econ exam
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109 Terms
what is personal finance? is it all about knowledge?
all the financial decisions an individual or family must make to earn, budget, save, spend, and give money over time; 80% decisions, 20% knowledge
what is debt?
money owed to another person or company
what is credit?
promise to pay later
what does it mean to live paycheck to paycheck? what % of Americans live this way?
an expression used to describe a person or household whose monthly income is devoted to expenses and has little to no savings; 70% of Americans live this way
why should you always have a budget?
to have a plan for your money
what is a budget?
a written plan for giving, saving, and spending
how often should you budget?
every month
what is the difference between a fixed expense and a variable expense?
fixed: expense that remains the same from month to month
variable: expense that varies in dollar amount from month to month but that you can expect to have every month
what makes a budget a zero-based budget?
when your income - your giving, saving, and spending = zero
net income vs gross income
net income: What a person earns after payroll taxes and other deductions are taken out. Often referred to as “Take home pay”
gross income: Amount you earn before taxes and other payroll deductions
why is saving important and how do you do it?
gives you a way out of the uncertainties of life and provides you with an opportunity to enjoy a quality life
what is an emergency fund and why is it important; when should you use it?
a cash reserve that's specifically set aside for unplanned expenses or financial emergencies.
What is compound growth?
the average rate of growth for an investment over time; often expressed as an annual figure
what is a principal?
the initial amount of money invested or borrowed
what is rate of return?
the measure of an investment’s profit or loss, usually expressed as a percentage of the initial investment
why is saving early important?
compound growth: your money will grow a lot over time (you can be a millionaire by the time you’re 50)
what is a credit score?
statistical number used to represent a consumers credit-worthiness
appreciating vs depreciating asset?
appreciating: increase in value over time
depreciating: decrease in value over time
what is the best way to purchase a car?
cash
what should you consider when making a college decision?
location, academics, scholarships, final price, way of living
what are the different types of investments?
money market account, single stocks, bonds, mutual funds, real estate, annuities
what are the different types of retirement accounts?
Roth IRA, 401K, 403b, 457 plan, SEP
what is the purpose of insurance?
Arrangement in which an individual will receive financial protection or reimbursement of losses from an insurer
what is a premium?
Amount of money paid for an insurance policy
what is a deductible?
The amount of money you will pay out of pocket before the insurance company will make a payment
what is the definition of economics?
The study of human choices and their consequences with regard to trade.
what is scarcity?
the universal condition of there being a lack of resources to meet humans’ unlimited wants & needs
what is the difference between selfishness and self-interest?
selfishness: the condition of pursuing one’s own advantage/benefit without regard for others
self-interest: one’s personal advantage, benefit
what is a trade-off?
the act of giving up one thing to gain another.
what is a PPF?
a curve depicting one party’s maximum output of two products, given a fixed amount of resources
upside risk vs downside risk
upside risk (benefits)
downside risk (cost)
what is a cost-benefit analysis?
process of weighing upside risk and downside risk of a particular decision
what is a opportunity cost? give an example
the value of the next best alternative to any decision you make
what is an example of “thinking at the margin”?
thinking about what the next or additional action means for you
what is specialization?
focusing production to become more efficient (more output per input)
how does specialization and trade create wealth?
When nations specialize, this exchange creates gains from trade.
absolute advantage vs comparative advantage
absolute: can produce more efficiently than someone else
comparative: can produce with lower opportunity cost than someone else
how should one decide what to specialize in?
know what your good at and what your interests are
does free trade always create more wealth? why or why not?
FREE TRADE ALWAYS CREATES MORE WEALTH, both for the individual as well as the whole.
what is capital?
Means “tools” → money, machines, assets
Anything used to build wealth
what is Adam Smith’s most famous work? what key ideas are put forth in this work?
“The Wealth of Nations”; Wealth is not limited, but rather unlimited due to entrepreneurship
what is the “Invisible Hand”? how does it create an efficient, productive society?
(Adam Smith) coordinates trade seamlessly and guides individuals’ self-interested decisions
what is capitalism? what are some criticisms of capitalism?
anything to build wealth; market instability and the tragedy of the commons (an economic problem where the individual consumes a resource at the expense of society)
what is a command economy?
economic system where a central government dictates permissible levels of production and prices
what is a market economy?
economic system where supply and demand regulate the economy, rather than government intervention
what is a mixed economy?
economic system where both government and markets have roles
why must all economies be a type of mixed economy?
it is difficult for a country to sustain economic activity without some degree of government intervention or market activity
what is the theory of Communism, according to Marx? what central problem of history is Marx trying to solve?
trying to solve a key problem of humanity: dialectical materialism
what are Marx’s criticisms of capitalism? which of his criticisms, if any, are valid?
he thought that the capitalistic system would inevitably destroy itself
what parts of Communism, if any, are correct? what parts are based on faulty assumptions?
no
why can’t a Christian be a Communist (think MLK)?
He says that Christianity and communism are two completely different things, you cannot believe in communism and still be a Christian. They contradict each other.
Why is Communism impractical? (Why does it not work?)
it can limit individual freedoms and creativity; it can lead to economic inefficiency and lack of innovation
what are some historical examples of Communism? how successful were/are these regimes in promoting well-being for their people?
Some historical examples of communism include the Soviet Union, China, and North Korea. While they often achieved certain social and economic advancements, such as universal healthcare and education, they faced significant challenges and criticisms, including political repression, economic inefficiencies, and human rights abuses.
in what ways is Democratic Socialism different from Communism?
No grandiose philosophies, and no totalitarian regime, genocide
what are the pros and cons of living with a Free Enterprise system, as opposed to a Democratic-Socialist system?
free enterprise pros: economic freedom, innovation, and individual choice
free enterprise cons: income inequality, lack of social safety nets
DS pros: social equality, access to essential services
DS cons: higher taxes, potential limitations on individual freedoms
what is microeconomics?
the study of the economic behavior & decision making of individual markets
what is the law of demand?
as the price of a good/service increases, the quantity demanded decreases, and vice-versa
how does quantity demanded differ from demand?
demand is the entirety of the demand curve, whereas quantity demanded is a single point
why does changing the price not change demand?
people still have need; the thing that changes demand, is need
what is the law of supply?
as the price of a good/service increases, the quantity supplied increases, and vice-versa
what is the relationship between price and quantity supplied? why is this the case?
a higher price leads to a higher quantity supplied and a lower price leads to a lower quantity supplied
why does a change in price not change supply?
only demand changes supply
what is the equilibrium point?
the state in which buyers and sellers are perfectly satisfied
what are the functions of prices?
Solve disequilibrium problems
Allocate resources to their most efficient use
Send messages to producers and consumers
what type of messages do prices tell produces/consumers?
high prices
consumers? (“High quality/popular!”)
producers? (“Make more!”)
low prices
consumers? (“Low quality/not popular!”)
producers? (“Stop making this.”)
what causes a shift in demand curve?
trends, population, prices of goods
what is the relationship between substitute goods? complementary goods?
A substitute good is a good that serves the same purpose as another good for consumers. A complementary good is a good that adds value to another good when they are consumed together.
what causes a shift in the supply curve?
product costs, number of buyers, competition, technology
what is a tax and how does it affect the supply curve?
more costs → shift Supply LEFT
what is a subside and how does it affect the supply curve?
lower costs → shift Supply RIGHT
under what conditions will a shortage occur?
when quantity demanded > quantity supplied
under what conditions will a surplus occur?
when quantity demanded < quantity supplied
what is a price floor?
the lowest price at which a product can be sold
what is a price ceiling?
maximum amount a seller is allowed to charge for a product or service
what is elasticity?
the effect of change in price on the quantity of demand
what does it mean that a good/service is “inelastic”?
goods that are necessities or have few or no substitutions (milk, eggs)
what is money?
money=cash
what is the distinction made in class between money and currency?
Currency takes the form of paper and coins, but money can be anything that is standardized and accepted as a form of payment.
what are the six characteristics of currency?
durability
Portability
Divisibility
Uniformity
Limited Supply
Acceptability
what is fiat money? what are the strengths and weaknesses of fiat money?
our cash- by order or decree; create economic stability and help protect against the booms and busts that are natural parts of the business cycle, but it could cause hyper-inflation
what is the money supply?
money + credit = money supply (total dollar amount of transactions in an economy)
what are the functions of banks?
they lend money
what is the fractional banking system? what are its strengths and weaknesses?
a system in which only a fraction of bank deposits are required to be available for withdrawal
what are the six basic types of organizations?
Sole Proprietorship
partnership
corporation
LLP and/or LLC
non-profit
franchise
what is the difference between a private corporation and a public corporation?
A public company can sell its registered shares to the general public. A private company can sell its own, privately held shares to a few willing investors
what is a stock?
a share in the ownership of a company
what is the benefit of limited liabilty?
provides more personal asset liability protection to its owners than any other type of entity
what is the federal reserve system?
the central bank of the United States (i.e. a BANK for banks)
what are the components of the Federal Reserve?
Board of Governors (chairman), the FOMC, 12 Reserve Banks
what is monetary policy?
the Fed’s decision about whether to expand or contract the money supply
what is the difference between contractionary and expansionary monetary policy?
contractionary: used to decelerate economic growth (less money in circulation)
expansionary: used to accelerate economic growth (more money in circulation)
what is the purpose of the Fed?
Regulate the banking system
Conduct monetary policy to regulate the economy
why is the Fed so powerful?
semi-independent when it comes to the govt. they are decently autonomous (play bad cop)
how does the Fed interact with other banks?
promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole
what are the three tools of the Fed used to control the money supply?
discount rate
reserve requirement
open market operations
how will the Fed use the three tools if they want to expand the economy? how will the Fed use the three tools if they want to contract the economy?
discount rate
expansionary= lower
contractionary= raise
reserve requirement
expansionary= lower
contractionary= raise
open market operations
expansionary= buy
contractionary= sell
what is macroeconomics?
the study of the workings & performance of an economy as a whole
what is GDP?
gross domestic product- total amount of all final goods & services produced in a given country in a given period of time, usually a year
what is real GDP?
gdp adjusted for inflation
what is the formula for GDP?
C + I + G + (X - M)
consumption, investment, govt spending, exports, imports