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223 Cards in this Set

  • Front
  • Back

Why is inflation bad?

It decreases the value of the dollar, which means you can buy less with it. Inflation is a big problem for people who have a fixed income.

What percentage of your income should you save?

10%

What are the two types of credit?

Credit cards and loans

What are 2 characteristics of credit cards?

1. No waiting for money


2. Higher interest rate

What are 2 characteristics of loans?

1. Wait for your money (wait to be approved)


2. Lower interest rate

What problem do people run into when using credit cards?

It is very easy to charge a lot of money

What is the name of the paperwork you must fill out to get federal financial aid?

FAFSA

How does insurance help us?

By transferring and sharing the risk

What kind of car insurance is required by law?

Bodily-injury liability

What is the equation for simple interest?

I = P x R x T

What is the equation for compound interest?

I =P x (I + R)^T

What are 3 ways to save for retirement?

1. General savings


2. 401(K)


3. IRA

What is a 401(K)

Money comes from your paycheck and your employer will match a certain percentage. The limit per year is $15500, and you should maximize it because of the matched money.

What is the difference between a traditional and Roth IRA?

In a traditional IRA, you pay taxes on the investment once you take it out, but in a Roth IRA, you pay takes when you put the money in (all the money is yours).
What is economics?
Economics is the study of the choices people make to try to satisfy their wants in a world of scarcity.
What is scarcity?
Scarcity is when a limited number of goods and services are available to meet unlimited wants. This requires us to make choices.
What is a need?
A need is something that is essential to have.
What is a want?
A want is something that you would like to have. It is not absolutely necessary, but it would be good to have.
What is an opportunity cost and what is an example?
An opportunity cost is the alternative that one has to give up when a choice is made. Everything we do has an opportunity cost. An example would be studying all night, which would require you to give up sleep.
What is a rationing device?
A rationing device is a way to decide who gets what, such as money (you can get a parking spot for $300, or when you get enough votes to be homecoming queen or king).
What are costs and benefits?
Costs are the negative aspects of a situation (the cons) and benefits are the positive aspects of a situation (the pros). In a good and correct decision, the benefits outweigh the costs.
Explain the concept: Global Economy
A global economy is an economy in which actions anywhere in the world can affect everyone. An example would be if China had a revolution causing its reproduction rates to slow down, preventing it from being able to trade with the countries it usually does.
What are the four types of resources?
The four types of resources, or the factors of production for a business, are land, labor, capital, and entrepreneurship.
How does a nation decide what and how to produce?
They decide with a production possibilities curve.
What is a production possibilities curve?
A graph that shows alternative ways to use an economy's resources. It also determines the opportunity costs and trade–offs involved in making an economic decision.
What is a production possibilities frontier?
The line on a production possibilities curve that shows the maximum possible output an economy can produce.
What is an Entrepreneur?
Someone who has developed a new idea, started a business, or fueled economic growth.
What is a marginal cost?
The cost of producing one more unit of a good.
What is marginal revenue (benefit)?
The additional income from selling one more unit of a good.
What are the 4 types of resources and their payment?
1. Land: natural resources (water, minerals, land, animals) Payment: rent
2. Labor: physical/mental tasks and talents that people contribute to production. Payment: wages
3. Capital: Human–made goods used for further production. MONEY IS NOT CONSIDERED CAPITAL! Payment: intrest
4. Entrepreneurship: Developing new ideas, making businesses and industries, and fueling economic growth. Payment: Profits
What are the three economic questions you ask of any economy?
What goods will be produced? (to satisfy needs and wants of people)
How will goods be produced? (to decide how to best use its resources)
Who consumes these goods? (determined by how societies dist. income)
What is the difference between human capital and physical capital?
Human capital is the knowledge and skills needed to make the business, while physical consists of the objects used to make the business and its products.
What are two things economists do to decide whether a decision is correct or not?
They always consider the costs and the benefits of a decision. If it is correct, the benefits will outweigh the costs.
What is the invisible hand principle?
A principle that states that if left alone, a market or economy will regulate itself. This means no government intervention.
What are the characteristics of a traditional economy?
–Simplest and oldest
–Based on custom and ritual
–Relies on being self–sufficient
–Restricts trades
–Little innovation or change happens
What are the characteristics of free enterprise/capitalism?
–Resources owned by private individuals
–Gov.'s role is small
–No economic plants
–No income distribution
–No gov. controlled prices – the market controls them
–Incentive is profit
What is an example of a country that is heavily capitalist on the spectrum?
Japan, America
What are characteristics of command/socialism?
–All resources are owned by the government
–Gov. role is HUGE in the economy
–Economic plans are made by the government (quotas set by gov.)
–Gov. distributes the income equally
–Gov. controls prices
–Incentive is the common good
What is an example of a modern day country that leans towards socialism on the spectrum?
North Korea, Cuba
What is a mixed economy?
An economy that is not purely capitalist or socialist
Ex.: America has some gov. reg. provided: vital services, promotion of the general welfare
EVERY ECONOMY IN THE WORLD IS ONE
What are the five features of capitalism?
1. Individuals have a right to private property (owned by an individual/business)
2. Economic freedom – workers can choose where they work and who they work for
3. Voluntary exchange – individuals only have to make trades that make them feel they are better off
4. Competition is good
5. There are motivating economic incentives (money, profit)
What does the word externality mean?
A side effect of an action that affects the well–being of a third party
Can be negative (second–hand smoke) or positive (flu shot)
What is a free rider?
A person who receives goods or services without paying for them.
What is a demand?
The want to purchase goods or services
People must be ________ and ________ to purchase a good or service to demand it.
Willing and able
What does the Law of Demand state?
–As the price of a good increases, the quantity demanded decreases–As the price of a good decreases, the quantity demanded increases
What type of relationship is found in the Law of Demand between the price and quantity demanded?
Inverse
What is the difference between demand and quantity demanded?
Demand is the willingness and ability to buy something, while the quantity demanded is the number of units bought at a specific price
What does the Law of Diminishing Marginal Utility state?
As a person consumes additional units of a good, eventually the utility (satisfaction) gained from each additional unit of the good decreases
What does utility mean in economic terms?
Satisfaction
What slope does a demand curve always have?
Always a negative/downward slope
What direction does the graph shift if the demand/supply increases?
right
What direction does the graph shift if the demand/supply decreases?
left
What are the 6 factors that shift the demand curve?
1. Income

2. Prices of related goods


3. Consumer tastes/advertising


4. Number of buyers


5. Demographics


6. Consumer expectations
What are the 3 types of goods?
Normal goods– demand rises and falls as income falls

Inferior goods– demand rises as income falls and falls as income rises


Neutral goods– demand for neutral goods remains constant as income falls and rises
What are substitutes and what is their relationship when it comes to demand?
A good that can easily be switched to anotherThe price of one and the demand of the other go in the same direction – when the price of one goes up, so does the demand of the other
What are complements and what is their relationship when it comes to demand?
A good used w/ anotherThe price of one and the demand for the other move in the same direction – they are used together, so if the price goes up for one, the demand of the other goes down
What are examples of consumer expectations affecting the demand of a product?
Future demands of a product can affect our demand todayIf the price of gas is gonna go up tomorrow, you get gas todayInversely, if you know there's going to be a sale in a week, you buy what you want when it's on sale and not now
What is the difference between changes in demand and changes in quantity demanded?
A change in demand is because demand itself changed (6 factors) and a change in quantity demanded is because of a product's price
What is elasticity of demand?
The relationship between percentage change in quantity demand and percentage change in price
What are the three types of elasticity?
1. Elastic demand2. Inelastic demand3. Unit–elastic demand
What is elastic demand?
When prices change, there are large changes in demand
What is inelastic demand?
When prices change, there are small changes in demand
What is supply?
The willingness and ability to produce and sell a product
What does the law of supply state?
If P goes up, then Qs goes upIf P goes down, then Qs goes down
What type of relationship is found in the Law of Supply?
Direct
What slope does a supply curve have?
Positive
What is quantity supplied?
The number of products produced and offered to sell at a specific price
What direction does the curve shift when supply/demand increases?
Right
What direction does the curve shift when supply/demand decreases?
Left
What changes when there is a movement along a curve?
The price for a product offered to a consumer by a producer
What are the 7 factors that alter supply?
1. Resource prices

2. Technology improvements


3. Taxes


4. Subsidies


5. Government regulation


6. Number of sellers


7. Weather
What is a subsidy?
A payment by the government for a certain action
How do bad and good weather impact supply?
Bad weather decreases while good weather increases
How are we a global economy?
Actions in the American economy have the potential to affect everyone in the world
What is payment on land?
Rent
What is payment on labor?
Wages
What is payment on capital?
Interest
What is payment on entrepreneurship?
Profit
What is a shortage?
The condition where the quantity demanded is greater than the quantity supplied (Qd > Qs)
What is a surplus?
The condition where the quantity supplied is greater than the quantity demanded (Qs > Qd)
What is an equilibrium?
The condition of being balanced in a market (when Qd = Qs). Without equilibrium, a market cannot exist!
What are the differences between supply and demand?
The major difference is that you must think like a business rather than a consumer. You must think of making money rather than spending money.
What do you supply?
Labor
What is an incentive?
Something that motivates someone to do something or take action

What are the 4 factors that determine elasticity?

1. Number of substitutes


2. Luxury vs. necessity


3. Relative importance


4. Time

What causes a change in quantity supplied/demanded?

The price of the product?

What happens to the price when there is a surplus?

It goes down

What happens the the price when there is a shortage?

It goes up
What are 4 characteristics of a perfect competition?
1. Many buyers and many sellers
2. All firms sell identical goods
3. Informed buyers and sellers
4. There is easy entry into the market and easy exit out

(Ex: stocks, ebay, crops)
How much price control is found in a perfect competition?
None
What are the differences between perfect competition and imperfect competition?
Perfect: Sellers are price takers, meaning that a seller can sell all its output at the equilibrium price but none at any other price (things on ebay)
Imperfect: Sellers are price searchers, meaning that a seller can sell some of its output at various prices (gas)
What are 4 types of competition?
1. Monopoly
2. Monopolistic competition
3. Oligopoly
4. Perfect competition
What are 3 characteristics of a monopoly?
1. There is a single seller
2. The single seller sells a product that has no close substitutes
3. There are extremely high barriers of entry
Ex.: water, energy, other utilities
How much price control is in a monopoly?
All of it
Are all monopolies illegal?
No, natural monopolies are legal
What is a natural monopoly?
A firm that has such a low average total cost that it can compete all other firms in their market, thus becoming the only option.
What is a barrier of entry?
How difficult it is for a new business to enter the market – things that prevent businesses from entering
What are three characteristics of monopolistic competition?
1. There are many buyers and many sellers
2. Firms produce and sell slightly different products
3. Easy entry and exit from the market
How much price control is in a monopolistic competition?
Little
What are 3 characteristics of an oligopoly?
1. There are few sellers
2. Sellers produce and sell either slightly different or identical products
3. There are significant barriers of entry
How much price control is in an oligopoly?
Some
What are some examples of a monopoly/natural monopoly?
Water, electricity, natural gas, other utilities
What are some examples of monopolistic competition?
Retail outlets, fast food
What are some examples of a oligopoly?
US cars, cereal, oil companies
What are the three types of businesses?
Sole proprietorship, partnership, corporation
What is a sole proprietorship?
A business owned by one person
What is a partnership?
A business owned by 2+ people
What are the pros/benefits of a sole proprietorship?
–Easy to form (w/ exception of food)
–Owner makes all decisions
–Few government regulations
–All profit goes to owner
What are the cons/costs of a sole proprietorship?
–Owner has unlimited liability (resp. if something goes wrong in the business)
–Difficult to raise money
–Business has a limited life (retirement/death of owner)
What are the pros/benefits of a partnership?
–Easy to form
–Owners have capability to specialize in areas they find interesting
–Easier to raise money than in sole proprietorship
What are the cons/costs of a partnership?
–Unlimited liability
–Decision making gets complicated if partners disagree
–Profit split equally (only w/ general partners)
What is an example of a partnership?
A law firm or a real estate business
What is the difference between a general partnership and a limited partner?
A general means there is equal responsibilities and risks, but a limited only invests money (limited liability – can only lose investment) and has no say in decision making of the business.
What are the pros/benefits of a corporation?
–Owners have limited liability
–Able to raise large sums of money (by selling stock)
–Can expand really fast
What are the cons/costs of a corporation?
–Profit taxed twice (through stocks)
–Complicated to set up
–Loss of control from original owner
What is an example of a corporation?
Walmart, Target
Who ultimately owns a corporation?
Stockholders
What is stock?
Partial ownership of a company
What are dividends?
Part of the profits that a corporation gives to its owners
What are bonds?
Statements of debt issued by a corporation (loans w/o putting up costs) or an IOU from a company, or private investors lending money to a company that will be paid back plus interest
What are the two types of corporations?
Cooperatives and franchises
What is a cooperative?
A not very common non–profit business that is formed when a group pools their resources to gain some benefits (credit union)
What is a franchise?
A contract between a firm and an individual that allows individuals to use its name and sell its goods in exchange for payments and requirements being met
What are the two types of costs?
Fixed costs and Variable costs
What is the difference between fixed costs and variable costs?
Fixed costs stay the same no matter how many units are produced
Variable costs change with the number of units produced
What are some examples of fixed costs?
rent, insurance, sales tax, salary employees
What are some examples of variable costs?
materials, utilities, hourly employees
What is marginal cost?
The additional cost from producing another unit
What does marginal mean in economics?
Additional
What is the marginal revenue?
The additional revenue from producing and selling one more unit of a good
Why are marginal costs and marginal revenues so important to businesses?
The concepts of marginal cost and marginal revenue are crucial to businesses because they tell a business HOW MUCH OF A PRODUCT TO PRODUCE. To maximize profits, a business will produce until marginal revenue equals marginal cost
What is the rule of marginal cost and marginal revenue when it comes to deciding how much to produce?
MR greater or equal to MC means produce
MR less than MC means don't produce
Who demands labor?
Employers
Who supplies labor?
Employees
What happens to the wage rate when there is a surplus of labor?
It goes down
What happens to the wage rate when there is a shortage of labor?
It goes up
What are the two reasons people get paid more money?
1. Education/training
2. Experience/productivity
What are the two types of benefits, and give an example of each
1. Money/monetary benefits: income
2. Non–money/non–monetary benefits: vacation, insurance, hours
What happens if the minimum wage rate is above the equilibrium?
1. Companies cannot hire as many workers
2. Prices of products go up
What are the two objectives of a labor union?
1. Raise wages
2. Improve working conditions

What is the wage rate?

The price of labor (must be at the equilibrium price)

What is the Law of Diminishing Marginal Return?

A law that states that if additional units of a resource are added to another that is fixed in supply the additional output will decrease (hiring too many workers, as not everyone will be productive)
What are the three functions of money
1. as a medium of exchange (people must accept it as a payment
2. as a unit of account (a measurement where values are expressed – not always face values)
3. as a store of value (holds value over time)
What is the official term for paper money?
federal reserve note
What are the 3 things that make up America's money supply?
1. Currency (dollar)
2. Checking/debit
3. Traveler's check
What form of money is most common in the US today?
checking/debit
Are credit cards considered a part of the money supply?
NO!
Why are credit cards not part of the money supply?
They are short–term loans that MUST be paid back
What are the 3 aspects investors must consider
1. Risk (potential to lose – low)
2. Reward (we want high rewards)
3. Liquidity (how fast you get your investment back into cast – high)
How do the 3 aspects apply to all types of investments?
You ALWAYS have to give up one
Why might a corporation sell its stock?
To raise money for expansion or business expenses
What are the two reasons people buy and sell stock?
Dividends and Capital Gains
What is a capital gain?
Buying stock at a lower price, then selling it in the future for a higher price
What is a capital loss?
Selling your stock for less than you paid for it
What are the two ways that someone can buy and sell stock?
Through a Full Service Broker or a Discount/Online Broker
What does a Full Service Broker do?
Give you advice and make trades for you
What does a Discount/Online Broker do?
You tell them what you want and they make the trade for you – you have to track the stock market yourself
What is a capital loss?
Selling your stock for less than you paid for it
Why might the stock market, in general, be a better risk over the long run than the short run?
Stocks go up and down short term but usually go up in the long run. However, the market is very risky and there are NO guarantees.
What is a mutual fund?
It is like a basket of stocks meaning you own a small amount of many stocks.
Why would you want a mutual fund?
It spreads out the risk between different stocks, is professionally managed, and has high liquidity.
What is a bond?
An IOU from a company or private investors lending money to companies that will be paid back plus intrest
Which of the 3 aspects of an investment do bonds give up?
Liquidity
What are the 3 basic rules for building wealth?
1. Start early and give your money more time to grow
2. Buy and hold investments; keep your money invested
3. Have diversification: create a portfolio, or a variety of different types of investments held by an investor (don't put all your eggs in one basket).
What does the Rule of 72 do?
Tells you how long it will take for an investment to double
How does the Rule of 72 work?
Regardless of the dollar amount, divide 72 by the interest rate with no decimal.
What is a Certificate of Deposit aka a CD?
An investment in which you must leave the money in for a fixed period of time
What's so great about CDs?
compound interest
What is the key to compound interest?
TIME! You build interest on your past interest.
Which of the 3 aspects of investing do you give up with CDs?
Liquidity
How do savings accounts differ from CDs?
You have easy access to your money at any time. They are also insured by the federal government and provide small but steady rates of return.
Which aspect of investing do you give up with savings accounts?
Reward
What are the types of investments from most risky to least risky?
Stocks>bonds>mutual funds>CDs>savings accounts
What are the 4 types of unemployment?
Cyclical, frictional, structual, seasonal
What is cyclical unemployment?
Unemployment based on demand and varies with the unemployment cycle (the demand for your product goes down)
What is frictional unemployment?
People who are temp. between jobs or searching for new ones (graduating students)
What is structual unemployment?
A mismatch between the workers looking for a job and the jobs available (lack of a skill or education)
What is seasonal unemployment?
When workers are only needed around certain times of the year (Six Flags)
What does the abbreviation GDP mean?
Gross Domestic Product
What is a GDP?
The total value of all final goods and services produced annually within the US
What are the 2 major ways we use GDP?
1. To measure the size of the economy
2. gauges standard of living for people
What is the equation for calculating GDP?
consumption + investment + gov. spending + (exports – imports)
Is a higher or lower GDP better?
The higher, the better
What is inflation?
Prices increasing on all products
What is deflation?
Prices decreasing on all products
Why is inflation important?
It affects how much you pay for everything
What happens to the value of the dollar when inflation occurs?
It reduces your purchasing power, and you can buy less with the same amount of money
What if you have a fixed income and inflation occurs?
It limits what you can buy
What major group has a fixed income?
retired
What is a normal inflation rate?
2%
What does the government do to counteract inflation?
get rid of money
What is the business cycle based on?
GDP
What are the 5 stages of the business cycle?
1. Expansion/recovery
2. Peak
3. Recession/contraction
4. Trough
5. Recovery/expansion
What are key aspects of the expansion/recovery?
The GDP rises, unemployment decreases, inflation rises
What is a key aspect of the peak?
GDP is at its highest
What are the key aspects of recession/contraction?
GDP decreases, unemployment rises, inflation decreases (deflation)
What a key aspect of the trough?
GDP is at its lowest
What is the multiplier affect?
1 person's spending is another person's income (you buy something, helping out everyone at the store)
What are the 5 factors causing the business cycle to move?
1. Consumer spending
2. Investing
3. Politics
4. Innovation
5. Supply shock
Why would companies rather give bonds instead of selling stock?
Stocks would require them to give up ownership of their company while stocks would not
What is a portfolio?
A variety of different types of investments held by an investor
How does compound interest work?
You build interest on your past interest
What is the multiplier effect?
When one person's spending is another's income
What happens to the value of the dollar when inflation occurs?
It goes down
What is the main objective of the Federal Reserve System?
To keep the economy stable
What are the two things the Fed fights
inflation and unemployment
What are the 7 functions of the Fed?
1. Regulate money supply
2. Supply the economy with paper money
3. Clears checks
4. Banker of last resort
5. Change reserve requirements
6. Supervises banking practices
7. Has a checking account for the US Gov, or acts as a banker or the US Gov
What is the purpose for the Federal Deposit Insurance Corporation (FDIC)?
to provide insurance for bank deposits
Who makes fiscal policy?
The government
Who makes monetary policy?
The federal reserve
When investing in the stock market, one must do it for the ____ term
Long
What does CPI measure?
Inflation
How does the Fed change the money supply through changing the reserve requirement?
Requiring to keep more shrinks the money supply while requiring to keep less increases the money supply
How does the Fed change the money supply through open market operations?
Issuing more treasury bonds shrinks the money supply while buying back treasury bonds expands the money supply
How does the Fed change the money supply through changing the discount rate?
The discount rate is the interest rate, so a higher rate would lead to not as many people borrowing money, and a lower rate would lead to more people borrowing money.
What date are taxes due (must be post marked to IRS)?
April 15th
What is the largest tax on Americans?
Personal Income
Is the federal government working at a surplus or deficit?
deficit
What is a proportional tax?
A tax with the same rate for everyone
Who uses the proportional tax system?
the Illinois government
What is a progressive tax?
A tax with rates that increase as taxable income rises
Who uses the progressive tax system?
the United States government