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The consumer price index is used to

Turn dollar figures into meaningful measures of purchasing power

CPI (Consumer Price Index)

(Price # in basket) + (price # in basket)= total $$$

The largest category of goods and services in the CPI basket is


The introduction of the video cassette recorder in the 1970s exemplified a problem in measuring the cost of living, that problem is the problem is the problem of

Introduction of new goods

Real Interest Rate

Nominal Interest - Inflation Rate

Inflation Rate

(CPI in year 2 - CPI in year 1)/ CPI in year 1 X 100

Nominal Interest Rate

Interest rate as usually reported

The inputs into production of goods and services that are provided by nature, such as land, rivers, and mineral deposits are called

Natural resources

Stock of equipment and structures, used to produce goods and services

Physical capital

Knowledge and skills workers acquire through education, training, and experience

Human capital

What would increase productivity?

An increase in physical capital stock, human capital, or natural resources per worker

This declines as the quantity of the input increase. Input goes up, out goes down

Diminishing returns

When Chile experiences investment from abroad, it experiences, as a result

An increase in productivity

When a country saves a larger portion of its GDP than it did before, we will have

More capital and higher productivity

The primary economic function of the financial system is to

Match saving of one person with investment of another

The two most important financial intermediaries are

Banks and mutual funds

Other things the same, bonds are likely to have higher interest rates if they have

No tax exemptions and long terms

A mutual fund

Is an institution that sells shares to the public and uses the proceeds to buy a selection of various types of stocks, bonds, or both stocks and bonds

Income that households have left after paying for taxes and consumption

Private saving

Tax revenue that the government has left after paying for its spending

Public saving

Total income in the economy that remains after paying for consumption and government purchases

National saving

The sum of private saving and public saving must equal investment

For a closed economy

In the loanable funds model, an increase in an investment tax credit would create a

Shortage at the former equilibrium interest rate. This shortage would lead to a rise in the interest rate

In the first part of the decade that began in 2000, the US government went from a surplus to a deficit. Other things the same, this means the

Supply of loanable funds shifted to the left

Employed and unemployed are included in

The labor force

The labor force participation rate measures the percentage of

Total adult population that is in the labor force

Labor force participation rate formula

Labor force/ adult population X 100

Satchel loses his job and immediately begins looking for another. Other things the same, the unemployment rate

Increases and the labor force participation rate is unaffected

Unemployment rate formula

Number of unemployed/ labor force X 100

Frictional unemployment results from

Job searching, it is often thought to explain relatively short spells of unemployment

Structurally unemployed

Results from the number of job available in some labor markets, longer spells of unemployment, wages are for some reason set above the equilibrium level

Paying efficiency wages mean that wages are

Above equilibrium and profits are higher otherwise

Minimum wage laws and unions are similar to each other but different from efficiency wages in that minimum wage law and unions

Prevent firms from lowering wages in the presence of a surplus of workers

Efficiency wages

Above equilibrium wages paid by firms to increase worker productivity


Set of assets in economy, people regularly use, used to buy goods and services from other peopl

Three functions of money

Medium of exchange, unit of account, store of value


Ease with which an asset can be converted into the economy's medium of exchange

Intrinsic value

Item would have value even if it were not used as money

Fiat money

Money without intrinsic value, used as money because of government decree


Order or decree

Money stock

Amount of money circulating in the economy

Demand deposits

Balances in bank account


Paper bills or coins in the hands of the public

Federal reserve (FED)

The central bank of the US, purpose is to ensure the health of the nations banking system

Central bank

Institution designed to oversee the banking system, regulate the quantity of money in the economy

Money supply

Quantity of money available in the economy

Monetary policy

Setting of the money supply

Fractional reserve banking

Banks that hold only a fraction of deposits as reserves

Reserve requirement

Minimum amount of reserves that banks must hold, set by the fed

Increase in overall prices


Decrease in overall prices


Extraordinary high rate of inflation


Lowers the value of money


He quantity of money available in the economy determines the price level (the value of money) and growth rate in quantity of money available determines the inflation rate

Quantity theory of money

Variables measured in monetary units (dollar prices)

Nominal variables

Variables measured in physical units (relative prices, real wages, real interest rate)

Real variables

Theoretical separation of nominal and real variables

Classical dichtomy

Velocity of money

V= (price X real GDP)/ quantity of money
V= (P X Y) / M
Rate at which money changes hands

Quantity equation

-Quantity of money X velocity of money= P X Y
-Dollar value of the economy's output of goods and services (PXY)

Inflation that exceeds more than 50% per month


Price level increases more than a hundred fold over the course of a year


Real interest rate

= nominal interest rate - inflation rate

Nominal interest rate

Real interest rate + inflation

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