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ECON 1202: EXAM 1
Scarcity |
A situation in which unlimited wants exceed the limited resources available to fulfill those wants.
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Economics |
The study of the choices people make to attain their goals, given their scarce resources .
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Economic Model |
A simplified version of reality used to analyze real-world economic situation.
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1. People are rational
2. People respond to economic incentives
3. Optimal decisions are made at the margin |
three key economic ideas
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Marginal Analysis |
Analysis that involves comparing marginal benefits and marginal cost.
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Trade-off |
The idea that, because of scarcity, Producing more of one good or service means producing less of another good.
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Opportunity Cost |
The Highest-valued alternative that must be given up to engage in an activity.
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1. What goods and services will be produced?
2. How will the goods and services be produced?
3. Who will receive the goods and services produced? |
The economic problems that every society must solve
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Centrally planned economy |
An economy in which the government decides how economic resources will be allocated
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Market economy |
An economy in which the decisions of households and firms interacting in markets allocate economic resources.
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Mixed economy |
An economy in which most economic decisions result from interactions of buyers and sellers in markets but in which the government plays a significant role in the allocation of resources
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Productive efficiency |
A situation in which a good or service is produced at the lowest possible cost.
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Allocative efficiency |
A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it.
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Voluntary exchange |
A situation that occurs in markets when both the buyer and the seller of a product are made better off by the transaction.
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Equity |
The fair distribution of economic benefits.
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Economic variable |
Something measurable that can have different values, such as the incomes of doctors.
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Positive analysis |
Analysis concerned with what is.
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Normative analysis |
Analysis concerned with what ought to be.
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Microeconomics |
The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
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Macroeconomics |
the study of economy-wide phenomena, including inflation, unemployment, and economic growth.
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Production possibility frontier (PPF) |
A curve showing the maximum attainable combinations of two products that may be produced with the available resources and current technology.
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Economic growth |
The ability of the economy to increase the production of goods and services.
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Trade |
The act of buying and selling.
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Absolute advantage |
the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources
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Comparative advantage |
The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers.
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Market |
A group of buyers and sellers of a particular good or service and the institution or arrangement by which they come together to trade.
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Product market |
A market for goods, such as computers; or services such as medical treatment
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Factor Market |
A market for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability.
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Factors of production |
The inputs used to make goods and services such as Labor, Capital, Natural resources, and entrepreneurial ability.
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Labor |
Work
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Natural resources |
Include land, water, oil, iron ore, and other raw materials that are used in producing goods.
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Entrepreneur |
A person who organizes, manages, and takes on the risks of a business.
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Entrepreneurial ability |
The ability to bring together the other factors of production to successfully produce and sell goods and services.
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Circular-flow diagram |
A model that illustrates how participants in markets are linked.
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Free market |
A market with few government restrictions on how a good or service can be produced or sold or on how a factor of production can be employed.
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Property rights |
The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it
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Perfectly competitive market |
A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.
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Demand schedule |
A table that shows the relationship between the price of a good and the quantity demanded.
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Quantity demanded |
The amount of a good or service that a consumer is willing and able to purchase at a given price.
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Demand curve |
A curve that shows the relationship between price of the product and the quantity of the product demanded.
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Market demand |
The demand by all the consumers of a given good or service
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Law of demand |
The rule stating that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.
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Substitution effect |
The change in quantity demanded resulting from a change in the price making the good more or less expensive relative to other goods that are substitutes.
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Income effect |
The change in the quantity demanded of a good that results from the effect of a change in the goods price on consumers purchasing power.
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Ceteris paribus condition |
The requirement that when analyzing the relationship between two variables- such as price and quantity demanded- other variables must be held constant.
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Normal good |
A good for which the demand increases as income rises and decreases as income falls.
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Inferior good |
A good for which the demand increases as income falls and decreases as income rises.
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Substitutes |
Goods and services that can be used for the same purpose.
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Complements |
Goods and services that are used together.
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Demographics |
The characteristics of a population with respect to age, race, and gender.
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Quantity supplied |
The amount of a good or service that a firm is willing and able to supply at a given price.
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Supply schedule |
A table that shows the relationship between the price of a product and the quantity of the product supplied.
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Supply curve |
A curve that shows the relationship between the price of a product and the quantity of the product supplied.
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Law of supply |
The rule that holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in quantity supplied.
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Technological change. |
A positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs.
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Market equilibrium |
A situation in which quantity demanded equals quantity supplied.
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Competitive market equilibrium |
A market equilibrium with many buyers and sellers.
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Surplus |
A situation in which quantity supplied is greater than quantity demanded.
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Shortage |
A situation in which quantity demanded is greater than quantity supplied.
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Price ceiling |
A legally determined maximum that sellers may charge.
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Price floor |
A legally determined minimum price sellers may receive.
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Consumer surplus |
The difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer paid.
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Marginal benefit |
The additional benefit to a consumer from consuming one more unit of a good or service.
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Marginal Cost |
The additional cost to a firm of producing one more unit of a good or service.
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Producer surplus |
The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives.
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Economic surplus |
The sum of consumer surplus and producer surplus.
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Deadweight loss |
The reduction in economic surplus resulting from a market not being in competitive equilibrium.
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Economic efficiency |
A market outcome in which the marginal benefit to consumers of the last unit produced is equal to its marginal cost of production and in which the sum of consumer surplus and producer surplus is at a maximum.
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Black market |
A market in which buying and selling take place at prices that violate government price regulations.
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Tax incidence |
The actual division of the burden of a tax between buyers and sellers in a market.
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Sole proprietorship |
A firm owned by a single individual and not organized as a corporation.
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Partnership |
A firm owned jointly by two or more persons and not organized as a corporation.
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Corporation |
A legal form of business that provides owners with protection from losing more than their investment should the business fail.
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Limited liability |
A legal provision that shields owners of a corporation from losing more than they have invested in the firm.
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Corporate governance |
The way in which a corporation is structured and the effect that structure has on the corporation's behavior.
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Separation of ownership from control |
A situation in a corporation in which the top management, rather than the shareholders control day-to-day operations.
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Principal-agent problem |
A problem caused by an agent pursuing his own interests rather than the interests of the principal who hired him.
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Indirect finance |
A flow of funds from savers to borrowers through financial intermediaries such as banks. Intermediaries raise funds from savers to lend to firms (and other borrowers).
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Direct finance |
A flow of funds from savers to firms through financial markets, such as the New York Stock Exchange.
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Bond |
A financial security that represents a promise to repay a fixed amount of funds.
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Coupon payment |
An interest payment on a bond.
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Interest rate |
The cost of borrowing funds, usually expressed as a percentage of the amount borrowed.
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Stock |
A financial security that represents partial ownership of a firm.
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Dividends |
Payments by a corporation to its stockholders.
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Liability |
Anything owed by a person or a firm
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Income statement |
A financial statement that shows a firms revenues, costs, and profit over a period of time.
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Accounting profit |
A firms net income, measured as a revenue minus operating expenses and taxes paid.
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Explicit cost |
A cost that involves spending money.
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Implicit cost |
A non-monetary opportunity cost.
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Economic profit |
A firm's revenues minus all its implicit and explicit costs.
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Balance sheet |
A financial statement that sums up a firms financial position on a particular day, usually the end of a quarter or year.
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Dodd-Frank act |
Legislation passed during 2010 that was intended to reform regulation of the financial system.
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Business cycle |
Alternating periods of economic expansion and economic recession.
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Expansion |
The period of a business cycle during which total production and total employment are increasing
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Recession |
The period of a business cycle during which total production and total expansion are decreasing.
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Inflation rate |
The percentage increase in the price level from one year to the next.
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Gross domestic product (GDP) |
The market value of all final goods and services produced in a country during a period of time, typically one year.
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Final good or service |
A good or service purchased by a final user.
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Intermediate good or service |
A good or service that is an input into another good or service, such as a tired on a truck.
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Transfer payments |
Payments made by the government to households for which the government does not receive a new good or service in return.
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Consumption |
Spending by households on goods and services, not including spending on new houses.
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Investment
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Spending by firms on new factories, office buildings, machinery, and additions to inventories, plus spending by households and firms on new houses.
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Government purchases |
Spending by federal, state, and local governments on goods and services.
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Net exports |
Exports minus imports.
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Value added |
The market value a firm adds to a product.
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Underground economy |
Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods and services are illegal.
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Nominal GDP |
The value of final goods and services evaluated at current-year prices.
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Real GDP |
The value of final goods and services evaluated at base-year prices.
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Price level |
A measure of the average prices of goods and services in the economy.
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GDP deflator |
A measure of the price level calculated as the ratio of nominal GDP to real GDP times 100.
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nominal gdp/real gdp X 100 |
GDP deflator equation
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unemployed |
someone who is not currently at work but who is available for work and who has actively looked for work during the previous month
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labor force |
the sum of employed and unemployed workers in the economy
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unemployment rate |
the percentage of the labor force that is unemployed
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discouraged worker |
People who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them.
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1.frictional
2.structural
3.cyclical
4.seasonal |
types of unemployment
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frictional unemployment |
short-term unemployment that arises from the process of matching workers with jobs.
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structural unemployment |
unemployment that arises from a persistent mismatch between the skills or attributes of workers and the requirement of jobs
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cyclical unemployment |
unemployment caused by a business cycle recession
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natural rate of unemployment |
the normal rate of employment consisting of frictional unemployment and structural unemployment
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full employment |
no cyclical unemployment, only people unemployed are either caused by structural or frictional unemployment
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efficiency wage |
an above market wage that a firm pays to increase workers productivity
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price level |
a measurement of the average prices of goods and services in the economy
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inflation rate |
the percentage increase in the price level from one year to the next
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consumer price index |
A measure of average change over time in the prices a typical urban family of four pays for the goods and services they purchase
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(expenditures in the current year/expenditures in the base year) X 100 |
CPI equation
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CPI substitution bias |
it is assumed that each month, consumers purchase the same amount of each product in the market basket. the problem is that consumers are likely to buy fewer of those products that increase in price the most and buy more products that increase least in price
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CPI increase in quality Bias |
adjustments are made for the improvement in quality of products but these adjustments are hard to make. The recorded price increases overstate the pure inflation in some products
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CPI new product bias |
the price of new products decrease in the years immediately after they are introduced. if the market basket is not updated frequently, these prices decreases are not included in CPI
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CPI outlet bias |
in the 1990's consumers began to increase their purchases from discount stores such as Costco. The BLS continued to collect price statistics from traditional full-price retail stores which meant that CPI did not reflect the prices some consumers actually paid.
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0.5%-1% |
estimated rate at which CPI is oversted
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producer price index |
an average of the prices received by producers of goods and services at all stages of the production process
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nominal interest rate |
The stated interest rate on a loan
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Real interest rate |
The nominal interest rate minus the inflation rate
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deflation |
a decline in the price level
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menu costs |
the costs to firms of changing prices
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business cycle |
Alternating periods of economic expansion and economic recession
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long-run economic growth |
the sustained rise in the quantity of goods and services the economy produces
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labor productivity |
the quantity of goods and services that can be produced by one worker or by one hour of work. increases in real GDP per capita depend on increases in labor productivity
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capital |
manufactured goods that are used to produce other goods and services
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potential GDP |
the level of real GDP attained when all firms are producing at capacity
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financial system |
The system of financial markets and financial intermediaries through which firms acquire funds from households.
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financial markets |
Markets where financial securities, such as stocks and bonds, are bought and sold.
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financial intermediaries |
firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers
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market for loanable funds |
the market in which those who want to save supply funds and those who want to borrow to invest demand funds
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the willingness of households to save and by the extent of the government saving or dissaving |
supply of loanable funds is determined by
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crowding out |
a decline in private expenditures as a result of an increase in government purchases
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shift to the left
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an increase in the governments budget deficit causes the supply of loanable funds curve to
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shift to the left |
an increase in the desire of households to consume today causes the supply of loanable funds curve to
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shift to the right |
an increase in tax benefits for saving which increase incentive to save causes the supply of loanable funds curve to
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shift to the right |
an increase in expected future profits causes the demand for loanable funds curve to
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shift to the left |
an increase in corporate taxes causes the demand for loanable funds curve to
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economic growth model |
A model that explains growth rates in real GDP per capita over the long run
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technological change |
A change that allows for more production using the same resources
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human capital |
the accumulated knowledge and skills that workers acquire from education and training or from their life experiences
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per worker production function |
the relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant
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new growth theory |
says that real GDP per person grows because of the choices people make in the pursuit of profit and that growth will persist indefinitely
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catch-up |
the prediction that the level of GDP per capita (or income per capita) in poor countries will grow faster than in rich countries
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foreign direct investment |
the purchase or building by a corporation of a facility in a foreign country
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foreign portfolio investment |
the purchase by an individual or a firm of stocks or bonds issued in another country
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globalization |
the process of countries becoming more open to foreign trade and investment
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aggregate demand and aggregate supply models |
a model that explains short-run fluctuations in real GDP and the price level
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aggregate demand curve |
a curve that shows the relationship between the price level and the quantity of real gdp demanded by households, firms, and the government
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short run aggregate supply curve |
a curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms
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wealth effect |
reduced savings and increased spending as income increases (shifts savings schedule downward and consumption schedule upward)
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interest rate effect |
The changes in household and business buying as the interest rate changes (in turn, a reflection of a change in the demand for or supply of credit brought on by price level changes).
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international trade effect |
Occurs when a change in the price level leads to a change in the quantity of net exports demanded
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1.changes in government policies
2.changes in the expectations of households and firms
3.changes in foreign variables |
The variables that shift the aggregate demand curve
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monetary policy |
the actions taken by the federal reserve to manage the money supply and interest rates to achieve macroeconomic policy objectives
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fiscal policy |
Changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.
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shift to the right |
an increase in government purchases causes the aggregate demand curve to
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shift to the left |
an increase in personal income taxes or business taxes causes the aggregate demand curve to
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shift to the right |
an increase in households expectations of their future incomes causes the aggregate demand curve to
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shift to the right |
an increase in firms expectations of the future profitability of investment spending causes the aggregate demand curve to
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shift to the left |
an increase in the growth rate of domestic GDP relative to the growth rate of foreign GDP causes the aggregate demand curve to
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shift to the left |
an increase in the exchange rate relative to foreign currencies causes the aggregate demand curve to
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long run aggregate supply |
a curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied
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shift to the right |
an increase in the labor force or the capital stock causes the SRAS curve to
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shift to the right |
an increase in productivity causes the SRAS curve to
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shift to the left |
an increase in the expected future price level causes the SRAS curve to
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shift to the left |
an increase in workers and firms adjusting to having previously underestimated the price level causes the SRAS curve to
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shift to the left |
an increase in the expected price of an important natural resource causes the SRAS curve to
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shift to the right |
a positive technological change causes the SRAS curve to
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supply shock |
an unexpected event that causes the short-run aggregate supply curve to shift
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stagflation |
A combination of inflation and recession, usually resulting from a supply shock.
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money |
asset that people are generally willing to accept in exchange for goods and services or for payment of debts
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asset |
anything of value owned by a person or a firm
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commodity money |
a good used as money that also has value independent of its use as money
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a function of money |
it must act as a medium of exchange
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a function of money |
it must serve as a unit of account
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a function of money |
it must serve as a store of value
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a function of money |
it must offer a standard of deferred payment.
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federal reserve |
The central bank of the USA
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fiat money |
money that has value because the government has ordered that it is an acceptable means to pay debts
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M1 |
the narrow definition of the money supply: the sum of currency in circulation, checking account deposits in banks, and holdings or travelers checks
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M2 |
a broader definition of the money supply: it includes M1 plus savings account deposits, small-denomination time deposits, balances in money market deposit accounts in banks, and non institutional money market fund shares
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reserves |
deposits that a bank keeps as cash in its vault or on deposit with the federal reserve
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required reserves |
reserves that a bank is legally required to hold, based on its checking account deposits
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required reserve ratio |
The minimum fraction of deposits banks are required by law to keep as reserves
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excess reserves |
reserves that banks hold over the legal requirement
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single deposit multiplier |
the ratio of the amount of deposits created by banks to the amount of new reserves (1/ reserve requirement)
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fractional reserve banking system |
a banking system in which banks keep less than 100% of deposits as reserves
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bank run |
A situation in which many depositors simultaneously decide to withdraw money from a bank
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bank panic |
a situation in which many banks experience runs at the same time
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Federal Open market committee |
Federal Reserve committee that makes key decisions about interest rates and the growth of the United States money supply
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open market operations |
The buying and selling of Treasury Securities by the Federal Reserve in order to control the money supply
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an increase in money supply |
an Increase in open market purchases results in
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increase money supply |
by lowering the discount rate the fed can encourage banks to take additional loans and thereby increasing their reserves. with more reserves, banks will make more loans to households and firms which will
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decrease in money supply |
if the fed raises the reserve requirement, then there will be a
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security |
a financial asset-such as a stock or bond- that can be brought and sold in a financial market
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securitization |
The process of transforming loans or other financial assets into securities
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money supply X velocity=Price level X real output |
quantity equation
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V=price level X real output/money supply |
velocity equation
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velocity of money |
the average number of times each dollar in the money supply is used to purchase goods and services included in GDP
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quantity theory of money |
a theory about the connection between money and prices that assumes that the velocity of money is constant
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price stability, high employment, stability of financial markets and institutions, and economic growth |
goals of monetary policy
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federal funds rate |
the interest rate banks charge each other for overnight loans
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expansionary monetary policy |
The Federal Reserve's policy of decreasing interest rates to increase real GDP
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contractionary monetary policy |
the federal reserves policy of increasing interest rates to reduce inflation
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Taylor rule |
A rule developed by John Taylor that links the Fed's target for the federal funds rate to economic variables
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inflation targeting |
a framework for conducting monetary policy that involves the central bank announcing its target level of inflation
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automatic stabilizers |
Government spending and taxes that automatically increase or decrease along with the business cycle
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change in equilibrium real GDP/change in taxes |
Tax multiplier equation
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budget deficit |
a situation in which the government spends more than it takes in
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budget surplus |
A situation in which the government takes in more than it spends
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cyclically adjusted budget deficit or surplus |
the deficit or surplus in federal governments budget if the economy were at potential GDP
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tax wedge |
the difference between the pretax and posttax return to an economic activity
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marginal propensity to consume |
the slope of the consumption function: the amount by which consumption spending changes when disposable income change (=change in consumption/change in disposable income)
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