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271 Cards in this Set
- Front
- Back
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Scarcity
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the limited nature of society's resources
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Economics
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the study of how society manages its scarce resources (what to produce, how to produce it and whom to produce it for)
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Efficiency
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society gets the most out of its scarce resources (people are rewarded for working hard)
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Equality
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when prosperity is distributed evenly among society's members (the difference between rich and poor is small)
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Opportunity Cost
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what you give up to obtain something
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Rational People
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systematically and purposefully do the best they can to achieve their objectives
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Incentives
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something that induces a person to act
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Market Economy
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allocates resources through the decentralized decisions of many households and firms as they interact in markets
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Market
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any arrangement that brings a group of buyers and sellers together
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Market Failure
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when the market fails to allocate society's resources efficiently
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Externalities
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when the production or consumption of a good affects bystanders
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Market Power
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a single buyer or seller has substantial influence on market price
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Productivity
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the amount of goods and service produced per unit of labor
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Inflation
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increases in the general level of prices
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Quantity Demanded
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amount of a good buyers are willing to purchase
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Law of Demand
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other things equal, when the price of a good rises, quantity demanded of a good falls
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Demand Curve
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a graph relationship between price of a good quantity demanded
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Individual Demand
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demand of one individual
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Market Demand
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sum of all individuals demands for a good or service
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Market Demand Curve
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horizontal summation of individual demand curves
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Normal Good (pos. or neg income elasticity)
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Def.: other things constant an increase in income leads to an increase in demand
Positive Income Elasticity |
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Inferior Good (pos. or neg income elasticity)
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Def.: other things constant, an increase in income leads to a decrease in demand
Negative Income Elasticity |
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Quantity Supplied
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amount of a good sellers are willing and able to sell
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Law of Supply
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other things equal, when the price of the good rises of the goods, quantity supplied of a good rises
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Supply Schedule
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a table showing the relationship between price of a good and quantity supplied
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Supply Curve
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a graph showing the relationship between a price of a good an quantity supplied
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Individual Supply
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supply of one seller
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Market Supply
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sum of the supplies of all sellers for a good or service
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Market Supply Curve
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horizontal summation of individual supply curves
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Equilibrium
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a situation where market price has reached the level such that quantity supplied equals quantity demanded
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Equilibrium Price
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the price that balances quantity supplied and quantity demanded
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Equilibrium Quantity
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quantity supplied and quantity demanded at the equilibrium price
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Surplus
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a situation where quantity supplied is greater than quantity supplied
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Shortage
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a situation where quantity demanded is greater than quantity supplied
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GDP (gross domestic product)
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measures the total income of everyone in the economy; market value of all final goods and services produced within a country at a given period of time
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Exports
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spending on domestically produced goods by foreigners
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Imports
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spending on foreign goods by domestic residents
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Nominal GDP
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production of goods and services valued at current prices
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Real GDP
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production of goods and services valued at constant prices designating one year as the base year
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Inflation Rate
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percentage change in some measure of the price level from one period to the next
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Consumer Price Index (CPI)
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measure of the overall cost of goods and services bought by a typical consumer
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Producer Price Index
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measure of the cost of a basket of goods and services bought by firms
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Nominal Interest Rate
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interest rate as usually reported without a correction for the effects of inflation
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Real Interest Rate
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interest rate corrected for the effects of inflation
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Growth Rate
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how rapidly real GDP per person grew in the typical year
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Productivity
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quantity of goods and services produced from each unit of labor input
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Physical Capital
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stock of equipment and structures used to produce goods and services
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Produced Factor of Production
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an input into the production process which was in the past an output of the production process
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Technology
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society's understanding of the best ways to produce goods and services
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Human Capital
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knowledge and skills that workers acquire through education, training and expense
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Diminishing Returns
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benefit from an extra unit of input declines as the quantity of the input increases
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Catch-Up Effect
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countries that start off poor tend to grow more rapidly than countries that start off rich
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Foreign Direct Investment
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capital investment that is owned and operated by a foreign entity
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Property Rights
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ability of people to exercise authority over the resources they own
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Financial System
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the group of institutions that helps match the saving of one person with the investment of another
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Financial Markets
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institutions through which savers can directly provide funds to borrowers
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Bond
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a certification of indebtedness that specifies the obligations of the borrower to the lender
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Debt Finance
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the sale of bonds to raise money
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Date of Maturity
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the times at which the loan will be repaid
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Principal
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the eventual repayment of the amount borrowed
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Term
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the length of times until a bond matures (short-term or long-term)
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Municipal Bonds
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bonds issued by the state and local governments
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Stock
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a claim to partial ownership of a firm
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Mutual Funds
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institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds
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Private Saving
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the portion of households' income that is not used for consumption or paying taxes
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Public Saving
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tax revenue less government spending
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Closed Economy
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an economy that does not interact with other economies
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Open Economy
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an economy that interacts with other economies
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National Saving
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private saving plus public saving
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Budget Surplus
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an excess of tax revenue over government spending
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Budget Deficit
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a shortfall of tax revenue from government spending
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Crowding Out
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the government borrow to finance its deficit, leaving less funds available for investment
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Finance
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the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk
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Present Value
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amount of money today that would be needed using prevailing interest rate to produce a given future amount of money
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Future Value
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amount of money in the future that an amount today will yield given prevailing interest rates
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Compounding
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accumulation of money in the when interest earned remains in an account to earn additional interest in the future
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Discounting
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finding the present value for a future sum of money
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Employed
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people who work; includes both full-time and part-time workers, as well as people temporarily absent from job
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Unemployed
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not employed; want to work, looking for a job for 4 weeks
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Not in the Labor Force
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not employed, not unemployed
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Labor Force
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total number of workers
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Natural Rate of Unemployment
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normal rate of unemployment around which the unemployment rate fluctuates
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Cyclical Unemployment
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deviation of unemployment from its natural rate
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Discouraged Workers
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not in labor force; individuals who would like to work but have given up looking for a job
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Frictional Unemployment
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results because it takes time for workers to search for jobs that best suit there tastes and skills
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Structural Unemployment
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result because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
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Job Search
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process by which workers find appropriate jobs given their tastes and skills
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Unions
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raises the wages about equilibrium levels
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Supply of Labor
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increase in industries not unionized
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Efficiency Wages
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above-equilibrium wages paid by firms to increase worker productivity
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Money
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set of assets in an economy that people regularly use to buy goods and services from other people
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Medium of Exchange
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item that buyers give to sellers when they want to purchase goods and services; MUST BE PORTABLE
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Unit of Account
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yardstick people use to post prices and record debts; MUST BE DIVISIBLE
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Store of Value
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item that people can use to transfer purchasing power from the present to the future; MUST BE STABLE IN VALUE
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Liquidity
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ease with which an asset can be converted into the economy's medium of exchange
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Commodity Money
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money that takes the form of a commodity with intrinsic value
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Intrinsic Value
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item would have value even if it were not used as money
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Fiat Money
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money without intrinsic value
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Money Stock
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quantity of money circulating in economy
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Currency
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paper bills and coins in the hands of the public
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Demand Deposits
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balances in bank accounts
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Federal Reserve
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the central bank of the United States
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Central Bank
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institution designed to oversee the banking system and regulate the quantity of money in the economy
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Reserves
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deposits that banks have received but not loaned out
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Money Multiplier
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the amount of money the banking system generates with each dollar it reserves
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Reserve Ratio
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fraction of deposits that the banks hold as reserves
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Open-Market Operations
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purchase and sale of US government bonds by the Fed
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Reserve Requirements
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regulations on minimum amount of reserves the banks must hold against deposits
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Discount Rate
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interest rate on the loans that Fed makes to banks
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Federal Funds Rate
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interest rate at which banks make overnight loans to one another
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Recession
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economic contraction; period of declining real incomes and rising unemployment
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Depression
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severe recession
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Marginal Changes
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incremental adjustments to the existing plan
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What causes us to try to manage our resources?
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Scarcity
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What do individuals decide about our economy?
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What to buy, how much to work, how much to save and how much to spend
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What do firms decide about our economy?
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How much to produce and how many workers to hire
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What does society decide about our economy?
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How to divide its resources between national defense, consumer goods, protecting the environment and other needs
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What do people face every day?
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Tradeoffs
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What leads to tradeoffs?
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Scarcity
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What is society's most important tradeoff?
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Efficiency vs equality
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If we were attempting to achieve efficiency in our economy, what would we do?
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Reward people for working harder
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If we were attempting to achieve equality in our economy, what would we do?
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Redistribute money from the rich to the poor
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Is there such thing as a free lunch?
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no! there is opportunity cost to every decision
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Is it better for a country to be self-sufficient and produce everything on their own, or to specialize in one or two things and then trade with other countries?
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Trade is better. Countries will benefit by getting better prices and buying goods more cheaply than they could have been produced at home.
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What decisions do the firms and households need to make in a market economy?
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They need to decide:
1. Who to work for, 2. what goods to buy, 3. whom to hire, and 4. what goods to produce. |
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What will the households and firms act as though they are led by to promote general economic well-being?
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An invisible hand
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What controls the invisible hand?
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The price system set up by households and firms. The interaction between buyers and sellers will determine the prices, and each price will reflect the good's value to the buyers and the cost of producing that good.
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Most of the time, prices will guide who to make decisions that will maximize society's economic well-being?
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Self-interested households and firms
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Most of the time, prices will guide self-interested households and firms to do what?
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Make decisions that will maximized society's economic well-being
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What is the most important role for government?
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To protect property rights
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How can the government protect property rights?
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With the police and the court system
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If there is a market failure, who can help?
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Government
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What are two possible causes of a market failure?
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Externalities, or market power (monopolies are a good example)
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If there is a market failure, what will promote efficiency or equity?
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Public policy
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How can public policy promote efficiency?
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Giving incentives to produce more output
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How can public policy promote equality?
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Taxing or welfare policies to changes how the economic pie is being distributed
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What does a country's well-being ultimately depend on?
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Productivity
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What does productivity depend on?
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Equipment, skills, and technology available to workers
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What happens when there is an influx of money?
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People feel richer, and therefore spend more. Since the demand for goods is increasing, prices will also increase, causing inflation.
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In the long run, what is inflation almost always caused by?
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An excessive growth in the quantity of money, which causes the value of money to fall.
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Even though inflation is bad, the government purposely creates it sometimes. Why?
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Short-term fix to unemployment, especially right before a presidential re-election.
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How does inflation temporarily fix unemployment?
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Because there is more money and people are spending more, there is a larger profit margin at first. This will cause them to hire more people to keep up with demand. However, since the value of money has gone down but people are still being paid the same amount, workers will not survive on that pay and will put pressure on employers to raise wages. When wages are raised, people will be let go to keep the profit margin higher. (full circle)
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What are five key features of a perfectly competitive market?
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1. Goods offered for sale are all exactly the same
2. Buyers and sellers are numerous 3. No single buyer or seller has an affect on market prices 4. Buyers and sellers accept market prices (price takers) 5. At market price, buyers will buy all they want and sellers will sell all they want |
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What is the key feature of a monopoly?
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There is only one seller in the market who set the price.
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What are the 3 other types of markets besides perfectly competitive and monopoly?
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1. Monopolistic competition
2. Oligopoly 3. Duopoly |
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What are 5 variables that can shift the demand curve?
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1. Income
2. Prices of related goods 3. Tastes 4. Expectations 5. Number of buyers |
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What are 4 variables that can shift the supply curve?
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1. Input prices
2. Technology 3. Expectations about the future 4. Number of sellers |
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Excess supply, or a surplus, will do what to prices?
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Put a downward pressure on prices
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Why does a surplus put downward pressure on prices?
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There is more product than what is actually being demanded
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A shortage will do what to prices?
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Put an upward pressure on them
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Why will a shortage cause prices to rise?
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Because more people want the product than is being produced
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For the economy as a whole, income must equal what?
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Expenditure
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What makes up government spending?
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1. Spending on goods and services
2. Local, state and government consumption DOES NOT INCLUDE TRANSFER PAYMENTS |
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For the base year, what would be true about the real AND nominal GDP?
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They will be equal.
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What is the GDP deflator for?
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To take inflation out of the nominal GDP
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What are 3 things that a larger GDP signifies?
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1. Good life
2. Better healthcare 3. Better educational systems |
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What are 4 things that the GDP does not include that causes the GDP to not be the best measure of well-being?
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1. Leisure
2. Value of almost all activity that takes place outside of the markets 3. Quality of the environment 4. No distribution of income |
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What are three problems in measuring the cost of living having to do with the CPI?
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1. Substitution bias
2. Introduction of new goods 3. Unmeasured quality change |
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What is the one thing (divided into two subcategories) that will affect the GDP deflator?
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Domestically produced goods:
1. Domestically produced consumer goods 2. Domestically produced non-consumer goods |
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What are the things that affect the CPI?
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1. Domestically produced goods (specifically ONLY consumer goods)
2. Consumer goods produced elsewhere and sold here |
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What will affect neither the CPI or the GDP deflator?
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Non-consumer goods produced elsewhere
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Why is productivity so important?
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It is the key determinant of living standards, because an economy's income is the economy's output
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What are the 4 things productivity is determined by?
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1. Physical capital
2. Technology 3. Human capital 4. Natural resources |
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What is included in physical capital?
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Any hard, real objects used to produce an output.
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What are three types of technology?
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1. Common knowledge
2. Proprietary 3. Proprietary for a short time |
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What is included in human capital?
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Resources expended in transmitting technology to the labor force
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What is included in natural resources?
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Land, rivers, mineral deposits, wood, stone, etc.
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What kind of resources are limiting how the world's economies can grow, and what kind of resources can be used to avoid these limits?
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Natural resources are limiting, technology helps to avoid limits
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What are the 7 ways you can raise productivity?
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1. Saving and investment
2. Investment from abroad 3. Education 4. Health and nutrition 5. Property rights and political stability 6. Free trade 7. Research and development |
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A higher savings rate will cause what?
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1. Higher level of productivity
2. Higher level of income NOT HIGHER GROWTH IN PRODUCTIVITY OR INCOME! |
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Education is a type of investment in what?
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Human capital
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Poor countries go through a vicious circle when it comes to health. Why?
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Poor countries cannot afford better healthcare, and therefore will remain unproductive, which causes them to remain poor.
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Why is protecting political stability a way to increase productivity?
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A more politically stable country will have a better economy because they will not have to spend on wars or worry about their well-being.
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When it comes to free-trade, the poorer countries have what type of trade policy?
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Inward-oriented
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When it comes to free trade, richer countries have what type of policies?
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Outward-oriented
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A large population means what for the country?
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Larger labor force
More consumers Lower GDP per person --> promotes technological progress |
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What are two examples of financial markets?
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1. Bond markets
2. Stock markets |
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What are two examples of financial intermediaries?
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1. Banks
2. Mutual funds |
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What do mutual funds allow people to do?
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1. If you have a small amount of money, you can still diversify.
2. Gives ordinary people access to professional money managers |
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National saving is what portion of national income?
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The portion that is not used for consumption or government purposes
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In the market for loanable funds, where does the supply of loanable funds come from?
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It comes from saving. Households with extra income can loan it out and earn interest.
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If public saving is positive, what happens in the market for loanable funds?
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Adds to national saving
Adds to supply of loanable funds |
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What happens to the market for loanable funds if public saving is negative?
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Reduces national saving
Reduces supply of loanable funds |
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What happens to the market for loanable funds if there is an increase in interest rates?
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Saving becomes more attractive
Increases the quantity of loanable funds SUPPLIED |
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What happens to the market for loanable funds if there is a decrease in interest rates?
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Reduces the cost of borrowing
Increase the quantity of loanable funds DEMANDED |
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Where does the demand for loanable funds come from?
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Firms borrow it to pay for new items, while households borrow it to purchase new houses.
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The equilibrium quantity of loanable funds equals what?
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The equilibrium investment and equilibrium saving
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What are 2 policies that affect saving and investment?
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1. Tax cuts
2. Investment tax credit |
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What do tax cuts on interest and dividend income do to saving and investment?
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1. Encourages saving
2. Increases supply of loanable funds 3. Reduces interest rates 4. Increases equilibrium quantity of loanable funds |
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What do investment tax credits do to saving and investment?
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1. Encourages investment
2. Increases demand for loanable funds 3. Increases interest rate 4. Increases equilibrium quantity of loanable funds |
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What will a budget deficit do to the market for loanable funds?
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1. Reduces national saving
2. Reduces supply of loanable funds 3. Increases equilibrium interest rate 4. Decreases equilibrium quantity of loanable funds 5. Decreases investment |
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What are some key aspects of the market for insurance?
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1. Person is facing a risk
2. Pays fees to insurance company 3. Insurance company will accept all or part of risk |
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What is the role of insurance?
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To spread the risks around more efficiently. DOES NOT ELIMINATE RISK
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What are 2 problems in the market for insurance?
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1. Adverse selection
2. Moral hazard |
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What is adverse selection when it comes to insurance?
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High-risk people are more likely to apply for insurance
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What is moral hazard when it comes to insurance?
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People are more likely to take risks when they are insured.
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There are two types of risk. What are they, and which can you eliminate?
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1. Firm specific risk
2. Market risk You can eliminate firm specific risk by diversifying. |
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How does diversification reduce risk?
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Increasing the number of stock in a portfolio will reduce firm-specific risk, but market risk remains.
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What is the risk-return tradeoff?
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The more a person puts into stocks, the greater the risk, but the greater the possible return as well.
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What are the 2 implications of the efficient markets hypothesis?
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1. Stock prices changes are impossible to predict
2. Market irrationality |
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What is the assumption that is made under the efficient market hypothesis?
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All people buying and selling stock are rational and will process information about stock's underlying value.
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Why is the unemployment rate an imperfect measure of joblessness?
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Discouraged workers
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Why are there always some people unemployed?
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1. Unemployment rate is never 0
2. Unemployment rate fluctuates around the natural rate of unemployment 3. Frictional unemployment 4. Structural unemployment |
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Why is some frictional unemployment inevitable?
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1. Changes in demand for labor among different firms
2. Changes in composition of demand among industries or regions |
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What is unemployment insurance?
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A gov't program that will partially protect workers' incomes with they become unemployed. This will unintentionally increase frictional unemployment.
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Why do minimum wage laws cause some unemployment?
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1. Forces wages above equilibrium level
2. Higher quantity of labor supplied, but lower quantity of labor demanded = surplus of labor |
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Who is better off in unions?
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Employed workers
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Who is worse off because of unions and why?
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Unemployed. The unions may cause them to stay unemployed or may force them to take jobs in firms that are unionized.
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The unionization of workers is backed by what, and allows workers to do what?
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Backed by antitrust laws of NLRB, allows workers to obtain power they need to bargain with employers
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Why are unions a bad thing?
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1. Unions are a type of cartel
2. Make allocation of labor inefficient (higher wages reduce employment = unefficient) 3. Make allocation of labor inequitable (some workers benefit at expense of others) |
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Why are unions a good thing?
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1. Necessary antidote to market power of firms that hire workers
2. Help firms respond efficiently to workers' concerns |
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What are four reasons to pay efficiency wages?
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1. Better worker health
2. Reduce worker turnover 3. Better worker quality 4. Better worker effort |
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What are the 3 functions of money?
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1. Medium of exchange
2. Unit of account 3. Store of value |
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A medium of exchange must be what?
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portable
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a unit of account must be what?
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divisible
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a store of value must be what?
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stable in value
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What are the 2 kinds of money?
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1. Commodity money
2. Fiat money |
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In money stock, M1 consists of what?
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1. Demand deposits
2. Travelers' checks 3. Other checkable deposits 4. Currency |
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In money stock, M2 consists of what?
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1. Savings deposits
2. Small time deposits 3. Money market mutual funds 4. A few minor categories 5. Everything in M1 |
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What are 2 reasons that currency is not a good way to hold wealth?
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1. Can be lost/stolen
2. Doesn't earn interest |
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When was the Fed created?
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1913
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How many members are there in the board of directors in the Fed?
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7
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Who appoints and confirms the appointment of the board of directors?
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President appoints, Senate approves
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How long are the terms of the board of directors of the Fed?
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14 years
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The chairman of the Fed is appointed by who?
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The President
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How long is the term of the chairman of the Fed?
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4 years
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What does the chairman of the Fed do?
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Directs the Fed staff
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Where is the Federal Reserve Board?
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Washington, D.C.
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How many regional Federal Reserve banks are there?
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12
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Where are the regional Federal Reserves banks located?
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Major cities around the country
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The president of each regional Fed. Reserve bank is chosen by who?
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Each bank's board of directors
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What does the Fed do?
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1. Regulate banks and ensure health of banking system
2. Control money supply 3. Monetary policy |
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How does the Fed regulate banks and ensure the health of the banking system?
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The regional banks monitors each bank's financial condition. The Fed facilitates bank transactions by clearing checks, and also acts as the "bank's bank" and is the lender of last resort.
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How does the Fed control the money supply?
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Open-market operations.
Open-market purchase will increase money supply, open-market sales will decrease money supply |
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What is the FOMC?
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Federal Open Market Committee
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How many members of the board of governors of the FOMC are there?
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7, with 5 being regional bank presidents
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How often and where does the FOMC board of governors meet?
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Every 6 weeks in Washington, D.C.
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What does the FOMC do when they meet?
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Discuss condition of economy and consider changes in monetary policy
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In 100% reserve banking, what will be true?
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All deposits held as reserves
Banks do not influence supply of money Assets = liabilities |
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What is fractional reserve banking?
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Banking system is only financial institution, and can create money (and therefore increase money-supply) by keeping only a fraction of deposits as reserves.
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The reserve requirement minimum is set by who?
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the Fed
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If the reserve ratio gets higher, what happens to the money multiplier?
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It gets lower
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What are the Fed's 3 tools of monetary control?
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1. Open-market operations
2. Reserve requirements (used rarely because it disrupts banking) 3. Discount rate |
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Higher discount rates will do what?
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Reduce money supply
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Smaller discount rates will do what?
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Increase money supply
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What are two problems dealing with the Fed in controlling money supply?
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1. The Fed cannot control how much money households choose to deposit in banks
2. The Fed cannot control the amount of money that bankers choose to lend out |
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What are bank runs?
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Depositors think the bank will go bankrupt, so they rush to withdraw all their funds. Fractional-reserve banking means that not everyone will be able to do this.
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What happens to the bank after a bank run?
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The bank will be forced to close until bank loans are repaid or until a lender of last resort can provide the needed currency.
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If the Fed buys in open-market operations, what happens to the federal funds rate and the money supply?
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FFR decrease, MS increase
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If the Fed sells in open-market operations, what happens to the federal funds rate and the money supply?
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FFR increase, MS decrease
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What are 3 key facts about economic short-term fluctuations?
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1. Economic fluctuations are irregular and unpredictable
2. Most macroeconomic quantities fluctuate together 3. As output falls, unemployment rises |
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Comparative Advantage |
The ability to produce a good at a lower opportunity cost then another producer |
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Absolute Advantage |
The ability to produce a good using fewer inputs than another producer |
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Elasticity |
measure of the responsiveness of quantity demanded or quantity supplied |
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Price Elasticity of Demand |
how much the quantity demanded of a good responds to a change in the price of that good |
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Price Elasticity of Demand or Supply Formula |
% Change in Quantity Supplied or Demanded / % Change in Price |
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Price Elasticity of Demand or Supply Formula (Midpoint Method) |
(Q2-Q1) / [(Q2-Q1)/2] / (P2-P1) / [(P2-P1)/2] |
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5 Factors of being Elastic |
1. The flatter the curve the more elastic it is 2. The more close substitutes the more elastic 3. Long run more elastic 4. Responds easier to price changes in the market 5. Luxuries |
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5 Factors of being Inelastic |
1. The steeper the curve the more inelastic it is
2. The less close substitutes the more inelastic 3. Short run more inelastic 4. Doesn't respond easily to price changes in the market 5. Necessities |
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If demand is Inelastic, What happens to TR? |
If P inc. , TR also inc., or vice versa |
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If demand is Elastic, What happens to TR? |
If P inc., TR dec., or vice versa (opposites) |
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Income elasticity of demand |
How much the quantity demanded of a good responds to a change in consumer's income |
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Income Elasticity of Demand Formula |
% change in quantity demanded / % change in quantity supplied |
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Cross Price Elasticity Formula |
% change in quantity demanded of good 1/ % change in quantity demanded of good 2 |
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Cross Price Elasticity of Demand |
How much the quantity demanded of one good responds to a change in the price of another good |
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Elasticity is < 1, Is it inelastic or elastic? |
Inelastic |
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Elasticity is > 1, Is it inelastic or elastic? |
Elastic |
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Marginal Benefit |
What people are willing to give up to obtain one more unit of good |
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Marginal Cost |
Refers to the value of what was given up in order to produce one more unit of good |
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Price Floor |
Legal Minimum a good can be sold at |
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Price Ceiling |
Legal Maximum a good can be sold at |
