BUSN (Kelly/Mcgowan) – Chapter 2

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Economy – Definition
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a financial system which represents the flow of resources through society, from production, to distribution, to consumption.
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Economics – Definition
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the study of the choices that people, companies, and governments make in allocating resources.
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Macroeconomics – Definition
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the study of a country’s overall economic issues, such as the employment rate, the GDP, and taxation policies. Affects: what jobs are available, your taxation rate, how far cash goes
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Microeconomics – Definition
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the study of smaller economic units such as consumers, families, and individual businesses.
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Subprime mortgages
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Loans to borrowers with low credit scores, high debt-to-income ratio or other signs of reduced ability to repay money borrowed.
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Fiscal Policy
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Government efforts to influence the economy through taxation and spending decisions that are designed to encourage growth, boost employment, and curb inflation.
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Budget surplus
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Overage that occurs when revenue is higher than expenses over a given period of time
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Budget deficit
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Shortfall that occurs when expenses are higher than revenue over a given period of time.
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Federal Debt
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The sum of all the money borrowed over the years (due to budget deficits) and not yet repaid.
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Redbox – Rate of Growth
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added 1 new location per hour in 2009 total of 22,000 kiosks
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US debt – as of April 2010
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12.8 Trillion ( $41,770 for each citizen)
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Monetary Policy
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Actions that shape the economy by influencing interest rates and the suplly of money.
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Federal Reserve – What is the heirarchal structure
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Has a 7 member board of governors.
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Federal Reserve – Appointments and Terms
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Each member appointed by the president to 14-year term. Terms are staggered: one expires every two years
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Federal Reserve – What does it do?
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Sets monetary policy, and oversees the operation of the 12 Federal reserve Banks that carry out Fed policies and perform banking services for commercial banks in their districts.
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Federal Reserve – Core purpose
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Core Purpose is to influence the size of the money supply
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Money Supply
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the total amount of money within the overall economy. (M1 and M2)
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M1 Money Supply
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All currency (paper bills and metal coins) plus checking accounts and traveler’s checks.
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M2 Money Supply
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All of M1 supply plus most savings accounts, money market accounts, and CD.
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Total of M1 (as of Apr.2010)
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1.7 trillion
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Total of M2 (as of Apr.2010)
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8.5 trillion
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Fed tools for changing money supply
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Open market operations Discount rate changes Reserve requirements
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Open Market Operations
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The Federal Reserve function of buying and selling government securities, which include treasury bonds, notes, and bills.
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Federal Open Market Committee
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Body that determines the open market operations Comprised of 7 governors of FED and 5-of-12 presidents of Federal reserve district banks. Holds 8 regulary scheduled meetings
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Discount Rate
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The rate the fed charges on loans to its commercial banks.
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Reserve Requirement
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A stated percentage of the deposits held by their customers. (Currently 10%)
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Federal Deposit Insurance Corporation
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A federal agency that insures deposits in banks and thrift institutions for up to $100,00 per customer per bank.
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Economic System
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A structure for allocating limited resources
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Capitalism
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An economic system based on private ownership, economic freedom, and fair competition. (also known as the private enterprise or free market system)
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Fundamental Rights of capitalism
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1. The right to own a business and keep after-tax profits 2. The right to private property 3. The right to free choice. 4. The right to fair competition
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Four Degrees of Competition
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Pure competition Monopolistic competition Oligopoly Monopoly
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Pure Competition
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a market structure with many competitors selling virtually identical products. Customers can’t or won’t distinguish one product from another, so no single producer has any control over the price.
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Monopolistic competition
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a market structure with many competitors selling differentiated products. Producers have some control over the price of their wares, depending on the value they offer customers.
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Oligopoly
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a market structure with only a handful of competitors selling products that are either similar or different.
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Monopoly
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a market structure with just a single producer completely dominating the industry.
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Two pieces of legislation against monopolies
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Sherman Antitrust Act of 1890 Clayton Antitrust Act of 1914
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Natural monopoly
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A market structure where one producer completely dominates because it would be inefficient or impractical to have competitors.
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Supply
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The quantity of products that producers are willing to offer for sale at different market prices
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Supply curve
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The graphed relationship between price (y) and quantity (x) from a supplier standpoint. (as price goes up, number produced goes up yielding a curve that slopes upward and rightward)
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Demand
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the quantity of products that consumers are willing to buy at different market prices.
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Demand curve
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the graphed relationsip between price (y) and quantity (x) from a consumer demand standpoint.
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Equilibrium price
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the point on the y-axis where the supply and demand curves intersect.
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Socialism
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an economic system based on the principle that the government should own and operate key enterprises that directly affect public welfare, such as utilities, telecommunications, and healthcare.
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Communism
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an economic and political system that calls for public ownership of virtually all enterprises, under the direction of a strong central government.
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Mixed economies
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Economies that embody elements of both planned and market-based economic systems.
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Gross Domestic Product – GDP
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the total value of all final goods and services produced within a nation’s physical boundaries over a given period of time, adjusted for inflation. A vital measure of economic health 14.7 trillion for U.S. (2008) – 0.3% increase Year-over-year.
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Privatization
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the process of converting government owned businesses to private ownership.
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unemployment rate
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the percentage of people in the labor force over age 16 who do not have jobs and are actively seeking employment.
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Frictional unemployment
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Unemployment reflective of individuals’ rights to change jobs and choose where they want to work
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Structural unemployment
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People who don’t have jobs because the economy no longer needs their skills.
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Cyclical unemployment
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layoffs due to recessions
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Seasonal unemployment
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job loss related to the time of year
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Cost of raising a child
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From birth to 17: $148,300 to $298,700 (exclusive of college)
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Business Cycle
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The periodic contraction and expansion that occur over time in virtually every economy.
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Contraction
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a period of economic downturn, marked by rising unemployment and falling business production.
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Recession
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An economic downturn marked by a decrease in GDP for two consecutive quarters.
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Depression
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An especially deep and long-lasting recession
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Recovery
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a period of rising economic growth and increasing employment, following a contraction. (essentially the transition period between contraction and expansion).
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Expansion
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a period of robust economic growth and high employment.
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Inflation
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A period of rising average prices across the economy.
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hyperinflation
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An average monthly inflation rate of more than 50%
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disinflation
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A period of slowing average price increases
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deflation
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A period falling average prices across the economy (usually associated with very high unemployment).
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Consumer Price Index
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Measure of inflation measures the change in weighted-average price over time in a consumer “market basket” of goods and services chosen by the U.S. Bureau of Labor Statistics.
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Producer Price Index
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Measure of Inflation Measures the change over time in weighted-average wholesale prices.
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Productivity
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the basic relationship between the production of goods and services (output) and the resources needed to produce them (input) calculated via the following equation: ouput/input = productivity.
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Walmart Detergent – % of all US liquid detergent sales ?
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25%

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