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72 Cards in this Set
- Front
- Back
Economics
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The study of markets
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The economic problem
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figuring out how to satisfy unlimitted wants with limitted resources
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Land
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one of the four factors of production
earns rent |
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Labor
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one of the four factors of production
earns wages |
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Capital
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one of the four factors of production
earns interest |
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Entrepreneurs
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one of the four factors of production
earn profits |
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Goods
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things that have tangible substance
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Durables
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goods that have an economic life greater than or equal to 3 years
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Nondurables
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goods that have an economic life of less than 3 years
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Services
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intangibles (health care, transportation, etc.)
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Ceteris paribus
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Assumption of "all else being equal"
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Pitfalls of Economic Analysis
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Correlation and Causality
Other Conditions Fallacy Fallacy of Composition Law of Unintended Consequences/Ignoring Secondary Effects |
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Correlation and Causality
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causality implies correlation
correlation DOES NOT imply causality |
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Spurious correlation
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two variables have correlation, but there isn't causality
(i.e. there is a 79% correlation that if an NFC team or old AFC team wins the superbowl, then the stock market increases) |
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Other conditions fallacy
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"what happened in the past will happen in the future"
-->yes, but only if all other conditions stay the same, which is rare, and almost impossible to measure |
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Fallacy of composition
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if you (wrongly) say that what is true of part is true of the whole (this is why we need large sample sizes)
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Law of unintended consequences/Ignoring secondary effects
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When government policy, designed to achieve a certain goal, yields unintended side effects
i.e. Alcohol prohibition (people were poisoned; crime rate increased) |
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Aggregate demand
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total spending on final goods and services
AD = C + I + G + Net X |
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What do households spend money on?
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C - Consumption spending
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What do business firms spend money on?
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I - Investment spending
-->firms spending on new plants/structures/buildings; new equipment/machinery; new residential structures; change in inventories |
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What does the government spend money on?
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G - Government spending on goods and services
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Net exports
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= (Exports) - (Imports)
Measure of economic output ~0 |
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5 factors that influence home production vs. buying from a firm
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1. specialization/skills needed
2. opportunity cost 3. avoiding taxes 4. technological advancements 5. reduction of transaction costs |
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Economic functions of the government
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1. establish & enforce "rules of the game"
2. promote employment 3. regulate natural monopolies 4. provide public goods 5. deal with externalities 6. promote equal income distribution |
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natural monopolies
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a case wehre it makes sense to have one producer because there are very high fixed costs
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public goods
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goods where consumption by one person doesn't diminish the amount available for others
(lighthouses, parks, national defense) |
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free riders
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people who consume but don't pay
solution: government provides public goods and taxes everyone |
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externalities
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when there is a social cost > production cost
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graduated/progressive income tax
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the more you make, the higher your taxes
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Marginal tax rate
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tax rate on one more $ of income
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average tax rate
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(taxes paid)/(income)
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flat tax
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constant marginal tax rate regardless of income
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regressive tax
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marginal tax rate decreases as income increases
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GDP
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gross domestic product;
output of all final goods and services produced in United States ~14trillion |
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flow variable
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a variable measured over a period of time ("per year")
i.e. GDP, wage rate |
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stock variable
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a variable measured at a point in time
i.e. money holdings, money supply, capital stock |
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budget deficit
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(federal outlays/year) - (federal revenue/year)
= new federal borrowing per year (flow variable) |
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federal debt
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the total value of all federal borrowing (how much debt the government owes)
= how much debt the government owes (stock variable) |
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price level
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average price of final goods and services
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real GDP
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the quantity of final goods and services produced
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why does aggregate demand slope down?
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1. a decrease in price level, leads to an increase in money holdings, which leads to an increase in comsumption spending
2. as the price level goes down, exports increase, and imports decrease. --> net exports increases. As net exports increase, aggregate demand increases. THEREFORE, as P decreases, Net X increases, and Aggregate demand increases |
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what shifts aggregate demand?
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1. a change in consumer optimism
2. change in wealth 3. change in government spending |
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explicit labor contract
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legally binding
type held by labor unions |
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implicit labor contract
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not legally binding
sets the wage rate (usually) for one year |
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Profit margin
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= (profit per unit) - (cost per unit)
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Why does aggregate supply slope up?
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as P increases, the profit margin increases. therefore, firms produce more output, which leads to an increase in Real GDP (Y)
increase in P leads to increase in Y --> upward sloping |
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Leftward shift of aggregate supply:
what? why? |
businesses are willing to produce the same amount of goods but they are charging a higher price
this is a result of higher input costs |
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Rightward shift of aggregate supply:
what? why? |
this means businesses are willing to produce the same amount of goods for a lower price
this is a result of lower input costs |
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If there is excess supply, then there is a tendency for price to...
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decrease
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If there is excess demand, then there is a tendency for price to...
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increase
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supply-side recession
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you're paying higher prices for lower output (result of an increase in input costs)
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what is wrong with using the percent change in real GDP to measure economic growth?
solution? |
real GDP does not adjust for population changes.
solution--compute percent change in real GDP per capita |
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what is the preferred measure of economic growth?
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(percent change in real GDP) / (number of hours)
= labor productivity growth |
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Rule of 72
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72 / (average annual growth rate %) = number of years for series to double
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what causes economic growth?
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Y = Real GDP = output
K = capital stock = stock of buildings/machinery L = labor input = # of hours worked A = state of technology Y = (A) x f(K, L) |
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Labor productivty
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= output per worker
= Y/L = (Real GDP)/(# of hours worked) |
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Equation for labor productivity growth
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Labor productivity growth = (rate of technological advancement) + (.25)(growth of capital per worker)
(Percent change in Y/L) = (Percent change in A) + (.25)(Percent change in (K/L)) |
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What 2 factors does labor productivity growth depend on?
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1. technological advancement
2. growth of capital per worker |
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What is needed to facilitate technological advancement (5 factors)
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1. patent law
2. property law 3. educated population 4. receptive to change 5. government funding |
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How does the government promote savings, and therefore the growth of capital per worker?
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1. reducing tax rates on taxable income
2. tax deferred accounts (401k, Roth IRA) |
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Why can immigrants cost the border and experience a extreme increase in standard of living?
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the opportunity costs for people in a rich country is much higher.
capital & technology |
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Nominal GDP
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= value of GDP @ current year prices
= (each year's output) x (that year's prices) |
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Real GDP
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= each year's output @ base year's prices
= (each year's output) x (base year's prices) |
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Price Index
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"GDP Deflator"
measures the average price of final goods and services = (Nominal GDP)/(Real GDP) Price Index = 1.28 --> The average price of cars and wheat increased 28% from 2007 (base year) to 2009 (current year) |
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Why do we use nominal GDP?
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to calculate price index
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Consumer Price Index
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measures the cost of living
= (Cost in year x) / (Cost in base year) = CPI in year x **use a constant, fixed quantity, but the price of a base year |
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Why was the 1920s such a good time economically?
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Aggregate supply was shifting rightward because of technology, which led to lower prices and higher output
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What were the two economic problems developing in the late 1920s
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1. distribution of income and wealth--gap was widening
2. stock market boom--created a speculative bubble |
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Greater fool theory
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Keynes - people will pay too much if you think there's a greater fool than you willing to pay even more
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Why did the federal reserve increase increase interest rates?
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to kill off stock market rally--they thought banks were feeding the speculative bubble by providing loans to brokers
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what factors influence the slope of aggregate supply?
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profit margin
(input costs) |
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what factors influence the slope of aggregate supply?
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profit margin
(input costs) |