Economics Basics: Understanding Key Concepts and Terms
Economics Basics
Understanding Key Concepts and Terms
Business Cycles
A business cycle has two turning points: Trough and Peak.
Commercial Banks
A commercial bank is defined as: A firm that is chartered to accept deposits and make loans.
Currency Drain
A currency drain is: An increase in currency held outside banks.
Discouraged Workers
A discouraged worker is: Someone who does not have a job but has given up looking.
Production Possibility Frontier (PPF)
A production possibility frontier (PPF) diagram illustrates all of the following concepts except: Unlimited wants.
Central Banks
A public authority that provides banking services to commercial banks and regulates financial institutions and markets is called a: Central Bank.
Price Ceilings and Floors
A regulation that sets the highest price at which it is legal to trade a good is a: Price ceiling.
The regulation that sets the lowest price at which it is legal to trade a good is a: Price floor.
NAFTA and Structural Unemployment
After the passage of the North American Free Trade Agreement (NAFTA), which made it less expensive to import goods from Mexico, workers in some industries found their factories being relocated to Mexico to take advantage of lower labor costs. These workers experience what type of unemployment? Structural.
Automatic Fiscal Policy
An example of automatic fiscal policy is: Expenditure for unemployment compensation increasing as economic growth slows.
Tight Monetary Policy
An example of tight monetary policy is: The Fed selling government securities in the open market.
Labor Force Calculation
Assume that the population of an island is 275 million. If 210 million people are of working age, 135 million are employed, and 6 million are unemployed, what is the size of the labor force? 141 million.
Barter System
Barter requires the: Exchange of goods and services directly for other goods and services.
Federal Reserve and Commercial Banks
Because the Federal Reserve System is a central bank, it provides banking services to: Commercial banks.
Frictional Unemployment
Bill has graduated from Monroe College with a degree in Accounting. The College’s Career Services submitted his resume to several companies that Bill will visit in the next two weeks. Bill is considered: Frictionally unemployed.
Money Creation by Commercial Banks
Commercial banks create money through: Making loans.
Cyclical Unemployment
Cyclical unemployment occurs because of: Recessions in national economic activity.
Discouraged Workers and Unemployment
Discouraged workers: Are not considered unemployed since they are not currently seeking work.
Discretionary Fiscal Policy
Discretionary fiscal policy is defined as fiscal policy: Initiated by an act of Congress.
Unemployment During the Great Depression
During the Great Depression, the unemployment rate rose to a maximum of about: 25 percent.
Measuring Economic Growth
Economic growth is measured by the growth rate of: Real GDP.
Economics and Scarcity
Economics deals primarily with the concept of: Scarcity.
Assumptions in Economics
Economists make assumptions: To make the world easier to understand.
International Trade and Economic Growth
Encouraging international trade will: Speed economic growth as workers specialize and trade with others.
Labor Force Participation
Every summer Sarah works as a lifeguard at the YMCA. When summer ends, she returns to college as a full-time student. After summer ends, Sarah is: Not in the labor force.
Fiscal Policy
Fiscal policy refers to: The spending and taxing policies used by the government to influence the economy.
Definition of Money
For a commodity or token to be money, it must: Be accepted in exchange for all other goods and services.
Comparative Advantage
For Jill to have a comparative advantage in the production of pins means that, relative to Jack, with the same resources: Jill is relatively better at producing pins than at producing needles.
Frictional Unemployment
Frictional unemployment occurs because: Of normal turnover in the labor market.
Calculating Government Spending
GDP is 1240, Consumption is 900, gross private domestic investment is 150, exports are 50, and imports are 125. Depreciation is 40. Government spending (government consumption and gross investment) is: 265.
Financing Budget Deficits
How does the government finance its budget deficit? By issuing government securities (Treasury Bills and Bonds).
Impact of Unpaid Labor on GDP
If a wealthy woman marries her butler, quits paying him even if he still does the same job, and does not hire a new butler, then: GDP definitely decreases.
Nominal GDP and Production Changes
If both the production of goods and services increase and prices rise, then the change in nominal GDP: Definitely overstates the change in production.
Comparative Advantage and Opportunity Cost
If someone has a comparative advantage in producing cars: They can produce cars at a lower opportunity cost than other producers.
Normal Goods
If the demand for coffee decreases as income decreases, coffee is a(n): Normal good.
Unemployment Benefits and Labor Supply
If the government increases unemployment benefits, then the labor: Supply curve shifts leftward.
Open Market Operations and Interest Rates
If the supply of money increases as a result of an open market purchase of securities by the Fed, the interest rate will: Decrease.
Net Exports and Trade Balance
If the value of net exports is negative, then: Imports exceed exports.
Calculating Economic Growth Rate
In 1996, the real GDP in the United States was $6,500 billion. In 1997, the real GDP grew to $7,100 billion. What was the US economic growth rate from 1996 to 1997? 9.2%.
Defining Unemployment in the Current Population Survey
In the Current Population Survey, a person is considered unemployed if the person: Does not have a job and is actively looking for a job.
Macroeconomics Focus
Inflation and unemployment: Are the focus of macroeconomics.
Definition of Inflation
Inflation is an increase in: The overall price level.
Labor Force Participation Rate
Labor force participation: Indicates the willingness of working-age people to take jobs.
Components of M1
M1 equals currency plus demand deposits plus: Traveler’s checks plus other checkable deposits.
Functions of Money
Money is: A medium of exchange, a unit of account, and a store of value.
Open Market Operations
Open market operations are defined as: The buying and selling of securities by the Fed.
Definition of Part-Time Workers
Part-time workers are defined as people who are working: Less than 35 hours per week.
Supply-Side Policies
President Reagan often stated that he preferred supply-side policies. Which of the following federal government policies would be considered supply-side? Lower taxes.
Opportunity Cost
Refer to Figure 2.5 (not provided). The economy is currently at Point A. The opportunity cost of moving from Point A to Point B is the: Number of LCD televisions that must be forgone to produce additional plasma televisions.
Shifts in Demand
Refer to Figure 3.2 (not provided). Which of the following would be most likely to cause the demand for macaroni and cheese to shift from D1 to D0? An increase in income, assuming macaroni and cheese is a normal good.
Labor Force and Unemployment Rate (Refer to Table 1, not provided)
Refer to Table 1. The labor force is: The sum of employed and unemployed individuals.
Refer to Table 1. The unemployment rate is: The percentage of the labor force that is unemployed.
Excess Demand and Supply (Refer to Table 3.2, not provided)
Refer to Table 3.2. If the price per cheeseburger is $5, there is an excess: Demand for cheeseburgers.
Refer to Table 3.2. If the price per cheeseburger is $6, the price will: Increase because there is an excess demand in the market.
Refer to Table 3.2. If the price per cheeseburger is $9, there is a(n): Excess supply of cheeseburgers.
Refer to Table 3.2. In this market, there will be an excess demand of 500 cheeseburgers at a price of: The price where quantity demanded exceeds quantity supplied by 500.
Refer to Table 3.2. In this market, there will be an excess supply of 500 cheeseburgers at a price of: The price where quantity supplied exceeds quantity demanded by 500.
Refer to Table 3.2. This market will be in equilibrium if the price per cheeseburger is: The price where quantity demanded equals quantity supplied.
Stagflation
Stagflation is defined as a period when real GDP decreases and the price level increases.
The Federal Budget Process
The annual budget is decided upon by the: President of the United States and the United States Congress.
Federal Reserve Board of Governors
The Board of Governors of the Federal Reserve (FOMC) is: A seven-member board, each one serving a 14-year term.
Opportunity Cost
The concept of opportunity cost: Can be applied to the analysis of any decision-making process.
The Discount Rate
The discount rate is: The interest rate the Fed charges on loans it makes to banks.
The discount rate is the: Interest rate that banks must pay when they borrow reserves from the Fed.
Federal Budget Surplus
The federal government has a budget surplus when: Tax receipts exceed government spending.
Federal Reserve System Structure
The Federal Reserve is organized into: 12 districts, dividing up the United States.
Functions of Money
The functions of money are: Medium of exchange, unit of account, and store of value.
Labor Force
The labor force is defined as: The sum of the employed and the unemployed.
Labor Force Participation Rate
The labor force participation rate indicates: The willingness of working-age people to take jobs.
Circular Flow Diagram
The main point to draw from the circular-flow diagram is that: Every dollar of expenditure is also a dollar of income.
Money Supply and Open Market Operations
The money supply increases immediately when the Fed: Buys bonds from the public.
The Fed’s Most Important Function
The most important function of the Fed is to: Regulate the money supply.
Natural Unemployment Rate
The natural unemployment rate is the unemployment rate that exists when there is no: Cyclical unemployment.
Impact of Rising Input Costs on Supply
The price of hard drives used in the manufacturing of laptop computers has risen. This will lead to: A decrease in the supply of laptop computers.
Production
The process by which resources are transformed into useful forms is: Production.
Regulation of the Money Supply
The Federal Reserve System regulates the quantity of money in the United States.
Real and Nominal Interest Rates
The real interest rate is 4%. Inflation is expected to run at 10% during 2008. During 2008, the market interest rate is 14%. If during 2008, the actual inflation rate is 4%, borrowers lose.
Reserve Requirement
The reserve requirement is the stipulation that: Banks must keep a minimum percentage of deposits available for withdrawals.
The Study of Economics
The study of economics: Is a way of analyzing decision-making processes caused by scarcity.
Federal Reserve Policy Tools
The three main policy tools the Federal Reserve System uses to influence the interest rate are setting the: Discount rate, open market operations, and setting the required reserve ratio.
Gross Domestic Product (GDP)
The total market value of all final goods and services produced within a given period of time by factors of production located within a country is: Gross Domestic Product.
Cyclical Unemployment
The type of unemployment that arises from a decrease in real GDP is called: Cyclical unemployment.
Fiat Money
The word “fiat” is: Used to describe today’s money because it is money set by law.
Working-Age Population
The working-age population includes: Employed and unemployed people over the age of 16.
Federal Funds Rate and Open Market Operations
To change the federal funds rate, the Fed: Uses open market operations to change the quantity of money.
Ceteris Paribus Assumption
To help unscramble cause and effect, economists: Must use the ceteris paribus assumption.
Labor Force, Unemployment Rate, and Working-Age Population (Refer to Table Above, not provided)
Using the table above, the number of people in the labor force is: The sum of employed and unemployed individuals million.
Using the table above, the unemployment rate is: The percentage of the labor force that is unemployed %.
Using the table above, the working-age population is: The total number of people over the age of 16 who are able to work million.
BLS Treatment of Incarcerated Individuals
When calculating the unemployment rate, the BLS counts those over 16 and in jail as: Institutionalized and therefore not in the working-age population.
Fiscal Policy and Inflationary Gaps
When the economy faces an inflationary gap, an appropriate fiscal policy is to: Decrease government expenditures.
Full Employment
When the economy is at full employment: Real GDP is equal to potential GDP.
Federal Funds Rate and Inflation
When the Fed worries about inflation, it raises the federal funds rate and, in the short run, raises the real interest rate.
Balanced Budget
When tax revenues are equal to government spending, the situation is referred to as: A balanced budget.
Benefits of Trade
When two people trade: They both expect to be better off by the exchange.
Store of Value
Which of the following best illustrates the concept of a store of value? You keep 6 ounces of gold in your safe-deposit box at the bank for emergencies.
FOMC Decisions and the New York Fed
Which of the following Federal Reserve banks carries out the decisions of the FOMC? The New York Federal Reserve Bank.
Sequence of Events During a Recession
Which of the following is a correct sequence of events during a recession? Unemployment rises, income falls, tax revenues fall, unemployment benefits rise, and the budget deficit rises.
Bank Liabilities
Which of the following is a liability to a bank? Customer deposits.
Positive Statements in Economics
Which of the following is a positive statement? The $7.25 minimum wage affects a firm’s hiring decisions.
Undesirable Economic Outcomes
Which of the following is not a desirable feature in the economy? Rapid increase in the general price level.
Factors of Production
Which of the following is not a factor of production? Money.
Components of GDP
Which of the following is part of GDP? Government purchases.
Calculating Unemployment Rate
Yorktown has a labor force of 80,000. There are 100,000 people over the age of 16 who are able to work. It also has an employment level of 60,000. What is the unemployment rate in Yorktown? 25%.