unit three econ test

If a contraction lasts for 6 months or two quarters then it is usually considered a

recession.

Price stability

refers to minimizing increases in the price level over time so that a country's money will retain its purchasing power over time.

peak

refers to the highest point of real GDP between the end of an economic expansion and the beginning of an economic contraction.

Full employment

refers to the state of the economy when virtually all who are willing and able to work have the opportunity to do so. Countries have many ways to measure full employment

Aggregate Demand

refers to the total quantity of all goods and services consumers are willing and able to purchase at each price level in a given period of time.

recovery

when real GDP becomes positive after a period of negative real GDP

surplus

when the amount of income received exceeds the amount of expenses paid.

deficit

when the amount of income received falls short of the amount of expenses paid.

structural unemployment in an economy is someone

whose job skills do not match the economy's needs

In October, Bill is laid off from his job as a Halloween costume maker solely because of a slow Halloween season.

Bill is cyclically unemployed

When the Federal Reserve buys government securities on the open market, what effect does this action have on the nation's money supply and aggregate demand

Money Supply Aggregate Demand increases increases

stagflation is problematic to correct

Solutions that address inflation tend to make existing unemployment worse and vice versa

finding the amount of real gdp produced at all possible price levels will determine

aggregate supply

business cycle

an economic model illustrating how economic activity fluctuates over time. looks a graph of waves from the field of Physics.

which is the FED most likely to do in the event of a recession?

buy treasury bonds on the open market

If the Federal Reserve System wanted to stimulate the U.S. economy and reduce unemployment, it would

cause interest rates to decrease because low interest rates encourage business growth and expansion

monetary policy is defined as the

decisions of the federal reserve system that determine the money supply

which component of the federal reserve system holds the most powerful regards to day to day monetary policy

federal open market committee

The aggregate demand curve (AD)

is downward-sloping showing an inverse relationship between price level and real GDP.

Economic growth

is increasing production of goods and services over time.

steady economic growth

is usually associated with things like entrepreneurs starting new businesses, firms becoming more productive by adding capital or new technology, workers becoming more productive through increases in knowledge and skills, and productive resources being available in greater quantities for the economy

How is the unemployment rate calculated?

number of people unemployed divided by the number of people in the civilian labor force multiplied by 100

The wealth effect

occurs when a rising price level reduces the purchasing power of consumers thus lowering the amount of consumption spending due to higher prices.

When does cyclical unemployment take place?

occurs when the economy downturns

contraction

phase of the business cycle is a period in which real GDP is declining.

The Federal Reserve System conducts its business directly with

the government and banks

trough

the lowest point of real GDP between the end of a contraction and the beginning of a recovery

Net exports

the monetary value of all final goods and services produced in one country but sold outside the country's borders minus the monetary value of all final goods and services produced outside the country's borders but sold within the country in a given time period.

Government spending

the monetary value of any spending on final goods and services by a local, state, or national government in a given time period.

describes an economy that is in a trough of the business cycle

unemployment is high, real GDP is low, and inflation is low

How does inflation affect purchasing power? Give an example

As prices rise, the purchasing power of money declines. Ex: suppose $1.00 would buy $1.00 worth of goods last year. if inflation rate is 10% this year, however, $1.00 will buy the equivalent of only $.90 worth of goods today

What is the purpose of the consumer price index (CPI)?

By looking at the CPI, consumers, businesses, and the government can compare the cost of a group of goods this month with what the same or a similar group cost months or even years ago

A government decision to increase taxes is MOST related to which combination of events

Consumption Aggregate Demand GDP decrease decrease decrease

Gross Domestic Product is a method for calculating how much a country produces by adding which four spending categories

Consumption, Investment, Government, Net Exports

primarily responsible for the control of the money supply

Federal Reserve System

Peggy, a recent college graduate, decides to look for a job instead of going to graduate school. If she is unable to find a job that suits her interests right away, what type of unemployment is she MOST likely experiencing?

Frictional unemployment

borrowers in the economy.

Households, firms, governments, and financial institutions

An economist is presented with information about the prices of a selection of goods over several years. This information would be MOST useful for which purpose

To compile a price index to measure inflation

Inflation

a sustained increase in the price level in an economy over time. One way to measure whether there is inflation in the economy is to calculate the inflation rate.

Finding the amount of Real Gross Domestic Product produced at all possible price levels will determine

aggregate supply

Why isn't full employment the same as zero unemployment?

because even when an economy is working it will still experience frictional, seasonal, and structural

The interest rate effect

causes the downward slope of the aggregate demand curve because as price level rises, interest rates (the price of borrowing money) rises resulting in consumers and businesses spending less on interest sensitive purchases like cars, new homes, and physical capital.

when there is inflation in an economy which is always true?

consumer price index has increased

If the economy was in a recession and Congress and the Federal Reserve Bank BOTH wanted to correct it quickly, which policy combination would be best

cut taxes, buy treasury bonds

If the federal government is attempting to encourage spending by consumers and businesses, a fiscal policy BEST serving •this purpose would be

decreasing taxes

If the federal government is attempting to encourage spending by consumers and businesses, a fiscal policy BEST serving this purpose would be

decreasing taxes-

If the unemployment rate is rising and GDP is falling, the fiscal policy action that the federal government should MOST likely follow is

decreasing taxes/

wants to reduce the nations money supply by doing all except

decreasing the discount rate

an economy characterized by increasing real gross domestic product (GDP), low unemployment, and increasing inflationary pressures

expansion phase of a business cycle

which of the following results when federal gov. expenditures are less than the federal gov. total reci epts

federal budget deficit

which of the following results when federal results when the federal government expenditures are less than federal gov.'s total receipts?

federal budget surplus

How do frictional and structural unemployment differ? Give examples of each.

frictional unemployment is unemployment that occurs when people take time to find a job. ex: Hannah stopped working at a large hospital to find a position at a small health clinic. structional unemployment is unemployment that occurs when workers' skills do not match the jobs that are available. ex: Martin barely graduated high school so he got fired because he lacked the skills needed for the job.

You hear another student say: "Fiscal policy is easy to understand, all you have to know is what is happening with current tax rates!" This student needs to include

government spending decisions as well

Unanticipated inflation

hurts lenders who lend at fixed rates.

Over a two-year period, the nation of Parthia experiences a steep decline in unemployment rate, a rise in real GDP, and a stabilized price level. Parthia appears to be

in the middle of a boom period

Investment

includes the monetary value of final capital goods businesses purchase in a given time period, the value of inventories produced by businesses, but not yet sold, by the end of the measurement time period, and the value of new home construction produced in the given time period.

what is most likely to lead to inflation?

increase in the costs of production

When aggregate demand exceeds aggregate supply in an economy, the MOST immediate result is

inflation

Monetary policies the Federal Reserve can adopt include

raising the discount rate buying government bonds lowering the reserve requirement

the role of the gov. in a mixed market economic system?

it monitors the safety of goods and services through regulatory

which is a person frictionally unemployed?

jake, who has recently entered the labor force

expansion

lasts until real GDP reaches the level of the previous peak.

the actions of the FED that control and regulate the amount of money in the economy are referred to as

monetary policy

which is not a goal promoted by the government through fiscal policy

money supply

national debt is different than gov. deficits in that

national debt is the sum of all past deficits plus interest

when the money supply is increased , which is most likely to happen?

price level will decrease

a goal promoted by the government through fiscal policy

price stability economic growth full employment

when the FED is conducting open market operations, they are buying or selling

raise the reserve requirement

The town of Smithville recently closed the blacksmith factory and now all of the blacksmiths are out of work. This type of unemployment is known as

structural

policymakers are trying to address this type of unemployment if they increase funding for training programs covering skills such as computer repair, programming, and networking

structural unemployment

Fiat money

the official money issued by the government of a country.

Gross Domestic Product (GDP)

the sum of consumer spending, investment spending, government spending, and net exports.

Aggregate Supply

the total quantity of final goods and services producers in an economy are willing and able to supply at each price level. has both a short-run and a long-run curve. has both a short-run and a long-run curve.

Real GDP

the value of current gross domestic product adjusted for inflation

an economist is presented with info about the prices of a selection of goods over several years

to compile a price index to measure iflation

If an economy is currently experiencing a contraction or recession, which stage of the business cycle will they experience next

trough