Untitled Flashcard Set

What is Quantity Demanded?

The amount of a good consumers are willing and able to buy at a specific price.

What does the Law of Demand state?

As price decreases, quantity demanded increases.

Define Quantity Supplied.

The amount of a good producers are willing and able to sell at a specific price.

What is the Law of Supply?

As price increases, quantity supplied increases.

What is Market Equilibrium?

The point where supply equals demand.

What is a Shortage?

A situation where demand is greater than supply.

What is a Surplus?

A situation where supply is greater than demand.

What are Demand Shifters?

Factors that shift demand include income, prices of related goods, tastes, expectations, and number of buyers.

What are Supply Shifters?

Factors that shift supply include input prices, technology, expectations of future prices, and number of producers.

Define Competitive Market.

A market with many buyers and sellers.

What is GDP?

The market value of all final goods and services produced within a country in a given period of time.

What is the GDP Formula?

GDP = C + I + G + NX.

What is Consumption (C)?

Spending by households on goods and services.

What is Investment (I)?

Spending on capital goods used to produce future goods and services.

What are Government Purchases (G)?

Spending by local, state, and federal governments on goods and services.

Define Net Exports (NX).

Exports minus imports.

What is Nominal GDP?

GDP measured using current prices.

What is Real GDP?

GDP measured using constant base-year prices.

What does Real GDP measure?

The actual output of goods and services.

What is the GDP Deflator Formula?

GDP Deflator = Nominal GDP / Real GDP.

What is the Inflation Formula?

Inflation = ((New - Old) / Old) × 100.

Define Consumer Price Index (CPI).

A measure of the cost of living for consumers.

What does CPI use?

Fixed quantities with changing prices.

What is the Fisher Equation?

Real Interest Rate = Nominal Interest Rate - Inflation Rate.

What are Factors of Production?

Labor, capital, natural resources, human capital, technological knowledge.

What is Labor in economics?

Workers and people in the economy.

What is Capital?

Tools, machines, and structures used to produce goods.

Define Human Capital.

Skills and knowledge gained through education and experience.

What is Technological Knowledge?

Society’s understanding of how to produce goods efficiently.

What is Diminishing Returns?

Adding more of one input eventually leads to smaller increases in output.

What does Constant Returns to Scale mean?

Doubling all inputs doubles output.

What is the Labor Force Formula?

Labor Force = Employed + Unemployed.

What is the Unemployment Rate Formula?

Unemployment Rate = Unemployed / Labor Force.

Define the Natural Rate of Unemployment.

The normal unemployment rate the economy fluctuates around.

What is Cyclical Unemployment?

Unemployment caused by recessions.

What is Frictional Unemployment?

Unemployment from workers changing jobs.

Define Structural Unemployment.

Unemployment caused by mismatches between workers’ skills and jobs.

What does Not in Labor Force mean?

Adults not working and not seeking work.

What are Savings?

Income not spent.

What does Investment mean in macroeconomics?

Purchase of capital goods.

What is the Loanable Funds Market?

Market where savers supply funds and borrowers demand funds.

What is the Price of a loan?

The real interest rate.

What is the National Savings Formula?

S = (Y - C - T) + (T - G).

What is a Budget Surplus?

When taxes are greater than government spending.

What is a Budget Deficit?

When government spending is greater than taxes.

What is the Future Value Formula?

FV = (1 + r)^N × PV.

What does Risk Aversion mean?

Preference for less risky investments.

What is Diversification in finance?

Reducing risk by spreading investments.

What is the Efficient Markets Hypothesis?

Asset prices reflect all publicly available information.

What is a Speculative Bubble?

Asset prices rise above fundamental value.

What are the Functions of Money?

Medium of exchange, unit of account, store of value.

What is Commodity Money?

Money with intrinsic value.

What is Fiat Money?

Money without intrinsic value.

What is Liquidity?

Ease of converting an asset into cash.

What is Fractional Reserve Banking?

Banks keep part of deposits in reserves and loan out the rest.

What is the Money Multiplier Formula?

Money Multiplier = 1 / Reserve Ratio.

What is the Federal Reserve?

Central bank of the United States.

What are the tools of the Federal Reserve?

Open-market operations, reserve requirements, discount rate.

What is Expansionary Monetary Policy?

Policies that increase the money supply.

What does buying bonds do?

Increases the money supply.

What does lowering reserve requirements do?

Increases the money supply.

What does lowering the discount rate do?

Increases the money supply.

What is the Quantity Theory of Money Formula?

Price Level = (Money Supply × Velocity) / Real GDP.

What does increasing the money supply cause?

Inflation.

What is the Business Cycle?

Short-run fluctuations in economic activity.

What is an Expansion in the business cycle?

Period when GDP is increasing.

What is a Recession?

Period when GDP is decreasing.

What is the Aggregate Demand Formula?

AD = C + I + G + NX.

Why does Aggregate Demand slope downward?

Wealth effect, interest-rate effect, exchange-rate effect.

What is the Wealth Effect?

Lower prices increase consumers’ purchasing power.

What is the Interest-Rate Effect?

Lower prices lower interest rates and increase investment.

What is the Exchange-Rate Effect?

Lower prices increase net exports.

What factors increase Aggregate Demand?

Tax cuts, government spending increases, optimism.

What factors decrease Aggregate Demand?

Tax increases, government spending cuts, pessimism.

What is Long-Run Aggregate Supply (LRAS)?

Determined by factors of production.

Why does Short-Run Aggregate Supply (SRAS) slope upward?

Sticky wages, sticky prices, misperceptions.

What shifts Long-Run Aggregate Supply (LRAS)?

Changes in factors of production.

What does an increase in expected prices do to SRAS?

Shifts SRAS left.

What does a decrease in expected prices do to SRAS?

Shifts SRAS right.

What is long-run equilibrium?

SRAS = LRAS = AD.

What is short-run equilibrium?

SRAS = AD.

What is a Demand Boom?

Increase in AD causing inflation and expansion.

What is a Demand Recession?

Decrease in AD causing recession and deflation.

What is a Negative Supply Shock?

Decrease in SRAS causing inflation and recession.

Give examples of negative supply shocks.

Oil crisis, bad weather.

What is Liquidity Preference Theory?

Interest rates are determined by supply and demand for money.

What does the Money Demand Curve look like?

Downward sloping because higher interest rates reduce demand for money.

Increasing money supply does what to interest rates?

Decreases interest rates.

Increasing money supply does what to Aggregate Demand?

Increases aggregate demand.

What is a Liquidity Trap?

Situation where interest rates are near zero and monetary policy becomes ineffective.

What is Fiscal Policy?

Government decisions about taxes and spending.

Increasing government spending does what?

Increases aggregate demand.

What is the Multiplier Effect?

Initial spending causes additional increases in spending.

What is the Multiplier Formula?

Multiplier = 1 / (1 - MPC).

What is the Marginal Propensity to Consume (MPC)?

Fraction of extra income that is spent.

What is the Crowding-Out Effect?

Government spending raises interest rates and reduces investment.

What is the Long-Run Phillips Curve (LRPC)?

Vertical curve showing unemployment returns to natural rate.

What is the Short-Run Phillips Curve (SRPC)?

Shows inverse relationship between inflation and unemployment.

What was Milton Friedman’s argument?

Monetary policy cannot affect unemployment in the long run.

What does unexpected inflation do?

Creates short-run changes in unemployment.