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factors of production
land: all raw materials labor: skilled to risk takers to special education capital: machines, factories, etc. entrepreneurship: "know how" TERM 2
marginal cost
DEFINITION 2 cost of consuming or producing one more unitas you produce more, MC increases because of opportunity costsnot all resources are equally well suited TERM 3
marginal benefit
DEFINITION 3 benefit from producing or consuming one more unitas you consume more, MB decreases TERM 4
comparative
advantage
DEFINITION 4 if a person can perform the activity at a lower opportunity cost that anyone else TERM 5
allocative efficiency
DEFINITION 5 point that makes you "happiest" occurs at equilibriumpoint where we cannot produce more of one good without giving up some other good that provides greater benefits
specialization and trade
increase amount of productsconsume outside individual PPFs TERM 7
opportunity cost
DEFINITION 7 produce more of one good but have to give up some of the other goodas the quantity produced of each good increase, so does the opportunity costslope of PPF TERM 8
complements
DEFINITION 8 good that is used in conjunction with another goodex. increase P peanut butter = Decrease Qd peanut butter = Decrease in D jelly TERM 9
substitutes
DEFINITION 9 good that can be used in place of another goodex. increase P red bull = decrease Qd red bull = increase D mt. dew TERM 10
equilibrium
DEFINITION 10 place where you have no incentive to leave
diminishing effect
more you have the less you are willing to pay TERM 17
demand shifters
DEFINITION 17 Price of related goods complements substitutesExpected future pricesIncomePopulationPreferences TERM 18
substitute in production
DEFINITION 18 goods that a firm can produce by using the same resources TERM 19
expected future prices
DEFINITION 19 If the price of a good is expected to rise in the future, current demand for the good increases and the demand curve shifts rightward. TERM 20
income shifter
DEFINITION 20 normal good -- demand increases as income Increasesinferior good -- demand decreases as income increases
law of supply
the higher the price of a good, the more quantity supplied TERM 22
supply shifters
DEFINITION 22 Prices of factors of production - increase in factor, decrease in supplyPrices of related goods produced - substitutes in production - complements in productionExpected future pricesNumber of suppliersTechnologyState of nature TERM 23
GDP
DEFINITION 23 market value of all officially recognized final goods and services produced within a country in a given period of time Y = C + I + G + X - M TERM 24
don't count in GDP
DEFINITION 24 intermediate goods second hand goods purely financial transactions public transfer payments unreported legal activity illegal activity non-market transactions US firms producing overseas TERM 25
intermediate good
DEFINITION 25 purchased by firm to produce final good and sell to consumeronly counts when YOU buy it (final good)
unemployment
rate
UE = (# unemployed / labor force) x 1004-6 is normal / healthy TERM 32
employment to population (could work)
DEFINITION 32 (employed / working age population) x 100 TERM 33
labor force population rate (willingness to
work)
DEFINITION 33 (labor / working age population) x 100 TERM 34
types of UE
DEFINITION 34 frictional --> natural kind of employment structural --> economy changes & kind of jobs change (longer than frictional) cyclical --> fluctuates over business cycle TERM 35
inflation
DEFINITION 35 annual percentage change in price level inflation rate = (CPI (this year) - CPI (last year)) / (CPI (last year)) x 100
CPI
consumer price index measures the average prices paid by consumers for a "fixed" basket of consumer goods and sercives CPI = (cost of CPI basket (current) / cost of CPI basket (base) - period) x 100 TERM 37
CPI bias
DEFINITION 37 CPI might overstate true inflation new good bias outlet subset bias quality change bias commodity bias TERM 38
rule of 70
DEFINITION 38 number of years to double money = 70 / annual percentage growth rate TERM 39
Aggregate Production Function (AGF)
DEFINITION 39 relationship between real GDP and quantity of labor direct relationship curved because of law of diminishing returns TERM 40
grow economy
DEFINITION 40 increase labor increase labor productivity (amt produced per person)
real interest
rate
nominal interest rate adjusted for inflation real = nominal - inflation TERM 47
loanable fund
DEFINITION 47 hypothetical market that brings savers and borrowers together, also bringing together the money available in commercial banks and lending institutions available for firms and households to finance expenditures, either investments or consumption. TERM 48
supply of loanable funds
DEFINITION 48 depends on: interest rate, disposable income, expected future income, wealth, default risk Increase interest rate --> Increase profit from loan --> Increase supply of funds upward sloping savings is the main component TERM 49
Loanable fund supply movement vs. shift
DEFINITION 49 movement: change in interest rate shift: change in savings (+income = ^s, +expected future income = -S, +wealth = -S) & change in default risk (^default risk, -S) TERM 50
Demand for loanable funds
DEFINITION 50 depends on: real interest rate, expected profit increase interest rate --> increase cost of loan --> decrease profits --> decrease demand for funds downward sloping
loanable fund demand movement vs. shift
movement: change in interest rateshift: change in expected profit TERM 52
shadow banks
DEFINITION 52 investment banks loan long-term funds not heavily regulated help other financial institutions and governments raise finance through issuing and selling stocks and bonds TERM 53
crowding out
DEFINITION 53 government deficit increases DLF Real interest rate increases increase household savings decrease firm investments TERM 54
nominal interest
rate
DEFINITION 54 actual percent interest payment on principal TERM 55
money functions
DEFINITION 55 means of payments unit of account medium of exchange store of value
MD
movement: change in nominal interest rate shifter: change in real GDP & financial innovation TERM 62
currency drain
DEFINITION 62 money exiting the system currency drain ratio = currency / deposits TERM 63
fixed pegged exchange
rate
DEFINITION 63 value decided by government that blocks the unregulated forces of demand and supply by direct intervention in the foreign exchange market TERM 64
flexible exchange rate / free
float
DEFINITION 64 exchange rate is determined by demand and supply in the foreign exchange market TERM 65
interest rate
parity
DEFINITION 65 short run no-arbitrage condition representing an equilibrium state under which investors will be indifferent to interest rates available on bank deposits in two countries
appreciation
increase in currency's value TERM 67
depreciation
DEFINITION 67 decrease in currency's value TERM 68
PPP
DEFINITION 68 The equilibrium value of an exchange rate is at the level that allows a given amount of money to buy the same quantity of goods abroad as it will buy at home TERM 69
capital flow
DEFINITION 69 foremost short-run force on exchange ratesresponsive to governmental policies and world economic conditions TERM 70
schools of thought
DEFINITION 70 classical : self regulating, always at full employment, free trade keynesian : need fiscal/monetary policy (government intervention) monetarist : self regulating, have to increase money supply
keynesian multiplier
= total change in output / change in autonomous expenditure TERM 77
fiscal policy
DEFINITION 77 directly changes government purchases but indirectly influences AD TERM 78
automatic stabilization
DEFINITION 78 occur automatically in response to the state of the economy, without any action of the government TERM 79
discretionary stabilization
DEFINITION 79 fiscal policy initiated by an act of Congress and signed by president either a change in spending program or change in tax la TERM 80
mandatory spending
DEFINITION 80 67%already written into previous existing lawex. Medicare, SS, paying off debt
discretionary spending
can be argued aboutex. defense and non defense TERM 82
deficit vs.
debt
DEFINITION 82 deficit - difference between the money Government takes in and what the Government spends debt -accumulated deficits TERM 83
monetary policy
DEFINITION 83 goals maximize employment moderate long term interest rates stable prices (keep inflation rate low) TERM 84
money neutrality
DEFINITION 84 Fed increases money supply interest rates decrease AD shifts up output and prices increase in SR (inflationary gap) wages & other factor prices increase SRAS shifts back real output unchanged and price level increases Changes in the quantity of money affect nominal variables such as the price level but not real variables such asoutput TERM 85
avoid recession
DEFINITION 85 decrease Federal Fund rate
