Economics for Today by Irvin B. Tucker – Flashcards
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Chapter 1
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Chapter 1
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scarcity
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The condition in which human wants are forever greater than the available supply of time, goods, and resources.
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resources aka "factors of production"
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The basic categories of inputs used to produce goods and services. Economists divide resources into three categories: land, labor, and capital.
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land
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Any natural resources provided by nature that is used to produce a good or service.
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Labor
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The mental and physical capacity of workers to produce goods and services.
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Entrepreneurship
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The creative ability of individuals to seek profits by taking risks and combining resources to produce innovative products.
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capital
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A human-made good used to produce other goods and services.
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economics
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The study of how society chooses to allocate its scarce resources to the production of goods and services to satisfy unlimited wants.
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macroeconomics
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The branch of economics that studies decision making for the economy as a whole.
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microeconomics
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The branch of economics that studies decision making by a single individual, household, firm, industry, or level of government.
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model
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A simplified description of reality used to understand and predict the relationship between variables.
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ceteris paribus
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A Latin phase that means while certain variables change, "all other things remain unchanged"
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positive economics
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An analysis limited to statements that are verifiable.
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normative economics
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An analysis based on value judgement.
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Chapter 1 Appendix
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Chapter 1 Appendix
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direct relationship
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A positive association between two variables. When one variable increases, the other variable increases, and when one variable decreases, the other variable decreases.
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inverse relationship
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A negative association between two variables. When one variable increase, the other variable decreases, and when one variable decreases, the other variable increases.
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slope
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The ratio of the change in the variable on the vertical axis (the rise or fall) to the change in the variable on the horizontal axis (the run).
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independent relationship
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A zero association between two variables. When one variable changes, the other variable remains unchanged.
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Chapter 2
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Chapter 2
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opportunity cost
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The best alternative sacrificed for a chosen alternative.
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marginal analysis
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An examination of the effects of additions to or subtractions from a current situation.
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production possibilities curve
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A curve that shows the maximum combinations of two outputs an economy can produce in a given period of time with its available resources and technology.
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technology
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The body of knowledge applied to how goods are produced.
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law of increasing opportunity costs
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The principle that the opportunity cost increases as production of one output expands.
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economic growth
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The ability of an economy to produce greater levels of output, represented by an outward shift of its production possibilities curve.
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investment
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The accumulation of capital, such as factories, machines, and inventories used to produce goods and service.
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Chapter 3
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Chapter 3
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law of demand
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The principle that there is an inverse relationship between the price of a good and the quantity buyers are willing to purchase in a defined time period, ceteris paribus.
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demand
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A curve or schedule showing the various quantities of product consumers are willing to purchase at possible prices during a specified period of time, ceteris paribus.
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change in quantity demanded
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A movement between points along a stationary demand curve, ceteris paribus.
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change in demand
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An increase or a decrease in the quantity demanded at each possible price. An increase in demand is a rightward shift in the entire demand curve. A decrease in demand is a leftward shift in the entire demand curve.
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normal good
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Any good for which there is a direct relationship between changes in income and its demand curve.
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inferior good
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Any good for which there is an inverse relationship between changes in income and its demand curve.
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substitute good
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A good that competes with another good for consumer purchase. as a result, there is a direct relationship between a price change for one good and the demand for its "competitor" good.
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complementary good
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A good that is jointly consumed with another good. As a result, there is an inverse relationship between a price change for one good and the demand for its "go together" good.
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law of supply
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The principle that there is a direct relationship between the price of a good and the quantity sellers are willing to offer for sale in a defined time period, ceteris paribus.
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supply
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A curve of schedule showing the various quantities of a product sellers are willing to produce and offer for sale at possible prices during a specified period of time, ceteris paribus.
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change in quantity supplied
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A movement between points along a stationary supply curve, ceteris paribus.
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change in supply
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An increase or a decrease in the quantity supplied at each possible price. An increase in supply is a rightward shift in the entire supply curve. A decrease in supply is a leftward shift in the entire supply curve.
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market
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Any arrangement in which buyers and sellers interact to determine the price and quantity of goods and services exchanged.
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surplus
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A market condition existing at any price where the quantity supplied is greater than the quantity demanded.
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shortage
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A market condition existing at any price at where the quantity supplied is less than the quantity supplied is less than the quantity demanded.
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equilibrium
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A market condition that occurs at any price and quantity at which the quantity demanded and the quantity supplied are equal.
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price system
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A mechanism that uses forces of supply and demand to create an equilibrium through rising and falling prices.
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Chapter 3 Appendix
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Chapter 3 Appendix
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consumer surplus
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The value of the difference between the price consumers are willing to pay for a product on the demand curve and the price actually paid for it.
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producer surplus
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The value of the difference between the actual selling price of a product and the price producers are willing to sell it for on the supply curve.
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deadweight loss
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The net loss of consumer and producer surplus form underproduction or overproduction of a product.
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Chapter 4
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Chapter 4
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price ceiling
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A legally established maximum price a seller can charge.
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price floor
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A legally established minimum price a seller can be paid.
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market failure
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A situation in which market equilibrium results in too few or too many resources being used in the production of a good or service. This inefficiency may justify government intervention.
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externality
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A cost or benefit imposed on people other than the consumers and producers of a good or service.
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public good
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A good or service with tow properties: (1) users collectively consume benefits, and (2) there is no way to bar people who do not pay (free riders) from consuming the good or service.
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Chapter 5
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Chapter 5
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price elasticity of demand
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The ratio of the percentage change in the quantity demanded of a product to a percentage change in its price.
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elastic demand
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A condition in which the percentage change in quantity demanded is greater than the percentage change in price.
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total revenue
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The total number of dollars a firm earns from the sale of a good or service, which is equal to its price multiplied by the quantity demanded.
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inelastic demand
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A condition in which the percentage change in quantity demanded is less than the percentage change in price.
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unitary elastic demand
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A condition in which the percentage change in quantity demanded is equal to the percentage change in price.
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perfect elastic demand
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A condition in which a small percentage change in price brings about an infinite percentage change in quantity demanded.
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perfectly inelastic demand
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A condition in which the quantity demanded does not change as the price changes.
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income elasticity of demand
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The ratio of the percentage change in the quantity demanded of a good or service to a given percentage in income.
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cross-elasticity of demand
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The ratio of the percentage change in the quantity demanded of a good or service to a given percentage change in the price of another good or service.
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price elasticity of supply
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The ratio of the percentage change in the quantity supplied of a product to the percentage change in its price.
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tax incidence
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The share of a tax ultimately paid by consumers and sellers.
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Chapter 6
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Chapter 6
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utility
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The satisfaction or pleasure, that people receive from consuming a good or service.
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total utility
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The amount of satisfaction received from all the units of a good or service consumed.
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marginal utility
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The change in total utility from one additional unit of a good or service.
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law of diminishing marginal utility
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The principle that the extra satisfaction provided by a good or services declines as people as people consume more in a given period.
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consumer equilibrium
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A condition in which total utility cannot increase by spending more of a given budget on one good and spending less on another good.
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income effect
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The change in quantity demanded of a good or service caused by a change in real income (purchasing power).
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substitution effect
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The change in quantity demanded of a good or service caused by a change in its price relative to substitutes.
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Chapter 6 Appendix
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Chapter 6 Appendix
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indifference curve
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A curve showing the different combinations of two products that yield the same satisfaction or total utility to a consumer.
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marginal rate substitution (MRS)
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The rate at which a consumer is willing to substitute one good for another with no change in total utility. The MRS equals the slope of the indifference curve at any point on the curve.
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indifference map
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A selection of indifference curves with each curve representing a different level of satisfaction or total utility.
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budget line
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A line that shows the different combinations of two goods a consumer can purchase with a given amount of money and prices for the goods.
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Chapter 7
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Chapter 7
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explicit costs
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The opportunity costs of using resources owned by a firm.
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economic profit
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Total revenue minus explicit and implicit costs.
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normal profit
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The minimum profit necessary to keep a firm in operation. A firm that earns normal profits earns total revenue equal to its total opportunity costs.
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fixed imput
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Any resource for which the quantity cannot change during the period of time under consideration.
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variable imput
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Any resource for which the quantity can change during the period of time under consideration.
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short run
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A period of time so short that there is at least one fixed input.
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long run
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A period of time so long that all inputs are variable.
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production function
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The relationship between the maximum amounts of output a firm can product and various quantities of inputs.
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marginal products
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The change in total output produced by adding 1 unit of a variable, with all other imputs used being held constant.
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law of diminishing returns
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The principles that states that beyond some point, the marginal product decreases as additional units of variable factor are added to a fixed factor.
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total fixed cost (TFC)
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Costs that do not vary as output varies and that must be paid even if output is zero. There are payments that the firm must make in the short run, regardless of the level of output.
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total variable cost (TVC)
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Costs that are zero when output is zero and vary as output varies.
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total cost (TC)
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The sum of total fixed cost and the total variable cost ad each level of output.
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average fixed cost (AFC)
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Total fixed cost divided by the quantity of output produced.
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average variable cost (AVC)
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Total cariable cost divided by the quantity of output produced.
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average total cost (ATC)
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Total cost divided by the quantitiy of output produced.
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marginal cost (MC)
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The change in total cost when one additional unit of output is produced.
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marginal-average rule
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The rule that states when marginal cost is below average cost, average cost falls. When marginal cost is above average cost, average cost rises. When marginal cost equals average cost, average cost is at its minimum point.
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long-run average cost curve (LRAC)
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The curve that traces the lowest cost per unit at which a firm can produce any level of output after the firm can build any desired plant size.
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economics of scale
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A situation in which the long-run average cost curve declines as the firm increases output.
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constant returns to scale
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A situation in which the long-run average cost curve does not change as the firm increases output.
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diseconomies of scale
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A situation in which the long-run average cost curve rises as the firm increases output.
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Chapter 8
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Chapter 8
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market structure
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A classification system for the key traits of a market, including the number of firms, the similarity of the products they sell, and the ease of entry into and exit from the market.
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perfect competition
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A market structure characterized by (1) a large number of small firms, (2) a homogeneous product, and (3) very easy entry into or exit from the market. Perfect competition is also referred to as pure competition.
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barrier to entry
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Any obstacle that makes it difficult for a new firm to enter a market.
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price taker
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A seller that hos no control over the price of the product it sells.
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marginal revenue (MR)
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The change in total revenue from the sale of one additional unit of output.
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perfectly competitive firm's short-run supply curve
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A firm's marginal cost curve above the minimum point on its average variable cost curve.
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perfectly competitive industry's short-run supply curve
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The supply curve derived from horizontal summation of the marginal cost curves of all firms in the industry above the minimum point of each firm's average variable cost curve.
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perfectly competitive industry's long-run supply curve
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The curve that shows the quantities supplied by the industry at different equilibrium prices after firms complete their entry and exit.
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constant-cost industry
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An industry in which the expansion of industry output by the entry of firms has no effect on the firm's average total cost curve.
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decrease-cost industry
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An industry in which the expansion of industry output by the entry of new firms decreases the individual firm's average cost curve (cost curve shifts downward).
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increasing-cost industry
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An industry in which the expansion of industry output by the entry of new firms increases the individual firm's average total cost curve (cost curve shifts upward)
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Chapter 9
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Chapter 9
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monopoly
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A market structure characterized by (1) a single seller, (2) a unique product, and (3) impossible entry into the market.
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natural monopoly
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An industry in which the long-run average cost of production declines throughout the entire market. As a result , a single firm can supply the entire market demand at a lower cost than can two or more smaller firms.
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network good
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A good that increases in value to each user as the total number of users increases. As a result, a firm can achieve economics of scale. Examples include Facebook and Match.com.
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price maker
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A firm that faces a downward-sloping demand curve and therefore it can choose among price and output combinations along the demand curve.
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price discrimination
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The practice of a seller charging different prices for the same product that are not justified by cost differences.
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arbitrage
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The practice of earning a profit by buying a good at a low price and reselling the good at a higher price.
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Chapter 10
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Chapter 10
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monopolistic competition
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A market structure characterized by (1) many small sellers, (2) a differentiated product, and (3) easy market entry and exit.
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product differentiation
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The process of creating real or apparent difference s between goods and services.
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non-price competition
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The situation in which a firm competes using advertising, packaging, product development, better quality, and better service rather than lower prices.
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oligopoly
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A market structure characterized by (1) few large sellers, (2) either a homogeneous or a differentiated product, and (3) difficult market entry.
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mutual interdependence
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A condition in which an action by one firm may cause a reaction from other firms.
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kinked demand curve
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A demand curve facing an oligopolist that assumes rivals will match a price decrease, but ignore a price increase.
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cartel
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A group of firms that formally agree to reduce competition by coordinating the price and output of a product.
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Chapter 11
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Chapter 11
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marginal revenue product (MRP)
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The increase in a firm's total revenue resulting from hiring an additional unit of labor or other variable resource.
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demand curve for labor
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A curve showing the different quantities of labor employers are willing to hire at different wage rates in a given time period, ceteris paribus. It is equal to the marginal revenue product of labor.
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derived demand
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The demand for labor and other factors of production that depends on the consumer demand for the final goods and services the factors produce.
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supply curve of labor
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A curve showing the different quantities of labor workers are willing to offer employers at different age rates in a given time period, ceteris paribus.
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human capital
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The accumulation of education , training, experience, and health that enables a worker to enter an occupation and be productive.
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collective bargaining
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The process of negotiating labor contracts between the union and management concerning wages and working conditions.
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monopsony
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A labor market in which a single firm hires labor.
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marginal factor cost (MFC)
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The additional total cost resulting from a one-unit increase in the quantity of a factor.
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Chapter 12
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Chapter 12
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Lorenz curve
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A graph of the actual cumulative distribution of income compared to a perfectly equal cumulative distribution if income.
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poverty line
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The level of income below which a person or a family is considered to be poor.
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in-kind transfers
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Government payments in the form of goods and services, rather than cash, including such government programs as food stamps, Medicaid, and housing.
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means test
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A requirement that a family's income not exceed a certain level to be eligible for public assistance.
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unemployment compensation
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The government insurance program that pays income for a short time period to unemployed workers.
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negative income tax (NIT)
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A plan under which families below a certain break-even level of income would receive cash payments that decrease as their incomes increase.
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comparable worth
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The principle that employees who work for the same employer must be paid the same wage when their jobs, even if different, require similar levels of education, training, experience, and responsibility. A non-market wage-setting process is used to evaluate and compensate jobs according to point scores assigned to different jobs.
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Chapter 13
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Chapter 13
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trust
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A combination or cartel consisting of firms that place their assets in the custody of a board of trustees.
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predatory pricing
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The practice of one or more firms temporarily reducing prices in order to eliminate competition and then raising prices.
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Sherman Act
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The federal anti-trust law enacted in 1890 that prohibits monopolization and conspiracies to restrain trade.
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Clayton Act
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A 1914 amendment that strengthens the Sherman Act by making it illegal for firms to engage in certain anti-competitive business practices.
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Federal Trade Commission Act
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The federal act that in 1914 established the Federal Trade Commission (FTC)
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Robinson-Patman Act
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A 1936 amendment to the Clayton Act that strengthens the Clayton Act against price discrimination.
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Celler-Kefauver Act
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A 1950 amendment to the Clayton Act that prohibits one firm from merging with a competitor by purchasing its physical assets if the effect is to substantially lessen competition.
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rule of reason
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The anti-trust doctrine that the existence of monopoly alone is not illegal unless the monopoly alone is not illegal unless the monopoly engages in illegal business practices.
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per se rule
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The anti-trust doctrine that the existence of monopoly alone is illegal, regardless of whether or not the monopoly engages in illegal business practices.
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horizontal merger
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A merger of firms that compete in the same market.
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vertical merger
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A merger of a firm with its suppliers.
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conglomerate merger
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A merger between firms in unrelated markets.
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deregulation
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The elimination or phasing out of government restrictions on economic activity.
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marginal cost pricing
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A system of pricing in which the price charged equals the marginal cost of the last unit produced.
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Chapter 14
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Chapter 14
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private benefits and costs
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Benefits and costs toe the decision maker, ignoring benefits and costs to third parties. Third parties are people outside the market transaction who are affected by the product.
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social benefits and costs
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The sum of benefits to everyone in society, including both private benefits and external benefits. Social costs are the sum of costs to everyone in society, including both private costs and external costs.
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free rider
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An individual who enjoys benefits without paying the costs.
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government failure
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Government intervention or lack of intervention that fails to correct market failure.
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incentive-based regulations
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Government regulations that set an environmental goal, but are flexible as to how buyers and sellers achieve the goal.
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command-and-control regulations
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Government regulations that set an environmental goal and dictate how the goal will be achieved.
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effluent tax
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A tax on the pollutant.
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emissions trading
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Firms buying and selling the right to pollute.
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offset
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A reduction in an existing pollution source to counteract pollution from a new source.
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new-source bias
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Bias that occurs when regulations provide an incentive to keep assets past the efficient point.
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hot spot problem
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For emissions that do not disperse uniformly, emissions may be higher in locations where firms buy permits that allow them to increase emissions.
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coase theorem
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The proposition that private market negotiations can achieve social efficiency regardless of the initial definition of property rights.
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transaction costs
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The costs of negotiating and enforcing a contract.
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free rider problem
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The problem that if some individuals benefit, while other pay, few will be willing to pay for improvement of the environment or other public goods. As a result, these goods are under-produced.
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tragedy of commons
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Individuals will use an open access resource to the point of exhaustion, basing their on private benefits while disregarding external costs to others.
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Gross domestic product (GDP)
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The market value of all final goods and services produced in a nation during a period of time, usually a year.
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transfer payment
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A government payment to individuals not in exchange for goods or services currently produced.
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final goods
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Finished goods and services and services produced for the ultimate user.
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intermediate goods
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Goods and services used as imputs for the production of final goods.
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circular flow model
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A diagram showing the exchange of money, products, and resources between households and businesses.
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flow
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A rate of change in a quantity during a given time period, such as dollars per year. For example, income and consumption are flows that occur per week, per month, or per year.
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stock
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A quantity measured at one point in time. For example, an inventory of goods or the amount of money in a checking account.
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income apprach
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The national income accounting method that measures GDP by adding all incomes, including compensation of employees, rents, net interest, and profits.
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Indirect business taxes
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Taxes levied as a percentage of the prices of goods sold and therefore collected as part of the firm's revenue. Firms treat such taxes as production costs. Examples included general sales taxes, excise taxes, and costumes duties.
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National income (NI)
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The total income earned by resource owners, including wages, rent, interest, and profits. NI is calculated as gross domestic product minus depreciation of the capital worn out in producing output.
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personal income (PI)
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The total income received by households that is available for consumption, saving, and payment of personal taxes.
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disposable personal income (DI)
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The amount of income that households actually have to spend or save after payment of personal taxes.
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nominal GDP
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The value of all final goods based on the prices existing during the time period of production.
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real GDP
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The value of all final goods produced during a given time based on the prices existing in a selected base year.
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GDP chain price index
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A measure that compares changes in the prices of all final goods during a given year to the prices of these goods in a base year.
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Chapter 16
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Chapter 16
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business cycle
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Alternating periods of economic growth and contraction, which can be measured by changes in real GDP.
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peak
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The phase of the business cycle in which real GDP reaches its maximum after rising during a recovery.
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recession aka contraction
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A downturn in the business cycle during which real GDP declines, and the unemployment rate rises.
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trough
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The phase of the business cycle in which real GDP reaches its minimum after falling during a recession.
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expansion aka recovery
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An upturn in the business cycle during which real GDP rises.
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economic growth
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An expansion in national output measured by the annual percentage increase in a nation's real GDP.
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leading indicators
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Variables that change before real GDP changes.
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coincident indicators
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Variables that change at the same time real GDP changes.
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lagging indicators
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Variables that change after real GDP changes.
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unemployment rate
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The percentage of people in the civilian labor force who are without jobs and are actively seeking jobs.
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civilian labor force
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The number of people 16 years of age and older who are employed or who are actively seeking a job, excluding armed forces, homemakers, discouraged workers, and other persons not in the labor force.
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discouraged worker
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A person who wants to work, but who has given up searching for work because he or she believes there will be no job offers.
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frictional unemployment
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Temporary unemployment caused by the time required of workers to move from one job to another.
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structural unemployment
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Unemployment caused by a mismatch of the skills of workers out of work and the skills required for existing job opportunities.
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outsourcing
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The practice of a company having its work done by another company in another company.
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offshoring
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The practice of work for a company performed by the company's employees located in another country.
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cyclical unemployment
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Unemployment caused by the lack of jobs during a recession.
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full employment aka rate of unemployment
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The situation in which an economy operates at an unemployment rate equal to the sum of the frictional and structural unemployment rates.
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GDP
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The difference between actual real GDP and potential or full-employment real GDP.
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Chapter 17
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Chapter 17
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Inflation
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An increase in the general (average) price level of goods and services in the economy.
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deflation
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A decrease in general (average) price level of goods and services in the economy.
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consumer price index (CPI)
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An index that measured changes in the average prices of consumer goods and services.
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base year
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A year chosen as a reference point for comparison with some earlier or later year.
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disinflation
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A reduction in the rate of inflation.
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nominal income
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The actual number of dollars received over a period of time.
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real income
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The actual number of dollars received (nominal income) adjusted for changes in the CPI.
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wealth
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The value of the stock of assets owned at some point in time.
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nominal interest rate
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The actual rate of interest without adjustment for the inflation rate.
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real interest rate
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The nominal rate of interest minus the inflation rate.
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adjustable-rate mortgage (ARM)
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A home loan that adjusts the nominal interest rate to changes in an index rate, such as rates on Treasury securities.
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demand-pull inflation
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A rise in the general price level resulting from an excess of total spending (demand).
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cost-push iflation
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An increase in the general price level resulting from an increase in the cost of production.
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hyperinflation
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An extremely rapid rise in the general price level.
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wage-price spiral
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A situation that occurs when increases in nominal wage rates are passed on in higher prices, which, in turn, result in even higher nominal wage rates and prices.
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Chapter 18
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Chapter 18
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John Maynard Keynes
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British economist (1883-1946) whose influential work offered an explanation of the Great Depression and suggested, as a cure, that the government should play an active role in the economy.
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classical economists
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A group of economists whose theory dominated economic thinking from the 1770's to the Great Depression. They believed recessions would naturally cure themselves because the price system would automatically restore full employment.
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Say's law
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The theory that supply creates its own demand.
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consumption function
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The graph or table that shows the amount households spend for goods and services at different levels disposable income.
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autonomous consumption
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Consumption that in independent of the level of real disposable income.
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dissaving
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The amount by which real personal consumption expenditures exceed real disposable income.
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saving
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The amount by which real disposable income exceeds real personal consumption expenditures.
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marginal propensity to consume (MPC)
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The change in consumption resulting from a given change in a real disposable income.
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marginal propensity to save (MPS)
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The change in saving resulting from a given change in real disposable income.
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wealth effect
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A shift in the consumption function caused by a change in the value of real and financial assets.
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investment demand curve
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The curve that shows the amount business spend for investment goods at different possible rates of interest.
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autonomous expenditure
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Spending that does not vary with the level of real disposable income.
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Chapter 19
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Chapter 19
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aggregate expenditures function (AE)
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The total spending in an economy at different levels of real GDP.
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aggregate expenditure model
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The model that determines the equilibrium level of real GDP by the intersection of the aggregate expenditures and aggregate output and income (real GPD) curves.
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spending multiplier (SM)
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The ratio of the change in real GDP to an initial change in any component of aggregate expenditures, including consumption, investment, government spending, and net exports. As a formula, the spending multiplier equals 1/(1 - MPC) or 1/MPS
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recessionary gap
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The amount by which the aggregate expenditures curve must be increased to achieve full-employment equilibrium.
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tax multiplier
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The change in aggregate expenditures (total spending) resulting from an initial change in taxes. As a formula, the tax multiplier equals 1 - spending multiplier.
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inflationary gap
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The amount by which the aggregate expenditures curve must e decreased to achieve full-employment equilibrium.
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Chapter 20
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Chapter 20
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aggregate demand curve (AD)
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The curve that shows the level of real GDP purchased by households, businesses, government, and foreigners (net exports) at different possible price levels during a time period, ceteris paribus.
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real balances effect
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The impact on total spending (real GDP) caused by the inverse relationship between the price level and the real value of financial assets with fixed nominal value.
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interest-rate effect
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The impact on total spending (real GDP) caused by the direct relationship between the price level and the interest rate.
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net exports effect
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The impact on total spending (real GDP) caused by the inverse relationship between the price level and the net exports of an economy.
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aggregate supply curve (AS)
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The curve that shows the level of real GDP produced at different possible price levels during a time period, ceteris paribus.
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Keynesian range
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The horizontal segment of the aggregate supply curve, which represents an economy in a severe recession.
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intermediate range
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The rising segment of the aggregate supply curve, which represents an economy as it approaches full-employment output.
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classical range
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The vertical segment of the aggregate supply curve, which represents an economy at full-employment output.
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stagflation
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The condition that occurs when an economy experiences the twin maladies of high unemployment and rapid inflation simultaneously.
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cost-push inflation
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An increase in the general price level resulting from an increase in the cost of production that causes the aggregate supply curve to shift leftward.
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demand-pull inflation
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A rise in the general price level resulting from an excess of total spending (demand) caused by a rightward shift in the aggregate demand.
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Chapter 20 Appendix
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Chapter 20 Appendix
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short-run aggregate supply curve (SRAS)
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The curve that shows the level of real GDP produced at different possible price levels during a time period in which nominal incomes do not change in response to changes in the price level.
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long-run aggregate supply curve (LRAS)
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The curve that shows the level of real GDP produced at different possible price levels during a time period in which nominal incomes change by the same percentage as the price level changes.
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Chapter 21
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Chapter 21
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fiscal policy
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The use of government spending and taxes to influence the nation's spending, employment, and price level.
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discretionary fiscal policy
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The deliberate use of changes in government spending or taxes to alter aggregate demand and stabilize the economy.
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marginal propensity to consume (MP)
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The change in consumption spending resulting from a given change in income.
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marginal propensity to save (MPS)
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The change in saving resulting from a given change in income.
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balanced budget multiplier
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An equal change in government spending and taxes, which changes aggregate demand by the amount of the change in government spending.
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automatic stabilizers
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Federal expenditures and tax revenues that automatically change levels in order to stabilize an economic expansion or contraction; sometimes refereed to as "non-discretionary fiscal policy."
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budget surplus
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A budge in which governemnt revenues exceed governemnt expenditures in a given time period.
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budget dificit
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A budget in which government expenditures exceed government revenues in a given time period.
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supply-side fiscal policy
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A fiscal policy that emphasizes government policies that increase aggregate supply in order to achieve long-run growth in real output, full employment, and a lower price level.
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Laffer curve
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A graph depicting the relationship between tax rates and total tax revenues.
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Chapter 22
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Chapter 22
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government expenditures
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Federal, state, and local government outlays for goods and services, including transfer payments.
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benefits-received principle
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The concept that those who benefit from government expenditures should pay the taxes that finance their benefits.
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ability-to-pay principle
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The concept that those who have higher incomes can afford to pay a greater proportion of their income in taxes, regardless of benefits received.
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progressive tax
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A tax that charges a higher percentage of income as income rises.
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average tax rate
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The tax divided by the income.
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marginal tax rate
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The fraction of additional income paid taxes.
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regressive tax
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A tax that charges a lower percentage of income as income rises.
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"proportional tax" aka "flat-tax rate" aka "flat tax"
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A tax that charges the same percentage of income, regardless of the size of income.
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public choice theory
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The analysis of the government's decision-making process for allocating resources.
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benefit-cost analysis
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The comparison of the additional rewards and costs of an economic alternative.
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rational ignorance
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The voter's choice to remain uninformed because the marginal cost of obtaining information is higher than the marginal benefit from knowing it.
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Chapter 23
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Chapter 23
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national debt
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The total amount owed by the federal government to owners of governemnt securities.
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net public debt
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National debt minus all government inter-agency borrowing.
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debt ceiling
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A legislated legal limit on the national debt.
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internal national debt
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The portion of the national debt owed to a nation's own citizens.
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external national debt.
answer
The portion of the national debt owed to foreign citizens.
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crowding-out effect
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A reduction in private-sector spending as a result of federal budget deficits financed by U.S. Treasury borrowing. When federal government borrowing increases interest rates, the result is lower consumption by households and lower investments spending by business.
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crowding-in effect
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An increase in private-sector spending as a result of federal budget deficits financed by U.S. Treasury borrowing. At less than full employment, consumers hold more Treasury securities and this additional wealth causes them to spend more. Business investment spending increases because of optimistic profit expectations.
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Chapter 24
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Chapter 24
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barter
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The direct exchange of one good or service for another good or service, rather than for money.
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money
answer
Anything that serves as a medium of exchange, unit of account, and store of value.
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medium of exchange
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The primary function of money to be widely accepted in exchange for goods and services.
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unit of account
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The function of money to provide a common measurement of the relative value of goods and services.
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store of value
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The ability of money to hold value over time.
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commodity money
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Anything that serves as money while having market value based on the material from which it is made.
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fiat money
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Money accepted by law, and not because of its redeem-ability or intrinsic value.
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M1
answer
The narrowest definition of the money supply. It includes currency and check-able deposits.
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currency
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Money, including coins and paper money.
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check-able deposits
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The total money in financial institutions that can be withdrawn by writing a check.
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M2
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The definition of money supply that equals M1 plus near monies, such as savings deposits and small time deposits of less than $100,000
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federal reserve system
answer
The 12 Federal Reserve district banks that service banks and other financial institutions within each of the Federal Reserve districts; popularly called the "Fed".
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Board of Governors of the Federal Reserve System
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The seven members appoints by the president and confirmed by the Senate who serve for one nonrenewable 14-year term. Their responsibility is to supervise and control the money supply and the banking system of the United States.
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Federal Open Market Committee (FOMC)
answer
The Federal Reserve's committee that directs the buying and selling of U.S. governemnt securities, which are major instruments for controlling the money supply. The FOMC consists of the seven members of the Federal Reserve's Board of Governors , the president of the New York Federal Reserve Bank, ad the presidents of four other Federal Reserve district banks.
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Federal Deposit Insurance Corporation (FDIC)
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A government agency established in 1933 to insure customer deposits up to a limit if a bank fails.
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Consumer Financial Protection Bureau (CFPB)
answer
An independent bureau within the Federal Reserve that helps consumers make financial decisions.
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Monetary Control Act
answer
A law, formally titled, the Depository Institutions Deregulation and Monetary Control Act of 1980, that gave the Federal Reserve System greater control over non-member banks and made all financial institutions more competitive.
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Chapter 25
answer
Chapter 25
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fractional reserve banking
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A system in which banks keeps only a percentage of their deposits on reserve as vault cash and deposits at the Fed.
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required reserves
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The minimum balance that the Fed requires a bank to hold in vault cash or on deposit with the Fed.
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required reserve ratio
answer
The percentage of deposits that the Fed requires a bank to hold in vault cash or on deposit with the Fed.
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excess reserves
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Potential loan balances held in vault cash or on deposit with the Fed in excess of required reserves.
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money multiplier
answer
The maximum change in the money supply (check-able deposits) due to an initial change in the excess reserves banks hold. The money multiplier is equal to 1 divided by the required reserve ratio.
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monetary policy
answer
The Federal Reserve's use of open market operations, changes in the discount rate, and changes in the required reserve ratio to change the money supply (M1).
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open market operation
answer
The buying and selling of governemnt securities by the Federal Reserve System.
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discount rate
answer
The interest rate the Fed charges on loans of reserves to banks.
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Federal funds market
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A private market in which banks lend reserves to each other for less than 24 hours.
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Federal funds rate
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The interest rate banks charge for overnight loans of reserves to other banks.
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Chapter 26
answer
Chapter 26
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transactions demand for money
answer
The stock of money people hold to pay everyday predictable expenses.
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speculative demand for money
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The stock of money people hold to take advantage of expected future changes in the price of bonds, stocks, or other non-money financial assets.
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demand for money curve
answer
A curve representing the quality of money that people hold at different possible interest rates, ceteris paribus.
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monetarism
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The theory that changes in the money supply directly determine changes in prices, real GDP, and employment.
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equation of exchange
answer
An accounting identity that states the money supply times the velocity of money equals total spending.
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velocity of money
answer
The average number of times per year, a dollar of the money supply is spent on final goods and services.
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quantity theory of money
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The theory that changes in the money supply are directly related to changes in the price level.
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classical economics
answer
The theory that free markets will restore full employment without governemnt intervention.
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Keynesian economics
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The theory, first advanced by John Maynard Keynes, that the role of the federal government is to increase or decrease aggregate demand to achieve economic goals
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subprime mortgage loan
answer
A home loan made to borrowers with an above-average risk of default.
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Chapter 27
answer
Chapter 27
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Phillips curve
answer
A curve showing an inverse relationship between the inflation rate and the unemployment rate.
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natural rate hypothesis
answer
The hypothesis that argues that the economy will self-correct to the natural rate of unemployment. The long-run Philips curve is therefore a vertical line at the natural rate of unemployment.
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adaptive expectations theory.
answer
The concept that people believe the best indicator of the future is recent information. As a result, people persistently underestimate inflation when it is accelerating and overestimate it while it is slowing down.
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political business cycle
answer
A business cycle caused by policymakers to improve politicians' re-election chances.
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rational expectations theory
answer
The belief that people use all available information to predict the future, including the future impact of predictable expansionary monetary and fiscal policies. Predictable expansionary macroeconomic policies can therefore be negated by immediately flexible wages and prices when businesses and workers anticipate the effects of these policies on the economy.
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income policies
answer
Federal governemnt policies designed to affect the real incomes of workers by controlling nominal wages and prices. Such policies include presidential jawboning, wage-price guidelines, and wage-price controls.
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jawboning
answer
Oratory intended to pressure unions and business to reduce wage and price increases.
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wage and price guidelines
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Voluntary standards set by the governemnt for "permissible" wage and price increases.
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wage and price controls
answer
Legal restrictions on wage and price increases. Violations can result in fines and imprisonment.
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Chapter 28
answer
Chapter 28
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absolute average
answer
The ability of a country to produce a good at a lower opportunity cost than another country.
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comparative advantage
answer
The ability to produce a good at a lower opportunity cost than another country.
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free trade
answer
The flow of goods between countries without restrictions or special taxes.
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protectionism
answer
The government's use of embargoes, tariffs, quotas, and other restrictions to protect domestic producers from foreign competition.
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embargo
answer
A law that bars trade with another country.
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tariff
answer
A tax on an import.
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World Trade Organization (WTO)
answer
An international organization of member countries that oversees international trade agreements and rules on trade disputes.
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quota
answer
A limit on the quantity of a good that may be imported in a given time period.
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balance of payments
answer
A bookkeeping record of all the international transaction between a country and other countries during a given period of time.
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balance of trade
answer
The value of a nation's imports subtracted from its exports. Balance of trade can be expressed in terms of goods, services, or goods and services.
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exchange rate
answer
The number of units of one nation's currency that equals one unit of another nation's currency.
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depreciation of currency
answer
A fall in the price of one currency relative to another.
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appreciation of currency
answer
A rise in the price of one currency relative to another.
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Chapter 29
answer
Chapter 29
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economic system
answer
The organizations and methods used to determine what goods and services are produced, how they are produced, and for whom they are produced.
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traditional economy
answer
An economic system that answers the "What," "How," and "For Whom" questions the way they have always have been answered.
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command economy
answer
An economic system that answers the "What," "How," and "For Whom" questions by a dictator of central authority.
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market economy
answer
An economic system that answers the "What," "How," and "For Whom" questions using prices determined by the forces of supply and demand.
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invisible hand
answer
A phase that expresses the belief that the best interest of a society are served when individual consumers and producers compete to achieve their own private interests.
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mixed economy
answer
An economic system that answers the "What," "How," and "For Whom" questions through a mixture of traditional, command, and market systems.
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capitalism
answer
An economic system characterized by private ownership of resources and markets.
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consumer sovereignty
answer
The freedom of consumers to cast their dollar votes to buy, or not to buy, at prices determined in competitive markets.
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socialism
answer
An economic system characterized by government ownership of resources and centralized decision making.
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communsim
answer
A stateless, classless economic system in which all the factors of production are owned by the workers and people share in production according to their needs. In Marx's view, this is the highest form of socialism toward which the revolution should strive.
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privatization
answer
The process of turning a government enterprise into a private enterprise.
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nationalization
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The act of transforming a private enterprise's assets into government ownership.
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Chapter 30
answer
Chapter 30
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GDP per capita
answer
The value of final goods produced (GDP) divided by the total population.
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industrially advanced countries (IACs)
answer
High-income nations that have market economies based on large stocks of technologically advanced capital and well-educated labor. The United States, Canada, Australia, New Zealand, Japan, and the most of the countries of Western Europe are IACs.
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less-developed countries (LDCs)
answer
Nations without large stocks of technologically advanced capital and well-educated labor. LDCs are economies based on agriculture, such as most countries of Africa, Asia, and Latin America.
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vicious circle of poverty
answer
The trap in which countries are poor because they cannot afford to save and invest, but they cannot afford to save and invest, but they cannot save and invest because they are poor.
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infrastructure
answer
Capital goods usually provided by the governemnt, including highways, bridges, waste and water systems, and airports.
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foreign aid
answer
The transfer of money or resources from one government to another with no repayment required.
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agency for international development (AID)
answer
The agency of the U.S. State Department that is in charge of U.S. aid to foreign countries.
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world bank
answer
The lending agency that makes long-term low-interest loans and provides technical assistance to less-developed countries.
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international monetary fund (IMF)
answer
The lending agency that makes short-term conditional low-interest loans to developing countries.
