ECON 221 – Final Exam Flashcards (Expanded Definitions)

A comprehensive set of flashcards for ECON 221, covering key economic concepts and definitions in preparation for the final exam.

Market equilibrium

Quantity supplied equals quantity demanded.

Surplus

Quantity supplied is greater than quantity demanded.

Shortage

Quantity demanded is greater than quantity supplied.

Law of Demand

When price increases, quantity demanded decreases.

Law of Supply

When price increases, quantity supplied increases.

Demand shifters

Factors that can cause the demand curve to shift, including income, tastes, number of buyers, expectations, and prices of related goods.

Supply shifters

Factors that can cause the supply curve to shift, including input prices, technology, taxes or subsidies, expectations, and number of sellers.

Gross Domestic Product (GDP)

The dollar value of all final goods and services produced within a country's borders.

GDP formula

Consumption + Investment + Government Spending + Net Exports.

Final goods

Goods that are consumed by end users; intermediate goods are used to make other goods and are excluded from GDP.

Economic growth rate

(GDP this year – GDP last year) divided by GDP last year.

Trade balance

Exports minus imports.

Trade surplus

When exports are greater than imports.

Trade deficit

When imports are greater than exports.

Expenditure multiplier

1 divided by (1 minus the marginal propensity to consume).

Change in GDP

Change in spending multiplied by the multiplier.

Marginal propensity to consume (MPC)

Change in consumer spending divided by change in income.

Marginal propensity to save (MPS)

Change in saving divided by change in income.

Average propensity to consume (APC)

Total consumption divided by total income.

Average propensity to save (APS)

Total saving divided by total income.

Consumption increases

When household income increases, indicating a positive relationship.

Investment spending

Decreases when real interest rates increase, indicating a negative relationship.

Investment instability

Businesses can delay purchases of capital goods, causing instability.

Aggregate expenditure model

Shows the 45-degree line where spending equals output (GDP).

Equilibrium in the AE model

Occurs when total spending equals total output.

Leakage

A withdrawal from the spending stream (e.g., saving).

Injection

An addition to the spending stream (e.g., investment).

Recessionary gap

When spending is too low to reach full employment GDP.

Inflationary gap

When spending is too high and pushes output above full employment GDP.

Aggregate demand (AD)

Slopes downward due to real-balance effect, interest-rate effect, and foreign-purchases effect.

Aggregate demand increase

Occurs when consumption, investment, government spending, or net exports increase.

Short-run aggregate supply (AS) curve

Slopes upward; the long-run AS curve is vertical at full employment output.

Aggregate supply increase

Shifts right when input prices fall or productivity rises.

Demand-pull inflation

Occurs when aggregate demand increases.

Cost-push inflation

Occurs when aggregate supply decreases.

Discretionary fiscal policy

Deliberate changes in government spending or taxes to influence the economy.

Nondiscretionary fiscal policy

Automatic stabilizers such as unemployment benefits.

Expansionary fiscal policy

Increasing government spending, decreasing taxes, or both.

Contractionary fiscal policy

Decreasing government spending, increasing taxes, or both.

Budget balance

Tax revenues minus government spending.

Budget surplus

When tax revenues exceed government spending.

Budget deficit

When government spending exceeds revenues.

Crowding-out effect

Higher government spending can raise interest rates, reducing investment.

Built-in stabilizers

Automatically reduce economic fluctuations.

Progressive tax system

Higher income leads to a higher tax rate.

Proportional tax system

All income levels face the same tax rate.

Regressive tax system

Higher income leads to a lower tax rate.

Money

Anything that functions as a medium of exchange, unit of account, and store of value.

M1 money supply

Currency in the hands of the public plus checkable deposits.

M2 money supply

M1 plus savings deposits, small time deposits, and money market funds.

Purchasing power of money

Equals 1 divided by the price level.

Hyperinflation

Rapidly decreases the purchasing power of money.

Federal Reserve (the Fed)

Aims for price stability and maximum employment.

Fed tools

Open-market operations, reserve requirement, discount rate.

Open-market purchases

Increase the money supply.

Open-market sales

Decrease the money supply.

Lower discount rate

Encourages banks to borrow and increases the money supply.

Higher reserve requirement

Forces banks to hold more reserves and decreases the money supply.

Federal funds rate

Interest rate banks charge each other for overnight loans.

Expansionary monetary policy

Buy bonds, lower interest rates, increase money supply.

Restrictive monetary policy

Sell bonds, raise interest rates, decrease money supply.

Interest

The price paid for borrowing money.

Bond prices

Move inversely to interest rates.

Fractional reserve banking system

Banks hold only part of deposits as reserves.

Required reserves

Required reserve ratio multiplied by checkable deposits.

Excess reserves

Actual reserves minus required reserves.

Banks create money

When they issue loans.

Economic investment

Spending on capital goods such as equipment and factories.

Financial investment

Buying financial assets like stocks and bonds.

Present value

Today's value of money received in the future.

Compound interest

Earning interest on previously earned interest.

Diversification

Reduces risk by spreading investments across many assets.

Systemic risk

Affects all investments and cannot be eliminated.

Exchange rate

Value of one currency in terms of another.

Appreciation

When a currency gains value relative to another.

Depreciation

When a currency loses value relative to another.

Current account

Records exports and imports of goods and services.

Capital account

Records international purchases and sales of assets.

Balance of payments

Must equal zero: current account + capital account = 0.

Exchange rates influence

Tastes, inflation differences, interest rate differences, and speculation.