EC211 Final Study Guide Quizlet Import

Economics

The study of how society allocates scarce resources to meet unlimited wants.

Microeconomics

Focuses on individual decision-making and markets, such as households and businesses.

Macroeconomics

Examines the economy as a whole, including growth, inflation, and unemployment.

Trade-offs

To get one thing, you give up another.

Opportunity Cost

The next best alternative forgone.

Rational Thinking

Decisions are made by comparing costs and benefits.

Incentives Matter

People respond to rewards and punishments.

Trade Benefits All

Allows for specialization and greater efficiency.

Markets Organize Activity

Markets allocate resources efficiently through prices.

Government Can Improve Markets

Addresses market failures and promotes equity.

Country's Standard of Living

Depends on production of goods/services.

Prices Rise with Too Much Money

Inflation occurs when more money chases fewer goods.

Trade-off Between Inflation and Unemployment

Short-run choices affect long-run outcomes.

Supply

Entire relationship between price and quantity.

Quantity Supplied (QS)

The specific amount producers will sell at a given price.

Demand

Entire relationship between price and quantity buyers want.

Quantity Demanded (QD)

The specific quantity buyers will purchase at a given price.

Invisible Hand

Market forces guide resources to efficient uses.

Goods

Items satisfying wants.

Bads

Items which people want to avoid.

Scarcity

Limited resources for high demand.

Rarity

Limited in existence, not necessarily in demand.

Market Failures

Causes: Externalities, market power, and lack of information.

Equilibrium

Where demand equals supply.

Surplus

Quantity supplied > Quantity demanded (price above equilibrium).

Shortage

Quantity demanded > Quantity supplied (price below equilibrium).

Circular-Flow Diagram

Shows the flow of money, goods, and services between households and firms.

Production Possibility Frontier (PPF)

Efficient points: On the curve.

Comparative Advantage

Lower opportunity cost.

Absolute Advantage

Produces more of a good overall.

Price Elasticity of Demand

Influenced by availability of substitutes, necessity, etc.

Total Revenue

Price × Quantity.

Substitutes

Goods replacing each other (coffee vs. tea).

Complements

Goods used together (peanut butter and jelly).

Ceteris Paribus

"All else equal" (used in economic models).

Positive Statements

Fact-based (e.g., "Inflation is 5%").

Normative Statements

Opinion-based (e.g., "Inflation should be lower").

Normal Goods

Demand rises with income (e.g., steak).

Inferior Goods

Demand falls with income (e.g., instant noodles).

Price Ceiling

A legal maximum price (e.g., rent control).

Price Floor

A legal minimum price (e.g., minimum wage).

Binding

Causes surpluses.

Non-binding

No effect.

Tax Incidence

Who bears the burden of a tax?

Elasticity of supply and demand

Depends on the elasticity of supply and demand.

GDP (Gross Domestic Product)

Measures all goods and services produced in a country.

GDP Formula

GDP = C + I + G + (X - M)

C

Consumption

I

Investment

G

Government Spending

(X - M)

Net Exports

Real GDP

Adjusted for inflation.

Nominal GDP

Measured in current prices.

CPI (Consumer Price Index)

Measures changes in the price of a basket of goods/services.

PPI (Producer Price Index)

Tracks price changes at the producer level.

Inflation

Rise in the overall price level.

Interest Rates

Nominal Interest Rate: Stated rate.

Real Interest Rate

Adjusted for inflation.

Real Rate Formula

Real Rate = Nominal Rate - Inflation Rate

Unemployment Rate Formula

Unemployment Rate = (Unemployed ÷ Labor Force) × 100

Frictional Unemployment

Short-term, between jobs.

Structural Unemployment

Mismatch of skills/jobs.

Cyclical Unemployment

Due to economic downturns.

Functions of Money

Medium of Exchange: Used to buy/sell goods.

Store of Value

Keeps value over time.

Unit of Account

Measures value.

Commodity Money

Has intrinsic value (e.g., gold).

Fiat Money

Value by government decree (e.g., U.S. dollars).

Money Supply (M1)

Includes currency, demand deposits, and traveler's checks.

Federal Reserve's Mandates

Maximize Employment and Stabilize Prices.

Monetary Policy

Managed by the Federal Reserve (e.g., interest rates).

Fiscal Policy

Managed by the government (e.g., taxes, spending).

Fractional-Reserve Banking

Banks hold only a fraction of deposits and loan the rest.

Federal Reserve Tools

Open Market Operations: Buying/selling bonds.

Discount Rate

Interest rate for loans to banks.

Reserve Requirements

Minimum reserves banks must hold.

Key Rates

Discount Rate: Fed to banks.

Federal Funds Rate

Banks to banks.

Current Federal Reserve Chairperson

Jerome Powell.

Current Treasury Secretary

Janet Yellen.

Current Inflation Rate

~3-4% (approximate, as of recent data).

Current Unemployment Rate

~3.5-4% (approximate, as of recent data).

Import

Goods bought from another country.

Export

Goods sold to another country.

Tariffs

Taxes on imports.

Trade Surplus

Exports > Imports.

Trade Deficit

Imports > Exports.

Net Exports

Another term for trade balance.

Sudden Stop

A sharp drop in demand for a country's assets.

Benefits of Free Trade

Specialization: Countries focus on what they do best.

Increased variety

More choices for consumers.

Lower prices

Competition reduces costs.

Arguments Against Free Trade

Job Losses: Domestic industries may suffer.

National Security

Overdependence on imports for key resources.

Infant Industries

New industries might struggle without protection.

2008 Financial Crisis Leadership

Federal Reserve Chairperson: Ben Bernanke.

Treasury Secretary (2008)

Henry Paulson.

Purchasing-Power Parity (PPP)

Currencies should adjust so the same goods cost the same in different countries.

Example of PPP

If a burger costs $5 in the U.S. and ¥500 in Japan, the exchange rate should be 100 yen/dollar.