Economics

Final Exam Review

Goods or services whose benefits are available to everyone and are

paid for collectively

• Public goods- ex. Highways, national defense, police, fire, etc.

Ch. 7

The study of how people try to satisfy their needs through the careful use of

scarce resources

Economics

1.1

Gross domestic product after adjustments for inflation

• Real GDP

12.1

A “strong” market with the prices moving up for several months or years

in a row

• Bull Market

11.5

The condition of not having enough resources to produce all the things

people want

Scarcity

1.2

The cost of the next-best alternative use of money, time, or resources

when one choice is made rather than another

• Opportunity cost 1.7

The situation in which some necessities have little value while some non-necessities have a much higher value is known asa. paradox of valueb. opportunity costc. trade-offsd. economic interdependence

• A 1.3

The study of economics is important because it enables us toa. describe our standard of living.b. increase our consumption of consumer goodsc. become better decision makers.d. determine what goods ought to be produced.

• C 1.5

Alternative choices made by consumers in the marketplace

• Trade-offs 1.7

A popular model used to illustrate the concept of opportunity cost isa. the production possibilities frontier.b. the paradox of value.c. entrepreneurship.d. the factors of production.

• A 1.8

What are the four factors of production?

• Land, labor, capital, entrepreneurs 1.9

Personal income minus individual taxes

• Disposable income

12.3

When firms that produce the same kind of product join forces.

• Horizontal merger

3.1

What three economic questions must every society answer?

1. What to produce2. How to produce3. For whom to produce1.10

Characteristics of a traditional economy

• Economic activities based on ritual, habit or custom

• Little innovation• Everyone knows what role to play

The purpose of government in a command economy is to

a. ensure the availability of consumer products.b. encourage entrepreneurs.c. make major economic decisions.d. promote economic freedom.

• B 2.1

Which group of people ultimately determines the products that a free enterprise economy produces?a. Congressb. local governmentc. property ownersd. consumers

• D 2.2

Characteristics of the American economy

• Economic freedom• Private property rights• Voluntary exchange• Profit motive• Competition

What is the role of an entrepreneur in a free enterprise

economy

• Organize land, capital and labor for profit• Accept the risk of loss• Decide how to produce• Are innovators and catalysts2.5

What is the role of the government in a free enterprise economy?

• Protector, provider and regulator of economic and social goals

• Large consumer in economy

2.5

What is the role of consumers in a free enterprise economy?

• Decide what is produced by how they spend their money

• Spur development of new products by changing wants

2.5

If a modest price increase has little or no effect, the demand for the product isa. Complementaryb. Inelasticc. Elasticd. Unit elastic

• B

4.4

When companies involved in different stages of manufacturing or marketing join together

• Vertical Merger

3.2

Advantages of a sole proprietorship

• Owned and run by a single owner• Easy to set up• Owner earns all profits

Part of economic theory that deals with behavior and decision making

by individual units.

• Microeconomics

4.1

The quantity demanded varies inversely with the price of a product.

• The Law of Demand

4.2

Which statement reflects the inverse relationship between quantity demanded and price?a. As the price goes up, quantity demanded goes downb. As the price goes down, quantity demanded goes downc. As the supply goes up, the price goes up.d. As the supply goes up, the demand goes down.

• A

4.6

The customers will have a tendency to replace a more costly item with a less costly item

• Substitution Effect

4.3

The principle that more will be offered for sale at higher prices

than at lower prices

• The Law of Supply

5.1

The amount offered for sale at a given price

• Quantity supplied

5.10

A market structure with many well-informed and independent

buyers and sellers who exchange identical products

• Perfect Competition

7.1

The change in the amount offered for sale when the prices change

• Change in quantity supplied

5.10

Only one seller for a particular product

• Monopoly

7.4

A few very large sellers dominate the industry

• Oligopoly

7.4

The supply and demand for a worker’s skills and services determine the wage or salary

• Market theory of wage determination

8.2

Percentage of income paid in taxes stays the same regardless of

income- ex. Medicare

• Proportional tax

5.9

Percentage of income paid in taxes goes up as income goes up- ex.

Individual income tax

• Progressive tax

9.5

Percentage of income paid in taxes goes down as income goes up- ex.

Sales tax

• Regressive tax

9.5

A point in time when real GDP stops declining and begins to

expand

• Trough

13.3

To estimate elasticity, we look at the amount a consumer will spend on a product at a particular price

• Expenditure test

Economic policies designed to stimulate the economy by

increasing production

• Supply-side policies

15.7

A country’s ability to produce more of a given product than another

country can produce

• Absolute Advantage

16.1

A country’s ability to produce a given product relatively more

efficiently than another country by doing it at a lower opportunity cost

• Comparative Advantage

16.2

An agreement signed in 1993 to reduce tariffs and increase trade

among the U.S., Canada and Mexico

• NAFTA

16.7

The most important source of income for the federal government

• Individual income tax

The measure of stock market performance based on 30

representative stocks

• The Dow Jones Industrial Average

11.4

Advantages of a mutual fund

• Less risky• Allows investor to diversify

State of the economy with large numbers of unemployed people,

declining incomes, overcapacity in manufacturing plants and economic

hardship.

• Depression

13.1

Committee that has 12 voting members and makes decisions about the level of interest rates

• FOMC- Federal Open Market Committee

14.7

Programs that automatically provides benefits to offset a

change in people’s incomes- ex. Medicaid, welfare

• Automatic stabilizers

15.6

The use of government spending and revenue collection measures

to influence the economy

• Fiscal Policy

15.5

The first stage of economic development during which the

economy is stagnant

• Primitive Equilibrium

17.3

The fourth stage of economic development where the makeup of the country’s economy changes and

income is growing faster than population

• Semi development

17.3

The dollar value of all final goods, services, and structures produced

within a country’s national borders during a one-year period

• Gross Domestic Product

12.1

Costs that remain the same regardless of level of production or

services offered

• Fixed Costs

5.3

Production costs that change when production levels change

• Variable costs

5.4

The sum of fixed costs and variable costs

• Total Cost

5.5

Extra cost of producing one additional unit of production

• Marginal Cost

5.7

Extra revenue from the sale of one additional unit of output

• Marginal revenue

5.7

This organization determines monetary policy by increasing or

decreasing the money supply.

• The Federal Reserve System

14.1

Gross domestic product measure in current prices, unadjusted for

inflation

• Nominal GDP

12.1

Institution that channels savings to investors

• Financial intermediary• 11.2

A fund that collects and invests income until payments are made

to eligible recipients

• Pension fund

Ch. 11

A firm that makes loans directly to consumers and specializes in buying

installment contracts from merchants who sell on credit

• Finance Company

Ch. 11

A “mean” or “nasty” market with the prices of equities falling

sharply

Bear Market

11.5

Four factors one should consider when investing

1. Consistency- The amount invested is not as important as investing on a regular basis2. Simplicity- Stick with what you know! Ignore any investment that seems too complicated. If it seems too good to be true it probably is!!3. The Risk-Return Relationship- Consider the level of risk you are willing to tolerate.4. Investment Objectives- Consider your reason for investing. Are you trying to cover living expenses or saving for retirement?11.6

Tax-deferred investment and savings plan that acts as a personal pension fund for employees.

Employees authorize regular payroll deductions. The money from all employees is pooled and

invested in mutual funds or other investments.

• 401(k) Plan

11.3

Tax on an imported product designed to protect less-efficient

domestic producers

• Protective Tariff

16.6

Tax placed on imp0rted goods to raise revenue

• Revenue Tariff

16.6

When revenues received from exports exceed spending on

imports.

• Trade surplus

16.4

When spending on imports exceeds revenues received from

exports

• Trade deficit

16.3

Functions of the Fed

• Maintaining the money supply • Regulating and supervising banks• Preparing consumer legislation• Serving as the federal governments bank

14.8

Actions by the Federal Reserve System to expand or contract he

money supply

• Monetary Policy

14.2

Monetary policy that results in lower interest rates and greater

access to credit

• Easy money policy

14.4

3 functions of money

• Medium of exchange• Measure of value• Store of value

14.6

4 possible causes of the business cycle

1. Changes in capital expenditures- Businesses expand because they anticipate future growth then cut back on expansions and layoffs and cutbacks may occur.

2. Innovation and Imitation- A business innovates and gains an edge on the competitor, the competitor then copies the innovation, an investment boom follows, eventually economic activity will slow down.

3.Monetary Policy Decisions- Interest rates are low and loans are easy to get, the economy is stimulated by the loans, then the increased demand for loans causes interest rates to rise, new borrowers are discouraged and the level of economic activity will decline.

4. External Shocks- Increases in oil prices, wars, and international conflict can have a negative or positive affect on the economy. 13.9

4 causes of inflation- 13.8

A statistical series that tracks monthly changes in prices paid by urban

consumers for a representative “basket” of goods and services.

• Consumer Price Index (CPI)

13.7

What is excluded from the GDP?• Intermediate Products Goods used to make other products

already counted in the GDP Replacement tires- NOT the tires on your new car

• Secondhand Sales No new production is created Used cars, homes, etc.

• Nonmarket Transactions They are so difficult to measure and do not generate expenditures in the market Homemakers, mowing own lawn, etc.

• Underground Economic Transactions They are difficult to measure and are not socially acceptable Gambling, drug trade, income not reported to IRS.

12.4

Hypothesis that the supply of money directly affects the price level over the

long run

• Quantity theory of money

14.3

5 largest federal government expenditures

• Social Security• National defense• Income security• Medicare• Health

10.7

4 ways in which government spending can impact the economy

• Resource Allocation• Redistributing Income• Increasing the Tax burden• Competing with the private sector

10.6

Advantage of Value Added Tax

• Hard to avoid• Incidence widely spread• Easy to collect

9.6

Advantage of Flat Tax

• Easy• Close most tax loopholes