1. What are the three major economic goals?
    • 1. maintaining employment of human resources at relatively high levels; meaning that there are enough jobs
    • 2. maintaining prices at a relatively stable level so that consumers and producers can make better decisions
    • 3. achieving a high rate of economic growth; meaning growth output per person over time
  2. Real Gross Domestic Product (RGDP)
    total value of all final goods and services produced in a given period
  3. What other goals are important?
    • 1. quality of life- reduce bads (pollution and crime) and increase goods (education and health services)
    • 2.fairness in distribution of income or wealth
    • 3. self-sufficiency in the production of certain goods and services
  4. Employment Act of 1946
    a commitment by the federal government to hold itslef accountable for short-run economic fluctuations
  5. Full Employment and Balanced Growth Act of 1978
    Humphrey-Hawkins Act
  6. Consequences of high unemployment
    • 1. lower unemployment sends stocks to rise and vice versa
    • 2. unemployment can cause financial insecurities and anxiety. Also tension and despair
  7. What is the unemployment rate?
    the percent of the population ages 16 and older who are willing and able to work but are unable to obtain a job

    Unemployment rate= number of unemployed/civilian labor force
  8. Labor force
    # of people aged 16 and older who are available for employment
  9. Discouraged workers
    an individual who has left the labor force because they could not find a job
  10. Categories of Unemployed workers
    • 1. job losers- an individual who has been temporarily laid off or fired: 49%
    • 2. job leaver- those who quit their jobs: 12%
    • 3. reentrant- an individual who worked before and is now reentering the labor force: 30%
    • 4. new entrant-an individual who has never had a job: 9%
  11. What is underemployment?
    a situation in which a worker's skill level is higher than necessary for a job
  12. How long are people usually unemployed?
    • Duration: Percent Unemployed
    • less than 5 weeks: 39%
    • 5-14 weeks: 30%
    • 15-26 weeks: 15%
    • 27+ weeks: 16%
  13. What is the labor force participation rate?
    % of the population in the labor force
  14. What is frictional unemployment?
    unemployment that results from the workers searching for suitable jobs and firms looking for suitable workers; leads to seasonal unemployment
  15. What is structural unemployment?
    unemployment that results from workers not having the skills to obtain longterm employment; more long term and serious because workers dont hve marketable skills
  16. What is cyclical unemployment?
    unemployment due to short term cyclical fluctuations in the economy
  17. What is the natural rate of unemployment?
    the median unemployment rate, equal to the sum of frictional and structural unemployment when they are at a maximum
  18. When there is full employment what is the potential output?
    the amount of real output the economy would produce if its labour and other resources were fully employed, at the natural rate of unemployment
  19. Why does unemployment exist?
    obstacles prevent wages from adjusting and balancing the quantity of labor demanded
  20. What is minimum wage?
    an hourly wage floor set above the equilibrium wage
  21. What is collectiver bargaining?
    unions negotiate their wages and benefits collectively through their Union officials
  22. What is the Efficiency Wage?
    theory stating that higher wages lead to greater productivity
  23. What is Unemployment insurance?
    • -recipients must have worked a certain length of timeand only lost their jobs because the employer no longer needed them
    • -recipients make half their salary for only 26 weeks
    • -this sometime leads to longer periods of unemployment
  24. What is price level?
    the average level of prices in the economy
  25. What is inflation?
    rise in the overall price level; decreasein the purchasing power of money
  26. What is deflation?
    decrease in the overall price level; increasing the purchasing power of money
  27. What is the consumer price index (CPI)?
    the measure of the trend in prices of a basket of consumable goods and services to guage inflation
  28. Who loses with inflation?
    • -lowers incomein real-terms for people on a fixed-dollar income
    • -can hurt creditors when they loan someone money with a fixed interest rate
    • -inflation can discourage investment and economic growth
    • -can raise one nation's price level relative to price levels in other countries
  29. What is hyperinflation?
    extremely high rates of inflation for sustained periods of time
  30. What is relative price?
    the price of a specific good compared to the price of other goods
  31. What is menu cost?
    the costs imposed on a firm from changing listed price
  32. What is shoe-leather cost?
    the cost incurred when individuals reduced their money holdings because of inflation
  33. What is the nominal interest rate?
    the reported interest rate that is not adjusted for inflation
  34. What is the real interest rate?
    the nominal interest rate minus the inflation rate, also called the inflation adjusted interest rate
  35. What is the business cycle?
    short term fluctuations in the economy relative to the long term tren in output
  36. What is expansion?
    the output (real GDP) is rising significantly- the period between the trough of a recession and the next peak
  37. What is a peak?
    the pointin time when expansion comes to an end, thatis, when outputis at the highest point in the cycle
  38. What is contraction?
    when the economy is slowly down-measured from the peak to the trough
  39. What is a trough?
    the point in time when output stops declining when business activity is at its lowest point in the cycle
  40. What is a recession?
    a period of significant decline in output and employment
  41. What is a depression?
    severe recession or contraction in output
  42. What is a boom?
    period of prolonged economic expansion
  43. What are the leading economic indicators?
    factors that economists at commerce department have found typically change before changes in economic activity
  44. What is gross domestic product (GDP)?
    measure of economic performance based on the value of all final goods and services produced within a country during a given period

  45. What is double counting?
    adding the value of a good or service twice by mistakenly counting the intermediate goods and services in GDP
  46. What is the expenditure approach?
    calculation of GDP by adding the expenditures by market participants on final goods and services over a given period
  47. What is consumption (C)?
    purchases of final goods and services
  48. What are nondurable goods?
    tangible items consumed in a short perod of time; such as food
  49. What are durable goods?
    longer-lived consumver goods, such as automobiles
  50. What are services?
    intangible items of value provided to consumers, such as education
  51. What is investment (I)?
    the creation of capital goods to augmentfuture production
  52. What is a fixed investment?
    all new spending on capital goods by producers
  53. What are producer goods?
    capital goods that increase future production capabilities
  54. What is an inventory investment?
    purchases that add to the stocks of goods kept by the firm to meet consumer demand
  55. What are government purchases in GDP (G)?
    expenditures on goods and services
  56. What is X-M?
  57. What are factor payments?
    wages (salaries),rent, interestpayments, and profits paid to the ownersof productive resources
  58. What is gross national product (GNP)?
    the difference between netincome of foreigners and GDP
  59. What is depreciation?
    annual allowance set aside to replace work-out capital
  60. What is net national product (NNP)?
    GNP minus depreciation
  61. What is indirect business taxes?
    taxes, such as sales tax, levied on goods and services sold
  62. Whatis national income (NI)?
    a measure of income earned by owners of the factors of production
  63. What is personal income (PI)?
    the amoutn of income recievedby households before personal taxes
  64. What is disposable personal income?
    the personal income available after personal taxes
  65. What is price index?
    a measure of the trend in prices paid for a certain bundle of goods and services over a given period
  66. What is consumer price index (CPI)?
    a measure of the cost of a market basket that represents the sonsumption of a typical household
  67. What is the typical CPI shopping basket of goods and services?
    • housing-41%
    • transportation-17
    • foods and beverages-16
    • education and communication- 6
    • medical care-6
    • recreation-6
    • apparel-4
    • other goods and services-4
  68. What is the GDP deflator?
    a price index that helps measure the average price level of all final consumer goods and services produced
  69. How do you calculate the price index?
    (cost of market basket in current year/ cost of market basket in base year) x 100
  70. What is the chain weighting system?
    calculates changes in prices that uses base years from neighboring years
  71. What is the producer price index?
    a measure of the cost of goods and services bought by a firm
  72. What is the gross domestic product per capita?
    real output of goods and services per person
  73. What is the classical school and Say's law?
    The classical school believed that wages andprices adjust quicklyto changes in supply and demand. Jean Baptiste Say's law establishes that full employment can be maintained because total spending will be great enough for firms to sell all the output a fully employed economy can produce. The people who followed this were called classical economists.
  74. Who is John Maynard Keynes?
    He wrote The General Theory of Employment, Interest and Money which attacks the classical theories.
  75. What is the short-run production function?
    the relationship between real GDP and labor while holding capital, land, and technology constant
  76. What is national saving?
    the sum of pricate and public savings
  77. What is a closed economy?
    an economy with no international trade- net exports are 0 and imports are 0
  78. What is private saving?
    the amount of income households have left over after consumption and net taxes
  79. What is public saving?
    the amount of income the government has left over after paying for its spending
  80. What is dissaving?
    consuming more that total available income
  81. What is the crowding out effect?
    theory that governmentborrowing drives up the interest rate, lowering consumption by households and investment spending by firms
  82. What is economic growth?
    and upward trend in the real per capita output of good and services
  83. What is the rule of 70?
    take the nations growth rate and divide by 70
  84. What is productivity?
    the amount of goods and services a worker can produce per hour
  85. What are the factors that contribute to economic growth?
    • 1. the quantity and quality of labor resources (labor and human capital)
    • 2. increase in the use of inputs provided by the land (natural resources)
    • 3. physical capital inputs (machines, tools, buildings, inventories)
    • 4. technological knowledge
  86. What is innovation?
    applications of new knowledge that create new products or improve existing products
  87. What is research and development?
    activities undertaken to create new products and processes that will lead to technological progress
  88. Who is Douglas North?
    an economic historian and won the Nobel Prize in economics in 1993. He made links between institutional changes and economic growth.
  89. Who is Milton Friedman?
    Won the Nobel Prize
  90. Who is Thomas Malthus?
    • he was a reverand and an economist. He made 3 assumptions:
    • 1. the economy was agricultural, with goods produced by 2 inputs,land and labor
    • 2. the supply of land was fixed
    • 3. human sexual desires worked to increase population
  91. What is aggregate demand (AD)?
    the total demand for all the final goods and services in the economy
  92. What is an open economy?
    a type of model that includes international trade effects
  93. What are net exports?
    the difference between the calue of exports and the value of imports
  94. What is the aggregate demand curve?
    graph that shows the inverse relationship between the price level and RGDP demanded
  95. What is the interest rate effect?
    increase in price level= households and firmsreduce their holdings of money and save more= supplyof loanable funds increases= interest rates fall= households and firmsare encouraged to borrow and spend= RDP demanded increases

    vice versa for decrease in price level
  96. What is the aggregate supply curve (AS)?
    the total quantity of final goods and services suppliers are willing and able to supply at a given price level
  97. What is the short run aggregate supply (SRAS) curve?
    the graphical relationship between RGDP and the price level when output prices can change but input prices are unable to adjust
  98. What are supply shocks?
    unexpected temporary events that can either increase or decrease aggregate supply
  99. What is stagflation?
    a situation in which lower growth and higher prices occur together
  100. What is cost push inflation?
    aprice levelincrease due to a negative supply shock or increases in input prices
  101. What is wage and price inflexibility?
    the tendency for prices and wages to only adjust downward to changes in the economy
Card Set
Chapters 21-25