Acadec 2026-2027 ECONOMICS - Section 3 (Crammable)

What is inflation?

General rise in price levels reducing money value.

How does inflation affect cash holding?

Causes smaller cash balances and more bank visits.

What are menu costs?

Administrative costs to firms for changing prices.

Why does inflation distort relative prices?

Prices do not adjust simultaneously across firms.

How does inflation affect save and invest?

Reduces savings and investment due to uncertainty.

What is macroeconomics?

Study of long-term growth and short-term economic fluctuations.

What is a recession?

Period between economic peak and trough with declining activity.

What is an expansion?

Period between economic trough and peak with rising activity.

What is a depression?

Unusually severe or prolonged economic recession.

What is the business cycle?

Recurrent alternation between economic expansions and recessions.

What is potential output?

Output produced when resources are fully utilized.

What is the output gap?

Difference between actual output and potential output.

What is the natural rate of unemployment?

Sustainable unemployment level from frictional and structural factors.

Who was Arthur Okun?

Economic advisor who related cyclical unemployment to output gaps.

What is Okun's Law?

One percent cyclical unemployment increase equals two percent output gap.

What determines long-run output growth?

Technological progress, population growth, and capital accumulation.

What are sticky prices?

Prices that adjust slowly to supply and demand changes.

What is aggregate demand?

Total desired spending on final goods and services.

What components make up aggregate demand?

Consumption, investment, government purchases, and net exports.

What is consumption?

Household spending on final goods and services.

What is investment?

Firm spending on capital goods, housing, and inventory.

What are government purchases?

Spending by government on goods and services excluding transfers.

What are net exports?

Exports of goods and services minus imports.

Who was John Maynard Keynes?

Economist who developed the Keynesian economic model.

What book did John Maynard Keynes write?

The General Theory of Employment, Interest, and Money.

Why did John Maynard Keynes create his theory?

To explain sustained unemployment during the Great Depression.

What is the Keynesian model?

Model explaining short-run fluctuations via aggregate demand and supply.

What is the wealth effect?

Lower price levels increase real wealth and consumer spending.

What is the interest rate effect?

Lower price levels reduce interest rates, boosting borrowing.

What is the foreign exchange effect?

Lower domestic prices increase net exports.

Who is Elon Musk?

Entrepreneur whose technological projects can shift aggregate demand.

What is short-run aggregate supply?

Output firms supply when prices are fixed short term.

What are aggregate supply shocks?

Events that shift short-run aggregate supply curve unexpectedly.

What is real GDP?

Total output value adjusted for inflation using base-year prices.

What is GDP per capita?

Real GDP divided by total population.

What is labor productivity?

Total economic output produced per employed worker.

What is unemployment?

Percentage of labor force actively seeking work but unemployed.

What is frictional unemployment?

Temporary unemployment from normal labor market turnover.

What is structural unemployment?

Unemployment caused by mismatch of worker skills and jobs.

What is cyclical unemployment?

Unemployment resulting from downturns in the business cycle.

What is aggregation?

Combining diverse economic activities into single representative variables.

What is Gross Domestic Product?

Market value of all final goods produced within country.

Who was Sir William Petty?

Early economist who attempted measuring national output in 1600s.

Who was Simon Kuznets?

Economist who developed modern U.S. national income accounting.

What award did Simon Kuznets win?

Nobel Prize in Economic Science in 1971.

What is nominal GDP?

Economic output measured using current-year prices.

Who measures U.S. CPI?

The U.S. Bureau of Labor Statistics.

What is the Consumer Price Index?

Measure tracking cost of fixed consumer market basket.

What is substitution bias?

CPI overstatement from consumers switching to cheaper goods.

Who was Michael Boskin?

Economist who chaired commission analyzing CPI calculation bias.

What did the Boskin Commission find?

CPI overstates annual inflation by about 1.3 percent.

What is the GDP deflator?

Price measure calculated as nominal GDP divided by real GDP.

What is the labor force participation rate?

Percentage of working-age population in the labor force.

What is the circular flow model?

Model showing monetary and real flows between economic sectors.

What is human capital?

Worker skills and knowledge gained through education and training.

What is the bond market?

Financial market where corporations and governments issue debt.

What is equity finance?

Raising capital by selling ownership shares in a corporation.

What are financial intermediaries?

Institutions like banks that connect savers and borrowers.

What is national saving?

Total income remaining after paying consumption and government purchases.

What is private saving?

Amount of household income left after taxes and consumption.

What is government saving?

Tax revenue collected minus government spending.

What is a budget deficit?

Excess of government spending over tax revenue.

What is a budget surplus?

Excess of tax revenue over government spending.

What is net capital outflow?

Domestic purchase of foreign assets minus foreign purchase of domestic.

What is foreign direct investment?

Capital investment owned and actively managed by foreign entity.

What is portfolio investment?

Financial investment in foreign stocks or bonds without control.

What is the real interest rate?

Interest rate adjusted for the effects of inflation.

What is crowding out?

Reduction in private investment caused by government budget deficits.

What is medium of exchange?

Item buyers give sellers when purchasing goods or services.

What is unit of account?

Standard unit used to post prices and record debts.

What is store of value?

Asset used to transfer purchasing power to the future.

What is liquidity?

Ease with which an asset converts into medium of exchange.

What is commodity money?

Money possessing intrinsic value independent of monetary use.

What is fiat money?

Money without intrinsic value established by government decree.

What is M1?

Money supply measure including cash, checking deposits, and traveler's checks.

What is M2?

Money supply measure including M1 plus savings deposits and small time deposits.

What is the Federal Reserve System?

Central bank responsible for overseeing U.S. monetary system.

When was the Federal Reserve created?

Enacted by Congress in 1913.

What is the Federal Open Market Committee?

Twelve-member Fed committee setting monetary policy.

What are open market operations?

Central bank buying or selling government bonds.

What is fractional reserve banking?

System where banks hold a fraction of deposits as reserves.

What is the money multiplier?

Amount of money banking system generates per reserve dollar.

What is a bank run?

Simultaneous cash demands from depositors exceeding bank reserves.

What is velocity of money?

Rate at which money changes hands in an economy.

What is money neutrality?

Proposition that money supply changes do not affect real variables.

What is the quantity equation?

Formula relating money, velocity, price level, and real output.

Who was Lyndon B. Johnson?

U.S. President whose 1960s military spending expanded aggregate demand.

What is expansionary fiscal policy?

Increases in government spending or tax cuts to boost output.

What is monetary policy?

Central bank management of interest rates and money supply.

What is stabilization policy?

Policy aimed at keeping output near potential level.

What is the Fisher equation?

Formula expressing real interest rate as nominal rate minus inflation.