Economics and personal finance final exam review

Opportunity Costs

the value of the next best alternative when making an economic decision. Also the value of what is given up when a person makes an economic decision.

Productivity

measures the average amount of goods and services that can be produced by one worker.

Mutual Funds

type of investment that combines the investments of many investors

Traditional vs. Roth IRA

Both are individual retirement accounts. The traditional IRA has a tax advantage/deduction as the money is being saved, while the Roth IRA allows people to avoid taxation when they start to use the money in retirement.

Annuities

also known as 401ks and 403bs-these are retirement investments that are offered by insurance companies. Often the money can be invested through a payroll deduction

Term Life

life insurance for a specified period of time

Whole Life Insurance

life insurances provided for the entire life of the purchaser

Payroll Taxes

another name for social security taxes

Real vs. Personal Property

real property is land and buildings on land; while personal property are other taxable possessions such as cars, boats and motorcycles.

Progressive (Graduated) tax rates

tax rate increases as income increases.

Proportional tax rates

 tax rate is the same regardless of income

Regressive taxes

tendency of some proportional taxes to tax lower incomes at a higher rate than higher incomes

Law of Demand

consumers are willing to purchase more of a good/service at lower rather than higher prices

Real Income

increases in income adjusted for inflation. Can be calculated by taking the percent change in income and subtracting the rate of inflation.

Elasticity

refers to the degree that demand for  a good or service will change due to change in price.

Elastic vs Inelastic Products

Elastic products are products whose demand changes significantly with a change in price. Inelastic products are products whose demand changes very little with a change in price.

Law of Supply

businesses are willing to produce more goods and services at higher prices rather than at lower prices

Subsidies

government payments made to businesses who produce certain goods and services.

Equilibrium Price

price at which supply equals demand

Shortages

where demand is greater than supply-normally causes prices to rise

Surpluses

where demand is less than supply-normally causes prices to decrease

Price Ceilings

a legal maximum that can be charged for a good or service-often causes artificial shortages

Price floors

legal minimum that can be charged for a good or services-often causes artificial surpluses and can lead to illegal markets

Circular Flow of the Economy

illustrates how the money businesses spend to produce products comes back to businesses when households buy goods and services.

Pure Competition

also known as perfect competition. Large numbers of  buyers and sellers, who can easily get in and out of the market, selling identical products

Monopolies

occurs when one business controls the production and sale of a good or service.

Natural Monopoly

type of monopoly allowed by governments when it is considered impractical to have competition for a particular good or service. (Utilities, such as electricity production/distribution is an example)

Technological Monopoly

when a business has the exclusive right to produce a particular good or service. (Businesses that have patents typically have a technological monopoly.)

Government Monopoly

when the government has the exclusive right to provide a good or service. (The post office is an example of this type of monopoly)

Patent

he exclusive right to produce a certain product-or to use a particular method of production

Oligopolies

type of market dominated by a few large companies. (Usually 3-5 business dominated the market)

Cartels

organizations of producers who work together to limit the production of a good or service in order to artificially raise its price. (OPEC: Organization of Petroleum Exporting Countries: an example of a cartel involved in oil production)

Labor Force

people over the age of 16 either working full time or wanting to work full time.

Labor Force Participation Rate

percentage of people who could be in the labor force who are actually in the labor force.

Discouraged Workers

people who have stopped looking for work-hence they are not counted as being unemployed.

Involuntary Part-time workers

people who are working part time, but want and need full time work.

Frictional Unemployment

people who are voluntarily unemployed-”in between jobs”. Includes those who are seasonally unemployed

Seasonal Unemployment

people who are unemployed because of major changes in seasonal weather.

Cyclical Unemployment

people who are unemployed due to a recession

Structural Unemployment

people who are unemployed because of major changes in the economy. Includes those who are technologically unemployed

Technological Unemployment

people who are unemployed because they have been replaced by machines/automation.

Human Capital

investments designed to improve workers’ productivity through better training and education

Outsourcing

moving some business related services to other countries-help desks are an example

Offshoring

moving actual production facilities to other countries

Gross Domestic Product (GDP

market value of all of all new, final goods and services, produced in a particular country in a given year

Nominal GDP

not adjusted for inflation

Real GDP

adjusted for inflation. Real GDP can be calculated by taking the percentage increase in GDP and subtracting the rate of inflation. Real GDP must be used to compare GDP over time.

Per Capita GDP

A country’s real GDP divided by its population. Per capita real GDP should be used when trying to compare the standard of living between countries.

Underground Economy

 unrecorded transactions. Can be both legal and illegal-these are not counted in GDP. (The underground economy in the US is approximately 15 percent of economic activity.)

Demand Pull

Inflation caused by demand rising faster than supply

Cost push inflation

(aka Supply-side inflation): inflation caused by an increase in the costs of production-leads to lower supply of goods and services.

Stagflation

high rates of inflation combined with high rates of unemployment.

Hyperinflation

very high rates of inflation over a short period of time. (Example 25 percent inflation in a couple of weeks)

Consumer Price Index

most used measurement of inflation. Measures price changes in a “market basket” (selected group of goods and services)

Aggregate Demand

the total amount of goods and services demanded by the entire economy. (Includes consumer purchases, investment, government purchases and net exports (value of exports minus imports)

Aggregate Supply

the total amount of goods and services produced by the entire economy.

Equilibrium Price Level

price level at which aggregate supply equals aggregate demand.

Equilibrium GDP

Amount of goods and services produced at the point where aggregate supply equals aggregate demand

Expansionary policy

expansionary policies are used by governments to correct recessions

Contractionary Policy

Contractionary policies are used to correct inflation.

Fiscal policy

government taxing and spending policy

Monetary Policy

refers to the FEDs control of the money supply and interest rates

Disposable Income

household income after taxes

Transfer Payments

payments made by the government to households for which the government receives no goods or services in return

Federal Funds Rate

interest rate banks charge each other for 24 hour loans

Discount Rate

interest rate the FED charges banks for longer term loans

Reserve Interest Rate

nterest rate the FED PAYS banks for the reserves they have on deposit at the federal reserve

Wealth

value of household holdings beyond income.

Cost of Production

prices that businesses pay for those things it needs to produce goods and services.

Deregulation

 reducing government regulation of businesses

Factors that can increase or decrease Demand

1. Changes in number of consumers (Population stats)

   1. Increase in consumers = increase in demand

   2. Decrease in consumers = decrease in demand

2. Changes in consumer preferences/taste

   1. As goods and services become more popular their demand rises.

   2. As goods and services become less popular their demand decreases.

3. Changes in Real Income (changes in income minus inflation): Example if wages rise by 5 percent and inflation increases by 3 percent-real income increases by 2 percent.

   1. As real income increases so does demand. 

   2. If real income decreases so does demand

4. Complements (products that are used together and often purchased together) and Substitutes (products that can used in place of each other)

   1. If the price of a substitute product rises-the demand for the other substitute product increases. (the reverse is also true)

   2. If the price of a complementary good increases the demand for the other complementary product decreases. (the reverse is also true)

5. Future Expectations

   1. Future expectations of income (optimism about the future increases demand in the present and visa versa)

   2. Future expectations of prices: if people believe the price of a good or services will increase in the future-the demand for that product will go up in the present. (the opposite is also true

Factors that can increase or decrease Supply

1. Changes in Cost of Production (anything that increases cost of production decreases supply-anything that decreases cost of production increases supply.)

   1. Wages: if wages rise supply will drop. The reverse is also true

   2. Taxes on businesses: if taxes increase the supply of products will drop. The reverse is also true.

   3. Energy Costs: if energy costs rise supply will drop. The reverse is also true.

   4. Subsidies (government payments to businesses to produce certain goods and services) if subsidies rise so will supply. The reverse is also true.

2. Productivity: as productivity increases so does the supply of products. The reverse is also true

   1. Increased use of technology increases productivity.

   2. Increased investment in Human Capital (things that improve the education and skills of the workforce)  increases productivity.

3. Changes in the number of people in the Labor Force (immigration is an important factor)-as the labor force increases so does the supply of products. The reverse is also true.

What counts and does not count in GDP

1. New (not used)

2. Final (not intermediate)

3. Produced in a particular country (Nation whose GDP is being calculated)

4. Produced in the year for which GDP is being calculated.

Other clarifications: Rent does count in GDP for the year it was paid. Stock purchases do not count-but commissions paid to stock brokers do.

What increases or decreases Aggregate Demand

1. taxes on Households:

   1. Decrease in taxes, increase household disposable income-which increases aggregate demand. The reverse is also true.

2. Transfer Payments: increases in transfer payments, increase household disposable income-which increases aggregate demand. The reverse is also true.

3. Gov’t Purchases: increases in government purchases-directly increase aggregate demand. (Reverse is also true)

4. Discount Rate (interest that the FED charges banks)-same: lower interest rates increase aggregate demand-higher interest rates decrease aggregate demand.

5. Reserve Interest Rate: FED lowers this rate, banks keep less reserves-increases lending/borrowing and spending decreases-raising this interest rate-increases reserves-lower lending/borrowing and spending

What increases or decreases Aggregate Supply

1. Cost of Production(similar to the supply for individual goods and services-if costs go up aggregate supply goes down and visa versa)

   1. Wages: if wages go up-costs up-aggregate supply goes down. If wages go down-costs go down-aggregate supply increases.

   2. Energy: if the cost of energy rises-cost rise-aggregate supply decreases. If energy costs go down-costs go down-aggregate supply rises.

   3. Subsidies (government payments made to businesses) if subsidies rise so does supply-if subsidies are cut supply decreases

   4. Regulations (regulations increase the cost of production-lowers aggregate supply)-deregulation (reducing regulation) lowers cost of production-increases aggregate supply.

   5. Access to Natural Resources/Raw Materials-as access increases-so does aggregate supply (reverse is true)

2. Productivity: 

   1. Technology: Increase in the use of technology in the production of goods/services-increases productivity and Aggregate Supply. Decreased investment in technology, decreases productivity-decreases Aggregate Supply.

   2. Human Capital (education and job training)-Increases in spending on Human capital-increases productivity and Aggregate Supply. Decrease spending on Human capital-decreases productivity-decreases Aggregate Supply.

3. Changes in the Labor Force

   1. Increases in the size of the labor force-increases Aggregate Supply.

   2. Decreases in the size of the labor force-decreases Aggregate Supply.