question

ceteris paribus

answer

used by economists to discuss laws in economics (Latin) "all other things being equal"

question

command economy

answer

an economy in which the governments makes all economic decisions about how the factors of production are used Mnemonic device: associate command with communism

question

market economy

answer

the forces of supply and demand determine how economic questions will be answered

question

traditional economy

answer

an economy in which economic decisions are made based on tradition

question

factors of production

answer

land, labor, capital, entrepreneurial ability (resources) land, labor, capital, entrepreneurship

question

resources

answer

land, labor, capital, entrepreneurial ability (factors of production)

question

economics

answer

the study of how we allocate our scarce resources among competing forces

question

land

answer

productive resources that come from nature Ex: water, trees, minerals

question

labor

answer

human resources Ex: physical effort of people, knowledge and skills of people

question

capital

answer

person produced tools of the trade Ex: buildings, equipment, tools, and machines

question

entrepreneurship

answer

The intelligence, imagination, and ability to take the risks that are needed to start up and maintain a business Ex: Oprah Winfrey, Ted Turner, Bill Gates

question

scarcity

answer

when there are not enough resources to supply everyone's unlimited wants or needs

question

opportunity cost

answer

the value of the next best alternative

question

production possibilities curve/frontier (PPC/PPF)

answer

a graphic representation of the production relationship between the two goods

question

capital versus consumer goods

answer

goods used in the production process goods used by people in their day to day lives

question

law of increasing opportunity

answer

as you increase production of one good, you must give up increasing units of the other good

question

absolute advantage

answer

the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources or fewer number of resources when some individual, group, or country has the ability to produce a product more efficiently than another individual, group, or country.

question

comparative advantage

answer

the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers.

question

property rights

answer

the ability of an individual to own and exercise control over scarce resources

question

role of incentives

answer

The possibility of personal gain; what motivates people to be involved in the market system and is a major contributor of efficiency in a market economy

question

law of diminishing marginal returns

answer

As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative

question

trade-off

answer

an exchange that occurs as a compromise

question

economic growth

answer

steady growth in the productive capacity of the economy (and so a growth of national income)

question

inefficiency

answer

unskillfulness resulting from a lack of efficiency

question

mixed economy

answer

an economic system that combines private and state enterprises has elements of both a command and market economy

question

capitalism

answer

an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, esp. as contrasted to cooperatively or state-owned means of wealth.

question

socialism

answer

A theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole.

question

equity

answer

conformity with rules or standards; fairness; impartiality

question

efficiency

answer

the ratio of the output to the input of any system

question

demand

answer

the amount of goods and services people are willing to buy

question

quantity demanded

answer

the amount of a good or service that a consumer is willing and able to purchase at a given price

question

law of demand

answer

consumers buy more of a good when its price decreases and less when its price increases

question

income effect

answer

a change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product's price.

question

substitution effect

answer

when consumers react to an increase in a good's price by consuming less of that good and more of other goods

question

TRIBE

answer

the five different factors that can cause a shift in demand T: Tastes and preferences R: Related goods and services I: Income B: Buyers, number of E: Expectations of price

question

complement goods

answer

Goods used together so that as price of the first good rises (falls), demand for the second or complement good will fall (rise.) Examples include razors and razor blades, coffee and cream or sugar, etc.

question

substitute goods

answer

Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.

question

normal good

answer

A good for which the demand increases as income rises and decreases as income falls

question

inferior good

answer

A good for which the demand increases as income falls and decreases as income rises

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direct cost

answer

A cost that can be easily and conveniently traced to a specified cost object.

question

benefits

answer

the pleasure or satisfaction derived from some activity or decision

question

marginal benefit

answer

the additional benefit to a consumer from consuming one more unit of a good or service

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marginal cost

answer

the additional cost to a firm of producing one more unit of a good or service

question

explicit cost

answer

known out of pocket, obvious costs

question

implicit cost

answer

non obvious or opportunity costs

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eminent domain

answer

the right of government to take private property for public use

question

per capita income

answer

the total national income divided by the number of people in the nation

question

gains from trade

answer

people can get more of what they want through trade than they could if they tried to be self-sufficient

question

specialization

answer

the concentration of the productive efforts of individuals and firms on a limited number of activities

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supply

answer

how much of a good or service producers are willing and able to supply at every price

question

quantity supplied

answer

the amount a supplier is willing and able to supply at one price level

question

law of supply

answer

there is a direct relationship between price and quantity supplied

question

Determinants of supply

answer

ROTTEN Resource: cost and availability Opportunity: cost of alternative production Taxes, subsidies and government regulation Technology (productivity) Expectations of the producer Number of firms in the industry

question

equilibrium

answer

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

question

shortage

answer

a situation in which quantity demanded is greater than quantity supplied

question

surplus

answer

a situation in which quantity supplied is greater than quantity demanded

question

price ceiling

answer

a maximum price that can be legally charged for a good or service

question

price floor

answer

a legal minimum on the price at which a good can be sold

question

circular flow

answer

A model that shows the process of exchange among consumers (also called households), businesses and government

question

factor market

answer

market in which firms purchase the factors of production from households

question

resource market

answer

a market in which households sell and firms buy resources or the services of resources

question

financial market

answer

the banking, stock and bond markets through which private savings and foreign lending flow to become investment, government, and foreign borrowing

question

gross domestic product

answer

the total dollar value of all final goods produced in a nation during one year Aggregate Spending (GDP) = C + I + G + (X-M) OR Aggregate Spending (GDP) = (W + P + I + R + depreciation + indirect business taxes (non-profit based taxes paid by corporations) ─ subsidies + net income of foreigners)

question

gross national product

answer

The total value of goods and services, including income received from abroad, produced by the residents of a country within a specific time period, usually one year.

question

transfer payments

answer

government spending where no good or service is exchanged; does not count towards GDP Ex: student aid; unemployment benefits; etc....

question

national income

answer

National income includes all money payments (wages, profit interest, rent) earned by households as a result of their interaction in the resource market. When added together, these factor payments should be equivalent to GDP (with the addition of a few things like depreciation and indirect business taxes). Transfer payments from the government are not counted in measures of national income.

question

net domestic product (NDP)

answer

calculated by subtracting consumption of fixed capital (depreciation) from GDP. If you didn't account for depreciation, the value of an economy's output would be significantly overstated. Especially in regard to macroeconomics, accounting for slight changes can have dramatic effects. Remember, we are dealing with billions and trillions of dollars, so 1 or 2 % of depreciation can mean hundreds of millions of dollars—equal to some undeveloped nations' entire GDP.

question

personal income (PI)

answer

While national income includes income from productive resources, personal income includes income directly and indirectly earned by households. Because personal income is spendable income, payments for Social Security taxes or undistributed corporate taxes or profits are not counted in measures of personal income, but transfer payments such as unemployment and welfare are counted.

question

disposable income (DI)

answer

DI is what households actually have to spend. If you subtract personal income tax from PI, you are left with disposable income. You can think of it as your take-home pay. Disposable income equals and individual's spending plus savings because people can either spend their money or save it.

question

real GDP

answer

gross domestic product (GDP) adjusted to account for changes in currency values and price changes as well as inflation real = nominal - inflation

question

nominal GDP

answer

the GDP measured in terms of the price level at the time of measurement (unadjusted for inflation)

question

Things that do not count towards GDP

answer

purely financial transactions intermediate goods:used in the production process and counted when the final good is sold (e.g. the flour used in baking bread) secondhand sales (used goods) non-market and other household production activities leisure activities the underground economy the costs of pollution

question

business cycle

answer

portrays the highs and lows of the economy as people buy and sell goods and services

question

unemployment

answer

people in the labor force who are actively looking for jobs

question

natural rate of unemployment

answer

structural and frictional unemployment that is always in an economy

question

willingness to pay

answer

a consumer's desire to buy a good or service

question

consumer surplus

answer

the difference between your willingness to pay and the price you actually pay. It is the area below the demand curve and above the price.

question

producer surplus

answer

the difference between the price received and the marginal cost of producing the good. It is the area above the supply curve and under the price.

question

excise tax

answer

a tax that is measured by the amount of business done (not on property or income from real estate)

question

total welfare

answer

the sum of consumer surplus and producer surplus. The free market equilibrium provides maximum combined gain to society.

question

utility

answer

a measure of the relative satisfaction from, or desirability of, consumption of goods and services

question

utils

answer

the fictional measuring unit of utility

question

marginal utility

answer

(economics) the amount that utility increases with an increase of one unit of an economic good or service

question

law of diminishing marginal returns

answer

a law that states that if additional units of one resource are added to another resource in fixed supply, eventually the additional output will decrease

question

production quota

answer

an artificial limit on how much of a good or service can be produced

question

excise tax

answer

a tax on sales of a good or service

question

law of unintended consequences

answer

The law that states that for any law or policy implemented to achieve one or more set of objectives, there will be unintended, or unexpected costs from that law or policy.

question

negative externality

answer

a negative impact that affects people not involved in an activity

question

sin tax

answer

a relatively high tax designed to raise revenue and reduce consumption of a socially undesirable product such as liquor or tobacco

question

pigovian tax

answer

a penalty tax set to restrict an activity

question

tax incidence

answer

burden of taxation; the percentage of any tax actually paid by consumers and producers

question

classical economics

answer

a school of thought based on the idea that free markets regulate themselves; proposed by Adam Smith

question

Say's Law

answer

theory that supply creates its own demand; advanced by John Baptiste Say in early 1800s

question

short-run aggregate supply

answer

the total amount of goods and services that all firms are willing and able to produce within the economy

question

long-run aggregate supply

answer

A time period when all production factors have time to adjust to full employment; this curve is vertical at the natural rate of employment

question

determinants of aggregate supply

answer

Resource prices Actions by the government Political or environmental phenomena Productivity

question

aggregate demand

answer

the amount of goods and services in the economy that will be purchased at all possible price levels

question

net export effect

answer

as interest rates in the U.S. fall, investors tend to put more money into foreign investments. This drives foreign prices up and lowers U.S. prices, which then leads to a better exchange rate. When American-made goods are cheaper compared to foreign goods, more goods are exported than imported, leading to a better net export rate

question

interest rate effect

answer

as price levels fall, consumers' demand for money increases. This causes interest rates (which are the price of money) to rise. Higher interest rates cause investment and other interest-sensitive components of aggregate demand to decrease

question

wealth effect

answer

When prices rise in an economy, the real value of household income declines, and so consumer spending drops. This drop results in a decrease in real GDP. If price levels drop, the value of money and other financial assets is higher, and consumers will spend more

question

demand pull inflation

answer

results when there is too much consumer spending; when prices go up due to an increase in consumer demand for goods

question

cost push inflation

answer

when prices rise because the cost of making the product increases.

question

wage push inflation

answer

when prices increase due to the fact that workers receive more wages for the same amount of work.

question

profit push inflation

answer

when the owners of business raise prices simply because they wish to make more profit.

question

Determinants of Aggregate Demand

answer

Consumer spending Investment spending Government spending Net Exports (Exports - Imports)

question

Difference between AD and GDP

answer

AD includes transfer payments because they can influence consumer's income but GDP does not include transfer payments anywhere in its calculation.

question

price level

answer

the average price of all goods and services in the economy

question

marginal propensity to consume (MPC)

answer

how much of every extra dollar would be consumed MPC= Change in Spending/Change in Income

question

marginal propensity to save (MPS)

answer

how much of every extra dollar would be saved MPS= Change in Savings/Change in Disposable Income

question

expenditure multiplier

answer

aids in calculating the change in GDP when expenditures change Spending Multiplier = 1/1-MPC; 1/MPS; Change in GDP/Change in Spending

question

tax multiplier

answer

aids in calculating the change in GDP when taxes change Tax Multiplier= MPC/MPS; Change in GDP/Change in Taxes

question

accounting profit

answer

A calculation of total earnings that includes the explicit costs of doing business, such as depreciation, interest and taxes, but does not include implicit costs such as opportunity costs.

question

average fixed cost

answer

the fixed cost per unit of output

question

average revenue

answer

total revenue divided by quantity sold

question

average variable cost

answer

the variable cost per unit of output

question

economic profit

answer

total revenue minus economic plus accounting costs

question

explicit cost

answer

known, out of pocket, obvious costs

question

fixed costs

answer

costs that do not change in the short run, like rent on a building

question

implicit cost

answer

non-obvious or opportunity costs

question

long run

answer

a period of time long enough to change the amount of any input used in production

question

marginal cost

answer

the additional, or incremental cost incurred from any activity, or action

question

marginal revenue

answer

additional revenue a firm earns from selling an additional unit of some good or service

question

short run

answer

a period of time too short to change some inputs in the production process

question

total cost

answer

fixed costs + variable costs

question

total revenue

answer

price times quantity sold

question

variable cost

answer

the cost of inputs such as labor, that can change in value

question

average fixed cost

answer

Fixed cost divided by the quantity of output

question

inflection

answer

the point in a curve where the rate of change in the slope begins to change

question

diseconomies of scale

answer

increases in costs stemming from a company becoming too large

question

economies of scale

answer

cost savings associated with large scale production

question

perfect competition

answer

a market structure where thousands of competing firms sell a homogenous good or service

question

perfectly elastic demand

answer

a good where any change in price causes quantity demanded to change in an infinite manner (a horizontal demand curve)

question

excess economic profits

answer

economic profits far exceeding what is normal in some industry

question

minimum losses

answer

the lowest price that can be charged for a good or service before losses begin to occur

question

normal profits

answer

total revenue equal to the explicit and implicit costs of production

question

shut down point

answer

the point where the price of a good or service is equal to the minimum point on the average variable cost curve

question

allocative efficiency

answer

is reached in production when marginal cost equals the price, which equals marginal revenue

question

productive efficiency

answer

is reached in production when price is set where the minimum average total cost (ATC) is equal to the price, which also equals marginal revenue and demand

question

economic growth

answer

an increase in gross domestic product illustrated by an outward shift of the long run aggregate supply curve or the production possibilities curve

question

fiscal policy

answer

the government's use of tax and spending policies to battle problems in the economy Examples include: government expenditures and personal income taxes

question

average total cost pricing

answer

pricing a good or service at a level that creates enough revenue to pay the total cost of production

question

average variable cost pricing

answer

pricing a good or service at a level that creates enough revenue to pay only the variable costs of production

question

fair-return price

answer

where P = ATC, monopolist will only earn normal profits (break-even profits that will cover all his/her costs)

question

marginal cost pricing

answer

pricing a good or service at a level just sufficient to pay for the marginal cost of production

question

natural monopoly

answer

a monopoly that is created from economies of scale- like an electric utility

question

price discriminating monopolist

answer

occurs when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs

question

public utility

answer

a company that sells a good or service that is vital to the public interest (electric power) and thus faces regulations on prices and output

question

socially optimal price

answer

where P = MC, it is the best option for consumers since it is the highest quantity of the lowest price

question

entry barrier

answer

a way of blocking new entrants into a market if profits are being earned (e.g. patents, trademarks and violence)

question

Federal Communications Committee

answer

The commission that regulates communications to ensure that the media does not post libel and that the government does not abuse their power of prior restraint; established in 1934

question

Herfindahl-Hirschman index

answer

a measure of how concentrated (how much, or little competition exists) an industry is

question

monopoly

answer

a market structure characterized by a single seller of a unique product with no close substitutes

question

monopoly pricing

answer

a price that is set equal to a monopolist's demand curve, rather than at a level that is just equal to cost of production

question

monopsony

answer

the single buyer of some good or service, typically the single buyer of labor in some market

question

problems with utility regulation

answer

1. gold plating: One of the major criticisms of public utility regulation is that if utilities are allowed to submit expenses to a body of elected regulators, the utility will have every incentive to inflate expenses in order to be allowed a higher rate charged to its customers. 2. the lack of research and development 3. the nuclear scare

question

imports

answer

when goods and services are brought into a nation

question

exports

answer

when goods and services are sold to other nations

question

terms of trade

answer

an agreement regarding how much of each product in terms of the other product being traded

question

brand loyalty

answer

a situation where buyers do not change their behavior much in response to price changes because they are loyal to a company's brand

question

excess capacity

answer

the difference between how much of a good or service is produced and how much could be produced

question

implicit contract

answer

an unwritten agreement between two parties- often a source of brand name loyalty

question

monopolistic competition

answer

a market structure where a few firms enjoy some brand name loyalty

question

product differentiation

answer

a way of helping consumers see differences in goods or services (advertising)

question

cartel

answer

a consortium of independent organizations formed to limit competition by controlling the production and distribution of a product or service

question

conglomerate merger

answer

a merger among firms in unrelated industries

question

dominant strategy

answer

A strategy where no matter what your rival does you are no better off or worse off from the strategy you have picked.

question

failing firm

answer

A firm that is incurring economic losses and is facing bankruptcy.

question

game theory

answer

A theory that seeks to explain how the behavior of one person, or firm, is impacted by the behavior of another person or firm.

question

horizontal merger

answer

A merger among competing firms.

question

merger

answer

The joining of two firms.

question

nash equilibrium

answer

A situation where rival individuals or rival firms cannot gain by changing their behavior.

question

oligopoly

answer

A market structure where only a few firms dominant the sales for a good or service.

question

synergy

answer

The phenomena that occurs when two agents acting together produce more than the expected outcome.

question

vertical integration

answer

Coordination of the production process from beginning to end.

question

vertical merger

answer

A merger among firms in the production process (a car maker buying a tire company).

question

balance of payments

answer

a system by which a nation tracks all transactions between nations; this is made up of two accounts: current and capital. The sum of these two accounts must always be zero.

question

current account

answer

record of all goods and services exchanged between two nations

question

financial account

answer

record of trade involving financial assets including stocks, bonds, and real estate; sometimes called the capital account

question

trade deficit

answer

When a nation spends more on imports than it earns from exports

question

trade surplus

answer

When a nation earns more from its exports than it spends on imports

question

outflow of financial capital

answer

When Americans purchase assets abroad

question

inflow of financial capital

answer

When foreigners purchase U.S. assets

question

exchange rate

answer

the price of one nation's currency in terms of another nation's currency

question

factors that affect the foreign exchange of currency

answer

• Consumer tastes and preferences - If consumers like foreign goods better than domestic goods, the demand for foreign dollars will increase and the domestic dollar will depreciate. • Inflation - Inflation may negatively impact a nation's currency as demand for the nation's goods decreases with higher price levels. • Economic growth and higher incomes- a nation that is healthy with a growing economy generally has a strong currency with high foreign purchasing power. The nation's citizens normally have higher incomes, which they spend on both foreign and domestic goods. • Interest rates - higher interest rates cause an increase in financial investment as financial investors seek the highest return on their money. Lower interest rates cause an outflow of financial capital. NOTE: This is not the same as capital investment where businesses borrow money to build factories and acquire other capital. Remember, high interest rates decrease investment spending.

question

appreciation

answer

when the price of a nation's dollar increases in relation to another nation's dollar

question

depreciation

answer

when the price of a nation's dollar decreases in relation to another nation's dollar

question

exchange rate

answer

the value of one currency expressed in terms of another currency

question

product market

answer

the market for final goods and services

question

input

answer

a good used to produce another good

question

factor market

answer

the market for the factors of production like land, labor and capital

question

circular flow

answer

a model showing how goods, services, resources, and money each flow through the economy

question

monopsony

answer

the single buyer of some good or service, typically the buyer of labor in some market

question

derived demand

answer

how the demand for one good stems from, or is derived from the demand for another good. The demand for labor is a derived demand. It comes from the demand for what labor produces.

question

labor supply

answer

the relationship between wages and salaries and the quantity of labor hours supplied

question

resources

answer

land, labor, capital

question

marginal physical product

answer

the additional output gained from employing one more unit of some input

question

marginal revenue product

answer

the marginal product of labor or capital multiplied by the price that can be charged for what labor or capital produced

question

perfectly competitive labor market

answer

a situation where there are many suppliers and many demanders of some type of labor

question

monopsony

answer

the single buyer of some good or service, typically the single buyer of labor in some market

question

input demand

answer

the demand for labor, capital and natural resources

question

substitute

answer

a good that consumers can opt to buy if some other good increases in price and vice versa (sausage and bacon)

question

complement

answer

pairs of good for which a fall in price of one good results in a greater demand for the other good

question

technology

answer

the knowledge of how to produce some good

question

industry demand for labor

answer

the total demand for any type of labor. The sum of all individual demand curves for some type of labor.

question

market demand for an input

answer

the total demand for any input in the production process

question

market supply of an input

answer

the total supply of any input in the production process

question

market equilibrium

answer

where the price of a good or service has settled at a point where quantity demanded equals quantity supplied

question

economic rent

answer

the value a producer or supplier receives over and above what would normally be received for a good or service

question

minimum wage

answer

a legal floor on the wage rate

question

marginal input cost

answer

additional cost of adding one more unit of some input

question

average input cost

answer

total input cost divided by the total quantity of inputs used

question

union

answer

a collection of workers who negotiate the terms of employment together, rather than individuals

question

collective bargaining

answer

the process whereby leaders of a labor union negotiate the terms of a labor contract with the management of a company

question

craft union

answer

a union representing such workers such as carpentry and plumbing

question

industrial union

answer

a union that represents people in automobile, trucking, and other industries

question

monopsony

answer

the single buyer of some good or service, typically the single buyer of labor in some market

question

bilateral monopoly

answer

a situation where there is a single seller of some labor resource and a single buyer of that resource

question

capital

answer

value of all assets; including money, equipment, buildings, tools, inventory

question

investment

answer

money put at risk with the expectation that income, or profit from that risk will be greater than the initial investment

question

interest rate

answer

the percentage of the borrowed money charged for one year

question

marginal product of capital

answer

the additional output gained from employing one more unit of some capital good

question

marginal product of labour

answer

the additional output gained from employing one more unit of labour

question

marginal rate of technical substitution

answer

the rate at which capital and labour can be substituted for one another in any given production process

question

physical capital

answer

consists of tools, machinery, raw materials, vehicles, structures, and inventories in various stages of production.

question

human capital

answer

consists of the knowledge, education, training, and skill that humans bring to the process of production.

question

marginal return on investment

answer

the percentage rate of return on investment of additional sums of money, to acquire more capital.

question

tariff

answer

a tax on imported goods

question

quota

answer

a restriction on the number of goods that can be exported by a nation to another nation

question

voluntary export restriction

answer

when a nation agrees to restrict the number of goods it exports to avoid tariffs and quotas

question

horizontal summation

answer

The process of creating a market demand curve by summing the quantities demanded by each individual at every price.

question

M1, M2, and M3

answer

different categories that help measure the money supply

question

fiat money

answer

money that has value because it is backed by the word of the federal government and not by gold or other valuable resources

question

M1

answer

The smallest, most liquid form of money; M1 includes checkable or demand deposits, travelers' checks, coins, and currency; it is not in circulation; when we talk about money supply, this is what we are usually describing; Vault cash is not counted in the money supply because it has already been counted when it is deposited in the bank.

question

M2

answer

This definition includes M1 plus savings and small (less than $100,000) time deposits. Time deposits must remain in the bank for a fixed length of time before they can be withdrawn. Other accounts less than $100,000 like money market deposit accounts and money market mutual funds are also counted in M2 and usually earn a higher interest rate than regular deposits. M2 is larger than M1 but less liquid.

question

M3

answer

This definition includes M2 plus large ($100,000 or more) time deposits. M3 is even less liquid than M2 because the money must stay in the bank longer. An example of M3 would be a 5-year certificate of deposit or a savings bond (which are usually held for 7 years before maturity). M3 is no longer reported by the Federal Reserve but is included here to give M2 context. It will not be tested on the AP exam.

question

bond

answer

a promise to pay the holder an amount equal to the cost of the bond along with a specified amount of interest earned.

question

security

answer

a more short-term loan than a bond.

question

stocks

answer

represent partial ownership in a corporation; much more volatile than bonds or securities

question

currency in circulation

answer

the total amount of paper currency, coins, and demand deposits that is held by consumers and businesses rather than by financial institutions, central banks, and the U.S. Treasury

question

common pool resource good

answer

a good that is owned by all members of society like the air or the ocean

question

common property

answer

property that is owned by all members of society

question

exclusion/rival goods

answer

goods where one person's use of the good excludes others from using it

question

free riders

answer

people who derive benefits from the work, or purchases of others without doing any work, or making any purchase

question

nonexclusion goods

answer

goods where one person's consumption does not exclude others from consuming as well (a sunset)

question

private good

answer

a good where one person can exclusively enjoy the consumption

question

public good

answer

a good that is not produced effectively by the private sector (national defense) and thus is provided by the government

question

shared consumption

answer

a good or service where more than one person can simultaneously enjoy it

question

toll good

answer

a good where a price can be charged and exclusion can take place

question

tragedy of the commons

answer

a term used to refer to the near starving of the Pilgrims as a result of practicing farming based on common property

question

shared consumption

answer

it means that when one person uses the good, it does not diminish the service to others

question

Coase theorem

answer

a theory that states even in the presence of externalities an economy can reach an efficient solution as long as transaction costs are sufficiently low

question

external benefit

answer

benefits conferred on party C from the transactions involving party A and B

question

external cost

answer

known, out of pocket, obvious costs

question

negative externality

answer

a negative impact that affects people not involved in an activity

question

positive externality

answer

the external benefits conferred on third parties who did not participate in the original transaction directly

question

demand deposits

answer

the amount of required reserves and excess reserves that a bank has not loaned out or otherwise invested

question

excess reserve

answer

the portion of every dollar that is deposited that a bank can loan out or otherwise invest

question

money multiplier

answer

shows how much a new deposit in the bank can impact the money supply (1/reserve requirement)

question

required reserve

answer

the portion of every dollar that is deposited that a bank cannot loan out or otherwise invest; the amount of currency they keep in the vault

question

required reserve ratio

answer

the amount of money each bank must keep by law from every dollar deposited in the bank

question

output method

answer

resources are fixed but output is variable

question

input method

answer

resources are variable but output is fixed

question

external benefit

answer

benefits conferred on party C from the transaction involving parties A and B

question

external cost

answer

costs imposed on party C from the transaction involving parties A and B (pollution)

question

marginal social benefit of pollution

answer

the incremental benefits (economic growth, jobs, etc.) that are derived from each additional unit of pollution

question

marginal social cost of pollution

answer

the incremental costs (poor health, poor productivity, etc.) that are created from each additional unit of pollution

question

socially optimal quantity of pollution

answer

the level of pollution where the marginal social benefits of pollution equal the marginal social costs of pollution

question

crowding out

answer

when government spending increases real interest rates causing private investment to decrease

question

loanable funds graph

answer

a graphic representation of the relationship between real interest rates and loanable funds

question

nominal interest rates

answer

interest rate stated in current prices

question

real interest rates

answer

interest rates adjusted for inflation

question

ability to pay principle

answer

the principle that suggests that people with greater income should have a greater share of the tax burden than people with lower levels of income

question

benefits received principle

answer

the principle of taxation that suggests that those people who derive the greatest benefits from the use of taxpayer dollars, should pay a greater share of the tax burden

question

effective tax rate

answer

the actual burden (over and above the stated tax burden) of taxation

question

nominal tax rate

answer

the stated tax rate

question

progressive tax

answer

a tax where as income increases, the percentage of income paid in taxes increases

question

proportional tax

answer

a flat, set percentage tax on income

question

regressive tax

answer

a tax that charges a higher percentage of one's income the less income one has

question

tax incidence

answer

the burden of taxation- the percentage of any tax actually paid by consumers and producers

question

geographic mobility

answer

the willingness and ability of a person to move to a geographic location where economic opportunities are greater

question

Gini ratio

answer

a measure of statistical dispersion commonly used as a measure of inequality of income or wealth

question

income distribution

answer

how concentrated income is in the hands of rich, middle class and poor people

question

Lorenz curve

answer

a curve that seeks to depict the distribution of income

question

resource endowment

answer

the resources a person is born with

question

equation of exchange

answer

MV = PY

question

velocity of money

answer

number of times a single dollar is spent during a year

question

monetarist theory

answer

belief that any problem in the economy can be solved by increasing the money supply 3-5%

question

supply side theory

answer

belief that any problem in the economy can be solved by taking action to shift AS to the right

question

rational expectations policy

answer

belief that people behave rationally so problems in the economy must be solved by actions that surprise the populace

question

automatic stabilizers

answer

changes to an economy that require no action by Congress or the President

question

discretionary policy

answer

actions by policymakers that impact the economy. Examples would include changing taxes or spending.

question

debt

answer

the cumulative amount of deficit that was not paid off in the year that the deficit was incurred

question

deficit

answer

the amount by which spending is greater than revenue in a given time period

question

The Federal Reserve System

answer

system of 12 district banks charged with monitoring the money supply with the goal of establishing price stability, full employment, and sustainable economic growth

question

monetary policy

answer

actions taken by the Federal Reserve to control inflation and recession in the economy

question

discount rate

answer

the interest rate the Federal Reserve charges banks when they borrow money from the Fed

question

open market operations

answer

buying and selling securities to control inflation and recession by varying the money supply

question

federal funds rate

answer

the interest rate at which one bank lends to another bank

question

Phillips curve

answer

graphical representation of the relationship between inflation and unemployment

question

stagflation

answer

high unemployment and high inflation

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