ECON 175 – Test 3 Review: Production & Growth, AS-AD Model, and Money

Comprehensive vocabulary flashcards covering economic growth, productivity determinants, the AS-AD model, and the functioning of the Federal Reserve and monetary policy.

Productivity

The amount of goods/services produced per worker, calculated as $\text{Productivity} = \frac{\text{Real GDP}}{\text{Hours Worked or Number of Workers}}$.

Physical Capital

Tools, machines, buildings, and infrastructure used to produce goods, such as factories, computers, and roads.

Human Capital

The knowledge and skills workers gain from education, training, and experience.

Natural Resources

Resources provided by nature, such as oil, land, water, and minerals.

Technology / Technical Knowledge

Knowledge about better ways to produce goods and services, including examples like computers, AI, and medical technology.

Per Worker Production Function

A function that shows the relationship between capital per worker and output per worker.

Diminishing Returns

The principle that as more capital is added, productivity still rises but by smaller and smaller amounts.

Catch-Up Effect

The phenomenon where poor countries can grow faster because they can copy technology and adopt systems already used by rich countries.

Foreign Direct Investment (FDI)

When a foreign company builds or buys a business in another country, such as Toyota building a factory in the U.S.

Foreign Portfolio Investment (FPI)

When foreigners buy stocks or bonds in another country.

Free Trade

A policy that allows specialization and larger markets, leading to efficiency, lower prices, and economic growth.

Aggregate Demand (AD)

The total spending on goods/services in the economy, defined by the formula $AD = C + I + G + NX$.

Long-Run Aggregate Supply (LRAS)

A vertical line representing the economy at full employment/potential GDP, determined by resources and productivity.

Short-Run Aggregate Supply (SRAS)

The supply curve showing how firms can produce above or below normal output in the short run based on factors like input prices and productivity.

Inflationary Gap

A state that occurs when $\text{Actual GDP} > \text{Potential GDP}$, leading to an overheating economy and rising inflation.

Recessionary Gap

A state that occurs when $\text{Actual GDP} < \text{Potential GDP}$, where the economy is below full employment.

Stagflation

A combination of recession and inflation, usually caused by a negative supply shock.

Medium of Exchange

A function of money where it is used to facilitate the trade of goods and services.

Unit of Account

A function of money where it serves as a measure to value goods and services.

Store of Value

A function of money where it allows users to hold purchasing power for future use.

Liquidity

The ease of converting an asset into cash, with cash being the most liquid asset.

Commodity Money

Money that has intrinsic value, such as gold.

Fiat Money

Money that has value because the government says it is legal tender, such as the U.S. dollar.

Federal Open Market Committee (FOMC)

The branch of the Federal Reserve responsible for open market operations and monetary policy decisions.

Reserves

The portion of deposits that banks keep on hand instead of loaning out.

Illiquid Bank

A bank that temporarily lacks cash although its total assets still exceed its liabilities.

Insolvent Bank

A bank where liabilities exceed assets, meaning the bank is bankrupt.

Fed Funds Rate

The interest rate that banks charge each other for overnight loans.

Discount Rate

The interest rate the Federal Reserve charges banks; it acts as a ceiling for the Fed Funds Rate.

Interest on Reserve Balances

The interest the Fed pays banks on reserves held at the Fed, which acts as a floor for the Fed Funds Rate.

Open Market Purchase

An action where the Fed buys U.S. government bonds from the public, resulting in increased bank reserves, increased money supply, and falling interest rates.

Open Market Sale

An action where the Fed sells U.S. government bonds to the public, resulting in decreased bank reserves, decreased money supply, and rising interest rates.