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Best describes personal disposable income

Income less than personal income taxes

Kara voluntarily quit her job as an insurance agent to return to school full-time to earn an MBA degree. With degree in hand she is now searching for a position in management. Kara presently is:

Frictionally Unemployed

Capital Stock

The maximum number of shares authorized under the terms of a corporation's articles of incorporation.

The income of households or individuals after taxes is called

Personal Disposable Income

Ways to calculate GDP: Expenditure Approach

-Personal Consumption (C) + Gross Private Domestic Investment (Ig) + Spending (G)+ Net Exports (Xn= Exports-Imports
- C + Ig + G + Xn

Net Exports

Exports - Imports

Most economists agree that the immediate cause of most business cycle variation is

An unexpected change in the level of total spending


Prices on average are rising

In comparing GDP data over a period of years, a difference between nominal and real GDP may arise because

The price level may change over time

In the resource market

Households sell resources to businesses

Economic systems differ according to which two main characteristics?

Who owns the factors of production, and the methods used to coordinate economic activity

GDP (Gross Domestic Product)

Market value of all final goods and services produced within the borders of a single country in a year

Characteristics of a Market System

- Freedom of Enterprise
- Competition in the product and resource market
- Private property

According to the Bureau of Labor Statistics, to be officially unemployed a person must:

Be in the labor force

A recession is defined as a period in which:

Real domestic output falls

Real GDP refers to:

GDP data that has been adjusted for changes in the price level

If intermediate goods and services were included in GDP:

GDP would be overstated

NFFI (Not Foreign Factor Income)

Measures US production abroad minus foreign production in the US

How will the market system accommodate change?

Prices and profits will be signals

How will the command system accommodate change?

Not very well

How will goods and services be produced in a market economy?

Labor and Capital


Work, manual, or physical work


The wealth, either money or property owned by a company or producer

How will goods and services be produced in a command economy?

Government will decide

Distinguishing factor in the market system

Wide-spread ownership of capital

GDP excludes:

The market value of unpaid work in the home

Frictional Unemployment

- Voluntary, in between jobs
- Historically 3%

Structural Unemployment

- Not voluntary, do not have skills necessary for employment, long term
- Historically 2%

Cyclical Unemployment

- Unemployed because economy is weak
- Historically 0% when economy is strong

Distinguishing feature in a command economy

Central planning

Firms are motivated to minimize production costs because:

Competitive pressures in the market will drive out higher-cost producers

Real GDP is:

The nominal value of all goods and services produced in the domestic economy corrected for inflation

GDP can be calculated by summing:

Consumption, Government Spending, Investments, and Net Exports

Transfer payments include:

- gifts
- social security benefits
- welfare assistance

A price index is:

A comparison of the current price of a market basket compared to a fixed reference point

In the circular flow model, the strength of the flow is the:

Strength of the economy

The economic function of profits and losses is to:

Signal that resources need to be reallocated

. The United States' economy is considered to be at full employment when:

About 4-5 percent of the labor force is unemployed

In national income accounting, consumption expenditures include:

Consumer durable goods, consumer non durable goods, and services

The phase of the business cycle in which real GDP is at a minimum is called:

The trough

In the simple circular flow model:

Businesses are sellers of final products

The value added of a firm is the market value of:

A firm's output - the value of the inputs bought from others

Transfer payments are:

Included in personal income

Demand pull-inflation:

Occurs when total spending in the economy is excessive

The U.S. public debt:

Consists of the historical accumulation of all Federal deficits and surpluses

If interest rates decrease, all else the same

Investment increase

In the Keynesian model tax cuts

Stimulate the economy by increasing consumer spending

The practical significance of the multiplier is that it:

Magnifies the initial changes in spending into larger changes in GDP.

The multiplier applies to:

Investments net exports, and government spending

In the late 1990s the U.S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the:

Wealth effect

Exports have the same effect on the current size of GDP as:


At the point where the consumption schedule intersects the 45-degree line:

Saving is zero

The multiplier is:


Marginal Propensity to Save

Increase in savings that results from an increase in income

Marginal Propensity to Consume

Increase in desire to consume that results from an increase in income

Interest on the public debt

Must be paid to avoid a default

A government may use a stimulus package to:

Calculate spending and hence employment

Other things equal, an increase in an economy's exports will:

increase its domestic aggregate expenditures and therefore increase its equilibrium GDP.

The largest part of the U.S. debt is held by

The U.S. public

Discretionary Spending

A spending category through which governments can spend through an appropriations bill.

Appropriations bill--> Discretionary spending

An act of a legislature authorizing money to be paid from the treasury for a specified use.

Significant contributor to the U.S. public debt?

- Recessions
- Increases in military spending
- Tax cuts and expenditure increases in the 1980s

The crowding out effect

The financing of a government deficit increases interest rates and, as a result, reduces investment spending.

The investment demand curve will shift to the right if:

Businesses become more optimistic about future business conditions

The equilibrium level of GDP

May be a recession

Keynes says an economy needs

Deficits during recessions and surpluses during inflations.

What do investment and government expenditures have in common?

Both injections to the circular flow

In an economy which trades with other economics, equilibrium GDP is determined at that point where:

S +imports + T = Ig + exports + G.

The best way to look at debts and deficit:

As a percent of GDP

The MPC is defined as

Change in consumption divided by change in income

The amount by which government spending is greater than tax revenues collected is the:

Budget Deficit

Investment spending in the United States tends to either increase or decrease from year to year because:

Changes in expected profits and changes in technology are different from year to year.

The intersection of the 45-degree line and the AE line shows

Equilibrium GDP

In the Keynesian model, an inflationary gap occurs if

Aggregate expenditures are too high

In a progressive tax system

Tax rates increase when income increases

The Treasury covers government budget deficits by:

Selling Treasury bonds inside and outside the United States

When the Federal Reserves increases the money supply

interest rates fall, business investment increases and GDP increases with a multiplier effect

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