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ECON MIDTERM REVIEW: here you go you slackers
Terms in this set (89)
Explain why scarcity faces all people at all times.
Because they do not have unlimited time. Scarcity means that people do not and cannot have enough income and time to satisfy their every want
Differentiate between microeconomics and macroeconomics
Microeconomics: deals with behavior and decision making by small units
Example: individuals and firms
Macroeconomics: deals with the economy as a whole and decision making by large units
List and summarize the four types of resources (factors of production).
Land: natural resources that exist without human intervention
Labor: the work people do
Capital: the manufactured goods used to make other goods and produce other services. Examples: machines, buildings, and tools
Entrepreneurship: the ability of individuals to start new businesses, introduce new products and processes, and improve management technique
Explain the relationship between trade-offs and opportunity cost.
Trade-off: exchanging one thing for another
Opportunity Cost: the value of the next best alternative that had to be given up to do that action that was chosen
The cost of a trade-off is the opportunity cost.
Describe how society's trade-offs can be shown on a production possibilities curve and how/why curves may shift.
Production possibilities curve shows the maximum combinations of goods and services that can be produced from a fixed amount of resources in a period of time
This curve reveals the trade-offs and opportunity costs involved in each decision.
The curve shifts with the amount of each thing produced.
Identify the major types of economic systems.
Traditional System: system where economic decisions are based on traditions(customs+beliefs) handed down from generation to generation
Command System: system where the government controls all factors of production and makes decisions about their use
Market System: system where individuals own the factors of production and freely make economic decisions
Mixed System: system that combines characteristics of multiple types of economy. Most countries around the world have a mixed system including the US
List and describe the six characteristics of free enterprise/ American system. (this shit is important, memorize it)
Limited Role of Government: the government limits its role in the economy
Freedom of Enterprise: individuals are free to own and control the factors of production
Freedom of Choice: buyers make the decisions about what should be produced
Profit Incentive: the desire to make a profit. Motivates entrepreneurs to produce new goods and services
Competition: the rivalry among producers of similar products to win more business by offering lower prices or better quality
Private Property: whatever is owned by individuals rather than by government
Describe the major aims of a market economy.
Freedom: allow each member of society to make choices
Economic efficiency: using our limited resources wisely to obtain the greatest benefits possible
Equity: the attempt to balance an economic policy so that everyone benefits fairly
Security: protection against risks beyond our control. Social programs
Stability: seeks to reduce extreme ups and downs in the standard of living
Growth: expansion of the economy to produce more goods, jobs, and wealth
Evaluate Adam Smith's laws of a market economy.
got no idea about this question. Look for it in chapter 2 somewhere. Adam smith can suck my ass
Identify the role of the consumer.
A person's role as a consumer depends on their ability to consume, which depends on income.
Income can be disposable and discretionary.
Disposable Income: the money a person has after all taxes have been paid. Spent on necessities
Discretionary: leftover income after all necessities have been bought
Evaluate the trade-offs when gathering information.
Trade-offs: time and effort
The value of your time and effort spent gathering information should not be greater than the value you receive from making the best choice of product for yourself.
list 5 consumer rights (this shit is important, memorize it)
1. The right to safety
2. The right to be informed
3. The right to choose
4. The right to be heard
5. The right to redress
Explain how credit is used to purchase consumer durables.
Purchase On an installment pan. The length of the installment period is important to determine the monthly payments and the total amount of interests
Describe how consumers decide to use credit.
The decision to use credit involves whether the satisfaction the borrower gets from the purchase is greater than the costs of the interest payments. Comparing costs and benefits
list the 6 types of lending institutions (this shit is important, memorize it)
Savings and Loan Associations
Consumer finance companies
difference between debit and credit cards
Debit cards come directly out of your account.
Credit cards use borrowed money to purchase goods and then are paid back over time with added interest
Explain the four factors that determine a person's credit rating.
History of credit use
Capacity to pay
differences between secured and unsecured loans
Secured loans: a loan that is backed with collateral (ie: a car)
Unsecured loans: when financial institutions lend money on a person's reputation and their ability to pay
State how the Equal Credit Opportunity Act affects consumer credit.
States that those lending credit can't deny you based on you race, religion, national origin, gender, marital status, or age (or if your income comes from public assistance benefits)
Compare passbook, statement, money market savings accounts and time deposits.
I could not find this one, try to look somewhere for it in ch. 6
Explain the function and importance of the FDIC.
It keeps the stock market from crashing by protecting many types of deposits. It also protects funds in regular checking accounts
differences between stocks and bonds
Stocks: companies sell stock to fund expanding their business. If you own a share of stock, you own a part of that company. The companies pay back dividends when the company make a profit. risky
Bonds: certificate issued by a company in exchange for borrowed funds. That company then pays a stated rate of interest over a stated period of time and then repays the borrowed amount in full at the end. The amount paid at the end also includes interest. Buying a bond does not make you part owner of the company
Explain why "hot tips" will not help an investor to get rich quick in the stock market.
It is far more successful and better to do our own research and analysis than to rely on someone else's predictions.
Aint no sparknotes on life homie do your own research
Describe three kinds of retirement investments. (Important, memorize this shit)
401k: a portion of your paycheck is withheld and the company matches the amount and invests in stocks or bonds. Don't pay tax on the amount you put in
Keogh plan: allows those who are self employed to set aside up to 25% of their income and deduct that amount from their yearly taxable income
Individual Retirement Account(IRA): private retirement plan that allows individuals or married couples to save a certain amount of untaxed earnings per year with the interest being tax-deferred
Identify the factors when deciding how to invest your money.
Amount of risk, values, spreading out investments
Describe the relationships that a demand curve shows (Law of Demand).
The relationship between quantity demanded and price is INVERSE. As the price of a good or service goes u, the quantity demanded goes down
Describe how the price elasticity of demand affects how much the price for a given product can vary. (important, memorize this shit)
Elastic demand: situation where a given rise or fall in a product's price greatly affects the amount that people are willing to buy
Inelastic demand: situation where a product's price change has little impact on the quantity demanded by consumers
What determines elastic demand: the existence of substitutes, the percentage of a person's total budget devoted to the purchase of that good, and the time consumers are given to adjust to a change in price
Discuss the determinants of demand.
Changes in population: when population increase, the opportunity to buy and sell increases
Changes in income; the demand for most goods and services depends on income
Changes in tastes and preferences: refer to what people like and choose
Substitutes: goods used in plane of one another
Complementary goods: products that are generally bought and sold together
Explain how the incentive of greater profit affects supply.
The higher the price of a good, the greater the incentive to produce more. they are DIRECTLY related
Describe the relationships that the supply curve shows (Law of Supply)
As the price of a good rises, the quantity supplied rises. DIRECT RELATIONSHIP
List the four determinants of supply and describe how they change supply.
Price of Inputs: if the price of inputs needed to make a product drops, there is an increase in supply
Number of firms: as more firms enter the industry, greater quantities of their products or service are supplied
Taxes: if the government imposes more taxes on the production of certain items, businesses will supply less
Technology: improvements in technology increase supply
Explain how shortages and surpluses affect price.
Shortage: Cause prices to rise. occurs when the quantity demanded is greater than the quantity supplied
Surplus: price drops. Situation where quantity supplied is greater than quantity demanded at the current price
Describe how shifts in equilibrium price occur.
Equilibrium price: the price at which the amount producers are willing to supply is equal to the amount consumers are willing to buy
Shifts occur when:
the demand shifts left or right due to the determinants of demand
The demand shifts left or right due to the determinants of supply
Discuss how the forces underlying supply and demand affect prices.
It all depends on the determinants of supply and demand and how they affect the price
Describe the advantages and disadvantages of a sole proprietorship
You get all the money
Fewer government regulations
Management decisions are quicker
Personal income taxes are paid on the profits
Personal satisfaction is high
Unlimited liability- Requirement that an owner is personally responsible for all losses and debts of a business
You have to do all the work yourself
You get all the losses
Limited life span
Financial growth is difficult
List the advantages and disadvantages of a partnership
You do not have to do all the work
More efficient management than sole proprietorship
Have certain people working in their area of expertise
Personal income taxes are paid on the profits
The combination of financial capital allows easier growth
You do not get all the money
Decisions are made slower
Limited life span
Disagreements over management
Less personal satisfaction
List the advantages and Disadvantages of corporations
Unlimited life span
Stockholders do not have to devote time into the business to make money
Financial growth is easier: Issue stocks or bonds
Taxed by federal and state governments and taxed again when dividends report them as income
Stockholders have no say in day to day operations
Decision making can be slow
Explain what type of business are involved in franchises
Franchise: a contract in which a company sells the right to use the name and sell the products of its business
Help with training and building
Advertising campaigns by the corporation
(Think of someone owning a McDonalds. While they do not own the actual company, they own the property that holds the larger business.)
List the five conditions of perfect competition.
Nearly identical products
Easy entry and exit
Easily obtainable information
List the four characteristics of a pure monopoly. (Risk is a better board game no cap...)
A single seller
Barriers to entry
Almost complete control over market price
List and describe the types of legal monopolies.
Natural monopolies: where the government grants exclusive rights to companies to provide things like utilities. A larger firm can usually use its factors of production more efficiently
Geographic monopoly: isolation causing monopoly
Technological monopoly: a government patent gives you exclusive rights to that product
Government monopoly: the government gives itself exclusive right sot thing such as roads
Describe the five characteristics of an oligopoly.
Oligopoly: industry dominated by a few suppliers who exercise some control over price
Domination by a few sellers: several large firms are responsible for 70 to 80 percent of the market
Barriers to entry: capital costs are high and it is difficult for new companies to enter major markets
Identical or slightly different products
Nonprice competition: advertising emphasizes minor difference and attempts to build customer loyalty
Interdependence: any change on the part of one firm will cause a reaction on the part of the their firms in the oligopoly
Explain the five characteristics of monopolistic competition.
Monopolistic competition: market situation where a large number of sellers offer similar but slightly different products and in which each has some control over price
Numerous sellers: no single seller or small group dominates the market
Relatively easy entry: entry into the market is easier but cost of advertising is higher
Differentiated products: each supplier sells a slightly different product to attract consumers
Nonprice competition: businesses compete by using product differentiation and by advertising
Some control over price: by building a loyal customer base through product differentiation, each firm has some control over the price it charges
Explain the difference between types of mergers.
Merger: occurs when two or more companies become one corporation
Conglomerate merger: large corporation made up of smaller corporations dealing in unrelated business
Vertical merger: firms of the same thing (like oil) bring different steps of manufacturing together
Horizontal merger: when businesses providing the same product combine into one
List and describe at least four major federal regulatory agencies.
Federal Trade Commission (FTC): Regulates product warranties, unfair methods of competition, and advertising fraud
Food and Drug Administration (FDA): regulates purity and safety of foods, drugs, and cosmetics
Securities and Exchange Commission (SEC): regulates the sale of stocks, bonds, and other investments
Environmental protection agency (EPA): develops and enforces environmental standards for air, water, and toxic waste
Define GDP and understand what is counted and what is not counted and why
GPD (Gross Domestic Product): Total dollar value of all final goods and services produced in a nation in a single year
Only count the final goods and services so that double counting might not occur
Don't count things being resold
List the four categories of GDP in terms of types of goods produced
Consumer Sector (C)
Investment Sector (I)
Government Sector (G)
Net Exports (X)
I don't know this one, look somewhere in ch. 13 for it
Compare the three measurements of income: National, Personal, and Disposable
National Income: Total income earned by everyone in the economy
Personal Income: Total income that individuals receive before personal taxes are paid
Disposable Income: Income remaining for people to spend or save after all taxes have been paid
Describe the relationship between inflation and the purchasing power of money
Inflation: Prolonged rise in the general price level of final goods and services
Purchasing Power of Money: The real goods and services that money can buy; determines the value of money
Make the distinction between two measures of inflation, the consumer price index (CPI), and the producer price (PPI) hehe pp...
Consumer Price Index: A statistical measure of the average of prices of a specified set of goods and services used to compile the consumer price index
Producer price index: measure of the change in price over time that U.S. producers charge for their goods and services
Graph Aggregate Demand and Aggregate Supply and explain changes in equilibrium
Aggregate demand: the total of all planned expenditures in the entire economy. As price level increases, quantity supplied decreases
Aggregate supply: real domestic output of producers based on the rise and fall of the price level. As price level increases, quantity supplied increases
Look in ch.13 to learn how to graph this bs
List the phases of a typical business cycle.
List the potential causes of fluctuations in the business cycle.
Changing policies of the government
Physiological reactions to certain events
List the three Functions and type of money
Medium of Exchange - Use of money for exchange for goods or services
Unit of Accounting - Use of money as a yardstick for comparing the values of goods and services in relation to one another
Store of Value - Use of money to store purchasing power for later use
Name six Characteristics that money should have
Durable - Withstand wear & tear of being passed from person to person
Portable - Easy to carry
Divisible - Must be easily divided into small parts so purchasing can be made
State in Value - Money must be stable in value
Scarce - Money must be scarce
Accepted - Must be accepted as a medium of exchange in payment for debts
Explain the difference between money and near moneys
Near Money - Assets, like saving accounts, that can be turned into money relatively easily and without the risk of loss of value. VERY LIQUID
Money - Coins, currency notes and demand deposits of the banks
List the components of the M2 definition of the money supply
M1 = Currency + Demand Deposits
M2 = M1 + Near Moneys
Contrast loose money and tight money policies
Loose Money - Monetary policy that makes credit inexpensive and abundant, possibly leading to inflation
Tight Money - Monetary policy that makes credit expensive and in short supply in an effort to slow the economy
Describe fractional reserve banking and money expansion in the banking system
Fractional Reserve Banking - System in which only a fraction of the deposits in a bank is kept on hand, or in reserve; the remainder is available to lend
Money Expansion - It is the multiplier that allows the bank see how much money they are able to lend
Describe the purpose of the Federal Reserve System
The Fed is responsible for monetary policy in the United States
Monetary Policy - Policy that involves changing the rate of growth of the supply of money in circulation in order to affect the cost and availability of credit
Fed's primary responsibility is regulating the money supply
Identify and explain the three tools of the Fed.
(VERY IMPORTANT, THIS IS PART OF THE ESSAY, MEMORIZE THIS IF YOU MEMORIZE NOTHING ELSE)
Open market operations
Setting the discount rate
Setting the reserve requirements
The Federal Reserve and the Money Supply
a. Fractional Reserve Banking: system in which only a fraction of the deposits in a bank is kept on had, or in reserve; the remainder is left to lend
b. Money Multiplier
Total Increase in the Money Supply = (1/Reserve ratio) X initial deposit
Explain why government has grown rapidly.
The nation became richer, especially in the late 1960s and early 1970s, people demanded more government service to even out certain income inequities.
Identify public goods, merit goods, and demerit goods
Public goods - goods or services that can be used by many individuals at the same time without reducing the benefit each person receives. Example: property rights, courts
Merit goods - socially desirable by government leaders. Example: museums, ballets, and classical music concerts
Demerit Goods - goods that government officials have deemed socially undesirable. Example: tobacco (rip juul) , alcohol, and gambling
Describe the 2 main areas through which government redistributes income.
Social insurance programs - government programs that pay benefits to retired and disabled workers, their families, and the unemployed
Public-assistance programs - government programs that make payments to citizens based on need
List 4 ways government regulates economic activity
Supervising Labor and management relations
Regulating negative by-products of the production process
Name 2 ways government promotes economic stability
Distinguish between the annual budget deficit and the national debt
Budget deficit - situation when the amount of government spending exceeds its receipts during the fiscal year
National debt - total amount of outstanding debt for the federal government
Give an example of a tax levied according to each of the 2 principles of taxation
I don't know this one, look somewhere in chapter 16
List the 3 forms of taxation according to their effect on taxpayers
Proportional Tax: takes the same percentage of all incomes. As incomes rise, the tax rises
Progressive Tax: tax that takes a larger percentage of higher income salaries
Regressive Tax: tax that takes a higher percentage of lower incomes than of higher incomes
Identify and explain the four types of unemployment.
Cyclical-associated with ups and downs of the business cycle (company loses money so people get laid off)
Structural- Caused by changes in the economy such as new technology
Frictional- temporary unemployment between jobs (usually does not last long)
Seasonal- related to weather patterns and seasons
Distinguish between the causes of demand-pull inflation and cost-push inflation.
Demand Pull: Results from excessive business and consumer demand. If the money supply grows too rapidly, individuals will spend more money on limited goods and services. Higher demand will cause prices to rise
Cost-push: When businesses have to pay higher wages, their costs increase. To maintain their profit levels, businesses must raise the prices of the goods and services they produce
Explain how a Keynesian would solve a recession.
By introducing a fiscal policy where the government would implement taxes and more jobs over a long period of time to steadily increase the economy
Indicate how fiscal policy might reduce inflation.
It can reduce taxes. If taxes are reduced on investments, then it allows them to deduct from the taxes of the capital growth which can expand production and hire more workers
Explain the differences between Monetarist and Keynesian theories
Monetarists believe in the government having less control while keeping individuals in control of their money while Keynesian believe that government should be in more control of our money and the economy
chapter 14 formulas
(btw for inflation, it is (difference OVER base year total) times 100
GDP = Consumer Goods + Business Goods + Government Goods + Net Exports
b. GDP = Wages + Interest + Rents + Profits
c. NDP = GDP - Depreciation
d. PI = National Income - (Undistributed
Corporate Profits + Corporate Taxes +
Social Security Contributions) +
e. DI = PI - Personal Taxes
f. Inflation = Difference x 100
Base Year Total
Chapter 15 Formulas
M1= Currency + Demand Deposits
M2= M1+ Near Moneys
Chapter 16 Formulas
(one over reserve ratio) times initial deposit
Total increase in money supply= (1/reserve ratio) X initial deposit
HOW TO STUDY FOR THE ESSAY
Buckle up, this is a shit ton of info
7 Areas to write about for the essay:
a )Money Supply
b) Business cycle
d) Aggregate demand for consumer goods
e) Aggregate supply for consumer goods
For each 7: 1) Define the term
2) State what will happen
3) Why it will happen
Example problem: Based on the increase of Unemployment rate, the discount rate is lowered at the same time the gov. buys additional security
Break this problem down step by step.
We know the economy is in recession due to the increase in job loss and the lowering of the discount rate. Also, the problem states the GOVERNMENT is buying something, which indicates Monetary Policy
Step A (1 out of 7) Money Supply
1) The money supply is the total amount of money circulating in the economy at a given time
2) If the Fed lowers discount rates and buys bonds (securities), the money supply will grow
3) It will grow because banks will have more money and it will stimulate borrowing+money creation throughout fractional reserve banking
Step B (2 out of 7) Business Cycle
1) the Business cycle refers to the ups and downs that the economy takes over time as it moves through expansion, peak, contraction, and troughs
2) if the fed decreases discount rates and buys bonds (Securities), the business cycle will move into expansion
3) It will do this because the money supply will increase which will stimulate spending and then production
step c ( 3 out of 7) Unemployment
1) The unemployment rate is the percentage of people that are without a job but are ACTIVELY SEARCHING FOR ONE
2) When the Fed lowers discount rate and buys bonds, the unemployment rate will go down
3) it will go down because there is more money in circulation which leads to more spending, therefore companies are in need of more workers thus hiring more people
step d (4 out of 7) Aggregate demand
1) refers to the total amount of spending in the economy
2) if the fed lowers discount rate and buys bonds, agg. demand will increase
3) it will increase because the expansion of the money supply leads to more borrowing+spending
step e (5 out of 7) Aggregate supply
1) Refers to the total output (production) of all goods and services in the economy at a given time
2) agg. supply will increase
3) it will increase due to that an increase in spending will lead to companies producing more goods and services
step f (6 out of 7) Inflation
1) prolonged rise in the price level of goods
2) The actions taken by the Fed will increase the inflation rate
3) Because the money supply increases, it may cause more money in circulation than needed, causing too much spending in the short term
step g (7 out of 7) Gross domestic Product
1) Refers to the total amount of final goods and services produced in the nation within a year
2) The actions of the fed will increase GDP
3) Because as spending increases, companies will hire more workers and increase output of goods and services
REMEMBER: This was for recession.
If the problem on the final is for inflation, do the opposite of all the terms. (i.e. if it says increase, then say decrease).
good luck bois
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Economics: Principles in Action
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