AP Macro Glossary – Flashcards

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absolute advantage
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the ability to produce more of a good than all other producers
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absolute (or money) prices
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the price of a good measured in units of currency
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accounting profit
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the difference between total revenue and total explicit cost
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aggregate demand curve
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the negative relationship between all spending on domestic output and the average price level of that output
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aggregate income
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the sum of all income earned by suppliers of resources in the economy
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aggregate spending (GDP)
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the sum of all spending from four sectors of the economy
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aggregate supply curve
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the positive relationship between the level of domestic output produced and the average price level of that output
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aggregation
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the process of summing the microeconomic activity of households and firms into a macroeconomics measure of economic activity
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all else equal
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the assumption that all other variables are held constant so that we can predict how a change in one variable affects a second. Also known as the "Ceteris Paribus" assumption
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allocative efficiency
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Production of the combination of goods and services that provides the most net benefit to society. This is achieved when the MB=MC of the next unit
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appreciating currency
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an increase in the price of one currency relative to another currency
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asset demand for money
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the amount of money demanded as an asset is inversely related to the real interest rate
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assets of a bank
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anything owned by the bank or owed to the bank
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automatic stabilizers
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Fiscal policy mechanisms that automatically regulate, or stabilize, the macroeconomy as it moves through the business cycle
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autonomous consumption
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the amount of consumption that occurs no matter the level of disposable income
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autonomous investment
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the level of investment determined by investment demand and independent of GDP
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autonomous saving
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the amount of saving that occurs no matter the level of disposable income
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Average Fixed Cost (AFC)
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total fixed cost divided by output
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Average Product (APL) of Labor
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total product divided by the labor employed
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average tax rate
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the proportion of total income paid to taxes
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average total cost (ATC)
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Total cost divided by output
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average variable cost (AVC)
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Total variable cost divided by output
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balanced-budget multiplier
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a change in government spending offset by an equal in taxes results in a multiplier effect equal to one
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balance of payments statement
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A summary of the payments received by the US from foreign countries and the payments sent by the US to foreign countries
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balance sheet or t-account
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A tabular way to show a bank's assets and liabilities
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base (or reference) year
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the year that serves as a reference point for constructing a price index and comparing real values over time
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bond
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a certificate of indebtedness from the issuer to the bond holder
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budget deficit
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exists if government spending exceeds the tax revenue collected
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budget surplus
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exists if tax revenue collected exceeds the tax revenue collected
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business cycle
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the periodic rise and fall in economic activity around its long-term growth trend
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capital account
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this account shows the flow of investment on real or financial assets between a nation and foreigners
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capitalist market system (capitalism)
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an economic system based upon the fundamentals of private property, freedom, self-interest, and prices.
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cartel
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firms that agree to maximize their joint profits rather than compete
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circular flow of economic activity (or circular of goods and services)
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a model that shows how households and firms circulate resources, goods, and incomes through the economy
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Classical school
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a macroeconomic model that explains how the economic naturally tends to come to full employment in the long run
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closed economy
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a model assuming no foreign sector (imports and exports)
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collusive oligopoly
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models where firms agree to work together to mutually improve their situation
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comparative advantage
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the ability to produce a good at a lower opportunity cost than other producers
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complementary goods
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two goods that provide more utility when consumed together than when consumed separately (i.e. milk and cookies)
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constant returns to scale
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the horizontal range of long-run average total cost where LRAC is constant over a variety of plant sizes
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constrained utility maximization
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Given prices and income, a consumer stops consuming a good when the price paid for the next unit is equal to the marginal utility recieved
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consumer price index (CPI)
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the price index that measures the average price level of the items in the base year market basket. This is the main measure of consumer inflation
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consumer surplus
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the difference between a buyer's willingness to pay and the price actually paid
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consumption and saving schedules
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tables that show the direct relationships between disposable income and consumption and saving
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consumption function
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a positive relationship between disposable income and consumption saving
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consumption possibility frontier
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the line that illustrates all possible combinations of goods that two nations can consume with specialization and trade
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contraction
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a period where real GDP is falling
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contractionary fiscal policy
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lower government spending or higher net taxes to shift AD to the left to full employment and reduce inflationary pressures
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contractionary monetary policy
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decreases in the money supply to increase real interest rates, shift AD to the left to full employment, and reduce inflationary pressures
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cost of living adjustment
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an annual adjustment to a salary (or pension) so that the purchasing power of income remains constant. This adjustment is typically based upon the change in the consumer price index
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cross-price elasticity of demand
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a measure of how sensitive the consumption of good X is to a change in the price of good X
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crowding out effect
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typically the result of government borrowing to fund deficit spending, this is the decline in spending in one sector due to an increase in spending from another sector
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current account
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this account shows current import and export payments of both goods and services investment income received by US citizens who invest abroad
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dead weight loss
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the lost net benefit to society caused by a movement from the competitive market equilibrium (more taxes), cf Laffer Curve
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debt financing
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a firm's way of raising investment funds by issuing bonds to the public
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decision to invest
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a firm invests in projects if the expected rate of return is at least as great as the real interest rate
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deflation
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a decline in the overall price level
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demand curve
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shows the quantity of a good demanded at all prices
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demand for labor
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shows the quantity of labor demanded at all wages. Labor demand for a firm hiring in a competitive labor market is MRPt
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demand-pull inflation
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Inflation that results from stronger AD as it increases in the upward sloping range of AS
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demand schedule
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a table showing quantity demanded for a good at all prices
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depreciating currency
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a decrease in the price of one currency relative to another currency
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depression
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a prolonged, deep trough in the business cycle
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derived demand
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Demand for a resource arising from the demand for the goods produced by the resource
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determinants of demand
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the external factors that shift demand to the left or right
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determinants of supply
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the external factors that influence supply. When thee variables change, the entire supply curve shifts to the left or right
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discount rate
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the interest rate commercial banks pay on short-term loans from the Fed
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discouraged workers
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Citizens who have been without work for so long that they become tired of looking for work and drop out of the labor force. Because these citizens are not counted in the ranks of the unemployed, the reported unemployment rate is understated
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disequilibrium
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any price where the quantity demanded does not equal the quantity supplied
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disposable income (DI)
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the income a consumer has to spend or save once they have paid out net taxes
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diseconomies of scale
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the upward part of the long-run average total cost curve where LRAC rises as plant size rises
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dissaving
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another way of saying that saving is less than zero
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domestic price
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the equilibrium price of a good in a nation without trade
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dominant strategy
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a strategy that is always the best strategy to pursue, regardless of what a rival is doing
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double counting
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the mistake of including the value of intermediate stages of production in GDP on top of the value of the final good
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economic costs
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the costs of explicit and implicit costs of production
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economic growth
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the increase in an economy's PPF over time
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economic profit
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the difference between total revenue and total economic cost
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economics
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the study of how society allocates scarce resources
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economies of scale
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the downward part of the long-run average total cost curve where LRAC falls as plant size rises
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egalitarianism
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the philosophy that all citizens should receive equal share of all economic resources
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elasticity
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measures the sensitivity, or responsiveness, of a choice to a change in an external factor
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elasticity along the demand curve
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at the midpoint of a linear demand curve, Ed=1. Above the midpoint demand is elastic and below the midpoint is inelastic
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equation of exchange
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the equation says that nominal GDP (P*Q) is equal to the quantity of money (M) multiplied by the number of times each dollar is spent in a year (V)
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equilibrium GDP
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the level of real GDP where real domestic production is equal to real domestic spending
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equity financing
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the firm's method of raising funds for investment by issuing shares of a stock to the public
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excess capacity
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the difference between the long-run output in monopolistic competition and the output at minimum average total cost
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excess demand
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the difference between quantity demanded and quantity supplied. A shortage.
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excess reserves
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the portion of a deposit that may be loaned to borrowers
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excess supply
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the difference between quantity supplied and quantity demanded. A surplus.
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exchange rate
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the amount of one currency you must give up to get one unit of the second currency
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excise tax
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a per unit tax on a specific good or service
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expansion
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a period where real GDP is growing
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expansionary fiscal policy
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increases in government spending or lower net taxes meant to shift AD to the right towards full employment, and reduce the unemployment rate
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expansionary monetary policy
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increases in the money supply meant to decrease real interest rates, shift AD to the right toward full employment, and reduce the unemployment rate
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expected rate of return (r)
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the rate of profit the firm anticipates receiving on investment expenditures
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explicit costs
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direct, purchased, out-of-pocket costs, paid to resource suppliers outside the firm. Also referred to as accounting costs.
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exports
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goods and services produced domestically but sold abroad
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factors of production
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inputs or resources that go into the production function to produce goods and services
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fiat money
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paper and coin money with no intrinsic value but used to make transactions because the government declares it to be legal tender (Go Illegal Currency!)
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final goods
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goods that are ready for their final use by consumers and firms
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the firm
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an organization that employs factors of production to produce a good or service that it hopes to profitably sell
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fiscal policy
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Deliberate changes in government spending and net tax collection to affect economic output, unemployment, and price level
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fixed inputs
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Production inputs that cannot be changed in the short run
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foreign sector substitution effect
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the process of domestic consumers looking for foreign goods when the domestic price level rises, thus reducing the quantity of domestic output consumed
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four-firm concentration ratio
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the sum of the market share of the four largest firms in an industry
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fractional reserve banking
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a system in which only a fraction of the total money deposited in banks is held in reserve
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free rider
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an individual who receives the benefit of a good without incurring any cost for the good
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free-rider problem
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the lack of private funding for a public good due to the presence of free riders
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full employment
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exists when the economy is experiencing no cyclical employment
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functions of money
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money serves as a medium of exchange, a unit of account and a store of value
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game theory
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an approach for modeling the strategic interactions of firms in oligopoly markets
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Gini ratio
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a measure of income inequality. As it gets closer to zero, the more unequally the income is distributed
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Gross Domestic Product (GDP)
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the market value of all final goods and services produced within a nation in a given period of time
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GDP price deflator
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the price index that measures the average price level of goods and services that make up GDP
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human capital
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the amount of knowledge and skills that labor can apply to the work that they do
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implicit costs
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indirect, non-purchased, or opportunity costs of resources provided by the entrepreneur
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imports
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Goods produced abroad and consumed domestically
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incidence of tax
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the division of tax between consumers and producers
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income effect
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due to a higher price, the change in quantity demanded that results from a change in the consumer's purchasing power (or real income)
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income elasticity
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a measure of how sensitive consumption of a good is to a change in consumers' income
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inferior goods
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a good for which demand decreases with an increase in consumer income
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inflation
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an increase in the overall price level
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inflation rate
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the percentage change in the price level from one year to the next
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inflationary gap
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the amount by which equilibrium real GDP exceeds full employment GDP
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interest rate effect
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the process of reduced domestic consumption due to a higher price level causing an increase in the real interest rate
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intermediate goods
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goods that require further modification before they are ready for their final use
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investment spending
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spending on physical capital, inventories, and new construction
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investment demand
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the negative relationship between the real interest rate and the cumulative dollars invested
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investment tax credit
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a reduction in taxes for firms that invest in new capital like a factory or a piece of equipment
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Keynesian school
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a macroeconomic model that believes the economy is unstable and does not naturally move to full employment in the long run
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labor force
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the sum of all individuals 16 years and older who are either currently employed (E) or unemployed (U). LF=E+U
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Law of Demand
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all else equal, when the price of a good rises, the quantity demanded of that good falls
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Law of Diminishing Marginal Utility
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in a given time period, as consumption of an item increases, the marginal (additional) utility from that item falls
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Law of Diminishing Marginal Returns
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as successive units of a variable input are added to a fixed input, beyond some point the marginal product declines
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Law of Increasing Costs
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as more of a good is produced, the greater is its opportunity (or marginal) cost
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Law of Increasing Marginal Cost
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as a producer produced more of a good, the marginal cost rises
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Law of Supply
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All else equal, when the price of a good rises, the quantity supplied of that good rises
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least-cost rule
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the combination of labor and capital that minimizes total costs for a given production rate is where MPl/Pl=MPk/Pk
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liability of a bank
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anything owned by depositors or lenders to the bank
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liquidity
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a measure of how easily an asset can be converted to cash
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loanable funds market
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a hypothetical market where borrowers (investors) demand more funds at a lower real interest rate and lenders (savers) supply more funds at a higher real interest rate
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long run
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a period of time long enough for the firm to alter all production inputs, including plant size
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Lorenz curve
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a graphical device that shows how a nation's income is distributed across the nation's households
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luxury
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a good for which the proportional increase in consumption exceeds the proportional increase in income
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M1
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the most liquid measure of money supply, including cash, checking deposits, and traveler's checks
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M2
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M1 plus savings deposits small time deposits and money market and mutual funds balances
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M3
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M2 plus large time deposits
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macroeconomic long run
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a period of time long enough for input prices to have fully adjusted to market forces, all input and output markets are in equilibrium and the economy is operation at full employment
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macroeconomic short run
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a period of time during which the prices of goods and services are changing in their respective markets, but the input prices have not yet adjusted to those changes in the product markets
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marginal
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the next unit, or increment of, an action
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marginal analysis
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making decisions based upon weighing the marginal benefits and costs of that action. the rational decision maker chooses an action if the MB is greater or equal than the MC
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marginal benefit
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the additional benefit received from the consumption of the next unit of a good or service
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marginal cost (MC)
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the additional cost of producing one more unit of output
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marginal productivity theory
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the theory that a citizen's share of economic resources is proportional to the marginal revenue product of his or her labor
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Marginal Product of Labor (MPL)
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the change in total product resulting from a change in the labor output
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Marginal Propensity to Consume (MPC)
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the change in consumption caused by a change in disposable income. The slope of a consumption function.
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Marginal Propensity to Save (MPS)
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the change in saving caused by a change in disposable income. The slope of the saving function
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Marginal Resource Cost (MRC)
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The change in a firm's total cost from the hiring of an additional unit of input
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Marginal Revenue Product of Labor (MRP)
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the change in a firm's total revenue from hiring an additional unit of input
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marginal tax rate
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the rate paid on the last dollar earned, calculated by taking the ratio of the change in taxes divided by the change in income
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marginal utility
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the change in an individual's total utility from the consumption of an additional unit of a good or service
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market
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a group with buyers and sellers of a good or service
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market basket
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a collection of goods and services used to represent what is consumed in the economy
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market economy
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an economic system in which resources are allocated through the decentralized decisions of firms and consumers
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market equilibrium
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exits at the only price where the quantity supplied equals the quantity demanded. Or, it is the only quantity where the price consumers are willing to pay is exactly the price producers are willing to accept
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market failure
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the inability of the free market to allocate resources efficiently
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market power
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the ability to set a price above the perfectly competitive level
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money demand
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the negative relationship between the real interest rate and the quantity of money demanded as an asset plus the quantity of money demanded for transactions
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money market
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the interaction of money demand and money supply determines the "price" of money, the nominal interest rate
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money multiplier
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equal to one over the reserve ratio, this measures the maximum amount of new checking deposits that can be created by a single dollar of excess reserves
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money supply
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the fixed quantity of money in circulation at a given point in time as measured by the central bank
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monopolistic competition
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a market structure characterized by a few small firms producing a differentiated product with easy entry into the market
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monopoly
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a market structure in which one firm is the sole producer of a good with no close substitutes in a market with entry barriers
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monopsony
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a factor market in which there is a sole firm that has market-power, i.e. a wage setter
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multiplier effect
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the idea that a change in any component of aggregate demand creates a larger change in GDP
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national debt
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the accumulation of all annual budget deficits
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natural monopoly
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the case where economies of scale are so extensive that is is less costly for one firm to supply the entire range of demand than for multiple firms to share the market
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natural rate of unemployment
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the unemployment rate associated with full employment, somewhere between 4-5% in the US
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necessity
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a good for which the proportional increase in consumption is less than the proportional increase in income
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negative externality
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the existence of spillover costs upon third parties from the production of a good
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net exports
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the value of a nation's total exports minus total imports
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net export effect
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the process of how expansionary fiscal policy decreases net exports due to rising interest rates. Another form of crowding out.
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nominal GDP
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the value of current production at the current prices
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nominal interest rate
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the interest rate unadjusted for inflation. The opportunity cost of holding money in the money market
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non-collusive oligopoly
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Models of industries in which firms are competitive rivals seeking to gain at the expense of the rivals.
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nonmarket transactions
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household work or do-it-yourself jobs that are missed by GDP accounting
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non-renewable resources
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Natural resources that cannot replenish themselves
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normal goods
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a good for which demand increase with an increase in consumer incom
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normal profit
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the opportunity cost of the entrepreneur's talents. Another way of saying the firm is earning zero economic profit
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official reserves account
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The Fed's adjustment of a deficit or surplus in the current and capital account by the addition or subtraction of foreign currencies so that the balance of payments is zero
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oligopoly
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a very diverse market structure characterized by a small number of interdependent large firms, producing either a standardized or differentiated product in a market with a barrier to entry
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open market operation (OMO)
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a tool of monetary policy, it involves the Fed's buying (or selling) of Treasury bonds from (or to) commercial banks and the general public
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opportunity cost
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the value of the sacrifice made to pursue a course of action
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peak
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the top of the business cycle where an expansion has ended and is about to turn down
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perfectly elastic
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Ed=infinity. In this special case, the demand curve is horizontal meaning consumers have an instantaneous and infinite response to a change in price
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perfectly inelastic
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Ed=0. In this special case, the demand curve is vertical and there is absolutely no response to a change in price.
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positive externality
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The existence of spillover benefits upon third parties from the production of a good.
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present value
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The amount of money needed today, to produce, at a given interest rate, a given amount of money at some time in the future.
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price ceiling
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a legal maximum price, above which the product cannot be sold
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price discrimination
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the sale of the same product to different groups of consumers at different prices
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price elasticity of demand (ED)
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Measures the sensitivity of consumers' quantity demanded for good X when the price of good X changes.
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price elasticity of supply (ES)
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Measures the sensitivity of producers' quantity supplied for good X when the price of good X changes
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price floor
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A legal minimum price, below which the product cannot be sold.
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price index
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A measure of the average level of prices in a market basket for a given year, when compared to the prices in a reference (or base) year.
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prisoners' dilemma
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A game where the two rivals achieve a less desirable outcome because they are unable to coordinate their strategies
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private goods
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Goods that are both rival and excludable
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producer surplus
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The difference between the price received and the marginal cost of producing the good.
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productive efficiency
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Production of maximum output for a given level of technology and resources.
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production function
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The mechanism for combining production resources, with existing technology, into finished goods and services
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production possibilities
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The different quantities of goods that an economy can produce with a given amount of scarce resources
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production possibilities frontier
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the graphical device used to show the production possibilities of two goods
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production possibility curve
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The graphical device that shows the combination of the two goods that a nation can efficiently produce with available resources and technology.
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productivity
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the quantity of output that can be produced per worker in a given amount of time.
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profit maximizing resource employment
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The firm hires a resource up to the point where MRP=MRC.
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progressive tax
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A tax where the proportion of income paid rises as income rises
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proportional tax
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a tax where the proportion of income paid in taxes is constant no matter the level of income
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protective tariff
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An excise tax levied on an imported good that is produced in the domestic market so that it may be protected from foreign competition
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public goods
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goods that are both nonrival and nonexcludable
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quantity theory of money
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The theory that an increase in the money supply will not affect real output and will only result in higher prices
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quintiles
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When you rank household incomes from lowest to highest, each quintile represents twenty percent of all households
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quota
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a maximum amount of a good that can be imported into the domestic market
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real GDP
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the value of current production, but using prices from a fixed point in time
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real rate of interest
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the cost of borrowing to fund an investment and equal to the nominal interest rate minus the expected rate of inflation
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recession
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Two or more consecutive quarters of falling real GDP
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recessionary GDP
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the amount by which dull employment GDP exceeds equilibrium real GDP
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regressive tax
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a tax where the proportion of income decreases as income rises
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relative prices
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the price of one unit of good X measured not in currency, but in the number of units of good Y that must be sacrificed to acquire good X
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renewable resources
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Natural resources that can replenish themselves if they are not overexhausted
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required reserves
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the minimum amount of deposits that must be held at the bank for withdrawals
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reserve ratio
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the fraction of total deposits that must be kept on reserve
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resources
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also called factors of production, these are commonly grouped into the four categories of labor, physical capital, land or natural resources, and entrepreneurial ability
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revenue tariff
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an excise tax levied on goods that are not produced in the domestic market
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saving function
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a positive relationship between disposable income and saving
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scarcity
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the imbalance between limited productive resources and unlimited human wants
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second-hand sales
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FInal goods and services that are resold
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shortage
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a situation which, at the going market price, the quantity demanded exceeds the quantity supplied
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short run
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a period of time too short to change the sixe of the plant, but many other more variable, resources can be adjusted to meet demand
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specialization
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production of goods, or performance of tasks, based upon comparative advantage
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spending multiplier
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the amount by which real GSP changes due to a change in spending
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spillover benefits
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additional benefits to society, not captured by the market demand curve from the production of gold
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spillover costs
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additional costs to society, not captured by the market supply curve from the production of a good
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stagflation
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a situation seen in the macroeconomy when inflation and the unempoyment rate are both increasing. Also called cost-push inflation
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sticky prices
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the case when price levels do not change, especially downward, with chanes in AD
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stock
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a certificate that represents a claim to, or share of, the ownership of a firm
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subsidy
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a government transfer, either to consumer or producers, on the consumption or production of a good
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substitute goods
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two goods are consumer substitutes if they provide essentially the same utility to the consumer
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substitution effect
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the change in quantity demanded resulting from a change in the price of one good relative to the price of other goods
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supply curve
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shows the quantity of a good supplied at all prices
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supply schedule
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a table showing quantity supplied for a good
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supply shock
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an economy-wide phenomenon that affects the cost of firms and results in a shifting AS curve
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supply-side fiscal policy
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Fiscal policy centered on incentives to save and invest to prompt economic growth with very little inflation
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surplus
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a situation in which, at the going market price, the quantity supplied exceeds the quantity demanded
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tax bracket
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a range of income on which a given marginal tax rate is applied
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tax multiplier
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the magnitude of the effect that a change in lump sum taxes has on real GDP
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technology
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a nation's knowledge of how to produce goods in the best possible way
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theory of liquidity preference
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Keynes's theory that the interest rate adjusts to bring the money market into equilibrium
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Total Cost (TC)
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the sum of total fixed and total variable costs at any level of output
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Total Product of Labor (TPL)
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production costs that do not vary with the level of output
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total revenue
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the price of a good multiplied by the quantity of goods sold
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total revenue test
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Total revenue rises with a price increase if demand is price inelastic and falls with a price increase if demand is price elastic
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total utility
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the total happiness received from consumption of a number of units of a good
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Total Variable Costs (TVC)
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Production costs that change with the level of output
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total welfare
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the sum of consumer surplus and producer surplus
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trade-offs
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the reality of scarce resources implies that individuals, firms, and governments are constantly faced with difficult choices that involve benefits and costs
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transaction demand
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the amount of money held in order to make transactions
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trough
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the bottom of a cycle where a contraction has stopped and is about to turn up
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underground economy
answer
the unreported or illegal activity, bartering or informal exchange of cash for goods and services that are not reported in official tabulations of GDP
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unit elastic demand
answer
Ed=1. The percentage change in price is equal to percentage change in quantity demanded
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utility
answer
happiness, or benefit, or satisfaction, or enjoyment gained from consumption of goods and services
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utility maximizing rule
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the consumer chooses amounts of goods X and Y, with their limited income, so that the marginal utility per dollar spent is equal for both goods
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utils
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a hypothetical unit of measurement often used to quantify utility, AKA "happy points"
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variable inputs
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Production inputs that the firm can adjust in the short run to meet changes in demand for the firm's output
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velocity of money
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the average number of times that a dollar is spent in a year
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world price
answer
the global equilibrium price of a good when nations engage in trade
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