Terms

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Aggregate Demand (AD)

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A schedule (or graph) that shows the value of output (real GDP) that would be demanded at different price levels.

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Aggregate Supply (AS)

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A schedule (or graph) that shows the value of output(real GDP) that would be produced at different price levels. In the long run, the schedule shows a constant level of real GDP at all price levels, determined by the economy’s productive capacity at full employment. In the short run, the aggregate supply schedule may show different levels of real GDP as the price level changes.

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Barter

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Trading a good or service directly for another good or service, without using money or credit.

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Benefit

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The advantage(s) of a particular course of action as measured by good feeling, dollars, or number of items.

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Budget

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An element of financial planning where all income is listed and compared to all expenditures. Often expenditure decisions need to be made to hold spending less than or equal to income.

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Budget Deficit

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Refers to national budgets; occurs when government spending is greater than government income from taxes and tariffs in a given year. A yearly deficit adds to the public debt.

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Budget Surplus

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Refers to national budgets; occurs when government income is greater than government spending in a given year.

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Business Cycles

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Fluctuations in the overall rate of national economic activity with alternating periods of expansion and contraction; these vary in duration and degrees of severity; usually measured by real gross domestic product (GDP

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Capital

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Resources and goods made and used to produce other goods and services. Examples include buildings, machinery, tools, and equipment.

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Competition

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Attempts by two or more individuals or organizations to acquire the same goods, services, or productive and financial resources. Consumers compete with other consumers for goods and services. Producers compete with other producers for sales to consumers.

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Compound Interest

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Interest that is earned not only on the principal but also on the interest already earned.

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Consumer Price Index (CPI)

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A price index that measures the cost of a fixed basket of consumer goods and services and compares the cost of this basket in one time period with its cost in some base period. Changes in the CPI are used to measure inflation.

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Consumer Surplus

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The difference between the price a consumer would be willing to pay for a good or service and what that consumer actually has to pay.

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Consumers

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People who use goods and services to satisfy their economic wants.

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Consumption

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People who use goods and services to satisfy th

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Costs

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The disadvantages of a particular course of action as measured by bad feeling, dollars, or numbers of items.

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Credit

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The opportunity to borrow money or to receive goods or services in return for a promise to pay later.

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Debt

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Money owed to someone else. Also see Debt for individual and National debt.

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Deflation

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A sustained decrease in the average price level of all the goods and services produced in the economy.

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Demand

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A schedule (or graph) showing how many units of a good or service buyers are willing and able to buy at all possible prices during a period of time.

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Distribution

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The allocation or dividing up of the goods and services a society produces.

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Distribution

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The allocation or dividing up of the goods and services a society produces.

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Economic Functions of Government

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n a market economy, government agencies establish and maintain a legal system to regulate both commercial and social behavior, promote competition, respond to market failures by providing public goods and adjusting for externalities, redistribute income, and establish macroeconomic stabilization policies. To perform these functions, governments must shift resources from

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Economic Growth

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An increase in real output as measured by real GDP or per capita real GDP.

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Economic Incentives

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Factors that motivate and influence the behavior of individuals and organizations, including firms and government agencies. Prices, profits, and losses are important economic incentives in a market economy.

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Economics

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The study of how people, firms, and societies choose to use scarce resources.

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Elasticity

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See Price elasticity of demand, Price elasticity of supply.

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Exports

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Goods and services produced in one nation and sold to consumers in other nations.

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Federal Reserve

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The central bank of the United States. Its main function is controlling the money supply through monetary policy.

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Fiscal Policy

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Changes in the expenditures or tax revenues of the federal government, undertaken to promote full employment, price stability, and reasonable rates of economic growth.

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Foreign Exchange Market

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Market where demand for and supply of foreign currencies determines exchange rates.

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Goods

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Tangible objects that satisfy economic wants.

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Gross Domestic Product (GDP)

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The market value of all final goods and services produced in a country in a calendar year.

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Human Capital

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The health, education, experience, training, and skills of people.

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Hyperinflation

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A very rapid rise in the overall price level.

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Imports

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Purchases of foreign goods and services; the opposite of Exports.

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Incentive

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Any reward or benefit, such as money or good feeling, that motivates choices and behaviors.

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Inflation

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A rise in the general or average price level of all the goods and services produced in an economy.

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Income

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Payments earned by households for selling or renting their productive resources. For example, workers receive wage or salary payments in exchange for their labor.

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Interest

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Payments for the use of real or financial capital over some period of time; paid by those who use the resources to those who own them, as in mortgage payments paid by a borrower to a lender.

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Investment

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Purchase of capital goods (including machinery, technology, or new buildings) used to make consumer goods and services.

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Keynesian Theory

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The macroeconomic theory holding that business cycles are caused by changes in aggregate demand and that such cycles can and should be influenced by fiscal and monetary policy undertaken to promote economic stability.

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Labor

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The quantity and quality of human effort available to produce goods and services.