scarcity
a situation in which unlimited wants exceed the limited resources available to fulfill those wants
consumer goods
goods (such as food or clothing) intended for direct use or consumption
capital goods
buildings, machines, technology, and tools needed to produce goods and services
trade-offs
alternatives that must be given up when one is chosen rather than another
opportunity cost
cost of the next best alternative use of money, time, or resources when one choice is made rather than another
centrally-planned economies
an economic system whereby government planners make economic decisions and there is little scope for individuals to influence economic outcome
free-market economies
economic systems in which the market largely determines what goods and services get produced, who gets them, and how the economy grows
mixed economies
economies in which the government controls certain economic activities it considers key or appropriate to the public trust while leaving others in the hands of the private sector
investment (as a component of GDP)
business spending on capital (tools and machinery) that makes businesses more productive
capital stock
the amount of capital businesses have
more capital stock=more output possible
3 shifters of the Production Possibilities Curve
-change in resource quantity or quality
-change in technology
-change in trade (doesn't change the amount they can produce, but it does change the amount they can consume)
product market
the market in which households purchase the goods and services that firms produce
factor (resource) market
market in which firms purchase the factors of production from households
factor payments
the income people receive for supplying factors of production, such as land, labor, or capital
transfer payment
-cash payments made by the government to people who do not supply goods, services, or labor in exchange for these payments
-they include Social Security benefits, veterans' benefits, and welfare payments
the Law of Demand
There is an INVERSE relationship between price and quantity demanded.
the Law of Supply
There is a DIRECT relationship between price and quantity supplied.
5 shifters of DEMAND
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5 shifters of SUPPLY
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price ceiling
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price floor
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subsidy
a government payment that supports a business or market
GDP
the total market value of all final goods and services produced annually in an economy
National Income
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nominal GDP
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real GDP
GDP adjusted for inflation and expressed in constant, or unchanging, dollars
3 things NOT included in GDP
#NAME?
frictional unemployment
unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills
structural unemployment
unemployment that occurs when workers' skills do not match the jobs that are available
cyclical unemployment
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natural rate of unemployment (NRU)
-the "normal" unemployment rate due to frictional and structural conditions in labor markets
-it is the unemployment rate that occurs when the economy is operating at a sustainable rate of output
-no cyclical unemployment
consumer price index (CPI)
an index number that shows how prices change over time for a fixed basket of goods
price of market basket/price of market basket in base year x 100
GDP Deflator
an index number that measures all prices and is used to convert nominal GDP into real GDP
nominal GDP/real GDP x 100
deflation
a general decrease in prices and rise in the purchasing value of money
inflation
a general increase in prices and fall in the purchasing value of money
disinflation
#NAME?
velocity of money
the average number of times each dollar in the money supply is used to purchase goods and services included in GDP
4 shifters of aggregate demand
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3 shifters of aggregate supply
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negative supply shock
-occurs when key input rapidly becomes more scarce and/or expensive or when producers are pessimistic about future profits
-SRAS "jumps" left.
positive supply shock
-occurs when key input rapidly becomes more available and/or inexpensive or when producers are optimistic about future profits
-SRAS "jumps" right.
stagflation
a period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)
a decline in real GDP combined with a rise in the price level
autonomous consumption
the level of consumption which does not depend on income (the argument is that even with zero income you still need to buy enough food to eat, through borrowing or running down savings)
disposable income
the income of consumers that is left over after the payment of income taxes
classical economic theory
the view that an economy will self-correct from periods of economic shock if let alone; "laissez-faire
Keynesian economic theory
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discretionary fiscal policy
Congress designs a new bill intended to change AD through government spending or taxation
non-discretionary fiscal policy
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automatic stabilizers
government policies already in place that promote deficit spending during recessions and surplus budgets during expansions
expansionary fiscal policy
laws enacted to increase output
-increase government spending
-decrease taxes (which increases disposable income)
contractionary fiscal policy
laws enacted to reduce inflation
-decrease government spending
-increase taxes (which decreases disposable income)
the multiplier effect
This occurs when one person's spending is received as income by another person, who in turn uses some of that income in new spending.
if this continues repeatedly, the total income will increase.
marginal propensity to consume (MPC)
the portion of additional income that is spent on consumption
(Change in Spending / Change in Income)
marginal propensity to save (MPS)
the portion of additional income that is saved
(Change in Saving / Change in Income)
deficit spending
when a government spends more than it takes in and goes into debt
time lags
periods between the time fiscal policy is enacted and the time it becomes effective
crowding-out effect
#NAME?
the financial sector
the part of the economy made up of institutions (like banks) that focus on pairing lenders and borrowers
assets
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liabilities
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liquidity
a measure of the ease with which an asset can be converted into money
transaction demand for money
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asset demand for money
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3 functions of money
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commodity money
objects that have value in themselves and that are also used as money
fiat money
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3 shifters of the money supply
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fractional reserve banking
a banking system that keeps only a fraction of funds on hand and lends out the remainder
federal funds rate
the interest rate banks charge each other for overnight loans
excess reserves
the amount of any deposit that does NOT have to be held aside and may be used to make loans and buy investments
required reserves
the amount of any deposit that must be set aside and not used to make loans or buy investments
demand deposits
bank deposits that can be withdrawn at any time (example: checking accounts)
owner's equity
the amount of money owners have put into a company or bank
It doesn't need to be held in reserve.
exports
the goods and services that a nation produces and then sells to other nations
imports
the goods and services that a nation buys from other nations
net exports (Xn)
exports minus imports
trade deficit
importing more than was exported
trade surplus
exporting more than what was imported
Balance of Payments
-the summary of all international transactions within a given year prepared in the domestic country's currency
-it has two accounts, the current account and the financial account
the Current Account
measures the international trade in goods and services, investment income, and net transfer payments
the Financial Account (the Capital Account)
measures the international trade of financial assets like stocks, bonds, and real estate
net capital flow
the difference between capital inflows ( investment financed by savings from another country) and capital outflows (domestic savings invested abroad
capital inflow
foreign savings that finance investment spending domestically (Example: France invests in U.S. businesses)
capital outflow
domestic savings that finance investment spending in another country (Example: The U.S. invests in French businesses.)
appreciation
the increase of value of a country's currency relative to a foreign currency
depreciation
the decrease of value of a country's currency relative to a foreign currency
FOREX (foreign exchange) shifters
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floating exchange rates
an exchange rate policy under which a government permits its currency to be traded on the open market without direct government control or intervention
fixed exchange rates
system under which the price of one currency is fixed in terms of another so that the rate does not change