Flashcards and Answers – Economics Essay

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Gross Domestic Product
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The total value of goods and services produced within the borders of a country during a specific time period, usually one year.
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Inflation
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A rise in the general level of prices in an economy.
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Economics
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study of how people and societies use limited resources to satisfy unlimited wants; the management of scarcity and choice
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Economy
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A system for coordinating a society’s productive and consumptive activities.
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Market Economy
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An economy in which the decisions of households and firms interacting in markets allocate economic resources.
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Command Economy
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An economy in which production, investment, prices, and incomes are determined centrally by a government.
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Property Rights
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Legally established titles to the ownership, use, and disposal of factors of production and goods and services that are enforceable in the courts.
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Marginal Analysis
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Analysis that involves comparing marginal benefits and marginal costs.
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Opportunity Cost
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Making a choice to give up one thing in order to get something else.
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Microeconomics
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The study of how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices.
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Macroeconomics
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Deals with the economy as a whole. Macroeconomics focuses on the determinants of total national income, deals with aggregates such as aggregate consumption and investment, and looks at the overall level of prices instead of individual prices.
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Positive Economics
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An approach to economics that seeks to understand behavior and the operation of systems without making judgments. It describes what exists and how it works.
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Normative Economics
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An approach to economics that analyzes outcomes of economic behavior, evaluates them as good or bad, and may prescribe courses of action. Also called policy economics.
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Business Cycle
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It shows fluctuations in the level of economic activity in an economy over time and suggests that the changes are cyclical. There are four stages, depression (slump), recovery, boom, and recession. https://o.quizlet.com/3RehNvEe14.PrGuZ-iJVNA_m.jpg
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Depression
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A long-term economic state characterized by unemployment and low prices and low levels of trade and investment
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Recession
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A period of declining real GDP, accompanied by lower real income and higher unemployment.
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Expansion
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A period of economic growth as measured by a rise in real GDP
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Unemployment Rate
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Number of unemployed/civilian labor force https://o.quizlet.com/l2TDfVQ.sRukd4rdmNU.Zw_m.png
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Labour Force
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Everyone who is employed plus those unemployed (out of work but actively seeking work)
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Deflation
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A decline in the price level
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Price Stability
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no inflation or deflation; no rapid changes in price level
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Economic Growth
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An increase in real output as measured by real GDP or per capita real GDP.
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Economic Model
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A simplified equation, graph, or figure showing how something works.
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Production Possibility Frontier
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Diagram representing maximum combinations of goods and/or services an economy can produce when all productive resources are fully employed. https://o.quizlet.com/8RkiLugrz8xo.ju-k7zuKw_m.png
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Production Possibility Curve
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Diagram representing maximum combinations of goods and/or services an economy can produce when all productive resources are fully employed. https://o.quizlet.com/8RkiLugrz8xo.ju-k7zuKw_m.png
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Trade off
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Alternative that must be given up when one choice is made rather than another.
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Efficiency
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Condition in which maximum output is obtained from the resources used to produce goods and services
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Specialisation
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Goods and services are produced in better quality, quantity and speed when people focus on producing a few things instead of making everything they want by themselves.
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Comparative Advantage
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The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers.
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Absolute Advantage
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The ability to produce a good using fewer inputs than another producer
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Competitive Market
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A market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold.
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Supply Curve
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A curve that shows the relationship between the price of a product and the quantity of the product supplied. https://o.quizlet.com/cD1gLJtOr2TJt6JUhbhEcA_m.jpg
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Law of Supply
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Holding all else equal, when the price of a good rises, suppliers increase their quantity supplied for that good
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Quantity Supplied
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The amount of a good or service that a firm is willing and able to supply at a given price.
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Quantity Demanded
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The amount of a good or service that a consumer is willing and able to purchase at a given price.
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Law of Demand
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Holding all else equal, when the price of a good rises, consumers decrease their quantity demanded for that good
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Demand Curve
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A graph of the relationship between the price of a good and the quantity demanded https://o.quizlet.com/M72ltsAuAE..vgvbOMMATQ_m.png
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Demand Schedule
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A table that shows the relationship between the price of a good and the quantity demanded
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Substitutes
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Goods and services that can be used for the same purpose.
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Compliments
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Two goods for which a decrease in the price of one good increases the demand for the other good
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Normal Good
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A good for which, other things equal, an increase in income leads to an increase in demand
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Inferior Good
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A good for which, other things equal, an increase in income leads to a decrease in demand.
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Equilibrium
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A situation in which the market price has reached the level at which quantity supplied equals quantity demanded https://o.quizlet.com/jk6T-wi6jRgio66-9EBnPw_m.png
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Excess Supply or Surplus
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A situation in which quantity supplied is greater than quantity demanded
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Excess Demand or Shortage
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A situation in which quantity demanded is greater than quantity supplied https://o.quizlet.com/i/5yflpd3xc4vyNIo7vkDzSA_m.jpg
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Price Controls
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Government-mandated prices that are generally imposed in the form of maximum or minimum legal prices.
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Price Ceiling
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A maximum price that can be legally charged for a good or service https://o.quizlet.com/gjs3AX4CM2cQJb6B22icqQ_m.png
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Price Floor
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A legal minimum on the price at which a good can be sold https://o.quizlet.com/.31XeMmOEYExLpDhUGXLuw_m.png
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Quota
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A limit placed on the quantities of a product that can be imported
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Deadweight Loss
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The fall in total surplus that results from a market distortion, such as a tax. https://o.quizlet.com/ZR6GVa.FslIvK.ZEd7obSw_m.png
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Circular Flow Diagram
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A diagram of the economy that shows the flow of goods and services, factors of production, and monetary payments between households and firms https://o.quizlet.com/i/IJgkT8_9tjuJCxI-dyEemA_m.jpg
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Product Market
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A market in which products are sold by firms and bought by households.
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Factor Market
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A market for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability.
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Stocks
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shares of ownership in a company
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Bonds
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A certificate issued by a government or private company which promises to pay back with interest the money borrowed from the buyer of the certificate.
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Government Transfers / Transfer Payments
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payments by the government to individuals for which no good or service is provided in return
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Imports
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Goods and services bought domestically but produced in other countries
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Exports
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Goods and services that are produced domestically and sold abroad
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Investment Spending
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spending on productive physical capital, such as machinery and construction of structures, and on changes to inventories
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Real GDP
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gross domestic product (GDP) adjusted to account for changes in currency values and price changes
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Value Added
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The difference between a good’s selling price and the “intermediate goods” used to make the good
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GDP Formula
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Y = C + I + G + (X – M)
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Nominal GDP
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GDP measured in current prices
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GDP per capita
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total value of goods and services produced in a year divided by the population
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Underemployed
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Working at a job for which one is overqualified, or working part-time when full-time work is desired.
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Frictional Unemployment
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A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.
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Structural Unemployment
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unemployment that results from a mismatch between the skills of the unemployed and the skills required in the labour market
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Cyclical Unemployment / Demand Deficient Unemployment
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Unemployment attributable to a general decline in macroeconomic activity, especially expenditures on gross domestic product, that occurs during a business-cycle contraction. When the economy dips into a contraction, or recession, aggregate demand declines, so less output is produced and fewer workers and other resources are employed
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Efficiency Wages
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above-equilibrium wages paid by firms to increase worker productivity
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Natural Rate of Unemployment
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The “normal” unemployment rate due to frictional and structural conditions in labour markets. It is the unemployment rate that occurs when the economy is operating at a sustainable rate of output.
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Shoe Leather Costs
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the increased costs of transactions caused by inflation
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Menu Costs
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The costs to firms of changing prices
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Nominal Interest Rate
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Market interest rate actually charged by the financial institutions and earned by bondholders
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Real Interest Rate
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Nominal Interest Rate – Inflation Rate
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GDP Deflator
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A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100
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Price Index
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An index that traces the relative changes in the price of an individual good (or a market basket of goods) over time
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Consumer Price Index
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A measure of the overall cost of the goods and services bought by a typical consumer
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Producer Price Index
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An average of the prices received by producers of goods and services at all stages of the production process
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Marginal Propensity to Consume
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MPC = Marginal Propensity to Consume – the ratio of the change in consumption spending to a given change in income. MPC = change in C / change in Y
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Marginal Propensity to Save
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Increase in household savings when disposable income rises by £1.
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Spending Multiplier
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1/MPS; the factor by which GDP grows as a result of more spending
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Multiplier
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Ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that automomous change.
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Consumption Function
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The relationship between consumption spending and disposable income
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Investment Spending
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spending on productive physical capital, such as machinery and construction of structures, and on changes to inventories
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Planned Investment Spending
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the investment spending that businesses intend to undertake during a given period
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Unplanned Inventory Investment
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occurs when actual sales are more or less than businesses expected, leading to unplanned changes in inventories
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Aggregate Demand Curve
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A curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government.
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Wealth Effect
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When price levels increase, the market value of certain financial assets decreases (fixed rate bonds) causing individuals to have less wealt
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Interest Rate Effect
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If the average price level rises, consumers and firms might need to borrow more money for spending and capital investment, which increases the interest rate and delays current consumption. This postponement reduces current consumption of domestic production as the price level rises.
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Fiscal Policy
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The federal government efforts to keep the economy stable by increasing or decreasing taxes or government spending
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Monetary Policy
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Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.
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Aggregate Supply Curve
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shows the quantity of goods and services that firms choose to produce and sell at each price level
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Short Run Aggregate Supply Curve
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aggregate supply that varies with the level of demand for goods and services and that is shifted by changes in the cost of factors of production
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Long Run Aggregate Supply Curve
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shows the relationship between the price level and the quantity of real GDP supplied in the long run –> no actual relation; the curve is vertical
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Nominal Wage
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the amount of money received by a worker per unit of time (hour, day, etc.); money wage
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Sticky Wage
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are nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages
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Potential Output
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the level of output the economy could produce if operating at full employment
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Long Run Equilibrium
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the condition that exists in the economy when wages and prices have adjusted to their equilibrium levels and workers do not have any relevant misperceptions. Occurs at the intersection of the AD and LRAS curves https://o.quizlet.com/i/R7IGZGwHRcYWMh5MG-qwYA_m.jpg
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Demand Shock
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an event that shifts the aggregate demand curve
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Supply Shock
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An unexpected event that causes the short-run aggregate supply curve to shift
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Stagflation
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a period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)
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Recessionary Gap
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Amount by which equilibrium output is below potential output.
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Inflationary Gap
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The amount by which aggregate spending at full employment exceeds full-employment output.
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Output Gap
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The gap between real GDP and potential GDP
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Expansionary Fiscal Policy
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An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output
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Contractionary Fiscal Policy
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A decrease in government purchases of goods and services, an increase in net taxes, or some combination of the two, for the purpose of decreasing aggregate demand and thus controlling inflation.
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Lump Sum Taxes
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taxes that dont depend on the taxpayers incomes
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Automatic Stabilizers
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Changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action
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Discretionary Fiscal Policy
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Deliberate changes of government expenditures and/or taxes to achieve economic goals.
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Savings-Investment Spending Identity
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an accounting fact that states that savings and investment spending are always equal for the economy as a whole.
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Interest Rate
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Cost of borrowing money, expressed as a percentage of the amount borrowed per year.
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Budget Surplus
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An excess of tax revenue over government spending
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Budget Deficit
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Government expenditures that exceed receipts.
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Budget Balance
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the difference between tax revenue and government spending
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National Savings
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the sum of private savings and the government’s budget balance; the total amount of savings generated within the economy.
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Capital Inflow
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the net inflow of funds into a country; the difference between the total inflow of foreign funds to the home country and the total outflow of domestic funds to other countries. A positive net capital inflow represents funds borrowed from foreigners to finance domestic investment; a negative net capital inflow represents funds lent to foreigners to finance foreign investment.
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Asset
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Anything of value that is owned
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Liability
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An amount owed by a business
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Net Worth
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Assets minus Liabilities
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Equity
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Amount of owners’ or shareholders’ portion of a business.
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Liquidity
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A measure of the ease with which an asset can be converted into money without a significant loss of value.
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Financial Intermediaries
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Institutions that “connect” borrowers and lenders by accepting funds from lenders and loaning funds to borrowers
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Mutual Fund
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a regulated investment company with a pool of assets that regularly sells and redeems its shares
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Pension Fund
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Large pools of money set aside by corporations, unions, and governments for later use in paying retirement benefits to their employees or members
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401K
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A defined contribution plan that automatically takes out money from an employee’s paycheck before income taxes and invests it in mutual funds for purposes of retirement savings
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Diversification
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Buying several different investment alternatives to spread the risk of investing.
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Money Supply
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The amount of money in a country or economy.
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M1
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A measure of the money supply that includes cash, demand deposits, and traveler’s checks
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M2
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All of M1 + less immediate (liquid) forms of money to include savings, money market mutual funds, and small denomination time deposits.
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M3
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All of M1 + M2 + large denomination time deposits and large-denomination repurchase agreements.
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Medium of Exchange
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Anything that is used to determine value during the exchange of goods and services
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Store of Value
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Something that keeps its value if it is stored rather than used
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Unit of Account
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A means for comparing the values of goods and services
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Fiat Money
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Money that has value because the government has ordered that it is an acceptable means to pay debts
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Commodity Money
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objects that have value in themselves and that are also used as money
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Near Monies
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close substitutes for transactions money, such as savings accounts and money market accounts
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Present Value
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FV/(1 + i) to the n’th power
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Future Value
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PV(1+i)^n
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Bank Reserves
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the currency banks hold in their vaults plus their deposits at the Federal Reserve
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T Account
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Accounting device used to analyze transactions. https://o.quizlet.com/i/SakATaSfQJXKrrmB1JkPow_m.jpg
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Reserve Ratio
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The fraction of deposits that banks hold as reserves
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Reserve Requirement
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This is the percentage of their deposits that member banks must keep available in a Federal Reserve Bank.
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Money Multiplier
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1/RR
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Discount Window
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a protection against bank runs in which the Federal Reserve stands ready to lend money to banks in trouble.
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Fractional Banking
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a banking system in which banks hold only a fraction of deposits as reserves
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Excess Reserves
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reserves that banks hold over and above the legal requirement
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Loanable Funds
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The aggregate of all the individual markets in which households, firms, governments, banks, and other financial institutions borrow and lend
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Federal Reserve Bank
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The central bank for the United States, charged with enforcing monetary policy.
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FOMC
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(Federal Open Market Committee) A body that controls the Fed’s sale and purchase of government securities. The FOMC consists of the seven members of the Federal Reserve Board, plus the President of the Federal Reserve Bank of New York, and four other Federal Reserve Bank presidents.
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Commercial Banks
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Privately owned financial institutions that accept demand deposits and make loans and provide other services for the public
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Investment Banks
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Financial institutions that assist firms in the process of issuing securities to investors. Investment banks also advise firms engaged in mergers and acquisitions, and they are active in the business of selling and trading securities in secondary markets.
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Savings and Loans
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A place that specializes in accepting savings deposits and making mortgages and other loans
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Leverage
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Borrowing by an individual or institution to expand the size of an investment. In so doing, the potential return from the investment may increase as well as the risk of the investment.
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Subprime Lending
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lending to home-buyers who don’t meet the usual criteria for being able to afford their payments
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Securization
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the process of packaging a group of assets into a financial security ( a security is a holders legal interest in a corporation, certificate, or note that may increase in financial value over time. this potential for increase makes it an investment
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Collateral
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A security pledged for the repayment of a loan.
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Discount Rate
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The interest rate on the loans that the Fed makes to banks
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Federal Funds Rate
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The interest rate at which banks make overnight loans to one another
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Open Market Operations
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Buying & selling government securities to change the supply of money
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Money Market
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A mutal fund or account thtat invest in short-term, liquid investments. these funds generally pay better that a savings accountwith a bank, but less than a typical stock mutual fund. These funds are comsidered very low risk.
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Money Demand Curve
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shows the relationship between the quantity of money demanded and the interest rate https://o.quizlet.com/MNLQQ6oWVaJ3oJokOAsbOA_m.png
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Money Supply Curve
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shows how the quantity of money supplied varies with the interest rate https://o.quizlet.com/bn5-41UXZrCDESOb5dypHw_m.png
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Loanable Funds Market
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a hypothetical market that illustrates the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders https://o.quizlet.com/BMl-DqJVHwRj6Sg85gbIbg_m.png
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Fisher Effect
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A rise in the rate of inflation causes the nominal rate to rise just enough so that the real rate of interest is unaffected. In other words, the real rate is invariant to the rate of inflation.
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Lorenz Curve
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Graph showing how much the actual distribution of income differs from an equal distribution https://o.quizlet.com/ktVw.mbydRCFmSBHtq6FoQ_m.jpg
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Laffer Curve
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Term used to describe a tax revenue curve suggesting the supply side economics result that lower taxes can raise government revenues. https://o.quizlet.com/WN-dcNX1hYaHKIKGgmx9ow_m.png
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Real Interest Rate
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Nominal Interest Rate – Inflation Rate
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Fiscal Year
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Runs from October 1st to September 30th
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Public Debt
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all of the money borrowed by the government and not yet repaid, plus the accrued interest on that money; also called the national debt or federal debt
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Debt-GDP Ratio
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government debt as a percentage of GDP, frequently used as a measure of a government’s ability to pay its debts.
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Monetary Neutrality
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the proposition that changes in the money supply do not affect real variables
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Inflation Tax
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the reduction in the value of money held by the public caused by inflation
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Cost Push Inflation
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When prices rise due to an increase in the cost of production.
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Demand Pull Inflation
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increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand
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Short Run Phillips Curve
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is the negative short run relationship between the unemployment rate and the inflation rate https://o.quizlet.com/o1YxFn.sm.ib.MKGWOeKSw_m.jpg
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Long Run Phillips Curve
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Relationship between the inflation rate and the unemployment rate in the long run, looks at long-term natural rate of unemployment. https://o.quizlet.com/uEtwPkShqEB0U9LcfGGaHA_m.jpg
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Supply Shocks
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A supply shock is an economy-wide phenomenon that affects the costs of firms, and the position of the AS curve, either positively or negatively
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Natural Rate of Unemployment
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The “normal” unemployment rate due to frictional and structural conditions in labor markets. It is the unemployment rate that occurs when the economy is operating at a sustainable rate of output.
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Classical Economic Thought
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includes the invisible hand, Laissez Faire, limited role of the government, supply creates its own demand, economy will be pushing towards a fuller capacity, lower interest rates, and that wages and prices will adjust downward and eventually people will start hiring again, whatever money isnt spent will be put in the bank and borrowed which circulates it
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Keynesian Economic Thought
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named after English economist John Maynard Keynes, the theory emphasizing that government spending and deficits can help the economy deal with its ups and downs. Proponents of this theory advocate using the power of government to stimulate the economy when it is lagging.
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Monetarist
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Economists who believe that (1) monetary instability is the major cause of fluctuations in real GDP and (2) rapid growth of the money supply is the major cause of inflation.
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Monetarism
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An economic philosophy that assumes inflation occurs when there is too much money chasing too few goods. Suggests that the proper thing for government to do is to have a steady, predictably increase in the money supply at a rate about equal to the growth in the economy’s productivity
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Quantity Theory of Money
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A theory that asserts that the quantity of money determines the price level and that the growth rate of money determines the rate of inflation
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Velocity of Money
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The average number of times each dollar in the money supply is used to purchase goods and services included in GDP
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Rational Expectations
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the view that individuals and firms make decisions optimally, using all available information
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Production Function
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The relationship between quantity of inputs used to make a good and the quantity of output of that good https://o.quizlet.com/i/sbg8bTkX_y3N_HTiUrucHg_m.jpg
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Infrastructure
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(n.) a basic foundation or framework; a system of public works; the resources and facilities required for an activity; permanent military installations
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Balance of Payments
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a system of recording all of a country’s economic transactions with the rest of the world over a period of one year
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Current Account
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A category of balance of payments transactions that measures the exchange of merchandise, the exchange of services, and unilateral transfers.
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Capital Account
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(economics) that part of the balance of payments recording a nation’s outflow and inflow of financial securities
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Official Reserves
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are the government’s holdings of foreign currency
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Trade Balance
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the value of a nation’s exports minus the value of its imports; also called net exports
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Foreign Exchange Market
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The market in which the currencies of different countries are bought and sold.
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Exchange Rate
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The price at which one currency is exchanged for another.
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Appreciation
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An increase in the value of a currency
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Depreciation
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A decrease in exchange rate in a floating exchange rate system
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Revaluation
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An increase in the official value of a currency (in a fixed-exchange-rate system).
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Devaluation
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A decrease in the governmentally defined value of a currency.
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Real Exchange Rate
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the rate at which a person can trade the goods and services of one country for the goods and services of another
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Purchasing Power Parity
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a measure of how many units of currency are needed in one country to buy the amount of goods and services that one unit of currency will buy in another country
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Fixed Exchange Rate
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An exchange rate policy under which a government commits itself to keep its currency at or around a specific value in terms of another currency or a commodity, such as gold.
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Floating Exchange Rate
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A system under which the exchange rate for converting one currency into another is continuously adjusted depending on the law of supply and demand

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