IB HL Economics – Paper 1 definitions: Micro and Macroeconomics

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Scarcity
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the basic economic problem – something is scarce when it is both limited in supply and desire
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Market
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a place where buyers and sellers come together to engage in exchange with one another
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Market economy
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an economy where resource allocation is determined mainly by market forces of demand and supply
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Competitive Market
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the market for a good with a large amount of buyers and sellers, where the single seller has very little or no market power
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Opportunity cost
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the cost of an economic decision in terms of the value of the next best alternative that was sacrificed
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Resource allocation
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the allocation of resources is concerned with how resources (land, labour, capital and management) are distributed in an economy
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Ceteris paribus
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other things equal; assuming other variables are constant (Latin phrase)
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Economic growth
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an increase in the output of goods and services in a nation over time (outward shift of a nation’s PPC) and is measure by an increase in real GDP.
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Productivity
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the output attributable to each unit of output
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Demand
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the quantity of a good or service that consumers are willing and able to buy at a given price during a specific time period
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Law of demand
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as the price of a good increases, the quantity demanded of a good decreases. (and vice versa =) as the price of a good decreases, the quantity demanded of a good increases.
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Determinants of demand
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the non-price variables that influence the demand for a good or service
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Free good
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a good that is abundant; is obtained without opportunity cost.
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Economic good
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a good that is scarce; has an opportunity cost
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Positive statement
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a statement which can be testable as right or wrong; when you claim a ‘fact’ to be true
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Normative statement
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a statement which is subjective or political; a matter of opinion
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Mixed economy
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an economy in which resource allocation is carried out partly by the state and partly by market forces
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Factors of Production
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Land and Capital (non-human factors), Labour and Entrepreneurship (human factors)
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Human resources
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the labour force of a country or the human capital of a country
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Entrepeneurship
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the factor of production involving organising of the other factors and/or risk taking.
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Capital good
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a good that is used to produce something else
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Consumer good
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a good that is used for social/private entertainment/use
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Competitive market
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the market for a good with a large number of buyers and sellers (where a single seller has very little market power)
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Marginal benefit
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the additional utility or satisfaction derived by an increase or a decrease in the amount of an item consumed or an activity enjoyed
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Normal good
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a good where demand increases as consumer income increases (and decreases when consumer income decreases)
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Inferior good
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a good where demand decreases as consumer income increases (and increases when consumer income decreases)
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Substitute good
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a good for which demand will increase when the price of the other good increases (and vice versa)
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Complementary good
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a good for which demand will increase when the price of the other decreases (and vice versa) – goods consumed together
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Giffen good
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a rare type of good whose demand rises when price rises, due to the income effect of a rise in the price causes you to buy more of this cheap good because you can’t afford more expensive goods
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Supply
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the quantity of a good or service that producers are willing and able to supply at a certain price and during a certain time period.
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Law of supply
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as price increases, more of a good is offered for sale by firms (and vices versa)
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Determinants of supply
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the non-price factors that influence the supply of a good or service
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Supply substitue
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a good or service which can be produced is a similar way, with similar inputs and processes as another good (ex: supply substitutes are the product of joint supply)
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Supply shock
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a random event that disrupt the normal supply of goods and services (can be positive, but mainly negative)
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Market equilibrium
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occurs at a price where quantity demanded and quantity supplied are equal (market-clearing price)
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Consumer surplus
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the benefit consumers receive when they pay a price below what they are willing and able to pay
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Producer surplus
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the benefit producers receive when the sell a good for a price that is above what they are willing and able to sell it at
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Community surplus
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the surplus achieved by combining the consumer and producer surplus
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Allocative efficiency (socially optimal)
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when marginal benefits (MB) equal marginal costs (MC)
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Price elastic
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is when the change in price of a product leads to a proportionately greater change in the quantity demanded (PED is greater than 1)
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Price inelastic
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is when the change in price of a product leads to a proportionately smaller change in the quantity demanded (PED is less than 1)
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Price elasticity of demand (PED)
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a measure of the responsiveness of the consumers to a change in price of a good or service
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Price elasticity of supply (PES)
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a measure of the responsiveness of the producer to a change in price of a good or service
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Cross-price elasticity of demand (XED)
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a measure of the responsiveness of the consumers of one good to a change in the price of another good.
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Income elasticity of demand (YED)
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a measure of the responsiveness of the consumers of a good to a change in their income
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Excess capacity
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the amount of output a firm is able to produce in the short run beyond its current level without having to expand their factors of production
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Tax
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a tax is a charge placed on an individual firm that is payable to the government under punishment of law
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Indirect taxes (sales taxes)
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taxes placed on goods and services by governments (consumption/expenditure taxes)
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Excise taxes
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taxes placed on one type of good
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Direct Tax
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a tax on income/wealth/firm’s profit
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Progressive Tax
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a tax which increases proportionally with income
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direct taxes
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taxes placed on income and collected by the government directly from the individual or household
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Specific tax / flat rate tax / per-unit tax
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a set amount charged per unit of the product sold
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Ad valorem tax / value added tax (VAT)
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a percentage tax on one or more goods
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Tax Incidence
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a measure of the consequences of a tax on all the affected parties
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Deadweight loss
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the loss of welfare, utility or benefit to market participants (typically as a result of taxes, policies or externalities)
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Subsidy
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a payment from the government to an individual or firm for the purpose of increasing the purchase or supply of a good
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Price ceiling
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a maximum legally allowable price for a good or service, set by the government
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Price floor
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a minimum legally allowable price for a good or service, set by the government
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Minimum wage
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a form of price floor which is a legal minimum price for labour, set by the government
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Informal (black/underground/parallel) market
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a market in which economic activity is not officially measured/recorded
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Market failure
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any situation where the allocation of resources is inefficient; where the optimal output for a good does not match that of the private market
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Pigouvian tax
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a corrective tax
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Externality / spillover
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a transaction where someone other than the buyer or seller (a third party), experiences a benefit or loss as a result of their transaction
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Marginal Social Benefit (MSB)
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the utility or benefit derived from the use of a good, including benefits to the consumer and the rest of society
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Marginal Private Benefit (MPB)
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the utility or benefit derived exclusively by the consumer of a good
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Marginal Social Cost (MSC)
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the cost incurred from the production or use of a good, including costs to the producer and costs to the rest of society
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Marginal Private Cost (MPC)
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the cost suffered solely by the producer of a good
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Negative externality
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the situation in which MSC is greater than MSB and therefore causes costs to a third party through the production or consumption of a good or service
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Positive externality
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the situation in which MSB is greater than MSC and therefore causes positive spillover effects on a third party through the production or consumption of a good or service
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Asymmetric Information
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when one side of a market knows more than the other side does
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Merit good
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a good or service for which marginal social benefits (MSB) exceed marginal social costs (MSC) when sold on the open market – they are considered to be beneficial for people (society) and are therefore under-provided and under-consumed by the free market
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Demerit good
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a good for which marginal social costs (MSC) exceed marginal social benefits (MSB) when sold on the open market – they are considered to create negative spillover costs to third parties (society) and are therefore over-provided and overer-consumed by the free market
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Public good
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a good which is non-rivalrous and non-excludable (typically provided by the government) – extreme examples of merit goods
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Difference between public and merit/demerit goods
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a public good, unlike a demerit or merit good, is a good which, when left to the free market, would not be produced as producer cannot gain profit from them
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Tragedy of the Commons
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a dilemma posed when common resources are use or degraded rapidly by private individuals who enjoy the short-term benefits of the resource, but are ignorant or neglectful to its long-term depletion
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Carbon taxes
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taxes charge levied by the government on firms burning fossil fuels in their production process
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Tradeable permits / cap-and-trade
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a system for taxing pollution levels where pollution licenses are exchangeable between firms on a secondary basis – they are meant to internalize the external costs of burning fossil fuels
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Factor immobility
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a market failure in which factors of production are immobile and cannot be increased
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Inequality
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a market failure in which unfair distribution of resources occurs in the free market
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Real income
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income that is adjusted for prices changes, and implies the actual buying power of a consumer
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Buying Power
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the amount of goods or services that can be purchased (with a unit of currency)
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Utility
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a representation of preferences over some set of goods and services (and the satisfaction received)
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Diminishing Marginal Utility
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as we consume additional units of something, the satisfaction (utility) we derive for each additional until (marginal unit) grows smaller (diminishes)
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Total Revenue (+equation)
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the income earned from a firm’s sale of its good or service P * Qd (Price x Quantity demanded)
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Profit
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Revenue – Cost
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Market/Immediate Time Period
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fixed quantity supplied (perfectly or highly inelastic)
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Short Run (micro)
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the time period in which at least one of the factors of production is fixed (slightly inelastic or unit elastic)
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Long Run (micro)
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the time period in which none of the factors of production are fixed
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Inventories
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the amount of a good held in stock by a firm
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Free rider problem
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people who don’t pay for a good or service but enjoy the benefits of it
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Normal Profit
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the revenue needed to keep a firm in an industry (in order to cover all opportunity costs of production)
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Perfect competition
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a market is perfectly competitive if there are a large number of firms producing identical products, facing identical production costs, and in which there are no barriers to entry
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Allocative Efficiency
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the point at which marginal costs equal the price
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Productive/technical Efficiency
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the point at which a firm produces at the lowest unit or average total cost (or where MC equals ATC)
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Monopoly
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a market where one firm dominates the market for a good that has no substitutes and where there are high barriers to entry
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Monopolistic Competition
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a market is monopolistically competitive if there are many firms producing differentiated products and in which there are no barriers to entry or exit
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Oligopoly
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a market where a few sellers dominate the market for an homogeneous or differentiated good and where there are high barriers to entry in the market
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Cartel
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an agreement between firms to fix prices (or output)
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Macroeconomics
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The study of economy-wide aggregate (total) behaviors.
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Macroeconomic objectives
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1) Low unemployment or full employment (NRU) 2) Price level stability 3) Economic growth also… 4) Economics development 5) Income Inequality
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Circular Flow of Income
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a model that describes how economic activity occurs between the different groups in an economy. Saving, taxation and spending on imports represent ‘leakages’ from the circular flow. Investment, government spending and export revenue represent ‘injections’ into the circular flow.
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Aggregate Demand
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total demand for goods and services in an economy (C+I+G+Xn)
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Components of Consumption (5)
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Level of national income (consumption, savings, taxes, imports) Wealth Real interest rates Household dept Consumer Confidence and expectations of future income
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Sticky wages
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wages that can not be reduced when the AD of labour decreases (like a price floor on wages)
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Components of Investment (2)
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Interest rates Business Confidence and expectations (future prices, technology, business taxes, inventories, the degree of excess capacity)
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Components of Net Exports (3)
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Incomes abroad Taste and preferences of consumers Exchange rates
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Aggregate Supply
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total supply of goods and services in an economy.
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Short run aggregate supply curve
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a macroeconomic curve that shows the relationship between the price level and the quantity of real output (real GDP) when resource prices (especially wages) do not change
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Consumption
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household spending on goods and services (both durable and non-durable goods)
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Investment
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business spending on capital goods
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Saving
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income that is not spent, setting aside income or money for future use
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Imports
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goods and services that foreign countries buy from the domestic country
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Exports
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goods and services that are produced domestically and sold to foreign countries
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Marginal propensity to… (MPC, MPS, MPT, MPM)
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they measure the proportion of a change in household income that is … (used to consume domestic output, saved by households, paid in taxes and used to purchase imports)
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Gross Domestic Product
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the total market value of all final goods and services produced within an economy over a period of time (usually a year) (and in dollars)
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Real GDP (or real output)
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the total value of all goods and services produced in a country of a country’s national income over a given time period (adjusted for inflation and measure in dollars)
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Expenditure approach
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a method used to calculate GDP by summing total expenditures on final goods and services OR it is a method of calculating GDP based on summing consumption, investment, government expenditure and net exports (ie C + I + G + X – M).
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Income approach
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a method used to calculate GDP by summing up all incomes received by factors of production
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Output approach
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adds up all production values of final output from firms
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Gross National Product / Income
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the market value of all goods and services produced by domestically-owned factors of production over a specific time period, usually one year (it attempts to measure the flow of income based on actual ownership of the factors of production)
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Real vs Nominal GDP
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real GDP is GDP adjusted for inflation and nominal GDP is measured in current dollars
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Green GDP
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a measure of the total output of an economy, taking into account the environmental consequences (externalities) involved in the production of that output
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Final vs. Intermediate goods
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intermediate are goods which are produced by a firm and used in the production process whereas final goods are the ones used for final consumption
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Double counting
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including the same good or service more than once in your valuation of output
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Investment
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business spending on capital goods
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Capital Formation
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additions to the stock of capital over a period of time
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Capital stock
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a nation’s capital stock is the value of all capital goods in the country (at a point in time)
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Purchasing Power Parity (PPP)
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the theory that in the long run identical goods and services sold in different countries will cost the same (for GDP measures it looks at the buying power in a country: the amount a person can buy with their income at local prices)
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Interest Rate
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the price of money (borrowing or loaning), expressed as a percentage (often called the opportunity cost of spending money)
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National Income
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the total value of all income in a nation (Consumption + Government Spending + Investment + (Exports – Imports))
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Fiscal Policy
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a policy that uses changes in government spending (G) and/or taxation (T) to affect aggregate demand
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Monetary Policy
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a demand-side policy, where the central bank uses changes in the money supply or interest rates to affect AD
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Expansionary Fiscal Policy
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an increase in government spending or a reduction in taxes
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Keynesian Economics
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economic theory based on the principles of John Maynard Keynes stating that government spending should increase during business slumps and be curbed during booms.
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Neo-Classical Economics
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an approach to economics based on supply and demand which depends on economic agents operating rationally based on available info
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Business Cycle
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economy-wide fluctuations in production or economic activity over a period of months or years, consisting of recession and recovery and growth and decline
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Recession
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state of economy declining – a decrease in real GDP over two consecutive quarters
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Recovery
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state of economy rising – an increase in real GDP, usually accompanied by a rise in employment
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Expansion
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when real GDP expands beyond recovery
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Depression
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a severe reduction in an economy’s total output, accompanied by high unemployment lasting several years
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Unemployment
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people who are actively looking for a job
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Unemployment rate
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the number of workers without a job, who are willing and able to work, expressed as a percentage of the workforce
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Labor force
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all non-institutionalized civilian individuals age 16 or above, who are either working or actively looking for work
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Real wages
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wages are the payment for labour/working and that real wages are the value after they have been adjusted for inflation (thus real wages refers to the “purchasing power” of wages)
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Autonomous consumption
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the level of consumption which does not depend on income (the argument is that even with zero income you still need to buy enough food to eat, through borrowing or running down savings)
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Frictional Unemployment
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Unemployment between jobs.
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Seasonal Unemployment
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Unemployment due to seasonal circumstances.
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Structural Unemployment
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unemployment that exists as a result of rigidities in the labour market (such as a fall in the demand for a particular type of labour)
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Cyclical/Disequilibrium/Demand deficient Unemployment
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unemployment caused by variations in the business cycle (recession – decrease in GDP)
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Voluntary unemployment
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people who are unwilling to work at the market wage rate
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Natural Rate of Unemployment (NRU)
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Frictional + Structural + Seasonal unemployment (5-6% for industrialised countries) – it is the level of unemployment that prevails when a nation is producing at it’s full-employment level of output
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Discouraged workers
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workers who have dropped out of the labor force because of lack of success in finding a job (not included in unemployment rate)
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Underemployment
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working below productive capacity (part time instead of full time)
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Disguised unemployment
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workers who have a job but are redundant or non-productive
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Full employment
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the level of employment where there is no cyclical unemployment (100% employment – NRU = 94-95% for industrialised countries)
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Crowding Out
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a decrease in AD/consumption/investment that results from government’s increased borrowing (which drives up interest rates)
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Multiplier
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the amount by which an injection is multiplied to result in a change in GDP that is higher than the injection
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Philip’s Curve
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curve showing a short-run trade-off between unemployment and inflation; only applies if there is a change in AD; in the long run, leads to an increase in inflation
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Wealth
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the total value of the accumulated assets owned, minus its liabilities. The wealthier a nation’s households, the greater the level of consumption
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Loanable funds market
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a hypothetical market that shows the relationship between the real interest rate in a country and the supply and demand for money from households and firms for private investment
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Depreciation
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a decrease in the value (price) of a currency (in terms of a foreign currency or in a floating exchange rate system)
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Budget surplus
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when government (tax and other) income (T) exceeds government expenditures (G)
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Budget deficit
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when government expenditures (G) exceed government (tax) revenues (T)
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Business confidence
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the degree of optimism or pessimism characterizing he businesses which affects their decisions on investment spending.
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Business cycle
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the fluctuations of real GDP in a given time period
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Capital
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produced means of production (tools, equipment, machines, etc.)
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Stimulus measures
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used when economy in a recession – increase in Government spending and decreasing direct Taxes such as: Expansionary Fiscal Policy
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Austerity policies
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used when economy is concerned with annual budget deficit and dept – decrease Government spending and increase Taxes
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Supply-side policies
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policies designed to increase the aggregate supply of an economy (shift the AS curve to the right)
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Durable goods
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goods that will last longer than a year (cars, house, etc.)
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Double-dip or Triple-dip Recession
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when it looks like an economy is recovering but only recovers for a short period and turns to a recession again
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Inflationary Spiral (Keynesian)
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once the economy goes down it will keep going down
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Dept
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accumulation of deficit (imbalance in money intake)
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Indebtness
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the amount of money that a country owes to other countries and/or international institutions
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Default
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when you cannot pay back bonds
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Inventories
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Inventories are goods that have been produced but have not been sold
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CPI
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Consumer Price Index measures the prices of goods and services in a particular nation over time, and is widely used by governments to measure changes in the price level of products typically bought by households
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Inflation
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Persistent increase in the average price level of goods and services in a nation, measured by consumer price index.
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Deflation
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a sustained decrease in the average price level of a nation’s output
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Disinflation
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a decrease (or reduction) in the rate of inflation (at which avg. price level is rising)
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Inflation rate
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the percentage change in a price index between one period of time and another. It measures the change in the average price level of goods and services in nations over time.
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Demand-pull inflation
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an increase in price levels for goods and services due to the increased overall demand for a nation’s output (when consumption, investment, government spending and net exports rise without corresponding to an increase in AS)
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Cost-push inflation
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an increase in price levels for goods and services due to an increase in the cost of production (faced by producers) which shifts the SRAS curve to the left
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Stagflation
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either zero or negative economic growth (cost-push inflation is often accompanied by stagflation)
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Negative supply shock
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an unexpected decrease in AS of a nation
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The inflationary spiral
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the situation in which demand-pull inflation leads to cost-push inflation (a major threat to the economy)
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Hyperinflation
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a very high rate of inflation (basically when prices increase on a daily basis)
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Price level (index)
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a measure of the average level of prices of goods and service in an economy
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Monetarism
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the school of economic thought (promoted by Milton Friedman), which argues that a change in the supply of money only causes inflation or deflation – but not a change in the level of employment in a nation. (supports the view of LRPC at NRU, and LRAS of neo-classical views)
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Profit push
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businesses are greedy and raise prices to gain profits
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Wage push
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people want to raise their wages
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Efficiency
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which every resource is optimally allocated to serve each person in the best way while minimizing waste and inefficiency
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Equality
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smaller disparities among a nation’s households in their maintainable living standards and in the distribution of income and wealth
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Equity
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refers to the fairness in economics, and requires a level in which all individuals of a society have a fair shot at achieving economic success
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Relative poverty
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the condition experience by people in a country whose incomes are considerably lower than the higher income group in the same country
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Absolute poverty
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the condition experienced by people in a country whose incomes are too low to be able to afford even the most basic necessities for a healthy and safe existence

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