Combo with "Combo with "BYU Econ Review #3" and 20 others" and 21 others
laissez faire?
"let them do" (as they please); the idea that individuals left alone try to better themselves
Money Wage Rate (MWR)
# of $ an hour of labor earns
Unemployment rate
# of unemployed/ labor force x100
the public debt of the U.S. federal government at the end of fiscal year 2011 equaled
$10.1 trillion
(Scenario: Monetary Base and Money Supply) How much are required reserves?
$50 billion
(Table: Kenya's Economy in 2010) Aggregate output per capita in Kenya at the beginning of 2010 was:
$775
sales tax
% tax added to almost all goods excluding food
EPA
(Environmental Protection Agency) Regulates the environment
EEOC
(Equal Employment Opportunity Commission) Enforces laws to prevent unfair treatment on the job due to sex, race, color, religion, national origin, disability, or age.
FCC
(Federal Communications Commission) regulates the television and radio industry, grants licenses to television and radio stations, and blocks monopolies.
FDIC
(Federal Deposit Insurance Corporation) Insurance for people's bank accounts.
FICA
(Federal Insurance Contribution Act) represents the taxes people pay for Social Security and Medicare.
FDA
(Food and Drug Administration) The agency that is responsible for determining if a food or drug is safe and effective enough to be sold to the public.
Gross Domestic Product
(Gross Domestic Product) The sum total of the value of all the goods and services produced in a nation
GNP
(Gross National Product) The sum of all goods and services produced in a nation in a year
IRS
(Internal Revenue Service) Governmental agency responsible for collecting federal taxes, issuing regulations, and enforcing tax laws
IMF
(International Monetary Fund) GIves loans to developing countries
NAFTA
(North American Free Trade Agreement) Allows open trade with US, Mexico, and Canada
OSHA
(Occupational Safety and Health Administration) A government agency in the Department of Labor to maintain a safe and healthy work environment
how is inflation rate calculated
(P2 - P1) P1
SEC
(Securities and Exchange Commission) A government commission created by Congress to regulate the securities markets and protect investors.
UAW
(United Auto Workers) a labor union which represents workers in the United States, Canada, and Puerto Rico. Founded in order to represent workers in the automobile manufacturing industry
WB
(World Bank) Gives out loans
socialist
(n) one who believes that communities and not individuals should own and control the community's land, work force, and wealth
excess supply
(surplus) quantity suppliers is greater than quantity demanded
Compliments
(usually plural) a polite expression of desire for someone's welfare
How do controls on interest rates, i.e. usury laws, affect the quantity of savings and investment within an economy
(usury laws are laws that set a maximm ceiling on the interest rate. it creates shortages of credit and will reduce savings and investment because it will cause interest rates to be below the market equilibrium
Cost of Inflation
- "noise" in the price system - distortions of the tax system - "shoe-leather" costs, which are the real resources that are wasted as people try to economize on cash holdings - unexpected redistribution of wealth - interference with long-term planning **Because of these costs, economists agree that the most economic growth will occur when inflation is low
Policies to take under inflationary shock
- FED respond to the increase in inflation by following the monetary policy rule and increasing the real interest rate; the increase in the real interest rate - the FED's accommodating policy is to allow inflation shock to decrease output in the short run and inflation in the short run and long run
Policies to take under Demand Shock
- First, Congress and the president can undertake expansionary fiscal policy through a combination of government spending increases and tax cuts - this will increase planned spending directly (through the increase in gov't spending) and indirectly (through increased consumption induced by lower taxes and increase disposable income) - Second, the Federal Reserve can apply expansionary monetary policy - this will lower interest rates, stimulate increased investment spending, and increase planned spending and output
Measuring Money
- M1: narrow measure of money, includes currency and checking accounts - M2: broader measure of money, includes all assets in M1 plus additional assets that are somewhat less convenient to use in transactions
Invisible Hand
- The interaction of buyers and seller, motivated by self-interest and regulated by competition, all happen without a central plan , this phenomenon
Factors about the quantity theory of money
- V is stable - A change in M causes nominal GDP ( P x Y) to change by same % - A change in M does not effect Y: Y is determined by technology $ real factors of production - P changes at same rate as m - rapid money supply growth causes rapid inflation
When does fiscal policy work best?
- When the economy needs a short-run boost. evan at the expense of the long-run - When the problem is a deficiency in AD rather than a real shock - When many resources are unemployed
Demand for Labor
- a firm will employ a worker only if the worker's value of marginal product exceeds the real wage they pay; same as the extra revenue the worker generates for the firm exceeds the wage the firm pays - the lower the real wage, the more workers the firm will find it profitable to employ
Should countries adopt a fixed or flexible exchange rate?
- a flexible rate actually strengthens the imacct of monetary policy on aggregate demand - a fixed rate prevents policymakers from using monetary policy to stabilize the economy because they must instead use it to keep the exchange rate's market equilibrium value to its official value
Bond
- a legal promise to repay debt, usually including both the principal amount and regular interest, or coupon, payments - the prices of existing bonds decline when interest rates rise
Recession
- a period in which the economy is growing at a rate significantly below normal - period during which real GDP falls for at least two consecutive quarters - tend to be followed by a decline in inflation and are often preceded by an increase in inflation
Okun's Law
- a relationship between cyclical unemployment and the output gap - an extra percentage point of cyclical unemployment is associated with about a 2 percent decrease in GDP
Money and Functions of Money
- any asset that can be used in making purchases Three Main Functions Medium of Exchange - an asset used in purchasing goods and services Unit of Account - a basic measure of economic value, meaning using a common symbol such as the dollar to make easy comparisons Store of Value - an asset that serves as a means of holding wealth
Monetary Policy
- can be changed quickly by the Federal reserve's federal open market committee - more flexible and responsive than fiscal policy because fiscal can only be changed by Congress - used more actively to stabilize the economy
Discount money lending (discount rate)
- commercial banks borrowing money from the FED with an interest rate - loans of reserves from the FED directly increases the reserves in the banking system, this leads to an increase in bank deposits and an increase in the money supply
Money Supply
- controlled by central banks through open market transactions - buying government bonds from the public will increase it which puts money into circulation
What changes AD?
- demand shocks: a positive demand shock will shift right and a negative demand shock will shift left - consumer confidence increased will shift it right, vice versa - the gov't cutting taxes and increasing spending will increase AD
Supply and Demand of Dollars
- dollars are demanded in the foreign exchange market for foreigners who seek to purchase U.S. goods - dollars are supplied by U.S. residents who need foreign currencies to buy foreign goods
Consumption Function
- equation for relationship between consumption and disposable income - C = c + (MPC) (Y-T) - little c is the autonomous expenditure because it does not react to changes in disposable income
Economic Growth
- even at a modest growth rate, if sustained over a long period of time, can lead to large increases in the size of the economy - governments can promote it by: adopting policies that encourage creation of human capital, promote saving and investment, investing in public infrastructure, support research and development in basic sciences, support private sector activities - costs: sacrifice current consumption to achieve a high rate of investment in new capital goods, extra work effort and the cost of research and development
Why does the AS curve slope upward?
- firms meet the demand for their products at present prices in the short run - inflation inertia: inflation remains constant as long as the economy is at potential output and there are no external shocks
A matter of timing
- fiscal policy is intended to correct short-term problems - By the time fiscal policy is in place, economic conditions have often changed
What is not included in GDP?
- goods and services that are not sold in markets, such as unpaid house work - intermediate goods, which are used in the process of production
Stabilization Policies
- government policies that are used to affect PAE, with the objective to eliminate output gaps - there are two major tools: monetary and fiscal policy
Key factors in determining Average Labor Productivity in a country
- human capital - quantity and quality of physical capital - availability of land and other natural resources - sophistication of the technologies applied in production - effectiveness of management and entrepreneurship - broad social and legal environment
Open Market Transactions
- if the FED wants to lower the interest rate, they must increase the money supply through purchasing government bonds from the public - if they want to raise the interest rate, the FED must decrease the money supply by selling government bonds
An increase in the real exchange rates
- implies that domestic goods are becoming more expensive relative to foreign goods, which tends to reduce exports and stimulate imports - a decline in the real interest rates leads to an increase in net exports
Basic Keynesian Model built on key assumption
- in the short run, firms meet the demand for their products at present prices - firms do not respond to every change in the demand by changing their prices
What will increase/decrease the expenditure line?
- increase: when autonomous expenditure increases - decrease: when autonomous expenditure decreases (if it drives below potential output then in a recession)
Why does inflation adjust very slowly?
- inflation expectation, if you expect inflation o be high, it will lead to a high rate of actual inflation - long-term price contracts, union contracts are usually set for years and they have built in wage and price increases that depends on inflationary expectations
Expansionary Policies
- intended to increase PAE and output - use this when in a recession
Prices of existing bonds
- inversely related to the interest rate - the higher the interest rate, the lower the cost of government bonds
What is included in GDP?
- newly produced final goods - only goods and services produced within a nation's boarders - only goods and services produced during the current year
FED can control money supply by:
- open market transactions - discount window lending (discount rate) - directly affecting bank reserves
Aggregate Demand - Aggregate Supply model
- provides a framework for evaluating the possible recessions - two distinct advantages over the Keynesian model 1) it analyses fluctuations in both output and inflation rate 2) applies to both short and long run, instead of just short run
Fiscal Policy
- refers to the decision about how much the government spends and how much tax revenue it collects - gov't purchases directly affect PAE, the more they spend, PAE will increase - remember that T equals total taxes, transfer payments, gov't interest payments; a tax cut will increase PAE - if the government spends more they are increasing the deficit, which reduces investment, and it effects both PAE and potential output - the government has to weigh the effects of short term and long term effects
What are some of the Fed's duties
- regulate other banks and lend money to other banks - maintain bank account of us treasury + manages their borrowing - regulating the u.s. money supply
Money Demand Curve
- relates to the aggregate quantity of money demanded to the nominal interest - because an increase in the nominal interest rate increases opportunity cost of holding money, which reduces the quantity of money demanded, graph slopes downward
Business Cycle
- short-term flucuations in GDP and other variables - unemployment is a key indicator of short-term fluctuations, rises during recession and recovers during expansions - KNOW WHAT THE GRAPH LOOKS LIKE AND HOW TO READ IT
AD
- shows the amount of output consumers, firms, government, and consumers want to purchase at each inflation rate - slopes downward because an increase in the inflation rate causes PAE to fall
Reserve deposit ratio
- the FED can set a minimum for commercial banks called reserve requirements - to increase the money supply the FED lowers this
Federal Reserve
- the FED is the central bank in the US - two responsibilities: to conduct monetary policy and to oversee the regulation of financial markets
Demand for money
- the amount of wealth and individual chooses to hold in the form of money - the opportunity cost of it is the nominal interest rate
Output Gap
- the difference between the economy's actual output, relative to potential output, at a point in time = ((Y-Y*) / Y*) x 100%
Income expenditure multiplier
- the effect of one unit increase in autonomous expenditure on the short run equilibrium output
What are two reasons why gov't doesn't monetize its debt
- the fisher effect, if lenders expect that the government will do this they will only charge higher nominal rates of interest - to keep voters happy. b/c bond buyers are usually voters and they wouldn't appreciate zero returns
Price Level
- the higher the prices of goods and services, the more dollars needed to make the transaction - so a higher one is associated with a higher demand for money
Short run equilibrium output
- the level of output at which output equals PAE - the level of output that prevails during the period i which prices are predetermined
Natural Rate of Unemployment
- the part of the total unemployment that is attributable to frictional and structural unemployment - occurs when cyclical unemployment is zero
National Saving
- the saving of a nation as a whole - the sum of public saving and private saving** S = Y - C - G (Y = GDP, C = consumption spending, G = gov't purchases)
Public Saving
- the saving of the government - equals the gov't budget surplus - when the gov't budget is in surplus, gov't saving is positive - when the gov't budget is in deficit, gov't saving is negative S public = T - G (T = net tax payments, G = gov't purchases)
Private Saving
- the saving of the private sector S private = Y - T - C (Y = GDP, T = net tax payments, C = consumption spending)
Money
- the set of assets, such as cash and checking accounts, that are usable in transactions - it is also a store of value, like stocks, bonds or real estate, type of financial asset - a way of holding wealth
Wealth Effect
- the tendency of changes in asset prices to affect household's wealth and thus their consumption spending - Ex. a fall in home prices or stock prices that made consumers feel poorer will be less inclined to spend money which will decrease little c
What are some examples of automatic stabilizers
- welfare and transfer programs: they increase income and consumption and therefore AD - Consumption smoothing: people draw on savings during an economic downturn, credit cards can help
What are 3 things that affect the velocity of money
- whether workers are paid monthly or biweekly - how long it takes to clear a check or electronic transaction - how easy it is to find an ATM, place to pull out money The velocity of money gives us some indication of how often each dollar is being spent
Changes in demand for dollars
- will increase if an increase in preference for the US goods by foreign customers - an increase in the real GDP abroad, which implies higher incomes abroad
Changes in supply of dollars
- will shift right if an increased preference in foreign goods, an increase in US GDP, increase real interest on foreign goods, decrease in the real interest rate of US assets
Supply of Labor
- willing to supply labor if the real wage that is offered is greater than the opportunity cost of the individual's time - generally, the higher the real wage, the more people are willing to work
Frictional Unemployment
-(college students graduate and have to wait until firms are hiring) -temporarily between jobs & looking for best opportunity
List and define Types of efficiency:
-Production efficiency:the economy is utilizing all of its resources efficiently. -Distributive efficiency:when goods and services are consumed by those who need them most. -allocative efficiency: economy/producers produce only those types of goods and services that are more desirable in the society and also in high demand.marginal benefit =marginal cost.
Cyclical unemployment
-business cycle -not working bc firms dont need them (downturn in economy)
how to increase productivity
-division of labor -buy needed capital goods -educate (work force) -fire unnecessary employees
Structural unemployment
-jobs arent around anymore Ex: no milkman, no blacksmith -unemployed people who lack skills or do not have sufficient education for available jobs
Seasonal unemployment
-lifeguarding -halloween store workers
Classical
-market will adjust, let it roll
Business cycle
-peak -trough -expansion -contraction
Unemployment rate
-percentage of people in an economy who are both able to and looking for work but who cannot find jobs
Discouraged worker
-quit looking for work -no longer in labor force!!!!
Not counted in GDP
-second- hand products -"black" market products -intermediary goods -transfer payments: -welfare -social security - gov. Grants & aids -stocks & bonds
three way money serves people
-standard value -medium of exchange -way to save for future
draw and label a supply and demand graph and table
...
Types of unemployment
..., Frictional (Fired/Quit), Structural (Jobs Move Overseas), Cyclical (Recession Layoffs), Seasonal (Census Workers, Holiday Workers)
Trade barriers
..., government-imposed regulations that increase the cost and restrict the number of imported goods
10. Normative perspective
...study or presentation of "what ought to be" rather than what actually is. Based more on judgments than actual facts
how much is the CPI overstated annually?
.9%
Solow's 1/3 Rule
1% increase in K/L brings a 1/3% increase in Y/L (T is fixed)
Parts of the Business Cycle
1) Peak is a positive uptrend in business activity. The business is making a profit, employing laborers, and doing well. 2) Recession exists when there is an overall downturn of many economic indicators, such as employment and production. 3) In order for a depression to occur, the economy must be declining for at least twelve months straight. In a depression, business activity and employment decline severely. 4) Expansion is a fast upward growth spike—lots of money flowing, jobs created, and positive activity. 5) Contraction is the opposite, a period of economic slowdown; money doesn't come in as fast, and indicators like unemployment rise. 6) A trough is the bottom of the downward trend, the point where the contraction turns the corner and begins to again expand.
Components of the GDP
1) The GDP only measures final products. 2) The GDP only measures legal transactions. 3) The GDP does not measure all transactions. 4) The GDP is not a measure of the well-being of the economy.
Monopolistic Competition Requirements
1) There must be many buyers and sellers in the marketplace, and none of them can be large enough to influence price. 2) There is freedom of entry and exit with the market. The barriers to entry are low, and firms are able to establish themselves in the marketplace quickly. 3) Buyers and sellers are fully informed. 4) There are differentiated products offered for sale. In other words, there are many brands of the same product available.
Perfect Competition Requirements
1) There must be many buyers and sellers in the marketplace. None of the buyers or sellers can be large enough to influence price. 2) There is freedom of entry and exit into and out of the market. The barriers to entry are low. 3) Firms earn only a normal profit, the bare minimum profit necessary to keep them in business. If firms earn more than that, other firms will enter the market and drive price level down. 4) Buyers and sellers are fully informed. 5) Products are homogeneous. All suppliers supply goods that are perfect substitutes. This means there is no distinction between goods.
GK yield
1) the annual income earned on a stock, bond, or other investment secuirty. It is usually expressed as a percentage of its market price. 2) the total income earned on a loan 3) the total interest income paid on a bond if the bond is held by the purchaser until its maturity.
What are the four limits to fiscal policy
1. Crowding out: the increase in AD is reduced or neutralized if government spending reduces private spending 2. A drop in the bucket: the economy is so large that government can rarely increase spending enough to have a large impact 3. a matter of timing: it can be difficult to time fiscal policy so that the AD curve shifts at just the right moments 4. Real shocks: shifting AD doesn't help much to combat real shocks
How will the following affect price level? 1. Inc in velocity? 2. Decrease? 3. Increase in Real gdp? 4. Decrease in real GDP?
1. Increase in price level, inflation 2. Decrease in price level, deflation 3. Decrease in price level 4. Increase in price level
Name two ways that the government can finance its spending
1. Raise taxes to finance fiscal policy 2. Sell more bonds to finance fiscal policy
What are the two general categories of fiscal policy used to fight a recession?
1. The government spends more money 2. The government cuts taxes, giving people more money to spend
5 fundamental question every economic system must answer
1. What goods does the economy produce? 2.How does the economy produce the chosen goods? 3. Who gets the goods that are produced by the economy? 4. How does the economic system accommodate change? 5. How does the economic system promote progress?
the law of supply is based on two phenomena
1. at higher prices, existing suppliers supply more 2. at higher prices, new suppliers enter the market
law of demand is based on
1. at lower prices, existing demanders buy more 2. at lower prices, new demanders enter the market
economic reality's three forces
1. economic forces 2. social and cultural forces 3. political and legal forces
Through what channels do open-market purchases stimulate the economy
1. higher money supplies and lower interest rates 2. in a sense, the increase in the money supply increases the supply of loans and the lower interest rates increase the quantity of loans demanded
What are the three major tools the fed uses to control the money supply
1. open market operations: the buying and selling of US government bonds on the open market 2. discount rate lending and the term auction facility: federal reserve lending to banks and other financial institutions 3. Paying interest on reserves held by banks at the fed
specific roles of Govt.
1. providing a stable set of institutions and rules 2. promoting effective and workable competition 3. correction for externalities 4. ensuring economic stability and growth 5. providing public goods 6. adjusting for undesirable market results
what the PPC demonstrates
1. there is a limit to what you can achieve, given the existing institutions, resources and technology. 2. every choice you make has an opportunity cost. you can get more of something only by giving up something else
economy's 3 main coordination problems
1. what and how much to produce 2. how to produce it 3. for whom to produce it
Possibility Curve Shifters
1.) change in quantity or quality of resources 2.) change in technology
Shifters of Demand
1.) preferences 2.) # of consumers 3.) price of related goods 4.) income 5.) expectations
Shifters of Supply
1.) price of resources 2.) # of producers 3.) technology 4.) taxes & subsidies 5.) expecations
Tariff
1.A Tax on imported goods or services 2.Higher revenue for domestic producer and lower revenue for foreign producers 3.Higher prices 4.Tax revenue for government
What are Tariffs, product Quotas, and embargoes?
1.tax on imports 2. a limit on the quantity of a good that can be produced abroad and sold domestically 3.An official ban on trade or other commercial activity with a particular country.
(Table: Market for Butter) Look at the figure Market for Butter. If the government imposes a price floor of $0.90 per pound of butter, the quantity of butter actually purchased will be
10 million pounds
how many federal reserve districts are there?
12
what is underemployment rate?
16.7
Wagner Act
1935, also National Labor Relations Act; granted rights to unions; allowed collective bargaining
(Figure: The Production Possibilities for Two Countries) Look at the figure The Production Possibilities for Two Countries. The opportunity cost of producing 1 radio in Indonesia is:
2 tires
what was the average inflation rate in us between 2000-2010
2.5%
when did the fed start paying interest on reserves
2008
what how for whom
3 basic questions of economics
what has been avg inflation since 1950
3.7%
What is a t-bond
30 year bond that pays interest every 6 months and is issued by the US treasury
(Table: Production of Good Z and Good X in Urbanville) Look at the table Production of Good Z and Good X in Urbanville. If this represents the production possibility frontier and Urbanville is currently producing at combination F, what is the opportunity cost of a move to combination E?
5 of Z
what is current estimate of the natural unemployment rate?
6%
how many board of governors?
7
FED-structure
7 board directors
What is minimum wage in Ohio
7.85
The rule of 70
70/x (where x is the growth rate *100) gives the approximate number of years to double income
(Figure: The Labor Market) Refer to the accompanying figure on the labor market. What will be the level of employment if firms decide to pay an efficiency wage of $16?
80,000
Bank Deposits
= bank reserves / reserve-deposit ratio - as the reserve ratio increase, the money supply decreases because more money needs to be put into reserves - a low interest rate encourages spending, while a high interest rate reduces spending
Social Security
A 1935 law passed during the Great Depression that was intended to provide a minimal level of sustenance to older Americans and thus save them from poverty.
Nonexcludable
A Characteristic of public goods in that their benefits cannot be kept from persons who do not pay for the goods provision in private market
Indivisible
A Characteristic of public goods in that they are impossible to divide into units sufficiently small to be sold in private markets
Demand Curve
A Graph showing the quantites that consumers are milling to buy at alternative prices during a specified time period
Cost-benefit Analysis
A Study that compares the costs and benefits of a policy or programs
What is a zero-coupon bond?
A bond that pays only a maturity
Partnership
A business in which two or more persons combine their assets and skills
partnership
A business in which two or more persons combine their assets and skills
Partnership
A business owned and operated by two or more individuals. Business decisions can be made almost as easily as in sole proprietorships. Also, partners can specialize—that is, they can contribute specific but different talents and skills to the successful operation of the business. Partnerships still face the problem of unlimited liability.
Sole Proprietorship
A business owned by a single person. The owner is responsible for all aspects of operation, including accounting, financing, production, and distribution. Sole proprietorships are easy to establish because they usually involve little government interference.
Sole Proprietorship
A business owned by one person
sole proprietorship
A business owned by one person
Corporation
A business owned by stockholders who share in its profits but are not personally responsible for its debts
corporation
A business owned by stockholders who share in its profits but are not personally responsible for its debts
unlimited liability
A business owner is responsible for all losses experienced by the business.
Certificate of Deposit
A certificate issued by a bank to a person depositing money for a specified length of time. Higher Rate then Regular Savings
income effect
A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product's price.
Nonrivalrous
A characteristic of public goods in that use by one person does not prevent use by others
Closed Shop
A company that hires only union members
Deflation
A continuing decrease in the average price of goods and services.
Franchise
A contract that gives a single firm the right to sell its goods within an exclusive market
Spillover
A costs or benefit of a private market activity that is shifted onto society at large. Alternatively called an externality
Injunction
A court order to stop a strike
supply curve
A curve that shows the relationship between the price of a product and the quantity of the product supplied.
what is deflation
A decrease in the average level of prices
Dividends
A distribution of the net income of a business to its owners
Patent
A document granting an inventor sole rights to an invention
Variable
A factor that can change
Medicare
A federal program of health insurance for persons 65 years of age and older
security deposit
A fee that a renter must pay in advance to cover any damage he or she might later cause to the property or if the rent is not payed
Worker's Compensation
A form of insurance paid by the employer providing cash benefits to workers injured or disabled in the course of employment.
Cartel
A formal organization of producers that agree to coordinate prices and production
Inflation
A general and progressive increase in prices
inferior good
A good for which the demand increases as income falls and decreases as income rises
normal good
A good for which the demand increases as income rises and decreases as income falls
Substitute in Production
A good that can be produced instead of the good you are producing.
Complement
A good that is bought along with another good.
Complement in Production
A good that is produced along with another good.
Inferior Goods
A good which consumers buy less of when they earn more money and more of when they earn less money.
Normal Goods
A good which consumers buy more of when they earn more money and less of when they earn less money.
Subsidy
A government payment that supports a business or market
Price Ceiling
A government regulation that sets the maximum legal price that can be charged for a product. A price ceiling has to be set below the equilibrium price in order to impact the economy.
Subsidy
A grant given by the government to producers to encourage production of a good or service
demand curve
A graph of the relationship between the price of a good and the quantity demanded
supply curve
A graph of the relationship between the price of a good and the quantity supplied
Supple Curve
A graph showing the quantities that suppliers are willing to sell at alternative prices during a specified time period
mutual funds
A group of investments held in common by many individual investors
Board of Directors
A group of persons elected by the stockholders to manage a corporation.
Medicaid =
A joint federal-state medical insurance program for low income persons.
franchise
A legal agreement that gives an individual the right to market a company's products or services in a particular area.
inventory
A list of possessions or goods on hand.
Perfect competition =
A lrge number of well informed independent buyers and sellers who exchange identical products.
Monopoly
A market dominated by a single seller
Pure Competition
A market in which many producers sell a standardized (identical) product to many buyers
Monopoly
A market structure composed of one company selling a product for which there is no good substitute. Monopolies offer a large economics of scale. Monopolies usually have large profits that can be used to invest in technological improvements and better products. Monopolies are production inefficient. They are also allocation inefficient, meaning they can restrict their output and thus charge higher prices.
Oligopoly
A market structure in which a few large firms dominate a market
Monopolistic competition
A market structure in which many companies sell products that are similar but not identical
Elasticity of Demand
A measure of how consumers react to a change in price
Elastic demand
A measure of how consumers respond to price changes
Elasticity of supply
A measure of the way quantity supplied reacts to a change in price
Insurance
A mechanism for protection against disaster
caucus meetings
A meeting of political party members to conduct party business
comparison shopping
A method of judging the benefits of different products by comparing several factors, such as quality, features, and cost.
subsidy
A money payment or other form of aid that the government gives to a person or organization.
geographic monopoly
A monopoly based on the absence of other sellers in a certain geographic area.
Federal Reserve
A national banking system, established in 1913, that controls the U.S. money supply and the availability of credit in the country.
Advertising
A paid form of communication sent out by a business about a product or service.
joint venture
A partnership created by two or more companies for a specific purpose over a set period of time
Depositor
A person who deposits money in a bank
Producer
A person, company, or country that makes, grows, or supplies goods or commodities for sale
Budget
A plan for making and spending money
Commodity
A product that is the same no matter who produces it, such as petroleum, notebook paper, milk
Positive Question
A question that can be answered using available information or facts.
Normative Question
A question that is based on societal beliefs on what should or should not take place
What is a "real price"
A real price is a price that has been corrected for inflation. they are used to compare the prices of goods over time
Inflation
A rise in the average price level in the economy
Market Basket
A sample of goods and services consumers purchase for everyday living.
collateral
A security pledged for the repayment of a loan in case then loan is unable to be payed back.
Stock
A share of ownership in a corporation.
stock
A share of ownership in a corporation.
Free-rider problem
A situation in which individuals that do not pay their share for a good or service nevertheless enjoy its benefits
Shortage
A situation in which quantity demanded is greater than quantity supplied
shortage
A situation in which quantity demanded is greater than quantity supplied
surplus
A situation in which quantity supplied is greater than quantity demanded
Unemployment
A situation in which resources are not fully used in productiong
Scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants
scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants
Shortage
A situation where the quantity demanded is greater than the quantity supplied.
Surplus
A situation where the quantity supplied is greater than the quantity demanded.
What is a bond
A sophisticated IOU that documents who owes how much and when payments must be made
Equilibrium
A state of balance between opposing forces or powers.
What is stock?
A stock is a certificate of ownership in a corporation
bait and switch
A store advertises bargains that do not really exist to lure customers in, in hopes that they will buy more expensive merchandise.
diversification
A strategy of increasing sales by introducing new products into new markets
Resource
A substance in the environment that is useful to people, is economically and technologically feasible to access, and is socially acceptable to use.
Pension
A sum of money paid regularly by a company to someone who has retired or has a disability
Economic Growth
A sustained increase in production, represented by an outward shift of the production possibilities curve
Socialism
A system in which government owns and controls the means of production.
checks and balances
A system that allows each branch of government to limit the powers of the other branches in order to prevent abuse of power
demand schedule
A table that shows the relationship between the price of a good and the quantity demanded
supply schedule
A table that shows the relationship between the price of a product and the quantity of the product supplied
Excise Tax
A tax on the production or sale of a good
Excise tax
A tax on the production or sale of a good
Arbitration
A third party makes the decision
Franchises
A type of business where a company is authorized to sell another company's goods or services in a specific area in exchange for a franchise fee. Basically an established business authorizing another owner to open that same business. Franchises are easy to open and do not require original ideas. The lack of control is a significant disadvantage of franchises.
What determines rGDP in the short run Keynesian model of the economy?
AD
In short-run equilibrium (AD-AS)
AD and AS intersect at a level of GDP above or below potential
In long-run equilibrium (AD-AS)
AD and AS intersect at potential GDP, the inflation rate in this situation is called expected inflation rate
When the government decreases government spending, the:
AD curve will shift to the left
durability
Ability of an item to last a long time
Entrepreneur
Ability of individuals to start new businesses.
Free Riding
Accepting benefits with out paying you share of the costs of providing them
entrepreneurship
Accepting the risk of starting and running a business.
services
Activities performed by people, firms or government agencies to satisfy economic wants for a fee
Services
Activities such as haircuts, healthcare, and education that are consumed (used) by consumers
Federal trade commision
Administers antitrust and consumer protection legislation for free competition
Easy to start and end, few regulations, unlimited personal liability, limited access to resource, lack of performance
Advantages from sole proprietorship
Economically successful if they meet their needs
Advantages of traditional economy
what is NAFTA?
Agreement between Mexico, U.S, and Canada which reduced or eliminated tariffs and embargoes between these countries.
Perfect pure competition
All buyers and sellers are well informed and no elements of monopoly exist
assets
All items to which a business or household holds legal claim
land
All natural resources
Land
All natural resources used to produce goods and services
Law of Supply
All other things remaining the same, the higher the price, the larger the quantity supplied. Another way to state this is that the quantity supplied correlates directly with price.
Law of Demand
All other things remaining the same, the higher the price, the smaller the quantity demanded. Another way to state this is that the quantity demanded varies inversely with price.
What does the Aggregate demand curve tell us?
All the combinations of inflation and real growth that are constant with a specific rate of spending growth
Resources
All things used in producing goods and services Natural or Corporate
john hancock
American revolutionary patriot who was president of the Continental Congress
revenues
Amounts earned from selling products or services to customers.
What is the difference between an IPO and a secondary stock
An IPO is the first time a stock is sold
Collusion
An agreement among firms to divide the market, set prices or limit production
trade-off
An alternative that we sacrifice when we make a decision
Wage
An amount of money paid to an employee at a specific rate per hour worked.
Lockout
An attempt by management to put pressure on unions by temporarily closing the business
recession
An economic slowdown of the economy which results in rising unemployment, increased business failures, declining economic growth and higher personal bankruptcies.
capitalism
An economic system based on private ownership of capital
Mixed economy
An economic system combining private and public enterprise
free enterprise system
An economic system in which individuals depend on supply and demand and the profit margin to determine what to produce, how to produce, how much to produce, and for whom to produce. The quest for improvement financially and materially motivates consumers and producers.
Command economy
An economic system in which the gov makes all decisions
command economy
An economic system in which the government controls a country's economy.
Traditional exonomy
An economic system that relies on habitat or rival
mixed economy
An economy in which private enterprise exists in combination with a considerable amount of government regulation and promotion.
traditional economy
An economy in which production is based on customs and traditions and economic roles are typically passed down from one generation to the next.
How does a change in demand for loanable funds affect the quantity of savings/borrowing and the equilibrium interest rate?
An increase in demand will increase interest rate and quantity. a decrease in demand will decrease interest rate and quantity
How does a change in the supply of loanable funds affect the quantity of savings/borrowing and the equilibrium interest rate?
An increase will shift the interest rate down and increase the quantity. A decrease in demand will decrease interest rate and quantity
Consumer Price Index
An index of the cost of all goods and services to a typical consumer
Moral Hazard
An individual does not bear the cost of additional risk
Asymmetric information
An individual possesses more information then the other
what are some examples of things that would inc/dec the demand of loanable funds?
An investment tax credit shifts demand up, it acts as a subsidy and gives them an incentive to borrow more
Union
An organization of employees that is formed to promote the welfare of its members.
Craft Union
An organization of skilled specialists in a particular craft or trade.
cost benefit analysis
Analysis done to compare and quantify the financial and non-financial costs of making a change or implementing a solution compared to the benefits gained.
Barrier to entry
Any factor that makes it difficult for a new firm to enter a market
Public Property
Any good that is owned by the government.
Capital
Any human made resource that is used to create other goods or services
Capital
Any human made resource that is used to produce other goods and services
Copyright
Any written document is copyrighted
Money
Anything generally accepted in exchange for goods and services; has an agreed upon value
Substitute goods
Are goods that are used in a place of another
Complementary goods
Are two goods that are bought and used together
Efficient market hypothesis
Argument that stocks are always priced about right ,and that bargins are so hard to find because they are closely watched by so many investors
law of supply
As a price increases the quantity of the good provided increases, as the price of a good decreases, the number provided decreases.
law of supply
As the price increases producers produce more
Ceteris paribus
Assumption used in economics (and other disciplines as well), where other relevant factors or variables are held constant.
Why do people use lenders to funnel their savings to borrowers instead of performing this function themselves?
B/c it would take a lot more time for each individual person to evaluate the risk of certain decisions then if they were to allow the bank to do it. It also allows them to spread their risk out more.
How do banks play the role of a financial intermediary
Banks receive savings from many individuals, pay them interest, and then loan their funds to borrowers or investors
Why is the demand for loanable funds downward sloping?
Because it is an inverse relationship. At higher rates, firms will not want to borrow as much money but as rates fall companies are willing to borrow more money
Why does inflation act like a tax
Because it transfers real resources from citizens to the government
Why is money neutral in long run?
Because the increase in money leads to people buying more and therefore people producing more. yet when they go to buy more they realize they don't have anymore purchasing power so they go back to their original level.
Why wil unemployment benefits increase the unemployment rate?
Because they are influencing people to not try as hard to find a job
Bonds are less risky than stocks why?
Bond holders get paid first and if a company files for bankruptcy stock holders get nothing.
Municipal bonds =
Bonds issued by states and local governments. highways, etc.
What is a T Bill
Bonds with maturities of a few days to 26 weeks that pay only at matuity
What is a T-note
Bonds with maturities ranging from 2-10 years that pay interest every 6 months issued by the US treasury
Technology
Branch of knowledge dealing with engineering, applied science, etc.
Sherman anti trust act
Breaks up monopolies
Bull and Bear Markets
Bull: rising Bear: falling
Implementation lag
Bureaucracies must implement the plan
Goods (Products) market
Business firms sell goods and services to households
Sole proprietorship
Business owned and managed by a single individual
Partnership
Business owned by two both share liability and pay
Stock Exchange
Buy and sell stocks
Open market operations used by Fed to control MS
Buy bonds = increase MS Sell bonds = decrease MS
Conspicuous Consumption
Buying expensive services and products in order to flaunt your wealth.
what is the law of the Invisible Hand?
By Adam Smith " the market process is an invisible hand which allows producers and consumers to buy and produce.
How does the PPCurve shift towards the unattainable margin?
By creating more capital goods
How do you calculate Gross domestic Product(GDP)?
C + Ig + G + Xn Consumer goods, gross investments, Government expenditures, and Exports Net
Induced consumption
C in excess of autonomous consumption, characterized by an increase in YD
Formula for figuring out multiplier effect
CHange in Y = 1/(1-MPC) + G
Price Index: Consumer price index
CPI reports on price changes for about 80,000 items in 364 categories.
Investments
Can be short term or long term in the form of interest on bonds and notes or dividends on shares of stock
Government
Can regulate either market w laws, taxes, subsidies
Discretionary policy
Changes in taxes or spending that are the result of deliberate changes in government policy
Merger
Combination of two or more companies into a single firm
merger
Combination of two or more companies into a single firm
Horizontal Merger
Combination of two or more frms producing the same kind of product.
Monopoly
Complete control of a product or business by one person or group
macroeconomics
Concentrates on the operation of a nation's economy as a whole
barriers to entry
Conditions that keep new businesses either from entering an industry or succeeding in that industry.
Corporations
Considered legal entities, which means they are separate from the people who own them.
Investment in GDP
Construction of new house
Name the determinants
Consumer income Consumer tastes # of consumers price of related goods consumer expectations
Demand
Consumer willingness and ability to buy products; what you want
substitution effect
Consumers ability to substitute other products for the focal brand and increase price elasticity of demand for the focal brand
Law of demand
Consumers will buy more of a good when its price is lower and less when its price is higher
The Largest part of PAE
Consumption PAE = C + G + I + NX
Expenditures approach
Consumption + Investment + Government + Net Exports
Federal Reserve System
Controls the amount of money in supply
Multinationals
Corp. producing and selling without regard to national boundaries and whos business activities are located in different countries.
Who issues bonds
Corporations
Menu costs
Cost of changing a listed price
Unit of account costs
Cost of having a less reliable unit of measurement
Externalities
Cost or benefits to others that decision makers do not take into account when making decisions
Fixed Expense
Costs that do not change from month to month.
Variable Expense
Costs that vary in amount and type, depending on the choices you make.
How do volatile and unpredictable inflation affect the labor market?
Could cause them to make wage agreements at the wrong level leading to too high of wages or too low of wages. Could lead to firms going under or unproductively if wages aren't high enough
Absolute advantage
Country's ability to produce more of a given product than another country.
Federal Reserve notes
Currency issued by the fed that eventually replaced all other types of currency.
CPI (Price Index)
Current year totals/ base year totals x100
Lorenz curve
Curve showing how actual distribution of income varies from equal distribution
Market economy
Decision on the three key economic questions are based on invisible hand is self interset snd competiton on the regulate the marketplace
Recession
Decline in real GDP lasting two quarters or more
Increased Competition
Decrease Costs, Increases quality, More option for consumers
What are two things the government could do if it wants to implement contractionary fiscal policy and what would these policies do to affect AD
Decrease government spending or increase taxes, which will therefore shift the AD curve in
How do insecure property rights affect the quantity of savings and investment within an economy
Decreses the amount of savings and investment
Demand-pull
Demand increases--cost up
Inelastic demand
Demand that is not very sensitive to price changes
rule by few
Describe the form of government known as an oligarchy:
Disequilibrium
Describes any price or quantity not at equilibrium
Inelastic
Describes demand that is not very sensitive to a change in price
Elastic
Describes demand that is very sensitive to change in price
Consumer Sovereignty
Describes the role of the consumer as sovereign, or ruler, of the market.
Production Possibilities
Diagram representing maximum combination of goods and services and economy can produce when all active resources are fully employed
Evaluation and adjustment lag
Did the plan work? have conditions changed?
...
Disadvantages of sole
Relatively small, no wide variety of goods
Disadvantages of traditional Economy
Shortage
Disparity b/w the ammount demanded and amount supplied
Djia
Dow Jones Industrial average, stats of 30 rep. stocks used to monitor price changes on NYSE
Under what conditions will the tax rebate have a limited effect on the economy?
During a recession. if consumers incur debt, then the one-time tax rebate is used to pay off the debt ->> no change in AD
Income
Earnings from work or investment
Four Sectors of the Economy
Economists view the economy as being divided into four sectors: government (G), investment (I), consumers (C) and net exports (NX). The GDP is measured by calculating the expenditures of each sector.
Entrepreneurs
Entrepreneurs combine land, labor, and capital to produces goods and services. They absorb the risk of being in business, including the risk of bankruptcy and other liabilities associated with doing business. Entrepreneurs receive profits for this effort.
Fairness
Equaity
Why do firms sell stocks?
Equity financing
How does money contribute to economic efficiency?
Establishes a price value
rise
Even if a bond has substantial initial current yield, its return can be negative if interest rates ___; sell the bond before it reaches maturity
Public goods and externalities give an example
Ex. If public schools weren't offered less children would go to school because of the costs.
Circular flow with government
Example: public goods and services are provided by government to households because they are not excludable and solves the free rider problem, and do not rival in consumption. Government to businesses: provides infrastructure( goods and services).
Federal Deficit
Excess of federal expenditures over tax and revenue collections
Monopoly
Exclusive control of the supply or trade in a commodity or service
Seasonal Unemployment
Exists because of the changing seasons. Seasonal unemployment affects people whose jobs depend a lot on the season.
Technological Unemployment
Exists when new technology replaces existing jobs. Jobs are eliminated because of the improvement, and this results in technological unemployment.
Fixed and variable costs
F: cost of production that doesn't change when output does. V: production cost that varies as output changes ; raw materials, labor, energy.
What information do you need to calculate the FV of an asset?
FV = PV x (1+i)^n I = interest paid by the investment N = number of periods the investment will be held.
What cause demand to shift (either right or left)
Factors that cause an increase or rightward shift in Demand 1) decrease in the price of compliments 2) increase in the price of substitutes 3) increase in income (for a normal good) 4) increased preference by demanders 5) increase in the population of potential buyers 6) expectations of higher prices in the future ** When these factors move in the opposite direction, demand will shift LEFT**
What cause supply to shift (either right or left)
Factors that cause an increase or rightward shift in Supply 1) decrease in cost of materials, labor, or other inputs used in production 2) improvement in technology that reduce cost of production 3) improvement in the weather (agricultural goods) 4) increase in the number of suppliers 5) expectation of lower prices in the future **When these factors move in the opposite direction, supply will shift LEFT**
FED- history
Fed Reserve Act in 1913; banking system was a failure
FDIC
Federal Deposit insurance Corporation
antitrust legislation
Federal laws starting with the Sherman Act of 1890 that tried to prevent a monopoly from dominating an industry and restraining trade.
What is the FOMC
Federal open market committee. they determine the stance of monetary policy by controlling open market policy. MUST IMPORTANT AND INFLUENTIAL PART OF THE FED
Conglomerate
Firm with four or more businesses making unrelated products, with no single business responsible for majority of its sales.
Which type of police, monetary or fiscal, has a shorter effectiveness lag?
Fiscal policy, because they have the ability to stick money directly into the pockets of people while monetary policy can just stick more money into the economy as a whole
Business fluctuations
Fluctuations in the growth rate of real GDP around its trend growth rate
communist
Followers of communism; people who believe in an eventual revolution in which social, political, and economic equality will be attained for all.
Corporation
Form of business recognized as a separate legal entity
example of normative economics
France ought to undertake policies to make its labor market more flexible to decrease the unemployment rate
Mod. Free enterprise economy.
Free enterprise with some government involvement, same as mod private enterprise economy.
what makes up a larger share of unemployment? frictional or structural
Frictional
Collusion
From an economic perspective, is cooperation among firms to manipulate prices and otherwise increase their profits. Collusion among buyers or sellers reduces the level of competition in a market.
Factors that Shift AD Curve
Future expectations, Policy and World Economy
Real GDP
GDP adjusted for inflation
Nominal GDP
GDP measured at current prices
real GDP?
GDP that adjusts with inflation
real GDP
GDP that has been inflated/deflated to reflect changes in price levels
Real GDP =
GDP where the distortions of Inflation have been removed
Example of intermediate good or service?
Gasoline purchased by insurance agent to visit clients at their homes
Mediation
Gets laborers and management to work together
Exports
Goods and Services sold to other countries
Production efficiency
Goods and service are produced at their lowest resource (opportunity cost).
Imports
Goods and services bought domestically but produced in other countries
Public Goods and Services
Goods and services often provided by the government because their unique characteristics make it unlikely that the private market will provide them in sufficient quantity
Luxuries
Goods beyond necessities
Public Goods
Goods or services that are non rival and non excludable
Common Resources
Goods or services that are rival and nonexcludable
consumer goods
Goods produced for present consumption.
Private Goods
Goods produced or purchased by business firm and individuals
Capital Goods
Goods such as machinery and factories that are used produce other goods
Consumer Goods
Goods that are consumed (used) by the consumers
Buyers Set the Price
Goods would be fairly cheap. Since the prices would be so low, there would not be many suppliers willing to produce the goods.
Suppliers Set the Price
Goods would be very expensive because suppliers want to make as much money as possible. Since their prices would be so high, the demand would be fairly low and the suppliers would end up with many goods they could not sell.
Public Corporation
Government
Public Choice Theory
Government agents are still human! They use economic tools to deal with traditional problems of political science
Communism
Government owns all means of production
what is public spending
Government spending
Demand curve
Graphic representation of a demand schedule
Corporation
Groups who set up entity with legal ownership
Inflation helps/hurts:
Helps borrowers Hurts lenders!!!! (If at fixed rate)
Recession
High prices and high unemployment
What are the repercussions of raises taxes to finance fiscal policy?
Higher taxes reduce private spending, limits the impact of fiscal policy
Resource (factor) markets
Households sell resources to business firms
Five features of a market economy
Households, Firms, Factor Market, Profit, and Product Market
Law of supply
How a company will supply at particular prices
Credit
How much money you owe
Supply
How much of a good or service a producer is willing and able to produce at different prices; what you have
Efficiency
How well resources are used and allocated. Do people get the goods and services they want at the lowest possible resource cost? This is the chief focus of efficiency.
Free Enterprise
How you do it; buy & sell
Means of Production
How you produce
labor
Human effort directed toward producing goods and services
5. Economic models
Hypothesis if proven become economic models however they must be continually tested due to the constant change of the economy.
When deriving AE curve using C, I, G, X and m what factors are fixed and what are not?
I, G, X and m are fixed C is not fixed
How does inflation affect the real return that lenders receive?
IF inflation > interest rate then lenders lose money. It decreases their returns
Why do we study unemployment?
IT IS THE SINGLE BEST INDICATOR OF HOW WELL THE LABOR MARKET IS WORKING IN BOTH THESE SENSES, but it is an incomplete indicator
Interchangeable Parts
Identical components that can be used in place of one another in manufacturing
capital gain
If a stock increases in value and is then sold for more than its original cost, a capital gain results.
capital loss
If interest rates rise and bond prices fall, there is a __ ___ if time to maturity is longer than the holding period
Under what conditions will the tax rebate restore the economy to its natural rate of growth?
If it is a permanent tax rebate it will be more likely spent than if it was temporary. UNLESS the government is taking on a lot of debt to finance the rebate then the ricardian equivalence will hold
Post hoc Ergo Propter hoc
If then, Because. Ex. Is something causes something like warm sunny days cause people to go to the beach.
Protective Tariff
Import tax; a tax on imported goods that raises the price of imports so people will buy domestic goods
Net Exports
Imports-exports
Double Taxation
In a corporation. The income of the corporation is taxed and its profits are taxed again when they are paid out to stockholders.
Unlimited Liability
In a sole proprietorship. Everything the owner has, and even more, is on the line.
limited government
In this type of government everyone, including all authority figures, must obey laws. Constitutions, statements of rights, or other laws define the limits of those in power so they cannot take advantage of the elected, appointed, or inherited positions.
Tragedy of the Commons
Incentives to maintain or conserve a resources are lacking; not enough resouces
Capital
Includes manufactured products such as tractors, welding equipment, and computers that are used to produce other goods and services. The payment to capital is referred to as interest.
Land
Includes natural resources such as mineral deposits, oil, natural gas, water, and land in the usual sense of the word. The payment to land as a resource is called rent.
Labor
Includes the mental and physical talents of the individuals who produce products and services. The payment to labor is called wage.
Savings
Income not spent
Savings
Income that is not spent on consumption goods. The source of the supply of loanable funds
What causes inflation if real GDP is fixed and velocity stable?
Increase in money supply
What are some examples of things that would inc/dec the supply of loanable funds
Increase in tax rate on savings income. Will decrease supply
Assume that marginal propensity to consume is 0.8 and potential output is $800 billion. If the actual real GDP is $850 billion, which of the following policies would bring the economy to potential output?
Increase taxes by $12.5 billion.
How do changes in interest rates because of the selling of bonds affect investment
Increase them
Inflation
Increased prices for goods and services combined with the reduced value of money
What impact does gov. borrowing have on savings? consumption? Investment?
Increases savings Decreases investment and consumption
What impact does gov. borrowing have on the equilibrium interest rate?
Increases the interest rate
Techonogy
Increasing output per unit of input
Price index: Implicit GDP Price Deflator
Index of average levels of prices for all goods and services in the economy.
Private Corporation
Individual People and Business
Market Economic System
Individual people and businesses decide what,how, and how much they will produce and how the products will be distributed
market
Individuals make their own decisions about what to produce, how to produce it, and for whom to produce it.
Discount Rate
Interest rate charged by the Fed to commercial banks for the loaning of excess reserves
IRS
Internal revenue service collects taxes
How is national savings defined
It is the difference between income, consumption and government expenditures. S = Y - C - G. Savings(s) = Investment (I)
What is fiscal policy?
It is the federal government's policy on taxes, spending and borrowing that is designed to influence business fluctuations
When we say that an economy is closed, what do we mean?
It means that net exports (NX) is equal to zero. Therefore GDP Y = C + I + G
What happens when Governments borrow?
It shifts the demand curve to the right, increasing both interest rates and savings and borrowings
Supply Curve
It shows the quantity producers plan to sell at each price. The supply curve shows the relationship between the quantity of a good supplied and its price. The only factor that can create movement along the supply curve is price.
What happens if the fed pursues an expansionary monetary policy at the same time that congress and the president pursue an expansionary fiscal policy
It will lesson the effect of crowding out in the short-run
goods
Items purchased to satisfy needs and wants
What information do you need to calculate the PV of an asset
Just rearrange FV formula. FV i and N
Factors that Determine Quantity of AS
K-Human Capital (fixed in SRAS) T-Technology (fixed in SRAS) L-Labor
how is the labor force participation rate calculated? (LFPR)
LFPR = (unemployed + employed)/adult population all x 100
LFPR
Labor force/ population x100
factors of production
Land, Labor, Capital, Entrepreneurship, and technology. reasorces need to produce goods and services
Resources
Land, labor, machinery, and other inputs used to produce goods and services; natural resources, physical capital, and human capital
What are the factors that can increase structural unemployment?
Large, economy-wide shocks that occur relatively quickly. oil shocks, shifts from manufacturing to services, globalization and global competition, fundamental technology, labor regulations ( underemployment benefits, minimum wage, powerful unions, employment protection laws)
Charter
Legal document giving certain rights to a person or company
Keynesian
Lets fix this w policies!
Profit maximizing quantity of output
Level of production where marginal cost is equal to marginal revenue.
11. Scarcity
Limit # of goods and services can be produced because an economy has limited resources available.
Scarcity
Limited resources relative to wanted and needs
Monopolistic Competition
Located somewhere between perfect competition and a monopoly. It is not pure competition yet not quite a monopoly. Monopolistic competition is the most efficient market structure. It consists of many buyers and sellers who are all fully informed making decisions based on many factors. If advertising is not truthful, monopolistic competition will be in jeopardy
What is the quantity theory of money equation
M x V = P x Y m = money supply v = velocity of money p = price level y = real gdp
What does each side of quantity eqn represent
M x v = represents how many times each dollar in the money supply is being spent on the goods and services being produced p x y = represents the amount of spending
M2
M1 + time-realted deposits, savings deposits and mutual funds
Calculating GDP Multiplier
M= 1/ (1-MPC)
What are the three most important definitions of the money supply
MB: monetary base: curreny and total reserves held at fed M1: currency + checkable deposits M2: M1 + savings deposits, money market mutual funds, and small-time deposits. M2 is largest, MB is smallest
Nominal Interest Rate EQ
MD = MS
Relationship between MPC and MPS
MPC + MPS = 1
Automation
Machines
Profit
Make money, more than what you spend to make the product.
how do sticky wages and prices affect the shape of the SRAS curve?
Makes it flatter to the left of the SGC
Differentiation
Making a product different from other similar products
Monopolistic comp.
Market structure having all conditions of pure comp except for identical products.
Price Index: producer price index
Measures price changes paid by domestic producers for their inputs
What is the producer price index
Measures the average price received by producers. Unlike the CPI and GDP the PPI measures produce price indexes for both intermediate AND final goods
Labor force participation rate
Measures the labor force as a percentage of the total population at least 16 yrs (Percentage of people who are working and who want to work)
price elasticity of demand
Measures the responsiveness of demand following a change in price
carl levin
Michigan U.S. senator; democrat
debbie stabenow
Michigan U.S. senator; democrat
What definition of the money supply does the Fed have direct control over
Monetary base: MB
Tight Monetary Policy
Monetary policy that makes credit expensive in an effort to slow the economy
Loose Monetary Policy
Monetary policy that makes credit inexpensive and abundant, possibly leading to inflation.
Which type of policy, monetary or fiscal, can be implemented quicker?
Monetary, because the federal reserve can act very quickly.. there is no legislative lag
What is price confusion and money illusion?
Money illusion is when people mistake changes in nominal prices for changes in real prices
Demand Deposit
Money in a checking account that can be paid out "on demand", or at any time
Commodity money
Money that has an alternative use as a commodity; gunpowder, flour, corn
Fiat Money
Money that has value because the government has ordered that it is an acceptable means to pay debts
Four types of Market Structures
Monopoly, oligopoly, perfect competition, and monopolistic competition.
Ethics
Moral codes or sets of moral principles that a person requires himself or herself to abide by. A business must be ethical in order to keep customers.
Shoe leather costs
More trips to bank bc of hyperinflation
Opportunity cost
Most desirable alternative given up as the result of a decision
Identify two free trade agreements
NAFTA- North American Free Trade Agreement APEC- Asia, Pacific, Economic Cooperation
New York Stock Exchange
NYSE New York Stock Exchange, which is one of the most organized stock markets in NYC
NASDAQ
National Association of Securities Dealers Automated Quotation, the worlds largest electronic stock market
Arguments for trade barriers
National Security, Infant industry, Retaliation
Collective Bargaining
Negotiation between an employer and trade union
price systems
Neutrality, Compromise, Can adjust to new circumstances
What counts in GDP?
New Products Durable and Nondurable Goods Goods and Service Produced within the US Final Goods and Services GDP = C + Ig + G + Xn Xn = Exports - Imports Both tangible and intangible products
What type of interest rate is in the market for loanable funds?
Nominal
Types of GDP
Nominal GDP is the current raw data not adjusted for inflation. Real GDP is adjusted for inflation and is measured in constant dollars.
what is the difference between nominal and real?
Nominal rates do not include the subtraction of inflation. To find real rates, you subtract nominal rate by inflation rate.
Services
Not tangible
Unemployment rate
Number of civilians at least 16 years who have been trying to find a job within the prior four weeks
4. Scientific method
Observe real world behavior and outcomes, Form a hypothesis, Test the outcomes to the predicted outcomes, hypothesis are accepted or rejected, must test hypothesis because of ever changing economy.
Cyclical Unemployment
Occurs because of the fluctuation of business cycles in the economy. Cyclical unemployment exists when there is not enough demand to employ all who are willing and able to work.
Ricardian equivalence
Occurs when people see that lower taxes today mean higher taxes later. They save their tax cut to pay future taxes. - Describes some people, but not all - Makes bond-financed tax cuts less effective in the short-run
1st continental congress
On September 1774, delegates from 12 colonies gathered in Philadelphia. After debating, the delegates passed a resolution backing Mass. in its struggle. Decided to boycott all British goods and to stop exporting goods to Britain until the Intolerance Act was canceled.
Oligopoly
One company exerts control over most of a market
Absolute advantage
One country can produce more of a good than another country.
Location
One critical factor that impacts the success of any of the four business models.
Limited Liability
Only lose what you put in
National Association of Securities Dealers Automated Quotation (NASDAQ)
Only measures stocks that are bought and sold "over-the-counter." It measures smaller stocks that are generally technology- and computer-related businesses.
Purchase or Sale of Bonds by the Fed to banks and/or the public
Open market operations
new jersey plan
Opposite of the Virginia Plan, it proposed a single-chamber congress in which each state had one vote. This created a conflict with representation between bigger states, who wanted control befitting their population, and smaller states, who didn't want to be bullied by larger states.
Scarcity
Our unlimited wants clash with limited resources, leading to scarcity. Everyone (rich and poor) faces scarcity because, at a minimum, our time on earth is limited. Economics focuses on the allocation of scarce resources to satisfy unlimited wants.
Per capita output
Output divided by total population
(Figure: Monetary Policy III) Refer to the information in the figure Monetary Policy III. Expansionary monetary policy will lead to an equilibrium price level of:
P4
Macroeconomics
Part of economics dealing with the economy as a whole
Microeconomics
Part of economics that deals with behavior and decision by making by small units such as individuals and firms
Market economy =
People and firms decide what, how, whom questions.. us
Rational Ignorance
People choose to be rationally ignorant when the cost of education one self on an issue exceeds the potential benefits the knowledge would provide
Who buys a bond
People of the public
Expansion
Period of growth real GDP; recovery from recession
Market Price
Point where supply and demand are equal.
Benefit principle of taxation
Principle belief that taxes should be paid according to benefits received regardless of income.
Recognition lag
Problem must be recognized. It can take 6/7 months to realize a recession
Mass Production
Process of making large quantities of a product quickly and cheaply
Assembly Line
Production method that breaks down a complex job into a series of smaller tasks
Resources
Productive resources include land (land and natural resources), labor (mental and physical talents of people), capital (manufactured products used to produce other products). and entrepreneurial ability (the combining of the other factors to produce products and assume the risk of the business).
Complements
Products that increase value of other prod; price of one goes up demand of both fall
what are progressive and regressive taxes?
Prog). As income goes up tax rate increases Reg). If income goes up marginal tax rate goes down
Private Property
Property owned by individuals or companies, not by the government or the people as a whole
standard of living
Quality of life based on ownership of necessities and luxuries that make life easier of a person individual group or a nation
RWR formula
RWR = MWR/P
Real GDP
Real GDP= nominal GDP/ deflator
in an economy that experiences a negative real shock, what happens to real growth and inflation if expansionary fiscal policy is implemented
Real growth will inc very little and inflation will inc a lot
Factors that Shift consumption and savings functions
Real interest rate wealth expected future income
If expected inflation < actual inflation what is true
Real rate of return < equilibrium real interest rate. therefore wealth will be redistributed from lenders to borrowers
if expected inflation > actual inflation what is true
Real rate of return > equilibrium real interest rate. therefore wealth will be redistributed from borrowers to lenders
Strike
Refusal by employees to work; union shuts down
Supply schedule
Relationship b/w product price and quantity
barb byrum
Representative.
The reserve requirement is 10% and Jack withdraws $5,000 from his checkable bank deposit to pay for a trip to New York City. Assume that banks do not hold any excess reserves and that the public holds no currency, only checkable bank deposits
Reserves decrease by $5,000, and checkable deposits decrease by $5,000
Frictional Unemployment
Results from the day-to-day changes in the economy. Occurs because of the time and effort it takes to find a new job.
S & P 500
Satistical series of 500 stocks used to monitor prices on NYSE, American stock exchange and otc market.
Who supplied loanable funds?
Savers(lenders). Savings = income - consumption
Change in Wealth Equation
Saving + Capital Gains - Capital Losses
Exchange in Government
Scarcity exists in government, so agents find ways to trad for what they want
Social Security
Set up a payment plan for the old age, handicapped, delinquent children, and dependent
Change in RWR moves or shifts Ls?
Shifts
Shortage
Shortages occur when producers will not or cannot offer goods or services at current prices (short or long-term).
Which of the following would most likely be a microeconomic question?
Should I go to business school or take a job?
Production possibilities frontier
Shows the combinations of two goods that are possible for a society to produced at full employment. Points on or inside the PPF are attainable, and those outside of the frontier are unattainable.
The Production Possibilities Curve
Shows the maximum amounts of two different goods that can possibly be produced during any particular time using society scarce resources
Demand Curve
Shows the relationship between the quantity of a good demanded and its price. The only factor that can create movement along the demand curve is price.
Oligopoly
Similar to monopolies, except instead of one firm there are at least two. Since oligopolies are comprised of so few industries, the industries often work together to control the market. The firms are easily able to withstand economic downturns because they are able to cooperate and fix prices. The lack of competition and the fixing of prices force consumers to pay higher prices.
Shortage
Situation in which quantity demanded is greater than quantity supplied; also known as excess demand
Surplus
Situation in which quantity supplied is greater than quantity demanded; also know and excess supply
Surplus
Situation where quantity supplied is greater than quantity demanded at a given price
Underemployed
Skills dont match job
Disinflation
Slowing rate of inflation
Why do people borrow money?
Smooth their consumption and finance large investments
Why do people save money
Smoothing consumption, impatience, marketing and psychological factors, interest rates
1. What is economics
Social science concerned with the problem of using scarce resources and unlimited wants and needs.
Four types of businesses
Sole-proprietorships, partnerships, corporations, and franchises.
Need
Something essential for surviving
Collateral
Something of value that by agreement becomes property of the lender if the borrower defaults
Want
Something people desire
What is private spending?
Spending by households and firms
Discretionary spending
Spending for federal programs must receive annual authorization.
mike rogers
State Senator; Republican
law of diminishing marginal utility
States that as extra units of a variable factor are applied to a fixed factor, the output from each additional unit of the variable factor will eventually diminish.
Business Regulations
Step 1) Business structure and name Step 2) Business tax responsibilities Step 3) Business licenses and permits by business type Step 4) Business employer requirements
Define stocks and bonds
Stocks: a share in a company Bonds: a loan to either corporations or government.
james madison
Strict constructionist, 4th president, father of the Constitution, leads nation through War of 1812
the federalists
Strong federal government; supported Britain; loose interpretation of the Constitution; emphasized manufacturing, shipping, and trade; led by Alexander Hamilton; favored national bank and protective tariffs
Economics
Study of how societies decide what to produce, how to produce it, and how to distribute what they produce
economics
Study of how societies decide what to produce, how to produce it, and how to distribute what they produce
microeconomics
Study of individual consumers and businesses.
Number of Suppliers
Supply will increase when the number of suppliers increases. Supply will decrease when the number of suppliers decreases.
Characteristics of market economy
Supply, demand, and price allocate resources: same as free ent.
Cost push
Supply: - oil prices go up, suppliers supply less
Demand schedule
Table that lists the quantity of. A good a person eill buy at various prices in a market
Stockholders
Take out stocks
Sales Tax
Takes on what you buy (not food)
Goods
Tangible items
What are the political difference between the tax cuts and inc. gov spending?
Tax cuts: puts more money into private sector, bush (republican) favored tax cuts Spending: government grows, obama (Democrat) focused on spending
Excise Tax
Tax on luxuries
Income Tax
Tax on what you make
Property Tax
Tax on what you own
Law of Supply
Tendency of suppliers to offer more of a good at a higher price
Institutions
The "rules of the game" shape the incentives people face when making decisions
Opportunity Cost
The Best alternative forgone in order to produce or consume something else: what you give up to get something else
connecticut plan
The Connecticut Plan called for a two-house Congress in which both types of representation would be applied, and is also known as the Compromise Plan.
Microeconomics
The Study of individual areas of activity with in the total economy
greater
The YTM is ____ than the coupon rate when the bond price is below face value
Market Power
The ability of an individual firm to influence the market price of its product
Comparative Advantage
The ability to produce a good or service at a lower opportunity cost than others
Incorporation
The act of becoming a corporation. Allows firms to accumulate sufficient capital to make large-scale investments and achieve economies of scale. Corporations are typically large, and they are able to easily find persons with specialized skills to handle all the requirements of the business. Corporations also offer the advantage of limited liability. Corporations are very costly and time consuming to organize because of the many government regulations involved in gaining a corporate charter.
Trade off
The act of giving up one benefit in order to gain another greater benefit
Multiplier effect
The additional increase in AD caused when expansionary fiscal policy increases income and thus consumer spending
Trade-Off
The alternatives that we give up when we coose one course of action over another
Capital Gain
The amount by which the selling price of an asset exceeds the purchase price
Quantity Supplied
The amount of a good or service that producers plan to sell during a given amount of time at a particular price.
Demand
The amount of a good that consumers are willing and able to buy at a given price.
Quantity Demanded
The amount of a good that consumers plan to buy at a given price during a specific time.
Supply
The amount of goods available
Price
The amount of goods or money that must be given up in exchange for something.
Opportunity cost
The amount of other products that must be forgone or sacrificed to produce a unit of a product.
Who demands loanable funds?
The borrowers. i.e. FIRMS, GOVERNMENT
Macroeconomics
The broader issues in the economy such as inflation, unemployment , and national output of goods and services.
Arbitrage principle
The buying and selling of equally risky assets, ensures that equally risky assets earn equal returns
price; interest rate
The concepts of present value and yield to maturity are used to calculate the ___ of these debt instruments and/or their ___ ___ for comparative purposes
Overhead Expense
The cost for items such as rent, insurance, utility parments, mortgage payments, and the like that are continuing costs of doing business; fixed expense
Marginal Cost
The cost of producing one more unit of output.
Opportunity cost =
The cost of time or resources, when one choice is made rather than another.
Opportunity cost
The cost paid for one product in terms of the output (or consumption) of another product that must be forgone.
federal reserve system
The country's central banking system, which is responsible for the nation's monetary policy by regulating the supply of money and interest rates
Microeconomics
The decision making by individuals, businesses, industries, and governments.
Crowding out
The decrease in private consumption and investment that occurs when government borrows more
Barter
The direct exchange of one set of goods or services for another
Labor
The effort people devote to tasks for which they are paid
Labor
The effort that people devote to a task for which they are paid
Net Benefits
The excess of benefits over costs
Star-up costs
The expenses a firm must pay before it can begin to produce and sell goods
closing cost
The expenses incurred and paid at the time of settlement in the transferring of property.
Incentives
The factors that motivate individuals and firms to make decisions in their best interest.
Equity
The fairness of various issues and policies.
Profit
The financial gain made in transaction
bill of rights
The first ten amendments to the Constitution
U.S. constitution
The government of the United States. A set of principles (guidelines) that describe the duties and powers of the government.
Command Economic System
The government tells you what to do
What is the relationship between risk and the interest rate paid by the borrower?
The higher the risk, the higher the interest rate paid
deregulation
The lifting of restrictions on business, industry, and professional activities for which government rules had been established and that bureaucracies had been created to administer.
Price Floor
The lowest legal price that can be paid for a good or service.
Allocative efficiency
The mix of goods and services produced is just what the society desires.
lower
The more distant a bond's maturity, the ___ the rate of return that occurs as a result of an increase in the interest rate
greater
The more distant a bond's maturity, the ____ the size of the percentage price change associated with an interest-rate change
Perfect Competition
The most competitive market you can imagine. The only competition is price competition.
Gross Domestic Product (GDP)
The most important measure of economic activity. It is the market value of all final goods and services produced in the nation in a year.
What is a real return/real interest rate formula
The nominal rate of return minus the inflation rate
principal
The original amount borrowed in a loan
Effectiveness lag
The plan takes time to work -> multiplier effect takes tie
Equilibrium
The point at which quantity demanded and quantity supplied are equal
Equillibrium
The point at which the demand for a product or service is equal to the supply of that product or service
dividends
The portion of corporate profits paid out to stockholders
Consumer Soverignty
The power of consumers to decide what gets produced
negatively
The price of a coupon bond and the YTM are _____ related
Scarcity
The principle that limited amounts of goods and services are available to meet unlimited wants
What is fractional reserve banking?
The process of banks only holding a fraction of deposits in reserve and lending the rest
Production
The process of converting resources (factor of production) - land, labor, capital, and entrepreneurial ability - into goods and services.
Investment
The purchase of new capital, things like tools, machinery and factories. the source of the demand for loanable funds
What do we mean when we say that the economy has a potential growth rate?
The rate of economic growth that would occur given flexible prices and the existing real factors of production. I.e. solow growth rate
equals
The rate of return equals the YTM only if the hold period ____ the time to maturity
What is a nominal return/nominal interest rate
The rate of return that does not account of inflation
Unemployment Rate
The ratio of job seekers to the total labor force. Unemployment rate = (job seekers)/(workers + job seekers). High unemployment rates usually indicate a decreasing economy. A low unemployment rate usually indicates that the economy is doing well. The five types of unemployment include frictional, structural, cyclical, seasonal, and technological.
Structural Unemployment
The reason that full employment in a market economy does not mean "zero unemployment." It exists when a person is not qualified for any job because the most the person can contribute is less than the minimum wage for the job.
Beneficiary
The recipient of funds, titles, property, and other benefits
Deregulation
The removal of the some government controls over a market
Inflation
The rise in the overall price of goods and services. High inflation rates typically mean that consumers have less purchasing power, because consumers are not able to buy as much as they used to. This is usually an indicator of a slow economy. A low inflation rate usually indicates that the economy is growing.
Economic system
The structure of methods and principles that a society uses to produce and distribute goods and services
Economics
The study of how individuals, firms and society make decisions to allocate limited resources to many competing wants.
Economics
The study of how people seek to satisfy their needs and wants by making choices
Macroeconomics
The study of the total economy
What are the repercussions of selling more bonds to finance fiscal policy?
The supply of bonds increases, making bond prices fall and causing interest rates to rise. and because of higher interest rates more people will save rather than invest meaning lower private spending
Net national income
The total net value of all goods and services produced within a nation over a specified period of time, representing the sum of wages, profits, rents, interest, and pension payments to residents of the nation.
Business Cycle
The typical business cycle includes expansion, boom, bust, recession, and trough. The business cycle takes many years to complete, and it is never the same. The causes and length of business cycles are always different.
Opportunity costs
The value of the next best alternative; what you give up to do something or purchase something.
What is future value (FV)
The value that a sum of money today will be worth at some point in the future if invested for a return
rate of return
There is a distinction between an instrument's interest rate and its ___ ___ __
Law of Demand
There is a negative relationship between price and quantity demanded
Law of Supply
There is a positive relationship between price and quantity supplied
interest-rate risk
There is effectively no ___ ____ for any bond whose time to maturity matches the holding period
Why was the great depression caused?
There was a serius of shocks that hit the economy that shifted the AD curve down leading to a large decrease in consumption investment and the money supply declined leading to deflation which really hurt real gdp growth. Some of the real shokcs were bank failures. So a decreas In M lead to bank failures which led to reduction in productivity of financial intermediation which was a real shock
What happens to the allocation of resources when prices are difficult to interpret?
They are not efficiently allocated
What are the primary type of assets the fed buys and sells in order to control the money supply?
They buy and sell government bonds, usually short term bonds called treasury bills or T-bills(also called treasury securities or treasuries)
What are two things the government could do if it wants to implement expansionary fiscal policy and what would these policies do to affect AD
They can increase government spending or cut taxes, which will therefore shift the AD curve out.
What role do institutions play in driving economic growth?
They encourage it
Whats the relationship between interest rates and bond prices
They move in opposite directions
second continental congress
They organized the continental Army, called on the colonies to send troops, selected George Washington to lead the army, and appointed the comittee to draft the Declaration of Independence
What happens to the interest rates when the government sells bonds
They rise
What is a financial intermediary?
Things such as banks, bond markets, and stock markets. They reduce the costs of moving savings from savers to borrowers and investors
Necessities
Things that we need to live, such as food, water, and shelter
necessities
Things that we need to live, such as food, water, and shelter
mayflower compact
This document was drafted in 1620 prior to settlement by the Pilgrims at Plymouth Bay in Massachusetts. It declared that the 41 males who signed it agreed to accept majority rule and participate in a government in the best interest of all members of the colony. This agreement set the precedent for later documents outlining commonwealth rule.
magna carta
This document, signed by King John of Endland in 1215, is the cornerstone of English justice and law. It declared that the king and government were bound by the same laws as other citizens of England. It contained the antecedents of the ideas of due process and the right to a fair and speedy trial that are included in the protection offered by the U.S. Bill of Rights
wants
Those things which make our lives more comfortable but are not needed for survival
Consumers
Those who buy/consume something
Producers
Those who make something
What is the role of the financial system
To bring savers and borrowers together
Why do bonds have different ratings
To determine the risk, different bonds are tied to companies that have different credit ratings and therefore more/less risk than other companies
What will shift the money demand curve?
To the Left: any change that makes people want to hold their money and any change that makes people want to hold less money To the Right: when real output or price level increases
Gross Domestic Product (GDP)
Total output of an economy
Aggregate demand
Total quantity of goods and services demanded at different price levels.
Explain the difference between variable, fixed, and total costs
Total- fixed + variable Variable- cost that changes when the rate of buisness changes Fixed- total amount organization incurs
What does an unexpected decrease in the inflation rate do?
Transfers earth from borrowers to lenders
What does an unexpected increase in inflation rate do?
Transfers wealth from lenders to borrowers. B/c lenders will be lending money that is earning a return that is less than inflation therefore giving money to borrowers
Rent Seeking
Trying to gain benefits through political means
Discount Bond
US savings bonds and Treasury bills, and long-term zero-coupon bonds
How is the unemployment rate calculated?
Unemployed/(unemployed +employed)
Capitalism
Use money to make money
Underutilization
Use of fewer resources than an economy is capable of using.
Consumption
Use of product
What is not counted in GDP?
Used Products GNP used to measure production outside U.S. Intermediate Goods Household production Purely financial transactions Imports Private transfers Public transfers Underground economy
"Lemon" Law
Used cars must pass a certain test
Efficient
Using resources in such a way as to maximize the desired output
Choice
Variety of the same products
virginia plan
Virginia delegate James Madison's plan of government, in which states got a number of representatives in Congress based on their population
thomas jefferson
Virginian, architect, author, governor, and president. Lived at Monticello. Wrote the Declaration of Independence. Second governor of Virgina. Third president of the United States. Designed the buildings of the University of Virginia.
What is a real rage?
W/P, wage divided by price level. What the wage is worth
Two-tier Wage System
Wage scale paying newer workers a lower wage than others already on the job
Income approach
Wages + Rent + Interest +Profit
Payment for resources
Wages payment for use of labor Interestpayment for the use of capital Rent Payment for use of land
Balanced Budget
What you spend is what you make
law of diminishing returns
When additonal units of a variable input are added to fixed inputs after a certain point, the marginal product of the variable input declines.
informative advertising
When buissnesses inform you about what their product has and what it does
Under what scenario will the government's spending have the biggest effect on the economy?
When people are afraid to spend their money. i.e. the MPC
coupon rate
When priced at face value, the YTM equals the ___ ___
Excess demand
When quantity demanded is more than quantity supplied
Excess supply
When quantity supplied is more than quantity demanded
What is crowding out?
When the government borrows more money and increases the interest rate they are decreasing investment because people are no longer willing to invest given the higher interest rates
What does 'monetizing the debt' mean
When the government pays off its debts by printing money
When is it best to use fiscal policy?
When there is an AD shock
gerrymandered
When voting districts are redrawn in such a way that they purposely favor a political party, they have been
Thinking at margins
When you decide how much more or less to do
Stock Market
Where stocks in corporations are bought and sold. The stock market reflects all aspects of the economy, and watching the stock market is a pretty good indicator of where the economy currently is.
Equilibrium Point
Where the quantity supplied equals the quantity demanded.
When is it best to use bond-financed expansionary fiscal policy?
Works best when the private sector is reluctant to invest or save
What is WTO?
World Trade Organization (WTO) is an organization that intends to supervise and liberalize international trade globally.
Productivity function
Y/L = K/L when T is fixed
Disposable income
YD = rGDP - net taxes
rGDP demanded
Yd = C + I + G + X - m
AD Curve
Yd in relation to P downward sloping, increase in P cause decrease in Yd
How do you compare the value of two different sums of money over time?
You use the discount rate. the opportunity cost that you have forgone when making a decision. it is the rate of return you could have received for an opportunity of equal risk.
opportunity cost
a benefit that is given up in order to achieve or gain something else ex. what did you give up to go to this class?
Municipal Bonds
a bond issued by a state or loan government or muniupalty to finance such improvement as high ways state building libraries part and schools
Sole Propietorship
a business owned and managed by a single individual
time deposit
a certificate of deposit from which withdrawals can be made only after advance notice or at a specified future date
Neo-Classical Growth Theory
a change in T increase Saving and Investment because income increases Y/L increase because T increase-->Saving and investment increase cause K/L to increase
market supply schedule
a chart that lists how much of a good all suppliers will offer at different prices
corporate charter
a charter issued by state that lets a buissness have limited liability
Stock (or equity)
a claim to partial ownership of a firm
Countries that engage in trade will tend to specialize in goods in which they have ________ and will ________ those goods.
a comparative advantage; export
fixed cost
a cost that does not change, no matter how much of a good is produced
injunction
a court order to stop something
Phillips Curve
a curve that shows the trade-off between inflation and unemployment
Stagflation
a decline in real GDP combined with a rise in the price level
Depreciation
a decrease in the value of a currency relative to other countries
charter
a document incorporating an institution and specifying its rights
oligopoly?
a few large firms dominate a market
Marginal Propensity to Consume (MPC)
a fixed number by which consumption rises when disposable income rises by $1
economic model
a framework that places the generalized insights of the theory in a more specific contextual setting
inflation
a general increase in prices
barter
a good for good trade
Price ceiling
a government imposed limit on how high a price can be changed
Demand Curve
a graph of the relationship between the price of a good and the quantity demanded
demand curve
a graphic representation of a demand schedule showing the relationship between the price of an item and the quantity demanded during a given period with all other things being equal
trust
a group of businesses in an industry that allows their firms to be controlled by one manager
industry
a group of businesses with common concerns
Non-Profit Corporation
a group of people who join to do some activity that benefits the public but no profit is earned by the company
usury law
a law restricting the amount of interest that can be charged for credit
Expenditure Line
a line showing the relationship between PAE and output
unsecured loan
a loan with no collateral
Junk Bonds
a lower- rated potentially higher-paying bond
describe monopoly
a market dominated by a single seller
invisible hand theorem
a market economy through the price mechanism, will tend to allocate resources efficiently
Equilibrium
a market price has reached the level at which quantity supplied equals quantity demanded
describe oligopoly
a market structure in which a few large firms dominate a market
Describe perfect competition
a market structure in which a large number of firms all produce the same product.
describe monopolistic
a market structure in which many companies sell products similar not identical
monopolistic compitition
a market structure in which many sellers offer similar, but not standardized, products to consumers
capitalism
a market-based econmic system in which individuals own and control the factors of production
Dow Jones Industrial Average
a measure based on the prices of the stocks of 30 large companies, widely used as a barometer of the stock market's health.
Nominal GDP
a measure of GDP in which the quantities produced are valued at current-year prices; measures the current dollar value of production
Calculate real GDP
a measure of GDP in which the quantities produced are valued at the prices in a base year rather than at current prices; measures the actual physical volume of production
Elasticity of Demand
a measure of how consumer react to a change in price
Elasticity of demand
a measure of how consumers react to a change in price
price index?
a measurement that shows how the average price of a standard good/goods changes over time
government monopoly
a monopoly created by the government like the us mail sevice
developing nations
a nation where the average income is much lower than in industrialized nations.
Socially Optimun Policies
a one-size-fits-all solution does not exist
Depression
a particularly severe or protracted recession
Boom
a particularly strong and protracted expansion
Expansion
a period in which the economy is growing at a rate significantly above normal
broker
a person who carries out investors orders to buy and sell stocks and bonds
What is underemployment
a person who is part tie but would like to be full time
producer
a person, group, or business that makes good or provides services to satisfy consumers' wants and needs
budget
a plan for saving and spending
democracy
a political system in which the supreme power lies in a body of citizens who can elect people to represent them
rent control
a price ceiling on rents, sett by government
CPI
a price index determined by measuring the price of standing group of goods meant to represent "market basket"
stock
a purchasable share in a company
What is an AD shock
a rapid an unexpected shift in the AD curve. AKA a rapid and unexpected shift in spending
what is disinflation
a reduction in inflation: inflation is growing at a decreasing rate
Dividend
a regular payment received by stockholders for each share that they own
market basket?
a representative collection of goods and services
I.R.A.
a self-funded retirement plan that allows you to contribute a limited yearly sum toward your retirement taxes on the interest earned in the account are deferred
Recession
a significant widespread decline in real income and employment
budget deficit
a situation in which the government spends more than it takes in
budget surplus
a situation in which the government takes more than it spends
shortage
a situation in which the quantity demanded of a good or resource exceeds the quantity supplied
economics
a social science that studies how resources are used and is often concerned with how resources can be used to their fullest potential
mortgage
a specific type of loan that is used to buy real estate
state convention
a state convention convened to amend the state constitution or draft a new one
(Figure: The Demand and Supply of Wheat) Look at the figure The Demand and Supply of Wheat. If a price of $8 temporarily exists in this market:
a surplus of 4,000 bushels will result.
federalism
a system in which power is divided between the national and state governments
winner take all
a system in which the candidate with the most district votes in a state gets all of the delegate votes from that state
market demand schedule
a table that lists the quantity of a good all consumers in a market will buy at each different price
Demand Schedule
a table that shows the relationship between the price of a good and the quantity demanded
excise tax
a tax that is levied on a specific good
brand name
a word picture or logo on a product that helps consurmers distinguish it from similar products
warrenty
a written guarantee from the manufacturer or distributor that states the conditions under which the product can be returned, replaced, or repaired.
entrepreneurship
ability to organize and get something done
elastic
able to adjust readily to different conditions
efficiency
achieving a goal as cheaply as possible
efficiency
achieving a goal using as few inputs as possible
productive efficiency
achieving as much output as possible from a given amount of inputs or resources
Tradeoffs
act of giving up one goal in order to gain greater goal all the alternative that we giving up where never we choose one course of action over other
outsourcing
act of one company contracting with another company to provide services performed by in house employees.
investment?
act of redirecting resources from being consumed today so that they may create benefits in the future
economic policies
actions or inactions taken by the government to influence economic actions
Expansionary Gap
actual output is higher than potential output, positive
Excess Reserves
actual reserves less rr money used to make loans with
intrinsic value
actual value
Marginal Product of Labor (MPL)
additional Y produced by an additional hr of L when K & T are fixed
marginal benefit
additional benefit above what you've already derived
Marginal cost
additional cost to you over and above the costs you have already incurred
marginal cost
additional cost you obtain when producing one more unit
ex post real interest rate
adjusted for actual changes in the price level; describes how lenders and borrowers fared in real terms after the fact
ex ante real interest rate
adjusted for expected changes in the price level; considered the most relevant for economic decisions but not ready observable
Who are the unemployed?
adults who do not have a job but are looking for work
sole proprietorship
advantage- easy to start, few regulations, complete control disadvantage- liability, limited access to resources
partnerships
advantage- easy to start, shared decision making, taxation, disadvantage- expensive, double tax, loss of control, more regulation.
corporations
advantage- no responsibility, stocks transferable, growth, borrow money disadvantage- double tax, loss of control, more regulation
Principle agent problem
agents do not do in the best interest of the principle.
gross domestic product (GDP)
aggregate output (annual total output of goods) as the dollar value of all final goods and services produced within the US in a year
Unit of Account
agreed measure for stating price of g/s
money
agreed value
collusion?
agreement among firms to divide the market, set prices, or limit production
closed shop
all companies must be part of a union (not in az)
labor
all human activity that is productive
land
all natural resources
Land
all nature respire that used to produce good and service
6. Ceteris Paribus Assumption
all other factors are held unchanged. It is used to isolate the effect one economic factor has on another. Without this assumption, it would be difficult to determine cause and effect in the economy.
mediation
all parties must agree and a judge is there to make sure they do
national debt
all the money the federal government owes to bonding
Who is in the labor force?
all workers employed + unemployed. MILITARY IS NOT INCLUDED
solution to scarcity
allocation
Flexible Exchange Rate
also known as a floating exchange rate is not officially fixed but varies according to the supply and demand for the currency in the foreign exchange market
trade-off
alternatives that must be given up when one is chosen over another
entrepreneur?
ambitious leader who combines land, labor, & capital to create and market new goods or services
equilibrium quantity
amount bought and sold at the equilibrium price
GDP multiplier (M)
amount by which a change in autonomous consumption is magnified to determine EQ and rGDP increase in fixed values of AE (I,G,X) = increase in AE and rGDP increase in rGDP results in an overall increase in AE and rGDP
how do you figure out the amount of money a bank creates by loaning out?
amount deposited x MM
wages
amount earned
Autonomous consumption
amount of C that would take place in the short tun without YD
quanitiy demanded
amount of good/service that consumers are willing and able to purchase in a given time period at a particular price
Nominal Money
amount of money measured in $
Reserve Ratio (rr)
amount of money on hand rr= reserved money/total deposits
money multiplier formula?
amount of new money that will be created with each demand deposit
aggregate demand
amount of real domestic output that domestic will desire to purchase at each possible price index
trade offs
an alternative we sacrifice when we make a decision
automation
an assembly line run by robots
Money is
an asset that can be easily used to purchase goods and services.
what is a liquid asset
an asset that can be used for payments, or, quickly and without loss of value, be converted into an asset that can be used for payments
Capital requirements for banks include all of the following EXCEPT:
an attempt to reduce deposits.
socialism
an economic system based on individual's goodwill towards others, not on their own self-interest, and in which, in principle, society decides what, how and for whom to produce
capitalism
an economic system based on private ownership of capital
market economy
an economic system based on private property and the market in which, in principle, individuals decide how, what and for whom to produce
market economic system
an economic system consisting of buying and selling
command economic system
an economic system run by the government
market economy
an economy in which the government has little say in what, how, and for whom goods are produced and in which the factors of production are only for individuals.
one-crop economy
an economy that is dominated by the production of a single item
board of directors
an elected group that runs a company
credit rating
an evaluation made by credit bureaus of a borrowers overall credit history
substitution
an event in which one thing is substituted for another
tariff
an excise tax on an imported good
Law of Diminishing Returns
an increase in L results in a decrease in MPL
law of demand
an increase in a product's price will reduce the quantity of it demanded (vice versa for a decrease in price)
How does government borrowing affect the deman dog loanble funds?
an increase in government borrowing will cause an increase in demand for loanable funds
Appreciation
an increase in the value of a currency relative to other countries
Adverse selection
an individual benefits from an exchange by having more information than the other
real gross domestic product
an inflation-adjusted measure of GDP
Suppose the Federal Reserve is following the Taylor rule, which takes both inflation and business cycles into account when setting the federal funds rate. Also suppose that the inflation rate in the economy is equal to 3% and the output gap is 5%.
an inflationary gap, since actual real GDP exceeds potential real GDP.
Financial Intermediaries
an institution acts as a service for both those who have extra money to save or lend and channels it to those who wish to invest or borrow.
real investment
an investment that creates a new capital good
Medium of Exchange
an object generally accepted in exchange for g/s
A quota is
an upper limit on the quantity of a good that can be bought or sold
draw and label a business cycle
answers will vary
provide a graph that shows what a price floor and ceiling cause
answers will vary
Factors the cause movement along SRAS
any change in P increase in P results in an increase in rGDP supplied
Labor
any effort a person devotes to task for which that person is paid
natural resource
any material provided by nature that can be used to produce goods or provide services.
What is a real shock/productivity shock
any shock that increases or decrease the potential growth rate AKA Solow growth curve
good
any tangible item
technology
any use of the other factors of production that produce foods and services more efficently
Assets
anything of value that one owns
resource
anything that can be used to produce a good or service
Factors that affect buying plans
anything that shifts or moved AD curve Price, Expectations, Fiscal and Monetary Policy, World Economy
capital gain
anytime you make money from selling property or stock
art of economics
application of the knowledge learned in positive economics to achieve the goals one has determined in normative economics
How is the chair of the red appointed and for how long?
appointed by the Prez and is confirmed by the senate for a term of 4 years
observations
as a science, economics always begins with what?
3. Marginal benefits and costs
as long as benefits are greater than cost we shall purchase the product.
How do lifecycle effects affect the LFPR?
as people age they retire and therefore there are less people in the labor force
law of supply
as the price rises, the quantity supplied rises.. and as price decreases, quantity supplied decreases
mass production
assembly line used to produce many goods quickly
infinite
at any one moment, how many market equilibrium points does each product have?
what is the term auction facility
auctioning off of funds to the banks until the rate was low enough so that the banks would borrow. they were designed to give the fed more control over the money supply
Example feedback-rule policy
automatic adjustment of MS in response to inflation
Automatic stabilizers act like:
automatic expansionary fiscal policy when the economy is in a recession.
Why does an increase in spending growth only cause a temporary increase in economic growth?
b.c. eventually the people who increase there output will realize they aren't gaining any actual purchasing power so they will fall down to their previous rate of output
Why was the Great depression prolonged
b/c the fed kept a tight monetary policy instead of trying to pump money back into the economy to help aid the failing banks
Why are long-term loans harder to secure if inflation is volatile and unpredictable?
b/c they are more riskier, lenders and borrowers are scared that unexpected inflation or deflation could redistribute wealth
examples of negative real shocks
bad weather, higher price of oil or important input, productivity/tech slump, higher taxes/regulation, disruption of production by war/earthquack/pandemic
barriers to entry
barriers that make it difficult to enter an industry
Traditional Economy
based on customs and beliefs
9. Economic perspectives: Positive statement
based on facts, can be measured and confirmed
core democratic values
basic rights outlined in the Declaration of independence and/or the United States Constitution and other important writings of the nation such as Supreme Court decisions.
Why is GDP multiplier greater than 1?
because increases autonomous consumption induce further increase in AE
why do changes in V only have a temporary effect on AD?
because it didn't crease any sort of long-term inflation, inflation is purely a monetary phenomenon and changes in velocity will eventually resort back
why will open market sales decrease AD
because it is decrease the monetary base, therefore decreasing M which will shift the AD curve in
why will open market purchases increase AD
because it is increase the monetary base, therefore increase M which will shift the AD curve out
Why is it difficult to measure the CPI accurately?
because it must take into account both new goods and better quality goods
why is frictional unemployment described as short-term?
because it normally takes a few months for them to find employment
why is Money is not considered a economic resource?
because its not productive
why do prices and wages fall slower when there i a negative shock to AD
because no one likes to have their wage cut
If people are forward-looking why will a tax cut lead to less consumption in the economy
because of ricardian equivalence
Why does the fed face difficulty in controlling broader measures of the money supply (M1 and M2) even tho they have direct influence over the money supply?
because of the changing of MM, if the MM is relatively low then the amount that the money supply will change in relation to the additional loans will be quite small.
why does it take time for AD shocks to work their way through an economy?
because of the cost to change things and the unknowing weather it is a shock or if it was an actual trend in the market
Why is the supply of loanable funds up sloping?
because the higher the return a person will expect to get the greater number of people who will be wiling to supply the money
Why i the fed a "lender of last resort"
because when everyone else has run out of funds or are too scared to lend, banks and other financial institutions can still turn to the fed to get money
classical economists
belief that cyclical employment is always at zero because there is always minimum wage job and those who do not take it are voluntarily unemployed
Ability to pay principle of
belief that taxes should be paid according to level of income regardless of benefits received.
comparative advantage
better suited to the production of one good than to the production of another good
cultural imperialism
black market
bonds
borrow money; buy a bond
experimental economics
branch of econ that studies the economy through controlled laboratory experiments
bull and bear markets
bull= high market bear=low market
partnership?
business organization owned 2+ persons who agree on a specific division of responsibilities and profits
price taker
business that accepts market price determined by supply and demand
corporations
businesses that are treated as a person and are legally owned by their stockholders who are not liable for the actions of the corporate "person"
sole proprietorships
businesses that have only one owner
partnerships
businesses with 2 or more owners
How does the Fed affect the interest rate?
by changing the MS
Store Value
can be held for a time and later exchanged for g/s
free enterprise
capitalism
positive externalities
causes demand side market failures and moves the demand curve to the left or below.. products are under produced
negative externalities
causes supply side market failures and moves the supply curve to the right or below
Marginal propensity to consume (MPC)
change in C/change in YD slope of consumption function
Movement along Productivity function
change in K/L or Y/L when T is fixed
Money Multiplier (mm)
change in MS/ change in MB or 1/rrr
Factors that cause movement along LRAS
change in P and MWR by the same % increase in P = increase in MWR
Marginal propensity to save (MPS)
change in S/ change in YD slope of savings function
Shift of Productivity Function
change in T when (K/L or Y/L is fixed)
Size of M
change in Y/ change in autonomous consumption
What causes a shift of Ld?
change in labor productivity
Substitution effect
change in quantity demanded because of change in relative price (margerine and butter)
What factors affect spending growth
changes in M and V, increase will lead to higher, decreases will lead to lower
What is the difference between changes in M and changes in V
changes in V are only temporary while changes in M can be permanent ands set at any rate
What is an automatic stabilizer?
changes in fiscal policy that stimulate AD in a recession without explicit action by policy makers
Which of the following factors cannot shift the aggregate demand curve?
changes in the price level
variable expense
changing expense
corporation
chartered company with stock holders
Which of the following is part of M1?
checking account balances
Demand for money (MD)
choice to hold money downward sloping
scarcity
choices are necessary because people experience a conflict between insatiability and ______
allocation
choosing when needs will be satisfied and how much of our resources we will use to get them
who is adam smith?
classical economist, created the idea of laissez faire & the invisible hand of self-interest
Vertical Merger
combination of firms involved in different steps of manufacturing or marketing
mechanization
combining labor of people and machines
economic principle
commonly held economic insight stated as a law or principle
Public utilities
company providing essential services, water, electricity to customers under some gov. regulations.
market share
company's percent of total sales in a market
marginal analysis
comparison of marginal benefits/costs (usually for decision-making)
bicameral
composed of two legislative bodies
equilibrium
concept in which opposing dynamic forces cancel each other out
The Federal Reserve is able to have an impact on financial crises because it:
conducts monetary policy
Legislation lag
confess must propose and pass a plan. takes a while for things to get done in legislation
supremacy clause
constitutional declaration (Article VI) that the Constitution and laws made under its provisions are the greatest law of the land
what indexes is inflation measured from
consumer price index (CPI), Gdp deflator, and producer price indexes (PPI)
consumer sovereignty
consumer's wishes determine what's produced
MC > MB
consumers are saying "that's not worth it" losing profits
Law of Demand
consumers buy more of a good when its price decreases and less when its price increases
Law of demand
consumers buy more of a good when its price decreases and less when its price increases
law of demand
consumers buy more of a good when its price decreases and less when its price increases
As the real interest rate goes up:
consumption and investment goes down
traditional economy
continuity is valued, tend to repeat problems
Coupon bond
corporate bonds and US treasury notes and bonds
spy on other businesses
corporate spying occurs when businesses _____
global corporations
corporations which substantial operations on both the production and sales sides in more than one country
fixed cost
cost that does not change; no matter how much of a good is produced
variable cost
cost that rises or falls depending or how much is produced (example supplies)
Inefficiencies in Distributing Funds
costs may out weigh benefits
sunk costs
costs that have already been incurred and cannot be recovered
Comparative advantage
country's ability to produce a given product relatively more efficiently than another country,
advertising
create a need
Karl Marx
created the communist manifesto
What is the role of government in regulating corporations?
creating laws and enforcing them
What assets serve as money?
currency, total reserves held at banks, checkable deposits, savings deposits/market mutual funds/small-time deposits
M1
currency, travelers checks, and checking deposits
Increase in expected future income (AD effect)
current consumption increases, so AD increases rightward shift
When Recession?
current inflation < expected inflation
When Expansion?
current inflation > expected inflation
incumbent
currently holding an office
production possibility curve (PPC)
curve measuring the maximum combination of outputs that can be obtained from a given number of inputs
production possibilities curve
curve showing 2 combinations of goods that can be produced in a full employment, full production economy where the available supplies of resources and technology are fixed
difference between a demand curve and demand schedule
curve- graph with a slope schedule- numbers in a table
MB > MC
customers will choose to do this because it's rational and helps maximize utility... you continue to make a profit
Microeconomics
deals with behavior and decision making by individual units
command economy
decisions are made by individual leaders or government agencies
economic choices
decisions made by consumers based on demand of resources
stagflation?
decline in real GDP, rise in prices
Interest rate effect on investment and AD curve
decrease in IR increase investment which increase AD
Rightward shift of LRAS
decrease in RWR causes an increase in Labor productivity which increases pGDP shifting LRAS rightward
Affect of financial innovation
decrease in rMD
discount rate used by Fed to control MS
decrease in the discount rate causes banks to borrow more which allows banks to lend more increasing MS
Planned AE > rGDP
decrease inventory, increase production --> overall increase rGDP to AE (aka EQ)
Increase in interest rate (AD effect)
decrease investment, decrease Yd and AD leftward shift
How do changes in interest rate because of the selling of bonds affect consumption.
decrease it, because it will encourage households to save more due to the higher interest rates
Effects of a recession in the world economy AD
decrease net exports, decreases AD leftward shift
rrr used by Fed to control MS
decrease rrr, increase mm which increase MS
increase in expected future income on saving and consumption
decrease saving, increase consumption
affect on unemployment if inflation is greater than expected in SRPC
decreases
increase in MWR increases or decreases SRAS?
decreases
Capital Losses
decreases in the value of existing assets
anti-trust legislation
defines monopolies and gives government the power to control them
Elastic
demand that is very sensitive to change in price
Inelastic
demands that is not very sensitive to change in price
Induced Expenditure
depends on output (Y)
Inelastic
describes demand that is not very sensitive to a change in price
Elastic Demand
describes demand that is very sensitive to a change in price (candy is an example)
Inelastic demand
describes demand that isn't very sensitive to change ( example :medicine)
unitary elastic
describes demand whose elasticity is exactly equal to one (example demand goes down equally with price)
rent-seeking activities
designed to transfer surplus from one group to another
partisan
devoted to a cause or party
Costs of a market economy
difficult to achieve, producers pick prices, no govt. help
What is the relationship between price and quantity supplied
direct relationship up- up down down
What is the difference between an automatic stabilizer and discretionary fiscal policy?
discretionary is a delibetare manipulation of macroeconomics while automatic happens without any actions done
circular flow diagram
draw and label one; How does it represent consumers and businesses in the market?
Production Possibilities Curve
draw one to demonstrate the concepts of opportunity costs vs. Standard of living
why do firms find it easier to fire workers or reduce hours than to lower wages when there is a negative shock to AD
due to the long time it takes for wages to fall its easier just to fire somoene
What are the characteristics of money?
durability, portability, divisibility, acceptability, uniformity, and limited supply
income
earnings
the fed initiates what policies?
easy money or tight money
positive economics
economic analysis that draws conclusions based on logical deduction or induction, value judgements are avoided
Free Market
economic decisions are made by individual and are based on exchange or trade
Benefits of a market econony
economic efficiency, economic freedom, and economic growth
market force
economic force that is given relatively free rein by society to work through the market
Law of Demand
economic law that states that consumers buy more of a good when the price decreases and less when it increases.
paper losses
economic losses because if the bond had not been bought, funds could have earned more elsewhere and bought more bonds at the lower price
market structure
economic model of competition among businesses in the same industry
Supplyside economics
economic policies designed to increase aggregate supply or shift aggregate supply curve to the right.
laissez-faire
economic policy of leaving coordination of individuals' actions to the market (let events take their course)
macroeconomics
economic problems encountered by the nation as a whole
microeconomics
economic problems faced by individual units within the overall economy
real income effect
economic rule stating that individuals cannot keep buying the same quantity of a product if its price rises while their income stays the same
Externalities
economic side effect that affects an uninvolved third party.
capitalism
economic system based on the market in which the ownership of the means of production resides with a small group of individuals called capitalists
market economy?
economic system in which decisions on production/consumption of goods & services
command economy?
economic system in which the central govt. makes all decisions on the production and consumption of goods & services
mixed economy?
economic system that combines the free market with limited govt. involvement
Command
economic systems in which the government largely decides what goods and services will be produced, who will get them, and how the economy will grow
normative economics
economics involving value judgements
Economics
economics is the study of how people make choice to satisfy their wants
8. Micro economics
economics that analyzes the market behavior of individual consumers and firms. It focuses on patterns of supply and demand and the determination of price and output in individual markets. Remember price theory
John Mayard Keynes
economist who belived that the government spending could help a falthering economy
externality
effect of a decision on a third party not taken into account by the decision maker
product differentiation
effort to distinguish a product from similar products
assembly line
enables workers to proform individual task more efficently
Free Enterprise System
encourage individuals to start and operate their own business in a competitive system, without government involvement
EPA
environmental protection agency
EEOC
equal opportunity comity
equilibrium
equality of distribution
Economy at full employment when Ld _____ Ls
equals
Resources are being used efficiently when:
every opportunity to make people better off has been utilized.
Why does economy growth rate matter?
everything from, government, to work, to life, to wealth, to health is better
communism
everything is owned and run by the government. planned economic system
gross domestic product
everything produced in the us
toxic waste
example of a nuisance good
watch
example of an economic good
lumber
example of an undifferentiated product
camera manufactures
example of industry
gas station
example of perfect competition
Surplus
excess demand
conspicuous consumption
excessive consumption "flashy"
secondhand sales
excluded from GDP... contributes nothing to current production
government monopoly
exists when the government either owns and runs the business or authorizes 1 product
geographic monopoly
exists when there are no other producers within a certain region
the govt. initiates what policies?
expansionary or contractionary
Describe the govt's two fiscal policy tools
expansionary policies and contractionary policies
start-up costs
expenses new businesses face when entering the market
How do exports and imports combine to create a nation's trade balance?
exports vs. imports
macroeconomic externality
externalities that affect the levels of unemployment, inflation, or growth in the economy as a whole
Economic Equity
fair distribution of wealth
economic equity
fairness in the economy and make it balenced
assembly line
fast moving production process involving the putting together of interchangeable parts for a finished good
Positive shocks to AD
faster money growth rate, confidence, increased wealth, greater growth of GOV. spending, increased export growth, decreased import growth
who is the FOMC in the fed?
fed committee that makes key decisions about interest rates & the growth of the united states money supply
FCC
federal communications commission
FDIC
federal deposit insurance corporation
fiscal policy is by who?
federal government
FICA
federal insurance contributions act (social security)
monetary policy is by who?
federal reserve
points
fees paid to a lender and computed as a percentage of a loan
Incidence of a tax
final burden of a tax
gas used for public transportation is an example of...
final good
price maker
firm that doesn't have to consider competitors when setting the prices of its products
How are fiscal policy tools used to expand and contract the economy?
fiscal policies that try to increase output- expansionary policies Fiscal policies intended to decrease output- contractionary policies
nominal GDP?
fixed GDP
total cost
fixed cost plus variable cost (example rent and supplies)
B-corportaions
flexible-purpose corporation or benefit corporations -- explicitly lake social mission in addition to profit into consideration when making decisions
positive economics
focuses on fact and cause and effect relationships (what is).. develops scientific generalizations about economic theory
Specialization
focusing on producing a few products better rather than producing many less efficiently
FDA
food and drug administration
Consumer Price Index (CPI)
for any period, a measure of the cost in that period of a standard basket of goods and services relative to the cost of the same basket of goods and services in a fixed year, called the base year = Cost in current year / Cost in base year
copyright
for artist to protect the ownership of their art
patent
for inventors to protect the ownership of their inventions
Keynesian economics?
form of demand-side economics that encourages govt. action to increase or decrease demand & output
cartel?
formal organization of producers that agree to coordinate prices & production
Taylor policy rule
formula for setting the interest rate ffr = 2 + inflation rate + .5(inflation rate - 2) + .5(output gap)
capitalism
free market enterprise
Unemployment that is due to the time workers spend in job search is considered
frictional unemployment
keynesian economists
full employment is never reached
what are capital gain
gains off of stock ect.
inflation?
general increase in prices
generic brand
general name for a product rather than a specific brand name given by the manufacturer
welfare loss triangle
geometric representation of the welfare cost in terms of misallocated resources caused by a deviation from a supply demand equilibrium
distribution
getting goods where you want them when you want them -- important and central component of a service economy
inefficiency
getting less output from inputs that, if devoted to some other activity, would produce more output
patent
gives an inventor the exclusive property rights to that invention or process for a certain number of years
Large economies should always have a flexible budget because:
giving up stabilization makes no sense
imports
good from other countries we purchase
substitute good
good that can be used in place of another good... an increase in price in one good will increase the demand of another good
public good
good that if supplied to one person, must be supplied to all and whose consumption by an individual does not prevent its consumption by another (national defense)
private good
good that, when consumed by one individual, cannot be consumed by another (apple)
demand
good wanted
examples of positive real shocks
good weather, lower price of oil/other important input, productivity/tech boom, lower taxes/regulation, smooth production without disruption
merit goods or activities
goods and activities that govt believes are good for you even though you may not choose to engage in them
want
goods and services that people consume beyond what is necessary for survival.
supply
goods available
import
goods brought into the country
export
goods leaving the country
demerit goods or activities
goods or activities that govt. believes are bad for people even though they choose to use the goods or engage in the activities (drugs)
exports
goods sold to other countries
complementary goods?
goods that are bought & used together
complementary goods
goods that are bought to work together with another good
normal goods
goods that experience an increase in demand as a result of increases in buyers incomes are known as what?
substitute goods?
goods used in place of another good
inferior goods
goods we buy when our income is low ex. used books
intermediate goods
goods wither purchased for resale or for further processing into final goods
what is Government and market failure?
government failure: is when the government intervenes with trade which cause inefficiency and economic costs. Market failure: the quantity of a product demanded by consumers does not equate to the quantity supplied by suppliers. Thus creating market ineficiency
social security
government funding for the disabled and peole over 65
price floors
government imposed limits on how low a price can be charged
subsidy
government loan commonly granted to small business owners
Command Economy
government makes all decisions, very restricted, no freedom
Mixed Economy
government plays a limited role, market driven
price ceiling
government set price below the market equilibrium price
What are the economic differences between the two types of fiscal policy
government spending is amore certain influence on the economy but is slower. Tax cuts will increase spending but only if people don't save their new money
price floors
govt set prices above equilibrium price
John Maynard Keynes
govt. official teacher and writer, theory of supply/demand and unemployment led to programs to help nations economy
demand-side economics?
govt. spending and tax cuts help an economy by raising demand
Demand Curve
graph showing quantity demanded at prices that may occur in market
Laffer curve
graph showing that lower tax rates will supposedly stimulate higher tax revenues
Production possibility curve
graph that shows alternative ways to use an economies productive resources
demand curve
graphic representation of the relationship between price and quantity demanded
Supply Curve
graphical representation of quantities produced at each and every price in the market
movement along a demand curve
graphical representation of the effect of a change i price on the quantity demanded
shift in supply
graphical representation of the effect of a change in a factor other than price on supply
supply curve
graphical representation of the relationship between price and quantity supplied
Great Depression
greatest economic decline in US history, lasting from 1929-1939
GNP
gross national product
CEA?
group of 3 respected economists that advise the president on economic policy
trust
group of firms combined in order to reduce competition
union
group of workers get together to gain power
cartel
group that acts together to set prices and limit output
households
groups of individuals living together and making joint decisions - most powerful economic institutions
Nominal GDP:
has not been adjusted for changes in prices over time.
Special Interest Groups
have intense interest in an issue. they may benefit from the concept of disbursed costs and concentrated benefits
medicare
health insurance for people over 65
Why do countries develop free trade agreements to reduce protectionism?
helps both countries
FED- purpose
helps keep stable economy
What has not been a facilitating factor in world trade?
here's a list of what has. Know these and you'll know what factors aren't in world trade: * technology, communications, nafta
What are some implicating for a person who is structurally unemployed?
higher rates of suicide, lower rates of happiness. Recipe for misery and social decay and can lead to people losing their skills in their industry
law of demand?
higher the price ⬆️, the lower the quantity demanded ⬇️
law of supply?
higher the prices ⬆️, the more the supply ⬆️
Near-moneys are
highly liquid financial assets
market demand curve
horizontal sum of all individual demand curves
a market supply curve
horizontal sum of all individual supply curves
power of households
households vote with their dollars resides in the people representatives suppliers of labor
means of production
how a good is produced
it shifts right
how does an increase in supply affect the supply curve?
budget
how much you make and how much you spend
Basic Keynesian Model or Keynesian Cross illustrate the theory of:
how recessions and expansions may arise from fluctuations in aggregate expenditures
Efficiency
how well resources are used to achieve a goal in the shortest amount of time
Specialization
human resources are used for better suited production. Increases completion brings more capital
How do politicized lending and government banks as well as bank failures and panics affect the quantity of savings and investments within an economy?
hurts both savings and investment
perfect competition
ideal model of a market economy
it will increase
if a group of retired rich people moves to a poor town, what will probably happen to the demand curve for jewelry at the local jewelry store?
shortage
if cell phones are selling below the market equilibrium price, what results?
How does inflation affect the real return that borrower's pay?
if inflation > interest then borrowers gain money
surplus
if milk is sold above the market equilibrium price, what results?
it will decrease
if people expect the price of antique furniture to fall in three weeks, what will probably happen to the demand curve for antique furniture immediately?
collusion
if poker players were working together to cheat against the other players, it would be called what?
they will increase
if the major business in a small town gives all of its workers a raise, what will probably happen to the demand curves for normal goods in that town?
economic decision rule
if the marginal benefits of doing something exceed the marginal costs, do it. if the marginal costs of doing something exceed the marginal benefits, don't do it
invisabel hand
if you let the economy go it will work its self out and consumers will buy what they want at the best price and producesers will make what they can at the cheapeest price.
Spending promises made by governments that are effectively a debt, despite the fact that they are not included in the usual debt statistics, are known as:
implicit liabilities
Spending promises made by the government that are effectively a debt, although they are not included in the usual debt statistics, are known as:
implicit liabilities
List two examples of trade barriers
import quota tariffs
The European Central Bank was created:
in 1999, when the euro was adopted
radical capitalism
in what type of economic system does a central authority, a committee, or the people in common control the economy?
disposable income
income made after taxes
Real GDP per Capita
income per person adjusted for purchasing power
disposable income
income received by households - personal taxes
revenue?
income recieved by a government from taxes and nontax sources
normative economics
incorporates value judgements about what the economy should be like or what policy should be recommended to achieve a desirable goal (what ought to be or should be)
Increase in money supply (AD effect)
increase AD rightward shift
Increase of wealth on saving and consumption
increase consumption, decrease saving
Interest rate effect on net exports and AD curve
increase in IR decrease net exports which decreases AD
Increase in expected future profit (AD effect)
increase in Investment so AD increases rightward shift
International Substitution (AD effect)
increase in P coupled with a decrease in X and an increase in m decreases Yd
Wealth Effect (AD effect)
increase in P decreases the real value of money, decreasing Yd (Consumption decreases)
Intertemporal Substitution (AD effect)
increase in P raises interest rate, decreasing Yd (Investment decreases)
Increase in government spending (AD effect)
increase in Yd and AD rightward shift
Decrease in taxes (AD effect)
increase in consumption, increase in Yd and AD rightward shift
Increase in expected future inflation rate (AD effect)
increase in future price, increases current consumption so AD increases rightward shift
Interest rate effect of decrease in MS
increase in interest rate
What is the 2-way link between rGDP and AE?
increase in rGDP increase AE and an increase in AE increase rGDP
What causes economic growth AD-AS model?
increase in rGDP per person
Affect of increase in rGDP on MD
increase in rMD
Which of the following is an expansionary fiscal policy?
increase in unemployment benefits
Planned AE < rGDP
increase inventory, decrease production --> overall decrease in rGDP to AE (aka EQ)
Affect of decrease of nominal interest rate on MD
increase of real money demanded (rMD)
Movement of MD Curve
increase or decrease in Nominal Interest Rate
Shifts of MD Curve
increase or decrease in rGDP or financial innovations
Increase of real interest rate on saving and consumption
increase saving, decrease consumption
learning by doing
increased productivity as firms get better and better at producing through practice
How does the fed fight inflation?
increases ffr... ...which decrease MS cause interest rates to rise, banks no have less loanable funds so investment decreases, causing AE and AD to decrease, rGDP falls to pGDP
A government surplus is contractionary because:
increases in taxation, decreases in government purchases, and decreases in government transfers are contractionary.
Capital Gains
increases in the value of existing assets
globalization
increasing integration of economies, cultures, and institutions across the world
Autonomous Expenditure
independent of output
S&P 500
index that shows the price changes of 500 different stock
market economy
individuals and businesses make main economic decisions
What are some of the weaknesses of using the unemployment rate as a measure of how well the labor market is working?
individuals without a job but aren't actively looking for work are not counted as unemployment
Income increases, demand decreases
inferior goods
cost-pull inflation
inflation caused by a decrease in aggregate supply
Demand-Pull inflation
inflation caused by an increase in AD increases in the price level resulting from an excess of demand over output at the existing price level
demand-pull inflation
inflation caused by an increase in aggregate demand
Cost-Push inflation
inflation caused by an increase in costs (MWR or production materials)
what will a negative shock do to spending growth in the long run?
inflation decreases, expected inflation decrease, GDP remains same
What is inflation
inflation is an increase in the average level of prices
demand-pull theory?
inflation occurs when demand for goods and services exceeds existing supplies
cost-push theory?
inflation occurs when producers raise prices in order to meet increased costs
What is expected along the LRPC?
inflation rate
If real interest rates are negative, what is the relationship b/t nominal interest rates and the inflation rate?
inflation rate > nominal interest rate
Above full employment EQ
inflationary gap pGDP < rGDP
liability insurance
insurance that pays for bodily injury and property damage
Contractionary Policies
intended to reduce PAE and output
A business will want a loan when
interest rate < (return on project - cost of project) / cost of project × 100
Federal funds rate (ffr)
interest rate at which banks borrow money from other banks over night
tools of monetary policy?
interest rates, open market operations, and reserve requirements (rrr)
crude oil is an example of...
intermediate good
GDP excludes...
intermediate goodsq
IRS
internal revenue service
IMF
international monetary fund
the the real business cycle monday, how are the equilibrium inflation rate and growth rate determined
intersection of AD and Solow growth curves
where does C=YD?
intersection of consumption function and 45 line
7. Macro economy
is a aggregate economy. Deals with overall production(Gross domestic product)
Containerization, what is it?
is a system of freight transport based on a range of steel inter-modal containers. allows for efficient global trading
purely financial transaction
is excluded from GDP... includes public transfer payments (social security payments, welfare & veterens payments), private transfer payments (cash gifts given during the holiday), and stock market transactions (buying and selling of stocks aka produces no output)
How does the underemployment rate compare to the unemployment rate?
is greater than unemployment
Production possibility curve why does it bow outward?
it bows outward because of law of increasing opportunity cost.
If the FED wants the federal funds rate to fall:
it conducts open-market purchases, which increases revenue
why challenges does the fed face when it tries to influence AD
it does not know by how much their changes in monetary decision will have on AD. They must predict: 1. Will banks lend out all the new reserves or will they lend out only a portion, holding the rest as excess reserves 2. How quickly will increases in the monetary base translate into new loans and thus larger increases in M1 and M2 3. Do businesses want to borrow? How low do short-term interest rates have to go to stimulate more investment borrowing 4. If businesses do borrow, will they promptly hire labor and capital, or will they just hold the money as precaution against bad times?
Does a change in V affect the inflation rate in the long-run
it doesn't it stays the same
How does inflation affect our tax burden on capital gains?
it increases it because even if your capital gains is just keeping up with inflation and you make no real profit, you must pay taxes on it
IF the fed buys bonds, aka open-market purchases, what happens to interest rates?
it increases the demand for bonds, which pushes up the price of bonds thus lowering the interest rates.
what is the natural unemployment rate
it is defined as the rate of structural plus frictional unemployment
How does a bank make money by making loans?
it loans out money that is deposited in the bank. i.e. you deposit 1k in bank they loan out 900 of it to keep RR at 1/10. thus creating 900 new dollars and this effect continues on as the money doesn't just stop at one bank.
Factor Market
it pay wage to government employees
What is the fisher effect?
it says that the nominal rate will rise with expected inflation
how will volatile and unpredictable inflation affect econ. growth?
it slows it down
through what channels do open-market purchase slow the economy?
it will slow down the economy
How will a change in V affect AD
it will temporarily increase AD but it will eventually retract back. Changes in the growth rate of C, I, G, and NX will cause changes in V
What does "inflation is always and everywhere a monetary phenomenon"
it's the amount of money and the rate at which you increase this money that is going to cause inflation
consumer price index
itemized list of how much things cost last year
what influences a banks reserve ratio?
its determined primarily by how liquid banks wish to be. When banks are worried about demanders wanting their money back they keep a high reserve ration, but when they aren't worried about demanders wanting their cash they keep a low reserve ratio
what are some policies that can reduce structural unemployment
job retraining, job-search assistance, work tests, early employment bonuses
merger
joining of 2 firms to form a single firm
full employment
keeping goal of full employment in sight
economic equity
knowing who will gain and who will lose in an economic decision, making sure it balances
economic security
knowing you'll have a job next week, okay financially
Demand for Labor (Ld)
labor demanded in relation to RWR downward slope
why has structural unemployment been more serious in europe than in US
labor regulations
Labor Supply (Ls)
labor supplied given the RWR # of hours that all households in the economy plan to work upward slope
factors of production?
land, labor, capital
factors of production
land, labor, capital; The three groups of resources that are used to make all goods and services
Perfect comp
large # well informed buyers, and sellers with identical products
ceteris paribus
latin phrase for "holding other things constant".. assumption that factors other than the one being considered are held constant simplify the complex world
ceteris paribus?
latin phrase meaning "all other things held constant"
"lemon" law
law applied to used cars
law of increasing costs
law that states that when more of a product is initially being produced, the higher the opportunity cost will be to produce still more
minimum wage laws
laws specifying the lowest wage a firm can legally pay an employee
antitrust laws?
laws that encourage competition in the marketplace
the front runner
leader (the candidate currently leading a election)
What happens to the economy when prices are difficult to interpret?
leads to missed opportunities
(Figure: The Market for Loanable Funds II) A decrease in government borrowing will shift the demand for loanable funds to the:
left and decrease the interest rate
corporation?
legal entity owned by the individual stockholders
Discount bond
lender buys at price below face value and is repaid the face value at maturity. No distinct interest payments but interest is implicit in the difference between the face payment at maturity and discount price
Have shocks to rainfall become more or less important since 1980?
less because agriculture makes up a smaller portion of GDP
registration fee
licensing fee, usually annual, paid to a state for the right to use a car
trust?
like a cartel, an illegal grouping of companies that discourages competition
import quota
limit on the amount of a good that can be imported
Explain how scarcity relates to economics
limited quantities of resources to meet unlimited wants
scarcity
limited quantities of resources to meet unlimited wants
coercion
limiting people's wants and increasing the amount of work individuals are willing to do to fulfill those wants.
Bonds
loan that a corporation or government repays
What determines interest rate when economy is in long run EQ?
loanable funds market
Treasury Bond
long-term 10-30 year
deadweight loss
loss of consumer and producer surplus from a tax
savings bond
low-denomination bond issued by the United States government used as a form of investment
Savings Bond
low-denomination bond issued by the united-state government.
private-labeled products
lower priced store-brand products carried by some supermarket chains and club warehouse chains
Economies of Scale
lower production costs as a result of large-scale production Factories, equipment, assembly line, bulk purchase, distribution network, volume marketing
To fight recession the FED should
lower the real interest rate to stimulate spending
How does the fed fight recession?
lowers ffr... ...which increase the MS causing the interest rate to fall, banks than have more loanable funds so investment increase resulting in an increase in AE and AD causing rGDP to increase to pGDP
excise tax
luxury tax added to specific items (i.e gasoline)
interchangeable parts
machine made parts used in an assembly line
Physical Capital
machines, equipment, and buildings
Market economy
make choices, exchange/trade, free market
producer
maker
producers
makes goods
barrier to entry
makes it hard for a new business to enter a market
FTC
makes sure companies are able to compete
capital
manufactored goods used to make more goods
The horizontal summation of individual demand curves for a particular product, holding the quantity demanded constant, is referred to as
market demand
Factor Market
market in which firms purchase the factors of production from households
factor market?
market in which firms purchase the factors of production from households
product market?
market in which households purchase the goods & services that firms produce
Product Market
market in which households purchase the goods and services that firms produce
oligopoply
market structure in which a small number of firms compete
monopolistic competition?
market structure in which many companies sell products that are similar but not identical
oligopoly
market structure in which only a few sellers offer a similar product
Oligopoly
market structure where few large sellers dominate
value added
market value of a firm's output - the value of the inputs a firm has bought from others
Market Failure
market where any of the requirements for a comp. market are lacking
goods market
market where businesses produce goods and services and sell them to households and government
factor market
market where households supply labor and other factors of production to businesses and are paid by businesses for doing so
price ceiling
max price that can legally be charged for a good or service
National Income
measure of nations income.
aggregate supply
measure of real domestic output available at each possible price level
2. Utility
measurement of satisfaction obtained from consuming a good or service.
What is a consumer price index
measures the average price for a basket of goods and services bought by a typical american consumer. This index covers some 80000 items and is weighted so that expensive items cary more pull then cheap itmes
national income accounting
measures the economy's overall performance
When we use money to buy groceries, money is playing the role of a:
medium of exchange
What are the functions of Money?
medium of exchange unit of account store value
What are the three functions or uses of money?
medium of exchange, unit of account, and store of value.
interlocking directorate
members of the board of directors of one corporation who also sit on the board(s) of other corporations
randy schafer
michigan commisioner
gretchen whitmer
michigan state senator
Margin requirement
minimum deposits left with a stock broker to be used as partial payment on other securities.
price floor
minimum price fixed by the government.. price at or above this is legal; below it is not
price floor
minimum price for a good or service
why will minimum wages increase the unemployment rate?
minimum wage raises the wage thus decreasing the quantity of labor demanded
focus group
moderated discussion with small groups of consumers
Control and adjustment of MS
monetary policy
credit
money available for a client to borrow, owned by the government
Specie
money in the form of gold or silver coins
inflation
money isn't worth as much
discretionary income
money made after paying for taxes and nessecities
profit
money made from selling a good or service after the cost of production and labor
What determines the interest rate?
money market
Increase of MS by fed when economy is in long-run EQ
money market moves to new EQ but nothing real has changed
insurance
money set aside in case of emergency (i.e car accident)
fiat money
money that has value because the govt. has ordered that is an acceptable means
fiat money?
money that has value because the govt. has ordered that it is an acceptable means to pay debts
savings
money that is put away
mutual funds
money to be diversified
profit
money you have left over after paying all expenses
wage
monies earned by work
price stability
monitering prices to avoid inflation or deflation
fixed expense
month to month expense that doesn't change
what is moral hazard
moral hazards occur when banks and other financial institutions take on too much risk hoping that the fed and regulators will later bail them out
opportunity cost?
most desirable alternative given up as a result of a decision
opportunity costs
most desirable alternative given up as a result of the decision
quantity supplied
movement from one point to another on a fixed supply curve
international Monetary Fund (IMF)
multinational, international financial institution, concerned primarily w/ monetary issues
business
name given to private producing units in our society (defines what to produce, how much to produce, and for whom to produce it)
According to the text, productivity is driven by all of the following EXCEPT:
natural resources
Land
natural resources that are used to make goods and/or services
resources
natural, capital
natural experiments
naturally occurring events that approximate a controlled experiment where something has changed in one place but not anywhere else
economics forces
necessary reactions to scarcity
collective bargaining
negotiation between an employer and trade union (wages&benefits)
In the long run ______ factors are fixed
no
is frictional unemployment bad?
no
price index
nominal GDP/real GDP
Affect of increase in the Price level on MD
nominal MD increases
How do lenders set the nominal interest rate?
nominal interest rate = real interest rate + inflation nominal interest rate = Expected inflation + equilibrium interest rate
Real Money
nominal money/price level
Fisher Equation
nominal rate = real rate - inflation
If an economy is operating at an output level below its potential output level, holding everything else constant, one would expect:
nominal wages to fall
Nonbank financial institution =
non-depository institutions that channel savings to borrowers. (Finance companies, life insurance companies, pension funds etc.)
what is excluded from the computation of GDP
nonproduction transactions
Income increase, demand increases
normal goods
NAFTA
north american free trade association
Market Equilibrium Value of the exchange rate
not constant but changes with shifts in supply and demand for dollars because the US has a flexible budget
unemployment
not working
characteristics of perfect competition
numerous buyers and sellers, standardized product, freedom to enter and exit market, independent buyers and sellers, well-informed buyers and sellers
representative money
objects that have value because the holder can exchange them for something else of value
economic efficiency
obtaining maximum results from limited resources
OSHA
occupational safety hazard administration
economies of scale
occur when average costs of production falls as producers grow larger
Market Equilibrium
occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price
imperfect competition
occurs in markets that have few sellers or products that aren't standardized
technological monopoly
occurs when a firm controls a manufacturing method, invention, or technology
price fixing
occurs when businesses agree to set prices for competing producers
predatory pricing
occurs when businesses set prices below costs for a time to divide competitors out of a market
market allocations
occurs when competing businesses divide a market amongst themselves
natural monopoly
occurs when costs of production are lowest with one producer
Crowding in
occurs when goe has a budget surplus w/ no effect on loanable funds market, increase interest rate, AD, P and rGDP
Crowding out
occurs when gov has a budget deficit affecting the loanable funds market, which increase the interest rate decreasing AD, price and rGDP
Short run EQ of AE
occurs when planned AE=rGDP (point on 45 line)
Recessionary Gap
occurs when potential output exceeds actual output, negative
nonprice competition
occurs when producers use factors other than low prices to convince customers to buy their products
Scarcity
occurs when there are limited quantities of resources to meet unlimited needs or desires (always).
monopoly
occurs when there's only 1 seller of a product that has no close substitutues
Demand side economics
of, relating to, or being an economic theory that advocates use of government spending and growth in the money supply to stimulate the demand for goods and services and therefore expand economic activity
test marketing
offering a prodcut in a small area to see how it will work out without taking to much of a risk
supply
offering goods and services for sale
Social Security?
old-age, survivors, and disability insurance (OASDI)
large number of firms
on the continuum of market competition given in your text, which of the following characteristics belongs on the left, with a monopoly?
sole proprietorship
one owner
What is creative destruction?
one product is produced which destroys the market for a older less efficient good.
characteristics of a monopoly
one seller, restricted/regulated market, control of prices
complementary good
one that is used together with another good ex. snowboards and lift tickets
equation of opportunity cost
opportunity cost of good x = change in good y production/change in good x production
Nominal interest rate
opportunity cost of holding wealth in the form of money rather than in an interest-bearing asset
European Union (EU)
org. of european countries that developed out of a trade association devoted to reducing trade barriers among members
Firms
organization that uses resources to produce a product
What is a stock exchange?
organized markets where stocks are traded. NYSE is the largest in the world
another term for ceteris paribus
other-things equal assumption
scarcity's 2 elements
our wants and our means of fulfilling those wants
What is the role of stockholders in financing corporations?
own the stocks in the corporation
private property
owned by individual persons
public property
owned by the government
stocks
ownership organization; divendends
Diversification
owning a variety of different assets to be less risky
pGDP based on Ld-Ls and production function
pGDP= level of production produced at full employment
what is currency
paper bills and coins held by people and non bank firms
allocative efficiency
particular goods and services most valued by society
worker's compensation
pays for recovery when injured on a job
Coupon Bond
pays the bond holder fixed interest payment each period until maturity when a specified final amount is paid
economic freedom
people having a choice when it comes to the economic decisions they make
popular sovereignty
people hold the final authority in all matters of government
stockholders
people that own a share in a particular company
cyclically unemployed
people who lose their job because of temporary downturn in economy
seasonally unemployed
people who lose their job predictably every year at the same time
Discouraged Workers
people who say they would like to have a job but have not made an effort to find one in the past four weeks
List the four market structures
perfect competition, monopolistic, oligopoly, and monopoly
What is structural unemployment
persistant, long-term unemployment. i.e. unemployed for more than a year and is constant
Households
person or group living in the same residence
Creditor
person or institution to whom money is owned.
an elector
person who elects someone
The primary taxes at the federal level for the United States are:
personal income taxes, corporate profit taxes, and social insurance taxes
Adam Smith
philosopher argued that a free marker would regulate itself with little government involvement
Planned Aggregate Expenditure
planned C + planned I + planned X - planned m
precepts
policy rules that conclude that a particular course of action is preferable
public disclosure
policy that requires businesses to reveal product information
Mutual Funds
pools that savings of many individuals and invest this money in a variety of stocks, bonds, and other financial assets
Products Possibilites Curve
presents potential prospects for a production of a pair of products
What is fixed in the short run Keynesian model of the economy?
price
CPI?
price index determined by measuring the price of a standard group of goods meant to represent the "market basket" of a typical urban consumer
What is a GDP deflator
price index for inflation. It is the ration of normal to real GDP multiplied by 100. The GDP deflator covers all final goods
Factors that affect MD
price level, nominal interest rate, rGDP and financial innovation
invisible hand
price mechanism, rise and fall of prices that guides our actions in a market
shift factors for supply
price of inputs technology expectations taxes and subsidies
equilibrium price
price toward which the invisible hand drives the market
equilibrium price
price where the intentions of buyers and sellers match.. where the demand and supply curves intersect
interest-rate risk
prices and returns for long-term bonds are more volatile than those for short-term bonds
What do we assume when deriving the Solow growth curve
prices are flexible and money is neutral
quantity demanded element to remember
prices tend to rise when there is execs demand and fall when there is excess supply
nominal GDP
prices that were in effect when the output was produced
Commercial Banks
private depository institutions that are authorized to take deposits and make loans
economic growth
produceing increasing amounts of products over the long term
economic growth
producing more goods and services to increase quality of living
productive efficiency
production of any good in the least costly way
capital
productive equipment or machinery
Factors of production
productive resources that make up four categories of land, capital, labor, and entrepreneurship.
final goods
products purchased by their end users
undifferentiated
products that are exactly alike from firm to firm
differentiated
products that visibly differ from one firm to another
dividends
profit made from stock holding
Workfare
program requiring welfare participants to provide labor in exchange for benifits
Automatic stabilizers
program that automatically provides benefits to offset a change in peoples' incomes; unemployment insurance, entitlement programs
private property
property owned by individuals or companies, not by the government or the people as a whole
collateral
property used to secure a loan
What are the three major types of taxes?
proportional (flat tax) progressive (income tax) regressive (sales tax)
Flat tax
proportional tax on individual income after a specified threshold has been reached.
theorems
propositions that are logically true based on the assumptions in a model
How do trade barriers affect trade between countries?
protect industries from foreign competition. protect jobs, protect infant industries, and safeguard national security.
Restrictions on free international trade designed to protect domestic industries from competitive market forces that originate beyond the borders of the country are:
protectionist policies
statement savings account
provides a monthly or quarterly computerized statement detailing all account activity
consumers
purchases goods, buyer
investments
put capital to work
savings
put money in; low interest rate
depositor
puts money in
Shortage
quantity demanded is greater than quantity supplied
law of demand
quantity demanded rises as price falls, other things constant - quantity demanded falls as price rises, other things constant
Real Wage Rate (RWR)
quantity of g/s produced in 1 hour of labor
law of supply
quantity supplied as price rises, other things constant, or quantity supplied falls as price falls
Surplus
quantity supplied is greater than quantity demanded
Shortage
quantity supplied is less than quantity demanded
What do consumption and spending depend on?
rGDP Disposable income Wealth Expected future income
Fed Response to recessionary gap
rGDP < pGDP so recessionary gap exist Fed increase MS, lowering interest rate (MD @ EQ is increased) increased MD raises price level shifting AD rightward to LRAS
Fed Response to inflationary gap
rGDP > pGDP so inflationary gap exists Fed decreases MS, increasing IR (MD @ EQ is decreased) decreased MD lowers price level shift AD leftward to LRAS
Labor productivity
rGDP per hour of labor Y/L
rGDP per person
rGDP/population
To fight inflation the FED should
raise the real interest rate, reducing spending
A sale of bonds by the Federal Reserve
raises interest rates and reduces the money supply
debt financing
raising money for a buismess through borrowing
prime rate?
rate of interest banks charge on short-term loans to their best customers
Unemployment rate
ratio of unemployed individuals divided by number of persons in the civilian labor force expressed as percentage.
If expected inflation = actual inflation what is true
real rate of return = equilibrium real interest rate
pGDP > rGDP
recessionary gap below full-employment EQ
What are the 5 relevant lags of implementing fiscal plocy
recognition lag, legislation lag, implementation lag, effectiveness lag, evaluation and adjustment lag
if the fed sells bonds, aka open-market sales, what happens to the interest rates?
reduces the money supply as people give up their reserves to buy the bonds. selling bonds lowers the price of bonds, which means interest rates increase
deregulation
reduces/removes government control of business
NAFTA
reducing trade barriers within north america
roles of government
referee (setting the rules that determine relations between business and households) actor (collecting money in taxes and spending the money on projects such as defense and education)
quantity demanded
refers to one particular point on the demand curve... refers to how much of the product is demanded at one particular price
popular rule
regime principle, people should be sovereign in some way (i.e. Leviathan), sovereign acting on behalf of people
Coupon Payments
regular interest payments made to the bondholder
Consumption function
relationship between C and YD
Saving Function
relationship between S and YD
LRAS- definition and slope
relationship between rGDP and P when MWR changes at same rate as P to maintain full employment vertical at pGDP
SRAS- definition and slope
relationship between rGDP supplied and P when MWR, prices of resources and pGDP are fixed upward sloping due to marginal cost of production
Adapting to Changes
relative scarcity of goods, tech, and personal preferences change constently
lease
renting a car but you can only drive so far
Market basket
representative collection of goods and services used to
Demand
request urgently and forcefully
cease and desist order
requires a firm to stop unfair business practice
who is the FAC of the fed?
research arm of the fed
What are the three tools of the Federal Reserve?
reserve requirement, discount rate, and buying and selling bonds
What are the real factors of production
resources, land labor and capital that are used to produce goods and services
scarcity
restricts options and demands choices... since we can't have it all, we have to decide what to get and what to forego
pension
retirement income
an increase in expectations results in a movement or shift of AD curve? what direction?
rightward shift
interest-rate risk
risk is actually about volatility in both directions
Why are junk bonds bad news?
risk you might not get your money, nor your investments
Entrepreneur
risk- taking individual in search of profits, one of the factors of production.
Required Reserve Ratio (rrr)
rr required by the Fed
Factors used by Fed to control MS
rrr, discount rate, open market operations
Corner offices in high-rise office buildings usually cost more to rent than other offices. This best illustrates the economic principle of
scarce resources
basic economic problem
scarcity
What are the causes of frictional unemployment
scarcity of information
supply
schedule of quantities a seller is willing to sell per unit of time at various prices other things constant
demand
schedule of quantities of a good that will be bought per unit of time at various pries, other things constant
supply
schedule/curve showing the amounts of a product a produce is willing/able to make available for sale
demand
schedule/curve where consumers have to be willing and able to purchase the good.. refers to the entire relationship between prices and the quantity of this product.. (demand curve)
SEC
securities and exchange commission
capital gains
sell stocks more than earn
Fixed Exchange Rate
set by government policy
regulation
set of rules designed to control business behavior
price ceiling
sets the maximum legal price a seller may charge for a product/service; below or at it is legal, above it is not legal ex. minimum wage laws
penetration priceing
settin a new product at a low price to draw consumers away from older products
Example of Fix-rule policy
setting a constant growth rate for money
price leadership
setting prices close to those of your competitors
Any change in pGDP when P is fixed causes a ______ of LRAS and SRAS
shift
What will a positive shock to spending growth do in the short run?
shift AD, will increase inflation and GDP growth, expected inflation will stay same
decrease in expected inflation leads to
shift down of SRAS
decrease in both supply & demand
shift to the left
increase in both supply & demand
shift to the right
increase in expected inflation leads to
shift up of SRAS
what happens to the AD curve if spending growth dec.
shifts down and left
what is a positive real shock
shifts solos growth curve to the right, it will dive the growth rate up and inflation down
what is a negative real shock
shifts the SGC to the left, increasing inflation and decreasing growth rate
What happens to the AD curve if spending growth inc.
shifts up and right
genereally, does the fed buy and sell short-term or long-term bonds?
short-term
What is frictional unemployment?
short-term unemployment caused by the ordinary difficulties of matching employee to employer
frictionally unemployed
short-term unemployment during a transition to a better job
prices below equilibrium
shortage (excess in quantity demanded)
excess demand
shortage - quantity demanded is greater than quantity supplied
Production Function
shows how Y changes as L changes when K and T are fixed Y/L = F(K/L, T) when K & T are fixed
AD Curve
shows the relationship between planned spending and the inflation rate
AS Curve
shows the relationship between the amount firms want to produce and the inflation rate
Short-Run Phillips Curve (SRPC)
shows the trade-off between inflation and unemployment when expected inflation and natural unemployment are constant downward sloping through expected rate
Long Run Phillips Curve (LRPC)
shows the trade-off between inflation and unemployment when the actual unemployment rate = the expected inflation rate vertical @ natural unemployment
monopoly
single business owner with total control
Monopoly
single producer, a form of imperfect comp.
Government failures
situations in which the govt. intervenes and makes things worse
market failures
situations in which the market does not lead to a desired result
craft union
skilled labors
human capital?
skills & knowledge gained by a worker through education & experience
Human Capital
skills and training of workers
negative shocks to AD
slower money growth rate, fear, reduced wealth, higher taxes, lower growth of gov. spending, dec. export growth, inc import growth
FICA funds...
social security and medicare
some factors that shift demand
societies income the price of other goods tastes expectations taxes and subsidies
List the three types of business organizations
sole proprietorship, partnership, and corporations
In the short run _________ factors are fixed
some
how do taxes and benefits affect the LFPR
some countries punish people who work past the retirement age by limiting the amount of benefits they receive
Inflation Hawk
someone who is committed to achieving and maintaining low inflation, even at some short-run cost in reduced output and employment
Inflation Dove
someone who is not strongly committed to achieving and maintaining low inflation
retailer
someone who sells dirctly to the consumers
Enterpreneur
someone who takes a risk in starting a business to earn a profit
entrepreneur
someone who takes the risk of starting a buissness
What is a discouraged worker?
someone who's given up on looking for a job because they've been looking for so long
nuisance good
something that bears a negative economic cost
service
something you get done that costs value
quantity demanded
specific amount that will be demanded per unit of time at a specific price other things constant
quantity supplied
specific amount that will be supped at a specific price
Fix-rule policy
specifies an action independent of the state of the economy
Feedback-rule policy
specifies how policy actions respond to changes in the state of the economy
Goals of monetary policy
stabilize price level maintain max employment control MS and interest rate through open market operations
(Figure: Policy Alternatives) If the economy is in equilibrium at Y1 in panel (a), it is experiencing
stagflation
two-tier wage system
starting off with a small wage that increases as your time increases in the company
Depression
state of economy with large numbers of unemployed, declining real incomes, overcapacity in manufacturing plants, general economic hardship.
Coupon
stated interest on a corporate, municipal, or government bond
consumer sovereignty
states consumers set the price
recession
steep rise in unemployment rate, moderation in inflation rate, reduction in RGDP by 2 to 3%
describe the corporate structure from stockholders to workers
stockholders hold money and workers make money
club warehouse stores
store that carries a limited number of brands and items in large quantities and is less expensive than grocery stores
economics
study of how human beings coordinate their wants and desires given the decision making mechanisms, social customs and political realities of the society
economics
study of how people spend and earn money
Alternative def. of econ
study of how to get people to do things they're not wild about doing and not do the things they are wild about doing, so that the things some people want to do are consistent with the things other people wanna do
microeconomics
study of individual choice and how that choice is influenced by economic forces
macroeconomics
study of the economy as a whole (considers inflation, unemployment, business cycles and growth)
positive economics
study of what is and how the economy works
normative economics
study of what the goals of the economy should be
goods that replace another good
substitute goods
market price
supply and demand are equal
You notice that the price of DVD players falls and the quantity of DVD players sold increases. This set of observations can be the result of the:
supply of DVD players shifting to the right.
prices above equilibrium
surplus (excess in quantity supplied)
Fractional reserve system
system requiring financial institutions to set aside a fraction of their deposits in the form of reserves.
Mixed Economies
systems that combine command and the free market with limited government intervention
a production possibility table
table that lists the trade-offs between 2 choices
Diffusion
take a good idea and apply it elsewhere • GAT • WTO • Declines in barrier to international trade
Goods
tangible products that we use to satisfy our wants and needs
protective tariff
tariff tax on imports to protect the sale of american goods
income tax
tax based upon salary
supply-side economics?
tax cuts can help an economy by raising supply
excise tax
tax levied on a specific good
tariffs
tax on imported goods
property tax
tax on something you own (car,house,etc.)
three main tools of fiscal policy?
taxes, spending, and debt
For developed countries, which of the following would be considered the most important driver in productivity growth?
technological progress
What shifts the AS?
technology, changes in expected inflation, and changes in available resources
Do real shocks cause temp or permanent changes in GR and Inflation rate
temporary, because the curve is always shifting because of many real shocks
law of Supply
tendency of suppliers to offer more of a good at a higher price
how can real shocks be used to explain the business cycle
that business fluctuations are simply changes in economic growth in the short run driven by real shocks
what assumption about expected inflation when drawing the SRAS
that it is set to a certain level
Substitution effect
that portion of a change in quantity demanded due to change in relative price of a product.
(Figure: Aggregate Supply Movements) Refer to the accompanying figure called Aggregate Supply Movements. In this figure, ________.
that there has been an increase in the short-run aggregate supply
Infation rate
the % rate of change in price level over time
When inflation rises:
the FED will increase the interest rates and vice versa
What is the money multiplier
the MM is the ratio of deposits to reserves. AKA the OPPOSITE OF THE RESERVE RATIO
What is the reserve ratio (RR)?
the RR is the ration of reserves to deposits
What is the relationship between the position of the SGC and the Solow growth rate?
the SGC is a vertical line at the solos growth rate
Which of the following oversees international trade agreements?
the World Trade Organization
demand
the ability and desire to purchase goods and services
productivity
the ability to produce greater quantitys o goods and servisees in better and faster ways
absolute advantage
the ability to produce something more efficiently
comparative advantage
the ability to produce something with a lower opportunity cost
GK capital formation
the accumulation of financial and capital goods that promote increased production and economic development
Investment
the act of redirecting resource from being consumed today so that they may create benefit in the future the use pf asset to learn income or profit
marginal benefit
the additional benefit to a consumer from consuming one more unit of a good or service
marginal product
the additional output obtained by employing one more unit of input.
Marginal Tax Rate
the amount by which taxes rise when before-tax income rises by one dollar
What is the opportunity cost of the bank holding reserves?
the amount of interest that could be gained through lending your money out instead of keeping it
apr
the amount of intrest that the person has to pay on their loan
What are bank reserves?
the amount of money the bank keeps in stock that it doesn't lend back out
opportunity cost
the amount of one good that must be sacrificed to obtain an alternative good
service flow
the amount of time you get to use a product and the value you place on this use
Principal Amount
the amount originally lent
Par Value
the amount that an investor pay to purchase a pond and that will be repaid to the investor a anoturity
Total receipts test
the analysis of the effects of a price change .
Rate of Inflation
the annual percentage change in the price level, can be measured by the Consumer Price Index (CPI)
Nominal Interest Rate
the annual percentage increase in the nominal value of a financial asset
Real Interest Rate
the annual percentage increase in the purchasing power of a financial asset = nominal interest rate - inflation rate
market
the arrangements people make for trading with one another
Peak
the beginning of a recession; the high point of economic activity prior to a downturn
opportunity cost
the benefit that you might have gained from choosing the next best alternative
macroeconomics
the branch of economics that studies the overall working of a national economy
how do demographics affect the LFPR?
the break up of age distribution can greatly affect the LFPR with the baby boomers coming to the retirement age there is a large quantity of people whoa re about to be unemployed and therefore the LFPR will increase
stock exchange
the buying and selling of stocks
Income effect
the change in consumption resulting from a change in real income
production possibilities fronteir
the combinations of two goods that can be produced if the economy used all of its resources fully and efficiently
private property rights
the control a private individual or firm has over an asset
marginal cost
the cost of producing one additional unit of output
marginal cost
the cost of producing one more unit of a good
marginal cost
the cost of producing one more unit of a good (example bean bags)
Maturation Date
the date at which the principal amount of a bond will be repaid
oligopoly
the debeers mining company of south africa owns roughly 70% of the worlds diamond mines. under what type of competition does diamond mining operate?
Liabilities
the debts one owes
What is crowding out?
the decrease in private spending that occurs when government increases spending
Capital Gains
the difference between a higher selling price and lower purchase price, resulting in financial gain for the seller
profit
the difference between the revenue received from the sale of a good or service and the costs of providing that good or service
What is the relationship b/t the nominal interest rate and the expected inflation rate?
the difference is the equilibrium rate of return. AKA interest rate
what is the difference between the real rate of return and the equilibrium real interest rate in the market for loanable funds?
the difference is the expected inflation rate - actual inflation rate
separation of powers
the division of power among the legislative, executive, and judicial branches of government
declaration of independence
the document recording the proclamation of the second Continental Congress (4 July 1776) asserting the independence of the colonies from Great Britain
GDP
the dollar value of all goods and services produced for final sale in the US in a year
Trough
the end of a recession; the low point of economic activity prior to a recovery
Nominal Exchange Rates
the exchange rate between 2 countries
Marginal Product
the extra production gained by adding one more worker
Cyclical Unemployment
the extra unemployment that occurs during periods of recession
fallacy of composition
the false assumption that what is true for a part will also be true for a whole
Who produces the money we use in the US
the fed. reserve
institutions
the formal and informal rules that constrain human economic behavior
Marginal propensity to consume (MPC)
the fraction of extra income that households consume rather than save.
marginal benefit
the gain you receive of doing something one more time
scarcity
the goods available are too few to satisfy the individual's desires
Centrally Planned Economies
the government own both land and capital, the government decides what to produce, how much to produce and how much to charge
movement along a supply curve
the graphical representation of the effect of a change in price on the quantity supplied
shift in demand
the graphical representation of the effect of anything other than prices on demand
Guns or butter
the idea that a country that produces guns has fewer resources to produce butter (consumer goods) and vice versa
classical economy?
the idea that free markets can regulate themselves
What is the cost of borrowing in the loanable funds market?
the interest rate
What is the discount rate
the interest rate banks pay when they borrow directly from the fed
Federal Funds Rate
the interest rate commercial banks charge each other for very short loans (overnight loans)
Coupon Rate
the interest rate promised when a bond is issued; the annual coupon payments are equal to the coupon rate times the principal amount of the bond
Coupon rate
the interest rate that a bond issues will pay to a bondholder
price
the law of demand describes the effects of _____ on demand.
Structural Unemployment
the long-term and chronic unemployment that exists even when the economy is producing at a normal rate
Foreign exchange market
the market on which currencies of various nations are traded for one another
Value added method
the market value of its product or service minus the cost of inputs purchased from other firms
Gross Domestic Product (GDP)
the market value of the final goods and services produced in a country during a given period Y= C + I + G + NX Y = GDP or Output C = Consumption Expenditure I = Investment G = Government Purchases NX = Net Exports
Potential Output
the maximum sustainabile amount of output that an economy can produce
Price Index
the measure of the average change in price over time.
profits
the money earned from subtracting cost from revenues
short term financing
the money needed to pay for the current operating activities of a business
rule of the relative burden of tax
the more inelastic one's relative s&d, the larger the burden of the tax one will bear
What is the relationship between liquidity and money?
the more liquid the asset, the more it can serve as money. -currency is usually the most liquid asset since it can be spent anywhere -checkable deposits and reserves are also very liquid -money market mutual funds and time deposits are less liquid since sometimes it takes time and trouble to turn these assets into currency or checkable deposits
law of diminishing margenal utility
the more of a product you have the less utility you will get out of it
diminishing marginal utility
the more of a supply a person has, the less the demand for that product is
opportunity cost
the most desirable alternative given up as the result of a decision
Opportunity cost
the most desirable alternative given up us as a result of decision.
what is the quantity demanded vs market quantity demanded
the number of products that a consumer demands vs. the number of products society demands
Unemployment Rate
the number of unemployed people divided by the labor force
the incumbent
the official who holds an office
What is the federal funds rate?
the overnight lending rate from one major bank to another
lockout
the owners of a company close the doors and do not allow people in to work
circular flow
the pattern at which money flows in and out of households and businesses
Compound Interest
the payment of interest not only on the original deposit but on all previously accumulated interest
rate of return
the payments to the owner plus the change in value expressed as a fraction of the purchase price
human resources
the people who contribute the physical and mental energy to the production process
what is the inflation rate?
the percentage change in the average level of prices over a period of time
third-party-payer markets
the person who receives the good differs from the person paying for the good
market equilibrium
the point at which the quantity supplied and the quantity demanded for a product are equal at the same place
Dividens
the portion of corporate profits paid out to stock holders
central planning
the power to decide what products will be made and how these products will be produced.
If the money supply increases by 10%, in the long run:
the price level increases by 10%
interest
the price paid for the use of borrowed money
equilibrium price
the price that balances quantity supplied and quantity demanded
producer surplus
the price the producer sells a product for less the cost of producing it
substitute good
the product that purchasers use in place of another product, particularly if the price of the other product rises
What does "in the long run, money is neutral" mean?
the proposition that changes in the money supply do not affect real variables. i.e. real gdp. increasing the money supply will cause only nominal prices to increase
If the interest rate is below equilibrium
the public will try and sell bonds, which will drive the prices down, which will increase the interest rate, and movement along the money demand curve will move to equilibrium
Risk Premium
the rate of return financial investors require to hold risky assets minus the rate of return on safe assets
Yield to Maturity
the rate that equates the present value of a cash flow of payments from a debt instrument with its value or price today
What is productivity, and what can increase labor productivity?
the ratio of how much you can produce (Output), based on the resources available (Inputs) machines, capital good, & human capital
beneficiary
the recipient of funds or other benefits (life insurance)
MD Curve
the relationship between rMD and Nominal Interest Rate, all other influences constant
deregulation?
the removal of some govt. controls over a market
wagner act
the right to collectively bargain
franchise?
the right to sell a good or service within an exclusive market
what is systemic risk?
the risk that the failure of one financial institution can bring down other institutions as well
opportunity cost
the satisfaction a person gives up when choosing between two options
opportunity benefit
the satisfaction a person receives from a choice
Frictional Unemployment
the short-term unemployment associated with the process of matching workers with jobs
surplus
the situation in which the quantity supplied of an item at a given price exceeds the quantity demanded
inelastic demand
the situation that exists when quanatity demanded changes only slightly or not at all in response to changes in price.
elastic demand
the situation that exists when quantity demanded changes greatly in response to a change in price
underemployed
the state of working significantly below skill level or working fewer hours than desired
economics
the study of how individuals and nations make choices about ways to use scarce resources to fulfill their needs and wants
Economy
the study of who people seek their needs and wants by making choices
Fisher Effect
the tendency for nominal interest rates to be high when inflation is high and low when inflation is low
total revenue
the total amount of money a firm receives by selling goods or services
example of positive economics
the unemployment rate in France is higher than that in the US
What is fiscal policy?
the use of govt. spending and revenue collection to influence the economy
Wealth
the value of assets minus liabilities
consumer surplus
the value the consumer gets from buying a product less than its price
law of one price
the wages of workers in one country will not differ significantly from the wages of (equal) workers in another institutionally similar country
Value of Marginal Product (of a worker)
the worker's marginal product times the price of the firm's output
If the economy is at equilibrium below potential output:
there is a recessionary gap, and expansionary fiscal policy is appropriate
normal goods
there is an increase in demand if a consumer's income increases... those products whose demand varies directly with income
socialism
there is some private ownership and some government ownership
What is the relationship between the growth rate of the money supply and the inflation rate
they are approx. equal. if the growth rate of V and Y are small
who are the fed's customers
they are both the government bank and the bankers bank
In long-run equilibrium what is the relationship between Einflation and actual inflation
they are equal
If the fed lowers the discount rate what does this tell us?
they are implementing expansionary monetary policy, they want the money supply to grow. BUY = expansionary policy, they are putting money into the economy
what does a bank borrowing from the discount window tell the market
they are in trouble
how much influence does the u.s. government have over the fed
they are more independent than not
how does the fed create money
they can literally print money or create it 'by computer' by adding reserves to bank accounts held at the fed
why will employment protection laws increase the unemployment rate?
they cause firms to be slower to hire employees because of higher hiring and firing costs. 1. They create valuable insurance for workers with a full-time job 2. they make labor markets less flexible and dynamic 3. they increase the duration of unemployment 4. they increase unemployment rate among young, minority, and "risky" workers
public choice economists
they integrate an economic analysis of politics with their analysis of the economy
How do discouraged workers affect the unemployment rate?
they make it lower than it really is because they are not included in caluculation
why will unions increase the unemployment rate?
they raise minimum wage, decreasing the quantity of labor demanded
During the 2008 crisis, what actions did the fed take to limit systemic risk?
they supported JP morgan's buyout of bear sterns as well as taking a majority stake in AIG to keep them afloat
how does the fed vary this interest rate to influence the money supply?
they vary it to help it achieve the goals of monetary policy
If the fed raises the discount rate what does this tell us?
they want to contract the moneytary policy, they want the money supply to shrink. Sales = contracting policy. it takes money out
What happens to financial intermediation when real interest rates are negative?
they will break down. Because savings accounts will turn into wasting accounts and therefore people will take their money out of the bank. This will also decrease economic growth
What will people do if they are forward looking and given a tax rebate?
they will use the tax rebate to pay down debt
Traditional
things are done the way they have always been done; economic decisions are based on custom or habit
services
things done for the consumer
goods
things produced for the consumer
Determinantes
things that can change the demand of a product
luxuries
things we want, but do not need to survive
articles of confederation
this document, the nations first constitution, was adopted by the second continental congress in 1781during the revolution. the document was limited because states held most of the power, and congress lacked the power to tax, regulate trade, or control coinage
e = nominal exchange rate
this is the number of units of foreign currency that each unit of domestic currency will buy, an increase in "e" corresponds to an appreciation
How does the fed control the federal funds rate via open-market operations?
through buying or selling bonds until they have had their desired increase or decrease in the federal funds rate. WILL BUY BONDS TO DEC. RATE. WILL SELL BONDS TO INC RATE
Maturity
time at which payment is due to bondholder
wants
to an economist what is unlimited?
What is present value (PV)
todays value of a future cash flow 100$ today > 100$ future
Personal Income
total ammt of income going to consumer sector before individual income taxes are paid.
Federal debt
total amount of money the federal government has borrowed from others.
Disposable personal income
total income available to consumer sector after income tax
Planned Aggregate Expenditure
total planned spending on final goods and services, the amount of people throughout the economy that are willing to spend
GDP
total value of all final goods and services produced in a particular economy
GNP?
total value of production in a country or foreign nations
GDP?
total worth of goods produced in a given year within a country's borders
merger
two companies coming together
Substitutes
two goods for which an increase in the price of one leads to an increase in the demand for the other
what is cyclical unemployment
unemployment correlated with the us and downs of the business cycle
Sole proprietorship
unincorporated business owned and run by a single person who has all rights to everything, most common form.
UAW
union of auto workers
needs
urgent wants for necessary things
consumption
use
promotion
use of advertising to inform consumers about a product and to pursade them to purchase it
tax incentive?
use of taxation to encourage certain behavior
Efficiency
using resources in such a way as to maximize the production of goods and services.
efficiency
using resources to their maximum potential
overhead expense
utility expenses required to run a business
Slope of MS Curve
vertical
Nominal wages are "sticky" because
wages are slow to rise in the short run when there are labor shortages and slow to fall even when there is significant level of unemployment
nominal wages
wages you see in your paycheck
What is perfect competition
well informed buyers/sellers that exchange identical products
the anti federalists
were more sympathetic to the "common man" and favored a more limited role for government
Opportunity Cost
what amount of product is given up in order to produce more of another product
Coordination: three central problems
what and how much to produce; how to produce it; for whom to produce it
normative economics
what approach to economic study focuses on value judgement?
federal trade comission
what does FTC stand for?
competition
what does a monopoly completely cut out?
to let alone
what does laissez-faire mean?
laissez-faire
what economic philosophy , first popularized in 1776, advised the government to keep its hands off the economy and let private citizens pursue their own wealth?
mercantilism
what economic philosophy promotes the accumulation of gold and silver as a demonstration of national wealth?
capitalism
what economic system is currently practiced in the United States?
candy
what has the greatest potential for differentiation?
Fallacy of Composition
what is good for one person is not good for all.
personal responsibility
what is not a major trait of laissez-faire liberalism?
perfect competition
what is probably the most prevalent form of competition in america today?
output?
what is produced from input in production of a good
utility
what is the economic term that means satisfaction?
improvements in technology
what is the most significant reason for the rapid drop in prices of older model cell phones and calculators since they were first introduced years ago?
few firms
what is true about an oligopoly?
socialist/welfare
what kind of capitalist nation relies on high taxes to redistribute wealth?
microeconomics
what level of economic study is concerned primarily with choices made by individual units?
macroeconomics
what level of economic study is concerned primarily with large scale economic choices and issues?
favorable balance of trade
what mercantilistic term describes a nation that exports more goods than it imports?
perfume company
what operates under imperfect competition?
50%
what percent of all small businesses close within their first 3 years of existence?
complementary good
what term best describes steak sauce that is often purchased with steak?
factors of production
what to produce, how to produce it, whom to produce it for
monopoly
what type of competition has one supplier?
perfect competition
what type of competition sells undifferentiated products?
capitalism
what type of economic system stresses the freedom of private individuals to own the factors of production and to make economic choices?
a legal monopoly
what type of market does the government create when it allows a power plant the exclusive right to provide electricity in an area?
the sherman antitrust act
what was america's first major legislation against monopolies?
increasing foreign competition
what was not a major aim of mercantilist countries?
automobile manufacturers
what would you expect to operate under the oligopoly form of competition?
balanced budget
what you make and what you spend are equal
opportunity benefit
what you will gain when making a decision
opportunity cost
what you will have to give up when making a decision
profit
what's left over from total revenues after all the appropriate costs have been subtracted
when does dissaving occur in consumption function?
when C > YD area above 45 line
when does savings occur in consumption function?
when C<YD area below 45 line
conglomerate
when a buissness ones a bunch of unrelated buissnesses
what is a jobless recovery
when a macroeconomy experiences growth while maintaing or decreasing its level of employment
subjective value
when a person determines an items value by the quantity of it
solvency crisis
when banks become insolvent: has liabilities greater than its assets
what is the relationship between bond prices and interest rates?
when bond prices go up, interest rates go down. When bond prices go down, interest rates go up.
competitive shopping
when buisseness's say why their product is better than anothers
substitution effect
when consumers react to an increase in a good's price by consuming less of that good and more of other goods
shortage
when demand is greater than supply, you end up with a _______
what is hyperinflation
when inflation occurs at a very high rate, i.e. prices are extremely volatile people will spend money as soon as they make it
they will decrease
when many people lose their jobs during a depression, what usually happens to the demand curves for normal goods?
What is 'creative destruction'
when millions of jobs are created which leads to millions of other jobs being destroyed
Economists use the term equilibrium to describe:
when no individual would be better off taking a different action or when no individual has an incentive to change his or her behavior
structurally unemployed
when people loe their job because their skills turn obsolete
Law of Demand
when price increases, demand decreases (downward slope)
general rule of political econ
when small groups are helped by a govt action and large groups are hurt by that same action, the small group tends to lobby far more effectively than the large group; thus, policies tend to reelect the small groups interests
externalities
when some of the benefits/costs are passed onto someone who isn't the buyer or seller
surplus
when supply is greater than demand, you end up with a _____
What is an open market operation
when the fed buys and sells government bonds
what is quantitative easing?
when the fed buys longer-term government bonds or other securities
what is quantitative tightening
when the fed sells longer-term government bonds or other securities
a primary election
when voters choose who they want in office
LRAS Equilibrium
where AD intersects LRAS rGDP = pGDP
SRAS Equilibrium
where AD intersects SRAS Ys = Yd
arbitration
where a conflict is taken to a judge to be decided
compitition
where buissnesses try to make their prices and quality of their products so then people will buy theirs and not the other persons
What is the golden rule of profit maximization?
where marginal costs equal marginal revenue
How are interest rates determined
where the quantity supplied = quantity demanded on the market of loanable funds curve
adam smith
who wrote "The Wealth of Nations?"
it displays more information
why is a demand curve preferable to a demand schedule?
What will a positive shock to spending growth do in the long run?
will increase inflation rate, GDP growth will stay the same and expected inflation will increase by the increase in spending growth
What will a negative shock do to spending growth in the short run?
will shift the AD down, inflation decreases, expected inflation remains same, GDP decreases
Supply-side view of income tax reduction
wise b/c: increase incentive to work increase Ls increase production increase AS
Supply-side view of corporate tax reduction
wise b/c: increase investment create more jobs increase T and K increase AS
input?
work/goods that go into making a good
strike
workers stop working and try to prevent others from working
People respond to reductions in their marginal tax rate by:
working more hours, investing more in education, and taking more entrepreneurial risks, all of which contribute to greater potential output
World trade organization (WTO)
works to reduce trade barriers
WB
world bank
Adam Smith
wrote Wealth of Nations; believed in an invisible hand (laissez-faire)
Demand Elasticity ( what do yes and no's mean)
yes- elastic no-inelastic
pernsion plan
youget part of you paycheck taken out and put into a retirment plan
what are checkable deposits
your checking or debit account
limited liability
your only responsible for the amount of money you invest
What are the factors of production?
• Land • Capital • Entrepreneurial ability
Assumptions of production Possibility curve?
• Only 2 products easily interchangeable • Resources are fixed supply
List the characteristics of a market system.
• Private property rights • Competition( lowers prices, raises quality, and diversity) • Laissez faire: government can't interfere • Dollar votes • Consumer sovereignty • Producer sovereignty • Incentives: system encourages skill, hard work and innovation • Freedom
