owned by the government of Sunzabia, a European country, is sold to an independent industrialist to ensure that the company is handled in a more efficient way. The given scenario exemplifies _____.

privatization

In the context of the free market system, which of the following market structures has a low barrier to entry?

pure competitions

In the context of monetary policy, the Fed is most likely to reduce the discount rate during:

recessions

In the context of monetary policy, the _____ is a rule set by the Fed, which specifies the minimum amount of funds a bank must hold, expressed as a percentage of the bank's deposits.

reserve requirement

The government of Bakhraan, an Asian country, owns key industries that directly affect public welfare, such as healthcare and telecommunications. To fund public welfare schemes, such as free childcare and free education, the government levies high taxes on its citizens. In the given scenario, the economic system followed by Bakhraan is _____.

socialism

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

Macroeconomics involves the study of:

the gross domestic product of a country.

privatiazation

the process of converting government-owned businesses to private ownership

money supply

the total amount of money within the overall economy

Gross Domestic Product (GDP)

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