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A.P. Economics Final Exam Study Guide
Reference(s):
Macroeconomics by McConnell and Brue, Lecture Notes by Walukiewicz
marginal
analysis The comparison of marginal (“extra” or “additional”)
benefits and marginal costs, usually for decision making. (G-11)
ceteris
paribus assumption (other-things-equal assumption) The
assumption that factors other than those being considered are held constant.
(G-14)
positive economics The analysis of facts or data to establish scientific
generalizations about economic behavior. (G-15)
normative
economics That part of economics involving value judgments about what
the economy should be like; focused on which economic goals and policies should
be implemented; policy economics. (G-14)
capital,
entrepreneurial ability, land, and labor (CELL) The economic
resources that are used in the production of goods and services; productive
agents; factors of production. (G-5)
factors of
production Economic resources: capital, entrepreneurial ability, land,
and labor (CELL). (G-7)
production possibilities table A table that lists the different
combinations of two products that can be produced with a specific set of
resources (and with full employment and productive efficiency). (Brue 25)
production
possibilities curve A curve showing the different combinations of two
goods or services that can be produced in a full-employment, full-production
economy where the available supplies of resources and technology are fixed.
(G-15)
opportunity
cost The amount of other products that must be forgone or sacrificed
to produce a unit of a product. (G-14)
scarcity Resources
can only be used for one purpose at a time. Scarcity requires that choices be
made. The relative scarcity of money compared to goods and services will allow
money to retain its purchasing power.
circular
flow model The flow of
resources from households to firms and of products from firms to
households. These flows are accompanied by reverse flows of money from firms to
households and from households to firms.
law of
demand The principle that,
other things equal, an increase in a product’s price will reduce the quantity
of it demanded, and conversely for a decrease in price.
law of
supply The principle that,
other things equal, an increase in the price of a product will increase the
quantity of it supplied, and conversely for a price decrease.
diminishing
marginal utility The decrease
in added satisfaction that results as one consumes additional units of a good
or service, i.e., the second “Big Mac” yields less extra satisfaction (or utility)
than the first.
substitute
goods Products or
services that can be used in place of each other. When the price of one falls,
the demand for the other product falls; conversely, when the price of one
product rises, the demand for the other product rises.
complementary
goods Products and
services that are used together. When the price of one falls, the demand for
the other increases (and conversely).
surplus The amount by which the quantity supplied
of a product exceeds the quantity demanded at a specific
(above-equilibrium) price.
shortage The amount by which the quantity demanded
of a product exceeds the quantity supplied at a particular
(below-equilibrium) price.
price
ceiling Occurs when the government sets a maximum price below the
market equilibrium price, such as a maximum interest rate a firm can charge on
a credit card. This causes the quantity
demanded by consumers to be greater than quantity supplied by the firms in the
market, thereby resulting in a shortage.
price
floor Occurs when the government sets a minimum price above the
market equilibrium price, as is the case with minimum wage. This causes the quantity demanded to be less
than quantity supplied, thereby resulting in a surplus. (Stacey Brook)
sole
proprietorship An unincorporated firm
owned and operated by one person.
partnership An unincorporated firm owned and operated by
two or more persons.
corporation A legal entity (“person”) chartered by a
state or the Federal government that is distinct and separate from the
individuals who own it.
spillover
cost A cost imposed without compensation on third parties by the
production or consumption of sellers or buyers. Example: A manufacturer dumps
toxic chemicals into a river, killing the fish sought by sport fishers.
double
taxation The taxation of
both corporate net income (profits) and the dividends paid from this net
income when they become the personal income of households.
payroll
tax A tax levied on
employers of labor equal to a percentage of all or part of the wages and
salaries paid by them and on employees equal to a percentage of all or part of
the wages and salaries received by them.
sales tax A tax levied on the cost (at retail) of a
broad group of products.
gross
domestic product (GDP) The total
market value of all final goods and services produced annually within the
boundaries of the United States, whether by U.S. or foreign-supplied resources
nominal
GDP The GDP measured in
terms of the price level at the time of measurement (unadjusted for inflation).
real GDP Gross domestic product adjusted for
inflation; gross domestic product in a year divided by the GDP price index for
that year, expressed as a decimal.
consumer
price index (CPI) An index
that measures the prices of a fixed “market basket” of some 300 goods and
services bought by a “typical” consumer
business
cycle Recurring increases
and decreases in the level of economic activity over periods of years; consists
of peak, recession, trough, and recovery phases.
frictional
unemployment A type of
unemployment caused by workers voluntarily changing jobs and by temporary
layoffs; unemployed workers between jobs.
structural
unemployment Unemployment of
workers whose skills are not demanded by employers, who lack sufficient skill
to obtain employment, or who cannot easily move to locations where jobs are
available.
cyclical
unemployment A type of
unemployment caused by insufficient total spending (or by insufficient
aggregate demand).
price
index An index number
that shows how the weighted-average price of a “market basket” of goods changes
over time.
measurement
of inflation To measure inflation, subtract last year’s price index from
this year’s price index and divide by last year’s index; then multiply by 100
to express as a percentage.
demand-pull
inflation Increases in the
price level (inflation) resulting from an excess of demand over output at the
existing price level, caused by an increase in aggregate demand.
cost-push
inflation Increases in the
price level (inflation) resulting from an increase in resource costs (for
example, raw-material prices) and hence in per-unit production costs; inflation
caused by reductions in aggregate supply.
Who is
hurt by inflation? Fixed-income groups, savers, lenders. Workers who
are paid on salary with progressively cheaper money, thereby lowering their
purchasing power. Farmers (i.e. Nael in the simulation).
Who
benefits from inflation? Borrowers, people who buy on credit, people who rent
out property (i.e. Kevin in the simulation)
Shifts in
Investment Demand Shifts in investment demand occur when any
determinant apart from the interest rate changes. Greater expected returns create more investment demand; shift
curve to right. The reverse causes a
leftward shift.
Say’s law The
largely discredited macroeconomic generalization that the production of goods
and services (supply) creates an equal demand for those goods and services.
multiplier
effect The effect on equilibrium GDP of a change in aggregate
expenditures or aggregate demand (caused by a change in the consumption
schedule, investment, government purchases, or net exports).
aggregate
demand A schedule or curve that shows the total quantity of goods
and services demanded (purchased) at different price levels.
aggregate
supply A schedule or curve showing the total quantity of goods and
services supplied (produced) at different price levels.
real-balances
effect The tendency for increases in the price level to lower the
real value (or purchasing power) of financial assets with fixed money value
and, as a result, to reduce total spending and real GDP, and conversely for
decreases in the price level.
interest-rate
effect The tendency for
increases in the price level to increase the demand for money, raise interest
rates, and, as a result, reduce total spending and real output in the economy
(and the reverse for price-level decreases)
determinants
of aggregate demand (AG) Factors such
as consumption spending, investment, government spending, and net exports that,
if they change, shift the aggregate demand curve.
determinants
of aggregate supply (AS) Factors such
as input prices, productivity, and the legal-institutional environment that, if
they change, shift the aggregate supply curve.
expansionary
fiscal policy An increase in government purchases for goods and services,
a decrease in net taxes, or some combination of the two for the purpose of
increasing aggregate demand and expanding real output.
contractionary
fiscal policy A decrease in government purchases for goods and services,
and increase in net taxes, or some combination of the two, for the purpose of
decreasing aggregate demand and thus controlling inflation.
monetary
policy A central bank’s changing of the money supply to influence
interest rates and assist the economy in achieving price stability, full
employment, and economic growth.
supply-side
fiscal policy Tax reductions will shift the aggregate supply curve to the
right, negating the inflation and increasing economic growth.
Laffer
Curve A curve relating government tax rules and tax revenues and
on which a particular tax rate (between zero and 100 percent) maximizes tax
revenues.
money Any item
that is generally acceptable to sellers in exchange for goods and services.
M1 The most
narrowly defined money supply, equal to currency in the hands of the public and
the checkable deposits of commercial banks and thrift institutions.
Federal
Reserve System (the “Fed”) Established by Congress in 1913 and holds power over
the money and banking system. The Board of Governors of the Fed directs the
activities of the 12 Federal Reserve Banks, which in turn control the lending
activity of the nation’s banks and thrift institutions.
Federal
Open Market Committee (FOMC) The 12-member group that
determines the purchase and sale policies of the Federal Reserve Banks in the
market for U.S. government securities.
open-market
operations The buying and selling of U.S. government securities by the
Federal Reserve Banks for purposes of carrying out monetary policy.
discount
rate The interest rate that the Federal Reserve Banks Charge on
the loans they make to commercial banks and thrift institutions.
reserve requirement The specified minimum percentage of its checkable deposits that a bank or thrift must keep on deposit at the Federal Reserve Bank in its district or hold as vault cash.
easy money
policy Federal Reserve System actions to increase the money supply
to lower interest rates and expand real GDP.
tight
money policy Federal Reserve System actions that contract, or restrict,
the growth of the nation’s money supply for the purpose of reducing or
eliminating inflation.
Short Run
and Long Run Analysis of GDP and Price Level For macroeconomics the
short-run is a period in which nominal wages (and other input prices) remain
fixed as the price level changes. In the long run, nominal wages are fully
responsive to price level changes. The long run aggregate supply curve is a
vertical line at the full employment level of real GDP. (See Figure 16-1b)
Phillips
Curve A curve showing the relationship between the unemployment
rate (on the horizontal axis) and the annual rate of increase in the price
level (on the vertical axis).
supply
shocks Rapid and significant increases in resource costs that may
occur with unexpected increases in the price of raw materials. The stagflation
of the 1970s and early 1980s may have been caused by a series of adverse
aggregate supply shocks.
labor-intensive
commodity A product requiring a relatively large amount of labor to
be produced.
land-intensive
goods A product requiring a relatively large amount of land to be
produced.
comparative
advantage A lower relative or comparative cost than that of another
producer.
absolute
advantage Occurs when a country or region can create more of a product
with the same factor inputs.
trade
barriers/controls Tariffs, export subsidies, import quotas, and other
means a nation may employ to reduce imports and expand exports. Trade barriers
in the 1930s contributed to the Great Depression.
tariff A tax
imposed by a nation on an imported good.
protective
tariff A tariff designed to shield domestic producers of a good or
service from the competition of foreign producers.
import
quota A limit imposed by a nation on the quantity (or total
value) of a good that may be imported during some period of time.
economic
impact of tariffs Direct impacts include the decline in consumption,
increased domestic production, decline in imports, and tariff revenue. Indirect
impacts include fewer U.S. exports and the contraction of relatively efficient
industries that do have a comparative advantage. (Brue 385-386)
infant
industry argument contends that protective tariffs are needed to allow
new domestic industries to establish themselves. Temporarily shielding young
domestic firms from the severe competition of more mature and more efficient
foreign firms will give infant industries a change to develop and become
efficient producers.
World
Trade Organization (WTO) An organization of 140 nations that oversees trade
agreements reached by the member nations and rules on trade disputes among
them. Established in 1994 to replace GATT to oversee the provisions of the
Uruguay Round and to resolve any disputes stemming from it.
North
American Free Trade Agreement (NAFTA) A 1993 agreement establishing,
over a 15-year-period, a free-trade zone composed of Canada, Mexico, and the
United States that has about the same combined output as the European Union
(EU) but encompasses a much larger geographic area.