Econ 2020 Final Exam

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comparative advantage

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the situation where an individual, business, or country can produce at a lower opportunity cost than a competitor can

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economics

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study of how people allocate their limited resources to satisfy their nearly unlimited wants

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economic thinking

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a purposeful evaluation of the available opportunities to make the best decision possible

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incentives

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factors that motivate a person to act or exert effort

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macroeconomics

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study of the overall aspects and workings of an economy

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maginal thinkings

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an evaluation of whether the benefit of one more unit of something is greater than its cost

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markets

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brings buyers and sellers together to exchange goods and services

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microeconomics

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study of the individual units that make up the economy

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opportunity cost

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highest-valued alternative that must be sacrificed in order to get something else

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scarcity

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limited nature of society's resources

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trade

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the voluntary exchange of goods and services between two or more parties

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absolute advantage

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the ability of one producer to make more than another producer with the same quanitity of resources

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capital goods

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help produce other valuable goods and services in the future

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ceteris paribus

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concept under which economists examine a change in one variable while holding everything else constant

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consumer goods

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produced for present consumption

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endogenous factors

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variables that can be controlled for in a model

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exogenous factors

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variables that cannot be controlled for in a model

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investment

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process of using resources to create or buy new capital

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law of increasing relative cost

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states that the opportunity cost of producing a good rises as a society produces more of it

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normative statement

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an opinion that cannot be tested or validated; "what ought to be"

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positive statement

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can be tested and validated; "what is"

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production possibilities frontier

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model that illustrates the combinations of outputs that a society can produce if all of its resources are being used efficiently

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complement

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two goods that are used together

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equilibrium price

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marketing-clearing price

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imperfect market

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market in which either the buyer or seller has an influence on the market price

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inferior good

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purchased out of necessity rather than choice

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inputs

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resources used in the production process

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law of supply and demand

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states that the market price of any good will adjust to bring the quantity supplied and the quantity demanded into balance

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normal good

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purchased more when income goes up

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shortage

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occurs whenever the quantity supplied is less than the quantity demanded

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substitutes

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two goods that are used in place of each other

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surplus

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occurs whenever the quantity supplied is greater than the quantity demanded

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gross domestic product (GDP)

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market value of all final goods and services produced within a country during a specific period of time

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per capita GDP

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GDP per person

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inflation

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growth rate of the overall level of prices in an economy

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real GDP

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GDP adjusted for changes in overall price levels

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economic growth

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measured as the percent change in real per capita GDP

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recession

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short-run economic downturn

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business cycle

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short-run fluctuation in economic activity

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economic contraction

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phase of a business cycle where the economy is growing slower than usual

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intermediate good

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good that firms repackage or bundle with other goods for sale at a later stage

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final good

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good sold to final users

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consumption ( C )

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purchase of final goods and services by households, excluding new housing

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investment ( I )

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private spending on tools, plant, and equipment used to produce future output

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government spending ( G)

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spending by all levels of government on final goods and services

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net exports ( NX )

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exports minus imports of fina goods and services

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nominal GDP

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GDP measured in current prices

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GDP deflator

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measure of a price level that includes prices of the final goods and services included in GDP

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price level

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index of the average prices of goods and services throughout the economy

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unemployment

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occurs when a worker is not currently employed is searching for a job unsuccessfully

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unemployment rate

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perfect of the labor force that is unemployed

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creative destruction

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occurs when the introduction of new products and technologies leads to the end of other industries and jobs

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structural unemployment

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unemployment causes by changes in the industrial make-up of the economy

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frictional unemployment

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unemployment caused by delays in matching available jobs and workers

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unemployment insurance

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government program that reduces the cost of being out-of-work by guaranteeing part of a worker's income while unemployed

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cyclical unemployment

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unemployment caused by economic downturns

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natural rate of unemployment (u*)

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typical rate of unemployment when the economy is growing normally

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full employment output (Y*)

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output level produced in an economy when the unemployment rate is equal to its natural rate

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labor force

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people who are employed or actively seeking work

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discouraged workers

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those who are not working, have looked for a job in the past 12 months and are willing to work, but have not sought employment in the past four weeks

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underemployed

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workers that are part-time workers who would prefer to work full-time

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labor force participation rate

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portion of the population that is in the labor force

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consumer price index (CPI)

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measure of the price level based on the consumption patterns of a typical consumer

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deflation

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occurs when overall prices fall

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chained CPI

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measure of the CPI in which the basket of goods considered is updated monthly

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shoeleather cost

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time and resources are spent to guard against the effects of inflation

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money illusion

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people misinterpret nominal changes as real changes

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menu cost

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inflation means firms must incur extra costs to change output prices

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future price level uncertainty

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long-term agreements may not be signed if lenders, firms, and workers are unsure about future price levels

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wealth redistribution

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surprise inflation redistributes wealth between borrowers and lenders

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price confusion

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inflation makes if difficult to read price signals and this can lead to a misallocation of resources

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tax distortions

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inflation makes capital gains appear larger and thus increases tax burdens

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loanable funds market

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market where savers supply funds for loans to borrowers

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interest rate

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price of loanable funds

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time preferences

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fact that people prefer goods and services sooner, rather than later

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investor confidence

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measure of what firms expect for future economic activity

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financial intermediaries

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firms that help channel funds from savers to borrowers

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banks

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private firms that accept deposits and extend loanss

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indirect finance

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when savers deposit funds into banks that then loan these to borrowers

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direct finance

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when borrowers go directly to savers for their funds

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security

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tradable contract that entitles its owner to certain rights

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bond

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a security that represents a debt to be paid

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maturity date

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date on a bond when the repayment is due

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face value or par value (pm)

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value of bond at maturity - the amount due at repayment

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default risk

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risk that the borrower will not pay off the loan

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stocks

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ownership shares in a firm

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secondary markets

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markets in which securities are traded after their first sale

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treasury securities

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bonds sold by the U.S. government to pay for the national debt

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securitization

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creation of a security as a combination of other securities

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rule of 70

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states that if the annual growth rate of a variable is x percent, the size of that variable doubles every 70 divided by x years.

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resources

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factors of production, inputs used to produce goods and services

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human capital

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resource represented by the quantity, knowledge, and skills of the workers in an economy.

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technology

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knowledge available for use in production

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technological advancements

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new techniques or methods so that firms can produce more valuable outputs per unit of input

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institution

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significant practice, relationship, or organization in a society

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private property

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right of individuals to own property and use their property in production

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production function

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describes the relationship between inputs a firm uses and the output it creates

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aggregate production function

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the relationship between all the inputs used in the macroeconomy and the total output (GDP) of that economy

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marginal product

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the change in output divided by the change in input

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diminishing marginal product

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when the marginal product of an input falls as the quantity of the input rises

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steady state

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the condition of a macroeconomy when there is no new net investments

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depreciation

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fall in the value of a resource over time

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net investment

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investment minus depreciation

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convergence

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idea that per capita GDP levels across nations will equalize, as nations approach the steady state

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exogenous growth

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growth that is independent of any factors in the economy

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endogenous growth

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growth driven by factors inside the economy

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aggregate demand

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total demand for final goods and services in an economy

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wealth effect

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change in the quantity of aggregate demand that results from wealth changes due to price level changes

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interest rate effect

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when a change in the price level leads to a change in interest rates, and therefore changes the quantity of aggregate demand

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international trade effect

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when a change in price level leads to a change in the quantity of net exports demanded

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short run

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when something partially adjusts

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long run

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when something has had enough time to fully adjust

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supply shock

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event that changes firms' production cost

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classical economics

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assume prices are flexible throughout the economy

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keynesian ecnomics

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assume prices are sticky downward and they focus on the demand side of the economy as the source of instability

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transfer payments

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payments to groups or individuals when no good or service is received in return

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government outlays

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side of government budget that includes both spending and transfer payments

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mandatory outlays

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spending that is determined by ongoing long-term obligations

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discretionary outlays

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spending that can be adjusted, even in the short run

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social security

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government-run retirement funding program

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medicare

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U.S. federal program that funds medical care for retirees

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progressive income tax system

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system in which people with higher incomes pay a greater fraction of their income in taxes

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marginal tax rate

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tax rate paid on a person's next dollar of income

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average tax rate

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total tax paid as a portion of taxable income

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budget deficit

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when government outlays exceed revenue

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budget surplus

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when government revenue exceeds outlays

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national debt

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sum total of accumlated budget deficits

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austerity

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strict budget regulations aimed at debt reduction

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fiscal policy

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use of government spending and taxes to influence the economy

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expansionary fiscal policy

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when the government increases spending or decreases taxes to stimulate the economy

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countercyclical fiscal policy

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policy used to counteract business cycle fluctuations

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marginal propensity to consume (MPC)

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portion of additional income spent on consumption

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spending multiplier

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formula to determine the total impact on spending from an initial change

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automatic stabilizers

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government programs that naturally implement countercyclical fiscal policy in response to economic conditions

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crowding out

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when private spending falls in response to increases in government spending

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new classical critique

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increases in government spending and decreases in taxes are largely offset by increases in savings

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supply side fiscal policy

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use of government spending and taxes to affect the production side of the economy

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Laffer curve

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illustration of the relationship between tax rates and tax revenue

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contractionary fiscal policy

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when the government decreases spending or increases taxes to eliminate the budget deficit

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currency

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paper bills and coins used to buy goods and services

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medium of exchange

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what people trade for goods and services

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double coincidence of wants

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when each party in an exchange transaction happens to have what the other party desires

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commodity money

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when an actual good is used for money

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commodity-backed money

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money you can exchange for a commodity at a fixed rate

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unit of account

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measure in which prices are quotes

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store of value

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means for holding wealth

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checkable deposits

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bank deposits in accounts that allow depositors to make withdrawals by writing checks

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M1

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money supply measure that is essentially composed of currency and checkable deposits

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M2

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money supply measure that includes currency, checkable deposits, and savings deposits

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balance sheet

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accounting statement that summarizes the firm's key financial information

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assets

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items a firm owns

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liabilities

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obligations the firm owes to others

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owner's equity

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difference between the firm's assets and its liabilities

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reserves

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portion of bank deposits that are set aside and not lent out

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fractional reserve banking

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when banks hold only a fraction of deposits on reserve

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bank run

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when many depositers attempt to withdraw their funds at one time

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required reserve ratio (rr)

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portion of deposits banks are required to keep on reserve

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excess reserve

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any reserves held in excess to those required

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moral hazard

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when a party that is protected from risk behaves differently from how it would behave if it were fully exposed to the risk

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simple money multiplier

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rate at which banks multiply money when all currency is deposited into banks and they hold no excess reserves

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federal funds

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private bank deposits at the Fed

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federal funds rate

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interest rate in loans between private banks

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discount loans

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loans from the Fed to private banks

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discount rate

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interest rate on discount loans

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open market operations

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purchase or sale of bonds by a central bank

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quantitative easing

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targeted use of OMOs whereby the central bank buys securities specifically targeted in certain markets

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fiat money

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money that has no value expect as the medium of exchange

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expansionary monetary policy

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when a central bank acts to increase the money supply

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contractionary monetary policy

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when a central bank acts to decrease the money supply

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monetary neutrality

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the idea that the money supply does not affect real economic variables

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Phillips curve

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indicates a short run inverse relationship between inflation and unemployment rates

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adaptive expectations

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theory that people's expectations for the future are based on their recent experience

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stagflation

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combination of high unemployment rates and high inflation

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rational expectations

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theory that people form expectations based on all available information

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active monetary policy

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strategic use of monetary policy to counteract macroeconomic expansions and contractions

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passive monetary policy

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when central banks purposefully choose to only stabilize money and price levels through monetary policy

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trade balance

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difference between total exports and total imports

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trade surplus

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when exports exceed imports

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trade deficit

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when imports exceed exports