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IB Econ Macro from Economics:Principles and Policy
IB Econ SL flashcards on macro economics
55
Economics
11th Grade
01/07/2010

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Term
Define unemployment rate
Definition
the number of unemployed people expressed as a percentage of the labor force
Term
describe one type of market failure
Definition
if a monopoly exists, that would be a market failure because there is a lack of business competition, undermining the "economic freedom" goal
Term
how does our govt attempt to fix a market failure involving prices
Definition
by placing price floors or ceilings
Term
Draw a diagram to show a price floor in the "real world". describe a negative effect of this price floor
Definition
it would be a supply & demand graph of min. wage. The price floor would cause business input costs to go up, perhaps causing them to layoff certain workers
Term
List and define the US economic goals.
Definition
1)price stability--keeping inflation low (usually under 3% a year)
2)economic freedom--people can control their own resources (money, usually)
3)full employment--everyone who wants to work has a job (in the US, full employment means the unemployment rate is < 5%)
4)economic growth--people have a better standard of living over time
5)economic security--there is a safety net for those in need
6)economic equity--"fair" distribution of resources
Term
what is the GDP formula?
Definition
I+G+C+(X-M)
Term
if nominal GDP were to increase this year vs last year, will our standard of living necessarily increase? explain.
Definition
not necessarily because nominal GDP has not adjusted for inflation. it could be that the new GDP is only higher because prices are higher
Term
what are two common causes of increased AD?
Definition
increased govt. spending or increased consumer spending
Term
From a Neo-Classical perspective, describe a situation where an increase in AD would NOT cause inflation.
Definition
if AD and LRAS both moved
Term
What 2 things would a Keynesian suggest to expand/improve our economy.
Definition
increased govt. spending
monetary policy + fiscal policy
Term
Full employment may occur @ Yf. What does Yf represent in macro terms?
Definition
that our economy is @ full capacity
Term
what is a possible negative effect of deflation
Definition
people stop buying things because prices will get lower and businesses will fail because of this lack of demand
Term
what would cause a LRAS increase? what effect would this have on the economy if the AD didn't move.
Definition
efficiency of economy has gone up
unemployment increase
prices decrease
Term
What are 2 Neo-classical solutions to a high unemployment rate?
Definition
1) move LRAS by decreasing input costs for businesses
2)remove welfare, etc. to encourage people to get jobs instead of mooching off the govt
Term
if our country is experiencing disinflation and frictional unemployment (ceteris peribus), what should the Fed do? why?
Definition
nothing. absolutely diddly-squat. disinflation is good, it meets the goal of price stability. also, frictional unemployment is always present in any economy.
Term
in general, what do "leading economic indicators" (LEI) forecast?
Definition
tell us what the economy will be like in the near future
Term
market failure
Definition
when a market allowed to operate freely has negative consequences
Term
price floor
Definition
min. set price usually set by govt.
e.g. min wage, milk
Term
price ceiling
Definition
max. set price, usually set by govt.
e.g. rent control
Term
positive economics
Definition
statements of fact, data from reliable sources
e.g. "Federal min wage was $5.15/hr from '97 to '07"
Term
normative economics
Definition
opinion of interpretation of information/data
e.g. "the min. wage should be increased to help poor."
Term
economic system
Definition
a set of rules that govern the production & distribution of goods/services
Term
What are the 3 basic economic questions
Definition
1. Who should get what is produces, and how much?
2. What and how much should be produced?
3. How should goods/services be produced?
Term
what are the components/requirements of a capitalist/market economy?
Definition
_laissez-faire--the govt does not make econ decisions
_free enterprise--freedom to run a business as you see fit
_private property--you can own/use property
_pi (profit) motive--people can try to make money
_competition--allowed to compete to make $$
_voluntary exchange--no one can force you to buy anything
_available credit (loans)--people must be able to loan money-helps people take advantage of other aspects
*most important aspect of a capitalist economy
Term
what are the components/requirements of a command/control (commuist) economy?
Definition
_govt answers all basic economic questions
Term
monetary policy
Definition
govt. controlling $$ supply to fight inflation & unemployment
Term
who is in charge of monetary policy?
Definition
the federal reserve
Term
loose money
Definition
more $$ put into supply
aka "easy money"
Term
tight money
Definition
taking $ out of supply
Term
Go through the process of loosening $
Definition
1) Fed uses tool to lower interest rates
2) banks are able to offer lower rates on loans
3) more people are able to get a loan
4) people have more $ and spend it
5) the demand curve shifts to the right
6) unemployment decreases, prices increase
Term
Go through the process of tightening $
Definition
1) Fed uses tool to raise interest rates
2)banks raise interest rates
3)fewer people are going to borrow $
4) people have less $ to spend
5) demand curve shifts to the left
6) unemployment goes up, prices tend to stay about the same (disinflation)
*prices tend to be "sticky" because people are not easily willing to charge less
Term
what are 2 tools the Fed uses to raise/lower interest rates?
Definition
discount rate
reserve requirement
Term
GDP
Definition
total spending in a nation per year
Term
what are the Leading Economic Indicators (LEIs)?
Definition
1) S&P 500
2)initial unemployment claims--first time people go apply for unemployment benefits
3)avg. weekly work hours
4) # of new applications for building permits
Term
lagging economic indicators
Definition
data changes after overall economy has changed--tells us how econ has been for past 6 months
1) unemployment rate
2)consumer price index (CPI)
stagflation--inflation & unemployment are high (very rare!)
Term
credit
Definition
euphemism for loan
Term
APR
Definition
annual percentage rate--yearly interest rate
Term
finance charge
Definition
interest added on to your loan balance
Term
how can you avoid paying interest?
Definition
by paying off balance every month
Term
what do coincident economic indicators show/describe?
Definition
what the economy is doing currently
Term
what are the 4 coincident economic indicators?
Definition
1.GDP 2.personal income 3.industrial production (what factories are making) 4.retail sales
Term
what is a fico score? What are its possible values
Definition
measures liklihood a borrower will repay a loan/between 300 and 850
Term
what are good things to borrow money for?
Definition
anything that can help you make more $ than you'd pay in finance charges:/home/education
Term
what are some risky things to borrow money for?
Definition
starting a business (most die w/in 2 yrs)/investing on margin
Term
mortgage
Definition
homeloan
Term
home equity
Definition
the amount of a house the home owner owns
Term
refinance
Definition
a new mortgage replaces your previous one
Term
monopoly
Definition
1 firm/Debeer's diamonds/very high price control/very very high barriers for new firms
Term
oligopoly
Definition
a few firms/Coke&Pepsi/possible price control/comewhat(possibly) high barriers for new firms
Term
monopolistic competition
Definition
numerous firms/fast food restaurants/some price control/some barriers for new firms
Term
perfect competition
Definition
infinite # of firms/lemonade stands in summertime/none/none
Term
what is the purpose of the FTC?
Definition
the Federal Trade Commission keeps business competition (secures economic goal of price stability)
Term
How does the FTC operate?
Definition
a board of 5 people, businesses must ask their permission before mergering or "buying out"/can impose conditions to merger
Term
cartel
Definition
when 2 companies conspire to "fix" prices--usually by limiting supply
Term
anti-trust laws
Definition
illegalizes cartels and trusts
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