Economics Final Study Guide 2009

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Macroeconomics is the study of

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the entire economy

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food, clothing, and shelter are examples of

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needs not wants

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the things that people use to make or obtain what they need or want are called

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resources

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the buildings, structures, machinery, and tools use in the production process are called

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capital goods (capital resources)

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What is the basic problem of economic life?

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scarcity

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What term do economists use for the value of the next best alternative given up in order to obtain an iten or pursue an activity

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opportunity cost

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What is the purpose of money?

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standardized unit of exchange, measure of value, store of value

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A production possibilities curve illustrates what?

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possible combinations of two goods/services that can be produced in a specific time period

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The distribution of goods is determined by family or tribal consideration is what type of economy?

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traditional economy

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What are consumer goods?

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finished products-the goods and services that people buy

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In pure market economies, the basic economic decisions are made by whom?

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consumers and producers

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The economic system in which the governments role is most limited?

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market economy/ capitalism

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Which of the following economic goals are concerned with making the best use of scarce resources?

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efficiency

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If the number of workers in the population grows faster than the average producton of each worker, what will happen to the standard of living?

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it will decline

Front 15

If, over a period of time, factors other than price cause an increase in the demand of a product, the demand curve will shift which way?

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to the right

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If, over a period of time, factors other than price cause an decrease in the demand of a product, the demand curve will shift which way?

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to the left

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Blue jeans are an example of a product that has elastic demand. how will a small increase in the price affect demand for blue jeans?

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people wont buy it as much: quantity demanded decreases dramatically

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A product such as salt has inelastic demand. How will a small increase in price affect demand for salt?

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quantity demanded wont (or little) change.

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A price increase causes a fall in a company's total revenue. This indicates that demand for the company's products is what?

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it has elastic demand (price goes up= quantity demanded goes down)

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In a free enterprise system, the key factor affecting supply is what?

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the price

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If, after the passage of time, the determinants of supply cause a decrease in the supply of a product, the supply curve for that product shifts which way?

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to the left

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The production costs that change as the level of output changes are called what?

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variable costs

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Externalities

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side effects, or unintended consequences.
negative: pollution, traffic congestion, overcrowding
positive: one company benefits from the other

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A government regulation that sets a minimum level for prices is called a what?

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price floor

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On what does a free-enterprise system economy rely to answer the basic economic questions of what, how, and for whom to produce goods?

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price system

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In a perfectly competitive market, a price is set by what?

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supply and demand

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John Keyes' influential boook that created the field of macroeconomics is titled what?

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General Theory of Employment, Interest, and Money

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In which four sectors of GDP is the production of capital goods included?

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C + I + G + (X-M)= GDP

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GDP adjusted for price changes is called what?

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Real GDP

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To create a price index, what do economists do?

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1. select base year
2. assign base year an index of 100
3. calculate index numbers with other years

Front 31

GDP figures are sometimes inaccurate because

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they use estimates, sample techniques, and the time factor is slow

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Childcare performed by a relative for free is not measure in GDP because

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it does not measure non market activity

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What phase of the business cycle is an economy in when there is a decline in business activity?

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contraction

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When estimating an economy's capacity for growth, economists look at its

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factors of production

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The factors that have an impact on productivity growth include,

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the skill level of the work force, technology available, and amount of capital goods available

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Unemployment hurts the economy as a whole because

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nation loses goods/services and
businesses lose sale

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why does the employment rate not accurately measure all aspects of unemployment?

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doesnt measure intensity of people looking for jobs, out of date, doesnt include the number of underemployed,people who have given up, people use to look for work

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A personal leaves one job to look for another, better-paying job experiences what type of umemployment?

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frictional unemployment

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What are the characteristics and effects of inflation?

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more money in circulation & increase in average price level of all products in economy

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What are the causes of inflation?

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increase in money supply

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Since the US was founded, its population has grown by how much?

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4 million ---> 300 million (75 fold)

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Before the great depression, most americans supported this kind of govt economic policy

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laissez- faire

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what term is used to describe the handling of certain govt services by private businesses

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privatization

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govt attempts to reduce the gap between the rich and the poor by doing what

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transfer payments (tax rich = give to poor)

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Govt attempts to stabilize the business cycle by doing what

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controlling nations money supply

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When the govt moderates the business cycle, it tries to avoid these:

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recession and inflation

Front 47

the fed differes from the central banks in most other countries in that the Fed is

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made up of 12 regions, NOT one central bank

Front 48

In fulfilling its function of regulating the money supply, the Fed does what?

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expands and contracts money supply

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A goal of an easy-money policy is to

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increase aggregate demand (easier way to get money)

Front 50

The major goal of the Fed is to do what?

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promote economic stability and growth

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When the Fed charges lower interest rates to borrow money, it does what?

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expands money supply

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A goal of a tight-money policy is

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shrink money supply, and reduce aggregate demand

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The prime rate is the interest rate that

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the Fed gives to its most reliable consumers

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Economics is what kind of science

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social science

Front 55

Adam Smith argued that the "invisible hand" does what?

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guides people to benefit others despite intention through laws of supply and demand

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A free market economy (or capitalism) is characterized by what types of economic institutions?

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free trade, private property, property rights, and price system, minimal govt involvement, economic exchange

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socialism is characterized by what types of economic institutions

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degress of govt involvement,
public and collective ownership of factors of production

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tax

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required payment to a local, state, or national govt, usually made on some regular basis

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income effect

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the effect that a change in an item's price has on consumers' ability to purchase goods

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substitute good

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product that purchasers use in place of another product, particularly if the price of the other product raises

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utility

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the usefulness of a good or service that contributes to its value

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inelastic demand

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the situation that exists when quantity demanded changes only slightly or not at all in response to a change in price

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demand

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amount of a good or service that consumers are willing and able to buy at various prices during a given time period

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market equalibrium

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point at which the quantity supplied and quantity demanded for a product are equal at the same price

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price ceiling

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a government regulation that sets a maximum price for a particular good

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marginal product

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additional output obtained by employing one more unit of input

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oligopoly

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market in which a few large sellers control most of the production of a good or service

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Interstate Commerce Act

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oversee the railroad freight business.

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subsidy

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payment made by a govt to individuals, businesses, or an industry to encourage certain activities that are considered essential or desirable

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public good

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any good or service that is consumed by all members of a greoup, regardless of who has helped pay for it

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elastic supply

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situation that exists when quantity supplied changes greatly in response to a change in price

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inelastic supply

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the situation that exists when quantity supplied changes only slightly or not at all in response to a change in price

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Sherman Antitrust Act

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banned agreements and actions "in restraint of trade."
broke up the Standard Oil Company

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monopoly

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market in which a single seller exercises exclusive or nearly exclusive control over a particular good or service

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price floor

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government regulation that sets a minimum price for a particular good

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depreciation

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a decrease in the vvalue of a capital good because its age, use, or detrioration

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elastic demand

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situation that exists when quantity demanded changes greatly in response to a change in price

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profit

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difference between the revenue received from the sale of a good or service and the costs of the providing of the service or good

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income

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money payments that households receive from business firms and the govt in exchange for resources

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capitalism

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a market-based economy system in which individuals own and control the factors of production

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natural resource

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any material provided by nature that can be used to produce goods or provide services

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efficiency

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the production of goods and services using the smallest amount of resources for the greatest amount of output

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division of labor

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division of a complex procedure into small tasks, enabling workers to increase output through specialization

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standard of living

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people's economic well-being as determined by the quantity of goods and services they consumer in a given time period

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money

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any item, typically currency, that is commonly excepted in exchange for goods, services, or the settling of debts

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scarcity

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fundamental condition of economics that results from the combination of limited resources and unlimited wants

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communism

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economic system in which the govt owns or controls nearly all the factors of production; also known as authoritarian socialism

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opportunity cost

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value lost by rejecting one use of resources in favor of another

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free enterprise

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private businesses operate within minimal govt involvment

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capital resource

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an item that is used in the production of other goods and services

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economics

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study of how society chooses to use scarce resources to satisfy its unlimited wants and needs

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market economy

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government has little say in how,what and for whom goods are profuced and in which the factors of production are owned by individuals

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private property

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property that is owned by individuals or businesses, rather than the govt

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factor of production

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a resource used to produce goods and services

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specialization

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focus of a worker on only one or few aspects of production in order to approve efficiency

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competition

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state of rivalry among sellers of the same or similar products, in which each seller tries to gain a larger share of a market and to increase profits

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barter

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direct exchange of goods and services without the use of money

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credit

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allows consumers to use items with promise of repayment over a specified time

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inflation

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increase in overall prices that results from rising wages, an increased money supply, and increased spending relative to the supply of products

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structural unemployment

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unemployment that is caused by changes in technology, govt policies, population trends, and other factors unrelated to the business cycle

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real GDP

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value of a nation's gross domestic product after it has been adjusted for inflation

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labor productivity

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a measure of how much each worker produces in a given time period

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gross investment

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total value of private spending in the economy for capital assets- such as new equiptment, machinery, and buildings- over a specified time period, plus total changes in business inventories

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producer price index

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PPI- a measure of the changes in prices of about 3200 items brought by producers

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cost-push inflation

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general rise in prices that result from a rise in the cost of production

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deflation

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general decrease in the prices of all goods and services

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poverty threshold

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the level of income that the government considers necessary to sustain a family at a minimum standard of living

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productivity growth

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increase in output per worker per hour worked

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lagging indicators

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help economists predict the duration of economic upturns or downturns

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underground economy

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illegal economic activities or unreported legal activites that are not accounted for in national economic measures

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demand-pull inflation

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general rise in prices that occures when overall demand of goods increases faster than the output of goods

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peak

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point of the business cycle that during which employment, production, and wages are at their highest. TURNING POINT

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coincident indicators

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move up or down with the overall economy, measuring current economic activity

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poverty rate

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percentage of individuals or families in the total population who are living below the povery threshold and are thus considered by the government to be poor

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cyclical unemployment

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unemployment that is caused by downturns in the business cycle

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recession

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substantial and general decline in overall business activity over a significant time period

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supply shock

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economic disturbance cause by events outside a nation's economy. increases costs of production for one or more industries and often leads to inflation

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gross domestic product
GDP

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total value of all final goods and services produced within a country in a given year

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leading indicators

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anticipate expansions and contractions of the business cycle from one month up to two years before similar changes in overall economic activity occur