Economics Flashcard Answers

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Economics
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The study of choices that individuals and societies make in the production, distribution, and consumption of goods.
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Economy
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Any system for the production,distribution, and consumption of goods.
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Good
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A material thing that people want and for which they will pay
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Service
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Produced by labor for which people expect to pay
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Want
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Something that a human desires to have
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Market
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A place to buy and trade goods
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Supply
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The quantity of goods for sale at a certain price and under certain circumstances
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Demand
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The amount of goods bought for a certain price under certain circumstances
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Producer
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Person working to produce goods
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Consumer
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Person purchasing the goods produced
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Value
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Scarcity
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Economic system that Governor Bradford found contrary to God's wisdom
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Communal Economy
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Name given to authorities on the production, distribution, and consumption of goods.
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Economists
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Term used for an economist's prediction of what will happen to an economy
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Economic Forecast
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The first thing to understand about economics
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All goods have to be worked for.
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The old word for the bad habit of spending more than one can fford
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Prodigality
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Type of good that is also called an investment good
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Capitol goods
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Type of good produced to directly satisfy people's wants
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Consumer goods
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Founder of the Austrian School of economics
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Karl Menger
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Economic Law
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The general rules or principles guiding the production, distribution, and consumption of goods.
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Mercantilism
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The aim of this economic system was to build up the state's treasury
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Trade balance
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the difference in the value of goods that a country sells abroad compared to what it purchases in other countries
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Tariffs
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Tax a government places on imported goods
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Imperialism
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The establishment of colonies in other countries to benefit the mother country.
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Physiocrats
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French economists who favored a "natural" economy
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Laissez-faire
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'Let it alone'
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Classical Economics
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The theories developed in the 19th and 20th century that advocated the free market system
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Division of labor
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The separation of work to be performed
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Specialization
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The best job someone can do
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Economic goal of mercatilism
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To build the state's treasury
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Group that made the first attempt to create a science of the production, distribution, and consumption of goods.
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Physiocrats
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Famous book written by Pierre Samuel Du Pont
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Physiocracy
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Father of Economics
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Adam Smith
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Name of Adam Smith's most famous book
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The Wealth of Nations
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The practical purpose of economics
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To understand the production, distribution, and consumption of goods
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Six ways given in the text that nations have used in their attempts to increase wealth
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1.Produce more goods from existing resources 2. Increase the amount of resources available for the production of goods 3. Find new resources to satisfy existing wants 4. Make goods already being produced more effective in satisfying people's wants 5. Reduce people's wants 6. Redistribute the goods that are already being produced among the population
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True source of prosperity
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Diligent work directed by ingenious intelligence allowed to develop under conditions of freedom
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Mixed Economy
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A mix of completely regulated system and a completely free system (neither of which exists)
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Labor
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Any work that contributes to the production of goods and services
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Subsistence Economy
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An economic system that provides barely enought to keep a society alive
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Private Capitalism
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The system in which the majority of a nation's capital is owned and controlled by private individuals and businesses
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State Capitalism
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A system in which the owner of much of the nation's capital is a powerful, centralized apparatus called the collectivist state
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Capitalist
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Anyone who owns producer goods or owns a share of some business that produces goods
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Entrepreneur
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A person who undertakes management of economic enterprises on a bold scale, with some danger of losing his investment of money and time.
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The Four Factors of Production
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Natural Resources Labor Capital Entrepreneurship
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Three main types of economics
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Traditional Economy command Economy Free enterprise economy
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System in which people are assigned jobs by a centralized authority
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Command Economy
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French entrepreneur who was the first to produce quality gunpowder in the United States
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Eleuthere Irenne Du Pont
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Capitalism's three basic components
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Property Rights Freedom of enterprise Competition in a market environment
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Three types of property
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Real Property Financial Property Intellectual Property
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Two components of the market in a free enterprise economy
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Resource Market Product Market
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Two entities that make the majority of economic decisions in the free market
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Private Households Private Businesses
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Market Price
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Value in Exchange
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Marginal Utility, Total Utility
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The amount of satisfaction that results from a one unit increase of a product, the total amount of satisfaction received from everything added together
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Law of Demand, Law of Supply
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Explains the inverse relationship between the price of a good and the amount that people choose to buy, law of supply states the direct relationship between the price of a good and the amount that supplies will make available
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Demand Curve, Supply Curve
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Demand curve is a graphic representation of the amount of goods purchased at different prices, a supply curve is a graphic representation of the quality of goods supplied at different prices.
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Substitute Good, Complimentary Good
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A substitute good is a product many consumers buy when the price of another same good rises, a complimentary good is a good with negative cross elasticity of demand in contrast to a substitute good
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Equilibrium
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The place at which quantity demanded and quantity supplied are equal
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Surplus, Shortage
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A surplus is if the quantity of goods supplied is greater than the quantity demanded at a given price. A shortage is the situation in which the quantity exceeds the quantity supplied at a given price.
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Price Ceiling, Price Floor
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A price ceiling is when governments place a limit on how much a producer may charge for his product. A price floor is a price level set above the equilibrium price
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The difference between value in use and value in exchange
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Value in use is the value that is directly related to the benefits their owners receive through their use. Value in exchange is what a particular good is worth in exchange for some other good
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Term that refers to the amount of money that a buyer pays a seller for a good
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Market Price
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Two effects used to explain why price changes influence the quantity demanded of a good
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Change in supply and change in demand
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Five factors that can increase or decrease the supply of a good.
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Technology Resource Prices Prices of Related Goods Number of Sellers Producer Expectations Government Taxes, Subsidies, and Regulations
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Market Signals
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Signs that are used by consumers and producers to determine how much of a good to buy or sell at a give price and time
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Durable Good
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A good expected to last more than three years
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Black Market
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An alternative, illegal system in which one can exchange goods.
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Private sector
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That part of an economy that is controlled by private individuals, businesses, and organizations
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Public sector
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That part of an economy that is controlled by national, state, and local governments
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Profit Motive
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This urge to work at bettering one's economic situation
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Profit
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The excess of the total revenue paid by buyers for goods over the seller's total expense of producing these goods
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Opportunity costs
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The cost of giving up one opportunity in order to pursue another.
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Means through which sellers and buyers exchange goods
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Market
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Economic system in which the choices of individuals are limited by the constraints of convention
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Traditional Economy
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Who makes the economic decisions in a command economy? In a free economy?
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Why is this an important distinction between the two economic decisions. In a free economy, economic decisions are made by individuals. It shows why some economies are more successful than others or vice versa
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Why are countries that let people respond to the inborn profit motive better off than those countries that do not
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The consumer and everyone else who demands goods have a better knowledge of what goods are to be produced and in what quantity.
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What are the differences between an accountant's and an economist's definition of profit?
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The accountant's view of a business's profit is its total revenue excluding the cost of depreciation. To an economist, profit is the excess of total revenue paid by producers for goods over the seller's total expense of producing those goods.
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Do most businesses make a large profit under the free market system? Explain your answer.
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No. There are two reasons why large profits from businesses are rare. The first is that even when the laws of supply and demand are allowed to work, interrupted by the government, businesses cannot raise the prices it charges for its products above that price which its competitors are charging.
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In a free market, how might a firm that does not make a true profit still stay in business?
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Ordinarily these types of firms receive return from their invested capital and their wage of management
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Explain why a small-business owner whose only income is what economists call the wage of management is not making true profit.
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Economists say that owners have not made true benefits they have simply paid themselves the wage or cost of managements. Most businesses simply get back their cost of doing businesses. They break even.
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Industry
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Firm that produces products and services similar to those of other industries
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Perfect competition
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Pure competition
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Characteristics of pure competition
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(a)There must be a large number of independent sellers (b)There must be a large number of independent buyers (c)The industry must be one in which all firms produce a standardized product (d) Firms must have free access to the market (e) Relevant market information must be made available to all firms and information
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Price taker
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The firm takes whatever price it can get
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Monoply
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The situation that arises when a single firm is the only supplier of a good for which no substitute exists
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Monopolistic competition
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Each firm promotes a differentiated product
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Oligopoly
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A market that occurs when an industry is dominated by only a few firms
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Trust
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A collusion of businesses which join together to restrict or eliminate competition
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Price discrimination
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Selling the same type of goods at different prices to different buyers.
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The goal of economic competition
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To prove the quality of goods and lower the prices
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Motive upon which competition is based
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To make possible a better standard of living for everyone in a prosperous society
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Five Characteristics of perfect competition
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(a)There must be a large number of independent sellers (b)There must be a large number of independent buyers (c)The industry must be one in which all firms produce a standardized product (d) Firms must have free access to the market (e) Relevant market information must be made available to all firms and buyers
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Three characteristics of a monopoly
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(a)The situation that arises when a single firm is the only supplier of a good or service (b)There must be no close substitutes for the firm's product (c)Entry into the market must be blocked
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Three characteristics of monopolistic competition
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There must be a large number of firms in the market These firms provide differentiated products Firms are able to easily enter or exit the market
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Three characteristics of an oligopoly
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(a)There are only a few firms in the entire industry (b)Firms in an oligopoly may sell products that are either differentiated or virtually the same (c)Potential firms are able to easily enter or exit the market
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The biggest defender of the American freedom from harmful monopolies
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The free market itself
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Two of the most important acts under the antitrust laws
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The Sherman Act of 1890 and the Clayton Act of 1914
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Government agency whose purpose is to investigate trade practices
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Federal trade commission
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Eight situations in which government may need to stop the abuse of the market
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1. When a business compromises national security 2. When a business threatens the safety or health of consumers through fraud or deceit 3. When a company or group of companies conspires to hinder free competition in the marketplace. 4. When a national emergency, such as war, disrupts the normal market cycle. 5. When a labor organization breaks the law or uses intimidation tactics against workers. 6. When the public safety or national security is endangered by labor strikes or unrest 7. When the purchasing of private property is necessary for the public good or safety 8. When the industry is under a natural monopoly
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Efficiency
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The quality of producing effectively with a minimum of waste
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Input
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The total amount of a good that is produced
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Total Cost
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The sum cost of all factors of all the factors of production used in
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Average Cost(of production)
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the sum of all the factors of production used in producing on unit of a good.
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Geographic specialization
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The production of goods in which a country or region has absolute or comparative advantage.
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Free Trade
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The result of no restrictions or penalties placed upon the trading of goods.
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The two methods by which a producer can improve his efficiency and profitability
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Taking into consideration his input and output
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Type of work that creates the wealth of nations
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Intelligent work
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The system Henry Ford used to produce
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"America Mass Production" via the assembly line
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The theory that domestic manufacturers need government to guard against foreign competition
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Protectionism
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Five specific situations in which it would not be beneficial for the United States to engage in free trade with another nation
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1. When a nation is notorious for breaking trade agreements 2. When a nation devalues or inflates currency 3. A nation counterfeits money 4. A nation illegally duplicates patented or copyrighted goods 5. A nation seizes American assets or engages in other dishonest practices to damage our economic system
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Money
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Anything that is generally accepted as forms of payment
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Barter
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The direct exchange of one good for another good without a standard form passing from hand to hand
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Specie
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Coined metallic money
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Face value
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The asserted value
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Inflation
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When the level of prices in the market rises because too much money is in circulation
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Deflation
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If prices decrease because money seems more valuable and stable
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Bullion
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Gold, silver, or platinum, usually found in the form of bars, ingots, or plates
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Fiat money
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Legal tender that is backed by nothing but a government's promise
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Near money
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Asset that can be easily converted into M1 because they are highly liquid
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Monetarism
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The theory that the variation in the money supply is the main source of economic fluctuations.
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Three functions of money
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1. To be a medium of exchange 2. To provide a measure of value 3. To provide a store of value
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Type of money coined in the Massachusetts Bay Colony
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Pine tree shilling
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Six qualities that an ideal money possess
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Portability Durability Homogeneity Divisibility Constancy Intrinsic Valuableness
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Gresham's Law
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To spend new and less trustworthy money
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Three main categories of United States money and what each one includes:
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M1- Value of all the balances in various types of transaction accounts M2- non-checkable savings deposits, money market mutual funds, and time deposits M3-money counted in M2
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Department responsible for printing and coining U.S. money.
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United States Department of the Treasury
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Three main components of the federal reserve
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Board of Governors Federal Open Market Committee(FOMC) Federal Reserve Banks
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20th Century economist associated with . monetarism
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Milton Friedman.
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What are some of the primary advantages and disadvantages of bartering
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Advantages • Buyers need not have a money system • Provides convenient means for comparing the value of one good with another
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...
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Disadvantages •Goods may not be readily divisible •Bartering often requires a lot of time and certain hassle
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For what reason have many government officials been responsible for debasing their national currencies? How could this policy be called a form of taxation?
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They have broken trade agreements, devalued and inflated currency, counterfeited money, illegally duplicated patented and/or copyrighted goods, seized American assets and other dishonest practices.
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Does every form of legal tender have intrinsic value? Why or why not?
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Yes. When money is legal tender, it has been declared a valid means of payment
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Explain how the fractional reserve system of banking was born and how this system.
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Fractional reserve banking is a system which allows banks to hold less than 100 percent of deposits in reserve.
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Is there enough gold in the world to base each nation's currency on a gold standard? Explain
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...
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Why are credit cards not considered a form of money?
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It is only a way of obtaining short term loans from the user's credit card company.
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What is the chief aim of the Federal Reserve? What are its three main tools, and how does the system use them in meeting its objectives?
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The chief aim of the Federal Reserve System is to form America's monetary; policy and thereby control the money supply. It's three main tools are the Board of Governors, The Federal Open Market Committee, and The Federal Reserve Banks.
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Would the Fed likely pursue an easy money policy or tight money policy during a recession? Why?
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They would pursue an easy money policy to encourage more spending.
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Is money moral or immoral? Explain your answer
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Money is neither good nor evil. Everything relies on how we make use of the money.
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Who founded the Austrian School of Economics
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Karl Menger
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What economic riddle did Karl Menger Solve?
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Diamond-Water Paradox
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What is a traditional economy?
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A system in which decisions involving the production, distribution, and consumption of goods are based upon custom, heredity, and caste.
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Throughout history most people have been poor because they lacked what kind of goods?
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Capital goods
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What is an economic system called that provides barely enough to keep a society alive?
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Subsistent economy
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Is a person's house usually considered capital? Why or why not?
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Yes. Because it can be traded for goods or a place to produce goods.
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E.I du Pont's powder mill made especially handsome profits in the year 1812. From your knowledge of history can you suggest a reason why?
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Demand. (War of 1812)
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A demand ______ is a list of numbers that compares quantity demanded with price.
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Schedule
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Define Complimentary good
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A good that is sold with another
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Why is it that governments cannot efficiently set prices that producers and consumers must follow?
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The free market will fail.
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What is an inferior good?
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Something of less value
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If the government were to impose a massive new tax on vehicle manufacturers, how might this affect the automotive industry?
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There would be less people buying new cars.
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Identify two effects used to explain why price changes influence the quantity demanded of a good.
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1. Substitution 2. Income
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What are market signals?
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Market signals are signs which consumers and producers use to determine the price of a good is sold for and in what quantity.
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Economic system in which the choices of individuals are limited by the constraints of convention.
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Traditional economic system
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Economic system also called a planned or directed economy.
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Command Economy
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Economic system in which price is set at the equilibrium point where supply and demand come into balance.
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Free Economy
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Define: Durable good Black Market Opportunity costs
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1. A good expected to last at least three years 2. An alternative, illegal way for people to buy and exchange goods 3. The cost of foregoing one opportunity to take another.
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When firms in an industry that is perfectly competitive, they produce_______ products.
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Blank: standardized
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Each firm in a market that is perfectly competitive is known as a(n)______ taker.
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Blank: Price
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How many suppliers of a good or service are there in an industry with a monopoly?
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One
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A firm that has a monopoly produces goods for which there are no close________
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Blank: Substitutes
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A group of firms that produces similar products or provide similar services is a(n)________
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Blank: Industry
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The goal of economic competition
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To provide better goods at lower prices
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Motive upon which competition is based
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To better one's economic situation
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Perfect competition
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Independent sellers
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Price discrimination
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Charging more or less for the same products
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List the three components of mass production
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1.Specialization 2. Distribution of labor 2. Automatic conveyance (the assembly line)
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What is the ability to produce a good at a lower opportunity cost than another producer called?
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Comparative advantage
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The theory that domestic manufacturers need government to guard against foreign competition
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Protectionism
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List the three functions of money
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1. To purchase 2. Measure value 3. Store/save wealth
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What are some of the primary advantages and disadvantages of bartering?
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Bartering often takes large amounts of time and there may not be goods to trade. An advantage is that goods may be traded directly for other goods.
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Why is it beneficial for money to have intrinsic value?
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It is easier to measure the value of a good
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What is the chief aim of the Federal Reserve
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To administer the supply of money
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What are the three main tools used by the Federal Reserve and what does it use them for?
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1. Open Market operations 2. Reserve Ratios 3. Discount rates
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List the three of the 5 harmful government practices discussed in the text
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1. Excessive taxation 2. Debasement of money 3. Creation of bureacracy
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What is a large, complex organization composed of appointed officials and their numerous agencies called?
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A bureacracy
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What can happen to the economy when taxes are too high?
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Production will go down, less capital will be bought, and not all needs will be met
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Why was FDR's New Deal enacted?
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To help stimulate the economy by providing temporary jobs
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Who is Keynesianism named for?
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John Maynard Keynes
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What is the economic philosophy of Keynesianism?
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Government planning works better than the 'invisible hand.'
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What is macroeconomics?
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The study of economics on a national and international level.
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From you knowledge of recent history, can you suggest how wars tend to affect the American economy?
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The wars have drained the economy because of the immense costs.
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Business cycle
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recurrent fluctuations in the level of economic activity
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GDP
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gross domestic product is the value of all finished goods and services produced within a country during a year's time
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Leading indicators
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components of the economy that normally change before the rest of the economy
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consumer price index
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based upon the average price consumers have to pay to purchase a specific "market basket" of goods
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base period
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period that serves as a reference point by which measurements are compared
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stagflation
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economic condition where high inflation is combined with high unemployment, resulting in stagnation of productivity.
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The three criticisms of the market economy mentioned in the text
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Business cycle Inflation of money and prices Hard, greedy, and selfish competitive economic system
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Four components of the business cycle
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Expansion Peak Recession Trough
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Difference between demand-pull and cost-push inflation
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Demand-pull inflation is caused when the demand becomes greater than the supply. Cost-push inflation is triggered when businesses face rising production costs, forcing them to increase the prices they charge for their goods
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Economic theory applied in the 1980's to reduce the effects of stagflation
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supply-side economics
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Why might a person hear more protest about the economy in a country with a free market than in one that is tightly regulated?
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In a free market people have more freedom to complain.
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how does the work of researchers and inventors make a nation more productive?
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The nation knows the steps that need to be taken to act on their findings
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Explain why the opportunity cost of buying a bicycle is normally much greater in command economics than in free market economics.
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IT is not a necessity. A person would have to sacrifice legitimate needs to make this purchase.
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Would the value of goods produced by an American manufacturer located in Mexico be counted in the U.S domestic product? How about the value Japanese products made in the United States?
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No. The goods in Mexico would not be counted because they are not made in the U.S The Japanese products made in the U.S would be counted.
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Why are recessions considered a normal and natural part of a business cycle?
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Recessions are times of reduced production, reduced consumption, and reduced employment.
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Why do economies pay close attention to leading indicators? Should people base their business choices base their business choices solely on on this economic tool? Why or why not?
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Yes. When people are aware of where the economy is headed, steps may be taken to fix any dangerous trends.
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If thousands of workers were to demand wage raises at the same time, would the likely result be demand-pull or cost-push inflation?
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Both
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Explain how supply-side economics can reduce unemployment and increase overall productivity.
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Reducing taxes allows for more private research and investment in capital.
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How can an individual's basic instinct to improve his personal situation result in better conditions for others? How is a market economy harmed when this characteristic is carried too far?
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Without motivation, little or no productive work would be done. However, if this 'motivation' is carried too far it turns into greed.
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Are selfishness and envy really done away with in command economies as their supporters claim? Explain
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Selfishness and greed certainly seem stronger in Totalitarian economies, but that doesn't mean that they are nonexistent in command economies.
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List four components of the business cycle
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Peak Trough Expansion Recession
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What is the difference between demand-pull and cost-push inflation?
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When the demand is higher than the supply available. Cost-push inflation is when inflation is when the production costs and supply rises but demand is low.
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Business cycle
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The standard process in which every business goes through.
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GDP
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Gross Domestic Production- The total value of all products produced in the country each year
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Consumer Price Index
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Economist's index/record
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Leading indicators
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Similar to a depression- A time when things just kind of stay the way they are.
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Nationalism
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The promotion of one's own nation and government regardless of moral considerations.
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Communism
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An economic system based upon public ownership and governmental control of the production and distribution of nearly all natural resources.
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Bourgeois
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Property owners
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Proletariat
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The common working class
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Socialism
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Any economic system based upon collective ownership and control of many or most national resources
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Man who is credited with formulation the basic ideas of communism
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Karl Marx
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Influential pamphlet published by London's economist league
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The Communist Manifesto
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Four terms used in the text that describes different types of socialism
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Welfare capitalism, managed capitalism, democratic socialism, and market socialism.
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Globalism
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A philosophy which regards the entire world as one giant community that should be unified politically and economically.
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UN
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United Nations
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IMF
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International Monetary Fund
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WTO
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World Trade Organization
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GATT
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General Agreement in Tariffs and Trade
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NAFTA
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North American Trade Agreement
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EU
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European Union
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The formal name for the World Bank
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International Bank for Reconstruction and Development(IBRD)
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The three original members of NAFTA
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The United States, Canada, and Mexico.
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The EU's first official currency
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The euro
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The three main organs of the UN and their purposes
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The General Assembly, the Security Council, and Economic and Social Council. The general assembly decides how much the UN may spend on its projects; the security COuncil makes decisions converning the UN's involvement in national and international conflicts. The Economic and Social Council study the economic and social problems so that thye may advise the General Assembly and the UN's other specialized agencies.
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The push for globalization in the 20th century became prominent around the time of which war?
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World War 2
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Why are many European nations eager to join the EU? What roles do the EU have today in addition to promoting free trade?
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The EU encourages free market and assures European influence around the world. Today the European Union has replaced its vision of just a free trade alliance with a vision of a unified economic power under a single authority.
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Give three reasons why global aid organizations are ineffective
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1) They fail to keep the peace 2) Restricts countries from making beneficial trades 3) Globalism requires major sacrifices on behalf of a single country and its people
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List four terms used in the text that describe different types of socialism
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Managed Capitalism Market Socialism Democratic Capitalism Welfare Capitalism
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Define Socialism
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Socialism is a deceptive government in which people are often told they will get something for sacrificing something else
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Define communisim
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Communism is when a country is not allowed to determine their choice of jobs or choose to better their living circumstances
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Who is credited with formulating basic ideas of communism?
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Karl Marx
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According to Communist philosophers, the ________ must be overthrown before social and economic equality can be established
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Bourgeois
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Many of the supporters of strong command economies claim to be atheistic, not believing there is a God. How is the belief that man is the highest being in the universe related to the philosophies promoted by Communism and socialism
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There is no freedom of religion or free will.
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