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Economics Semester Exam Study Guide

Study guide for Economics Semester Exam.
What is the fundamental problem that economics tries to solve?
In what market do individuals earn income?
Factor markets
What are the characteristics of a free enterprise system?
Consumers and businesses make the FOR WHOM, WHAT and HOW decisions
What is the chief disadvantage of a sole proprietorship?
Unlimited liability
What is a multinational corporation?
Corporation that has manufacturing or service operations in a number of different countries
What is Microeconomics?
Deals with behavior and decision making by small units such as individuals and firms.
What is Macroeconomics?
Deals with the economy as a whole and decision making by large units such as government or unions.
What does the demand curve illustrate?
The quantity demanded at each and every possible price that might prevail in the market at a given time.
What is inelastic?
Percentage change in the independent variable causes a less than proportionate change in the dependent variable
What is elastic?
Percentage change in the independent variable causes a more than proportionate change in the dependent variable
What is unit elastic demand?
Change in the independent variable causes a proportional change of the dependent variable
In a market economy a low price signals what to producers?
Low prices are bad for the producers because they are seeking a profit
In a market economy a low price signals what to consumers?
Low prices are good for the consumers, who are seeking good deals to save money.
When does a surplus occur?
When quantity supplied is greater than quantity demanded.
What does laissez-faire mean?
Government should not interfere with business activity.
What is perfect competition?
Large number of well informed independent buyers and sellers who exchange identical products
What is monopolistic competition?
Market structure having all conditions of pure competition except for identical products
What is a monopoly?
A single producer (able to charger whatever price they choose)
What is an oligopoly?
A few large sellers dominate and have the ability to affect prices in the industry.
What happens when labor and management decides to go into arbitration?
They agree to place a dispute before a 3rd party. Whatever decision is decided has already been accepted by the 2 parties (binding settlement)
What does the traditional theory of wages state?
Supply and demand for a workers skills and services determine the wage or salary.
What is the single most important source of revenue for national government?
What is proportional tax?
Tax percentage is the same regardless of the level of income
What is a progressive tax?
Tax percentage increases as the level of income increases .
What is a regressive tax?
Tax percentage decreases as the level of income decreases.
What is demand?
Combination of desire, ability, and willingness to buy a product.
What is supply?
Schedule of quantities offered for sale at all possible prices in the market.
What is marginal cost?
Extra cost of producing one additional unit of production.
What is factors of production?
Productive resources that make up the four categories of land, capital, labor, and entrepreneurship.
What is equilibrium price?
Price where quantity supplied equals quantity demanded.
What is union shop?
Workers must join a union after being hired.
What is corporation?
Businesses organization recognized by law as a separate by law as a separate legal entity with all the responsibilities of an individual.
What is the substitution effect?
Portion of a change in the quantity demanded due to a change in relative price of the product.
What is opportunity cost?
Cost of the next best alternative use of money, time, or resources when one choice is made rather than another.
What is an oligopoly?
Market structure in which a few large sellers dominate and have the ability to affect prices in the industry
What is a command economy?
Economic system characterized by a central authority that makes most of the major economical decisions.
What is supply elasticity?
Responsiveness of quantity supplied to a change in price.
What are the benefits of a flat tax?
Simplicity it offers to the taxpayers.

Flat tax closes or minimizes most tax loopholes

Reduce the need for tax accountants, tax preparers, and even large portions of the IRS
What is skilled labor?
Workers who can operate complex equipment and require little supervision.
What is unskilled labor?
Workers not trained to operate specialized machines and equipment.
What is professional labor?
Workers with a high level of professional and managerial skills.
Who initiates the budget of the Federal Government?
The President
What is the advantage of buying a mutual fund for a small investor?
Mutual funds all people to play the market without risking all they have in one or few companies
What does the foreign sector of the economy represent?
The difference between the dollar value of goods sent abroad and the dollar value of goods purchased from abroad (x-m)
What are the economic characteristics of a depression?
Large number of people out of work

Acute shortages

Excess capacity in manufacturing plants.
What are some examples of automatic stabilizers in our country?
Unemployment Insurance

Federal Entitlement Programs

Progressive Income Tax
Why is a market basket used in the economy?
Representative selection of commonly purchased goods and services
What percentage of the nation's wealth does the wealthiest 20% of the population control?
What does does the Fed use to conduct monetary policy in the U.S.?
Reserve requirement
Open market operations
Discount rate
Margin requirements
Moral Suasion
Selective credit controls
What is Fiscal Policy?
Use of government spending and revenue collection measures to influence the economy
What reasons do protectionists cite to justify high tariffs?
National Defense
Promoting Infant Industries
Protecting Domestic Jobs
Keeping money at home
Helping the balance of payments
What name would we give the American economy today?
Mixed Economy
Why is the most favored nation clause important to foreign countries?
What are the characteristics of communism?
Central planning authority sets prices

Movement of resources and labor is strictly controlled

Central planning authority makes all decisions

States own most major factors of production.

No private property rights

Individual risk taking is forbidden

State officials answer the WHAT, HOW, and FOR WHOM to produce
What is trust funds?
Special account used to hold revenues designated for a specific expenditure such as social security, Medicare, or highways.
What is incidence of tax?
Final burden of a tax.
What is municipal bond?
Bond, often tax exempt, issued by state and local governments known as munis.
What is federal budget?
Annual plan outlining proposed expenditures and anticipated revenues.
What is creditor?
Person or institution to whom money is owed
What is crowding out effect?
Higher than normal interest rates and diminished access to financial capital faced by private investors when government increases its borrowing in financial markets
What is benefit principle of taxation?
Belief that taxes should be paid according to benefits received regardless of income.
What is signaling theory?
Theory that employers are willing to pay more for people with certificates, diplomas, degrees, and other indicates of superior ability
What is cyclical unemployment?
Unemployment directly related to swings in the business cycle
What is real GDP?
Gross domestic product after adjustments for inflation. Same as GDP in constant dollars.
What is current GDP?
Gross domestic product measured in current prices unadjusted for inflation
What is wage-price controls?
Policies and regulations making it illegal for firms to give raises or raise prices
What is aggregate demand?
The total quantity of goods and services demanded at different price levels
What is aggregate supply?
The total value of goods and services that all firms would produce in a specified period of time at various price levels
What is expansion?
Period of growth of real gross domestic product (GDP) recovery from recession
What is contraction?
Period of failing of the GDP
What is supply-side economics?
Policies designed to increase aggregate supply or shift the aggregate supply curve to the right
What is price index?
Statistical series used to measure changes in the price level over time
What is tariff?
Tax placed on an imported product.
What is free trade area?
Group of countries that have agreed to reduce trade barriers among themselves, but lack a common tariff barrier for nonmembers
What is foreign exchange rate?
Price of one country's currency in terms of another currency
What is collateral?
Property or other security used to guarantee repayment of a loan.
What is protective tariff?
Tax on an imported product designed to protect less efficient domestic producers
What is revenue tariff?
Tax placed on imported goods to raise revenue
What is developing country?
Country whose average per capita income if only a fraction of that in more industrialized countries.
What is trade deficit?
Balance of payments outcome when spending an imports exceeds revenues received from exports.