102 Cards in this Set
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Macro-economics
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the study of problems that affect the economy as a whole (lack of growth, recessions, unemployment, and inflation) and what to do about them
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Classical Economists
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economists who believe that business cycles (ups and down of the economy) are temporary glitches, and who generally favor laissez-faire, or non-activist, policies
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Keynesian Economists
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economists who believe that business cycles reflect underlying problems that can be addressed with activist government policies
- said the government can help
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Supply-side economics
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the long-run growth framework focuses on incentives for supply
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Demand-side economics
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the short-run business cycle framework focuses on demand
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Potential Output
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the highest amount of output an economy can sustainably produce and sell using existing production process and resources
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Per Capita Output
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output divided by the total population
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Business Cycle
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a short-run, temporary upward or downward movement of economic activity, or real GDP, that occurs around the growth trend
- Economy goes through ups and downs (peaks and troughs)
- economic growth (long term going up)
- business cycles -short run
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Peak
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top of a cycle
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Boom
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a very high peak, representing a big jump in output
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Recession
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a decline in real output that persists for more than two consecutive quarters of a year
- creates unemployment and lower profits, etc.)
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Expansion
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an upturn that lasts at least two consecutive quarters of a year
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Depression
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a deep prolonged recession
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Unemployment rate
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the percentage of people in the economy who are both able to and looking for work but who cannot find jobs
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Cyclical Unemployment
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unemployment resulting from fluctuations in economic activity
- caused by recessions
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Structural unemployment
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unemployment caused by the institutional structure of an economy or by economic restructuring making some skills obsolete
- few jobs available with many people wanting them
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Frictional unemployment
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unemployment caused by people entering the job market and people quitting a job just long enough to look for and find another one
- occurs because it takes time to find a new job (always exists)
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Target rate of unemployment
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the lowest sustainable rate of unemployment that policy makers believe is achievable given existing demographics and the economy's institutional structure
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Structural Stognation
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cyclical downturn that is not expected to end any time soon without major changes to the structure of the economy
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Gross Domestic Product (GDP)
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the total market value of all final goods and services produced in an economy in a one-year period
-final goods and services
-in an economy
-during a time period
- Flow variable (income not wealth, what's happening now)
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Aggregate Accounting System
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a set of rules and definitions for measuring economic activity in the economy as a whole
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Consumption
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spending by households on good and services
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Investment
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spending for the purpose of additional product
-"saving", spend money in order to improve a businesses productivity
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Government Spending
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goods and services that government buy
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Transfer Payments
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payments to individuals that do not involve production by those individuals
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Net Exports
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spending on goods and services produced in the US that foreigners (export) minus goods and services produces abroad that US citizens buy (imports)
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Final Output
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goods and services purchased for their final use
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Intermediate Products
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products used as input in the production of some other product
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Value Added
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the increase in value that a firm contributes to a product or services
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Depreciation
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the decrease in an assets's value
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Net Investment
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gross investment minus depreciation
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Gross National Product (GNP)
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the aggregate final output of citizen and businesses of an economy in a one-year period
- GNP = GDP + Net foreign Factor Income
- includes foreign factors (making something abroad)
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Net foreign factor income
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the income from foreign domestic factor sources minus foreign factor income earned domestically
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Nominal GDP
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the amount of goods and services produced measured at current prices
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Inflation
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a continual rise in the price level over time
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Real GDP
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the total amount of goods and services produced adjusted for price-level changes
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GDP deflator
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the average price of all components of total output expressed relative to comparison year prices set at 100
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Price Index
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a measure of the composite price of a specified group of goods
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Nominal Interest Rate
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rate you pay or receive to borrow or lend money
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Real Interest Rate
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the nominal interest rate adjusted for inflation (nominal interest rate - inflation)
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Real Wealth
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the value of the productive capacity of the assets of an economy measured by the goods and services it can produce now and in the future
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Nominal Wealth
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the value of those assets measured at their current market prices
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Asset Price Inflation
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a rise in the price of assets unrelated to increases in their productive capacity
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Purchasing Power Parity
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a method of comparing income that takes into account that different relative prices among countries
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Potential Output
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the highest amount of output an economy can sustainably produce using existing production processes and resources
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Monetary Policy
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a policy of influencing the economy through changes in the money supply and interest rates
- government influences money
-Using interest rate or the money supply to change aggregate demand
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Equilibrium Output
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the level of output toward which the economy gravitates in the short tun because of the cumulative cycles of declining or increasing production
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Deflation
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an overall decline the price level in the economy
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Paradox of Thrift
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an increase in saving can lead to a decrease in expenditures, whit can lead to decreasing supply, decreasing output, causing a recession, and lowering total saving
- we think something's going to happen so it does
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Aggregate Demand Curve
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a curve that shows how a change in the price level will change aggregate expenditures on all goods and services in an economy
-slopes down
-government only controls government spending, the people decided the rest
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Interest Rate Effect
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the effect that a lower price level has an investment expenditure through the effect that a change in the price level has on interest rates
- higher price levels cause people to want more money. Thus, can borrow more and lend less, driving up the interest rate. Leads to reduce investment…
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International Effect
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as the price level falls, net exports will rise
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Money Wealth Effect
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a fall in the price level will make the holders of money richer, so they buy more
- changes in price affect the purchasing power of your wealth, which shifts the consumption function
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Multiplier Effect
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the amplification of initial changes in expenditures
- multiplier= 1/(1-Marginal Parpincy to Consume)
- Marginal Parpincy to Consume- a measurement comparing how much we spend to how much we save (Poor people have a higher MPC)
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Fiscal Policy
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associated with government spending and taxes
-using government spending or tax policy to change aggregate demand
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Short-run aggregate supply curve
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a curve that specifies how a shift in the aggregate demand curve affects the price level and real output in the short-run, other things constant
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Quantity-Adjusting markets
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markets in which firms respond to changes in demand primarily by changing production instead of changing their prices
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Aggregate Supply curve
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a curve that shows the long-run relationship between output and the price level
-in the short-run, some things are sticky (changes don't move very fast)
-long-run- when everything has time to adjust, changes in prices will have zero effect on Real GDP (Vertical at potential output)
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Inflationary Gap
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aggregate expenditures above potential output that exist at the current price level
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Counter-cyclical Fiscal Policy
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fiscal policy in which the government offsets any change in aggregate expenditures that would create a business cycle
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Fine-tuning
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fiscal policy designed to keep the economy always at its target or potential level of income
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Recessionary Gap
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the amount by which equilibrium output is less than potential output
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GDP=
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=Potential GDP - Actual GDP
= C+I+G+NX
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Productivity
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Output per unit of input
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Say's Law
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supply creates its own demand
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The Rule of 72
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the number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of increase
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Specialization
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the concentration of individuals on certain aspects of production
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Division of Labor
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the splitting up of a task to allow for specialization of production
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Per Capita Growth
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producing more goods and services per person (% change in real GDP - % change in population)
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Human Capital
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the skills that are embodied in workers through experience, education, and on-the-job training, or, people's knowledge
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Social Capital
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the habitual way of doing things that guides people in how they approach production
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Technology
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the way we make goods and supply services
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Classical Growth Model
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a theory of growth that emphasizes the role of capital in the growth process
-focuses on diminishing marginal productivity of labor
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Law of Diminishing Marginal Productivity
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as more and more of a variable input in added to an existing fixed input, eventually the additional output produced with that additional input falls
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New Growth Theory
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a theory of growth that emphasizes the role of technology in the growth process
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Positive Externalities
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positive effects on others not taken into account by the decision maker
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Patent
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positive effects on others not taken into account by the decision maker
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Learn by Doing
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improve the methods of production through experience
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Network Externality
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the use of a good by one individual makes the technology more valuable to other people
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Disinflation
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a fall in the inflation rate
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Price Stablility
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a majority goal of the economy (keeping inflation in check because a lot of inflation is bad)
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Trade Deficits
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import more than we export
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Trade Surplus
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trading more than we bring in
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National Account
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Keep track of consumer spending, sales of producers, businesses, etc.
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Shifters of the Aggregate Demand Curve
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-Changes in Foreign Income
-Exchange rates (how much our currency is worth in other countries)
-Distribution of Income
-Changes in Expectations (Paradox of Thrift)
-Multipler Effect
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Macroeconomic Policy
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-we want price stability and low unemployment
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Capital
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factor of production, the things that help run a business
-those with more capital grow slower
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Entrepreneurship
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most important source of economic growth
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Money
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a highly liquid financial asset that;s generally accepted in exchange for other goods, is used as a reference in valuing other goods and can be stored as wealth
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Reserve Ratio
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the ratio of reserves to total deposits
1/reserve ratio=amount of demand deposit
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Money Multiplier
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the measure of the amount of money ultimately created per dollar deposited in the banking system, when people hold no currency
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Transaction Motive
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the need to hold money for spending
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Precautionary motive
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holding money for unexpected expenses and impulse buying
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Speculative Motive
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holding cash to avoid holding financial assets whose prices are falling
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M1
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currency in the hands of the public, checking account balance, and traveler's checks
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M2
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M1 plus savings and money market accounts, small-denomination time deposits and retail money funds
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Double Coincidence of Wants
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in order to trade something that you want, you must have something they want
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Types of Money
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-Commodity Money- trading an actual good as money (gold)
-Commodity-backed Money- not trading gold, trading the paper that says you own gold
-Fiat Money- money backed by nothing
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Bank Reserves
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actual amount of money in the vault
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T-accounts
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assets on one side, liabilities on the other
-assets=loans
-liabilities=Deposits
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Bank Run
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everyone shows up at once asking for their money and banks may not have enough money (Mary Poppins)
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Monetary Base
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bank reserves and currency in circulation all physical currency in the economy
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