question

absolute advantage

answer

the ability to produce something more efficiently

question

capital

answer

productive equipment or machinery

question

comparative advantage

answer

the ability to produce something with a lower opportunity cost

question

economics

answer

a social science that studies how resources are used and is often concerned with how resources can be used to their fullest potential

question

efficiency

answer

using resources to their maximum potential

question

labor

answer

all human activity that is productive

question

land

answer

all natural resources

question

law of Increasing costs

answer

law that states that when more of a product is initially being produced, the higher the opportunity cost will be to produce still more

question

macroeconomics

answer

economic problems encountered by the nation as a whole

question

microeconomics

answer

economic problems faced by individual units within the overall company

question

opportunity cost

answer

the amount of one good that must be sacrificed to obtain an alternative good

question

positive economics

answer

economic analysis that draws conclusions based on logical deduction or induction (value judgements are avoided)

question

production possibilities frontier

answer

the combinations of two goods that can be produced if the economy uses all of its resources fully and efficiently

question

normative economies

answer

economies involving value judgement

question

resource

answer

anything that can be used to produce a good or service

question

allocative efficiency

answer

term for resources being deployed to produce just the right amount of each product to satisfy society's wants

question

capitalism

answer

an economic system where supply and demand determine prices

question

circular flow diagram

answer

diagram that shows how households and firms are related by the exchange of resources and products

question

command economy

answer

economy in which the central government dictates what will or will not be produced and who gets what

question

the law of demand

answer

law that states that when the price of a product increases, the quantity demanded decreases, ceteris paribus

question

law of supply

answer

law that states that when the price of a product increases, the quantity supplied increases, ceterus paribus

question

mixed economy

answer

a blend of government commands and capitalism

question

consumption expenditures

answer

all the goods and services sold to households

question

disposable personal income (DPI)

answer

the income of households after taxes have been paid

question

government expenditures

answer

goods and services sold to governments

question

gross domestic product (GDP)

answer

dollar value of production within a nation's borders

question

gross national product (GNP)

answer

dollar value of production by a country's citizens

question

intermediate sales

answer

sales to firms that will incorporate the item into their final product

question

investment sales

answer

sales to firms that will incorporate the item into their final product

question

investment expenditures

answer

expenditures by businesses on plants and equipment plus the change in business inventories

question

national income (NI)

answer

the income earned by households and profits earned by firms after subtracting depreciation and indirect business taxes

question

national income and product accounts (NIPA)

answer

a comprehensive group of statistics that measures various aspects of the economy's performance

question

net exports

answer

exports minus imports

question

personal income (PI)

answer

income received by households

question

real GDP

answer

GDP adjusted for the price changes

question

underground economy

answer

all the illegal production of goods and services and legal production that does not pass through markets

question

GDP

answer

C+I+G+X

question

GDP per capita

answer

GDP/population

question

consumer price index (CPI)

answer

measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services

question

cyclical unemployment

answer

loss of jobs by individuals during a recession and the corresponding slowdown in production

question

fisher's hypothesis

answer

Nominal Interest Rate= Real Interest Rate + Expected Inflation

question

frictional unemployment

answer

state of being out of work because the person is in between jobs

question

GDP deflator

answer

measure of the level of prices in the economy

question

hidden unemployment

answer

describing those who are able to work but who are not actively seeking employment because they are discouraged about their prospects for finding employment

question

inflation

answer

a sustained rise in most prices in the economy

question

menu cost

answer

the misallocation of resources because of inflation

question

nonaccelerating inflation rate of unemployment

answer

the full employment rate of unemployment; when employment falls below this rate, inflation accelerates

question

seasonal unemployment

answer

state of being out of work because of the time of year

question

structural unemployment

answer

state of being out of work because the economy is structured, or set up, to a person's disadvantage

question

unemployment rate

answer

the number of unemployed persons divided by the labor force

question

CPI

answer

(Total Cost this Period/Total Cost Base Period) x 100

question

Inflation rate

answer

[(this period CPI-previous period CPI)/previous period CPI] x 100

question

GDP deflator

answer

(GDP/Real GPD) x 100

question

Real GDP

answer

(GDP/GDP deflator) x 100

question

Nominal Interest Rate

answer

Real Interest Rate + Expected Inflation

question

Unemployment Rate

answer

Number of unemployed/civilian labor force

question

aggregate demand

answer

the demand for all goods and services by all households, business, governments, and foreigners

question

aggregate supply

answer

the supply of all goods and services by all producers in the economy

question

break-even point

answer

point where the consumption function crosses the 45 degree line and income equals spending so that saving is zero

question

business cycle

answer

a wave of economic activity comprised of an expansion and a recession

question

classical economic theory

answer

the predominant paradigm in economic analysis from about 1800 until 1930, based on Say's Law

question

consumption theory

answer

the relationship between consumer spending and income

question

equilibrium price level

answer

the price level that equates aggregate supply and aggregate demand, the average level of prices in the economy

question

equilibrium quantity

answer

the amount of output that results in no shortage or surplus, the amount of goods and service bought and sold in the economy

question

expansion

answer

a sustained improvement in economic activity

question

Keynesian theory

answer

theory that opposes Classical theory by emphasizing the short run and focusing on economies that are operating below full capacity

question

marginal propensity to consume (MPC)

answer

idea that given an extra dollar, how much is spent?

question

multiplier

answer

an initial change in spending in the economy that will have a magnified, or multiplied, effect on income

question

recession

answer

a sustained decline in economic activity

question

Say's Law

answer

theory that supply creates its own demand

question

MPC

answer

change in spending / change in income

question

Multiplier

answer

1/(1-MPC)

question

total change in income

answer

Initial Change in Spending x Multiplier

question

automatic stabilizers

answer

government policies already in place that promote deficit spending during recessions and surplus budgets during expansions

question

crowding out

answer

the increase in interest rates and subsequent decline in spending that occurs when the government borrows money to finance a deficit

question

deficit

answer

situation that exists when government spending exceeds tax revenues

question

fiscal policy

answer

changes in government spending and taxes to fight recessions or inflations

question

inflationary gap

answer

what occurs when the equilibrium quantity of output is above potential output

question

Phillips tradeoff

answer

the inverse relationship between inflation and unemployment

question

rational expectations

answer

the idea that households and businesses will use all the information available to them when making economic decision

question

recessionary gap

answer

what occurs when the equilibrium quantity of output is below potential output

question

stagflation

answer

term used to describe the situation when the economy experiences inflation and a recession simultaneously

question

surplus

answer

spending by the government that is less than tax revenues

question

change in real GDP

answer

Initial Change in Spending x Multiplier

question

certificate of deposit

answer

debt instrument that is similar to a savings account except the interest rate is slightly greater and the deposit cannot be drawn on without penalty

question

currency

answer

coins and paper money

question

discount rate

answer

the rate of interest the FED charges when it makes loans to depository institutions

question

excess reserves

answer

the amount of any deposit that does not have to be held aside and may be used to make loans and buy investments

question

federal reserves

answer

the central bank of the United The United States

question

fiat money

answer

money that is not backed by any precious commodity

question

government securities

answer

IOUs that the government issues when it borrows money

question

liquidity

answer

the ability to turn an asset into cash rapidly and without loss

question

M1

answer

currency, transaction accounts, and travelers' checks

question

M2

answer

M1 plus savings accounts, certificates of deposit, and other liquid assets

question

money

answer

anything that society generally accepts in payment for a good or service

question

money multiplier

answer

1/reserve requirement, the multiple by which the money supply will change because of a change in bank reserves

question

open market operations

answer

activities in which the FED buys and sells government securities in the secondary market

question

required reserves

answer

the amount of any deposit that must be held aside and not used to make loans or buy investment

question

reserve requirement

answer

the percentage of any deposit that must be held aside and not used to amke loans or buy investments

question

savings account

answer

an account at a depository institution that earns interest while the funds are readily available but cannot be withdrawn with checks

question

secondary market

answer

place where government securities that have already been issued may be bought or sold

question

transaction account

answer

a checking account at a bank or a similar account at some other depository institution

question

money multiplier

answer

1/ Reserve Requirement

question

change in money supply

answer

Money Multiplier x Change in Bank Reserves

question

board of governors

answer

executive board of the FED that makes major monetary policy decisions

question

demand management policy

answer

monetary and fiscal policy

question

equation of exchange

answer

M x V = P x Q; the money supply times its velocity equals the price level times output

question

federal open market committee (FOMC)

answer

a committee within the FED that designs and executes the particular of monetary policy

question

monetarist

answer

one who believes that changes in the money supply have a profound effect on the economy

question

monetary neutrality

answer

policy in which a change in the money supply would result in a proportional change in prices while real variables, such as the unemployment rate, would be unaffected

question

monetary policy

answer

changes in the money supply to fight recessions or inflations

question

money demand

answer

the amount that households and firms want to hold in currency and deposits

question

velocity of money

answer

describing the number of times the typical dollar of M1 or M2 is used to make purchases during a year

question

equation of exchange

answer

M x V = P x Q

question

capital productivity

answer

the amount of output per unit of plant and equipment

question

economic growth

answer

growth of output usually measured by the percentage change in real GDP or real GDP per capita

question

human capital

answer

the skill and knowledge embodied in the labor force

question

labor productivity

answer

the amount of output per unit of labor

question

potential GDP

answer

the amount that can be produced using resources fully and efficiently

question

productivity

answer

output per unit of input

question

total productivity

answer

the amount of all inputs

question

Rule of 70

answer

years it takes a variable to double =70/the annual growth rate of the variable

question

appreciation

answer

the increase of the value of a currency in terms of another currency

question

balance of payments

answer

an accounting of the funds that flow in and out of a country comprised of the capital account and the current account

question

balance of trade

answer

a nation's exports minus its imports

question

capital account

answer

a portion of the balance of payments comprised of foreign purchases of US assets minus US purchases of foreign assets, plus the change in official reserves

question

closed economy

answer

a hypothetical economy with no foreign trade

question

current account

answer

a portion of the balance of payments comprised of the trade balance, net investment income, and net transfers

question

depreciation

answer

the decrease of the value of a currency in terms of another currency

question

dumping

answer

the practice or foreign producers selling a product in the domestic market for less than it cost to produce it

question

exchange rate

answer

the value of one country's currency in terms of another's

question

gold standard

answer

a unit of one currency that is equivalent to a stated amount of gold

question

import quota

answer

a limit on the amount of a product that can be imported

question

import tariff

answer

a tax on a specified import product

question

infant industries

answer

those industries that are just getting started, perhaps requiring trade restrictions

question

intervention

answer

situation in which a nation or group of nations uses their official reserves to supply or demand a currency in order to alter the exchange rate

question

managed float

answer

an exchange rate regime where supply and demand determine exchange rates with occasional intervention when warranted

question

net investment income

answer

amount US citizens earned as interest and dividends from abroad minus how much was paid to foreigners in interest and dividends

question

net transfers

answer

money our government and citizens send as gifts or aid to foreigners minus how much foreigners send to us in gifts and aid

question

official reserves

answer

government's holdings of foreign currencies

question

open economy

answer

an economy with foreign trade

question

trade deficit

answer

excess of a nation's imports over its exports

question

trade surplus

answer

excess of a nation's exports of over its imports

question

balance of payments

answer

current account +capital account

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