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37 terms

AP Economics (Chapters 21-24 of 36)

STUDY
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budget constraint
the limit on the consumption bundles that a consumer can afford
Giffen good
a good for which an increase in the price raises the quantity demanded
income effect
the change in consumption that results when a price change moves the consumer to a higher or lower indifference curve
indifference curve
a curve that shows consumption bundles that give the consumer the same level of satisfaction
inferior good
a good for which an increase in income reduces the quantity demanded
marginal rate of substitution
the rate at which a consumer is willing to trade one good for another
normal good
a good for which an increase in income raises the quantity demanded
perfect complements
two goods with right-angle indifference curves
perfect substitutes
two goods with straight-line indifference curves
substitution effect
the change in consumption that results when a price change moves the consumer along a given indifference curve to a point with a new marginal rate of substitution
adverse selection
the tendency for the mix of unobserved attributes to become undesirable from the standpoint of an uninformed party
agent
a person who is performing an act for another person, called the principal
Arrow's impossibility theorem
a mathematical result showing that, under certain assumed conditions, there is no scheme for aggregating individual preferences into a valid set of social preferences
behavioral economics
the subfield of economics that integrates the insights of psychology
Condorcet paradox
the failure of majority rule to produce transitive preferences for society
median voter theorem
a mathematical result showing that if voters are choosing a point along a line and each voter wants the point closest to his most preferred point, then majority rule will pick the most preferred point of the median voter
moral hazard
the tendency of a person who is imperfectly monitored to engage in dishonest or otherwise undesirable behavior
political economy
the study of government using the analytic methods of economics
principal
a person for whom another person, called the agent, is performing some act
screening
an action taken by an uninformed party to induce an informed party to reveal information
signaling
an action taken by an informed party to reveal private information to an uninformed party
consumption
spending by households on goods and services, with the exception of purchases of new housing
GDP deflator
a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
government purchases
spending on goods and services by local, state, and federal governments
gross domestic product (GDP)
the market value of all final goods and services produced within a country in a given period of time
investment
spending on capital equipment, inventories, and structures, including household purchases of new housing
macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
microeconomics
the study of how households and firms make decisions and how they interact in markets
net exports
spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)
nominal GDP
the production of goods and services valued at current prices
real GDP
the production of goods and services valued at constant prices
consumer price index (CPI)
a measure of the overall cost of the goods and services bought by a typical consumer
indexation
the automatic correction by law or contract of a dollar amount for the effects of inflation
inflation rate
the percentage change in the price index from the preceding period
nominal interest rate
the interest rate as usually reported without a correction for the effects of inflation
producer price index
a measure of the cost of a basket of goods and services bought by firms
real interest rate
the interest rate corrected for the effects of inflation