Combo with "AP Macroeconomics Chapter 2 Vocabulary" and 25 others

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What are some concepts that the Production Possibilities Frontier illustrates?

-scarcity - the law of increasing opportunity costs -efficiency -economic growth

The expenditures approach adds up the 4 forms of expenditures: (CIGX) Consumption, Investment spending, Government spending on goods and services, eXports

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The first equilibrium view is the national income equilibrium view. The second view is value of production or "value of total output."

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The government taxes both the household sector and the business sector and so taxes are considered leakages.

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The gross domestic product is the value of all final goods and services produced in an economy in a certain period.

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The most-used economic statistic is gross domestic product.

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The value of production is the total receipts of all producers.

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There are two different ways to measure income; expenditures approach and the income approach.

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This higher injection causes the level of income to rise so a rise in Savings, Import or Taxes would have to occur to create balance again or equilibrium.

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This total spending by buyers is called aggregate expenditures.

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Transfer payments are one-way transactions in which payment is made by the government but no good or service flows back in return.

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Value of production = business receipts = aggregate expenditures

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Value of production = cost of production (including profits) = total income

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We can also measure the value of production in terms of how much it costs to produce that output.

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Yet the government purchases goods and services too so that is considered an injection.

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you can look at a product in terms of price or

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What is the cost of producing one sword in rings?

0.25 broomstick

What is the cost of producing one broomstick to Potter?

0.5 sword

consumer soverignty

1 characteristic of the market where individual production decisions are made --> free enterprise decentralized distribution of output.

Suppose that the cost of producing one unit of wine in Happy Island is two units of rice; Enjoy Island one unit of wine cost four units of rice. What might be possible terms of trade between the two countries?

1 rice = 3/8 wine

True or false: when the Canadian dollar depreciates, the effective price of Canadian exports increases and, as a result, total exports are likely to fair.

False: the effective price decrease and exports will increase

T/F- The terms of trade relate to the laws and conditions that govern trade.

False: they relate to the comparative prices of exports and imports. (1 banana for 3 diapers for example...thats what is meant as exports and imports)

Value Added

Farmer sells raw milk: 1,000 gal @ $0.80 = $800 Dairy Processes: $2.70/gal = $1,900 Grocer sells milk: $3.00/gal = $300 add those numbers up = $3,000 which is the final value or the value added

Personal Consumption Expenditure (PCE) Price Index

Fed's preferred inflation measure now; Chain weighted index of overall IR & core IR (w/o food & energy prices)

Discretionary Spending

Federal spending on programs that are controlled through the regular budget process

Fractional reserve system is a banking system in which banks keep only a small fraction of their total d__________ on the reserve in the form of cash.

deposits

reserves

deposits the bank has received but has not loaned out

consumption function

describe relationship b/w consumption and income

consumer sovereignty

determination by consumers of the types and quantities of goods and services that will be produced with the scarce resources of the economy

The main focus of the chapter was an examination of how exchange rates are d___________ under a flexible exchange rate system and how this contrast with a fixed exchange rate system.

determined

Recessionary gap is the d_________ between actual real GDP and potential real GDP when the economy is producing below its potential.

difference

Consumer surplus

difference b/w max amount a person is willing to pay and its current market price base x height/2

Net factor payments

difference between payments to domestically owned factors located abroad & payments to foreign factors located domestically

The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____.

direct, inverse

2.1C: A government could also finance a budget deficit by issuing loans d________ to the central bank.

directly

Neoclassicists say that the economy can adjust and any gaps will immediately d________.

disappear

Leakage is a flow of income that is d________ out of the circular flow and doesn't flow directly back.

diverted

Circular Flow Diagram

divides the economy into two sectors: "businesses" and "households." Additionally, we divide this economy's markets into the "resource market" and the "product market."

A new bank deposit of currency changes in the composition of the money supply but d____ ____ change its total.

does not

foreign liabilities

domestic physical & financial assets owned by foreigners

Durable/Non-durable goods

durable goods (food, clothing) are used up, while non-durable are more long lasting (new cars, appliances, furniture); distinction is not always clear-cut

1. Consumption spending as a result of changes in wealth, the age of consumer d_______, or expectations. ...change in aggregate demand

durables

liquid

easily converted to money

National income is the SUM OF ALL INCOMES earned from e____________ transactions or the SUM OF ALL SPENDING.

economic

The market system:

effectively harnesses the incentives of workers and entrepreneurs.

labor force

employed + unemployed

Underemployment

employed only part-time when one needs full-time employment or not making full use of your skills

Potential GDP is the total amount that the economy is capable of producing at full e__________ (at the natural rate of unemployment).

employment

Freedom of Choice

enables owners to employ or dispose of their property and money as they see fit.

The competitive market system.

encourages innovation because successful innovators are rewarded with economic profits.

The factors of production are divided into 4 categories: land, labour, capital and e___________.

enterprise

The purchasing power parity theory suggests that the purchasing powers of different currencies will tend to become e____ overtime.

equal

relationship between government income & private income

equal to GNP

Purchasing power parity theory is a theory suggesting that exchange rates will change so as to e______ the purchasing power of each currency.

equate

Calculate equilibrium price and quantity

equilibrium price: set QD = QS and solve for P equilibrium quantity: put p into one of the equations (both should come to same # though either QS or QD)

Intermediate Goods

goods produced by a firm for use in further processing by another firm. *not counted in GDP* (if it was then some goods would be counted twice).

Exports

goods produced domestically and sold abroad

Complimentary Goods

goods that "go together" inc Price(good x) --> dec Demand (good y)

Inventory investment

goods that are produced during a given period but are not consumed (Finished goods, Goods in process, & Raw materials)

Complementary G/S

goods that are related- when you buy one, you buy the other ex. phone and phone case

intermediate goods

goods that are used up to make other things (in contrast to final consumption goods)

Substitute Goods

goods that can serve as replacements for one another inc Price(good x) --> inc Demand (good y)

Non-durable Goods

goods that don't last durable goods - goods that last longer (ie. car) service

budget surplus

gov't spends less than it taxes

budget deficit

gov't spends more than it taxes = G - T

Components of GDP: Government Spending

gov. spending on final G&S; doesn't include transfer payment

Fiat money is anything that is declared as money by g____________ order.

government

A price floor means that:

government is imposing a minimum legal price that is typicallly above the equilibrium price.

The term laissez-faire suggests that:

government should not interfere with the operation of the economy.

government savings

government's spending to meet current needs (not investment); aka budget surplus (or deficit if negative

2. An inflationary gap, which means an output level g______ than potential GDP.

greater

Society sees the greatest good for the _______ number of people

greatest

Output Growth

growth rate of output of entire economy

Per Capita Growth

growth rate of output per person

Productivity Growth

growth rate of output per worker

Have more of one thing means

having less of something else

Employed are those who are in the labour force and hold paid employment. Unemployed are those who are in the labour force and are actively seeking employment, but do not h____ paid employment.

hold

An injection is any expenditure received by firms in the business sector that does not come from the h________ sector in the form of consumption and thus does not depend on the level of income from households.

household

In a market, or capitalist, economy, most payments for goods and services are made by:

households (consumers).

Demand decisions are made by:

households in product markets and businesses firms in resource markets.

Supply decisions are made by:

households in resource markets and business firms in product markets.

Marginal Propensity to Save

how likely you are to save

Marginal Propensity to Consume

how likely you are to spend

Investment Multiplier

how much GDP increases as investment increases (depends on mpc & mps)

Division of Labor

human specialization contributes to a society's output in several ways: makes use of differences in ability, fosters learning by doing, and saves time.

Consumer sovereignty refers to the

idea that the decisions of producers must ultimately conform to consumer demands.

The production possibilities curve illustrates the basic principle that:

if all the resources of an economy are in use, more of one good can be produced only if less of another good is produced.

12.1B: higher interest rates caused by expansionary fiscal policy will encourage m____ foreign financial investment, thus increasing the exchange rate and crowding out net exports.

Assume an economy is incurring unemployment. The effect of resolving this problem will be to:

move the level of actual output to the economy's production possibilities curve.

AD will increase more than the initial change in spending because of the m________.

multiplier

The GDP deflator is a measure of the price level of goods and services included in the GDP by the real GDP and m____________ by 100.

multiplying

Capital account is a subcategory of the balance of payments that reflects changes in o___________ of assets associated with a foreign investment.

ownership

Portfolio investment is the purchase of shares or bonds representing less than 50% o_________.

ownership

Rational People

people who systematically and purposefully do the best they can do to achieve their objectives

The scarcity problem:

persists because economic wants exceed available productive resources.

private savings

private DI after consumption; investment is not included b/c it's designed to increase future productive capacity rather than to satisfy current needs

production

process that transforms resources into useful goods and services

These four factors of production combine to p_________ the goods and services that individuals consume on a daily basis.

produce

Producer Surplus

producers are willing to sell for less, and they get more

So the upper two loops show counter flowing of money. This portion of the model is referred to as the p_______ market. Goods and services-Consumption expenditures.

product

Goods and services are exchanged in:

product markets.

Cost-push inflation is inflation caused by an increase in the costs of p____________ or in profit levels, affecting the supply side.

production

Fixed Investment

production of capital (plant, equipment, housing); can be residential (housing) or non-residential (adding to plant equipment, software; things that make up capital stock)

PPC

productions possibility curve- shows combinations of any two g/s a country can produce if 1. the # and quality of resources is fixed 2. all resources are used at 100% efficiency

Which of the following is a fundamental characteristic of the market system?

property rights.

investing

purchase of capital

Entrepreneur

puts resources together and takes the risk

Shortage

quantity demanded exceeds quantity supplied at that price.

If the supply and demand curves for a product both decrease, then equilibrium:

quantity must decline, but equilibrium price may either rise, fall, or remain unchanged.

demand for money

quantity of money an individual wants to hold given income and interest rates

If we say that a price is too high to clear the market, we mean that:

quantity supplied exceeds quantity demanded.

Independence of the fed

quasi public institution created by an act of congress members of the B.O.G. nominated by President and approved by congress

Exchange rate is the r___ at which one currency in exchange for another.

rate

Diminishing Marginal Utility

the law that for a single consumer the marginal utility of a commodity diminishes for each additional unit of the commodity consumed.

Scarcity

the limited nature of society's resources

When the price of a product rises, consumers shift their purchases to other products whose prices are now relatively lower. This statement describes:

the substitution effect.

The economy refers to:

the sum of all the decisions, or choices, made and actions taken by individuals and groups, including households, businesses, and government, that involve the use of any kind of resource

invisible hand

the tendency of firms and resource suppliers that seek to further their own self interests in competitive markets to also promote the interests of society

Bob decided to take a walk rather than study for his economics exam. Assuming that studying for his exam is the best alternative use of his time, the opportunity cost of Bob's walk is:

the understanding of economics that Bob could have gained if he had studied economics rather than take a walk.

specialization

the use of the resources of an individual, a firm, a region, or a nation to concentrate the production on one or a small number of goods or services

GNP

the value of output produced by US (domestically owned) factors of production whether or not produced inside the borders of the US

Opportunity cost is:

the value of the best alternative that must be forgone when a choice is made.

Opportunity Cost:

the value of the best alternative use of the wood.

dollar votes

the votes that consumers and entrepreneurs cast for the production of consumer and capital goods, respectively, when they purchase those goods in product and resource markets

National Wealth

the wealth of countries; rate of increase depends on savings of households, businesses, and the government; includes net foreign assets & domestic physical assets (capital & labor)

Labor Resources

the workers

At the equilibrium price:

there are no pressures on price to either rise or fall.

Scarcity exists because:

there are not enough resources available to satisfy all of society's wants and needs.

scarcity

there are unlimited wants yet resources are limited

Law of Supply

there is a positive relationship b/w price and quantity supplied. inc P --> inc Qs dec P --> dec Qs

The presence of market failures implies that:

there is an active role for government, even in a market system.

Law of Demand

there is an inverse relationship b/w price and quantity Inc. P --> dec. quantity demanded Dec. P --> inc. quantity demanded

assets

things that a firm owns that are worth something (uses of funds)

commodity monies

those things that have an intrinisic value in some other use

Frictional unemployment is that part of the total unemployment caused by the fact that it takes t____ for people to find their first job or to move between jobs.

time

Savings thus becomes a l___________ from the circular flow of income.

leakage

Explicit Cost

out of pocket cost (money)

Consumer Price Index

Index used to measure price changes for a market basket of frequently used consumer items

Rational person

Someone with well-defined goals who tries to fulfill those goals as best he or she can

Output costs (of inflation) are costs of loss of o_______ resulting from inflation.

output

Marginal Cost

the increase in cost from the production or consumption of one additional unit of a good or service

Disinflation

the inflation rate is decrease, but is still positive

Deflation

the inflation rate is negative

Market

the institution where buyers and sellers interact and engage in exchange.

Economic System

the institutional arrangements and coordinating mechanisms used to respond to the economic problem

The circular flow model depicts:

the inter-relationships of market participants in a capitalist economy.

Savings + Imports + Taxes = Investment +Exports + Government Spending or LEAKAGE = INJECTIONS

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Simply add up the 4 types of income that flow from the business sector to the household sector: wages, interest, rent and profits.

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So, changes in spending have BIG impact on the level of income. Thus . . .

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Some of the goods and services households buy come from foreign business sectors so this expenditure on imports is a leakage.

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Subtract imports from exports because we are after looking at total spending on Canadian-produced goods and services. (X-IM = Xn

...

The 2nd conceptual approach to measuring national income is called the income approach.

...

The aggregate expenditures of buyers and the total receipt of the business sector are the same thing.

...

The amount that producers receive for their product is equal to the amount paid by those who buy the output.

...

The development of the circular flow of income model is complete.

...

Federal Income Tax

A payroll deduction collected by employers by law and sent to the federal government to support governmental programs

AE = C + I + G + Xn

Aggregate Expenditures equal Consumption plus Invest spending plus Government spending on goods and services plus net exports.

True or false: If the Panamanian balboa is worth $.20 Canadian, then $1 Canadian is worth 4 balboas.

False: it is worth 5 Balboas.

In the Laffer curve relates income levels with unemployment rates.

False: it relates tax rates with tax revenues.

The Canadian dollar has not fallen below $.80 US for over 20 years.

False: it went as low as $.64 during the 20 year.

(LO 6) Explain, in terms of a graph, how an increase in aggregate demand could have no effect on the price level.

If the AS was horizontal.

Marginal Reasoning

If the marginal benefit exceeds the marginal cost, then you accept it.

Pitfall II (hidden)

Ignoring implicit costs

T or F If the marginal tax rate increases, then the marginal propensity to expend will be smaller, and the marginal leakage rate will be larger.

The market system's answer to the fundamental question "What will be produced?" is essentially:

"Goods and services that are profitable."

Ceteris paribus:

"Other-Things-Equal" Assumption. A prediction, or a statement about causal or logical connections between two states of affairs, is qualified by ceteris paribus in order to acknowledge, and to rule out, the possibility of other factors that could override the relationship between the antecedent and the consequent.

The market system's answer to the fundamental question "Who will get the goods and services? is essentially:

"Those willing and able to pay for them."

The market system's answer to the fundamental question "how will the system accomodate change?" is essentially:

"Though the guiding function of prices and the incentive function of profits."

The market system's answer to the fundamental question "How will the goods and services be produced? is essentially:

"Using the least-cost production techniques."

The term ceteris paribus means:

"all other things held constant" and is used to isolate the relationship between two vairables

What is the value of the euro in dollars if a French importer can buy eight dollars for €10?

$.80

Refer to the above data. Equilibrium price will be:

$2 price per bushel.

What is the world (free trade) price of kumquats, and what quantity of this product is being consumed mystically?

$4 and 90 kilos

(LO 1) Suppose the real GDP of an economy is $480 billion dollars and its unemployment rate is 7 percent. If the natural rate of unemployment is estimated at 5 percent, what is the value of the country's potential GDP in billions of dollars? $

$504 billion. (the GDP gap is equal to cyclical unemployment of 2% x 2.5 x actual GDP of $480 = $24 billion. Potentail GDP is equal to actual GDP of $480 + GDP gap of $24 = $504)

If Smith's island introduced and import quota of 20, what would be the new price of cloth in Smith Island?

$70

Inflation Rate

% change in price level from one period to the next. GDP deflator (t) - GDP deflator (t-1)/GDP deflator (t-1) x 100%

required reserve ratio

% of total deposits the bank must hold as reserve

What are the 4 fundamental questions every economy must answer?

- What goods and services will be produced? - How will the goods and services be produced? - Who will get the goods and services? - How will the system promote progress?

Equilibrium Principle

(AKA "No-Cash-on-the-Table" Principle): A market in equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action

Efficiency

(AKA Economic efficiency): occurs when all goods and services are produced and consumed at their respective socially optimal levels

Principle of Increasing Opportunity Cost

(AKA Low-Hanging-Fruit Principle): In expanding the production of any good, first employ those resources with the lowest opportunity cost, and only afterward turn to resources with higher opportunity costs

The Scarcity Principle

(AKA No-Free-Lunch): Although we have boundless needs and wants, the resources available to us are limited. So having more of one good thing usually means having less of another.

Demand in Output Market

(households demand goods and services) focus on individual HH demand for a single product consumed in a given time period

Supposing that there are 200 workers each in rings and Potter. If, originally, half the workers were employed in each industry, what would be the gains from trade if the countries completely specialized in the products in which they have a comparative advantage?

+500 broomsticks, +100 swords

What are the four assumptions made when a Production possibilites curve is constructed?

- Full employment - Fixed Resources - Fixed technology - Two Goods

Tax Multiplier

-mpc/mps = (-mpc/1-mpc) change in y = (-mpc/mps) x change in T tax cut = (neg #) tax increase = (pos #)

"Sit and Leak"

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"Veg Injections"

...

AE = C + I + G + Xn = NATIONAL INCOME = w + i + r + π

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Another significant statistic is national income. (NI) used by the Canadian Government but the book will use "Y".

...

Business receives payments for goods and services exported and that is a leakage.

...

Equilibrium implies not only that the total leakages equal total injections but also that aggregate expenditures equal total income.

...

Equilibrium is a state of balance between equal forces.

...

Examples of transfer payments are Employment Insurance payments, Canada PEnsion Plan payments and subsidies to businesses.

...

Financial intermediaries are financial institution, such as banks that act as agents between borrowers and lenders

...

If Leakage = Injections, then national income will remain unchanged.

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If tax rates were to increase this would cause consumption spending to fall and income to continue to fall until the resulting decreases in Savings, Imports or Taxes were sufficient to bring injection and leakage back into equilibrium.

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Injections > Leakage this causes disequilibrium.

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LO 3 Understand the components of GDP accounting and be aware of some of the problems in determining official statistics.

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LO2- Explain the concept of equilibrium and why national income can rise and fall.

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NNP

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National Income is the total earnings of all the factors of production in a certain period.

...

Net tax revenue is total tax revenues minus government transfer payments.

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Open Private Model with the Public Sector- The third pair of leakage/injections is not so simple- we must add another sector to our analysis: government.

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Open Private Model- Putting Savings and Leakage aside for now, lets look a second pair of leakage/injection: imports and export.

...

Our first definition of national income equilibrium is: the level of income is where the total of all three leakages equals the total of all three injections.

...

Three Basic Economic Questions

1) What and how much will be produced? 2)How will items be produced? 3)For whom will the items be produced?

(LO 2) When does macroeconomic equilibrium occur? When aggregate supply equals potential GDP When the aggregate demand curve intersects the aggregate supply curve When the aggregate demand curve intersects the potential GDP curve When full employment occurs

14. b

What are the Factors of Production?

1. Land 2. Labor 3. Physical Capital (factories & equipment) 4. Human Capital (education and training of workers) 5. Entrepreneurship (subdivision of labor)

(LO 2) Why is the AS curve upward sloping? Because firms will produce more if prices are higher, despite a lack of increase in profits Because firms will experience higher profits at higher prices and will therefore produce more Because aggregate demand rises with higher prices Because the potential GDP curve is also upward sloping

12. b

(LO 3) Which of the following will cause the aggregate demand curve to shift to the right? A decrease in the money supply A decrease in the interest rate An increase in the exchange rate A decrease in government spending

13. b

Unemployment is the number of persons 1_ years old and over who are actively seeking work but are not employed.

(LO 2) T or F Aggregate demand is the total quantity of final goods and services that consumers, businesses, government, and those living outside the country would buy at different price levels.

1. True

2 uses of national savings

1. increases K stock through I; 2. increases the stock of net foreign assets by lending to foreigners or acquiring foreign assets in an amount equal to the current account balance

2 ways that national wealth can change

1. value of assets or liabilities can change (for example stock market increase in 1990s or the depreciation of K à drop in wealth); 2. Change through national saving: if existing assets and liabilities are constant an increase in saving increases national wealth

What is the opportunity cost of producing one apple in harmony and in tranquility?

1/2 pair in harmony and 1/3 pair in tranquility.

Refer to the above table. If the economy is producing at a production alternative C, the opportunity cost of the tenth unit of consumer goods will be.

1/3 of a unit of capital goods.

the investment multiplier

1/mps = 1/(1-mpc)

Gov't Spending Multiplier

1/mps or 1/(1-mpc) change in y = (1/mps) x change in G

the money multiplier

1/reserve ratio change in m1 = change in Deposits x money multiplier

(LO 5) T or F According to neoclassicists, an increase in aggregate demand will have no effect upon real GDP but will cause the price level to increase.

10. True

(LO 2) Why is the AD curve downward sloping? Because production costs decline as real GDP increases Because higher prices cause an increase in wealth, which increases spending Because lower prices cause an increase in real balances, which increases spending Because lower prices cause interest rates to increase, which increases spending

11. c

(LO 4) What could cause the level of real GDP to rise but the price level to fall? A rightward shift in the aggregate demand curve A leftward shift in the aggregate demand curve A rightward shift in the aggregate supply curve A leftward shift in the aggregate supply curve

15. c

Supposing that there are 200 workers in rings, How many broomsticks could be produced if 200 swords were produced?

150 broomsticks

(LO 3) What can cause an increase in potential GDP? An increase in nominal wage rates A decrease in taxes Technological improvement A leftward shift in the AS curve

16. c

(LO 2) What does the real-balances effect mean? A higher price level will lead to an increase in the rate of interest thereby causing a decrease in consumption. A lower price level will lead to an increase in the rate of interest thereby causing a decrease in consumption. A higher price will increase the real value of financial assets thereby causing an increase in consumption. A higher price will decrease the real value of financial assets thereby causing an increase in consumption. A higher price will decrease the real value of financial assets thereby causing a decrease in consumption.

17. e

(LO 3, 4) What could cause a movement from point a to point b? An increase in government spending A decrease in labour productivity The discovery of new oil fields A decrease in taxes A decrease in the prevailing nominal wage

18. b

(LO 4) What effect will a decrease in aggregate demand have if the economy is in a recession? The price level will drop a great deal, but real GDP will fall only a little. The price level will drop a little, but real GDP will fall a great deal. The price level will drop a little, but real GDP will increase a great deal. The price level will drop a little, and real GDP will increase a little. Both the price level and real GDP will increase by the same amount.

19. b

The supply-side school of thought argues that the phenomenon of stagflation in the 1_____ highlighted the need to consider policies aimed at aggregate supply is well.

1970s

3 traditional policy tools

1: open market operations (omo) : buying and selling of gov't securities (buy gov't sec. = inc in MS & selling gov't sec = dec in MS) 2: discount rate : rate @ which banks can borrow from the fed 3: sets the required reserve ratio : min % of deposits that banks must hold as reserves

X and Y could exhibit constant or independent relationships which means they have...

2 unrelated variables

(LO 2) T or F The foreign-trade effect is the effect that a change in exports and imports has on the price level.

2. False: it is the effect which a change in the price level has upon exports and imports.

Suppose that both harmony and tranquility are producing 20 pairs. What will be the total gains from trade for the two countries?

20 apples and 0 pears

If Smith Island introduced and import quote of $20, How much would be imported?

20 units

(LO 3) What is the result of an increase in labour productivity? A decrease in aggregate supply An increase in potential GDP An increase in aggregate demand An increase in aggregate demand and aggregate supply

20. b

(LO 1) What is the business cycle? The periodic cycles of profits and losses that all firms experience The natural evolution of new firms growing quickly at first, then slowing and fading into obsolescence The fact that real GDP falls as often as it rises The expansionary and contractionary phases in the growth rate of real GDP

21. d

(LO 1) What is meant by the term human capital? The sum of all financial assets owned by people The accumulated skills and knowledge of human beings The total amount of machines and physical overhead a country possesses The amount of physical capital that each worker has to work with

22. b

(LO 1) All of the following, except one, will contribute to economic growth. Which is the exception? Increased levels of human capital Higher prices Increases in the capital stock Technological improvement Increased quantities of natural resources

23. b

(LO 3) What are the four components of aggregate demand? Consumption, investment, government spending, and net exports Consumption, investment, productivity, and net exports Consumption, investment, productivity, and human capital Potential GDP, AD, AS, and the GDP deflator

24. a

(LO 3) What will be the effect on trade of an increase in the Canadian price level? It will increase the volume of both Canadian exports and imports It will decrease the volume of both Canadian exports and imports It will increase the volume of Canadian exports but decrease the volume of imports It will decrease the volume of Canadian exports but increase the volume of imports

25. d

(LO 3) What is the domestic effect of an increase in the incomes of a country's major international trading partners? The aggregate demand curve will shift to the right. The aggregate demand curve will shift to the left. The aggregate supply curve will shift to the right. The aggregate supply curve will shift to the left.

26. a

(LO 4) All of the following, except one, would cause a movement from a to b. Which is the exception? An increase in the price level An increase in wealth holdings An increase in government spending A decrease in the interest rate An increase in foreign incomes

27. a

(LO 3, 4) Which of the following would cause a movement from point a to point c? A decrease in the price level An increase in wealth holdings An increase in government spending An increase in the interest rate An increase in foreign incomes

28. d

(LO 4) What are the implications if the price level is 100? The price level is above equilibrium. There is a shortage of real output of $250. There is a surplus of real output of $250. There is a surplus of real output of $150.

29. b

(LO 2) T or F The aggregate supply curve is upward sloping.

3. True

(LO 4) If the aggregate quantity demanded falls by $100 at every price level, what will be the new equilibrium price level and real output, respectively? 100 and $550 105 and $650 110 and $650 115 and $500

30. b

(LO 4) At what level of real output will full employment occur in this economy? $600 $650 $700 Cannot be determined from the information

31. d

(LO 5) What is the slope of the aggregate supply curve, according to neoclassical economists? Vertical, because prices tend to be inflexible Vertical, at the capacity level of output in the economy Horizontal, because wages are flexible Horizontal, because prices are flexible

32. b

(LO 6) Which of the following statements is true if the economy is at point a? Firms will find it hard to hire labour, and people will find it easy to find jobs. Wages will eventually be forced down. An inflationary gap exists. Unemployment is at its natural rate. The achievement of full employment must await a decrease in aggregate demand.

33. b

Supposing that there are 200 workers in Potter? How many swords could be produced if 540 broomsticks were produced?

330 swords

(LO 6) If the economy was initially at point a, then what would a movement to point b suggest? The movement could be the result of an increase in aggregate demand. The movement could be the result of a decrease in prices. The movement could be the result of a decrease in wages. It is a movement from one full-employment level of real GDP to another. The movement could be the result of expansionary monetary policy.

34. c

(LO 5) What is the slope of the AS curve according to Keynesians? Vertical, because prices tend to be inflexible Vertical, at the level of potential GDP Horizontal, because wages are inflexible Downward sloping, because wages are inflexible

35. c

Economic Policy

4 criteria for judging the outcomes. 1) Efficiency (allocative): produces what people want @ lowest op. cost 2)Equity: fairness (in the eyes of the beholder) 3) Growth: increase in the total output of the economy 4) Stability: output = growing steadily w/ low inflation and full employment of resources

(LO 2) T or F Macroeconomic equilibrium occurs where the aggregate demand is equal to potential GDP.

4. False: where aggregate demand equals the short-run aggregate supply.

A.(LO 4) Assume that the potential GDP of the economy of Arion is $1000 and that the aggregate demand and the aggregate supply are as shown in Table 5.4. What is the value of equilibrium real GDP and the price level? Is there a recessionary gap or an inflationary gap? Real GDP: Price level: There is a(n) gap of $ If firms become more optimistic and aggregate demand increases by $65, what will be the new values of equilibrium real GDP and the price level? Real GDP: Price level: Is there a recessionary gap or an inflationary gap? What is the size of the gap? There is a(n) gap of $

42A. a) Real GDP: $1000; price level: 100; There is no gap. (Actual GDP is the same as potential GDP). b) Real GDP: $1025; price level: 102; c) There is an inflationary gap of $25 (Actual GDP is $25 greater than potential GDP)..

(LO 2) Assume that the nominal wage rate increases from $18 to $20.80 per hour and, at the same time, the price index increases from 120 to 130. By how much has the real wage rate changed?

43A The real wage has increased by $1 from $15 (18/120 x 100) to $16 (20.8/130 x 100).

(LO 1) What does the term potential GDP mean?

44A Potential GDP refers to the total amount that the economy is capable of producing when all of its resources are being fully utilized. (It is also referred to as capacity GDP or full-employment GDP).

(LO 1) Assume that the size of the labour force in the economy of Mersin remained unchanged in the year 2011, while labour productivity increased. If real GDP also remained unchanged, what change in the labour market must have occurred?

48A There must have been an increase in unemployment in Mersin.

(LO 1) Figure 5.29 depicts the economy of Altrua, which is presently in equilibrium. What is the size of its recessionary gap? $ What is the size of this gap as a percentage of its actual GDP$? $ If the natural rate of unemployment is 6 percent, use Okun's law to calculate the amount of actual unemployment in Altrua. %

49A a) $20; b) 5 percent (20/400 x 100); c) Since the GDP gap is 2 ½ times the amount of cyclical unemployment, the latter must equal 2% (5/2.5). Therefore the unemployment rate must be 8 percent (natural rate of 2% plus cyclical unemployment of 2%).

(LO 3) T or F A change in resource prices will shift both the aggregate supply and the potential GDP curves.

5. False: it will not shift the potential GDP curve.

You are given the following options: ↑ aggregate demand ↓ aggregate demand ↑ aggregate supply ↓ aggregate supply ↑ aggregate supply and potential GDP ↓ aggregate supply and potential GDP Which of options 1-6 will occur as the result of the following changes? An increase in investment spending A decrease in imports An increase in factor prices A decrease in productivity A decrease in factor prices An increase in human capital

50A. a) 1; b) 1; c) 4; d) 6; e) 3; f) 5

(LO 2) What are the three reasons for the downward slope of the aggregate demand curve?

51A. The aggregate demand curve is downward-sloping because of: real-balances effect which refers to the fact that a lower price level increases the value of real balances which will cause an increase in consumption; interest-rate effect which means that a lower price level will reduce interest rates and thereby causing an increase in investment; foreign-trade effect which means that a lower price level will make domestic products more competitive on world markets thus increasing exports and decreasing imports.

(LO 4) Starting from full-employment equilibrium, explain what effect an increase in aggregate demand will have on price, real GDP, and equilibrium.

52A. An increase in aggregate demand will lead to an increase in both real GDP and in the price level. As a result the economy will be above potential, full-employment GDP, i.e. an inflationary gap will exist.

(LO 4) T or F An increase in potential GDP has no effect on macroeconomic equilibrium.

6. False: it will, because any change in potential GDP will also affect the aggregate supply and, therefore, equilibrium.

(LO 4) T or F An increase in aggregate demand will cause an increase in both real GDP and the price level.

7. True

(LO 4) T or F An increase in wage rates will cause an increase in both real GDP and the price level.

8. False: it will cause a decrease in real GDP.

(LO 5) T or F According to Keynes, the aggregate supply curve is vertical.

9. False: to Keynes, it is horizontal.

Total aggregate expenditure (C + I)

= autonomous AE + induced AE

T or F The value of the multiplier is equal to the inverse of the marginal leakage rate.

Supply schedule

Table showing the relationship between the price of a good and quantity supplied

(LO 2) If the MPE is equal to 0.4, what is the value of the MLR? 0.6 2.5 0.4 40

A 0.6

(LO 2) If the MPE is equal to 0.4, what is the value of the multiplier? 1.67 2.5 0.25 0.167

A 1.67

(LO 3, 4) All of the following, except one, could cause a change from a to c. Which is the exception? An increase in Canadian income A decrease in interest rates A decrease in the Canadian exchange rate A decrease in autonomous taxes An increase in American income

A An increase in Canadian income

(LO 4) What circumstance will lead to a smaller multiplier? If the MPS becomes bigger If the MPC becomes bigger If the MPM becomes smaller If the MLR becomes smaller

A If the MPS becomes bigger

(LO 4) What effect does an increase in exports have? It leads to an even larger increase in income. It leads to an even larger decrease in income. It leads to a smaller increase in income. It leads to a smaller decrease in income.

A It leads to an even larger increase in income.

LO 4) Graphically, when is the balance of trade equal to zero? When the rising IM line intersects the horizontal X line When the rising X line intersects the horizontal IM line When the rising IM line intersects the horizontal axis When the rising X line intersects the horizontal axis

A When the rising IM line intersects the horizontal X line

12.4B: A concern of supply-siders was that a reduction in tax rate by lowering government tax revenues would cause budget d__________.

deficits

Sole Proprietorship

A business owned and manged by a single person.

12.3: Fiscal and monetary policy can push unemployment or inflation down by either increasing or decreasing aggregate d_________.

demand

Aggregate:

A collection of specific economic units treated as if they were one unit.

Benefits-Received

A concept of tax fairness that states that people should pay taxes in proportion to the benefits they receive from government goods and services.

Deflation

A contraction of economic activity resulting in a decline of prices

Money

A convenient social invention to facilitate exchanges of goods and services.

Sunk cost

A cost that is beyond recovery at the moment a decision is made

12.4A: traditional fiscal and monetary policy is aimed at the level of aggregate d________.

demand

Product Possibility Curve (PPC)

A curve representing all possible combinations of maximum outputs that could be produced.

Phillips Curve

A curve that illustrates the typical inverse relationship between the rate of inflation and the unemployment rate

Market

A group of buyers and sellers of a particular good or service.

What is Canada's current account balance?

A deficit of 20.

M1 is currency in circulation plus d__________deposits.

demand

Medicaid

A federal and state assistance program that pays for health care services for people who cannot afford them

Medicare

A federal program of health insurance for persons 65 years of age and older

User fee

A fee charged by the government to do certain things (e.g., paying a toll to use a tunnel).

If X is a normal good, a rise in money income will shift the:

demand curve for X to the right.

Inflation

A general and progressive increase in prices

Supply Curve

A graph showing the hypothetical supply of a product or service that would be available at different price points.

Production Possibilities Frontier

A graph showing the possible combinations of output that the economy can produce given the available factors of production and the available production technology.

Business firms

demand factors of production in the Resource market.

Economic Growth:

A larger total output.

Derived Demand

demand for the resources depends on demand for the final g/s

1040 Tax Form-

A long form used to calculate your Federal Income Tax

Depression

A long-term economic state characterized by unemployment and low prices and low levels of trade and investment

What is a perfectly competitive market?

A market in which buyers and sellers are so many that no single one has any influence on market price and in which all the goods offered for sale are identical.

Product Market

A market in which products are sold by firms and bought by households

What is a competitive market?

A market in which there are so many buyers and sellers that no single one has more than minimal impact on market price.

Price ceiling

A maximum allowable price, specified by law

Price index

A measurement that shows how the average price of a standard group of goods changes over time

Households

demand goods and services in the Product Market.

Quantity of Money Demanded

depends on opportunity costs of holding money = the interest rate

Real wage is the amount of goods and services that an employee can buy for a g______ amount of nominal wage.

given

The pursuit of self-interest:

gives direction to the market system.

Circular Flow of Economics

A nation's overall levels of income, employment and prices are determined by the interaction of spending and production decisions made by all households, firms, gov't agencies and others in the economy.

Economic System

A particular set of instititonal arrangements and a coordinating mechanism--to respnd to the economizing problem.

Contraction

A period of economic decline marked by falling real GDP

Expansion

A period of economic growth as measured by a rise in real GDP

Stagflation

A period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)

The Incentive Principle

A person (or a firm or a society) is more likely to take an action if its benefit rises, and less likely to take it if its cost rises. In short, incentives matter.

Absolute advantage

A person who takes fewer hours to perform a task compared to another

Comparative advantage

A person whose opportunity cost of performing a task is lower than that of another's

Normative Economic Principle

A principle that tells how people SHOULD behave

Positive Economic Principle

A principle that tells how people WILL behave

What is the difference between a tariff and a quota?

A quota effects of foreign producers equally, whereas a tariff does not.

Disinflation

A reduction in the rate of inflation

Inverse Relationship

A relationship between two people that is negative. A increase in one variable means a decrease in another.

Direct Relationship

A relationship between two variables that is positive. Increase.

People make choice they believe are ______ for them.

good

Demand

A schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of aseries of possible prices during a specified period of time.

Budget Line:

A schedule or curve that shows various combinations of two products a consumer can purchase with a specific money income.

Consumption is the expenditure (the action of spending funds) by households on g______ and services.

goods

Change in demand

A shift of entire demand curve

Change in supply

A shift of entire supply curve

1040EZ Form-

A simpler form used to calculate your Federal Income Tax

Budget Deficit

A situation in which the government spends more than it takes in

Budget Surplus

A situation in which the government takes in more than it spends

Imports

goods produced abroad and sold domestically

Economic Principle:

A statement about economic behavior or the economy that enables prediction of the probable effects of certain actions.

Labor Force Participation Rate

labor force/adult population x 100%

Law of Supply

A supply schedule tells us that, other things equal, firms will produce and offer for sale more of their product at a high price than at a low price. This, again, is basically common sense.

What is Canada's capital account balance

A surplus of 10 billion

What is Canada's balance of trade?

A surplus of 5 billion

Equilibrium

A system in which there is no tendency for it to change

Demand schedule

A table showing the relationship between the price of a good and the quantity demanded

Regressive Tax

A tax for which the percentage of income paid in taxes decreases as income increases

Proportional Tax

A tax in which the average tax rate is the same at all income levels.

Excise Tax

A tax levied on a particular good or service - federal excise tax on gasoline.

FICA

A tax on employees and employers that is used to fund the Social Security system

Gift tax

A tax on money or property that one living person gives to another

Sales tax

A tax on the dollar value of a good or service being sold

Estate tax

A tax on the estate, or total value of the money and property, of a person who has died

Property tax

A tax on the value of a property.

Customs Duty

A tax placed on goods coming into the country

Progressive Tax

A tax that takes a larger percentage of higher incomes than lower incomes

Outsourcing

A term increasingly used to connote having services performed by low-wage workers overseas

What is purchasing power parity theory?

A theory suggesting that exchange rates will change to equate the purchasing power of each currency.

The unemployment rate is the percentage of those in the l_______ force who do not hold paid employment.

labour

"Guns and butter" is an example of what economic phenomena?

A trade-off

factors of production

land (L) labor (L) capital (K)

The four factors of production are:

land, labor, capital, and entrepreneurial ability.

Monopoly

A type of market failure in which only one seller exists, so this seller sets the price for the market.

Cyclical unemployment

A type of unemployment caused by insufficient total spending (or by insufficient aggregate demand).

Frictional Unemployment

A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.

Frictional unemployment

A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.

Hyperinflation

A very rapid rise in the price level; an extremely high rate of inflation.

in equilibrium

AE = Y AE = C + I + G Y = C + I + G

Law of increasing opportunity costs

AKA Low Hanging Fruit: the cost to get the first one is less but the benefit is the same

Equilibrium real GDP occurs when the aggregate quantities of goods and services demanded equal the aggregate quantity supplied (and AD curve intersects the A_ curve).

How does price influence the demand curve?

According to the law of demand, an increase in price will create a decrease in the demand. A lower price will create a higher demand.

On what basis are the gains from trade divided between countries?

According to the terms of trade

Y>AE

Actual Investment > Planned Investment unplanned RISE in inventories decrease in OUTPUT

Innovation

Adapting and improving to human needs. New methods of production.

Injections

Additions to an economy's circular flow which include investments, government spending, and exports

Adjustment from a Recessionary Gap- Initially, the economy is at price level P1, and real GDP level, Y1, below the full-employment level, YFE. This situation will put downward pressure on wages. As nominal wages fall, the aggregate supply curve shifts to the right until it is at AS2. The net result will be a lower price level, P2, and a full-employment real GDP, YFE.

Adjustment from an Inflationary Gap- The economy is initially at equilibrium, with the AD curve intersecting AS3 at the real GDP level, Y3. With real GDP above its potential level, the unemployment rate is below the natural rate. The high demand for labour will push up nominal wage rates, causing aggregate supply to decrease and pushing the AS curve back to AS2. The new equilibrium level of real GDP is now lower and the price level is higher than initially—price increases from P3 to P1.

How would technology influence the supply curve?

Advances in technology make production easier, shifting the supply curve to the right.

Capital:

All manufactured aids used in producing consumer goods and services.

Land:

All natural resources ("gifts of nature") used in the production process.

Economic Resources:

All natural, human, and manufactured resources that go into the production of goods and services.

Labor force

All persons over age 16 who are either working for pay or actively seeking paid employment

Goods

All things from which individuals derive satisfaction or happiness.

What is capital?

Already-produced durable goods that are used as factors of production in the making of other goods or services.

Market System

Also known as capitalism. The system is characterized by the private ownership of resources and the use of markets and prices to coordinate and direct economic activity.

Command System

Also known as socialism or communnism. Government owns most property resources and economic decision makking occurs through a central economic plan.

All of the following groups except one, demand Canadian dollars. Which is the exception? -An American tourists visiting Canada -Canadians who received dividends from American corporations -Texans who purchase Alberta beef -Americans who receive interest on their holdings of Canadian savings bonds -International speculators who think that the Canadian dollar will soon appreciate

Americans who receive interest on their holdings of Canadian savings bonds.

Excess demand

Amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price

Excess supply

Amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price

An Increase in Aggregate Supply and Potential GDP- An increase in the size of the labour force will shift the aggregate supply curve to the right (from AS1 to AS2) and also increase potential GDP. This change causes a reduction of the price level from P1 to P2 and an increase in real GDP from Y1 to Y2. The economy is now experiencing a recessionary gap; that is, the GDP is at Y2, which is below the new potential GDP2.

An Increase in Aggregate Supply- A decrease in the price of imported oil will improve profitability, causing the aggregate supply curve to shift to the right from AS1 to AS2. This change will cause the price level to drop from P1 to P2 and the level of real GDP to increase from Y1 to Y2.

An Increase in Aggregate Supply- An increase in the size or the quality of the labour force, an increase in the amount of capital stock and natural resources, or an improvement in technology shifts the aggregate supply curve to the right. (It also equally shifts potential GDP.)

Social Security

An act passed in 1935 gave government-payed pensions to American citizens over the age 65 as well as provided help for the unemployed, the disabled, and the needy.

Recession

An economic slowdown of the economy which results in rising unemployment, increased business failures, declining economic growth and higher personal bankruptcies., the state of the economy declines

Subsidy is a payment by government for the purpose of increasing some particular activity or increasing the o______ of a particular good.

output

Inflation

An increase in the overall level of prices in the economy

Complements

An increase in the price of one good causes a leftward shift in the demand curve for the other good (or a decrease causes a rightward shift)

Substitutes

An increase in the price of one good causes a rightward shift in the demand curve for the other good (or a decrease causes a leftward shift)

Corporation

An independent legal entity that can--on its own behalf--acquire resources, own assets, produce and sell products, incur debts, extend credit, sue and be sued, and otherwise engage in any legal business activity.

Consumer price index

overall measure of the costs of goods and services bought by a typical consumer.

Cost-Benefit Principle

An individual (or a firm or a society) should take an action if, and only if, the extra benefits from taking the action are at least as great as the extra costs.

What was Adam Smith's influential economics book called?

An inquiry into the nature and causes of the wealth of nations

Assets are the part of a company's balance sheet that represents what it owns or what is o_____ to it.

owed

Liabilities are the part of a company's balance sheet that represents what it o_____.

owes

Normative Economics

Analysis involving value judgements about economic policies; relates to whether outcomes are good or bad.

Positive Economics

Analysis that is strictly limited to making either statements or scientific predictions.

Tax Return

Annual report filed with local, state, or federal government detailing income earned and taxes owed

Production

Any activity that results in the conversion of resources into products.

Efficient point

Any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the other

Inefficient point

Any combination of goods for which currently available resources enable an increase in the production of one good without a reduction in the production of the other

Attainable point

Any combination of goods that can be produced using currently available resources

Unattainable point

Any combination of goods that cannot be produced using currently available resources

Inefficient point

Any point below the production possibilities curve. The use of resources is not generating the maximum possible output.

money

Anything that is generally excepted as a medium of change 1) medium of exchange - anything that buyers gen. use and sellers gen. accept as payment 2) store of value - transfer purchasing power from one period to the next. 3) unit of account - standard unit that provides a consistent way of quoting proces

Economic theories:

Are generalizations based on a careful observation of facts.

Law of Increasing Opportunity Costs:

As the production of a particular good increase, the opportunity cost of producing an additional unit rises.

What are the two largest categories of goods that Canada exports?

Automotive products and machinery/Equipment products. (The test answer may say raw material)

If factor p______ change, then only aggregate supply and the AS curve are affected; potential GDP remains the same.

prices

Households

primary consumption units in an economy

(LO 4) What happens to income earned in Canada? It is spent on exports, imports, and investment, and saved. It is spent on consumption, imports, and taxes, and saved. It is spent on consumption, exports, and taxes, and saved. It is spent on consumption, imports, taxes, and investment. It is spent on imports, taxes, and government spending.

B It is spent on consumption, imports, and taxes, and saved.

(LO 4) What is the effect of a decrease in government spending? It leads to an even larger increase in income. It leads to an even larger decrease in income. It leads to a smaller increase in income. It leads to a smaller decrease in income.

B It leads to an even larger decrease in income.

(LO 2) How is the AE function placed onto the 45° graph? It starts at zero income and rises with a slope equal to the MPE. It starts on the vertical axis at the level of autonomous expenditures and rises with a slope equal to the MPE. It starts at zero income and falls with a slope equal to the MPE. It starts on the vertical axis at the level of autonomous expenditures and falls with a slope equal to the MPE.

B It starts on the vertical axis at the level of autonomous expenditures and rises with a slope equal to the MPE.

What does the multiplier effect indicate? That a small increase in income will generate a large decrease in aggregate expenditures That a change in autonomous expenditures will cause income to change by a larger amount That a small increase in income will generate a large increase in aggregate expenditures That a change in induced expenditures will cause income to change by a larger amount

B That a change in autonomous expenditures will cause income to change by a larger amount

(LO 4) What is the effect of a decrease in the MTR? The MLR will increase, and the multiplier will increase. The MLR will decrease, and the multiplier will increase. The MLR will increase, and the multiplier will decrease. The MLR will decrease, and the multiplier will decrease.

B The MLR will decrease, and the multiplier will increase.

(LO 1) What are induced consumption and the marginal propensity to consume, respectively? The amount of income that results from higher levels of consumption and the change in income divided by the change in consumption The amount of consumption that results from higher levels of income and the change in consumption divided by the change in income The amount of consumption that occurs at zero income and the change in consumption divided by the change in income The amount of consumption that occurs at zero income and the change in income divided by the change in consumption

B The amount of consumption that results from higher levels of income and the change in consumption divided by the change in income

(LO 2, 4) All of the following statements concerning the equilibrium level of income are correct, except one. Which is incorrect? There will be no tendency for firms to increase or decrease production. The government's budget will be balanced. Unplanned investment in inventories will not occur. Leakages equal injections. Aggregate expenditures equal income.

B The government's budget will be balanced.

(LO 4) If X is an autonomous $90 (there are no auto nomous imports) and the MPM is 0.2, what is the value of XN at an income of $500? + $10 − $10 + $90 + $590

B − $10

Why do choices occur?

Because of scarcity. Human wants always exceed what can be produces with the limited resources and time that nature makes available.

Consumers vote with their dollars for the production of a good or service when they _____ it, and because of this, consumers are said to be ________ in a market economy. The buying decisions of consumers _______ the freedom of firms and resource suppliers.

Buy; Sovereign; Restrain

Invention

Brand new idea.

Firms

primary producing units in an economy

A line that shows the various combinations of two products a consumer can purchase with a specific money income, given the product's prices is a _______________.

Budget line

In the circular flow model what happens in the resource market?

Businesses are buyers and households are sellers

Strong predictive accuracy is called a ______

principle

Which of the following would increase the supply of Canadian dollars on the international money market?

Canadians traveling abroad

What will be the result of a change in exchange rates if you were Mexican pesos are needed to buy a Canadian dollar?

Canadians will buy fewer Mexican goods and services.

T/F- If a country's trading possibility curve lies to the right of its production possibilities curve, there are no gains from trade.

False: it would be able to obtain more by trading.

(LO 4) What is the value of expenditures equilibrium? $300 $400 $500 $600 $1000

C $500

(LO 4) What is the value of the multiplier? 0.5 1 2 2.5 5

C 2

(LO 4) Which two of the four components of aggregate expenditures are wholly autonomous? C and I C and G I and G I and XN C and XN

C I and G

(LO 4) Which of the following variables in the expenditure model are wholly autonomous, and which are partly induced? I, G, and S are autonomous; X, IM, and C are partly induced. I, G, and C are autonomous; S, IM, and X are partly induced. I, G, and X are autonomous; S, IM, and C are partly induced. G, X, and IM are autonomous; S, C, and I are partly induced.

C I, G, and X are autonomous; S, IM, and C are partly induced.

(LO 4) What is the marginal propensity to expend? It is the fraction of income that is not spent. It is the ratio of change in income that results from a change in expenditures. It is the ratio of change in expenditures that results from a change in income. It is the fraction of income that is taxed.

C It is the ratio of change in expenditures that results from a change in income.

T/F- Protectionism is the economic policy of protecting domestic producers by putting restrictions on exports.

False: protectionism is aimed at imports. (Governments put a level on what can be imported and how much. The rest gets grown or manufactured in their own country.)

CPI vs GDP deflator

CPI is more volatile and shows an upward bias over the longer term; GPD is more accurate by includes things that don't really matter to most consumers (investment goods, exports, things sold to gov.)

Which of the following would result from an increase in Canada's GDP?

Canadian imports with rise.

Aggregate demand policies are effective in curing the problem of stagflation.

False: stagflation can only be cured by changes in aggregate supply

Change in Factor Prices- A decrease in factor prices, such as lower prices of imported oil, will lower the costs of production and therefore shift the aggregate supply curve from AS1 to AS2 while leaving potential GDP unaffected.

What variables can shift the demand curve?

Changes in income, prices of related goods (substitutes and complements), tastes, expectations, and the number of buyers.

coincident indicator

Confirm where the economy is; those measurable factors that vary directly and simultaneously with the business cycle include: number of hours worked (as a proxy for personal income), employment levels, nonagricultural employment, personal income, industrial production, manufacturing and trade sales, and GDP

Deflation means that the rate of inflation is falling.

False it means that the average price level is falling

Business

Commercial establishments that attempt to earn profits for their owners by offering goods and services for sale.

Commodity money is a type of money that can also usefully function as a c____________.

Commodity

Income

Comp. of Employee + profits + Depreciation

National Income Formula

Comp. of Employees + Proprietors Inc. + Rental Inc. + Corp. Profit + Net Interest + Indirect Taxes - Subsidies + Net Business Transfer Payments + Surplus of Government Enterprise = National Income

One producer cannot hold the comparative/absolute advantage in both goods x and y.

Comparative. It is possible to hold the absolute advantage in the production of both goods if the producer requires fewer inputs for both goods.

Marginal Analysis:

Comparisons of marginal benefits and marginal costs, usually for decision making.

Income Approach to Measuring GDP

Compensation of Employees: (wages) salaries & various supplement Proprietors Income: Income of unincorporated businesses Rental Income: Rent Corporate Profits: income of corporations Net Interests: interest paid on Household loans Indirect Taxes - Subsidies (sales tax, custom duties) Net Business Transfer Payments Surplus of Gov't Enterprises (income of gov't enterprises)

Self interest might lead to an abuse of power in a market economy if it were not directed and constrained by who/what?

Competition

W-4 Form-

Completed form that indicates to the employer how muych tax should be withheld

Anne works in the technical support industry and argues that since policies designed to discourage outsourcing would protect her job and make her better off, society as a whole would benefit from policies that discourage outsourcing.

Composition fallacy.

Macroeconomics

Concentrates on the operation of a nation's economy as a whole.

Behavior Economics

Consumer behavior that emphasizes psychological limitations and complications that potentially interfere with rational decision making.

CPI

Cost of basket in current year/cost of basket in base year x 100

Principle #3

Count all the Costs

(LO 3, 4) What could cause a change from a to b? An increase in American income An increase in government spending A decrease in interest rates An increase in Canadian income A decrease in autonomous taxes

D An increase in Canadian income

(LO 3) What does the real-balances effect refer to? The effect that a change in savings has on the real rate of interest The level of income where it is exactly equal to the level of consumption The effect that a change in interest rates has on the real value of savings The effect that a change in the price level has on the real value of wealth The effect of a change in consumption on the real value of wealth

D The effect that a change in the price level has on the real value of wealth

(LO 3) What is the most important determinant of the level of consumption? The level of prices Consumer expectations The stock of wealth The level of income

D The stock of wealth

Refer to the above diagram. This economy will experience unemployment if it produces at point:

T/F- Ricky Ricardo first introduced the theory of comparative advantage

False: It was David Ricardo, the brother of Ricky Ricardo who played the congo drum.

Microeconomics

Deals with choices of a single entity

Macroeconomics

Deals with the actions of the economy as a whole (unemployment, GDP, inflation, businesses)

Allocation

Deciding how to use resources.

Microeconomics

Decision making by individuals and by firms.

Exemptions-

Dependents which are used to reduce your taxable income

Production possibilities curve

Describes the maximum amount of one good that can be produced for every possible level of production of the other good

Buyer's surplus

Difference between buyer's reservation price and price he or she actually pays

Total surplus

Difference between buyer's reservation price and seller's reservation price

Seller's surplus

Difference between the price received by the seller and his or her reservation price

Production Possibilities Curve:

Displays the different combinations of goods and services that society can produce in a fully employed economy, assuming a fixed availability of supplies of resources and fixed technology.

True or false: a resident in Canada receiving a British pension will have a demand for the British pound.

False: a demand for Canadian dollars

T/F- A tariff is a tax on exports; a quota is a tax on imports.

False: a tariff is a tax on imports and a quota is a limit on imports. (Quota is a limit NOT a tax)

If the economy as a whole is better off due to free trade, then each member of the economy must also be better off as a result of free trade."

Division fallacy.

stagflation

During the 60's and 70's, the U.S. was suffering from 5.3% inflation and 6% unemployment. Refers to the unusual economic situation in which an economy is suffering both from inflation and from stagnation of its industrial growth.

Economic Growth and Potential GDP- A positive change in any of the determinants of economic growth will result in a rightward shift of the potential GDP curve.

Economic Growth and Production Possibilities- Figure A shows the economy growing from point A to point B. But this growth may not be sustained, since its potential level (the PP curve) has not changed. Figure B shows similar economic growth from point A to point B. But in this case, the growth is more likely to be sustained, since its potential has similarly increased (from PP1 to PP2).

If marginal benefit is greater than or equal to marginal cost that equals what?

Economic Surplus

"Cash on the Table"

Economic metaphor for unexploited gains from exchange

lagging indicators

Economic variables such as the prime interest rate, labor cost per unit of output, inventories to sales ratio and unemployment duration that tend to change after real output changes.

Economic Perspective:

Economic way of thinking.

T/F- A country has a comparative advantage over another only if it is able to produce all products more cheaply.

False: if it is able to produce some products comparatively cheaper.

What are 2 Important fundamental concepts?

Efficiency (getting the most benefit from inputs) and Equity (is society satisfied with the outcome?)

Efficiency Principle

Efficiency is an important social goal because when the economic pie grows larger, everyone can have a larger slice.

Labor Force

Employed + Unemployed

Employment Act of 1946

Enacted by Truman, it committed the federal government to ensuring economic growth and established the Council of Economic Advisors to confer with the president and formulate policies for maintaining employment, production, and purchasing power

W-2 Form-

End of year report of all one's earrings from work and the amount of tax withheld

Freedom of Enterprise

Ensures that entrepreneus and private businesses are free to obtain and use economic resources to produce their choice of goods and services and to sell them in their chosen markets.

T/F- If the prices of a country's exports decrease and the prices of imports increase, then the terms of trade will move in it's favor.

False: it depends on the relative change in each.

Equilibrium and Full Employment- Figure A shows an economy in equilibrium, and this equilibrium is also at full employment. In other words, the AD and AS curves intersect at potential GDP. Figure B shows equilibrium occurring below full employment, that is, there is a recessionary gap. In Figure C, equilibrium occurs above full employment, that is, there is an inflationary gap.

Principle of Comparative Advantage

Everyone does best when each person (or each country) concentrates on the activities for which his or her opportunity cost is lowest

The Phillips curve is based on the relationship between tax rates and the amount of tax revenue.

False: it is based on the relationship between unemployment and inflation rates.

T/F- If a country is able to produce all products more cheaply than any other country then there is no advantage in trade.

False: it is comparative cost that determines the advantage to trade. (Remember we may be able to produce items cheaper but at what cost? Everything we produce has an opportunity cost)

Macroeconomics:

Examines either the economy as a whole or its basic subdivisions or aggregates, such as the government, household, and business sectors.

Macroeconomics

Examining the aggregates measure this through GDP, price levels, averages (the unemployment rate, the interest rates): output growth unemployment inflation

Surplus

Excess supply.

Net Exports (Nx)

Exports (sale to foreigners) - Imports (U.S. purchase of foreign products)

T or F Autonomous spending depends on the level of income, whereas induced spending does not.

T or F If taxes increase, disposable income will fall, but consumption will remain the same.

T or F Induced taxes do not change with income, but autonomous taxes do.

The real-balances effect refers to the effect that a change in interest rates has on the real value of wealth.

Positive Analysis

Factual; "What is" No personal Judgements

Pitfall III (edge)

Failure to think at the margin

John has observed that the stock market performs better in years when his favorite football team makes the playoffs. Therefore, he purchases more stock when his team is winning and sells off his stock when his team is losing.

False cause fallacy.

The market system replaced what archaic financial system?

Feudalism

Production/Technical Efficiency

Fewest resources necessary; maximize output of product.

All of the following, except for one, would help explain differences in purchasing power among countries. Which is the exception?

Financial assets seldom traded internationally

chain-weighted GDP

Fisher Index is used like using a rolling base period; expressed in ratio of real GDP in year 2 to real GDP in year 1

Positive Economics:

Focuses on facts and cause-and-effect relationships.

There is no such thing as ________ ______ in economics because scarce resources have _____________ uses.

Free lunch; alternative

Uses of Private Saving

Funds new capital investment, finances government debt & allows people to purchase assets from foreigners or lend to them.

GNP

GDP + Net factor income from the rest of the world

Expenditure Approach to measuring GDP

GDP = C + I + G + Nx

relationship between GDP & GNP:

GDP = GNP - NFP

Real GDP

GDP w/o effect of inflation; today's output at yesterday's prices

Principle #5

Good intentions do not guarantee desirable outcomes <--- (Law of unintended Economic Consequences)

Economic Goods

Goods that are scarce.

Inferior Goods

Goods whose demand varies inversely with money income.

Deficit Spending

Government practice of spending more than it takes in from taxes

Unemployment Insurance

Government program that provides benefits for the unemployed. Monetary assistance to those without work & causes more people to not work.

Demand curve

Graph of the relationship between the price of a good and the quantity demanded

GDP

Gross Domestic Product- the total market value of all final goods and services produced annually in an economy

How does income affect the demand curve?

Higher income creates greater demand; lower income results in diminished demand.

Which of the following represents a positive macroeconomics statement?

Historically, the national unemployment rate is higher during severe economic downturns than during periods of substantial economic growth.

Factors Affecting Demand

HH tastes & preferences, Expectations, price of product, HH income/wealth, price of related goods if any factors besides price change there will be a change (shift) in the demand curve if only price changes (only change in the quantity demanded) then there will be a movement along the curve

Output Market

HHS & gov't purchase goods and services from firms firms purchase good & services from other other firms foreign sector buys/sells goods and services

Flow Diagram Output Markets

HHS --(payment for imports)--> Foreign Sector --(exports)--> Firms-(taxes)-->Gov't--(wages, interest, transfer payments, welfare)--> HHS--(taxes)-->gov't--(goods&services)-->firms HHS--(goods/services)-->firms --(wages,interest.profits)-->HHS

Suppose that the cost of producing one unit of wine and Happy Island is two units of rice Enjoy Island, one unit of wine cost four units of rice. What does this mean for the two countries?

Happy island should specialize in an export wine to joy island.

All of the following, except one, are forms of protectionism. Which is the exception Import subsidies, tariffs, exchange controls or quotas

Import subsidies (Thats where Canada actually gives money to other countries to import their stuff here.)

Lagging Indicators

Indicator that changes after the overall economy has changed; examples include labor costs, business spending, the unemployment rate, the prime rate, outstanding bank loans, and inventory book value

The Financial Flows of income model. They move in opposite direction from the H_________ Sector to the Business Sector.

Household

Output Market Flow Diagram

Households (demand outputs & supply inputs) Firms (supply output & demand input) Firm --($$$)--> input market & input market --(L,L,K)--> firm Household --(L,L,K)--> input market & input market --($$$)--> Household Firms --(goods/services)-->output market output market --(payment)--> firms output market --(goods/services) --> households households --(goods/services)-->output market

In the circular flow model what happens in the product market?

Households are buyers and businesses are sellers

Resource Market

Households sell resources to businesses.

What is the principal-agent problem?

How does the principal (boss) create a set of incentives that will cause the agent (employee) to align his goals with the principal's?

Coincident Indicators

Indicator whose changes in activity seem to happen at the same time as changes in overall business activity; examples include sales of wholesalers and retailers, personal income minus transfer payments, and # of non-agricultural workers employed

Law of Demand

If supply is held constant, an increase in demand leads to an increased market price, while a decrease in demand leads to a decreased market price.

The utility (benefit) goes toward whom?

Individual/Households, Firm, Society

Bounded Rationality

Hypothesis that people are nearly rational.

Private Property

In a market system, private individuals and firms, not the government, own most of the property resources (land and capital).

I_____________ control the sale of their own labour; individual land and mineral rights; individual own the shares of a corporate assets or their capital.

Individuals

Normative Economics:

Incorporates value judgments about what the economy should be like or what particular policy actions should be recommended to achieve a desirable goal.

How Does Output Increase (grow)

Increase in resources (labor or capital) & Technical Improvement

Inflation

Increase in the overall price level. Hyper-inflation: a period of very rapid changes in the price level inflation > 40%/month (U.S. hasn't seen this yet)

Discouraged workers

Individuals who would like to work but have given up looking for a job

Competition is present if 2 conditions prevail; what are they?

Independently acting sellers/buyers operating in a particular product or resource market. Freedom of seller and buyers to enter or leave markets, on the basis of their self interest.

leading indicator

Include; manufacturers' new orders for consumer goods and materials; contracts and orders for plant and equipment; building permits; stock prices; and the MONEY SUPPLY. The index of leading indicators, the components of which are adjusted for inflation, accurately forecasts the ups and downs of the business cycle.

3 Ways to Calculate GDP:

Income Approach, Product Approach, Expenditure Approach

Withholding

Income tax withheld from employees' wages and paid directly to the government by the employer

List some factors that can shift the supply curve.

Input prices (how much production costs), technology, expectations, number of sellers.

All economic differences consist of:

Institutional arrangements and coordination mechanism.

Economic System

Institutional mechanism for determining the way in which scarce resources are used to satisfy human desires.

Real rate of interest

Interest rate minus inflation

Investment Demand Curve- At a high rate of interest, r1, investment spending will be small at I1 because it will be costly to borrow. At a low interest rate of r1, investment spending will be higher at I1 because it will be cheap to borrow.

If the Canadian dollar appreciates in value against the Mexican peso, what happens to the value of the Mexican peso against the dollar?

It depreciates

What is a tariff?

It is a tax imposed on an import. (So when I drove up from Grand Forks I had to pay a tariff on my alcohol because I wasnt down there more than 48 hours.)

At the world price, how much is Smith Island trading?

It is importing 40 units.

What does it mean if the opportunity cost differ between two countries?

It is possible for both countries to gain from specialization and trade. Opportunity costs is what drives trading.

What is the definition of the terms of trade?

It is the average price of a country's exports divided by the average price of its imports. Exports/Imports

Which of the following is a normative statement?

It is too hot to play tennis today.

Which of the following statements is true about the supply curve for the Canadian dollar.

It is upward sloping because a higher price for the dollar means foreign goods are cheaper to Canadians.

Supply Schedule

It shows the quantities of corn that will be supplied at various prices, other things equal.

One of the major criticisms of the supply-side emphasis on tax cuts as a way to stimulate the economy is that such cuts affect aggregate demand more than they do aggregate supply.

True

Input Market

Labor -->firms and gov't demand labor while Households (HHS) and firms supply labor Capital

The country of Lancores, which was on a fixed exchange rate system and had an undervalued currency, has just adopted a flexible exchange rate system. Which of the following statements is correct?

Lancores will appreciate, and its exports will decrease.

4 Factors of Production

Land, Labor, Capital, Entrepreneurship

What are the 4 factors of production aka scarce resources?

Land, Labor, Capital, Entrepreneurship

Factors of Production:

Land, labor, capital, and entrepreneurial ability are combined to produce goods and services are called "inputs."

Buyer's reservation price

Largest dollar amount the buyer would be willing to pay for a good

measuring the supply of money

M1 : transactions money currency + travelers checks + checkable deposits M2 : broad money close substitutes for transactions money: savings accounts + other near monies + money market accounts + M1

equilibrium interest rate

MS = MD QMD > QMS out of equilibrium (shortage of money) inc. in i QMS > QMD out of equilibrium (surplus of money) dec. in i

Macroeconomic Equilibrium- Equilibrium exists where the aggregate demand and the aggregate supply curves intersect. This determines the equilibrium price level P∊ and the equilibrium real GDP level Y∊, as seen in Figure A. In Figure B, P2 is a price level above equilibrium, and there is a surplus of goods and services. In this circumstance, firms will be forced to cut prices. At prices below equilibrium, as seen by P3 in Figure C, there is a shortage, which will force the price level up.

The economic perspective recognizes that choice has an _____________.

Opportunity cost

T/F- If a country wishes to specialize it's production it will also want to engage in trade.

True

Which of the three organization styles tends to be most efficient?

Market Economy! :D

Factor Market

Market in which firms purchase the factors of production from households

In a capitalist economy, individual buyers communicate their demands and individual sellers communicate their supplies in the system of _________, and the outcomes from economic decisions are a set of product and resource ________ that are determined by demand and supply.

Markets; prices

When individuals specialize, what must the price of goods be in order for both to gain from trade?

The price must fall in between the opportunity cost that each pays for specializing. If one member is paying more than the opportunity cost for a good, it would be more efficient for him to produce the good himself instead of trading for it.

The two lines in the graphs allow us to what?

Measure whats happening between 2 variables

Producer Price Index

Measures changes in the prices of goods purchased by producers

Pitfall I (%)

Measuring costs and benefits as proportions rather than absolute dollar amounts

In market economies, what does money function as?

Medium of exchange

Economic Efficiency

Minimizing financial cost.

Entrepreneurship

Mixing the resources and taking the responsibility to combine resources to put it into productivity. Risk-bearers: uncertainty of success.

Medium of Exchange

Money performs several functions, including making trade easier.

Consumer Price Index

Monthly index of consumer prices based on a basket of goods (updated periodically); less broad than GDP deflator b/c it only includes goods used by consumers

The rise of supply-side economics is rooted in the stagflation of the 1970s.

True

Adam Smith, a professor of _____ __________ at ______ __________, believed that the market system would make a (better/worse) society.

Moral Philosophy, Glasgow University, Better

Change in quantity demanded

Movement along the demand curve that occurs in response to a change in price

Change in quantity supplied

Movement along the supply curve that occurs in response to a change in price

Net National Product (NNP)

National Income + Net factor Payments received from the rest of the world - Depreciation = NNP also GNP -Depreciation national income + statistical discrepancy = NNP

GDP

NI + statistical Discrepancy + depreciation + factor payments to the rest of the world - factor income from the rest of the world

What are the four categories of scarce economic resources?

Natural Resources, Labor, Capital, and Human Capital (worker knowledge/skill)

Assuming a flexible exchange rate system, What would happen to the value of the Canadian dollar and the Mexican peso if Canadian interest rates increased while Mexican rates remain the same?

The price of dollars in terms of the peso would increase.

X and Y will exhibit a ________ or ________ relationship when they move away from each other.

Negative; indirect

Neoclassical Aggregate Demand-Supply- The neoclassical AS is synonymous with potential GDP. This means that the price level has no effect on the quantity supplied. The aggregate supply curve will always be at the full-employment level of real GDP, labelled YFE. Changes in aggregate demand, therefore, have no effect upon real GDP and affect only the price level. An increase in aggregate demand from AD1 to AD2, for instance, will increase the price level from P1 to P2 but will leave real GDP unaffected at YFE.

GPDI

Net Inv. + Depreciation

Equilibrium Price

The price that balances quantity supplied and quantity demanded.

True or false a fixed exchange rate above the market value will lead to an outflow of foreign currency's.

True

"Everyone should have to learn something about economics in order to make more informed choices as consumers and voters."

Normative statement

"Individuals should be able to decide whether their social security contributions are kept in less risky government bonds or more risky stocks"

Normative statement

Scientific Method:

Observing real-world behavior and outcomes. Based on those observations, formulating a possible explanation of cause and effect (hypothesis). Testing this explanation by comparing the outcomes of specific events to the outcome predicted by the hypothesis. Accepting, rejecting, and modifying the hypothesis, based on these comparisons. Continuing to test the hypothesis against the facts. If favorable results accumulate, the hypothesis evolves into a theory.

Market equilibrium

Occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price

Cost Push Inflation

Occurs when businesses respond to rising production costs, by raising prices in order to maintain their profit margins.

True or false: A major source of demand for the Canadian dollar in the international money markets is the desire of foreigners to buy Canadian exports.

True

True or false: The purchasing power parity theory suggests that exchange rates but just so as to equate the purchasing power of each currency.

True

True or false: an increase in Canadian interest rates will lead to an appreciation of the Canadian dollar.

True

Housholds

One or more persons occupying a housing unit.

What could be possible terms of trade between the two countries?

One pear equals 2.5 apples

Inferior good

One whose demand curve shifts leftward when the incomes of buyers increase and rightward when incomes of buyers decrease

Normal good

One whose demand curve shifts rightward when the incomes of buyers increase and leftward when the incomes decrease

When will bartering take place ?

Only if there is a coincidence of wants

Normative Analysis

Opinion Based, "What should/ought to be" personal judgements, cannot be proven or disproven

Cost is always a forgone ______.

Opportunity

Joe sold gold coins for $1000 that he bought a year ago for $1000. He says, "At least I didn't lose any money, because he could have received a 3 percent return on the $1000 if he had bought a bank certificate of deposit instead of the coins. The economist's analysis in this case incorporates the idea of:

Opportunity Costs

The term "ceteris paribus" means:

Other things equal -- the assumption that factors other than those being considered do not change.

Law of supply

Other things equal, the quantity supplied of a good rises when the price of the good rises

True or false: an increase in imports will have a negative effect on the current account balance.

True

True or false: if Canada where on a fixed exchange rate system and increase in the demand for the Canadian dollar would result in the dollar being undervalued.

True

True or false: if the Canadian dollar appreciates cross-border shopping by Canadians will increase.

True

True or false: the common way for government to fund expansionary fiscal policy is by borrowing from the general public

True

Microeconomics:

Part of economics concerned with decision making by individual customers, workers, households, and business firms.

Taxes

Payments by individuals and businesses to support the activities of government

Principle #2

People and Society face trade offs

What does the economic perspective assume?

People make choices based on their self-interest and they are rational

Structural unemployment

People not having jobs due the change in structure of the industry or firm

1. P_________ assets which are ownership of things like cars, boats, jewelry.

Personal

AE > Y

Planned Investment > Actual Investment unplanned FALL in inventories increase in OUTPUT

T/F- Domestic producers gain and domestic consumers lose as a result of the imposition of tariffs quotas.

True Farmers for example, gain by the government not letting other countries import wheat but we loss as consumers because we may end of paying a higher cost for an inferior product.)

Role of Gov't in Economy

Policy Fiscal Policy- all gov't policy regarding taxes and gov't spending Expansionary fiscal policy-decrease taxes and/or increase gov't spending contractionary fiscal policy-increase taxes and/or decrease in gov't

What is the difference between positive and normative economics?

Positive describes the world as it is; normative makes statements about how the world should be.

"If a government on tax on gasoline causes the price of gasoline to increase, people are likely to decrease the amount of gasoline they buy."

Positive statement

X and Y will exhibit a ________ or _______ relationship when they increase or decrease together.

Positive; direct

Potential GDP- Potential GDP is a straight vertical line showing the amount of GDP at full employment. In 2006, it equalled $1360 billion.

Scarcity is not the same as ________.

Poverty

Real GDP

Tthe value of final output produced in a given period, adjusted for changing prices

command system

a method or organizing the economy in which property resources are publicly owned and government uses central economic planning to direct and coordinate economic activities

In the market system, how are property resources owned? The means used to direct and coordinate the economic activity __________.

Privately; markets and prices

Consumer Goods:

Products that satisfy our wants directly.

Capital Goods:

Products that satisfy our wants indirectly by making possible more efficient production of consumer goods.

Normal Goods

Products whose demand varies directly with money income.

Supply in Output Markets

Profit = Total Revenue - Total Costs P x Q Determinants of Supply price of product cost of production (inputs)

The incentive for a firm to be the first to use a new and improved technique of production or to produce a new and better product is a greater economic _____, and the incentive for other firms to follow its lead is the avoidance of ______.

Profit, loss

Efficiency

Providing production to those who want it the most (not wasting resources on those who won't buy it).

3. Bonds which are securities IOUs issued by the governments a___ corporations at a fixed rate of interest at a fixed term often from 1 to 10 years.

and

In a command system, how are property resources owned? The coordinating device in this system ____________.

Publicly; Central Planning

Socially optimal quantity

Quantity of a good that results in maximum possible economic surplus from producing and consuming the good

Equilibrium

Quantity supplied=quantity demanded. The supply and demand curves intersect.

Leakages

Withdrawals from an economy's circular flow which include savings, taxes, and imports

Comparative Advantage

a producer has a comparative advantage in the production of a good/service if he can produce at a lower op. cost David Ricardo - producers should specialize in and trade the product of their comparative advantage --> gains from trade

2. R_____ estate which are ownership of houses and land.

Real

Business Cycle

Recurring fluctuations in economic activity consisting of recession and recovery and growth and decline

Empirical

Relying on real-world data in evaluating the usefulness of a model.

What things are limited relative to the wants and desires for them?

Resources, goods, and services

Frictional Unemployment

Results because it takes time for workers to search for jobs that best suit their skills.

Demand Schedule

Reveals the relationship between the various prices of corn and the quantity of corn a particular consumer would be willing and able to purchase each of these prices.

Savings identity

S = I + CA

Principle #1

Scarcity is a part of life

Seller's reservation price

Smallest dollar amount for which a seller would be willing to sell an additional unity, generally equal to marginal cost

These policies include: -privatization of Crown corporations -Deregulation of private industry -Contracting-out of government services -The reduction of tax rates

So Reagan

Shifts in the Aggregate Demand Curve- An increase in aggregate demand shifts the AD curve to the right, from AD1 to AD2. This means that at every price level, the quantity of goods and services demanded has increased. In contrast, a decrease in aggregate demand will shift the AD curve to the left, in this case from AD1 to AD3.

What causes a shift in an economic curve? What causes a movement along the curve?

Shifts occur along with changes in relevant variables that do not appear on the graph's axes. Movements occur when a change in either of the two measured variables happens.

Demand curve

Shows the quantity of a good that buyers wish to buy at each price

Supply curve

Shows the quantity of a good that sellers wish to sell at each price

What is a model?

Simplified representations of how markets of the economy works based on combinations of economic principles.

Economics may best be defined as the:

Social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity.

Which of the following statements illustrates the fallacy of composition?

Some groups in the economy will benefit from a national health care plan, therefore the entire economy will benefit from such a plan.

Investment

Spending by firms on new factories, office buildings, machinery, and additions to inventories.

Government Spending

Spending by government on a wide variety of goods and services which includes health, education, law and order, transport, social security, housing, and defense.

Consumption

Spending by households on goods and services.

Mandatory Spending

Spending on certain programs that is mandated, or required by existing law

Investment:

Spending that pays for the production and accumulation of capital goods.

Absolute Advantage

a producer has an absolute advantage over another if he can produce that good/service more efficitently. Adam Smith - producers should specialize in and trade the products of their absolute advantage --> mutually beneficial trade

Which of the following would not shift the demand curve for beef?

a reduction in the price of cattle feed.

What is a theory?

Statements about economic behavior that enables the prediction of the likely effects of certain actions

Economic Indicators

Statistics or data series that are used to analyze business conditions and current economic activity

Leading Indicators

Statistics that point to what will happen in the economy, indicator that changes before the economy has changed. Examples of leading indicators include production workweek, building permits, unemployment insurance claims, money supply, inventory changes, and stock prices

economic indicators

Statistics that provide information about the performance of the economy and its position in the business cycle.

Capital as a factor of production is best represented by:

a robot used on the assembly line of an automobile manufacturing facility.

Normative Economics:

Studies what should be, which requires a value judgement.

Macroeconomics

Study of behavior of the economy as a whole.

Problems with Measuring Real GDP & the Price Level

Substitution bias (affects both CPI & GDP deflator; corrected for in GDP deflator by chain weighted GDP), changes in good quality, & introduction of new products (means real GDP growth is understated & inflation is biased upward)

Market Demand

Sum of demands of all buyers.

Market Supply

Sum of supplies of all sellers

Describe the general behavior of supply curves and demand curves.

Supply curves generally slope upwards because the higher the price, the higher the quantity. Demand curves have a negative slope because higher price means a lower quantity demanded.

What are the 3 goals that nations have as a whole?

Sustained Growth Full Employment Price-Level Stability

Barter

Swapping goods for goods.

T or F A change in the price level shifts the aggregate expenditures curve but does not shift the aggregate demand curve.

T or F A decrease in the interest rate will cause an increase in investment spending.

T or F Equilibrium income occurs where the value of production is equal to aggregate expenditures.

T or F Growth in an economy's GDP (if not caused by a change in exports) results in a larger trade deficit or in a reduction of a previous trade surplus.

Services

Tasks that are preformed by individuals.

Economists use the term demand to refer to:

a schedule of various combinations of market prices and amounts demanded.

economic system

a set of industrial arrangements and a coordinating mechanism for solving the economizing problem

What does managed or dirty float mean?

That a country central bank buys and sells current sees in order to smooth out short run fluctuations in its own currency.

What do the comparative opportunity costs in the two countries suggest?

That harmony should specialize in pairs but export apples.

Refer to the above diagram. A price of $20 in this market will result in:

a shortage of 100 units.

Market Failure

a situation in which a market left on its own fails to allocate resources efficiently

The Aggregate Demand Curve- As the price level drops from P1 to P2 and to P3, the quantity of goods and services that buyers are willing and able to purchase increases from Y1 to Y2 and to Y3.

Opportunity Cost

The amount of a good one could produce if one's inputs weren't being utilized to produce a different good.

Quantity Demanded

The amount of a good that buyers are willing and able to buy.

If Canada and the United Kingdom are both on flexible exchange rate systems, what would happen if the United Kingdom experiences rapid inflation, while prices remain steady and Canada?

The British pound will depreciate.

The Business Cycle- The rate of growth in real GDP reflects two major contractionary phases (in red) and two expansionary phases (in blue). The average annual growth rate for the period is 2.6 percent.

Which of the following statements is correct?

The Canadian dollar has depreciated, and the Japanese yen has appreciated.

Quantity Supplied

The amount of a good that sellers are willing and able to sell

Quantity Demanded

The amount of a product that a HH would buy in a given period if it could buy all that it wanted to at the current point.

"Economics" is best defined as:

a social science that studies how individuals and societies makes choices regarding the use of scarce resources.

Equilibrium Quantity

The quantity supplied and demanded at the equilibrium price.

The Effect of an Increase in Aggregate Demand on Real GDP- The increase in investment of $10 will increase aggregate demand by $25 from AD1 to AD2, which would result in an increase in real GDP from $800 to $825 (point a to b) if the price level did not change from its original level of P1. However, since the equilibrium price level does rise to P2, the increase in real GDP is smaller as seen by point a to c.

The Effect of an Increase in Aggregate Demand- Because the AS curve is flat at low levels of income and gets steeper as the economy approaches its potential level, an increase in AD will have different effects, depending when it occurs. At low incomes, such as Y1, most of the impact is on real GDP, increasing it to Y2, while the price level only increase to P2. At an income close to full-employment, such as Y3, the same increase in AD impacts mostly on the price level, increasing it to P4, while GDP increases only a little to Y4.

Economics is:

a social science the studies the choices individuals and societies make regarding the use of resources.

keynes

a theory of consumption

Circular-Flow Diagram

a visual model of the economy that shows how dollars flow through markets among households and firms

The Keynesian View of Aggregate Demand-Supply- The aggregate supply curve, according to Keynesians, is horizontal at the prevailing price level. Changes in aggregate demand, therefore, have no effect on the price level but do cause changes in real GDP. An increase in aggregate demand from AD1 to AD2 will cause an increase in real GDP from Y1 to Y2 but leave the price level unchanged at P1.

The Multiplier in Action- One person's spending becomes another person's income. However, in this example, at each round, only 60 percent of income gets spent (the rest is leaked to taxes, savings, and spending on imports). The spending in each round, therefore, is only 60 percent of the previous round's spending. But the process continues indefinitely.

The Modern View of the Aggregate Supply Curve- The modern view of the AS curve is that at low GDP levels, the curve is quite flat (the Keynesian range) but gets progressively steeper as real GDP approaches full-employment (potential) GDP, where the curve becomes almost vertical (the neoclassical range). In between the two extremes is the intermediate range.

(LO 1) What are the four sources of economic growth?

a) Improved levels of human capital (an increase in the quantity or quality of labour employed); b) an increase in the capital stock; c) technological change; d) additional quantities of natural resources.

Working-age population in Canada is the total population, excluding those under 15 years of age, those in the armed forces, and residents of a__________ reserves and territories.

aboriginal

Inflationary gap is the difference between actual real GDP when the economy is temporarily producing an output a_____ full employment.

above

Money is anything that is widely a__________as a medium of exchange and therefore can be used to buy goods or to settle debts.

accepted

Expenditures is the a_______ of spending funds.

action

The Shape of the AS Curve- An increase in the price level from P1 to P2 will increase the profits of firms and will lead to an increase in GDP from Y1 to Y2.

Participation rate is the percentage of those in the working-age population who are a___________ in the labour force.

actually

Assuming a fixed interest rate system, which of the following would contribute to a Canadian balance of payments deficit?

The United States increases its tear on Canadian softwood lumber.

planned investment

adding to capital spending inventory that's planned by the firm

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer

Comparative Advantage

The ability to produce a good or service at a lower opportunity cost compared to other producers.

Absolute Advantage

The ability to produce a good using fewer inputs than another producers

Absolute Advantage

The ability to produce more units of a good or service using a given quantity of labor or resource inputs.

The Law of Supply and Demand

The activities of many buyers and sellers automatically push the market price towards the equilibrium price.

National Debt

The amount of money a national government owes to other governments or its people

Why do market economies practice specialization?

The average worker tends to be inefficient.

Ability-to-Pay

The belief that people should be taxed according to their ability to pay, regardless of the benefits they receive. The U.S. individual income tax is based on this principle.

Economic surplus

The benefit of taking an action minus its cost

What is arbitrage?

The buying of a current see at one price and it's immediate sale at another price.

Income effect

The change in the quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power

Substitution effect

The change in the quantity demanded of a good that results because buys switch to or from substitutes when the price of the good changes

Law of Demand

The claim that other things equal, the quantity demanded of a good falls when the price of the good rises.

Aggregate

The collection of specific units that are being added and treated as if they were one unit

Creative Destruction

The creation of new products and production methods completely destroys the market positions of firms that are wedded to existing products and older ways of doing business.

Be careful of the word investment in this book, it is an increase in the economy's c__________ to produce goods and services and is done by business for profit. Merely investing in stock does not create new wealth for the firm it just means it changed hands.

capacity

Entrepreneurial Ability:

The entrepreneur performs several socially useful functions including: a. taking the initiative in combining the resources of land, labor, and capital to produce a good or a service. b. Making the strategic business decisions that set the course of an enterprise. c. Commercializing new products, new production techniques, or even new forms of business organization. d. Bears risk devoting their time, effort, and ability - as well as their own money and the money of others - to commercializing new products and ideas that may enhance society's standard of living.

Demand-pull inflation is inflation that occurs when total demand for goods and services exceeds the economy's c_________ to produce those goods.

capacity

Expected Real Interest Rate

The expected real interest rate is used to make economic decisions about borrowing & lending

The following is a chapter summary review.

How is market price and quantity determined?

The interaction of buyers and sellers determines the price and quantity of the good/service in the market.

In response to the terrorist attacks of September 11, 2001, the government decided to allocate more resources toward defense goods. The government's decision reflects their assessment that:

The marginal benefits of additional defense goods outweighed the marginal cost.

Supply curve

The graph relating price and quantity

Which of the following is a macroeconomic statement?

The gross profits of all U.S. business were $182 billion last year.

Peake

The highest point between the end of an economic expansion and the start of a contraction in a business cycle.

Opportunity Cost

The highest value alternative given up by making a choice.

Moral Hazard

The idea that if you aren't paying for it you will live however you want because you aren't using your own money to pay for it

What is the meaning of the term gains from trade?

The increase in input resulting from international trade. Both countries will get more stuff if they trade fairly.

Marginal benefit

The increase in total benefit that results from carrying out one additional unit of an activity

Marginal cost

The increase in total cost that results from carrying out one additional unit of an activity

Debt Service

The interest required to be paid each year on outstanding debt

Product Approach

aka the value added approach - this is the sum of value added to all goods and services, equal to value of all G&S produced minus the intermediate goods used in production

Economic growth rates are not steady, which means that economies are subject to business cycles- the periodic economic expansion and contractions that they a__experience.

all

Trough

The lowest point in an economic contraction, when real GDP stops falling

Economic growth source 1- Improved levels of human c_______ (an increase in the quantity or quality of labour employed).

capital

Revenue

The money a government collects from taxes or other sources

Interest is income received for the use of the factor c________.

capital

Explain what is meant in economics by the phrase "guns and butter".

The more a country spends on national defense (guns) the less it can spend on the domestic standard of living (butter), and vice versa.

Without household savings there would be no business sector investment. However this does not mean that a__ savings will be invested by the business sector through bank loans.

all

all of m1 and money accounts

Ceterus Parabus

all other things held equal

Economizing Problem:

The need to make choices because economic wants exceed economic means.

Unemployment

The number of Americans who are out of work but actively looking for a job. The number does not usually include those who are not looking.

Law of Increasing additional cost

The opportunity of additional cost of additional units of a good generally increases as people attempt to produce more of that good.

Specialization

The organization of economic activity so that what each person consumes is not identical to what that person produces.

Recovery

The phase in which unemployment begins to decrease, demand for goods and services increases, and GDP begins to rise again

Labor:

The physical actions and mental activities that people contribute to the production of goods and services.

Product Market

The place where the goods and services produced by businesses are bought and sold.

Utility:

The pleasure, happiness, or satisfaction obtained from consuming a good or service.

market economy

all the product and resource markets of a market economy and the relationships among them; a method that allows the prices determined in those markets to allocate scarce resources

Try this (see 53 for answer)

The plotting is fairly straightforward, though you will appreciate that the AS is not a straight line and therefore needs a little care in drawing it. The potential GDP curve is a vertical straight line at $200. Since Everton is in equilibrium and at full employment, the potential GDP is located at the intersection of the AD1 and AS1 curves. See the following figure at q53 b) Price: 80; real GDP: $200 The equilibrium values can be read off the graph or by glancing at Table 5.3 and locating the price at which the quantity demanded is equal to the quantity supplied. c) See Figure 5.26 (completed) above. The new AD2 curve is 3 squares to the left of AD1. Price: 75; real GDP: $160 d) Recessionary gap of $40. (The difference between the new equilibrium GDP and potential GDP.) e) increased exports higher taxes X higher interest rates X lower government spending X f) See Figure 5.26 (completed) above. Price: 75; real GDP: $220 g) Inflationary gap of $20. (The difference between the new equilibrium GDP and potential GDP.)

Assuming flexible exchange rates, which of the following would result in an increase in a country's exchange rate?

The purchase by the central bank of its own currency

If a country is suffering perennial balance of payments deficits, all of the following, except one, will help solve the problem. Which is the exception? -The introduction of quotas on imported goods -An increase in interest rates -The introduction of exchange controls -The reduction in tariffs on imported goods -An increase in subsidies to exporting industries

The reduction in tariffs on imported goods

All of the following are examples of factors of production, or resources, except:

cash held in a corporate bank account

Economics

The study of how people allocate their limited resources to satisfy the unlimited wants.

Economics

The study of how people make choices under conditions of scarcity and of the results of those choices for society

Microeconomics

The study of individual choice under scarcity and its implications for the behavior of prices and quantities in individual markets

Dr. Childs Economics Definition

The study of scarcity on this side of eternity

Macroeconomics

The study of the performance of national economies and the policies that governments use to try to improve that performance

Division of Labor

The segregation of resources into different specific tasks.

Economics.

The social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity.

Monetary policy

all the tools of the federal reserve used to control quantity of money Expansionary monetary policy- decrease in interest rates (r) Contractionary monetary policy- increase in interest rates (r)

Economics is...

The study of choice; how individuals and societies choose to use scarce resources to maximize benefit

Economics Definition

The study of choices on how people, institutions, and society make choices under the conditions of scarcity.

Macroeconomics

The study of economy-wide phenomena, focusing on sectors of the economy (service sector, ag/nat resources sector) rather than smaller units.

Microeconomics

The study of how individual firms and households make decisions and how they interact in markets

Corporate Income Tax

The tax a corporation pays on its profits

Which of the following is a positive statement?

The temperature is 92 degrees today.

Suppose that originally the average price of happy islands exports was 180 and the average price of its imports was 120. Now, the price of its exports drops to 160, and the price of its imports drop to 100. What effect will this have on. Happy islands terms of trade?

The terms of trade have moved in happy islands favor.

Quantity Supplied

amount of a product that a firm would be willing and able to sell at a give price during a given time period.

Average benefit

The total benefit of undertaking n units of an activity divided by n

Average cost

The total cost of undertaking n units of an activity divided by n

Technology

The total pool of applied knowledge concerning how goods and services can be produces.

Gross Domestic Product

The total value of goods and services produced within the borders of a country during a specific time period, usually one year.

Market Economy

an economy that allocates resources through the decentralization of many firms and households as they interact in markets for goods and services

This relationship between unemployment and inflation is it was traded by the Phillips c_______. Phillip is unemployed because he has an inflated ego.

curve

Consumption

The use of goods and services for personal satisfaction.

Net Exports

The value of exports minus the value of imports

Opportunity cost

The value of what must be forgone in order to undertake the activity

Positive Economics:

deals with statements about what is, which can be tested against facts.

Demand Pull Inflation

Theory that prices rise as the result of excessive business and consumer demand; demand increases faster than total supply, resulting in shortages that lead to higher prices

There are 6 types of financial assets: (TTBSMG)

There are 6 types of financial assets.

Scarcity

There are not enough resources available to satisfy all desires.

There are three types of money: 1. C__________ which are coins or notes. 2. C_______ d________ which are deposits in checking accounts. 3. N______ d______ which are deposits in savings accounts.

There are three types of money: 1. Currency 2. Chequeing deposits 3. Notice deposits

There are two types of real assets:

What does it mean for a country that is on a fixed exchange rate system to have a balance of payments surplus?

There is an inflow of foreign currency's into the country.

First Rule of Economics

There is no such thing as a free lunch.

The economic rationale for the law of increasing opportunity costs is that economic resources are what?

They are not completely adaptable to alternative uses.

Why do economists give differing advice?

They disagree about the validity of positive theories or they have different values and so different normative views.

How do economists function in the government?

They serve on a council of economic advisers that publishes an annual economic report for the United States. They also serve as advisers to the president and other policymakers.

Resources

Things used to produce goods and services to satisfy people's wants.

Expansionary fiscal policy may crowd out both private investment and exports spending.

True

Entitlements

Those benefits guaranteed by law paid to individuals by the federal government, such as Social Security

Opportunity Cost:

To obtain more of one thing, society forgoes the opportunity of getting the next best thing.

National Income

Total income earned by factors of production owned by a nation citizens

Profits of a Producer:

Total revenue minus wages, interest payments, cost of intermediate goods, taxes & wages

What can a nation do if it desires to consumer beyond its PPC?

Trade or adopt pro-growth policies

What are the basic three ways to organize economic activity?

Tradition economy, command economy, and market economy.

Monetary policy cannot be used effectively when a country has a fixed exchange rate.

True

Competition

Two or more buyers and two or more sellers acting independently in a particular product and resource market. Freedom of sellers and buyers to enter or leave markets on the basis of their economic self-interest.

Partnership

Two or more individuals (the partners) agree to own and operate a business together.

Seasonal Unemployment

Type of unemployment that occurs as a result of harvest schedules, vacations, or when industries make seasonal shifts in their production schedule

What currency will and American resident who receives interest on the Canadian savings bond she holds be demanding?

US dollars

Unemployment Rate

Unemployed/labor force x 100% The % of the labor force that is unemployed.

Structural Unemployment

Unemployment that occurs when workers' skills do not match the jobs that are available

Cyclical Unemployment

Unemployment that rises during economic downturns and falls when the economy improves

Normative Economics:

deals with statements of what should be and requires value judgements.

Principle #4

Use Marginal Analysis

GDP Excludes

Used goods paper assets transactions (stocks & bonds) assets produced abroad by domestically owned factors of production

In economics, the pleasure, happiness, or satisfaction received from a product.

Utility

Jenny left her job as a production engineer to start her own consulting business. She took $40,000 out of savings to rent an office and buy a computer and office furniture. As factor of production, Jenny is best described as a ___________ and the computer and office furniture are best described as _________.

an entrepreneur; capital

An increase in AS only will increase real GDP but d_______ the price level.

decrease

Real GDP

Value of GDP measure at constant prices (no inflation). Use base year prices and then the quantities of whatever year is asked for.

Equilibrium price and quantity

Values of price for which quantity supplied and quantity demanded are equal

circular flow diagram

an illustration showing the flow of resource from households to firms and of products from firms to households

Inflation

an increase in the overall level of prices in the economy

Consumer price index (CPI)

an index of the cost of all goods and services to a typical consumer

"Invisible Hand"

We have seen that in a competitive environment, businesses seek tobuild new and improved products to increase profits. Those enhanced products increase society's well-being.

Wants

What people would like if their incomes were unlimited.

Market

an institution or mechanism that brings buyers ("demanders") and sellers ("suppliers") into contact.

Under what circumstances will there be no opportunity for mutual advantageous trade between two countries?

When comparative costs are the same.

Why does specialization maximize production?

When members of an economy specialize in the good for which they have comparative advantage, each is producing the most good possible. This means that production in the economy rises overall, and everybody can enjoy more of the goods they require without working any harder.

How does the number of buyers influence the demand curve?

When more buyers enter the market for a service or good, the quantity demanded is higher at any price. Market demand increases.

Determinants of Demand

When price changes, quantity demanded will change. That is a movement along the same demand curve. When factors other than price changes, demand curve will shift. These are the determinants of the demand curve, i.e., income, consumer preferences, number of buyers, and prices of related goods.

Crowding Out

When private borrowing and investment are reduced due to govt. borrowing

Discouraged Workers

Workers who want to work but have given up finding work

Economic systems differ according to what two main characteristics?

Who owns the factors of production, and the methods used to coordinate economic activity.

Underemployment

Working at a job for which one is over-qualified or working part-time when full-time work is desired

An increase in potential GDP is a___________ to a rightward shift in the production possibilities curve.

analogous

If the equation of a line is y= 10 -2x, then:

X and Y are inversely related.

Taxable Income

Your adjusted gross income less any allowable tax deductions and exemptions

What is the value of the US dollar if a flexible exchange rate system is in effect?

Zero billion Canadian dollars for one US dollar.

bond

a debt instrument that promises to pay a set amount over the life of bonds

A rightward shift in the demand curve for product C might be caused by:

a decrease in the price of a product that is complementary to C.

Demand Curve

a downward slope that reflects the law of demand--people buy more of a product, service, or resource as its price falls.

Production Possibility Frontier

a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology

Production Possibilities Frontier (PPF)

a graph that shows the combos of output that an economy could produce given the available factors of production and technology. points beyond ppf only 2 ways to obtain this point 1) trade 2)economic growth -accumulation of capital -technological improvements law of increasing oppertunity costs

A positive, or direct, relationship between two variables is illustrated by:

a line the slopes upward to the right

resource market

a market in which households sell and firms buy resources or the services of a resource

product market

a market in which products are sold by firms and bought by households

efficient markets

a market in which profit opportunities are eliminated almost instantaneously *trade off = efficiency vs equality

Producer price index (PPI)

a measure of the cost of a basket of goods and services bought by firms

Producer Price Index (PPI)

a measure of the cost of a basket of goods and services bought by the firms.

Economic Systems

answers the 3 economic questions (who, what, how) Command Economies - central gov't directly/indirectly sets targets Laissez-faire economies - individuals pursue their own self interests w/o gov't intervention. "Let the market be" --> market answers ?'s by means of supply and demand mixed system (everything in between) - mixed economy w/ varying degrees of gov't interruption

Money is a__ medium of exchange that is widely accepted.

any

market

any institution or mechanism that brings together buyers and sellers of a particular good or service

medium of exchange

any item sellers generally accept and buyers generally use to pay for a good or service

money

any item that is generally acceptable to sellers in exchange for goods or services

Land Resources

anything used up in the production process

Determinants of Supply

are (1) resource prices, (2) technology, (3) taxes and subsidies, (4) prices of other goods, (5) producer expectations, and (6) the number of sellers in the market.

Entrepreneurs:

are the innovators and risk-takers who combine resources to produce an output.

Law of Diminishing Marginal Utility

as the marginal product repeats, the marginal utility (your satisfaction) eventually begins to decrease

Direct investment is the purchase of real a_____.

assets

However since it cannot push aggregate demand both ways at the same time, lower unemployment is usually a______________ with higher inflation, and vice versa.

associated

Multiplier is the effect on income of a change in a___________ spending, such as I, G, X or autonomous C.

autonomous

Total spending (aggregate expenditures) =

autonomous spending + induced spending

The chapter concluded with a discussion of the b_________ of payments.

balance

A discouraged worker is an individual who wants work but is no longer actively seeking it because of the b_____ that no opportunities exist.

belief

1. A recessionary gap, which means an output level b_____ potential GDP or

below

An increase in potential GDP will also increase AS and will increase real GDP and decrease the price level but will leave the economy b_____ full-employment GDP.

below

Okun's law is the observation that for every 1 percent of cyclical unemployment an economy's GDP is 2.5 percent b_______ its potential.

below

Utility

benefit

unemployment insurance

benefits to unemployed gov't program that provides monetary assistance to those without work and causes more to not work

opportunity cost

best alternative that we forgo when we make a decision arise because resources are scarce

coupon bonds

bonds that issues coupon payments periodically, then repay face value maturity

Spread is the difference between the rate of interest a bank charges b_________ and the rate it pays s_____.

borrowers, savers

12.1A: Governments finance deficit spending by b____________.

borrowing

Output Growth

business cycle: cycle of short term ups and downs in the economy. Even through expansions and contractions our economy has grown. Recession: aggregate output declines for 2 consecutive quarters Depression: A prolonged and deep recessoin Contractions: move from peak to trough, output and employment fall. Expansion: movement from trough to peak where output and employment grow

In the two-sector circular flow model of the economy:

business firms supply goods and services and demand factors of production.

In a market, or capitalist, economy, most payments for inputs or factors of production are made by:

business firms.

Aggregate demand is the total quantity of goods and services that consumers, businesses, government, and those living outside the country would b__ at various price levels.

buy

Resources:

can be categorized into: Land and other natural resources, labor services, capital (structures and equipment), and entrepreneurial ability.

Equilibrium

can be referred as a state of rest, or a state of normalcy, which can, from time to time, be disrupted by various shocks.

unemployment

can occur because of minimum wage laws price floor

Depreciation of the Canadian dollar will d_______ the affected price of exports and cause exports to rise and imports too far.

decrease

This income is divided into specific c__________ of wages, interest, rent and profits.

categories

fed reserve system

central bank of the us 12 reg. fed banks board of govenors - chair - JANET YELLIN member banks F.O.M.C. - fed open market committee reserve req omo discount rate interest on reserves

M3 is M2 plus non-personal term deposits known as c_________ of deposits. Hint- M#see? (C)

certificates

Economic growth source 3- Technological c______.

change

Shifts in Demand

change in income/wealth normal goods: goods for which demand increases when income increases inferior goods: goods for which demand decreases when income increases

checkable deposits, travelers checks and currency

Demand deposit is money deposited in a c_______ account.

checking

Scarcity forces us to...

choose among available alternatives

LO1- I want to understand the c__________ flow of national income

circular

4. Stocks or shares are a part ownership of a corporation which entitles the owner to a c_____ on its assets and profits in the form of dividends.

claim

Positive Statements

claims that attempt to describe the world as it is

Normative Statements

claims that attempt to prescribe how the world should be

Bank rate is the rate of interest that the bank of Canada charges a c_______ bank for a loan.

commercial

The regulator mechanism of the market system is:

competiiton.

Substitutes

competing products that can be used in place of one another ex. Soccer ball and volley ball

descriptive economics

compilation of data

Consumer Surplus

consumers are willing to pay more, but get it for less

Dollar Votes

consumers spend their income on the goods they are most willing and able to buy -- they register their wants in the market.

Individuals in the household sector earn income by receiving payment for the factors they sell or rent. With this income, they engage in c__________.

consumption

S = Y - C. Savings can be defined as income (Y) received but not spent on c______________ (C).

consumption

Depreciation

consumption of fixed capital (plant and equipment) that wears out during the period under consideration.

primary role of the fed

control money supply also serve as a lender of last resort

calculating cpi

cost of basket in each year price (a) x weight (a) + price (b) x weight (b) choose a base year 08' / compute CPI price1/base year x 100 price 2/base year x 100 price 3/base year x 100 Inflation rate = CPI t - CPI t-1 / CPI t-1 x 100%

Near-banks are financial institutions, such as c_______ ______ or trust companies, that share many of the functions of commercial banks but are not defined as banks under the bank act (they are also known as non-bank financial intermediaries).

credit unions

But the expansionary effect is reduced because of the c________-___ effect.

crowding-out

This chapter began with a discussion of the exchange rate and what is meant by the appreciation or depreciation of a c__________.

currency

Nominal wage is the present day value of a c______ wage.

current

Medium of e____________ is something that is accepted as payment for goods and services.

exchange

Full employment is when frictional and structural unemployment e ______ but cyclical unemployment is zero.

exist

Components of GDP: Investment

expenditure on goods produced in the current period but not consumed in the current period; 2 types (fixed & inventory)

Closed Private Money: This simple economy demonstrates the value of production, e____________ and income.

expenditures

Government Spending (G)

expenditures by federal state and local governments on final goods and services

The purpose of a good theory or model is to:

explain real world relationships.

3. Net e______ as a result of changes in the exchange rate, income levels abroad, or the price of competitive (foreign) goods. ...change in aggregate demand

exports

Modern economists say that recessionary gaps are eliminated by f_____ prices eventually falling and the AS curve shifting to the right.

factor

Summary: Households sell f______ services to the business sector and earn incomes. With this income, they pay for the goods and services received from the business sector.

factor

The aggregate quantity supplied varies directly with the price level because f_______ prices are constant and increases in the price level will raise profits, resulting in producers increasing output.

factor

The business sector must pay for the f______ services they receive which goes to the household sector which is income for the Household sector.

factor

The lower two loops are considered the f_______ market, which is the buying and selling of the factor production, land, labour, capital and enterprise.

factor

Income is the earnings of f_________ of production expressed as an amount per period of time.

factors

Incentives & Disincentives

factors that motivate and influence human behavior

positive economics

facts seeks to understand and explain behavior and operation of systems w/o making judgments. what exists & how it works

Currency depreciation is the f___ in the exchange rate of one currency for another.

fall

This causes interest rates to increase, further causing investment spending, and therefore GDP, too f___.

fall

interest

fee that borrowers pay lenders

6. GICs which are guaranteed investment certificates are securities issued by f__________ institutions like investment and insurance companies.

financial

adding gov't to model

fiscal policy ~ spending by gov't & taxes by congress monetary policy ~ control of money supply and interest rates by fed reserve

A term deposit is a deposit held at a financial institution - bank, building society or credit union - for a f_____ amount of time, known as a term.

fixed

2 kinds of investment spending

fixed investment & inventory investment

Business Cycle

fluctuations in economic activity, such as employment and production

foreign assets

foreign bonds, stocks, & factories owned by domestic residents

Equilibrium real GDP at a level other than f__ employment will mean one of the following (RI GAP)

full

Natural rate of unemployment is the unemployment rate at f___ employment.

full

5. Mutual funds which are a part ownership of a f____ that has invested its clients money in various assets, including shares incorporations.

fund

At the heat of the historical debate between the Keynesians and neoclassicists is the question of whether the economy is capable of self-adjusting to an economic g__.

gap

Economic principles are often imprecise quantitative statements or _________.

generalizations

You have learned to use the aggregate demand curve and the aggregate supply curve to i________ and understand real-world events.

illustrate

The circular Flow model of economic activity:

illustrates the relationship between households and business firms in a market economy.

Sacrcity

imbalance resulting from scarce resources and people's virtually unlimited wants. We cannot have everything, so we must choose what we want most

The use of capital in the production process:

improves efficiency, increases output, and provides for growth.

actual investment

includes unplanned change in inventories

Nominal i__________ is the present value of person's income.

income

We are building a circular flow of of i_________ model and it is important that we distinguish between the flow of income and the stock of money.

income

Savings

income after spending; a flow

disposable income

income after taxes

Calc (x's) income in 2005

income amount (x) cpi of x year/cpi of current year

Money (nominal) income

income measured in terms of current dollars

Government's Income

income not at disposable of private sector

Private Disposable Income

income of the private sector

Appreciation of the Canadian dollar will i________ the effect of price of exports and cause exports to fall and imports to rise.

increase

This happens because prices increase causing the transactions demand for money to i__________.

increase

inflation

increase in the overall price level increase in price level -> MD shift to right increase in income -> MD shift to right

Suppose product X is an input in the production of product Y. Product Y in turn is a substitute for product Z. An increase in the price of X can be expected to:

increase the demand for Z.

The four sources of economic growth are: IITA (improved, i________, technological, additional)

increases

Keynesians say that that such gaps occur often and can last i________.

indefinitely

Income Effect

indicates that a lower price increases the purchasing power of a buyer's money income, enabling the buyer to purchase more of the product than before.

College students living off-campus frequently consume large amounts of beans and weiners and boxed macaroni and cheese. When they finish school and start their careers, their consumption of these goods frequently declines. This suggests that beans and weiners and boxed macaroni and cheese are:

inferior goods

Demand-pull inflation

inflation caused by an increase in demand or in the supply of money

Cost-push inflation

inflation caused by an increase in the costs of production

macro

inflation overall increase in price level aggregate (sum of)

This is seldom done because the result causes an increase in the money supply and is therefore highly i____________.

inflationary

Components of GDP: Consumption

largest component, includes services & durable/non-durable goods, second hand sales aren't included (but dealer prices are)

Investments = i__________!

injection

bank

institutions that accept deposits and make loans a type of financial intermediaries

Savings make up the portion of wealth that is held in the form of financial i____________, such as bonds, term deposits, savings accounts and checking accounts.

instruments

These effects are: real-balance effect, i__________ rate effect and foreign-trade effect.

interest

Price ceilings and price floors:

interfere with the rationing function of prices.

Flexible exchange rate is a currency exchange rate determined by the market forces of supply and demand and not i_________ with by government action.

interfered

12.2: Monetary policy's effectiveness is enhanced when we take into account i____________ financial flows.

international

The aggregate quantity of goods and services demanded varies i_______ with the price level because of three effects (RIF) [real, interest, foreign]

inversely

bond price and interest rates =

inversely related* increase in pb = decrease in interest

An increase in money supply reduces interest rates and this lowers the exchange rate. The result is a rise in both i___________ spending and in exports.

investment

Interest-rate effect is the effect that a change in prices, and therefore interest rates, has upon i_________; for example, higher prices cause higher interest rates, which leads to lower investment.

investment

The process of producing and accumulating capital goods is called:

investment.

The slope of a line through the coordinates (6,1) and (2,3):

is -1/2

Nominal GDP

is GDP measured at current prices. (Px) x (Qx) + (Py) x (Qy)

Price Floor

is a government- or group-imposed limit on how low a price can be charged for a product.

Price Ceiling

is a government-imposed limit on how high a price is charged for a product. Governments intend price ceilings to protect consumers from conditions that could make necessary commodities unattainable.

Change in Quantity Supplied

is a movement from one point to another on a fixed supply curve. The cause of such a movement is a change in the price of the specific product being considered.

Change in Quantity Demanded

is a movement from one point to another point--from one price-quantity combination to another--on a fixed demand curve. The cause of such a change is an increase or a decrease in the price of the product under consideration.

An economic system:

is a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem.

Supply

is a schedule or curve showing the various amounts of a product aht producers are willing and able to make available for sale at each of a series of possible prices during a specific period.

Change in Demand

is a shift of the demand curve to the right (an increase in demand) or to the left (a decrease in demand). It occurs because the consumer's stte of mind about purchasing the product has been altered in response to a change in one or more of the determinants of demand.

If a product is in surplus supply, its price:

is above the equilibrium level.

Investment

is autonomous which means it remains constant whatever the level of income. It therefore plots as a horizontal straight line.Marginal

Microeconomics

is concerned with individual economic units and specific markets.

Consumer Sovereignty

is crucial in determining the types and quantities of goods produced.

Substitute Good

is one that can be used in place of another good.

Complementary Good

is one that is used together with another good.

Marginal propensity to consume

is the ratio of the change in consumption to the corresponding change in income

Induced spending

is the result of us earning an income and rises as our income rises

Refer to the above diagram. Other things equal, this economy will achieve the most rapid rate of growth if:

it chooses point A.

The emergence of the MP3 (iPod) technology is an examle of "creative destruction" because:

it has replaced compact discs as a technology used for the storage and transfer of music.

Problem w/ real GDP calculation

it matters what year is base year - solution is chain-weighted GDP

Ceteris Paribus (C.P.)

keeping all other variables constant/equal

Problems w/ GDP & GDP per capita

leaves out wealth distribution, excludes non-market activities (things made/activities performed at home), ignores underground economy (both cash payments and illegal stuff), & government production can be hard to measure (b/c one doesn't sell roads/defense on the market)

Modern economist say that inflationary gaps are eliminated by factor prices eventually rising and the AS curve shifting to the l___.

left

Balance of trade is the value of a country's exports of goods and services l____ the value of its imports.

less

Net worth is the total assets l___ total liabilities of a company--also called equity.

less

The more you take from society the _____ choice you have.

less

Devaluation is the re-fixing by government of an exchange rate at a lower l_____ .

level

Real income is the purchasing power of income, that is, nominal income divided by the price l______.

level

The consumer price index is a measurement of the average l______ of prices of the goods and services that a typical Canadian family consumes.

level

The problems of aggregate inflation and unemployment are:

major topics of macroeconomics.

marginalism

marginal exchange = change in total

Arbitrage is the process of buying a commodity in one market, where the price is low and immediately selling it in the second m______ where the price is higher.

market

In a market system scarce goods are allocated htrough the operation of:

market prices that are determined by consumers and producers acting in their own self-interest.

Capital Market (financial Market)

market where stocks & bonds are exchanged Foreign & HHS & firms --> purchase stock from firms Firms, Gov't & Foreign --> issue bonds HHS--> buys bonds

model

mathematical statement about the relationship b/w variables gdp --> y=bc inc y --> inc c (by some fraction of an amount)

Implications of Negative Current Account Balance

means US citizen must borrow from foreigners or sell them US assets; Foreigners use their saving to lend to the US or to acquire US assets.

Change in Supply

means a change in the schedule and a shift of the curve. In increase in supply ***** the curve to the right; a decrease in supply shifts it to the left. The cause of a change in supply is a change in one or more of the determinants of supply.

Specialization

means using the resouorces of an individual, firm, region, or nation to produce one or a few goods or services rather than the entire range of goods and services.

Goal of National Income Accounting

measure the total amount of goods and services produced in a country in a given time period.

Structural unemployment is that part of unemployment that results from a m_________ in the skills or location between jobs available and people looking for work.

mismatch

the creation of money

money is created when banks make loans banks can lend up to the amount of their excess reserves

Implications of Positive Current Account Balance

money is flowing out of the country; means foreigners must make up the difference by borrowing from US private savers or selling assets to US savers; financing the CA uses a country's private savings

Money is not an economic resource because:

money, as such, is not productive.

disposable income

must be consumed or saved yd = C + S y-t = C+S --> y = C+S+T

Assume an economy is operating at some point on its production possibilities curve, which shows civilian and military goods. If the output of military goods is increased, the output of civilian goods:

must be decreased.

Foreign factor income is income such as wages, interest, or dividends that n___________ received from providing their services to other countries

nationals

Economic growth source 4- Additional quantities of n_______ resources.

natural

Current Account Balance

net payments received from abroad for currently produced goods & services, also includes net unilateral transfers (measures transfers between countries - private gifts or official foreign) but we generally ignore this

Implicit Cost

non-monetary (time)

Business firms tend to produce those products from which they can obtain at least ________ profit and a maximum _________ profit.

normal, economic

"It is not fair that students have to pay to park on campus" is an example of a:

normative statement

Unemployment rate

not engaged in a gainful occupation

Structural Unemployment

number of jobs in some labor markets is insufficient to provide jobs to all who want them.

structural unemployment

number of jobs in some labor markets is insufficient to provide jobs to all who want them.

The fallacy of false cause ( post hoc fallacy or association-causation issue )

occurs when it is assumed that because one event follows another, the first event must have cause the second event.

The fallacy of composition

occurs when it is incorrectly assumed that what is true for the parts are also true for the whole.

The fallacy of division

occurs when it is incorrectly assumed that what is true for the whole is also true for each part of the whole.

Trade surplus

occurs when the value of exports exceeds the value of imports.

Trade deficit

occurs when the value of imports exceeds the value of exports.

(dirty float) is an exchange rate that is not o________ fixed by government but is managed by the central banks on going intervention in the market.

officially

normative economics

opinion analyze, evaluates and prescribes a course of action; imparts judgment

Sally had to decide between continuing work as an accountant or take a new job as a floral designer. She opted to be a floral designer. The income and benefits of the accounting job that Sally gave up represent her:

opportunity cost

Elasticity of Demand

our sensitivity to price changes

The business cycle is the expansionary and contractionary p________ in the growth rate of real GDP.

phases

Economic growth source 2- Increases in p_______ capital stock.

physical

Investment is defined as spending that results in a p_________ increase in plant or equipment. Why would a firm invest in new machinery or equipment? To increase potential profit on the future.

physical

Capital is defined as the p___________ plant, tools and equipment. In finance capital equals m_________ but not in economics.

physical, money

Full employment

physically and mentally capable of working at a regular job and available

Chapter summary: following discussion of international markets in Chapter 11 this chapter takes a second look at fiscal and monetary p________.

policy

Recession is a period when the economy is producing below its p________ and has had two consecutive quarters of negative growth.

potential

The GDP gap is the difference between p________ GDP and actual GDP (real or normal)

potential

The change causes the p________ GDP line and the AS curve to shift.

potential

Fixed exchange rate is a currency exchange rate paid by government and therefore p_______ from falling or rising.

prevented

An increase in AD will increase both real GDP and the p_____ level.

price

The aggregate supply is the total quantity of goods and services that sellers would be willing and able to produce at various p______ levels.

price

Refer the to above diagram. Rent controls are best illustrated by:

price A

The law of demand states that:

price and quantity demanded are inversely related.

constraints on market

price ceiling: max price above which exchange cannot occur (binding only if the price ceiling affects the equilibrium/below or above the equilibrium) inc. in income = inc in demand price floor: min. price below which exchange cannot occur (binding only if the price floor affects the equilibrium/above or below the equilibrium) Ex: min. wage

Market System

price rationing of goods and services to consumers allocation of resources to producers

discount bond

priced at a discount to the face value is repaid at maturity

Foreign-trade effect is the effect that a change in p______ has upon exports and imports.

prices

In the circular flow model, the flow of economic resources and finished goods and services is the ______ flow, and the flow of income and expenditures is the ______ flow.

real; money

From society's point of view the economic function of profits and losses is to:

reallocate resources from less desired to more desired uses.

Cyclical unemployment occurs as a result of the r___________ phase of the business cycle.

recessionary

GDP Deflator

reflects what happens to prices. measure of price level calculated as nominal GDP yr(x)/Real GDP yr(x) x 100

Current account is a subcategory of the balance of payments that shows the income or expenditure r_______ to exports and imports.

Official settlements account is a subcategory of the balance of payments that shows the change in a country's official foreign exchange r________.

reserves

Households supply inputs, or factors of production, in:

resource markets.

Potential GDP is the total amount that an economy is capable of producing when all of its r_______ are being fully utilized.

resources

A nation's production possibilities curve is bowed out from the origin because:

resources are not equally efficient in producing every good.

An effective price floor on wheat will:

result in a surplus of wheat.

friction unemployment

results because it takes time for workers to search for jobs that best suit their skills

Specializaiton in production is important primarily because it:

results in greater total output.

Economic profit= _________ - _________

revenue-cost

Profits is income left over after the three factors of production have been paid. It can be thought as a r________ for the fourth factor; enterprise.

reward

Economic growth implies an increase in an economy's potential GDP and is illustrated by a r_________ shift in its potential GDP line.

rightward

Currency appreciation is the r___ in the exchange rate of one currency for another.

rise

Inflation is a persistent r____ in the general level of prices.

rise

Marginal Benefit

the increase in benefit from the production or consumption of one additional unit of a good or service (aka the benefit for the next decision)

Remember that rent in this case means a business having to pay a r_______ for the use of a stand of timbre not an apartment building, etc. For the household sector it is income received from the use of the factor LAND.

royalty

What else do individuals in the household sector do with their money besides spend on consumption? They s____it.

save

There's an interesting relationship: When a business borrows money from a bank to invest (build a bigger plant) that money came from the household's s_______.

saving

Notice deposit is money deposited in a s________ account which is available only after notice is given.

savings

The fundamental economic problem society faces, forcing it to decide how to allocate resources and distribute output, is:

scarcity

Economics relies on the _______ _______. It involves gathering __________ and the formulation of __________. These are then tested to develop ________.

scientific method; facts; hypotheses; theories

(LO 4) In Figure 5.28, show a new equilibrium on the graph illustrating demand-pull inflation, and then name three things that could have caused the change.

see answer at q 56

(LO 3, 4) Starting from full-employment equilibrium, indicate whether each of the following factors will affect aggregate demand (AD) or aggregate supply (AS) and whether the effect would be an increase or a decrease. Then, indicate what will happen to the price level and the level of real GDP and what type of equilibrium will result. A decrease in interest rates: Price level: Real GDP: Type of equilibrium An improvement in technology: Price level: Real GDP: Type of equilibrium An increase in the exchange rate: Price level: Real GDP: Type of equilibrium . A decrease in government spending: Price level: Real GDP: Type of equilibrium An increase in the money supply: Price level: Real GDP: Type of equilibrium An increase in the nominal wage rate: Price level: Real GDP: Type of equilibrium

see answers q54

46A.(LO 4) Use the graph in Figure 5.27 to illustrate the effect of the Great Depression on the Canadian economy, when prices, production, and employment all decreased dramatically in the 1930s. (Assume the economy was originally at full-employment equilibrium.)

see q 55

Wages mean income received for the use of labour s________ - includes commissions, tips, all employee benefits.

services

According to the concept of the "invisible hand," if Susie opens and operates a profitable childcare center, then:

she has served society's interests by providing a desired good or service.

Refer to the above diagram. A decrease in supply is depicted by a:

shift from S2 to S1.

An improvement in production technology will:

shift the supply curve to the right.

1. Term deposits which are funds deposited for a fixed amount of time. Generally s______ t____ at a fixed interest rate.

short-term

2. Treasury bills which are s______ t____ security usually for three months in specific denominations issued by the federal government.

short-term

Economic profits in an industry suggest the industry:

should be larger to better satisfy consumers' desire for the product.

Marginal Changes

small incremental adjustments to a plan of action

Externality

the impact of one person's actions on the well-being of a bystander

A leftward shift of a product supply curve might be caused by:

some firms leaving an industry.

Incentive

something that induces a person to act

The fallacy of division states that:

something that is beneficial to society as a whole is not necessarily beneficial to each part of society.

Liability

something you owe to someone else

Asset

something you own with value

2. Investment s__________ as a result of changes in interest rate, purchase price, the age of capital goods, or expectations. ...change in aggregate demand

spending

Also, note that every buy/sell transaction in either market is income to one sector and s___________ to the other.

spending

Consumption (c)

spending by consumers on goods and services.

investment

spending by firms on building and change in inventories

Dis-saving

spending on consumption in excess of income

economic theory

statement or set of statements about cause and effect or action and reaction

Economic growth

steady growth in the productive capacity of the economy (and so a growth of national income)

Another way of thinking of investment is spending that increases the economy's s________ of capital goods.

stock

The Flow of Income versus the Stock of Money: Before we add complications there's a fundamental point to be understood; we are building a circular flow of income model and now we must distinguish between the flow of income and the s_____ of money.

stock

The book used an example of only $10 as the stock of money for the 3 businesses. Each business passed along the $10- 3 times. Total production, total spending and total income was $30 but the s______ remained at only $10.

stock

Microeconomics

studies the behaviors of individuals and specific markets.

Microeconomics:

studies the decisions of individuals, households and firms and focuses on the interaction of buyers and sellers in specific markets and ther production decisions of firms.

Macroeconomics

studies the economy as a whole.

Substitution Effect

suggests that at a lower price buyers have the incentive to substitute what is now a less expensive product for other products that are now relatively more expensive.

national saving

sum of private saving & government saving

A change in any of the four factors that cause economic growth will cause BOTH potential GDP and aggregate s______ to change.

supply

Aggregate demand will change, (causing the AD curve to shift), if the money s______ changes or if there are changes in any of the four components of total spending (CING)

supply

An increase in the excise tax on cigarettes raises the price of cigarettes by shifting the:

supply curve for cigarettes leftward.

Households

supply factors of production in the Resource Market.

In the circular flow of economic activity, business firms:

supply goods and service in product markets.

Business firms

supply goods and services in the Product market.

Goods

tangible things/something produced ex. clothes, cars, shoes

Excess reserves are reserves in excess of what the bank wants to hold as its t______ reserves.

target

4. Government spending on goods and services or t_____.

taxes

Expenditure equilibrium

the income at which the value of production and aggregate expenditures are equal.

When the price of a product increaes, a consumer is able to buy less of it with a given money income. This describes:

the income effect.

Income Approach

the incomes generated by production, to calculate, add up all income received by economic agents contributing to production. (compensation of employees, proprietors' income, rental income, corporate profits, net interest, indirect business taxes (sales and excise taxes paid by businesses), and depreciation

Marginal propensity to expend

tells us how much of each extra dollar earned is spent on purchasing domestically produced goods.

Refer to the above table. As compared to production alternative D, the choice of alternative C would:

tend to generate a more rapid growth rate.

M2 is M1 plus all notice and personal t____ deposits.

term

Equilibrium income

that level of income (and production) at which there is neither a surplus nor a shortage of goods.

self-interest

that which each firm, property owner, worker, and consumer believes is best for itself to seek and obtain

Market Power

the ability of a single economic actor (or a small group of actors) to have a substantial influence on market prices

Property Rights

the ability of an individual to own and exercise control over scarce resources

Comparative Advantage

the ability to produce a good at a lower opportunity cost that another producer

Absolute Advantage

the ability to produce a good using fewer inputs than other producers

Autonomous spending

the absolute minimum level of spending that occurs (the people have to live, after all)

Expenditure approach

the amount of spending by purchasers

Unplanned investment

the amount of unintended investment by firms in the form of a buildup or rundown of inventories

Nominal

the beginning number

Some large hardware stores such as Home Depot boast of carrying as many as 20,000 different products in each store. This volume of goods is the result of:

the choice of consumers regarding what to purchase to satisfy their wants and the choice of producers regardign what to produce to maximize profits.

Opportunity Cost

the cost of the next best alternative use of time, money, or resources when one choice is made rather than another

Microeconomics focuses primarily on:

the decisions and behaviors of individuals and firms.

Unplanned investment

the difference between production (Y) and aggregate expenditures (AE)

A fundamental difference between the command system and the market system is that, in command systems:

the division of output is decided by central planning rather than by individuals operating freely through markets.

GDP

the dollar value of output produced within the borders of a country in a given time period.

Assume that a change in government policy results in greater production of both consumer goods and investment goods. We can conclude that:

the economy was not empoying all of its resources before the policy change.

barter

the exchange of one good or service for another

Income-expenditure identity

the fact that aggregate income equals aggregate expenditure (so calculating GDP via expenditure or income approach yields the same results)

Stan earned an "A" on an economics exam after eating oatmeal and toast for breakfast. Stan's friend, Steve decided to eat oatmeal and toast for breakfast on the day of his exam because he believed that what Stan had for breakfast determined his grade. Steve's conclusion that eating oatmeal and toast resulted in Stan earning an "A" is an example of:

the fallacy of false cause (post hoc fallacy)

liabilities

the firms debits (sources of funds)

freedom of enterprise

the freedom of firms to obtain economic resources, to use those resources to produce the products they want, and to sell their products in the markets of their choice

freedom of choice

the freedom of owners of property resources to employ or dispose of them as they see fit, of workers to enter any line of work for which they are qualified, and of consumers to spend their incomes in a manner that they think is appropriate

creative destruction

the hypothesis that the creation of new products and production methods simutaneously destroys the market power for existing monopolies

Gross Domestic Product (GDP)

the market value of all final goods and services produced by factors of production within a nation in a given time period.

Self-interest

the motivating force of the various economic units as they express their free choices.

Real

the number after adjusted for inflation

Allocative Efficieny

the particular mix of goods and services most highly valued by society (minimum-cost production assumed).

Inflation rate

the percentage rate increase in the price index over a certain period

Capital refers to:

the physical plant and equipment used in production.

Induced spending

the portion of spending that depends on the level of income

Autonomous spending (expenditures)

the potion of total spending that is independent of the level of income.

competition

the presence in a market of independent buyers and sellers competing with one another along with the freedom of buyers and sellers to enter and leave the market

Productive Efficiency

the production of any particular good in the least costly way.

Equity

the property of distributing economic prosperity fairly among the members of society

Efficiency

the property of society getting the most it can from its scarce resources

Investment (I)

the purchase of capital non-residential investment (firms purchase capital: machines/tools) residential investment (purchase of new homes by households) changes in business inventories (inventories - goods firm produce now but intend to sell later)

Equilibrium Price

the quantitiy at which the intentions of buyers and sellers match, so that the quantity demanded and the quantity supplied are equal.

Equilibrium Quantity

the quantity at which the intentions of buyers and sellres match, so that the quantity demanded and the quantity supplied are equal.

Productivity

the quantity of goods an services produced from each hour of a worker's time

Refer to the above data. If price was initially $4 and free to fluctuate, we would expect:

the quantity of wheat supplied to decline as a result of the subsequent price change.

Marginal propensity to expend

the ratio of change in expenditures that results from a change in income

Marginal leakage rate

the ratio of change in leakages that results from a change in income.

Marginal propensity to save

the ratio of the change in saving to the corresponding change in income

All of the following are macroeconomics topics except:

the reaction of a firm to an increase in the demand for its product.

Which of the following will not produce an outward shift of the production possibilities curve?

the reduction of unemployment.

Consumption function

the relationship between income and consumption

Saving function

the relationship between income and saving - S = autonomous dis-saving + induced saving

private property

the right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property

Utility

the satisfaction recieved

division of labor

the separation of the work required to produce a product into a number of different tasks that are performed by different workers

Human Capital

the skills that human workers possess

SOL

the standard of living

Unemployment

the state of being unemployed or not having a job

Macroeconomics

the study of economy-wide phenomena including inflation, unemployment, and economic growth

Microeconomics

the study of how households and firms make decisions and how they interact in markets

economics

the study of how individuals and society choose to use the scarce resources that nature and previous generations have provided.

Video Economics Definition:

the study of how people choose to use their resources in an attempt to satisfy unlimited wants

Economics

the study of how society manages its scarce resources

Capital Resources

tools used in the production of a g/s

Money multiplier is the increase in t____ deposits that occur in the whole banking system as a result of a new deposit in a single bank.

total

Gross National Product (GNP)

total market value of all final goods and services produced within a given period by factors of production owned by a nations citizens regardless of where that output is produced.

aggregate expenditure

total spending (no gov't & no foreign sector)

aggregate output

total sum of goods/services produced in an economy in a given period

aggregate income

total sum of income received by factors of production in an economy in a given period.

T = Net taxes =

total taxes paid by firms and households minus the transfer payment yd = Y-T

3 motives for holding money (Keynes)

transaction motive: people hold money to spend it speculative motive: holding bonds when interest rates are high Precautionary motive: help us face unforeseen circumstances or for a rainy day.

Balance of payments is an account of a country's international t__________ that involves the payment and receipt of foreign currency.

transactions

unemployment rate

unemployed/labor force x 100%

This chapter introduces you to the aggregate demand-aggregate supply model, which is a powerful tool that can be used to better understand the causes of u_____________ and inflation as well as the effects of economic growth.

unemployment

Externalities

unintended side effects for a third party

Everyone has __________ wants.

unlimited

If a decrease in the price of airline tickets leads to a decrease in the quantity of supplied airline tickets, then the graph of the relationship between price of airline tickets and the quantity supplied of airline tickets will be a curve that slopes:

upward to the right indicating, a direct or positive, relationship between the price and quantity supplied of airline tickets.

Macroeconomics:

uses economic aggregates to measure the activity in the economy as a whole.

Full production

using all available resources

Consumers want to obtain goods and services that provide satisfaction, or what economists call ________

utility

Real-balances effect is the effect that a change in the v_____ of real balances has on consumption spending.

value

Unit of account is the function of money that allows us to determine easily the relative v______ of goods.

value

Wealth

value of assets minus value of liabilities; a stock

The full cost of anything includes the _______ of the _______ most valuable ___________ use.

value/price; second; alternative

Deductions

variable amounts that you can subtract, or deduct, from your gross income

The slope of a line can be calculated by dividing the:

vertical change by the horizontal change between any two points on the line.

Circular Flow Diagram

visual model of the economy showing how dollars flow through the markets connecting households and firms

Target reserve ratio is the portion of deposits that a bank w____ to hold in cash.

wants

Cost-Benefit Analysis

way of thinking that compares the cost of something to its benefits

Store of w______ is the function of money that allows people to hold and accumulate wealth.

wealth

Human capital investments

wealth in the form of money or property owned by a person or business and human resources of economic value

Price Index

weighted average of a set of observed prices that gives a measure of the price level; if it includes all prices in the economy than it is a measure of the general price level

choice

what to produce? how to produce? who gets what is produced?

Opportunity Cost

whatever must be given up to obtain some item

Allocated Efficiency

when a county uses their resources to produce g/s most derived by society

Consumer Surplus

when a customer values something, but they think they got a deal

Other things Equal assumption

when economists assume that other factors are held constant and do not change when studying an economic relationship

Elastic Demand

when the quantity changes due to the price change

Equilibrium

where Quantity supplied = Quantity demanded changes in equil. inc D = inc P & inc Q dec D = dec P & dec Q inc S = dec P & inc Q dec S = inc P & dec Q inc D & S but D>S --> inc P & inc Q inc D & S but D<S --> dec P & inc Q dec D & S but D>S --> dec P & dec Q dec D & S but D<S --> inc P & dec Q

Services

work/labor performed by someone

The division of labor means that:

workers specialize in various production tasks.

discouraged workers

workers who went to work but have given up on finding work

shifts in money demand

y = aggregate output (real) p = price level p (x) y = nominal income (ouput) (increase in p increase in y or both increase in p & y = increase in MD curve)

If a function has a slope of 5 and a y-intercept of 2, the equation for this function is:

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