Economics Final Exam Study Guide Flashcard

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Production Possibilities Frontier
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A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good
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Examples of shortage rather than scarcity
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scarcity describes the general fact that there aren’t enough goods or resources in the world to satisfy all our needs and wants shortage means that for a specific good at a specific price, there is excess demand e.g there is a shortage of apples in country x because at the market price of $3, producers are only willing to supply 10,000 but consumers demand 15,000
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Physical capital
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all human-made goods that are used to produce other goods and services; tools and buildings
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What causes production possibilities curves to shift downwards to the left?
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a major war causes destruction of capital equipment in the country. This would cause output to decrease and a shift toward the left
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Why do free market economies need some government intervention?
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The main reason associated with government intervention in a free market economy is to prevent the formation of monopolies. This ensures fair competition within the market and cannot take advantage of the consumer. It also helps prevent abuse of the system.
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Adam Smith
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1723-1790. Pioneering economic theorist. Father of economics. Explained how rational self-interest and competition, operating in a social framework which ultimately depends on adherence to moral obligations, can lead to economic well-being and prosperity.
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Traditional economies
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rely on habit, custom, or ritual to decide what to produce, how to produce it, and to whom to distribute it.
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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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Advantages of a free market
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economic efficiency, economic freedom, economic growth, consumer sovereignty
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Socialism
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A system in which society, usually in the form of the government, owns and controls the means of production.
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Rationing
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A limited portion or allowance of food or goods; limitation of use
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What might lead to a black market?
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when governments or regulatory bodies set a maximum price for a good/rationing
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Search costs
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the financial and opportunity costs consumers pay when searching for a good or service
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What does it mean when it is said that in a free market prices lead to an efficient allocation of resources?
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A market system, with its freely changing prices, ensures that resources go to the uses that consumer value most highly. Also ensures that resource will adjust to the changing demands of consumers.
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Why do fads often lead to shortages?
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demand increases so quickly and unexpectedly that time is needed for quantity supplied and price to increase to meet new equilibrium
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Where is equilibrium and disequilibrium on a supply/demand curve?
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Equilibrium is the point of balance between price and quantity. Disequilibrium happens when quantity supplied is not equal to quantity demanded. Equilibrium will be found at the price which the quantity demanded is equal to quantity supplied.
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Examples of barter system
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paint neighbors house in exchange for vegetables
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Examples of money as a “unit of account”?
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Means for comparing the values of goods and services Suppose jacket was $30 and you compare with other jacket prices, instead of a jacket being 30 apples and another being 30 oranges
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What did the Federalists believe about banking?
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Need a strong central government to establish economic and social order Therefore, a strong central banking system was necessary for the US to develop healthy industries and trade. Hamilton proposed a national bank
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M1 money
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includes all currency plus checking accounts and traveler’s checks, liquidity
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Municipal bond
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a bond issued by a state or local government or municipality to finance such improvements as highways, state buildings, libraries, parks and schools
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OTC market
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a stock exchange where securities transactions are made via telephone and computer rather than on the floor of an exchange
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Characteristics of bonds
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Coupon rate is the interest rate that the bond issuer will pay the bond holder Maturity is the time at which the payment to the bondholder is due Par value is the amount that an investor pays to purchase the bond and that will be repaid to the investor at maturity/face value/principal
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If a bond has a coupon rate of 5%, a par value of $2000, matures in five years, how much will the company have paid the holder when the bond matures?
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$500
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Income stock
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a stock which pays higher than average dividends because the company chooses to retain only a small portion of the profits
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Capital deepening
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an increase in the amount of capital per worker; one source of rising labor productivity Through saving and investment
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How is nominal GDP converted to real GDP?
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Nominal is real time Real is unchanging/constant Usually Nominal GDP is quoted because it is directly measurable. Real GDP is actually relative term which is derived from Real GDP = Nominal GDP x CPI now/CPI base year.
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Aggregate supply and aggregate demand
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The total amount of goods and services that all the firms in all the industries in a country will produce at various price levels in a given period of time; The amount of goods and services in the economy that will be purchased at all possible price levels.
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What is an example of a positive external shock to aggregate supply?
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good weather leads to an unusually productive harvest for corn farmers
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Why does higher saving lead to higher GDP in the future?
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more capital is available for investment, leading to higher output through capital deepening
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Why does the federal gov’t collect income taxes as a person earns?
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To pay their employees
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What is a major difference between an operating budget and a capital budget?
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an operating budget is for day-to-day expenses; a capital budget is for investment spending
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Tax bases and Tax burden
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The income, property, goods, or services that is subject to a tax, falls more heavily on the side of the market that is less elastic
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Classical economics
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Modern, Western economic theories of the effects of resource scarcity, monetary policy, and competition on supply and demand of goods and services in the marketplace. This is the basis for the capitalist market system.
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Automatic stabilizer
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Government program that changes automatically depending of GDP and a person’s income (taxes and transfer payment)
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When does a government’s fiscal year begin?
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October 1
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How many Federal Reserve Districts are there?
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12
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tight money supply and easy money policy
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monetary policy resulting in higher interest rates and restricted access to credit; associated with a contraction of the money supply, Monetary policy that increases the money supply (occurs when the Fed wants to expand/stimulate the economy)
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Why do banks sometimes hold excess reserves?
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to be sure they can meet their customers’ demands
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What is the role of the Federal Open Market Committee?
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The most important monetary policy-making body of the Federal Reserve System responsible for developing policies to promote economic growth, full employment, and stable prices
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Money multiplier
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The amount of money the banking system generates with each dollar of reserves, the multiple by which deposits can increase for every dollar increase in reserves; equal to 1 divided by the required reserve ratio.
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What effect would an increase in the discount rate have on the money supply?
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It would cause the money supply expand.
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How well did the Federal Reserve Banks perform during the great depression?
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System did not work well because each bank acted independently. Separate actions often cancelled one another out.

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