Macroeconomics Final Exam Practice Questions – Flashcards
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What does the aggregate supply and demand model show?
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It shows the relationship between a nation's overall price level, and the quantity of goods and services produces by that nation's suppliers, at various price levels.
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If we need a shift right in the aggregate demand model, what point are we in the Business Cycle?
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we are in the trough point in the business cycle.
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If we need a shift Left in the aggregate demand model, what point are we in the Business Cycle?
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we are in the peak of the business cycle. We are growing too quick!
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According to the Aggregate supply and Demand model if we need to Expand the market which direction do we shift, Left or Right?
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Shift to the Left
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According to the Aggregate supply and Demand model when we need to shift to the left under Fiscal Policy what can be done? Name 1 of 2 things.
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Government Spending Increases ( G) & Taxes Decrease (Tax)
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According to the Aggregate supply and Demand model when we need to shift to the left under Monetary Policy what can the Fed. do? Name 2 of 3 things.
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Decrease Discount Rates ( Dis. R.), Decrease Reserve Requirements ( Res. Req.), Buy bonds
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According to the Aggregate supply and Demand model if we need to Contract the market which direction do we shift, Left or Right?
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Shift To the Right
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According to the Aggregate supply and Demand model when we need to shift to the Right under Fiscal Policy what can be done? Name 1 of 2 things.
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Government Spending Decreases ( G), & Taxes Increase (Tax)
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According to the Aggregate supply and Demand model when we need to shift to the right under Monetary Policy what can the Fed. do? Name 2 of 3 things
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Increase Discount Rates ( Dis. R.), Increase Reserve Requirements ( Res. Req.), Sell bonds
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How much will Balance of Payments come to?
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They always equal to zero.
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What is the Balance of Trade
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A nation's balance of trade = exports - imports.
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What is the definition of Balance of Trade surplus
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A nation that exports more than imports will have a trade surplus.
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What is the Definition of Balance of Trade Deficit
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A nation that imports more than exports will have a trade deficit.
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What are the Causes of Balance of Trades deficit
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Exports may be inferior quality, Country may not have many products to export, A nation's currency may be overpriced, making imports cheaper. , A nation may have higher incomes than its trading partner, & Poorer nations cannot afford richer nation's products.
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What helps moderate the inflation and deflation in the Business cycle
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We need Policy to help moderate inflation and deflation
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What is the ideal growth in the Business cycle?
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2% - 4%
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What is the definition of Capital Account or Financial Account?
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That part of balance of payments which records net changes in a country's international financial assets and liabilities.
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Ceteris Paribus
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Ceteris paribus or caeteris paribus is a Latin phrase meaning "with other things the same" or "everything will remain the same".
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What is Change in Quantity Demanded?
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A change in price is a change in quantity demanded Example, Netflix increases their rate from $8 to $10. Because of their price increase their quantity demanded decreased.
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What is Change in Demand
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A change in the quantity of a good that buyers are willing and able to purchase that results from a change in some conditions other than the price of that good, shown by a shift in the demand curve
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What is Circular Flow Model of the Economy
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Your Skills enter the market, Business come into the market to buy your skills, Business buys your skills, You get a job and earn money, Your skills are used by the business to create a product to put into the market, You use the money that you earned from your job to purchase products from the market, The business's product sells in the market and generates cash inflow, & You purchase products from the market and bring them home to use.
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What is Comparative Advantage
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The ability to produce a good or service at a relatively lower opportunity cost then someone else.
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Government Expenditures, what are they?
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The Purchase of goods by all levels of government plus purchase of services from contractors and wages of government employees.
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What is not included in government expenditures?
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Transfer Payments(Free money), i.e. Social Security, Disability payments & Unemployment compensation
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Who Determines Government Expenditures?
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They are determined by politics or other considerations that lie outside the model other than by any variables that are included in the model.
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Consumer Price Index
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A price index based on the market basket of goods and services purchased by a typical urban household.
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Current Account
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The value of a country's exports of good's & services minus the value of its imports of goods & services plus its net transfer receipts from foreign sources.
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What are the Determinants of Demand?
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Income, Taste, Expectations, Number of Buyers, & Price of other Compliments & Substitutes.
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Economic Modeling
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A synonym for theory; in economics, often apply to theories that are stated in graphical or mathematical form.
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Economics
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The social science that seeks to understand the choices people make in using scarce resources to meet their wants
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Elastic Goods
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Think Quality & Luxury. Like GUCCI!
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What are the examples that show impact on Total Revenue for Elastic goods?
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P↑Q↓TR↓ =Elastic P↓Q↑TR↑ =Elastic
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What is the Equation of Exchange
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An equation that shows the relationship among the money stock (M), the income velocity (V), the price level (P), and gross domestic product (GDP). M x V = P x GDP
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Exchange Rate Definition
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The exchange rate is the rate at which one currency trades against another on the foreign exchange market.
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How is Currency effected?
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Economics, Politics, Products, Speculation
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How do you state strengths & Weaknesses of Currency's
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The (Currency) is Strong relative to the (Currency). The (Currency) is Weak relative to the (Currency).
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Increase in currency relative to another currency
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If the U.S. currency Increases relative to the British pounds then, for example, British tea kettles would become cheaper.
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Decrease in Currency Relative to another Currency
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If the U.S. currency decreased relative to the British pounds then, for example, British tea kettles would become more expensive.
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What is Contractionary Fiscal Policy
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Its used during economic growth to lower inflation. To cut government spending which impacts aggregate demand by decreasing it & it Increase Taxes to reduce the purchasing power of consumers and business investments.
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What does Expansionary Fiscal Policy do
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Cut government spending, Increase of taxes - to reduce purchasing power, & Rebates.
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What does Expansionary Monetary Policy do?
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Its used during economic downturn & The Federal Reserve can raise the money supply in 3 ways, Buy bonds, & Lower the discount rate, & Lower the Reserve Rate
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What does Contractionary Monetary Policy do?
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Its used during economic growth & The Federal Reserve can decrease the money supply in 3 ways: Sell bonds on the open market, Raise the discount rate, & Raise the Reserve Rate.
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What is the Expenditure Component of GDP?
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C (consumer) + I (Business & Investment) + G (Government) + [X(export) - M(Import)] or C + I + G + ( X - M )
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What are Expenditures
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C= consumer I= Business & Investments G= Government X = Exports M= Imports
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Factors of Production
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The basic inputs of labor, capital, and natural resources used in producing all goods and services.
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Financial Inflow
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Purchase of domestic assets by foreign buyers and borrowing from foreign lenders; also often called capital inflows.
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What happens if Imports Exceed Exports in an open economy - where do we get the money now to buy all the imports?
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We use our financial inflows, so we...Borrow from foreign banks or other lenders & Sales of domestic securities like stocks or bond to foreign investors
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Financial Outflow
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Purchases of foreign assets by domestic residents or loans by domestic leaders to foreign borrowers-also often called capital outflows.
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What happens If Exports Exceed Imports in an open economy - Where do foreign buyers afford the exports since only part of them can be paid for by the payments they receive through imports?
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They use the financial outflow, which are ... Lending by domestic banks and other financial institutions, Foreign borrowers &, Purchase of foreign securities like stocks or bonds by domestic investors.
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What is Fiscal Policy
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Policy that is concerned with government purchases, taxes, and transfer payments. Or Simply, Government spending and taxes.
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Definition of fiscal policy
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Fiscal policy involves the government changing the levels of taxation and government spending in order to influence Aggregate Demand (AD) and the level of economic activity.
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What is the The purpose of Fiscal Policy?
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Stimulate economic growth in a period of a recession, Keep inflation low, it aims to stabilise economic growth, avoiding a boom and bust economic cycle. this is often used in conjunction with monetary policy.
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What is Expansionary (or loose) Fiscal Policy
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Increasing AD, government will increase spending (G) and / or cut taxes (T). Lower taxes will increase consumers spending because they have more disposable income (C), & This will tend worsen the government budget deficit and the government will need to increase borrowing.
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GDP - Gross Domestic Product
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The value at current market prices. Of all final goods and services produced in a given country in 1 year.
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What are the Consumed Products of GDP?
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Business, Consumer, Government, &Net Exports
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What is the GDP Growth Rate
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The ideal Growth Rate is 2-4%
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Unemployment Rate
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The Ideal rate is 4-6%
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GDP Deflator
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A weighted average of the prices of all final goods and service produced in the economy.
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What are Inelastic Goods?
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Addictive - Coffee, Necessities, & Medicines.
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What are the examples that show impact on Total Revenue for Inelastic goods?
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P↑〖 Q〗_(↓ ) TR↑ =Inelastic P↓ Q^(↑ ) TR ↓ =Inelastic
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Inflation
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A sustained increase in the average level of prices of all goods and services.Intermediate Goods: A Intermediate good is a good or service that is used in the production of a final good or finished product. These goods are sold by industries to one another for the purpose of resale or producing other goods. Example, Sugar is directly consumed but is also used to manufacture food products.
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Invisible Hand
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In economics, this is a metaphor used by Adam Smith to describe unintended social benefits resulting from individual actions. The phrase is employed by Smith with respect to income distribution (1759) and production (1776).
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Laissez faire
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This is an economic system in which transactions between private parties are free from government interference such as regulations, privileges, tariffs, and subsidies. This phrase is part of a larger French phrase and literally translates to "let (it/them) do", Basically, let the market be. It will correct itself.
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Law of Comparative Advantage
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The ability of a firm or individual to produce goods and/or services at a lower opportunity cost than other firms or individuals. A comparative advantage gives a company the ability to sell goods and services at a lower price than its competitors and realize stronger sales margins.
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Law of Demand
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Price ↑→Quantity Goes↓
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What are the Macro Goals
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Low unemployment rates, Growth - Gross domestic product (GDP), stable Prices, Not going down to much - deflation, & Not going up to much - inflation.
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What is a Mixed Economy
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A mix of market & Government.
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Macroeconomics
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The branch of economics that studies large-scale economic phenomenon, particularly inflation unemployment and economic growth.
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What are Major Economic Questions
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How? What? & Whom? How are we going to produce it? What are we going to produce? Whom will we produce it for?
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Microeconomics
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The branch of economics that studies the choice is up individual units including households, business firms, and government agencies.
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Monetary Policy
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Monetary policy influences the decisions that we make about how much we save, borrow and spend.
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Keynesian Multiplier Definition
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The ratio of change in equilibrium level of real national income to the change in autonomous expenditures.
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Keynesian Multiplier Equation
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Tax Multiplier Formula
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What is the Tax Cut Multiplier?
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Tax cuts and government spending increase aggregate demand during a recession.
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Money Multiplier Formula
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What is the money multiplier
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When bonds are sold, it is negative, When bonds are bought, it is positive.
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Expenditure Multiplier
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1/(1-NPC)
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National Income
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The total income earned by a country's residents, including wages, rents, interest payments, & profits.
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Nominal
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In economics a term that refer to data that have not been adjusted for the effects of inflation.
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Normal good
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A good for which an increase in consumer income result in an increase in demand.
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Inferior good
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A good for which an increase in consumer incomes results in a decrease in demand.
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Normative Economics
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The area of economics that is developed to judgments about whether economic policies or conditions are good or bad.
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Opportunity cost
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The cost of a good or service measured in the terms of forgone opportunity to pursue the best possible alternative activity with the same time or resource.
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Positive Economics
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The area of economics that is concerned with facts and the relationships among them.
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Price Elasticity of Demand
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(% Percentage of Change∆ in Quantity)/(% Percentage of Chane ∆ in Price) If quantity changes more than 1 it's Elastic. If quantity changes less than 1 it's Inelastic.
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Production possibility frontier
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A graph that shows possible combination of goods that can be produced by an economy given available knowledge and factors of production.
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Real
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In economics a term that refers to data that has been adjusted for the effects of inflation
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Real Interest Rate
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A real interest rate is an interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower, and the real yield to the lender. Real Interest Rate = Nominal Interest Rates - Inflation Rate
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Role of the Banking System
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The main points of the banking system is that they help with; Internet banking and transfers, Over the counter, Cash Payments, Management of Cash Flow over time, & Help Manage Risks for Promising/ Business ventures.
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What is Movement?
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This is a multivariable function. If income and other determinants of demand such as tastes of the consumers, changes in prices of related goods, income distribution, etc., remain constant and there is a change only in price of the commodity, then we move along the same demand curve.
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What is a Shift?
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When there is a change in demand due to one or more than one factors other than price, results in the shift of demand curve.
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Substitutes
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A pair of goods for which an increase in the price of one causes an increase in demand for the other.
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Compliments
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A pair of goods for which an increase in the price of one results in a decrease in demand for the other.
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What are the Tools of the Federal Reserve?
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Discount Rate, Open Market, & Buy or Sell Bonds in the Market.
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Transfer Payments
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Payments by the government to individuals not made in return for services currently performed, for example, unemployment compensation and pensions.