AP Economics Final Review

paradox of thrift

(John Maynard Keynes) - A Keynesian concept explaining why consumers will not help the economy get out of a recession because if they increase their thriftiness, this leads to less savings.

Union shop

A provision found in some collective bargaining agreements requiring all employees of a business to join the union within a short period, usually 30 days, and to remain members as a condition of employment

zero sum game

A situation in which a gain by one country results in a loss by another.

floating exchange rate

A system under which the exchange rate for converting one currency into another is continuously adjusted depending on the law of supply and demand

Capture Hypothesis

A theory of regulatory behavior that predicts that regulators will eventually be captured by special interests of the industry being regulated. (leads to perfect competition)

Frictional unemployment

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

Closed shop

A working establishment where only people belonging to the union are hired. It was done by the unions to protect their workers from cheap labor.

free rider problem

The problem faced by unions and other groups when people do not join because they can benefit from the group's activities without officially joining.

"The world is flat". What does this mean?

The world has leveled out, you are now competing with those in other nations for jobs.

Rational expectations

Theory that emphasizes the fact that government cannot reduce an economy's unemployment - even in the shortrun. The arguement is that because people anticipate the consequences of announced government policies and change their behavior accordingly, they end up undermining the policy.

Economic Profit

Total revenue minus total cost, including both explicit and implicit costs

Accounting Profit

Total revenue minus total explicit cost.

T/F: A strong dollar is associated with lots of imports

True

T/F: Greed makes it likely that most collusion efforts by oligopolies and cartels are doomed to fail.

True

T/F: It is nearly impossible for any monopoly to exist in the long run.

True

T/F: The demand curve facing a perfect competitor is perfectly elastic.

True, perfectly elastic meaning demand is horizontal

Structural unemployment

Unemployment of workers whose skills are not demanded by employers, who lack sufficient skill to obtain employment, or who cannot easily move to locations where jobs are available.

When will a perfectly competitive firm stop hiring?

Where the dollar value of marginal revenue product of the worker(s) equals the wage rate (MRP = MRC)

Which law is used to prevent strikes of "key" public employees (in Wisconsin)?

Wisconsin Mediation Arbitration law

bond

a certificate that promises to repay the money loaned, plus interest, on a certain date. also considered less risky than a stock from the same company in the primary market.

balanced budget multiplier

a change in government spending affects aggregate expenditures more powerfully than a tax change of the same size

An increase in the inflation rate of one country relative to the rate in another country will probably cause:

a current account surplus for the inflating country.

A so-called "dead-weight loss" means that a government intervention in the market has caused...

a decrease in consumer/producer surplus, a price increase, and a decrease in the quantity demanded.

Cutthroat competition

a firm selling a product at a loss in an effort to destroy one's competitor.

Holding company

a form of business which does not create anything itself; instead, it owns the stock of companies that do produce goods.

Conglomerate

a group of diverse companies under common ownership and run as a single organization.

quota

a limitation on imports

Oligopoly

a market structure in which a few large firms dominate a market (examples in OS market: Microsoft, Mac OSX, Linux)

Economic Rent

a payment beyond what is necessary to keep land or labor or capital in its present use; the part of the payment for a factor of production that exceeds the owners reservation price.

true market

a place where sellers are price tackers, perfect knowledge exists, individual buyers cannot influence supply or price, and all quantities demanded equals all quantities supplied.

If the economy of a nation has recently experienced a reduction in trade barriers and an increase in multi-national competition, it is likely to experience:

a reduction in prices and an increase in production (growing economy and more productive workers).

Conservative economists (like Arthur Laffer and the late Milton Friedman) tended to support:

a reduction in tariff barriers among nations.

Market failure

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

tax bracket

a specified interval of income to which a specific and unique marginal tax rate is applied

In full employment (in the US)

about what percent of the labor force is often unemployed?,4-7%

Bretton Woods Agreement

all exchange rates were fixed in terms of the dollar; the US stood ready to convert foreign holdings of dollars into gold at a rate of $35/ounce; created the IMF

float

allow (currencies) to fluctuate

Phillips curve

an illustration of a policy dilemma trade-off between inflation and unemployment, also illustrating the effect of inflationary expectations. policy makers would like to have an inflation rate of about 2-3% with an unemployment rate of 4-6%.

Which of the following would be policies that reinforce each other? a) the FED raises the FF rate as Congress cuts taxes b) the FED raises the FF rate as Congress cuts spending c) the FED buys gov't securities as congress raises taxes d) the FED lowers reserve requirements as congress raises taxes

b.

A bank can increase its excess reserves by...

borrowing from another bank.

In the long run, the FED raising discount rates should what?

cause a lower real national income.

Under monopolistic competition

collusion is:,essentially impossible

Collusion

conspiring in a fraudulent scheme to cheat or deceive others; V. collude

Fixed costs

expenses that are the same no matter how many units of a good are produced.

Variable costs

expenses that change with the number of products produced.

Rising interest rates could very well cause a weak dollar.

false

T/F: A weak dollar will lead to lots of imports

false

a negative trade balance means a negative capital account balance too.

false

Seniority Systems

favors members with the most years of service... leads to lower productivity rates for workers

Most effective and legal long-run way to remain a monopoly

get a government granted license or charter.

For long term economic growth: -(high/low) investment -(high/low) interest rates -(high/low) savings rate

high investment, low interest rates, and high savings rates will lead to long term economic growth.

A short run effect of an increase in the money supply is to:

increase the price level only.

leverage

investing with borrowed money as a way to amplify potential gains (at the risk of greater losses)

What are four examples that are exempt from anti-trust laws?

labor unions, baseball, farm co-ops, defense industry

A reduction in a nation's rate of inflation should:

lead to a negative trade balance... (x-m) = (neg #)

Problems for the FED:

leakages, time lags, identifications of the problem, etc.

Major barriers to entry in a monopolistic market:

legal: 1. gov't patents, contracts, licenses, charters, quotas, etc. 2. tremendous capital requirements. 3. brand loyalty. 4. no good substitutes exist. 5. control of inputs. 6. geography (ie: diamond industry). 7. Vertical integration/combination. illegal: horizontal mergers (buying out all other companies)

Criticisms of TIF plans?

major disagreements as to the exact definition of a "blighted" area; businesses not located in the TIF area feel the businesses inside the area have an unfair competitive advantage; schools and other gov't services are sometimes needed before the additional tax money is collected; In the short run, property taxes could increase.

In theory

market deregulation should lead to:,more competition, or perfect competition

T/F: For a monopoly

max. profits occur where MC = MR.,False

Economists criticize monopolies because:

monopolies restrict output and raise prices compared to a competitive situation.

trade restrictions usually lead to...

more pay for the workers in the industry protected

Seasonal unemployment

unemployment caused by seasonal changes in the demand for certain kinds of labor.

Cyclical unemployment

unemployment that rises during economic downturns and falls when the economy improves. gov'ts greatest responsibility to resolve.

Insider-Outsider Theory

why unions support an increase in minimum wage laws, oppose less restrictive immigration laws, support tariffs and quotas, and support apprenticeship licensing programs.

Right-To-Work Laws

Refers to statutes that prohibit unions from making union membership a condition of employment

strike-breakers

Replacements for striking workers.

Economic Profit

Revenue greater than accounting costs plus implicit costs (like opportunity cost).

deficit

An excess of federal expenditures over federal revenues.

Perfect competition

The market situation in which there are many sellers in a market and no seller is large enough to dictate the price of a product

Unemployment

The percentage of those in the labor force over the age of 16 actively seeking work, but who are unable to find jobs.

What do foreign suppliers prefer to a tariff?

quota

dumping

selling goods abroad at a price below that charged in the domestic market

Featherbedding

situation in which unions try to require the employment of more workers than is necessary (use labor inefficiently).

deficit spending

spending money raised by borrowing (stimulus package or government spending)

aggregate demand

sum of all personal consumption expenditures, business expenditures, and government expenditures in a particular time period; total quantity of goods and services all citizens, businesses, government will want at any one time

Say's law

supply creates its own demand. (Supply = Demand)

tariff

tax on imports

contractionary gap

the amount by which actual output in the short run falls short of the economy's potential output

consumer surplus

the amount of goods/services buyers are ready, willing, and able to buy at a price above price equilibrium.

Present value

the amount of money you would need to deposit now in order to have a desired amount in the future.

present value

the amount of money you would need to deposit now in order to have a desired amount in the future.

A firm should continue producing until...

the cost of increasing output by one more unit equals the revenues obtainable from selling the extra unit.

T/F: If labor productivity rises

the demand for labor rises.,True, because companies have a higher demand for workers if they are more productive

In recent years

the market power of large US corporations has (increased or decreased) and why?,decreased because of the growth of foreign competition.

real interest rate

the nominal interest rate minus the inflation rate

crowding out effects

the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending... ie: the loss of funds for private investment due to government borrowing

Price Leadership

the procedure by which one or more dominant firms set the pricing practices that all competitors in an industry follow. common in an oligopolistic market.

Total costs

the sum of the fixed and variable costs for any given level of production.

fiscal policy

the use of government spending and revenue collection to influence the economy

T/F: In a monopolistic market situation

there is only one supplier.,False

Stock vs. Flow

"A stock variable is measured at one specific time, and A flow variable is measured over an interval of time."

Gresham's law

"Bad money drives out good money." As money of different quality circulates, people tend to trade away inferior quality money and keep superior quality money.

4 key goals economists agree on...

2-3% inflation rate 2-3% GDP growth rate 4-6% Unemployment Positive balance of payments

public policy

A choice that government makes in response to a political issue. a policy is a course of action taken with regard to some problem.

Open shop

A company with a labor agreement under which union membership cannot be required as a condition of employment.

Cartel

A consortium of independent organizations formed to limit competition by controlling the production and distribution of a product or service. Ex: OPEC

TIF plans are:

A financing tool that helps a municipality redevelop a defined geographic area.

Monopsony

A market in which goods or services are offered by several sellers but there is only one buyer.

Why monopolists earn economic profit in long-run?

Barriers to entry prevent new firms from entering the industry.

Why are there few competitors if any in a natural monopolistic situation?

Competition would be both inefficient and costly (to consumers) (ie: local sewers)

Perfectly Competitive Firm

Firm that is a price taker in input and output markets; Its too small to effect price; It operates under perfect information

Contestable Market Theory

Freedom of entry and exit in a market. IF a firm has a monopoly now and knows the chances of new firms entering the market are high if profits are high, they will keep profits low to avoid the situation.

Natural Monopoly

Industry in which one company can most efficiently supply all needed goods or services.

Union membership peaked when?

It peaked in the early 1960s and has since declined.

Final Goods and Services

Items that are not going to be sold again. This is helpful to determine which item can be counted for the calculation of real GDP.

A horizontal merge happens when...

Large companies attempt to create more efficient economies of scale.

Antitrust law

Law intended to promote free competition in the market place by outlawing monopolies.

Quantity theory of money

MV = PQ or MV = PY A theory that hypothesizes that a change in the money supply will cause a proportional change in the price level because velocity and real output are unaffected by the quantity of money.

Perfectly competitive market "going" price established by what?

Market forces brought about by the laws of supply and demand. An example was if price was changed by a perfectly competitive firm, there would be no demand for it since demand is perfectly elastic.

Monopolistic Competition

Market situation in which a large number of sellers offer similar but slightly different products and each has some control over price

fee simple

Means an owner has transferred all rights of a property to a new owner for an indefinite duration of time

Do perfect competitors worry about the behavior of his/her competitors?

No, because there are too many where it doesn't make a difference.

Is it impossible for a monopoly to price discriminate?

No.

Which market is advertising virtually non-existent?

Perfect competition, because all products are homogeneous or too similar where it doesn't make a difference.

According to the new classical model, gov't fiscal and monetary policy changes are effective:

only when the policy changes are unanticipated.

adverse selection

people that may make riskier loans than they otherwise would because it is insured.

laissez faire

policy based on the idea that government should play as small a role as possible in the economy