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62 Cards in this Set

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Production Possibility Frontier
a graph that shows the max combo of 2 outputs that an economy can produce in a given period of time
what 4 assumptions does the production possibility curve follow?
1)Fixed resources(quantity&quality)
2)Technology fixed
3)resources are fully employed
4)Society is producing effieciently
On the production possibility curve define the points inside the curve, on the curve, or outside of the curve?
Inside- Attainable, & inefficient points
On- all points on the curve are efficient
Outside- unattainable points
Scarcity
Not enough resources to make all of the goods & services necessary to fulfill mans material wants
Economics
the study of how society choosesto allocate it scarce resources to the production of good and services in order to satisfy unlimited wants
Cyclical Unemployment
unemployment caused by the lack of jobs during a recession
Frictional Unemployment
(normal jobturnover. The process of finding a job is not smooth) Unemployment caused by the normal search time required by workers with marketable skills who are changing jobs, initially enterinh the labor force, or seasonally unemployed
Structural Unemployment
unemployment cause by a mismatch of the skills of out-of-work workers and the skills required by existing job opportunities
Macroeconomics
the branch of economics that studies decision making for the economy as a whole.
Demand-Pull inflation
A rise in the general price level resulting from an excess of total spending(demand)
Cost-push inflation
An increase in general price level resulting from an increase in the cost of production.
Efficiency
The extent to which a given set of resources is being allocated across uses or activities in a manner that maximizes whatever value they are intended to produce, such as output, market value, or utility

or

Resources Utilized for production of maximum set output
Labor Force
individuals 16+ working or activily seeking work.
Discourage worker is not considered part of the labor force
Consumer Price Index (CPI)
An index that measures changes in the average price of consumer good and services

Formula:
(cost of the market basket of products at current year prices)/ (cost of the same market basket of products at base-year prices) x 100
Define GDP? what's the formula?
GDP- the market value of all final goods & services produced in a nation during a period of time, usually a yr.
Formula- GDP=Consumption+Investment+government+Net Exports
or
Y=C+I+G+NX
Define Real Income?
How do you calculate it?
Def-the amount of goods and services your money income (nomical income) can purchase
Formula-
nomical income
---------------
CPI/100
Gross Prvate Domestic Investment (I)
The national account that includes all not government, nonforeign spending by businesses for investment in assets that are expected to earn profit in the future.
I is the sum of: 1)fixed investment expenditures
2)change in business inventories
Ceteris Paribus
The assumption that while certain variables change "all other things remain the same"
Full employment
the situation in which an economy operates at an unemployment rate equal to the sum of frictional and structional unemployment rates.
What are the factors of production?
-land(natural resources)
-labor(human skills and talents used to produce goods and services)
-capital(actual man-made equiptment used to produce goods)
-Enterprise/Entrepreneurial ability (skills and talents of the CEO)
Model
A simplified description of reality used to understand the relationship between variables
Nominal GDP
The value of all final goods based on the time period of production.
Ceteris Paribus
The assumption that while certain variables change "all other things remain the same"
Full employment
the situation in which an economy operates at an unemployment rate equal to the sum of frictional and structional unemployment rates.
What are the factors of production?
-land(natural resources)
-labor(human skills and talents used to produce goods and services)
-capital(actual man-made equiptment used to produce goods)
-Enterprise/Entrepreneurial ability (skills and talents of the CEO)
What are the fundamental question that ever society must answer?
1)What to produce?
2)How to produce?
3)For whom to produce?
Positive Statement
A positive statement is a statement about "what is" and that contains no indication of approval or disapproval.
Normative Statement
A normative statement expresses a judgment about whether a situation is desirable or undesirable. "The world would be a better place if the moon were made of green cheese" is a normative statement because it expresses a judgment about what ought to be.
Marginal Analysis
An examination of the effects of additions to or subtracted from a current situation.
The idea that the rational decisionmaker decides on an option only if the marginal benefit is greater then the marginal cost.
Say's law
The theory (that supply creates its own demand) stated that long-term underspending is impossible b/c of the production of goods and services(supply) generates a demand for that supply
Criticism that Keynes made of the classical theory.
Keynes rejected the classical theory that the economy self-corrects in the long run to full employment. The key in Keynesian theory is aggregate demand rather than the classicals'focus on aggregate supply. Unless aggregate spending is adequate, the economy can experience prolonged and severe unemployment.
Determinance of Consumption
-Expectations
-Wealth a household accumulates
-Price Value: any change in general price level shifts the consumption schedule by reducing or enlarging the purchasing power of financial assets(wealth)with fixed niminal value
-The interest rate
-Stock of Durable Goods
Determinance of Investment
-Expectations
-Technological Changes
-Capacity(maximum possible output of a firm or industry)
-Business Taxes (ie:an increase in business taxes therefore would lower profitability and shift the investment demand curve to the left)
What is the relationship between the MPC & MPS?
MPC-The change in consumption resulting from a given change in real disposible income.
MPS-The change in saving resulting from a change in real disposible income.
Relationship: MPC+MPS=Disposible Income
-Conculsion:Disposible income is divided between changed in consumption and changes in savings
Analyze the Consumption Function Graph on page 182 (Exhibit 2). Define the 45 degree line.
-45 degree line- It indicates all points where aggregate real income and consumption are equal. Also makes it easier to identify the breaking even point or no saving income level.
-Autonomous Comsumption-When income is equal to zero
-Breaking-even income- where the consumption and disposible income lines cross
-Savings-amount not spent on comsumer goods and services
-Dissavings-consumption that exceeds disposable income
Define:-45 degree line
-Autonomous consumptio
-Breaking-even income
-Savings
-Dissavings
Real GDP
The value of all final goods produced during a given time period based on the price existing in the selected base year
Potential real GDP
the level of GDP that can be produced at full employment
GDP per Capita
The value of final good produced divided by the total popultation
How does inflation effect different people in the economy?
Who's Benefitted-
-Owners of wealth- property values go up and you can sell it for more then you bought it for.
-Borrowers(when the real rate of interest is negative, lenders lose b/c interest earned doesn't keep up with the inflation rate; in other words the borrower gets paid for borrowing)
-People whose nominal income increases faster than the rate of inflation (they gain purchasing power)
Hurt:
-Those without wealth;buyers- the prices go up due to inflation
-Lenders & Savers
-People whose nominal income does not keep pace with inflation
Real Interest Rate
The nominal rate of interest minus the inflation rate
Nominal Interest Rate
The actual rate of interest without adjustment for the inflation rate.
Depression
When there is a large recession, high unemployment, and stocks are priced low
Recession
A down turn in the business cycle which real GDP rises, also called an expansion.
Inflation
An increase in the general(average) price level of goods and services in the economy
Business Cycle
An up and down movement in the level of economic activity. consist usually of an expansion, peak, recession, trough, and recovery.
Autonomous expenditure
spending that does not vary with the current level of disposible income
Macro Economic Equalibrium
businesses neither overestimate nor underestimate the real GDP demand at the prevailing price level.Occures when the aggregate demand curve and the aggregate supply curve intersect.
Define Multiplier. What's the formula?
Definition:The ratio of change in real GDP to an initial change in any component of Aggregate Expenditure(C,I,G,NX).
Formula: 1/MPS
Def. Recessionary gap.
The amount by which aggregate expenditure must be increased to acheive full employment
What are tools used to eliminate a recessionary gap?
-Using Government Spending-the central government should take aggressive action and adopt policies that boost autonomous spending by an amount equal to the recessionary gap.
- Using a tax cut- change in autonomous taxes and/or income taxes
Inflationary Gap
the amount by which aggregate expenditures must be decreased to reach full employment equilibrium.
Aggregate Demand Curve
the level of real GDP purchased by households, businesses, government, & foreigners(NX) @ different possible price levels during a time period, ceterus paribus
Reason for shape of aggregate demand curve
-Real balances or wealth effect
-Interest-Rate effect
-Net Export Effect
Wealth Effect or Real Balance Effect
The impacct on total spending(RGDP) caused by the inverse realtionship between the price level & the real value of financial assets with fixed nominal value.

- Price level decrease-> ->purchasing power rises-> ->Wealth rises-> ->Consumers Buy more goods-> ->Real GDP demanded increases
Factors that would cause the aggregate demand curve to shift.
-Increase in AE(nonprice-level determinants) shifts the curve rightward
-Decrease in AE shifts the curve leftward
Define the three ranges of the Supply Curve
-Keynesian Range-the horizontal segment of the aggregate supply curve, which represents an economy in a severe recession
-Intermediate Range- the rising segment of the aggregate supply curve, which represents an economy as it approaches full employment output
-Classical Range- The vertical segment of the aggregate supply curve, which represents the economy at full employment output.
Stagflation
the condition that occurs when an economy experiences the twin maladies of high unemployment and rapid inflation simultaneously(level of output remains the same, but prices increase)
Define Discretionary Fiscal policy. Define the two types(Expansionary & Contractionary Fiscal policy)
Discretionary- the deliberate use of changes in government spending or taxes to alter aggregate demand and stabilize the economy
Expansionary:
-Increase gov. spending
-Decrease taxes
-Increase both equally
Contrationary:
-Decrease gov. spending
-Increase taxes
-Decrease both equally
Tax multiplier
The change in AD resulting from an initial change in taxes
Formula: 1-spending multiplier
Policy measures used to correct Demand-Pull inflation
discretionary fiscal policy is used
Automatic Stabilization
Federal expenditure and tax revenues that automatically change levels in order to stabilize an economic expansion or contraction.
National Debt
The total amount owed by the federal government to owners of government securities