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Long Run Aggregate Supply, The natural level of GDP, shown vertical on a graph. When LRAS shifts, SRAS (Short Run Aggregate Supply) will follow .

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LRAS

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Real Estate, Equipment, and Cash (physical assets)

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Tangible Assets

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Patents, Goodwill, and Trademarks (lack physical substance)

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Intangible Assets

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Economic rule stating that if two items satisfy the same need and the price of one rises, people will buy the other.

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Substitution effect

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The price at which the number of products that businesses are willing to supply equals the amount of products that consumers are willing to buy at a specific point in time.

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Equilibrium price

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When quantity supplied is more than quantity demanded. The formula for excess supply is: Supply - Demand = Excess Supply

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Excess Supply

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Maximum price that a customer is willing to pay for a good

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Reservation price

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The difference between a buyer's reservation price (the price they want to pay) and the actual price paid for a good or service

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Buyer's surplus

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The difference between the price received by the seller and the seller's reservation price

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Seller's surplus

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The difference between the buyer's reservation price and the seller's reservation price. Consumer surplus + Producer surplus

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Total surplus

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A market with unrestricted trading of goods, where the prices of goods are determined by supply and demand.

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Free market

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In a traditional economic system, the availability of resources is based on inheritance. Goods are only produced for consumption and surpluses do not occur. This type of economy is normally found in South American, Asian, and African countries.

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Traditional economic system

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An economic system in which all factors of production are owned and controlled by the government. Often referred to as a centrally planned economic system. Example: Former Soviet Union.

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Command economic system

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Combines pure market and command. Example: Japan

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Mixed market

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A law stating that as a person consumes additional units of a good, eventually the utility gained from each additional unit of the good decreases.

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Law of Diminishing Marginal Utility

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A law stating that as the price of a product increases the demand of that product decreases, while if the price of a product decreases the demand for that product increases.

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Law of Demand

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The law that states that as the price of any good or service increases, the quantity of that good or service will increase and vice versa.

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Law of Supply

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The ease with which an asset can be converted to currency.

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Liquidity

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The part of economics study that looks at the operation of a nation's economy as a whole

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Macroeconomics

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(n) something of value; a resource; an advantage

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Asset

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The degree to which people have access to goods and services that make their lives better.

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Standard of living

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The output per employed worker

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Labor productivity

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The smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost

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Seller's reservation price

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The adding up of individual economic variables to obtain a large, general picture of the economy.

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Aggregation

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The total demand for a country's output. It includes demands for consumption, investment, government purchases, and net exports.

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Aggregate demand

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Total supply of goods and services in an economy

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Aggregate supply

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A record of economic increases and decreases over time.

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Business cycle

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A free market system that relies on private property ownership and supply and demand

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Capitalism

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Sole proprietorships, partnerships, and corporations are private producing units of the economy knows as __________.

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Businesses

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Unicorporated entity that has shared ownership.

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Partnership

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Legal entity that has received a charter from a state or federal government.

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Corporation

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Business entity which legally has no separate existence from its owner.

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Sole proprietorship

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A Scottish man (1723-1790) who is known as the father of modern economics.

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Adam Smith

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A phrase coined by Adam Smith to describe the process that turns self directed gain into social and economic benefits for all.

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Invisible hand

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When goods and services are made and consumed at the best levels for the society. Nothing more can be acheived with the resources available.

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Economic efficiency

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The quantity of a good that results in the maximum possible economic surplus from producing and consuming the good.

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Socially optimal quantity

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That efficiency leads to economic prosperity for all.

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The principle of efficiency

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The real cost of changing a listed price.

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Menu cost

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The basic assumption of this model is that in the short run, firms meet demand at present price.

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Keynesian model

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The total planned spending on final goods and services.

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Planned aggregate expenditure (PAE)

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The relationship between disposable income and spending on consumable goods and services

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Consumption function

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An increase in spending due to a perceived increase in wealth.

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The Wealth Effect

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The portion of planned aggregate expenditure that is not based on output

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Autonomous Expenditure

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The slow change in inflation from year to year in industrialized nations

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Inflation inertia

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When inflation suddenly deviates from its normal course.

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Inflation shock

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The rise in taxes that occurs when before-tax income increases by one dollar

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Marginal tax rate

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Total tax paid divided by total (taxable) income, as a percentage.

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Average tax rate

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An extreme decline in the rate of inflation. Can lead to high levels of unemployment and recessionary gaps.

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Disinflation

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The speed that money changes hands in order to buy and sell final goods and services.

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Velocity

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Money multiplied by velocity equals nominal GDP.

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Quantity equation

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The level of output where output equals planned aggregate expenditure

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Short run equilibrium output

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The economic theory that states the main cause of change in aggregate output and price level is the result of monetary supply and the interest rate that comes from the amount of monetary supply

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Monetarism

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A large, unexpected change in the cost of resources.

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Aggregate supply shock

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A result of there only being one buyer of a resource input, good, or service.

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Monopsony

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On a demand curve, the _____ of the item is placed on the vertical axis of the graph.

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Price

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Natural Rate of Unemployment - a rate that will always exist

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NRU

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When both producers and consumers are satisfied with their quantities at market price.

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Market equilibrium

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The opposite of a substitute good, because it usually completes another item and may lead to more consumption of that item.

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Complement

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Can be found by multiplying the average labor productivity by the percentage of people that are working in the economy.

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The real GDP per person

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Measures the ability of an economy to produce (output) goods and services in the short-term and the long-term.

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Aggregate Supply

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The continuing increase in the average level of prices of goods and services over time.

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Inflation

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A GDP decline that lasts two-quarters (six months). A period of slow economic growth

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Recession

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Is equal to Consumption + Government Expenditures + Investment + Exports - Imports The market value of all goods and services produced within a nation during a specified amount of time.

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Gross Domestic Product (GDP)

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The value of all goods and services produced anywhere in the world by a nation's citizens during a specified amount of time.

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Gross National Product (GNP)

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Goods that are used in the production of final goods.

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Intermediate goods

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Used in the production of final goods, but instead of being consumed, are available for reuse.

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Capital goods

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The amount spent by a household on goods and services such as: entertainment, food, and other perishables.

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Consumption

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Goods like food and clothing that have a short lifespan.

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Consumer Nondurables

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Goods not counted in the nation's GDP.

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Intermediate Goods

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Includes payment to the owners of tangible and intangible capital items such as: factories, machines, and copyrights.

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Capital income

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The total value of goods and services produced in a country valued at current prices.

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Nominal GDP

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Gross domestic product adjusted for inflation; gross domestic product in a year divided by the GDP price index for that year, the index expressed as a decimal

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Real GDP

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The percentage of working-age people within the labor force

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Participation rate

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The annual percentage rate of change in price level reflected by price indexes

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The rate of inflation

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When prices fall consistently over time, leading to negative inflation.

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Deflation

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A quantity that is measured in real terms - the actual quantity of a good or service

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Real quantity

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When there is no cyclical unemployment and every person who wishes to work is able to find a job at the prevailing rate for wages and in the prevailing working conditions.

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Real employment

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Involves increasing a nominal quantity so that it remains unaffected by increases in inflation

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Indexing

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A flaw in the CPI that exaggerates real increases in the cost of living by failing to take into account customers ability to choose equally desirable goods or services when the price of their preferred good or service increases

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Substitution bias

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When economists fail to account for improvements in goods or services and incorrectly report inflation as higher.

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The quality adjustment bias

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A measure of overall price levels at a specific point in the price index.

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Price level

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The price of a good or service in relation to the price of other goods and services.

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Relative price

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When the rate of inflation is extremely high.

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Hyperinflation

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The movement of workers between jobs, companies, and industries

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Worker mobility

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Caused by changes in the overall economy.

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Cyclical unemployment

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Caused by changes in demand or technology. Long-term and continual unemployment that continues even though the economy is producing normally

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Structural unemployment

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Refers to individuals between jobs seeking new employment, people re-entering the workforce (ie mom whose kids are grown), and new entrants (ie college graduates).

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Frictional unemployment

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There is an ___________ ___ when aggregate output is above potential output

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Inflationary gap

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Short-run macroeconomic equilibrium occurs at the level of GDP where the:

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AD curve intersects the SAS curve

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An increase in which of the following would cause an increase in the aggregate supply? Labor productivity The wage rate The price of imports Consumer spending Interest rates

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Labor productivity

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Organizations that act as moderators between employers and employees

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Labor unions

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Payments that the government makes to unemployed workers.

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Unemployment insurance

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When an economic unit makes more than it spends

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Saving

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The amount of workers that are willing to work for a real wage.

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Labor supply

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The beginning of a recession

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Peak

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If the Federal Reserve lowers the reserve ratio, it ______ the bank's required reserves and ______ the quantity of money.

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decreases increases

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The lowest point of the recession

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Trough

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Extreme economic growth

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Boom

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The maximum amount that an economy can output over a period of time

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Potential output

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A difference between the potential output (potential GDP) of an economy and its actual output (actual GDP)

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Output gap

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1 percent more unemployment results in 2 percent less output.

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Okun's Law

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Distributing a good or resource among consumers that would like to have more of that good or resource than is made available

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Rationing

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A cost that is beyond recovery the moment a consumer decides to purchase a certain good or service is made

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Sunk cost

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The increase in total cost that comes from producing one additional unit of a specific good or service.

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Marginal cost

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The increase in total benefit that comes from producing one additional unit.

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Marginal benefit

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A macroeconomic policy that directly affects the structure and various institutions of an economy

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Structural policy

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Concerned with analyzing whether or not a policy should be used.

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Normative analysis

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Government policies aimed at stabilizing the economy by eliminating output gaps

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Stabilization policies

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Government policies intended to increase spending and output.

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Expansionary policies

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Government policies intended to avoid inflation and other effects due to increased expansion. Includes: Action such as decreasing government spending, increasing taxes, and decreasing the supply of money, and raising interest rates.

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Contractionary policies

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Programs and economic policies such as income taxes, unemployment insurance and TANF (Temporary Aid to Needy Families) that are automatically in place, help to decrease fluctuations in the GDP.

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Automatic stabilizers

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Describes how the economy directly effects the actions policymakers take.

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Policy reaction function

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A policy that affects potential output

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Supply-side policy

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When people's expectations of future inflation do not change even though inflation rates change.

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Anchored inflation expectations

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The rate of price increase on all things except food and energy

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Core rate of inflation

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When the people believe that the nation's central bank will keep inflation rates low.

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Credibility of monetary policy

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The time between the need for a macroeconomic policy and its implementation

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Inside lag

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The time period between a policy's implementation and its desired effects on an economy.

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Outside lag

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The tendency for nominal interest rates to be high when inflation rates are high and low when inflation rates are low.

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Fisher effect

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Goods and services sector, Labor sector, monetary sector, international sector.

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Four sectors of the economy

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The goods and services sector focuses largely on the level of ______ .

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Income

question

The labor sector highlights the rate of ____ .

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Pay

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The monetary sector focuses on the ________ rate.

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Interest

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The international sector emphasizes the ________ rate.

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Exchange

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Economies based on capitalism have microeconomic instability and that government is required to properly stabilize the economy.

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Keynesian economic theory

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Represents the governmental tax rate that will best maximize tax revenues.

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Laffer curve

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Used to demonstrate shifts in income distribution among a population over time.

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Lorenz curve

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The government office that is responsible for projecting federal surpluses and deficits

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Congressional budget office

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Most free-market banking systems are based on __________ reserves.

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Fractional

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Demonstrates that there is an inverse relationship between inflation and unemployment; as inflation increases, unemployment decreases (and vice versa).

answer

Phillips curve

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