Economics Final Test Review

A comprehensive set of vocabulary flashcards based on the Economics Final Test Review notes, covering fundamental concepts, formulas, and policy types.

Capital Goods

Tools, equipment, and other manufactured goods used to produce other goods and services

Gross Domestic Product

The total dollar value of all final goods and services produced within a country's borders during a one-year period.

Complementary Goods

Products that increase the use of other products; products related in such a way that an increase in the price of one reduces the demand for both.

Substitute Goods

Competing products that can be used in place of one another; an increase in the price of one often leads to an increase in the demand for the other.

Substitution Effect

The portion of a change in quantity demanded that is due to a change in the relative price of the good.

Total Cost

The sum of fixed costs and variable costs; the total amount of money spent on production.

Fixed Costs

Costs of production that do not change when the level of production output changes.

Variable Costs

Production costs that change when production levels change, such as labor and raw materials.

Surplus

A situation where the quantity supplied is greater than the quantity demanded at a given price

Shortage

A situation where the quantity demanded is greater than the quantity supplied at a given price

16th Amendment

An amendment to the U.S. Constitution that authorizes Congress to collect an income tax.

Discretionary Spending

Federal spending on programs that must receive annual authorization

FICA

Federal Insurance Contributions Act; a tax levied on both employers and employees to pay for Social Security and Medicare.

Bonds

A formal contract to repay borrowed money and interest on the borrowed money at regular future intervals.

Real GDP

Gross Domestic Product adjusted for inflation using a price index to compare output from one year to another.

Cyclical Unemployment

Unemployment directly related to swings in the business cycle, such as during a recession.

Demand-Pull Inflation

An explanation of inflation where prices rise because all sectors of the economy try to buy more goods and services than the economy can produce.

Consumer Price Index

A statistical series used to measure changes in the price level of a market basket of consumer goods and services.

Frictional Unemployment

Unemployment caused by workers changing jobs or waiting to go to new ones.

FDIC

Federal Deposit Insurance Corporation; a government agency that insures customer deposits if a bank fails.

Tariffs

Taxes placed on imported products as a trade barrier.

Quotas

Limits on the amount of a specific good that is allowed into a country.

Protective Tariff

A tax on imported goods designed to protect less-efficient domestic industries from foreign competition.

North American Free Trade Agreement

A quantitative trade agreement designed to reduce trade barriers between Canada, Mexico, and the United States.

Production possibilities curve

Diagram representing the maximum combination of goods and/or services an economy can produce when all productive resources are fully employed

Characteristics of a traditional economic system

the allocation of scarce resources and other economic activities are based on ritual, habit, or custom.

examples of a traditional economic system

many indigenous societies have traditional economies, Inuit, Australia’s Aborigines, Central African Mbuti

Advantages of a traditional economic system

everyone knows which role to play, and it’s stable, predictable, and continuous life

Disadvantages of a traditional economic system

discourages new ideas, stagnation and a lack of progress, leads to a lower standard of living

Characteristics of a command economic system

a central authority makes the major decisions about what, how, and for whom to produce; it can be headed by a king, dictator, a president, or a small group. The government makes the major economic decisions. Private property rights are severely limited. Individual freedom is limited-government might tell you what your career is

examples of a command economic system

Cuba, North Korea

advantages of a command economic system

a country can change direction very quickly, health and public services are available to everyone at little to no cost

disadvantages of a command economic system

they ignore the basic wants and needs of consumers, the system gives people the incentive to fulfill their quote instead of producing good products, the system requires a large decision-making bureaucracy, the system lacks the flexibility to deal with minor day-to-day problems, lacks room for individual initiative, lacks effective incentives to get people to work hard

characteristics of a market economy

people make decisions in their own best interests, people have a great deal of freedom, producers are free to determine how to answer the three basic economic questions

Examples of a market economy

The U.S., Japan, South Korea, Singapore, Australia, most of Europe

advantages of a market economy

Individual freedom for everyone, able to adjust to change gradually, lack of government interference, decentralized decision making, incredible variety of goods and services, and a high degree of consumer satisfaction

disadvantages of a market economy

rewards only productive resources, does not produce enough public goods, and workers and businesses face uncertainty as a result of competition and change

economic system of the U.S

modified free enterprise system

characteristics of free enterprise capitalism

Economic freedom, voluntary exchange, private property rights, profit motive, competition

advantages of proprietorship organization

easy to start, easy to end, profits are all yours, pride of ownership, management is fairly simple, lower taxes

disadvantages of a proprietorship organization

unlimited liability, limited life of the business, difficult to raise money, loans on you credit or personal fortune, size and efficiency/ limited managerial ability/difficulty attracting employees

advantages of a partnership organization

easy to start, not as difficult to raise funds, ease of management, lack of special taxes, more efficient operation due to their larger size, easier to attract top talent

disadvantages of a partnership organization

unlimited liability, limited life of the business, profits are shared, potential for conflicts

advantages of a corporation organization

easy to raise money, limited liability, unlimited life, can hire professional managers to run the firm, ease of transferring ownership of the corporation

disadvantages of a corporation

difficult to start, less direct control, double taxation, subject to more government regulation, both as a corporate profit and as personal income

horizontal mergers

a combination of two or more firms producing the same kind of product

vertical mergers

a combination of two or more firms involved in different stages of manufacturing or marketing

conglomerate mergers

a firm with four or more businesses making unrelated products with no single business responsible for a majority of sales

types of mergers the government regulates

horizontal and vertical mergers because they can reduce regulation

why do business merge

so they can grow or expand

change in demand causes

change in consumers’ income, consumers’ taste, change in price of a substitute or complementary product, number of consumers, consumers’ future expectation of price or income

profit-maximizing output level

marginal cost=marginal revenue

What causes a change in supply shift

change in cost of resources, technology, taxes and subsidies, productivity, expectations, number of sellers, and government regulations

change in supply

means you have a new curve

change in quantity supplied

is movement along a supply curve due to a price change

major expenditure categories of the federal government

Social Security and Medicare/Medicaid

major expenditure categories of the state/local governments

Education

Competition and market structure

Perfect Competition, Monopolistic Competition, Oligopoly, Monopoly

mandatory spending

federal spending authorized by law that continues without the need for annual approvals by Congress

discretionary spending

spending for federal programs that must receive annual authorization

output-expenditure model

C + I + G + (X-M)

Four kinds of Unemployment

Seasonal, Frictional, seasonal, cyclical

seasonal unemployment

caused by annual changes in the weather or other conditions that reduce the demand for jobs

structural unemployment

caused by a fundamental change in the economy that reduces the demand for jobs

Frictional unemployment

involving workers changing jobs or waiting to go to new ones

cyclical unemployment

directly related to swings in the business cycle

Demand-pull inflation

prices rise because all sectors of the economy try to buy more goods and services than the economy can produce (too many $ chasing too few goods)

Cost-Push inflation

rising input costs, especially energy and organized labor, drive up the prices of goods

wage-price spiral

self-perpetuation spiral of wages and prices becomes difficult to stop

excessive monetary growth

if money supply grows faster than real GDP, any extra money or additional credit created by the Fed will increase someone’s purchasing power. When they spend this additional money, they cause a demand-pull effect that drives up prices

fractional reserve banking system

system requiring financial institutions to set aside a fraction of their deposits in the form of reserves

legal reserves

currency and deposits used to meet the reserve requirement

reserve requirement formula

Actual reserves-legal reserves=excess reserves

when the Federal Reserve System was established

1913

M1

coins, currency, checking accounts, traveler’s checks-money used as a medium of exchange

M2

M1 + savings deposits, time deposits, and money market funds

what is closely associated with deregulation

supply-side