Economics Ch. 9-13 – Flashcards

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a relatively high tax designed to raise revenue while reducing consumption of a socially undesirable product
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sin tax
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tax on liquor or tobacco
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example of sin tax
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the cost of production goes up which causes prices to rise and causes people to buy less which then causes companies to cut back on the factors of production (land, capital, labor, etc.)
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What can happen to factors of production when prices go up as an end result of taxation?
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final burden of a tax
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incidence of a tax
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demand must be inelastic
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What situation must exist to make it easier to shift the incidence of a tax to the consumer?
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it changes the incentives to save, invest, and work
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What effect might taxes have on productivity and economic activity?
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1. Equity 2. Simplicity 3. Efficiency
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What are the 3 criterion for effective taxes?
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exception/oversight in the tax law allowing a taxpayer to avoid paying certain taxes
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tax loophole
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if taxes have fewer exceptions, deductions, and exemptions, then taxes are viewed as being fairer
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What criteria is generally recognized as making taxes fairer?
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when the tax laws are simple and easy to understand
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What makes taxes tolerable to many people?
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federal tax levied on the wages, salaries, and other income of individuals
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individual income tax
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general tax levied on most consumer purchases
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sales tax
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1. tax should be easy to administer 2. tax should generate enough worthwhile revenue that doesn't harm the economy
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What are the two criteria for making a tax efficient?
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annual report by a taxpayer filed with the local, state, or federal gov't detailing income earned and taxes owed
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tax return
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belief that taxes should be paid according to benefits received regardless of income
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benefit principle of taxation
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belief that taxes should be paid according to level of income, regardless of benefits received
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ability-to-pay principle
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1. the benefits received from the gov't can't always be measured 2. people with higher income suffer less discomfort than people with lower income
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What two factors is the ability-to-pay principle based on?
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1. proportional tax 2. progressive tax 3. regressive tax
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3 general types of taxes in the U.S.
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percentage of income paid in tax is the *same* regardless of the level of income
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proportional tax
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percentage of income paid in tax *rises* as the level of income rises (people with higher income pay more tax than lower income people)
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progressive tax
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percentage of income paid in tax goes *down* as income rises (people with lower incomes pay more taxes than people with higher incomes)
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regressive tax
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total taxes paid divided by the total taxable income
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average tax rate
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federal health-care program for senior citizens
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Medicare
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tax rate that applies to the next dollar of taxable income
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marginal tax rate
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benefit
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Gasoline taxes are a good example of the ___________ principle of taxation.
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Progressive
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Paying $1,000 tax on $10,000 of taxable income, $4,000 on $20,000 of taxable income, and $20,000 on $60,000 of taxable income is an example of a tax system that is ___________________.
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a line-item budget expenditure that circumvents normal budget procedures and benefits a small number of people or business
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pork
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that part of the economy made up of local, state, and federal gov'ts
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public sector
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1. a major change in public opinion gave the gov't a larger role in everyday economic affairs (FDR's New Deal) 2. massive gov't spending funded the U.S. involvement in WW2
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What are the two main causes for the growth in gov't spending since the 1930s?
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that part of the economy made up of private individuals and businesses
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private sector
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1. the gov't pays to hire workers, maintain utilities, and give supplies. (tanks, office buildings, etc.) 2. transfer payments such as Social security, welfare, unemployment compensation, and aid for people with disabilities
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2 types of gov't spending
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payment for which the gov't receives neither goods nor services in return
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transfer payment
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transfer payment from one level of the gov't to another that doesn't involve compensation
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grant-in-aid
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gov't payment to encourage or protect a certain economic activity
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subsidy
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way in which the nation's income is divided among families, individuals, or other designated groups
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distribution of income
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annual gov't spending in excess of taxes and other revenues
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deficit spending
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the state of the economy, the changes in the economy, and the way expenditures are reported
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What factors affect the accuracy of the deficit projection?
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total amount borrowed from investors to finance the government's deficit spending
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national debt
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annual budget in which expenditures equal revenues
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balanced budget
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If the federal budget runs a surplus, then the debt goes down.
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What is the only way the annual budget can lower the federal debt?
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special account used to hold revenues designated for a specific expenditure such as Social Security, Medicare, or highways
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trust fund
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Because trust fund balances represent money the gov't owes to itself
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Why do most economists tend to disregard trust fund balances?
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per person basis; total divided by population
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per capita
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higher-than-normal interest rates caused by heavy gov't borrowing
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crowding-out effect
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It causes a transfer of purchasing power from the private sector to the public sector
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What happens to the purchasing powers of individuals as a consequence of national debt?
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requirement that new spending proposals or tax cuts must be offset by reductions elsewhere
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pay-as-you-go provision
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pay-as-you-go provision
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What was the 1990 Budget Enforcement Act's main feature?
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power to cancel specific budget items without rejecting the entire budget
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line-item veto
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limits on annual discretionary spending
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spending cap
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program/benefit using established eligibility requirements to provide health, nutritional, or income supplements to individuals
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entitlements
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entitlements are classified as mandatory spending in the federal budget
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What is the connection between entitlements and mandatory spending in the federal budget?
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public and private
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What are the two broad categories of gov't spending?
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A. remained fairly constant
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Since 1983, spending by all levels of gov't as a percentage of GDP has ________________. A. remained fairly constant B. has decreased slightly C. has increased dramatically D. has increased
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D. transfer payment
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Social Security is an example of a ___________________. A. pork expenditure B. private sector expenditure C. subsidy D. transfer payment
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Public sector spending
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What directly and indirectly affects how resources are allocated?
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C. The national debt doesn't have to be repaid by a specific date.
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In what way is the national debt different from private debt? A. Most of the national debt is owed to others. B. Private debt doesn't have to be repaid by a specific date. C. The national debt doesn't have to be repaid by a specific date. D. The gov't gives up purchasing power when it repays the national debt.
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The federal deficit leads to borrowing, which adds to the national debt.
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Describe the relationship of the federal deficit to the national debt.
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B. federal money given to a senior citizen as a Social Security payment
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Which of the following is an example of entitlement payment? A. federal money given to a contractor in exchange for military uniforms B. federal money given to a senior citizen as a Social Security payment C. federal money spent to pay interest on the national debt D. federal money spent to build a new public highway
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A. an increase in taxes
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Which of the following normally decreases the federal deficit? A. an increase in taxes B. an increase in spending C. entitlement programs D. low economic activity
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the dollars that become available when people abstain from consumption
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savings
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network of savers, investors, and financial institutions that work together to transfer savings to investors
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financial system
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claims on the property and the income of the borrower
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financial assets
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regular payment intended to provide income security to someone who has worked a certain number of years or reached a certain age
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pension
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degree to which the outcome is uncertain but a probable outcome can be estimated
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risk
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absence of spending that frees resources for use in other activities or investments
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saving
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document showing that an investor has made an interest-bearing loan to a financial institution
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certificate of deposit
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institution that channels savings to investors
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financial intermediary
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1. banks 2. credit unions 3. life insurance companies 4. pension funds 5. savings & loan associations 6. mutual savings banks 7. mutual funds 8. savings banks 9. finance
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examples of financial intermediaries
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non-depository institution that channels savings to investors
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nonbank financial institution
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1. finance companies 2. insurance companies 3. pension funds
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examples of nonbank financial institution
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firm that makes loans directly to consumers and specializes in buying installment contracts from merchants who sell on credit
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finance company
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price paid at regular intervals for an insurance policy
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premium
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fund that collects & invests income until payments are made to eligible recipients
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pension fund
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C. both saving & borrowing
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Capital formation depends on _______________________. A. saving alone B. borrowing alone C. both saving & borrowing D. neither saving nor borrowing
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intermediaries
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The financial institutions that bring together funds that savers provide and then lend those funds to others are called financial __________________.
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households and businesses
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What sector(s) of the economy provide(s) the most savings?
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someone who inherits the ownership of a financial asset if the purchaser dies
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beneficiary
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stated interest on a corporate, municipal, or government bond
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coupon rate
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exceptionally risky bonds
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junk bonds
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bonds issued by the state & local governments
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municipal bonds
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long-term, tax sheltered time deposits that can be set up as a part of an individual retirement plan
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IRAs
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contract to repay borrowed money and interest on the borrowed money at regular future intervals
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bond
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life of a bond or length of time funds are borrowed
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maturity
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principle of a bond or total amount borrowed
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par value
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bond's annual coupon interest rate divided by purchase price; measure of a bond's return
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current yield
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1. coupon rate 2. maturity 3. par value
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3 main components of a bond
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not subject to tax by federal or state gov'ts
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tax-exempt
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low denomination, non-transferable bond issued by the federal gov't
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savings bond
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U.S. gov't obligation with a maturity of 2 to 10 years
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treasury note
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U.S. gov't bond with a maturity of 30 yrs.
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treasury bond
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short-term U.S. gov't obligation w/a maturity of one year or less in denominations of $100
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treasury bill
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market in which financial capital is loaned and/or borrowed for *more than one year*
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capital market
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market in which financial capital is loaned and/or borrowed for *one year or less*
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money market
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market in which only the original issuer can sell/repurchase a financial asset
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primary market
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market in which financial assets can be sold to someone other than the original issuer
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secondary market
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high
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High return, _________ risk.
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municipal bonds
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What kind of bonds are generally tax-exempt?
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stocks that represent ownership shares in corporations
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equities
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place where buyers & sellers meet to exchange stocks
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securities/stock exchange
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electronic marketplace for securities that aren't traded on an organized change
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over-the-counter market
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period during which stock market prices move *down* for several months or years in a row
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bear market
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period during which stock market prices move *up* for several months or years in a row
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bull market
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person who buys or sells securities for investors
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stockbroker
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argument that stocks are always priced about right because they are closely watched
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efficient market hypothesis
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strategy of holding different investments to protect against risk
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portfolio diversification
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company that sells stock in itself and uses the proceeds to buy stocks and bonds issued by other companies
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mutual fund
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the market value of a mutual fund share found by dividing the net value of the fund by the number of shares issued
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net asset value
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tax deferred investment and savings plan that acts as a personal pension fund for employees
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401(k) plan
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measure of stock market performance based on 30 representative stocks
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Dow Jones Industrial Average
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measure of stock market performance based on 500 stocks traded on several markets
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Standard & Poor's 500
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market in which a transaction is made immediately at the prevailing price
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spot market
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an agreement to buy/sell at a specific date in the future at a predetermined price
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futures contract
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futures contract giving a buyer the right to cancel the ocntract
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option
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futures contract giving a buyer the right to cancel a contract to *buy* something
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call option
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futures contract giving a buyer the right to cancel a contract to *sell* something
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put option
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Dow Jones Industrial Average
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the most popular and widely measure of stock market performance?
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New York Stock Exchange
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oldest, largest, and most prestigious organized stock exchange in the U.S.?
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regular increases and decreases in real GDP
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business cycles
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irregular increases and decreases in real GDP
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business fluctuations
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decline in real GDP lasting at least two quarters
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recession
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point in the business cycle when real GDP stops expanding
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peak
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point in the business cycle when real GDP stops declining
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trough
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period of uninterrupted growth of real GDP
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expansion
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growth path the economy would follow if it were not interrupted alternating periods of recession and recovery
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trend line
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state of the economy with large numbers of unemployed people, declining real incomes, overcapacity in manufacturing plants, and general economic hardship
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depression
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currency issued by towns, chambers of commerce, and other civic bodies during the Great Depression of the 1930s
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depression scrip
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statistical series that turns down before the economy turns down, or up before the economy turns up
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leading economic indicator
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statistical series used to predict turning points in the business cycle
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composite index of leading economic indicators
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mathematical expression used to describe how the economy is expected to perform in the future
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econometric model
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increase in the general level of prices of goods and services
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inflation
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decrease in the general level of prices for goods and services
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deflation
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statistical series used to measure changes in price level over time
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price index
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series used to measure price changes for a representative sample of frequently used consumer items
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consumer price index
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representative selection of goods and services used to compile a price index
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market basket
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year serving as a point of comparison for other years in the price index
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base year
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dividing the cost of every market basket by the base-year market basket cost
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How is the dollar cost of a market basket converted to an index value?
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low rate of inflation at 1-3% annually
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creeping inflation
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inflation in excess of 500% per year
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hyperinflation
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period of slow economic growth coupled w/inflation
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stagflation
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index used to measure prices received by domestic producers
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producer price index
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index used to measure price changes in GDP
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implicit GDP price deflator
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prices rice b/c all sectors of the economy try to buy more good and services than the economy can produce
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demand-pull inflation
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rising input costs drive up prices of products
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cost-push inflation
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person/institution to whom money is owed
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creditor
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person who borrows and owes money
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debtor
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people 16 or older either working or looking for a job
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labor force
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number of unemployed persons divided by civilian force; percentage of people unemployed
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unemployment rate
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workers that are in between jobs
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frictional unemployment
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caused by change in economy that reduced demand for workers
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structural unemployment
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hiring outside firms to perform non-core operation to lower operating costs
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outsourcing
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caused by technological advances that makes workers' skills obsolete
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technological unemployment
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related to swings in the business cycles
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cyclical unemployment
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caused by changes in weather or other conditions that reduce demand for jobs
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seasonal unemployment
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doesn't blame any group for rising prices
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wage-price spiral
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difference b/t what economy can and does produce
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GDP gap
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unofficial statistic that is the sum of the monthly inflation and unemployment rates
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misery/discomfort index
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divide CPI by the beginning value of CPI
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how to calculate rate of inflation?
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demand-pull
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According to the excessive monetary growth theory of inflation, any extra money in the economy is spent, leading to a _________ ___________ effect.
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True
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T/F Reduced purchasing power is a consequence of inflation.
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