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Economics Final Exam

Terms in this set (105)

What is physical capital and what are examples?
Building such as a factory
What is the difference between shortages and scarcity?
A shortage can be long-term or temporary but scarcity always exists.
What are factors of production?
Land labor capital
What is an extreprenuer?
A person who takes financial risks to start a business.
What is a "guns or butter" decision?
A government must decide to produce more or less military or consumer goods.
What is opportunity cost?
The most desirable option given up as a result of a decision.
What is making a decision "at the margin"?
Deciding to do something in increments (one more or one less for example)
Why does every decision include trade-offs?
Resources are limited.
What is the production possibilities frontier?
Line on a production possibilities curve showing the relative amounts of two types of goods produced using all resources.
What is the law of increasing costs?
As production shifts from one item to another the cost of producing the second item increase.
What is an efficient economy?
An economy that is producing the maximum amount of goods and services.
What are traditional economies?
Small, close communities that avoid change and new technology.
Who owns factors of production?
households
What is the "invisible hand" that regulates the market economy?
Competition and self-interest
How did heavy industry in the Soviet Union avoid the competition that drives a free market economy?
The government controlled prices, wages, and products to discourage competition.
What was the trade-off of the Soviet Union's focus on heavy industry?
Fewer consumer goods were produced.
Describe the U.S. economy.
A mixed economy with a free market system and some limited government intervention.
What is the main differenceW between the economies of China and North Korea?
China is privatizing businesses.
What are characteristics of a centrally planned economy?
The central government decides what to produce, how to produce them, and who will consumer them.
How do consumers make their desires known to businesses in a free market economy?
Buying or not buying products.
How are savers and borrowers linked through financial institutions?
Savers deposit money that is used to loan money to borrowers.
What is considered a normal rate of unemployment when the economy is working properly?
4 to 6 percent
How could the Chinese economy be characterized?
Mixed but leaning towards centrally planned
What basic principles are fundamental to American free enterprise?
Open opportunity, private property, contracts, voluntary exchange
What is profit motive?
Incentive to make money
What are the government's 3 goals for promoting economic strength?
High employment, steady growth, and stability.
What may the government do to try to promote economic growth?
Increase spending
What is the rule for determining whether a good is a public good or not?
Whether the benefits to society are greater than total cost.
What is the government's role in controlling externalities in the American economy?
Tries to encourage positive and limit negative externalities
If a student volunteers at a nursing home after school, what would possible negative externalities be?
A student might be unable to work at her part-time job that afternoon.
What are examples of in-kind benefits?
Food giveaways, food stamps, subsidized housing, and legal aid.
What government programs provide health insurance for the elderly, the poor, and the disabled?
Medicare and Medicaid
When did the nation's welfare system develop?
During the great depression
What is the difference between a business cycles and the day-to-day fluctuations of the stock market?
A business cycle consists of prolonged fluctuations rather than day-to-day fluctuations.
What is the law of demand?
Price goes up, demand goes down.
What is necessary for there to be demand for a good or service?
A person must be willing and able to buy the goods at a given price.
What does the substitution effect say happens when the price of a good or service rises?
Consumers will buy less of a good and ore of a cheaper substitute when the price of the first good rises.
How can expectations about the suture change consumer behavior?
Demand for a good will go up if its price is expected to rise.
What can cause an entire demand curve to shift?
A change in demographics.
How does elasticity affect a company's pricing policy?
If demand is elastic at the current price, the company knows that an increase in price would reduce total revenues.
What does elasticity of demand measure?
How buyers will cut back or increase their demand when price rises or falls.
How does a person's perception of a good as a necessity or a tuxery affect his or her purchase of it?
A good that is percieved as a necessity will be purchased even if the price rises.
What efect does the availability of many substitutes have on the elsticity of demand for a good?
Demand would be elstic.
Name goods with elstic demand? With inelstic?
Candy bars, solft drink, steak. Inelstic-- medicine, contact lenses, glasses
What is ceteris paribus?
"all other things held constant"
What are inferior goods?
Goods for which a consumer will buy less of when income rises.
What are demographics?
Infromation such as ages, income level, and occupation of a particular market
What are complements?
items that typically are bought and used together such a cemar and memory card
Where along a demand curve would you show a decrease in quantity demanded where only price was a factor?
On the curve
What is elasticity of less than one called?
inelastic
What is the biggest factor impacting elasticity of supply?
time
Which way does a supply curve always run?
It always rises from left to right.
When the price of a product goes down, what happens to producers?
Some produce less, others leave the market.
How does a manufacturer set total output to maximize profit?
They set production at the point where marginal revenue equals marginal cost.
When would it make sense for a factory that is losing money to remain in business?
If the total revenue from the goods being produced exceeds the operating cost
How is total cost determined?
Fixed costs + variable costs
How does specialization affect production?
It makes workers more efficient.
What are characteristics of sole proprieterships?
They are owned and managed by an individual. Sole proprietorships may have problems borrowing money from a bank.
What are characteristics of partnerships? general? limited liability?
Two people sharing a business and profits. Each general partner has unlimited liability for the obligations of the business. Each limited partner has liability limited to his capitol contribution to the business.
What are advantages of each? disadvantages?
Shared responsibility, more assets; disadvantages: more risk, partner might not have the same ideas as you.
What are adavantages of a franchise? Disadvantages?
You don't have to come up with everything yourself/ more profit; disadvantages: no creative freedom, and you have to follow strict rules.
What percentage of income is earned by corporations?
60%
Define horizontal merger.
Firms are involved in producing the same good or service.
What does limited liability mean for stockholders?
Stockholders can only lose the money they invested.
What does limited liability mean for stockholders?
Stockholders can only lose the money they invested.
What are characteristics of money?
Acceptability, portability, divisibility, uniformity, durability, and limited supply.
What do the characteristics mean?
That money is acceptable anywhere in the US, it is also easily transferable, it is divisible by 1,5,10,20,50,100, it is uniform, it is durable enough to survive a washing machine, and the supply is limited
What is the difference between representative money and fiat money?
representative money can be converted into fsolver or gold; fiat money cannot.
Why would commodity money be hard to use in most societies?
It is not ofetn portable, durable, or divisible.
What did the Federalists favor economically in the early U.S.?
a centralized banking system.
How was the U.S. Banking system reformed during the depression era?
The bamking system was taken off the gold standard.
What was one disadvantage of the Gold Standard?
It can slow economic growth by limiting the amount ofmeony in circukation.
What is the difference between how simple inetrest and compound interest are paid?
Simple interest is on principal only; compound interest is on principal only; compound interest is on both principal and interest
What is a credit union?
A cooperative lending institution for a particular group.
How does a bank make most of its profit on its business?
By paying out less in interest than it earns in interest on loans.
What is an important characteristic of the M1 money supply?
liquidity
What is a prospectus?
An investment report for potential investors
Why is a certificate of deposit considered such a safe investment?
It is guaranteed by the federal government.
What is a mutual fund?
A device for pooling the savings of many investors and investing in a variaty of ways.
Why m you choose an investment with high risk as opposed tor risk. one?
For a higher return
Why would investors buy a junk bond?
They pay a potentially higher level of interest than other bonds.
What is the difference between a primary and a secondary market?
Primary market assets can be redeemed only by the original investor; ;second market assets can be resold.
What is usually the relationship between a bond's rating and the interest rate a company pays to buyers?
The higher the rating, the lower the rate.
Rank the types of bonds according to risk.
Savings, treasury bonds, municipal bonds, corporate bonds
What is gained and what is lost when switching from a short-term to a long-term CD?
Gained interest. lost liquidity
What does the New York Stock Exchange do?
Arranges stock and bond trading of many large and established companies.
What were the outcomes of the Great Crash of 1929?
Ordinary people were afraid to invest in the stock market
What happened to stock prices in the Great Crash?
Prices fell
What are the characteristics of a certificate of deposit?
Safe, lower interest rates, low liquidity
How do savings bonds differ from most other bonds?
The buyer does not receive periodic interest payments.
What is a municipal bond?
bonds issued by local and state governments
Why don't government planners try to end seasonal unemployment?
It is a natural part of a healthy economy
What does "full employment" mean?
There is no cynical unemployment
Why does unemployment rise when the economy slows?
Decreased demand for goods causes demand for labor to go down.
What are the causes of inflation?
Producers raise prices to meet increased costs
How does inflation impact real returns?
Your money buys less.
What are the causes poverty in the U.S.?
lack of education
How has income distribution in the u.S. changed over the last 20 years?
It had become less even.
What is underemployment?
A person with a Ph.D. working in a low-skilled job.
What gives the U.S. government authority to collect taxes?
The U.S. Constitution
What is a proportional tax?
The percentage of tax remains the same.
Why is a sales tax a regressive tax?
It is a higher percentage of income if you earn less money.
What are characteristics of a good tax?
Simplicity and equity.
Why does the government tax alcohol and tobacco?
to discourage use of these products.
What is the difference between an estate tax and a gift tax?
An estate tax is a tax on the money and property of a person who has died. A gift tax is a tax on money or property worth over $12,000 that one living person gives to another.
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