Econ Final

Benefits of international trade

1. Allows a country to specialize in Production 2. Allows a country to rise to a higher consumption level 3. increase world output 4. Allows a country to expand beyond its production possibilities frontier

Desirable Qualities of Money

1. Durable 2. Portable 3. Divisible 4. Acceptable or of Uniform Quality 5. Low Opportunity Cost 6. Relatively Stable Value

What 3 things happen when the government purchases government securities

1. Increases aggregate demand because it increases the amount of reserves in the banking system 2. Increases the money supply 3. Decreases the interest rate in the short run

Purpose of money (4 things)

1. Medium of Exchange 2. Unit of Account or Measure of Value 3. Money as a Store of Value 4. Money as a mean of Deffered payment

3 Major Methods that the FED uses to control the supply of money

1. Open Market Operations (most used) 2. Change reserve requirements 3. Change its discount rate

Required Reserve Ratio

The percentages of deposits a bank must hold

Percentage of the labor force that does not have jobs but is actively seeking one

Unemployment Rate

The average number of times per year each dollar is used to purchase final goods and services

Velocity

What does CPI stand for and what is it?

Consumer Price Index is a measure of the trend in prices of a market basket of consumable goods and services

The idea behind using active discretionary fiscal policy is to stabilize the economy by using planned budget deficits during economic ____________ and planned budget surpluses during economic ______________

Contractions; Expansions

Unemployment that results from short term fluctuations in the economy

Cyclical Unemployment

A sharp reduction in the economy's total output accompanied by high unemployment lasting for more than a year

Depression

a chain reaction of additional income and spending that results in total purchases that are greater than the initial increase in purchases

Mulitplier

The interest rate that is not adjusted for inflation

Nominal Interest Rate

As the US price level rises, what happens? why?

Overall output/production demanded goes down because people turn to foreign goods that are cheaper than American goods

Complementary Goods

Products that go well together (peanut butter and jelly)

Equation for Nominal Interest Rate

Real Interest Rate+Inflation Rate

The Amount by which actual output/production in the short run falls short of the economy's potential output

Recessionary/Contractionary Gap

Excess Reserves

Reserve levels above that required by the FED

Unemployment because of a job that is seasonal in nature

Seasonal Unemployment

Price Ceiling

Set the maximum price that a producer can legally charge for a good

Price Floor

Sets the minimum price that is the lowest a consumer can legally pay for a good (minimum wage)

related to occupational movement or mobility. occurs when workers lack the necessary skills required for jobs that are available or have particular skills that are no longer in demand

Structural Unemployment

Tariff

Tax on imported goods; bring about higher prices and revenues to domestic producers and lower revenues for foreign producers

Banks having trouble meeting the Federal Reserve Requirement can borrow funds directly from the Fed. The interest rate charged is called

The Discount Rate

The main effect of an increase in the amount of capital or an increase in new technology is

a rightward shift on the short run and long run aggregate supply curve

Market

a set of arrangements through which buyers and sellers carry out exchange at mutually agreeable terms

shortage

an excess quantity demanded that occurs when prices are less than the equilibrium price

Surplus

an excess quantity supplied that occurs when prices are higher than the equilibrium price

Money is

anything generally accepted as a payment for goods or repayment of debt

Commodity Money

anything that serves as both money and a commodity; money that has intrinsic value such as gold and silver

Long lags make active fiscal and monetary policy less effective because

by the time the impact of the policy actions are felt, the contraction or expansion it was meant to correct may be over

Transfer Payments

cash or in-kind benefits given to individuals as outright grants from the government (social security, unemployment benefits, welfare, food stamps)

a period in which unemployment is increasing and production/output is decreasing

contraction

M1

currency, including coins, held by the non banking public including checkable deposits, debit and checking accounts, and traveler's checks

An increase in the supply of money will ________ the interest rate and ___________investment spending

decrease; increase

Examples of Adverse supply shocks

drought, Government instability, Terrorist attacks

The price of one unit of a country's currency in terms of another country's currency

exchange rate

substitutes

if the price of one goes up (butter), the demand for the other (margarine) will increase

Beneficial Supply Shock

increase aggregate demand and shift SRAS curve rightward

Labor Productivity is important because...

it is the key to standard of living

Four Categories of Resources

land, labor, capital, entrepreneurship

scarcity

limited resources being unable to satisfy unlimited wants

The economy of the US is best describes as what kind of economic system

mixed

Credit cards are not __________, they are a __________, they are a means of postponing ______________

money; short term loan; cash payments

What causes the International demand of the US dollar to increase?

more US goods are exported and sold abroad

Examples of "Investment"

new residential construction, new factories, new machinery, inventories

Gresham's Law

people tend to trade away inferior goods while keeping the best for themselves

In the long run, an increase in aggregate demand will cause an increase in the _________ and no change in output at ________

price level; equilibrium

marginal

small change or that little extra unit

Adverse supply shocks

sudden, unexpected events that reduce aggregate supply, SRAS shifts leftward

Equilibrium

the condition in the market when the plans of buyers match those of sellers (demand=supply)

Physical Capital

the equipment and structures used to produce goods and services (Office Buildings, Tools, Machines, Factories)

Marginal Propensity to Consume

the fractional change in extra income that is spent on consumption

Intermediate good

the goods and services that are used to produce other goods and services

Two goods are called substitutes if:

the increase in price of one results in the increase in demand for the other

Law of demand

the lower the price of a good, the greater the quantity demanded

law of supply

the lower the price of a good, the smaller the quantity supplied

Human Capital

the productive knowledge, education, and skill people receive, from education and on-the-job training

Aggregate Supply curve

the relationship between the total quantity of final goods and services that suppliers are willing and able to produce and the overall price level

Economics is defined as

the study of how individuals decide to use their scarce resources to satisfy their unlimited wants

Macroeconomics

the study of the behavior and performance of the total economy. It includes price levels, economic growth, unemployment, and economic fluctuations

Definition of GDP

total market value of all final goods and services produced in a country in a year

Opportunity Cost

value of best alternative not chosen

What Law is this? As the price of flat screen TV's increase, producers are willing and able to supply greater quantities of this product.

The Law of Supply

Law of comparative advantage

when a firm or individual has the lowest opportunity cost in producing a good, then they should specialize in producing this good

Budget Deficit

when government spending exceeds tax revenues

The ease with which one asset can be converted into another asset or goods and services

Liquidity

The floating exchange rate adjusts in response to what?

Market Forces

The FDIC ensures that our bank deposits are safe up to $_____________

100,000

Equation For GDP and meanings of Symbols

C+I+G+(X-M); C=Consumer Purchases, I=Investments, G=Government Purchases, X=Exports, M=Imports

DI=__+__

C;S

How are lenders affected by increase in interest rates? borrowers?

Lenders are rewarded with higher interest income; borrowers have to pay more interests expense

What is an Inventory

A Producer's stock of finished and in process goods

The amount by which quantity demanded exceeds quantity supplied is what?

A Shortage

Examples of Beneficial Supply Shocks

Abundant Harvests, Discoveries of natural resources, Technological Breakthroughs, Sudden changes in the economic system that promote more production

the quantity of final goods and services demanded at different price levels in a given time period

Aggregate Demand

What effect would an increase in income have on demand?

An increase in demand (shift to the right)

What is the effect of an increase in consumer income on the equilibrium price and quantity supplied?

An increase in demand, an increase in equilibrium price, and an increase in quantity supplied

Price Level

Average level of prices in the economy

Summarizes the transactions that occur between individuals, firms, and governments of one country and individuals, firms, and governments of another

Balance of Payments

Reserve Requirement

Banks are required to keep on hand a quantity of cash or reserve accounts with the Federal Reserve or in their own vaults equal to a prescribed proportion of their checkable deposits

income households have available to spend or to save after paying taxes and receiving transfer payments

Disposable Personal Income

On a graph the demand curve slopes which direction?

Downward

occurs when a foreign country sells its products at a price level below their costs or below the price of goods sold on the domestic market

Dumping

Interest Rate Banks charge one another for overnight or short term borrowing

Federal Funds Rate

The use of government purchases, taxes, and transfer payments to alter GDP and the price level

Fiscal Policy

the temporary unemployment that results from the search time that occurs when people are searching for suitable jobs and firms are looking for suitable workers

Frictional Unemployment

Three Major Economic Goals

Full Employment, Maintaining prices at a stable level, and achieving a high rate of economic growth

Certain economic activities that signal forthcoming changes in the economy

Leading Economic Indicators

Crowding Out

Government borrowing drives up interest rates and crowds out interest sensitive private investment needs

GDP stands for

Gross Domestic Product

An increase in the economy's average price level is called

Inflation

The amount by which output/production in the short run exceeds the economy's potential output

Inflationary/Expansionary Gap

What is the most unstable category of GDP

Investment

One reason for US Budget Deficits

It is more politically popular to increase spending than it is to increase taxes to pay for the spending

National debt is..

The total of all Budget Deficits

What are the two ways GDP can be measured

Total spending or Total Income

Budget Surplus

When tax revenues are greater than government spending

Underemployed

Workers who are overqualified for their jobs or work fewer hours than they want