question

Rewards and penalties that motivate behavior (It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest)

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Incentives

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Said that when markets work well, those who pursue their own interest end up promoting the social interest, as if led to do so by an "invisible hand.

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Adam Smith

question

A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all.

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Invisible Hand

question

The choice of one item while giving up another. (Researching, developing, and testing a new drug cost time and resources. More testing means that approved drugs will have fewer side effects, but there are two important _______: drug lag and drug loss.)

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Trade-off

question

When lives are lost because safe drugs that are still in the testing stage have not yet been approved. Likewise, unsafe drugs would also be in the testing stage so they wouldn't be able to kill you either. (You can die because an unsafe drug is approved—you can also die because a safe drug has not yet been approved.)

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Drug Lag

question

When a drug is approved that is unsafe, or a safe drug is never developed. (You can die because an unsafe drug is approved—you can also die because a safe drug is never developed),

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Drug Loss

question

The amount of other products that must be forgone or sacrificed to produce a unit of a product. **The value of possibilities lost when a choice is made**. ***The opportunity cost of taking the job at Forty Thieves is the forgone wages at Ali Baba's.***

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Opportunity Cost

question

Making choices by thinking in terms of marginal benefits and marginal costs, the benefits and costs of a little bit more (or a little bit less). (The speed limit is 70 mph but he figures the risk of a ticket is low if he travels just a little bit faster, so Robert sets the cruise control to 72 mph. When it is 75, he sets it to 77 to accomodate and FINE TUNE RISK WITH ADDED BENEFIT)

answer

Marginal Thinking

question

Simultaneously described Marginal Thinking in 1871, where a new form of economic thought was rising.

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William Stanley Jevons (Carl Menger, and Leon Walras)

question

Increase production through specialization. FEW OF US COULD SURVIVE IF WE EVEN ATTEMPT TO BE SELF-SUFFICIENT IN EVERY WAY

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The Power of Trade

question

Forecast economic conditions to help consumers, firms and governments make better decisions. Are especially interested in the incentives to produce new ideas.

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Macroeconomists

question

during this time period, people buy more, invest in business, and industries / businesses grow

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Economic Boom

question

during this time period, people buy and invent less, and businesses close, the number of more unemployed people rises. A BAD DOWNTURN IN THE ECONOMY

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Economic Bust

question

an increase in the general or average level of prices. *comes about when there is a sustained increase in the supply of money* (When people have more money, they spend it, and without an increase in the supply of goods, prices must rise)

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Inflation

question

(1912- ) American economist. Conservative thinker famous for his advocacy of monetarism (an revision of the quantity theory of money) in works like A Monetary History of the United States, 1867-1960 (1963). he is strongly associated with the ideals of laissez-faire government policy. , "Inflation is always and everywhere a monetary phenomenon."

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Milton Friedman

question

1913 - central banking system of the US - created by the Federal Reserve Act - quasi public system

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Federal Reserve

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The ability of a country to produce a good at a lower cost than another country can. To increase its wealth a country should produce the goods it can make at low cost and buy the goods that it can make only at high cost

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Comparative Advantage

question

Factors that cause a producer's average cost per unit to fall as output rises. **WHEN Specialization gives producers an incentive to invest in equipment that reduces the average costs of production.***

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Economies of Scale

question

the % of the last dollar earned that goes into taxes

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Margin Tax

question

Property rights, political stability, honest government, a dependable legal system, and competitive and open markets are all examples of

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Institutions

question

The focus of buyers and sellers on their own personal benefit

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Self-Interest

question

Adler's conception of an innate potential to cooperate with other people to achieve personal and societal goals.

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Social Interest

question

**Goods and services are produced in better quality, quantity and speed when people focus on producing a few things instead of making everything they want by themselves.**, *A focus on a particular activity or area of study*

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Specialization

question

A measure of the goods and services produced within a particular country.

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Productivity

question

*Think of an assembly line, and its advantages are.....*Trade allows people to specialize in certain ideas, which increases the total knowledge available

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Division of Knowledge

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The ability to produce the same good using fewer inputs than another. ** Specialization and trade, however, are based on comparative advantage.**

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Absolute advantage

question

All the combinations of goods that a country can produce given its productivity and supply of inputs

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Production Possibilities Frontier

question

The value of a fraction does not change if both the numerator and the denominator are divided (or multiplied) by the same nonzero number.

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Fundamental Principles of Scarcity

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(economics) the utilization of economic goods to satisfy needs or in manufacturing

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Consumption

question

Exchanging goods and services between countries

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International Trade

question

a factory can produce more goods in less time and for less money

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Advantage of Specialization

question

Actions or processes that involve the entire world and result in making something worldwide in scope. BEEN AROUND SINCE ROMAN EMPIRE

answer

Globalization

question

a situation in which the quantity supplied is greater than the quantity demanded. DROPS PRICES. Competition will push prices down whenever there is a ________.

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Surplus

question

a situation in which the quantity demanded is greater than the quantity supplied. RAISES PRICES. Competition will push prices up whenever there is a ________.

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Shortage

question

The price at which the quantity demanded is equal to the quantity supplied

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Equilibrium Price

question

the quantity at which the quantity demanded is equal to the quantity supplied

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Equilibrium Quantity

question

The amount a seller is paid for a good minus the seller's cost of providing it

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Producer Surplus

question

The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

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Consumer Surplus

question

A model that predicts economic responses to scarcity of a resource will lead to increases in prices that will result either in decreased demand for that resource or increased supply, or both

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Market Model

question

Examined economic behavior in a controlled, laboratory. Experimental economics- a game as an investment simulation

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Vernon Smith

question

An international oil cartel originally formed in 1960. Represents the majority of all oil produced in the world. Attempts to limit production to raise prices. It's long name is the Organization of Petroleum Exporting Countries.

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OPEC

question

Can be manipulated by politics, not just supply and demand; in 1960 some MIddle Eastern countries formed OPEC to get more control over the world _________________

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Price of Oil

question

A position where the market price has no tendency to change, assuming ceteris paribus as D=S, *supply & demand intersect.*

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Market Equillibrium

question

How much of a good or service a producer is willing and able to produce at different prices.

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Supply

question

*Quantity of a good or service that consumers are willing and able to buy.*

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Quantity Demanded

question

A function that shows the quantity demanded at different prices.

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Demand Curve

question

The price that works when supply=demand

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Market Equillibrium

question

consumers buy more of a good when its price decreases and less when its price increases

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Law of Demand

question

the consumer's gain from exchange, or the difference between the maximum price a consumer is willing to pay for a certain quantity and the market price

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Consumer Surplus

question

an amount measured by the **area beneath the demand curve and above the price up to the quantity traded**

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Total Consumer Surplus

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Consumers ability to substitute other products for the focal brand and increase price elasticity of demand for the focal brand

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Substitution Effect

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Indicates that a lower price increases the purchasing power of a buyer's money income, *, If item is cheap, people will feel rich and buy more*

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Income Effect

question

Income, Population, Price of substitutes, Price of complements, Expectations, Tastes

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Important Demand Shifters

question

two goods for which a INCREASE in the price of one leads to a DECREASE in demand for the other. DEMAND SHIFTER

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Substitute

question

two goods for which a decrease in the price of one leads to an increase in the demand for the other, e.g. hamburgers and hamburger buns. DEMAND SHIFTER

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Complements

question

(n) money that is earned from work, investments, business, etc. DEMAND SHIFTER

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Income

question

More people, more demand. That's simple enough. Things get more interesting when some subpopulations increase more than others. DEMAND SHIFTER

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Population

question

In other words, the ____________ of a reduction in the future oil supply increased the demand for oil today. DEMAND SHIFTER

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Expectations

question

In the 1990s, doctors warned that too much fat could lead to heart attacks and demand for beef decreased. DEMAND SHIFTER

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Tastes

question

the assumption that all else remains the same

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Ceteris Parabus

question

a function that shows the quantity supplied at different prices

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Supply Curve

question

the quantity that sellers are willing and able to sell at a particular price

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Quantity Supplied

question

As the price increases producers produce more

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Law of Supply

question

the producer's gain from exchange, or the difference between the market price and the minimum price at which a producer would be willing to sell a particular quantity

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Producer Surplus

question

an amount measured by the area above the supply curve and below the price up to the quantity traded

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Total Producer Surplus

question

Technological innovations and changes in the price of inputs, Taxes and subsidies, Expectations ,Entry or exit of producers, Changes in opportunity costs

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Important Supply Shifters

question

A reduction in input prices also reduces costs and thus has a similar effect. A fall in the wages of oil rig workers, for example, will reduce the cost of producing oil, shifting the supply curve down and to the right as in the left panel of Figure 3.11. Alternatively, an increase in the wages of oil rig workers will increase the cost of producing oil, shifting the supply curve up and to the left as in the right panel of Figure 3.11. SUPPLY SHIFTER

answer

Technological Innovations and Changes in the Price of Inputs

question

a tax on output is the same as an increase in costs. If the government taxes oil producers $10 per barrel, this is exactly the same to producers as an increase in their costs of production of $10 per barrel. SUPPLY SHIFTER

answer

Taxes and Subsidies

question

When the United States signed the North American Free Trade Agreement (NAFTA), reducing barriers to trade among the United States, Mexico, and Canada, Canadian producers of lumber entered the U.S. market and increased the supply of lumber. We can most easily think about this as a shift to the right of the supply curve. SUPPLY SHIFTER

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Entry or Exit of Producers

question

Now suppose that a farmer is currently growing soybeans but that he could also use his land to grow wheat. If the price of wheat increases, then the farmer's opportunity cost of growing soybeans increases and the farmer will want to shift land from soybean production into the more profitable alternative of wheat production. As land is taken out of soybean production, the supply curve for soybeans shifts up and to the left. SUPPLY SHIFTER

answer

Changes in Opportunity Costs

question

The attempt to profit from future price changes

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Speculation

question

a good for which demand increases when income increases

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Normal Good

question

a good for which demand decrerase when income decreases

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Inferior Good

question

taxes on goods; ex: fuel, liquor, cigarette. CREATES DEADWEIGHT LOSS BY REDUCING GAINS FROM TRADE

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Commodity Taxes

question

Taxes on specific goods/services. Ex: Social Security, cigarettes, payroll, etc.

answer

Excise Taxes

question

**The party that actually bears the economic burden of the tax.** CHANGING THE STATUTORY BURDEN OF AN EXCISE TAX DOES NOT ALTER OR CHANGE THE ECONOMIC BURDEN OF THE TAX

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Economic Incidence of the Tax

question

**The party that is legally obligated to pay the tax** CHANGING THE STATUTORY BURDEN OF AN EXCISE TAX DOES NOT ALTER OR CHANGE THE ECONOMIC BURDEN OF THE TAX

answer

Statutory Incidence of the Tax

question

The manner in which the burden of a tax is shared among participants in a market. BUY BOTH CONSUMERS AND PRODUCERS ALIKE. IT'S NOT WHO SENDS THE CHECK THAT MATTERS; ITS WHO WRITES THE CHECK THAT MATTERS. **THE BEARERS OF THE TAX BURDEN DEPENDS ON THE RESPECTIVE ELASTICITIES OF SUPPLY AND DEMAND!!!!**

answer

Tax Incidence

question

A transfer of income from the market participants to members of the general public. TAX CREATES A DEADWEIGHT LOSS WHICH IS THE TRUE ECONOMIC BURDEN. THE LOST GAINS FROM TRADE FROM BOTH SIDES IS WHAT THE GOVERNMENT TAKES TO ESSENTIALLY TRANSFER YOUR INCOME.

answer

Tax Revenue

question

A measure of how consumers react to a change in price. THE AMOUNT OF TAX REVENUE DEPENDS ON THIS!! **If a small change in price is accompanied by a large change in quantity demanded, the product is said to be**

answer

Elasticity of Demand

question

A measure of the way quantity supplied reacts to a change in price * shows the responsiveness, or elasticity, of the quantity supplied of a good or service to a change in its price.*

answer

Elasticity of Supply

question

Strong loyalty to a product, resulting in consumers being less sensitive to price increases. USUALLY HAPPENS WITH GAS OR CIGARETTES SINCE THEY NEED IT. (STEEPER DOWNWARDS SLOPE)

answer

Inelasticity of Demand

question

exists when producers are unwilling or unable to increase supply, regardless of the price

answer

Inelasticity of Supply

question

Useful because it helps us to see the true benefits and costs of economic policy and thus to choose wisely.

answer

Tax Analysis

question

A government payment that supports a business or market. A REVERSE TAX- INSTEAD OF TAKING AWAY CONSUMER/PRODUCER's MONEY, THEY GIVE IT TO THEM .

answer

Subsidy

question

A subsidy to wages that increases employment. **A government financial incentive to private employers to hire more workers, as through tax deductions for new job creation, probably better than the minimum wage as it will create less unemployment.**

answer

Wage Subsidies

question

A legal maximum on the price at which a good can be sold. MAX PRICE ALLOWED BY LAW. SET BELOW EQUILLIBRIUM MARKET PRICE. RESULTS IN DEADWEIGHT LOSS, BUT NOT ALWAYS A SHORTAGE

answer

Price Ceiling

question

1. Shortages 2. Reductions in product quality 3. Wasteful lines and other search costs 4. A loss of gains from trade 5. A misallocation of resources

answer

Important Effects of Price Shortages

question

When prices are held below the market price, the quantity demanded exceeds the quantity supplied. **Notice also that the lower the controlled price is relative to the market equilibrium price, the larger the shortage.**

answer

Shortage

question

*Ordinarily, this would be an opportunity to profit by raising prices, but when prices are controlled, sellers can't raise prices without violating the law. Is there another way that sellers can increase profits? Yes. It's much easier to evade the law by cutting quality than by raising price, so when prices are held below market levels, quality declines.*

answer

Reductions in Product Quality

question

Price controls on an item (such as oil) can cause intense shortages and lines.

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Wasteful Lines and Other Search Costs

question

We can now see that in a market with a price ceiling, the sum of consumer and producer surplus is not maximized because the price control prevents mutually profitable gains from trade from being exploited

answer

A Loss of Gains from Trade

question

High-valued uses are at the top of the curve and low-valued uses at the bottom. Without market prices, however, we have no guarantee that oil will flow to its highest-valued uses. As we have just seen, in a situation with price controls, it's possible to have plenty of oil to heat swimming pools in California (hello, rubber ducky!) and not enough oil for heating cold homes in New Jersey.

answer

Misallocation of Resources

question

the total of lost consumer and producer surplus when not all mutually profitable gains from trade are exploited

answer

Deadweight loss

question

People can get more of what they want through trade than they could if they tried to be self-sufficient.

answer

Gains from Trade

question

When there is price control, the buyers with the highest valued uses cannot outbid any other buyers, so goods will flow to ANY buyer willing to pay more than the controlled price of x dollars. This is part of the reason why in the 70's californias were breezing to the gas station for beach trips and nutmeggers were struggling to find barrels of oil to heat their homes.

answer

Random Allocation

question

Definition: failure to distribute (resources or duties) fairly for a particular purpos

answer

Misallocation of resources

question

above the price line and below the equilibrium. ALWAYS CAUSES A SHORTAGE

answer

Binding Price Ceiling

question

the sum of consumer surplus and producer surplus

answer

Social Surplus

question

At ___________ social surplus is as LARGE As POSSIBLE

answer

Market Equilibrium

question

Legal restrictions on how high or low a market price may go. THE BEST CASE FOR _____ ______ IS TO DISCPLINE MONOPOLIES AS OPPOSED TO HELPING THE POORLY, BUT THIS IS RARELY WHY THEYRE PUT IN PLACE.

answer

Price Control

question

a price ceiling on rental housing. *_______ ______ reduce the price of discrimination, so remember the law of demand: When the price of discrimination falls, the quantity of discrimination demanded will increase.** ***A KIND OF PRICE CEILING THAT CAUSES SHORTAGES***

answer

Rent Control

question

prohibits landlords from raising rents.

answer

Rent Freeze

question

limits price increases without limiting prices. Prices increases, for example, might be limited to, say, 10% per year. Thus, ____ __________ can protect tenants from sharp increases in rent, while still allowing prices to rise or fall over several years in response to market forces. These ____ __________ laws usually also allow landlords to pass along cost increases so the incentive to cut back on maintenance is reduced.

answer

Rent Regulation

question

access to things or services that are hard to get and that other people want or need. Russian ELITE HAD TONS OF THIS SINCE THEY WERE THE ONES THAT CONTROLLED THE PRICES BELOW, SO THEY BIPASSED THE LONG BREAD LINES FOR THEIR OWN NEEDS.

answer

Blat

question

a minimum price allowed by law. RESULTS IN SURPLUS EXAMPLE, MINIMUM WAGE

answer

Price Floor

question

A policy promoting cutbacks in the amount of Federal regulation in specific areas of economic activity.

answer

Deregulation

question

Reduction in Product Quality WHEN THE PRICES ARE FORCED TO GO DOWN.

answer

Product Degredation

question

Some system that determines WHO GETS WHAT, HOW MUCH GETS MADE, AND WHO ENDS UP WITH IT. *QUEUES: Think Iphone lines. ***CREATES GAINS FROM TRADE***

answer

Rationing Scheme

question

N a file or line, especially of people waiting their turn (plural) LOTTERIES, POLITICAL FAVORITISM VIA BRIBES BLATS OR BIAS, BLACK MARKETS.* HAPPENED A LOT IN RUSSIA WHERE BREAD WAS CHEAP BUT EVERYONE WOULD WAIT IN LINE FOR IT AND THE SHORTAGE KEPT SOME PEOPLE LAST IN LINE FROM BUYING BREAD.

answer

Queues

question

Item or economic activity of which the tax is levied. WHAT CAN YOU TAX?

answer

Tax Base

question

The relationship between tax collected and the tax base. HOW MUCH OF THOSE THINGS DO YOU TAKE AS TAXES, HOW MUCH THEY KEEP

answer

Tax Rate

question

Total taxes paid divided by total income

answer

Average Tax Rate

question

The extra taxes paid on an additional dollar of income

answer

Marginal Tax Rate

question

Sums of money or fees that are imposed by local, state, or federal government based on the amount of money a person makes is called this.

answer

Income Taxes

question

The personal income rate that applies whenever the amount of taxes paid falls below some designated level

answer

Alternative Minimum Tax

question

taxes that are deducted from your paycheck

answer

Payroll Taxes

question

Taxes on goods and services; taxes on what people spent

answer

Consumption Taxes

question

Taxes on property, especially real estate, but also can be on boats, automobiles (often paid along with license fees), recreational vehicles, and business inventories.

answer

Property Taxes

question

You pay a different Rate for different Chunks of your income

answer

Tax Bracket

question

Act that provides the federal system of old-age, survivors, disability and insurance. TAXES ALL FOR MEDICARE AND DISABILITIES!

answer

Federal Insurance Contributions Act tax

question

an income tax with higher tax rates on people with higher incomes

answer

Progressive Tax

question

an income tax with the same tax rate on all levels of income (compare with progressive and regressive tax)

answer

Flat Tax

question

**an income tax with higher tax rates on people with lower incomes** BETTER YET A LOWER TAX RATE ON PEOPLE WITH HIGHER INCOMES BECAUSE...., A tax whereby people with lower incomes pay a higher fraction of their income than people with higher incomes. When you make more money you get less taxes. PROVIDES INCENTIVE TO MAKE MORE MONEY

answer

Regressive Tax

question

A "negative income tax" that provides income to very poor individuals in lieu of charging them federal income taxes

answer

Earned Income Tax Credit (EITC)

question

Federal legislation that replaces Aid to Families with Dependent Children and whereby government welfare assistance to poor parents is limited to five years for most families with most adult recipients required to find work within two years.

answer

Temporary Assistance for Needy Families

question

all federal debt held outside the U.S. government

answer

National Debt Held by the Public

question

the annual difference between federal spending and revenues

answer

Deficit

question

Factors that affect affect the amount of a Social Security recipient's benefits

answer

marriage, age of retirement, amount of years worked

question

A federal program of health insurance for persons 65 years of age and older. RUN MAINLY BY FEDERAL GOVERNMENT

answer

Medicare

question

A health care payment program sponsored by federal & state governments. BUT RUN MAINLY BY STATE GOVERNMENTS. FOR DISABLED AND POOR

answer

Medicaid

question

Advises Congress on the probable consequences of its decisions, forecasts revenues, and is a counterweight to the president's Office of Management and Budget.

answer

Congressional Budget Office

question

The sum total of the value of all the goods and services produced in a nation

answer

Gross Domestic Product

question

THE STUDY OF CHOICE AND UNINTENDED CONSEQUENCES

answer

Economics

question

taxes on goods; ex: fuel, liquor, cigarette. CREATES DEADWEIGHT LOSS BY REDUCING GAINS FROM TRADE

answer

Commodity Taxes

question

Taxes on specific goods/services. Ex: Social Security, cigarettes, payroll, etc.

answer

Excise Taxes

question

**The party that actually bears the economic burden of the tax.** CHANGING THE STATUTORY BURDEN OF AN EXCISE TAX DOES NOT ALTER OR CHANGE THE ECONOMIC BURDEN OF THE TAX

answer

Economic Incidence of the Tax

question

**The party that is legally obligated to pay the tax** CHANGING THE STATUTORY BURDEN OF AN EXCISE TAX DOES NOT ALTER OR CHANGE THE ECONOMIC BURDEN OF THE TAX

answer

Statutory Incidence of the Tax

question

The manner in which the burden of a tax is shared among participants in a market. BUY BOTH CONSUMERS AND PRODUCERS ALIKE. IT'S NOT WHO SENDS THE CHECK THAT MATTERS; ITS WHO WRITES THE CHECK THAT MATTERS. **THE BEARERS OF THE TAX BURDEN DEPENDS ON THE RESPECTIVE ELASTICITIES OF SUPPLY AND DEMAND!!!!**

answer

Tax Incidence

question

A transfer of income from the market participants to members of the general public. TAX CREATES A DEADWEIGHT LOSS WHICH IS THE TRUE ECONOMIC BURDEN. THE LOST GAINS FROM TRADE FROM BOTH SIDES IS WHAT THE GOVERNMENT TAKES TO ESSENTIALLY TRANSFER YOUR INCOME.

answer

Tax Revenue

question

A measure of how consumers react to a change in price. THE AMOUNT OF TAX REVENUE DEPENDS ON THIS!! **If a small change in price is accompanied by a large change in quantity demanded, the product is said to be**

answer

Elasticity of Demand

question

A measure of the way quantity supplied reacts to a change in price * shows the responsiveness, or elasticity, of the quantity supplied of a good or service to a change in its price.*

answer

Elasticity of Supply

question

Strong loyalty to a product, resulting in consumers being less sensitive to price increases. USUALLY HAPPENS WITH GAS OR CIGARETTES SINCE THEY NEED IT. (STEEPER DOWNWARDS SLOPE)

answer

Inelasticity of Demand

question

exists when producers are unwilling or unable to increase supply, regardless of the price

answer

Inelasticity of Supply

question

Useful because it helps us to see the true benefits and costs of economic policy and thus to choose wisely.

answer

Tax Analysis

question

A government payment that supports a business or market. A REVERSE TAX- INSTEAD OF TAKING AWAY CONSUMER/PRODUCER's MONEY, THEY GIVE IT TO THEM .

answer

Subsidy

question

A subsidy to wages that increases employment. **A government financial incentive to private employers to hire more workers, as through tax deductions for new job creation, probably better than the minimum wage as it will create less unemployment.**

answer

Wage Subsidies

question

Item or economic activity of which the tax is levied. WHAT CAN YOU TAX?

answer

Tax Base

question

The relationship between tax collected and the tax base. HOW MUCH OF THOSE THINGS DO YOU TAKE AS TAXES, HOW MUCH THEY KEEP

answer

Tax Rate

question

Total taxes paid divided by total income

answer

Average Tax Rate

question

The extra taxes paid on an additional dollar of income

answer

Marginal Tax Rate

question

Sums of money or fees that are imposed by local, state, or federal government based on the amount of money a person makes is called this.

answer

Income Taxes

question

The personal income rate that applies whenever the amount of taxes paid falls below some designated level. **an income tax imposed by the United States federal government on individuals, corporations, estates, and trusts. AMT is imposed at a nearly flat rate on an adjusted amount of taxable income above a certain threshold (also known as exemption).** MADE TO MAKE THE RICH PAY TAXES TOO!

answer

Alternative Minimum Tax

question

taxes that are deducted from your paycheck

answer

Payroll Taxes

question

Taxes on goods and services; taxes on what people spent

answer

Consumption Taxes

question

Taxes on property, especially real estate, but also can be on boats, automobiles (often paid along with license fees), recreational vehicles, and business inventories.

answer

Property Taxes

question

You pay a different Rate for different Chunks of your income

answer

Tax Bracket

question

Act that provides the federal system of old-age, survivors, disability and insurance. TAXES ALL FOR MEDICARE AND DISABILITIES!

answer

Federal Insurance Contributions Act tax

question

an income tax with higher tax rates on people with higher incomes

answer

Progressive Tax

question

an income tax with the same tax rate on all levels of income (compare with progressive and regressive tax)

answer

Flat Tax

question

**an income tax with higher tax rates on people with lower incomes**, A tax whereby people with lower incomes pay a higher fraction of their income than people with higher incomes. When you make more money you get less taxes. PROVIDES INCENTIVE TO MAKE MORE MONEY

answer

Regressive Tax

question

A "negative income tax" that provides income to very poor individuals in lieu of charging them federal income taxes

answer

Earned Income Tax Credit (EITC)

question

Federal legislation that replaces Aid to Families with Dependent Children and whereby government welfare assistance to poor parents is limited to five years for most families with most adult recipients required to find work within two years.

answer

Temporary Assistance for Needy Families

question

all federal debt held outside the U.S. government

answer

National Debt Held by the Public

question

the annual difference between federal spending and revenues

answer

Deficit

question

Factors that affect affect the amount of a Social Security recipient's benefits

answer

marriage, age of retirement, amount of years worked

question

A federal program of health insurance for persons 65 years of age and older. RUN MAINLY BY FEDERAL GOVERNMENT

answer

Medicare

question

A health care payment program sponsored by federal & state governments. BUT RUN MAINLY BY STATE GOVERNMENTS. FOR DISABLED AND POOR

answer

Medicaid

question

Advises Congress on the probable consequences of its decisions, forecasts revenues, and is a counterweight to the president's Office of Management and Budget.

answer

Congressional Budget Office

question

The sum total of the value of all the goods and services produced in a nation

answer

Gross Domestic Product

question

An Active Process of competitive striving. NOT A ZERO SUM GAME. *MAKES THE PIE BIGGER*

answer

Competition

question

A firm with market power. ONE SOLE SELLER. *FACES DOWNWARD SLOPING CURVES* PRICE= INTERSECTION PT of MC and MR up to DEMAND CURVE

answer

Monopoly

question

*a market structure characterized by (1) a single seller*, (2) the sale of a product that has no close substitutes, and (3) extremely high barriers to entry.

answer

Monopolistic Market

question

(economics) a market in which control over the supply of a commodity is in the hands of a small number of producers and each one can influence prices and affect competitors. *WHEN THERE ARE A HANDFUL OF SELLERS*

answer

Oligopoly

question

characterized by 1) *few sellers*, 2) production and sale of either identical or slightly differentiated products, and 3) significant barriers to entry

answer

Oligopolistic Market

question

the ability of a company to change prices and output like a monopolist. THE POWER TO RAISE PRICE ABOVE MARGINAL COST WITHOUT FEAR THAT OTHER FIRMS WILL ENTER THE MARKET. ***Change in total revenue/change in Quantity***

answer

Market Power

question

The change in total revenue from selling an additional unit

answer

Marginal Revenue

question

the change in total cost from producing an additional unit Setting a price helps firms cover ________ ____.

answer

Marginal Cost

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**A market with so many buyers and sellers** that *no single buyer or seller can affect the market price*

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Perfectly Competitive Market

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A positioning strategy that some firms use to distinguish their products from those of competitors

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Product Differentiation

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Originator of the concept of creative destruction

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Joseph Schumpeter

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The hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies. *CHURNS CHANGES IN PRODUCTS AND FIRMS ACROSS ALL COUNTRIES*

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Creative Destruction

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enjoy what you have and don't worry about what you don't have, since you can't take things with you when you die

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"You can't take it with you" Effect

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by Louis Brandeis, wrote insurance companies controlled people through their own money

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"Other people's money" Effect

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the advantages of large-scale production that reduce average cost as quantity increases

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Economies of Scale

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factors that increase the cost to new firms of entering an industry

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Barriers to Entry

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Potential gov solution to monopoly corruptness. **THINK, "Is there a way to eliminate the deadweight loss without reducing the incentives to innovate?"**

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Patent Buyout

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A market structure in which a large number of firms all produce the same product. DEMAND CURVE IS HORIZONTAL=PERFECTLY ELASTIC

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Perfect Competition

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An amount added to the cost of the product to create a price at which the channel member will sell the product. *PRICE-MARGINAL COST*

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markup

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NO DEADWEIGHT LOSS

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Optimal quantity

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The practice of taking advantage of price differences for the same good in different markets by buying low in one market and selling high in another market. **makes it difficult for a firm to set different prices in different markets, thereby reducing the profit from price discrimination.**

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Arbitrage

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Division of customers into groups based on how much they will pay for a good

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Price Discrimination

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Sends income from relatively healthy people to relatively poorer people

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Progressive Transfers

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Sends income from relatively poor people to relatively richer ones

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Regressive Transfers

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Doesn't affect distribution of income AT ALL.

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Neutral Transfers

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The reduction of incentive to innovate/reduce costs

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X-Inefficiency

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The monopoly producer surplus that may be wasted by trying to take the monopoly

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Rent-Seeking Behavior

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A market that runs most efficiently when one large firm supplies all of the output. *WHEN FIXED COSTS ARE HIGH, THE FIRM'S AVERAGE COST CURVE IS FALLING, SINCE IT INCREASES OUTPUT IT IS AVERAGING THOSE FIXED COSTS OVER MORE UNITS.

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Natural Monopoly

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Economies of scale. WHEN THE FALLING PORTION OF THE AVERAGE COST CURVE INTERACTS THE DEMAND CURVE.

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Cost Advantage

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Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit. **the situation that exists when each customer is charged his or her maximum willingness to pay**

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Perfect Price Discrimination

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Price discrimination in which at least some buyers are charged less than their reservation prices.

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Imperfect Price Discrimination

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a form of price discrimination in which one good, called the base good, is tied to a second good called the variable good. *PRICING INK HIGH AND PRINTERS LOW TO DETERMINE WILLINGNESS TO PAY*

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Tying

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the requirement that products be bought together in a bundle or package

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Bundling

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Costs that change as output changes

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Variable costs

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Costs that do not vary with the quantity of output produced (Price discrimination can increase the size of the market, which allows firms to cover )

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Fixed costs

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Total Costs divided by quantity. ATC = TC/Q *easy to cover by charging a profit-maximizing price.*

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average costs

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A positive or negative environmental stimulus that motivates behavior.

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Incentive

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**external costs or external benefits; costs or benefits that fall on bystanders** When an ________ exists, the decision maker does not bear all the costs or reap all the gains from his or her action. THE UNCOMPENSATED EFFECT OF ONE PERSON'S ACTIONS ON THE WELL BEING OF A BYSTANDER. (Somebody outside of contracting)

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Externality

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When THE EFFECT ON THE BYSTANDER IS BENEFICIAL. If I plant a beautiful garden, all my neighbors benefit from it in that they get to look at it, BUT THEY DON'T have to compensate me for my efforts.

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Positive Externality

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WHEN THE EFFECT ON THE BYSTANDER IS ADVERSE. If the price system does not take into account that the smoke stack pollutes the valuable clean air I need/use for my hotdog business on MY PROPERTY

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Negative Externality

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**Creates inefficiencies because they are OUTSIDE the price system.** Ex: Pollution. *ME DUMPING POLLUTION INTO CLEAN AIR W/O PAYING, I AFFECT SOMEBODY ELSE NOT TAKEN INTO ACCOUNT BY THE PRICE SYSTEM. IF THE SMOKE STACK IS NEXT TO THE HOTDOG VENDOR, IT DRIVES AWAY BUSINESS.

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Technological Externality

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**Does not create inefficiencies because they are TRANSMITTED BY the price system** Ex: Fair Business competition. IF THE HOTDOG STAND NEXT TO ME DRIVES AWAY CUSTOMERS BECAUSE MY HOTDOGS SUCK, THEN IT IS **NOT** A TECHNOLOGICAL EXTERNALITY,

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Pecuniary Externality

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an external benefit that results when knowledge spreads among individuals and firms

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Technology Spillover

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altering incentives so that people take account of the external effects of their actions, that by consequence SHIFT THE SUPPLY CURVE WHERE IT IS AT THE TRUE EQUILIBRIUM THAT ACCOUNTS FOR THE TRUE PRICE OF THE GOOD.

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Internalizing the Externality

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Changing structure of property rights so that participants take into account all effects of their behavior. FIX STRUCTURES OF PROPERTY RIGHTS OR CREATE NEW PROPERTY RIGHTS THRU INCENTIVES. This shifts the supply curve to the true equillibrium

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Institutional (Coasean) Approach

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If transaction costs are low, private bargaining will result in an efficient solution to the problem of externalities

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Coase Theorem

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The costs associated with the time and effort needed to search out, negotiate, and consummate an exchange. THE COSTS THAT PARTIES INCUR IN THE PROCESS OF AGREEING TO AND FOLLOWING THROUGH ON A BARGAIN

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Transaction Cost

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OBTAINING A PRE-SPECIFIED, TRADABLE RIGHT TO BE USED. Ex. Golden Tickets to pollute increase the incentive for the need not to have to pay to pollute.

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Cap and Trade System

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****A created system of property rights****. EXCLUDES OTHERS FROM THE TECHNOLOGY YOU SO LABORIOUSLY CREATED. **WITHOUT THE PROTECTION OF INNOVATION, OTHERS CAN COME AND COPY YOUR DISCOVERY FOR A CANCER CURING PARTICLE.** IF NOT the incentive to innovate reduces

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Patent System

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Using taxes or subsidies to equate private cost and social cost, which ALSO SHIFTS THE SUPPLY CURVE TO THE TRUE EQUILIBRIUM

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Fiscal (Pigovian) Approach

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***USING THE LAW TO FORBID OR REGULATE CERTAIN BEHAVIORS***. EX: Prohibition. REDUCES THE INCENTIVE TO INNOVATE BECAUSE RESOURCES CANNOT FLOW FROM LESS-VALUED TO HIGH-VALUED USES, USEFUL LOCAL KNOWLEDGE OF PEOPLE IN THE INDUSTRY CANNOT BE LEVERAGED. INCENTIVES FOR INNOVATIVE SOLUTIONS TO THE EXTERNALITY PROBLEM ARE LACKED.

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Command and Control Regulation

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the price and quantity that maximizes social surplus

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Efficient Equillibrium

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A tax on a good with external costs

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Pigouvean Tax

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A subsidy on a good with external benefits

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Pigouvean Subsidy

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the ability to prevent buyers from enjoying the benefits of consuming a good or service without paying for it. IT'S CHEAP TO STOP SOMEBODY FROM CONSUMING THE GOOD. IF YOU DON'T PAY FOR THE ICE CREAM, I WON'T SELL YOU ONE.

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Excludability

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The property of a good whereby one person's use diminishes other people's use. IF ONE CONSUMES A GOOD, ANOTHER PERSON CANNOT ALSO CONSUME IT. IF I EAT AN ICECREAM, YOU CAN'T EAT IT. YOU CAN BUY ANOTHER ICE CREAM BUT YOU CAN'T EAT MINE.

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Rivalry in Consumption

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*Goods that are Excludable and rivalrous in consumption.* (Ex: Ice cream cones)

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Private Goods

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Goods that are neither excludable nor rival in consumption

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Public Goods

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Goods that are Not excludable but rivalrous in consumption. Ex; fish in the ocean. If I catch a fish you can't catch it. But it's too hard to exclude others from fishing in that same place.

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Common Resource

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Goods that are excludable but not rivalrous. Ex. Cable TV: If I watch FIFA on Charter you can do the same... unless you fail to pay for your cable service. MAKES NO SENSE TO HAVE SO MANY CABLE LINES FOR THE SAME SERVICE. **AS THE EASE TO MONITOR DECREASES THE INCENTIVE TO _____ ______ INCREASES**

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Quasi-Public Goods (Nonrival Public Good)

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A person who receives the benefit of a good but avoids paying for it. I won't pay for the music that I pirate but while everyone else does I still enjoy the same benefits

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Free Rider

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A theory that when a common renewable resource is shared, people tend to exploit the resource since they feel that if they do not use it, someone else will. SOLUTION: Find an institutional technology of exclusion. EX: When lumber companies don't own the forest, they clearcut. When lumber companies own the land, they cut down and replant.

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Tragedy of the Commons

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someone who must pay a share of the costs of a public good but who does not enjoy the benefits

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Forced Rider

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Efficient quota system entitles the holder to catch a certain share of the cap, the cap is equal to the efficient catch, and the quotas are freely tradable.

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Individual Transferable Quotas

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the desire to have goods and services sooner rather than later (all else being equal)

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Time Preference

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The study of how people make decisions about the allocation of resources over time and the handling of risk

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Finance

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The interest rate on the loans that the Fed makes to banks

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Discount Rate

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Percentage of amount borrowed to be added to the amount loaned and paid back

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Interest Rate

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By borrowing, saving, and dissaving at different times in life, workers can smooth their consumption path, improving their overall satisfaction.

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Lifecycle Theory

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70/ annual rate of inflation = years it takes for inflation to double. IF r IS THE RATE OF GROWTH OF A VARIABLE, THEN THE AMOUNT OF TIME IT TAKES FOR THAT VARIABLE TO DOUBLE IS ABOUT 70/r

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The Rule of 70

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Degree of uncertainty of return on an asset; in business, the likelihood of loss or reduced profit.

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Risk

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When there is more money at stake, the risk averter's satisfaction diminishes; he or she prefers a more certain outcome and demands a premium to accept projects of high risk. IF I HAVE TO PAY YOU TO ACCEPT THE LOTTERY, THEN YOU ARE...

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Risk Averse

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Refers to a buyer who does not care about variation in possible payoffs. A risk-neutral buyer will invest in any investment with a positive expected return, regardless of how risky it is. IF YOU ACCEPT THE LOTTERY FOR FREE, THEN YOU ARE....

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Risk Neutral

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a person who is willing to make a fair bet; increasing MU of wealth. IF YOU ARE WILLING TO PAY FOR THE LOTTERY, THEN YOU ARE...

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Risk Preferring

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A contract under which, for consideration, the insurer, or the insurance company, agrees to compensate you for a specific loss.

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Insurance

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the market where suppliers of loanable funds (savers) trade with demanders of loanable funds (borrowers), thereby determining the equilibrium interest rate

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The Market of Loanable Funds

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something of value, LIKE A HOUSE, that by agreement becomes the property of the lender if the borrower defaults

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Collateral

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the decrease in private consumption and investment that occurs when government borrows more; also, the decrease in private spending that occurs when government increases spending

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Crowded Out

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the practice of taking advantage of price differences for the same good in different markets by buying low in one market and selling high in another market. BUY LOW, SELL HIGH

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Arbitrage

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the first instance of a corporation selling stock to the public in order to raise capital

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Initial Public Offering

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restricts the amount of interest that can be charged for credit. LIKE A CEILING BUT FOR AMOUNT OF INTEREST CHARGABLE ON CREDIT

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Usury Laws

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the value of the asset minus the debt, E = V − D

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Owner's Equity

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the ratio of debt to equity, D/E

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Leverage Ratio

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a bank whose liabilities are greater in value than its assets

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Insolvent

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non commercial banking companies such as investment banks, money market mutual funds, and hedge funds that offer different services such as advice to firms issuuing stocks/bonds or raising money for wealthy investors

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Shadow Banking System

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The institutions through which savers can DIRECTLY provide funds to borrowers. EX. STOCK MARKETS

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Financial Markets

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Financial Institutions through which savers can INDIRECTLY provide funds to borrowers. EX. BANKS, MUTAL FUNDS

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Financial Intermediates

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A certificate of indebtedness that specifies obligation of the borrower to the holder of the bond. A NICE PAPER IOU

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Bond

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The length of time until the bond matures

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Bond Term

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The probability that the borrower will fail to pay back some of the interest or principal.

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Bond Credit Risk

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The way in which the tax laws treat the interest on the bond. (MUNICIPAL BONDS=TAX EXEMPT)

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Tax Treatment

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documents that represent debt and equity

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Financial Instrument

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A certificate THAT REPRESENTS OWNERSHIP in a corporation. REPRESENTS A CLAIM TO PARTIAL OWNERSHIP OF A CORPORATION- a residual CLAIM TO THE CORPORATION's PROFIT. (If there are 100 shares of microsoft and I buy 3 shares, then I own 3 percent of microsoft

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Stock

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The sale of stock to raise money. HIGH RISK, HIGHER POTENTIAL RETURNS ON STOCK. RISKIER THAN BONDS

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Equity Financing

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Difference between when you bought low and sold high (stocks) or vice versa (riskier IOU, you may or may not get it back)

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Capital Gains

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A group of investments held in common by many individual investors. ALLOWS PEOPLE WITH SMALL AMOUNTS OF MONEY TO EQUALLY DIVERSIFY

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Mutual Funds

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Risk that cannot be reduced by diversification; risk that is unique to individual securities., represents the possibility that a company will make poor decisions that negatively impact value of stock; able to be diversified out

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Non-Systemic Risk

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An investment strategy involving ongoing buying and selling actions by the investor

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Active Investing

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An investment strategy involving limited ongoing buying and selling actions

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Passive Investing

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the claim that the prices of traded assets reflect all publicly available

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Efficient Markets Hypothesis

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the practice of buying stocks and then holding them for the long run, regardless of what prices do in the short run

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Buy and Hold

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A model of politics that views governments and public services in market terms; governments are seen as producers of public services and citizens are seen as consumers.

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Public Choice Model

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a model that predicts candidates will choose a position in the middle of the distribution. **, people choose person closest to their views (middle proves decisive)**

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Median Voter Model

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**Because it is highly unlikely that an individual vote will decide the outcome of an election, a rational individual has little or no incentive to search for and acquire the information needed to cast an informed vote.**

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Rational Ignorance

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a situation in which consumers pay one price (or tariff) for the right to buy as much of a related good as they want at a second price. *EX. "membership discount retailers" such as shopping clubs that charge an annual fee for admission to the point of sale and also charge for your purchases amusement parks where there are admission fees and also per-ride fees*

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Two-Part Tariff

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consumers of health care do not pay a price that reflects the full cost of providing the service., In the United States, the health-care system in place is one in which most individuals do not pay directly for the delivery of care. What is the proper term for this?

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Third-Party Payer System

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A mathematical theorem that holds that no system of voting can be devised that will consistently represent the underlying preferences of votes.

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Arrow Impossibility Theorem

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A payroll deduction collected by employers by law and sent to the federal government to support governmental programs.

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Federal Income Tax

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A program that manages a limited resource like hotel rooms or airline seats, to maximize revenue, A process that adjusts prices as demand for a service occurs (or does not occur)

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Yield Management

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A situation where voting patterns will not consistently reflect citizens' preferences because of multiple issues on which people vote

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Voting Paradox

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a tax levied as a fixed amount per unit of the commodity purchased

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Unit Tax

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the laws of state or local governments that require that a worker satisfy certain specified requirements and obtain a license from a licensing board before engaging in a particular occupation.

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Occupational Licensing

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A situation in which all of the potential gains from trade have been realized. An action is efficient only if it creates more benefit than cost. With well-defined property rights and competition, market equilibrium is efficient.

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Economic Efficiency

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when a firm produces a quantity such that at that quantity marginal revenue (MR) is equal to marginal cost (MC).

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Profit Maximizing Quantity

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The practice of ending prices in numbers below even dollars and cents in order to create a perception of greater value.

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Odd Pricing

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costs of production that affect people who have no control over how much of a good is produced

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Spillover Cost

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A quasi-governmental organization formed to regulate the money supply and help keep the economy stable

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Federal Reserve System

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An economic system in which goods or services are traded without the exchange of money. *ILL GIVE YOU 3 CHEESEBURGERS FOR 2 COWS*. IN EFFECTIVE WAY TO DETERMINE VALUE

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Barter System

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An intermediate commodity that facilitates trade

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Money

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An item that buyers give to sellers when they want to purchase goods and services. *I WANT A CHEESEBURGER, BUT I ONLY HAVE COWS. I CAN TRADE A COW FOR SOME CHAINMAIL AND SWAP THE CHAINMAIL FOR THE BURGER!*

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Medium of Exchange

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A means for comparing the values of goods and services. (MONEY). STORE THE VALUE OF THE COW DURING THE SUMMER IN GOLD COINS, WHICH RETAINS VALUE DURING WINTER, AND BUY SOMETHING NICE IN THE SPRING!

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Unit of Account

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A good used as money that also has value independent of its use as money. IE. GOLD COINS CAN BE TURNED INTO BEAUTIFUL JEWELRY

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Commodity Money

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Money that has value because the government has ordered that it is an acceptable means to pay debts. NO ALTERNATIVE USE OR VALUE AS A COMMODITY

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Fiat Money

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Coins and paper bills used as money

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Currency

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balances in bank accounts that depositors can access on demand by writing a check

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Demand Deposits

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Appointed by the President, confirmed by the Senate - their duty is to operate America's banking system.

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Board of Governors

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Comparing the European and the US central bank systems, the National Central Banks that make up part of the European System of Central Banks resembles:

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The Regional Federal Reserve Banks

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Who decides wether the money supply increases or decreases? CONDUCTS MONETARY OPERATIONS/SYSTEM

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The Federal Open Market Committee

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selected by the president form among the Board for a 4 year term. HAS THE GREATEST INFLUENCE IN THE MONETARY FEDERAL RESERVE SYSTEM (Ben Beranke)

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Chairman of the Board of Directors

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Refers to the quantity of money available in the economy

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Money Supply

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The setting of the money supply by policymakers in the central bank. (HOW DOES IT SET UP THE MONEY SUPPLY?)

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Monetary policy

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the purchase and sale of U.S. government bonds by the Fed to ALTER THE SUPPLY OF MONEY. *TO INCREASE the money supply, New York Feds buy government bonds (lend money to) the public. MAKES MONEY OUT OF THIN AIR* **TO DECREASE THE MONEY SUPPLY: New York Feds buy government bonds (borrow money from) the Public, and basically TEAR IT UP**

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Open-Market Operations

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A percentage of commercial banks' checking and savings accounts that must be physically kept in the bank. THE MARKET TYPICALLY INFLUENCES THIS THOUGH

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Reserve Requirement

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Percentage of amount borrowed to be added to the amount loaned and paid back

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Interest Rate

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the benchmark interest rate that banks use as a reference point for a wide range of loans to businesses and individuals. INTEREST RATE CHARGED BY BANKS TO THEIR MOST CREDITWORTHY CUSTOMERS (LOWER BECAUSE THEY ARE MOST LIKELY TO PAY IT BACK)

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Prime Interest Rate

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The interest rate at which banks make overnight loans to one another. AT THE END OF THE DAY, IF YOU GENERATE $$, YOU DON'T WANT THIS IN A SAFE GATHERING DUST. YOU WANT IT IN A BANK GATHERING INTEREST TO GENERATE MORE MONEY

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Federal Funds Rate

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Rate the Fed charges for loans to commercial banks. TYPICALLY for members of the federal reserve, THE INTEREST RATE THAT IS AN ELIGIBLE DEPOSITORY INSTUTION IS CHARGED TO BORROW SHORT-TERM FUNDS DIRECTLY FROM A FEDERAL RESERVE BANK.

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Discount Rate

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The sum of currency in circulation plus bank reserves (vault cash and reserves with the Fed). It reflects the stock of U.S. securities held by the Fed.

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Monetary Base

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Resources such as cash that are easily converted into other assets or used to pay for goods, services, or liabilities.

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Liquid Asset

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The Part of the Monetary supply that consists of Demand Deposits, Traveler's Checks, Other Checkable Deposits, and CURRENCY

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M1

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EVERYTHING IN M1 PLUS SAVINGS DEPOSITS, SMALL TIME DEPOSITS, MONEY MARKET MUTUAL FUNDS, AND A FEW MINOR CATEGORIES

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M2

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The fraction of deposits that banks hold as reserves

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Reserve ratio

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The amount of goods and services in the economy that will be purchased at all possible price levels

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Aggregate Demand

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the lending of reserves by the federal reserve to commercial banks

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Discount Window Lending

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Risk associated with many or all assets that may not be reduced through diversification, unlike idiosyncratic risk... *the risk that the failure of one financial institution can bring down other institutions.*

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Systemic Risk

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deposits that earn interest but have no specific maturity date

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Savings Deposits

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any deposit in a commercial bank or thrift institution against which a check may be written.

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Checkable Deposits

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A banking system that keeps only a fraction of funds on hand and lends out the remainder

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Fractional Reserve Banking

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the amount the money supply expands with each dollar increase in reserves; MM = 1/RR where RR is the reserve ratio

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Money Multiplier

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occurs when banks become insolvent

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solvency crisis

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when the Fed sells longer-term gov't bonds to other securities

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Quantitative Tightening

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Attempt to buy bonds and get the money out of the financial sector of the economy. Done when the economy is weak.

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Quantitative Easing

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*an increase in the general or average level of prices* Inflation does more than transfer wealth to the government—it also redistributes wealth among the public, especially between lenders and borrowers. Inflation is perfect for those who hide their transactions under the bed because it catches them too.

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Inflation

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the percentage change in the average level of prices (as measured by a price index) over a period of time

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Inflation Rate

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OPPOSITE OF ________- A DECREASE in the general or average level of prices

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Deflation

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DIFFERENT FROM __________- The RATE of increase in the economy's overall price level is DECREASING

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Disinflation

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A measure of the Overall Cost of the goods and services bought by the typical consumer. 1.Fix The basket (determine which goods are most important to consumer). 2. Find the Prices of each of the goods. 3. Compute the basket's total cost 4. Choose a base year and compute the index. 5. COMPUTE INFLATE RATE **THE PRICE OF THE GOODS IN THE BASKET CHANGE ALL THE TIME!!!**

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Consumer Price Index (CPI)

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the inability of the CPI to account for consumers' substitution toward relatively cheaper goods and services. *CONSUMERS SUBSTITUTE TOWARDS GOODS THAT HAVE BECOME RELATIVELY LESS EXPENSIVE*

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Substitution Bias

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When a new good is introduced, consumers have more variety from which to choose, and this in turn reduces the cost of maintaining the same level of economic well-being

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Introduction of new goods

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If the quality of a good deteriorates from one year to the next while its price stays the same, the value of a dollar falls.

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Unmeasured Quality Changes

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The government organization responsible for regularly gathering data about the economic status of the population. SURVEY's PEOPLE ON HOW THEY SPEND THEIR INCOME AND DETERMINES THE PRICE OF THE BASKET

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Bureau of Labor Statistics

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100 X (nominal GDP/real GDP) The ratio of nominal to real GDP multiplied by 100 (discussed in Chapter 24). The GDP deflator covers all final goods.

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GDP Deflator

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prices of wholesale commodities weighted by net sales of each commodity

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Producer Price Index (PPI)

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a price that has been corrected for inflation; used to compare the prices of goods over time

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Real Price

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A very rapid rise in the price level; an extremely high rate of inflation. EXTREMELY HIGH INFLATION!!!!

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Hyperinflation

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How much something is compared to something else

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Relative Price

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When Consumers switch away from convenience stores to lower-price outlets and it is not accounted for in the price of living

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Outlet Substitution Bias

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a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate. *sets out the general relationship between inflation, money, real output, and prices; second, it presents the critical role of the money supply in regulating the level of prices.* BOYLES LAW FOR ECONOMISTS Mv=PY where M is the money you are paid, v is the number of times in a year that you spend M (we call v the "velocity of money," hence the v), P is prices, and Y is a measure of the real goods and services that you buy

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quantity theory of money

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the average number of times a dollar is spent on final goods and services in a year`

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Velocity of Money

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describes the relationship between inflation and both real and nominal interest rates. states that the real interest rate equals the nominal interest rate minus the expected inflation rate.

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The Fisher Effect

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It is the rate of interest before adjustment for inflation. The real interest rate is the nominal rate of interest minus inflation. In the case of a loan, it is this real interest that the lender receives as income. If the lender is receiving 8 percent from a loan and inflation is 8 percent, then the real rate of interest is zero because nominal interest and inflation are equal. A lender would have no net benefit from such a loan because inflation fully diminishes the value of the loan's profit. *THE INTEREST RATE THAT IS USUALLY REPORTED AND NOT CORRECTED FOR INFLATION* **THE INTEREST RATE THE BANK PAYS!**

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Nominal Interest Rate of Return

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The interest rate that is CORRECT FOR INFLATION **=Nominal Interest Rate - Inflation Rate**

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Real Interest Rate of Return

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the resources wasted when inflation encourages people to reduce their money holdings. *SINCE MY DOLLAR IS LESS VALUABLE, I NEED TO GO TO THE ATM MORE OFTEN*

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Shoeleather Costs

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The costs to firms of changing prices. IT COSTS MONEY TO KEEP REPRINTING A LOVELY MENU AT THE FANCY RESTAURANT, ESPECIALLY WHEN TRYING TO KEEP UP WITH CHANGES

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Menu Costs

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some prices increase faster than other prices. EXCHANGE RATE BETWEEN A PIZZA VS A CHEESEBURGER

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Relative Price Variability

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inflation changes the yardstick we use to measure transactions, so if inflation is unpredictable, economic decisions cannot be made easily

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Confusion and Inconvenience

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Inflation makes nominal income grow faster than real income, but taxes are based on nominal income. INFLATION IS A KIND OF TAX

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Tax Distortion

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unexpected inflation transfers purchasing power from debtors to lenders; repay debt with dollars that aren't worth as much as before.

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Arbitrary Redistribution of Wealth

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the false perception that occurs when people mistake changes in nominal prices for changes in real prices

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Money Illusion

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the result of government paying off its debts by printing money

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Monetizing the Debt

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the annual difference that results when the value of a country's imports exceeds the value of its exports

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Trade Deficit

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the annual difference that results when the value of a country's exports exceeds the value of its imports

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Trade Difference

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a yearly summary of all the economic transactions between residents of one country and residents of the rest of the world Earning − Spending = Changes in debt + Changes in ownership of assets + Changes in your cash reserves

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Balance of Trade

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the excess that exists when the inflow of foreign capital into a country is greater than the outflow of domestic capital to other nations

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Capital Surplus

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*Records the balance of payments, the sum of the balance of trade, net income on capital held abroad, and net transfer payments* EX. FOREIGN AID PAYMENTS

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Current Account

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in the balance of payments, the account that measures changes in foreign ownership of domestic assets, including financial assets like stocks and bonds as well as physical assets. RECORDS FOREIGN INVESTMENT IN THE USA MINUS INVESTMENT HOLD *FOREIGN INVESMENT IN USA-INVESTMENT HOLD=

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Capital Account

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When foreigners construct new business plants or set up other specific and tangible operations in the United States.

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Foreign direct investment

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When foreigners buy U.S. stocks, bonds, and other asset claims. Unlike FDI, this switches the ownership of already existing investments and it does not immediately create new investment on net.

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Portfolio investment

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RECORDS THE CHANGE IN THE US GOVERNMENTS HOLDINGS OF FOREIGN CURRENCY. This third category measures reserves or currency held by the government. This can include foreign currencies, gold reserves, and also International Monetary Fund (see below) claims known as special drawing rights (SDRs), but for simplicity we will focus on foreign currencies.

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Official Settlements Account

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the price of one currency in terms of another currency

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Exchange Rate

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an increase in the price of one currency in terms of another currency

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Appreciation

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a decrease in the price of a currency in terms of another currency.

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Deprecciation

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the rate at which you can exchange one currency for another. WHAT's CURRENCY IS GOING FOR IN THE WALL STREET JOURNAL *CANNOT BE NEGATIVE OTHERWISE YOU'LL BE PAID TO BORROW MONEY*

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Nominal Exchange Rate

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the rate at which you can exchange the goods and services of one country for the goods and services of another. *The exchange rate CORRECTED FOR SOMETHING THAT IS DETERMINED BY SUPPLY AND DEMAND, SUCH AS INFLATION*

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Real Exchange Rate

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the principle that the real purchasing power of money should be roughly the same, whether it is spent at home or converted into another currency and spent abroad. COMPARES CURRENCIES IN TERMS OF PURCHASING POWER. ALL REAL PURCHASING POWER IS ROUGHLY THE SAME

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Purchasing Power Parity Theorem

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the principle that if trade were free, then identical goods should sell for about the same price throughout the world

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The Law of One Price

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an exchange rate determined primarily by market forces

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Floating Exchange Rate

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(also known as a pegged exchange rate) an exchange rate based on the promise of a government or central bank to convert its currency into another currency at a fixed (set) rate.

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Fixed Exchange Rate

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a foreign country's use of the U.S. dollar as its currency

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Dollarization

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a currency whose value is not fixed but for which governments will intervene extensively in the market to keep its value within a certain range

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Managed (Dirty) Float

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An international organization of 183 countries, established in 1947 with the goal of promoting cooperation and exchange between nations, and to aid the growth of international trade.

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International Monetary Fund

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A specialized agency of the United Nations that makes loans to countries for economic development, trade promotion, and debt consolidation. Its formal name is the International Bank for Reconstruction and Development.

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World Bank

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Real Interest Rate + Expected Inflation. RATE OF INTEREST BEFORE INFLATION

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Nominal Interest Rate

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Nominal Interest Rate - Inflation Rate. CORRECTED FOR SOMETHING THAT IS DETERMINED BY SUPPLY AND DEMAND, SUCH AS INFLATION* ***REAL INTEREST RATE= NOMINAL INTEREST RATE - INFLATION***

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Real Interest Rate

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A form of fixed exchange rate that failed during the 1970's. as a result we now have MOSTLY JUST THE FIXED EXCHANGE RATE

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Brett and Whitts System

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Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.

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Monetary Policy

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Government policy that attempts to manage the economy by controlling taxing and spending.

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Fiscal Policy

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Supply of ALL goods and services within a country, the total amount of goods and services in the economy available at all possible price levels

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Aggregate Supply

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The amount of goods and services in the economy that will be purchased at all possible price levels.

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Aggregate Demand

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A large and sudden reduction in the demand for assets located in a country, When money rapidly flows out of a country.

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Capital Flight

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The net amount that a country has to borrow from abroad when it imports more than it exports.

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Capital Account Surplus

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The net amount that a country lends out to other countries when it exports more than it imports.

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Capital Account Deficit

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The total market value of all final goods and services produced within a country in a given period of time. *HOUSEHOLD PRODUCTION, PRODUCTION OF LEISURE, AND ILLEGALLY/ILLICITLY BOUGHT AND SOLD ITEMS ARE NOT COUNTED HERE!!!* Components are Consumption, Investment, Government Purchases, and Net Export ***Y=C+I+G+NX

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Gross Domestic Product (GDP)

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The sum total of the value of all the goods and services produced in a nation DIVDED BY THE NUMBER OF PEOPLE IN THAT NATION

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Gross Domestic Product Per Capita

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the market value of all final goods and services produced by a country's permanent residents, wherever located, in a year

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Gross National Product (GNP)

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The spending by households on goods and services, EXCEPT purchases of new housing

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Consumption (C)

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The spending on capital equipment, inventories and structures, including new housing.

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Investment (I)

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DOES NOT INCLUDE transfer payments, b/c there are not made in exchange for Currently produced goods or services

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Government Purchases (G)

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Exports-Imports

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Net Exports (NX)

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Cash payments made by the government to people who do not supply goods, services, or labor in exchange for these payments. They include Social Security benefits, veterans' benefits, and welfare payments.

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Transfer Payments

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Values the production of goods and services at current prices

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Nominal GDP

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Values the product of goods and services at constant prices

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Real GDP

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Tells us what portion of the rise in nominal GDP that is attributable to a rise in prices rather than a rise in the quantities produced. ________ = (real GDP)/(nominal GDP) *100

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GDP Deflator

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a significant, widespread decline in real income and employment

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Recession

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The NBER is a "private, nonprofit, nonpartisan research organization" dedicated to studying the science and empirics of economics.

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National Bureau of Economic Research (NBER)

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the short-run movements in real GDP around its long-term trend

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Business Fluctuations

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Y = C + I + G + NX , add up all the spending: consumption, Investment, Government, and Net Exports

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National spending approach to GDP

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Y = Wages + Rent + Interest + Profit, add up all the receiving: compensation (paid to workers), Rent (paid to land lords), Interest (paid to capital owners), Profit (paid to buisness owners)

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Factor income approach to GDP

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the growth rate of real GDP per capita: where Y is real GDP per capita in time period T

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Economic Growth

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the stock of tools including machines, structures, and equipment

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Physical Capital

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tools of the mind; the productive knowledge and skills that workers acquire through education, training, and experience

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Human Capital

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knowledge about how the world works that is used to produce goods and services

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Technological Knowledge

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**Property rights, honest government, political stability, dependable legal system, and competitive and open markets.**

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Institutions of Economic Growth

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The ability of an individual to own and exercise control over scarce resources

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Property rights

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when government does not deviate from its commitments

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Honest government

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A stable government that's been in power for several years. This would act as a pull factor attracting people to the place

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Political stability

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A legal system that Shapes incentives that induce economic growth

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Dependable legal system

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someone who consumes the benefits of a public good without paying a share of the costs

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Free Rider

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Help nations to organize and use resources efficiently

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Competitive and open markets

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the advantages of large-scale production that reduce average cost as quantity increases

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Economies of Scale

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describing, explaining, or predicting economic events

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Positive Economics

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recommendations or arguments about what economic policy should be

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Normative Economics

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principle that justice requires maximizing the benefits going to society's most disadvantaged group

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Rawls's Maximin Principle

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the idea that the best society maximizes the sum of utility

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Utilitarianism

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theory that says that the distribution of income in a society is just if property is justly acquired and voluntarily exchanged

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Nozick's entitlement theory of justice

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