question

Natural Resources

answer

the lands, water, metals, minerals, animals and other gifts of nature that are available for producing goods and services.

question

Scarcity

answer

the perpetual state of insufficiency of resources to satisfy people's unlimited wants.

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Economics

answer

the study of how people work together to transform resources into goods and services to satisfy their most pressing wants, and how they distribute these goods and services among themselves

question

Consumer sovereignty

answer

the ability of consumers to exercise complete control over what goods and services the economy produces (or doesn't produce) by choosing what goods and services to buy (or not to buy).

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Economic model

answer

an abstraction of an economic reality. It can be expressed pictorially, graphically, algebraically, or in words.

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Ceteris paribus

answer

the Latin phrase meaning "everything else being equal".

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Circular flow model

answer

a model of how the economy's resources, money, goods and services flow between households and firms through resource and product markets.

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Household

answer

an economic unit of one or more persons, living under one roof, that has a source of income and uses it in whatever way it deems fit.

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Firm

answer

an economic unit that produces goods and services in the expectation of selling them to households, other firms or government.

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Microeconomics

answer

a subarea of economics that analyzes individuals as consumers and producers, and specific firms and industries. It focuses especially on the market behavior of firms and households.

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Macroeconomics

answer

A subarea of economics that analyzes the behavior of the economy as a whole.

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Positive economics

answer

a subset of economics that analyzes the way the economy actually operates.

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Normative economics

answer

a subset of economics founded on value judgments and leading to assertions of what ought to be.

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Econometrics

answer

the use of statistics to quantify and test economic models.

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Factor of production

answer

any resource used in a production process. Resources are grouped into labor, land, capital and entrepreneurship.

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Labor

answer

the physical and intellectual effort of people engaged in producing goods and services.

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Capital

answer

manufactured goods used to make and market other goods and services.

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Human capital

answer

the knowledge and skills acquired by labor, principally through education and training.

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Land

answer

a natural state resource such as real estate, grasses and forests, and metals and minerals.

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Entrepreneur

answer

a person who alone assumes the risks and uncertainties of a business

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Production possibilities

answer

the various combinations of good that can be produced in an economy when it uses its available resources and technology efficiently.

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Opportunity cost

answer

the quantity of other goods that must be given up to obtain a good.

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Vicious circle of poverty

answer

a country is poor because it does not produce capital goods. It does not produce capital goods because it is poor.

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Innovation

answer

an idea that eventually takes the form of new, applied technology

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Underemployed resources

answer

the less than full utilization of a resource's productive capabilities.

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Economic efficiency

answer

the maximum possible production of goods and services generated by the fullest employment of the economy's services.

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Labor specialization

answer

the division of labor into specialized activities that allow individuals to be more productive.

question

Absolute advantage

answer

a country's ability to produce a good using fewer resources than the country it trades with.

question

Comparative advantage

answer

a country's ability to produce a good at a lower opportunity cost than the country with which it trades.

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Change in quantity demanded

answer

a change in the quantity demanded of a good that is caused solely by a change in the price of that good.

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Law of demand

answer

the inverse relationship between price and quantity demanded of a good or service, ceteris paribus.

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Demand schedule

answer

a schedule showing the specific quantity of a good or service that people are willing and able to buy at different prices.

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Demand curve

answer

a curve that depicts the relationship between price and quantity demanded.

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Market demand

answer

the sum of all individual demands in a market.

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Supply schedule

answer

a schedule showing the specific quantity of a good or service that suppliers are willing and able to provide at different prices.

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Market day supply

answer

a market situation in which the quantity of a good supplied is fixed, regardless of price.

question

Supply curve

answer

a curve that depicts the relationship between price and quantity supplied.

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Excess supply

answer

the difference, at a particular price, between quantity demanded, quantity supplied being the greater.

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Excess demand

answer

the difference, at a particular price, between quantity supplied, quantity demanded being the greater.

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Equilibrium price

answer

the price that equates quantity demanded to quantity supplied. If any disturbance from that price occurs, excess demand or excess supply emerges to drive price back to equilibrium.

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Short run

answer

the time interval during which suppliers are able to change the quantity of some but not all the resources they use to produce goods and services.

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Long run

answer

the time interval during which suppliers are able to change the quantity of all the resources they use to produce goods and services.

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Change in demand

answer

a change in quantity demanded of a good that is caused by factors other than change in the price of that good. These factors include changes in income, taste, prices of other goods, expectations about future prices, and population size.

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Normal good

answer

a good whose demand increases or decreases when people's incomes increase or decrease.

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Substitute goods

answer

goods that can replace each other. When the price of one increases, the demand for the other increases.

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Complementary goods

answer

goods that are generally used together. When the price of one increases, the demand for the other decreases.

question

Change in supply

answer

a change in quantity supplied of a good that is caused by factors other than a change in the price of that good. These factors include changes in technology, resource prices, prices of other goods, and the number of suppliers

question

Recession

answer

a phase in the business cycle in which the decline in the economy's real GDP persists for at least a half year. Usually has high unemployment.

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Depression

answer

severe recession

question

Prosperity

answer

a phase in the business cycle marked by a relatively high level of real GDP, full employment, and inflation.

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Inflation

answer

an increase in the price level.

question

Business cycle

answer

alternating periods of growth and decline in an economy's GDP.

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Trough

answer

the bottom of a business cycle

question

Recovery

answer

a phase in the business cycle, following a recession, in which real GDP increases and unemployment declines.

question

Peak

answer

the top of a business cycle

question

Downturn

answer

a phase in the business cycle in which real GDP declines, inflation moderates, and unemployment emerges.

question

Gross domestic product

answer

total value of all final goods and services, measured in current market prices, produced in the economy during a year. Dependent on personal consumption expenditures, gross private domestic investment, government purchases, and net exports of goods and services.

question

Nominal GDP

answer

GDP measured in terms of current market prices-that is, the price level at the time of measurement. (It is not adjusted for inflation).

question

Real GDP

answer

GDP adjusted for changes in the price level

question

Consumer price index

answer

a measure comparing the prices of consumer goods and services that a household typically purchases to the prices of those goods and services purchased in a base year.

question

Base year

answer

the reference year with which prices in other years are compared in a price index.

question

Price level

answer

a measure of prices in one year expressed in relation to prices in a base year.

question

GDP deflator

answer

a measure comparing the prices of all goods and services produced in the economy during a given year to the prices of those goods and services purchased in a base year.

question

Aggregate supply

answer

the total quantity of goods and services that firms in the economy are willing to supply at varying price levels.

question

Aggregate demand

answer

the total quantity of goods and services demanded by households, firms, foreigners, and government at varying price levels. = C+I+G+(X-M)

question

Demand pull inflation

answer

inflation caused primarily by an increase in aggregate demand

question

Stagflation

answer

a period of stagnating real GDP, inflation and relatively high levels of unemployment.

question

Cost push inflation

answer

inflation caused primarily by a decrease in aggregate supply.

question

Circular flow of goods, services, and resources

answer

the movement of goods and services from firms to households and of resources from households to firms.

question

Circular flow of money

answer

the movement of income in the form of resource payments from firms to households and of income in the form of revenue from households to firms.

question

Expenditure approach

answer

a method of calculating GDP that adds all expenditures made for final goods and services by households, firms, and government.

question

Final goods

answer

goods purchased for final use, not for resale.

question

Intermediate goods

answer

goods used to produce other goods

question

Value added

answer

the difference between the value of a good that a firm produces and the value of the goods the firm uses to produce it.

question

Personal consumption expenditures

answer

all goods and services bought by households.

question

Gross private domestic investment

answer

the purchase by firms of plant equipment and inventory goods

question

Government purchases

answer

all goods and services bought by the government

question

Net exports

answer

an economy's exports to other economies, minus its imports from other countries.

question

Durable goods

answer

goods expected to last at least a year.

question

Nondurable goods

answer

goods expected to last less than a year.

question

Services

answer

productive activities that are instantaneously consumed.

question

Inventory investment

answer

stocks of finished goods and raw materials that firms keep in reserve to facilitate production and sales.

question

Income approach

answer

a method of calculating GDP that adds all the incomes earned in the production of final goods and services.

question

National income

answer

the sum of all payments made to resource owners for the use of their resources includes adding interest, corporate profit, rent compensation of employees and proprietors' income.

question

Gross national product

answer

the market value of all final goods and services in an economy produced by resources owned by people of that economy regardless of where the resources are located.

question

Capital depreciation

answer

the value of existing capital stock used up in the process of producing goods and services.

question

Personal income

answer

national income, plus income received but not earned, minus income earned but not received.

question

Transfer payments

answer

income received but not earned. Examples is winning the lottery.

question

Disposable personal income

answer

personal income minus direct taxes.

question

Underground economy

answer

the unreported or illegal production of goods and services in the economy that is not counted in GDP.

question

Consumption function

answer

the relationship between consumption and income.

question

Absolute income hypothesis

answer

as national income increases, consumption spending increases, but by diminishing amounts. That is, as national income increases, the MPC decreases.

question

Marginal propensity to consume (MPC)

answer

the ratio of the change in consumption spending to a given change in income.

question

Relative income hypothesis

answer

as national income increases, consumption spending increases as well, always by the same amount. That is, as national income increases, MPC remains constant.

question

Permanent income hypothesis

answer

a person's consumption spending is related to his or her permanent income.

question

Life cycle hypothesis

answer

typically, a person's MPC is relatively high during young adulthood, decreases during the middle age years, and increases when the person is near or in retirement.

question

Permanent income

answer

the regular income a person expects to earn annually.

question

Transitory income

answer

the unexpected gain or loss of income that a person experiences. It is the difference between a person's regular and actual income in any year.

question

Autonomous consumption

answer

consumption spending that is independent of the level of income.

question

Saving

answer

that part of national income not spent on consumption.

question

Marginal propensity to save

answer

the chang in saving induced bya change in income.= change in savings/change in income

question

Income curve

answer

a line, drawn at a 45 degree angle, showing all points at which the distance to horizontal axis equals the distance to the vertical axis.

question

Intended investment

answer

investment spending that producers intend to undertake.

question

Autonomous investment

answer

investment that is independent of the level of income. Determined by technology level, interest of rate,expectations of future economic growth, rate of capacity of utilization.

question

Aggregate expenditure

answer

spending by consumers on consumption goods, businesses on investment goods, government and spending by foreigners on net exports. Same as GDP or AD

question

Equilibrium level of national income

answer

I=S

question

Unwanted inventories

answer

goods produced for consumption that remain unsold.

question

Actual investment

answer

investment spending that producers actually make-that is, intended investment (investment spending that producers intend to do), plus or minus unintended changes in inventories.

question

Aggregate expenditure curve

answer

a curve that shows the quantity of aggregate expenditures at different levels of national income or GDP.

question

Income multiplier

answer

the multiple by which income changes as a result of a change in aggregate expenditure. 1/1-MPC or 1/MPS

question

The paradox of thrift

answer

the more people try to save, the more income falls, leaving them with no more and perhaps with even less savings.

question

Frictional unemployment

answer

relatively brief periods of unemployment caused by people deciding to voluntarily quit work in order to seek more attractive employment.

question

Structural unemployment

answer

unemployment that results from fundamental technological changes in production, or from the substitution of new goods for customary ones.

question

Cyclical unemployment

answer

unemployment associated with the downturn and recession phases of the business cycle..

question

Discouraged worker

answer

unemployed people who give up looking for work after experiencing persistent rejection in their attempts to find work.

question

Underemployed workers

answer

workers employed in jobs that do not utilize their productive talents or experience.

question

Labor force

answer

people who are gainfully employed or actively seeking employment. Counts underemployed workers as working and discouraged workers as nothing.

question

Natural rate of unemployment

answer

the rate of unemployment caused by frictional plus structural unemployment in the economy.

question

Full employment

answer

an employment level at which the actual rate of employment in the economy is equal to the economy's natural rate of unemployment. Cyclically unemployment is zero.

question

Recessionary gap

answer

the amount by which aggregate expenditure falls short of the level needed to generate equilibrium national income at full employment without inflation.

question

Inflationary gap

answer

the amount by which aggregate expenditure exceeds the aggregate expenditure level needed to generate equilibrium national income at full employment without inflation.

question

Fiscal policy

answer

government spending and taxation policy to achieve macroeconomic goals of full employment without inflation.

question

Balanced budget

answer

government spending equals tax revenues.

question

Tax multiplier

answer

the multiple by which the equilibrium level of national income changes when a dollar change in taxes occurs. Dependent on marginal propensity to consume. (-MPC/1-MPC)

question

Balanced budget multiplier

answer

the effect on the equilibrium level of national income of an equal change in government spending and taxes. Always equal to 1.

question

Budget deficit

answer

government spending exceeds tax revenues. G>T

question

Budget surplus

answer

tax revenues exceed government spending. G<T

question

Countercyclical fiscal policy

answer

fiscal policy designed to moderate the severity of the business cycle.

question

Accelerator

answer

the relationship between the level of investment and the change in the level of national income. = I/Y

question

Barter

answer

the exchange of one good for another, without the use of money.

question

Money

answer

Any commonly accepted good that acts as a medium of exchange, a measure of value, and a store of value.

question

Fiat money

answer

paper money that is not backed by or convertible into any good.

question

Currency

answer

coins and paper money

question

Liquidity

answer

the degree to which an asset can easily be exchanged for money

question

Money supply

answer

typically, M1 money, includes currency, demand deposits, and traveler's checks used in transactions

question

M1 money

answer

the most immediate form of money. It includes currency, demand deposits, and traveler's checks.

question

M2 money

answer

M1 money plus less immediate forms of money, such as savings accounts, money market mutual fund accounts, money market deposit accounts, repurchase agreements, and small denomination time deposits.

question

Velocity of money

answer

the average number of times per year each dollar is used to transact an exchange.

question

Equation of exchange

answer

MV=PQ. The quantity of money times its velocity equals the quantity of goods and services produced times their prices.

question

Quantity theory of money

answer

P=MV/Q. The equation specifying the direct relationship between the money supply and prices.

question

Transactions of demand for money

answer

the quantity of money demanded by households and businesses to transact their buying and selling of goods and services.

question

Fractional reserve system

answer

a banking system that provides people immediate access to their deposits but allows banks to hold only a fraction of those deposits in reserve.

question

Balance sheet

answer

the bank's statement of liabilities (what it owes) and assets (what it owns).

question

Legal reserve requirement

answer

the percentage of demand deposits banks and other financial intermediaries are required to keep in cash reserves.

question

Financial intermediaries

answer

firms that accept deposits from savers and use those deposits to make loans to borrowers.

question

Potential money multiplier

answer

the increase in the money supply that is potentially generated by a change in demand deposits. 1/LRR

question

Excess reserves

answer

the quantity of reserves held by a bank in excess of the legally required reserve.

question

Federal Deposit Insurance Corporation

answer

A government insurance agency that provides depositors in FDIC-participating banks 100 percent coverage on their first $100,000 of deposits.

question

Bank note

answer

a promissory note, issued by a bank, pledging to redeem the note for a specific amount of gold or silver. The terms of redemption are specified on the note. government

question

State chartered bank

answer

a commercial bank that receives its charter or license to function from a state government and is subject to the laws of that state.

question

Nationally chartered bank

answer

a commercial bank that receives its charter from the comptroller of the currency and is subject to federal law as well as the laws of the state in which it operates.

question

Federal Reserve System

answer

the central bank of the United States

question

Federal Open Market Committee

answer

the Fed's principal decision making body, charged with executing the Fed's open market operations.

question

Countercyclical monetary policy

answer

policy directives used by the Fed to moderate swings in the business cycle. Their tools include changing the legal reserve requirement, changing the discount rate or buying/selling bonds on the open market.

question

Reserve requirement

answer

the minimum amount of reserves the Fed requires a bank to hold, based on a percentage of the bank's total deposit liabilities.

question

Open market operations

answer

the buying and selling of government bonds by the Federal Open Market Committee.

question

Federal funds market

answer

the market in which banks lend and borrow reserves from each other for very short periods of time, usually overnight.

question

Federal funds rate

answer

the interest rate on loans made by banks in the federal funds market.

question

Margin requirement

answer

the maximum percentage of the cost of a stock that can be borrowed from a bank or any other financial institution, with the stock offered as collateral.

question

Public good

answer

a good whose benefits are not diminished even when additional people consume it and whose benefits cannot be withheld from anyone. An example is a streetlight.

question

Merit good

answer

a good that market demand and supply do not produce enough of, in some people's opinion. Examples include education and health care.

question

Welfare

answer

government-provided assistance-cash payments and goods and services-to the poor, the elderly and the disabled. Eligibility is based principally on income and family size.

question

Food stamp program

answer

an aid program that provides low-income people with stamps that can be redeemed for food and related items.

question

Medicaid

answer

a health care program administered through Social Security that is applicable to low income and disable people.

question

Social Security

answer

a social insurance program that provides benefits, subject to eligibility, to the elderly, disabled and their dependents.

question

Unemployment insurance

answer

a program of income support for eligible workers who are temporarily unemployed.

question

Medicare

answer

a health care program administered through Social Security that is applicable to everyone over the age of 65.

question

Poll tax

answer

a tax of a specific absolute sum levied on every person or every household. Normally occurs when there is not a lot of date about a population's income.

question

Regressive income tax

answer

a tax whose impact varies inversely with the income of the person taxed. Poor people have a higher percentage of their income taxed than do rich people.

question

Proportional income tax

answer

a tax that is a fixed percentage of income, regardless of the level of income. Also known as a flat rate tax.

question

Progressive income tax

answer

a tax whose rate varies directly with the income of the person taxed. Rich people pay a higher tax rate-a larger percentage of their income is taxed-than do poor people.

question

Corporate income tax

answer

a tax levied on a corporation's income before dividends are distributed to stockholders.

question

Property tax

answer

a tax levied on the value of physical assets such as land, or financial assets such as stock and bonds.

question

Unit tax

answer

a fixed tax, in the form of cents or dollars per unit, levied on a good or service.

question

Sales tax

answer

a tax levied in the form of a specific percentage of the value of the good or service.

question

Customs duty

answer

a sales tax applied to a foreign good or service.

question

Excise tax

answer

any tax levied on a good or service, such as a unit tax, a sales tax or a customs duty.

question

Public debt

answer

the total value of government securities-treasury bills, notes, and bonds-held by individuals, businesses, other government agencies and the Fed.

question

Savings bond

answer

a nonmarketable Treasury bond that is the most common held form of public debt.

question

External debt

answer

public debt held by foreigners.

question

Economic growth

answer

an increase in real GDP, typically expressed as an annual rate of real GDP growth

question

Labor productivity

answer

the quantity of GDP produced per worker, typically measure in quantity of GDP per hour of labor.

question

Capital deepening

answer

a rise in the ratio of capital to labor.

question

Labor skills

answer

the proficiency to perform actual tasks and technical functions required in specific occupational fields. These skills reflect the laborer's natural ability, experience on the job, and education.

question

Efficiency gains

answer

the increase in productivity associated with adoption of new technology and the reorganization of the workplace to accommodate the technology.

question

Entrepreneurship

answer

a person who alone assumes the risks and uncertainties of business.

question

Capital labor ratio

answer

the ratio of capital to labor, reflecting the quantity of capital used by each laborer in production.

question

Capital output ratio

answer

the ratio of capital stock to GDP.

question

Less developed countries

answer

the economies of Asia, Africa, and Latin America.

question

Infrastructure

answer

the basic institutions and public facilities upon which an economy's development depends.

question

Big push

answer

the development strategy that relies on an integrated network of government sponsored and financed investments introduced into the economy all at once.

question

Forward linkages

answer

investments in one industry that create opportunities for profitable investments in other industries, using the goods produced in the first as inputs. Example: Beverage companies need bottles.

question

Backward linkages

answer

investments in one industry that create demands for inputs, including investment in other industries to produce those inputs. An example is need plastic to make a bottle.

question

Free trade

answer

international trade that is not encumbered by protectionist government policies such as tariffs and quotas.

question

International specialization

answer

the use of a country's resources to produce specific goods and services, allowing other countries to focus on the production of other goods and services.

question

Absolute advantage

answer

a country's ability to produce a good using fewer resources than the country it trades with.

question

Comparative advantage

answer

a country's ability to produce a good at a lower opportunity cost than the country with which it trades.

question

Imports

answer

goods and services bought by people in one country that are produced in other countries.

question

Exports

answer

goods and services produced by people in one country that are sold in other countries.

question

Terms of trade

answer

the amount of a good or service (export) that must be given up to buy a unit of another good or service (import). A country's _____ are measured by the ratio of the country's export prices to it import prices.

question

Dumping

answer

exporting a good or service at a price below its cost of production

question

Tariff

answer

a tax on an imported good

question

Quota

answer

a limit on the quantity of a specific good that can be imported.

question

Reciprocity

answer

an agreement between countries in which trading privileges granted by one to the others are the same as those granted to it by the others.

question

General Agreement on Tariffs and Trade

answer

a trade agreement to negotiate reductions in tariffs and other trade barriers and to provide equal and non-discriminating treatment among members of the agreement. Around 100 countries are members

question

World Trade Organization

answer

the successor to GATT. The only global international organization dealing with the rules of trade between nations. It promotes free trade. Once negotiated and signed by member nations, agreements are ratified by member nations' parliaments.

question

Customs union

answer

a set of countries that agree to free trade among themselves and a common trade policy with all the other countries. Example: European Union.

question

European Economic Community

answer

a customs union consisting of France, Italy, Belgium, Holland, Luxembourg, Germany, Britain, Ireland, Spain, Denmark, Greece, Portugal, Iceland, Finland, Sweden, and Austria.

question

European Union

answer

an organization of European nations committed to economic and political integration without abandoning individual national sovereignty.

question

Free trade area

answer

a set of countries that agree to free trade among themselves but are free to pursue independent trade policies with other countries.

question

North American Free Trade Agreement

answer

a free trade area consisting of Canada, the United States and Mexico.

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