Economics Study Guide Final Examination

Cooper Krings

ATM- An electronic device that allows bank customers to make transactions without seeing a
bank officer.

BARTER- The exchange of goods and services without using money.

COMMODITY MONEY- Money that has intrinsic value based on the material from which it is
made.

CURRENCY- Paper money and coins.

FIAT MONEY-Money that has no tangible backing but is declared by the government and
accepted by citizens to have worth.

FRACTIONAL RESERVE BANKING-banking practice in which banks keep only a fraction

of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder,
while maintaining the simultaneous obligation to redeem all these deposits upon demand

MONEY- Anything that people will accept in exchange for goods and services.

NEAR MONEY-Savings accounts and other similar time deposits that can be converted into
cash relatively easily.

REPRESENTATIVE MONEY- Paper money that is backed by something tangible.

STORE OF VALUE- Something that holds its value over time.

DEBIT CARD-A card one can use like an ATM card to withdraw cash or like a check to make
purchases.

CAPITAL GAINS-The profit made from the sale of securities.

COMMON STOCK-A share of ownership in a corporation that gives the holder voting rights
and a share of profits

PREFERRED STOCK- A share of ownership in a corporation giving the holder a share of

profits but, in general, no voting rights.

EQUITY

BOND- A contract a corporation issues that promises to repay borrowed money, plus interest, on
a fixed schedule.

STOCK- Shares of ownership in a corporation.

BULL MARKET- A situation in which stock market prices rise steadily over time.
BEAR MARKET- A situation in which stock market prices decline steadily over time.

EXCHANGE RATE- Determined by standard of value per country.

DIVERSIFICATION- The practice of distributing investments among different financial assets

to maximize return and limit risk.

MATURITY- The date at which a bond is due to be repaid.

MONEY MARKET- A market in which short-term financial assets are bought and sold.

PRIMARY MARKET-A market for buying newly created financial assets directly from the
issuing entity.

SECONDARY MARKET- A market in which financial assets are resold.

RISK- The possibility for loss on an investment.

RETURN- The profit or loss made on an investment.

BID- What buyer is willing to pay.

ASK-What seller is willing to sell stock for.

PINK SHEET- an electronic quotation system operated by Pink OTC Markets that displays
quotes from broker-dealers for many over-the-counter (OTC) securities. These securities tend to
be inactively traded stocks, including penny stocks and those with a narrow geographic interest.
Market makers and other brokers can use Pink Quote to publish their bid and ask quotation prices

NASDAQ- (Stock exchange) It is the largest electronic screen-based equity securities trading
market in the United States. With approximately 3,700 companies and corporations, it has more
trading volume per hour than any other stock exchange in the world

WALL STREET- Home of the New York Stock Exchange (NYSE, NASDAQ, AMEX,
NYMEX, NYBOT)

ARBITRAGE-the practice of taking advantage of a price differential between two or more

markets: striking a combination of matching deals that capitalize upon the imbalance, the profit
being the difference between the market prices

OPTION- A contract giving an investor the right to buy or sell stock at a future date at present
price.

FUTURE- A contract to buy or sell stock on a specific future date at present price.

OTC- (over-the-counter)- to trade financial instruments such as stocks, bonds, commodities or

derivatives directly between two parties. It is contrasted with exchange trading, which occurs via
facilities constructed for the purpose of trading (i.e., exchanges), such as futures exchanges or
stock exchange

ROUND TRIP EXECUTION- the buying and selling of stocks.

AGGREGATE SUPPLY- The sum of all of the supply in the economy.

AGGREGATE DEMAND- The sum of all the demand in the economy.

BUSINESS CYCLE- the series of growing and shrinking periods of economic activity,
measured by increases or decreases in real GDP.

LEADING INDICATORS- measures of economic performance that usually change before real
GDP changes.

LAGGING INDICATORS- measures of economic performance that usually change after real
GDP changes.

COINCIDENT INDICATORS- measures of economic performance that usually change at the

same time as real GDP changes.

MACRO EQUIIBRIUM- is achieved when aggregate supply = aggregate demand.

DEPRESSION- an extended period of high unemployment and reduced business activity.

RECESSION- a prolonged economic contraction lasting two or more quarters *6 months or

more).

TROUGH- The final phase of the business cycle—the point at which real GDP and employment
stop declining.

DPI- Personal income minus taxes

GNP-The market value of all final goods and services produced by a country. GNP = GDP plus
income of goods and services produced by U.S. companies and citizens in foreign countries (but
minus the income foreign companies and citizens earn here)

REAL GDP- states GDP corrected for changes in prices from year to year.

NOMINAL GDP- states GDP in terms of the current value of goods and services.

STAGFLATION describes periods during which prices rise at the same time that there is a
slowdown in business activity.

UNDERGROUND ECONOMY- describes market activities that go unreported because they are
illegal or because those involved want to avoid taxation.

PRODUCTIVITY- ratio of the amount of output produced to the amount of input.

PER CAPITA GDP- real GDP divided by total population.

PAR VALUE- the amount a bond issuer must pay the buyer at maturity.

YIELD- the annual rate of return on a bond.

COUPON RATE- the interest rate a bond holder receives every year until maturity.
POVERTY- the situation in which a person’s income and resrouces do not allow him or her to
achieve a minimum standard of living.

POVERTY THRESHOLD- The official minimum income needed to pay for the basic expenses
of living.

SEASONAL UNEMPLOYMENT- employment linked to seasonal work.

Demand for some jobs changes dramatically from season to season

Construction work falls in winter

Tourism peaks at certain times of year; varies by region

Migrant farm work drops off in inter; migrant families suffer.

CYCLICAL UNEMPLOYMENT- unemployment caused by the part of the business cycle

with decreased economic activity.

Employers lay off workers during low points in business cycle.

During recession hard to find new jobs since demand for labor drops

Unemployment period varies by type; average relatively short

Over one third of unemployed find work in five weeks or less.

FRICITONAL UNEMPLOYMENT- the temporary unemployment of workers moving from

one job to another.

Frictional unemployment not a threat to economic stability. Includes:

Childrearing parents returning to work.

New college graduates looking for first job.

Experienced workers who want to switch jobs.

Reflects workers’ freedom to find best job for them at highest wage.

STRUCTURAL UNEMPLOYMENT- unemployment that exists when the available jobs to not
match the skills of available workers.

As businesses become more efficient, require fewer workers

New technologies replace workers or require them to retrain

New industries required specialized education do not employ unskilled

Change in consumer demand can shift types of workers needed.

Offshore outsourcing sometimes leaves people out of work.

LORENZ CURVE- curve that shows the degree of income inequality in a nation.

WELFARE- government economic and social programs that provide assistance to the needy.

Some criticized for wasting government funds, harming recipients.

WORKFARE- a program that requires welfare recipients to do some kind of work in return for
their benefits.

INFLATION- a sustained rise in the general price level, or a sustained fall in the purchasing
power of money.

CONSUMER PRICE INDEX (CPI)- a measure of changes in the prices of goods and services
that consumers commonly purchase. (ex. bird seed, milk, epicac, castor oil).

PRODUCER PRICE INDEX (PPI)- a measure of changes in wholesale prices.

HYPERINFLATION- a rapid, uncontrolled rate of inflation in excess of 50 percent.

DEFLATION- a decrease in the general price level.

DEMAND-PULL INFLATION- a condition that occurs when total demand rises faster than the
production of goods and services.

COST-PUSH INFLATION- a situation in which increases in production costs push up prices.

WAGE-PRICE SPIRAL- a cycle that begins with increased wages, which lead to higher
production costs, which in turn results in higher prices, which result in demands for even higher
wages.

KEYNESIAN ECONOMICS- The idea, first advanced by John Maynard Keynes, that the
government needs to stimulate aggregate demand in times of recession. (Demand Side
Economics)

LAFFER CURVE- A graph that illustrates how tax cuts affect tax revenues and economic
growth.

DEMAND SIDE ECONOMICS- Focuses on stimulating consumption to increase business

output, increased government spending results in more money in people’s hands, people spend
more, and increased demand causes business to increase output. (Keynesian Economics)

SUPPLY SIDE ECONOMICS- Focuses on stimulating production to increase business output,

lower taxes + decreased government spending + deregulation = greater incentives for business
investment, businesses expand and create jobs; people work, save, and invest more, and greater
investment and productivity cause businesses to increase output.

BUDGET SURPLUS- A situation in which the government takes in more than it spends.

NATIONAL DEBT- The total amount of money that the federal government owes.

TREASURY BILLS- A short-term bond that matures in less than one year.
TREASURY NOTES- An intermediate-term bond that matures in between two and ten years.

TREASURY BONDS- A long-term bond that matures in 30 years.

CROWDING OUT EFFECT- A situation in which the government outbids private bond
interest rates to gain loanable funds.

FISCAL POLICY- The federal government’s use of taxing and spending to affect the economy.

EXPANSIONARY POLICY- A plan to increase aggregate demand and stimulate a weak

economy.

CONTRACTIONARY POLICY- A plan to reduce aggregate demand and slow down the
economy during a period of too-rapid economic expansion.

DISCRETIONARY POLICY- Actions taken by the federal government by choice to correct

economic instability.

AUTOMATIC STABILIZERS- A feature of fiscal policy that works automatically to steady

the economy. (Personal Income Tax, Unemployment Insurance, Corporate Income Taxes)

SPENDING MULTIPLIER EFFECT- A situation in which small change in spending

eventually results in a much larger change in GDP.
 Things to Know

1. Calculate Equity and Interest on Loans.

What is the total interest you pay on the first three months?
100,000 Loan, 5%, $5,000 Payment
1,000 * .05 = 5,000
5,000/12= $416.67 Interest
1,000-416.67=583.33

99,416.67 * .05 = 4,970.83

4970.83/12= 414.24 = Interest 2nd month
1,000-414.24 = $585.76

Start-> 100,000
After 1st Month -> 99,416.66 ← 100,000-583.22
After 2nd Month -> 98,830.91 ← 99,416.67= 585.76
4. Stocks v. bonds

Bonds: Bonds are like loans, in the sense that you are essentially lending your money to a
corporation, company, or government of your choosing. In return they promise interest
on the money you give them in the form of a bond. Bonds are MUCH safer than stocks
because you are guaranteed intrest.

Stocks: common, preferred

5. Calculate GDP per capita and discuss what it measures.

Read GDP divided by total population. Calculates average cost of living for one person.

6) Business Cycle

• Expansion- economic growth- GDP increases. Unemployment down, resources become

scarce, prices rise.

• Peak- real GDP is the highest.

• Contraction- recession, depression, stagflation

 • Trough-The final phase of the business cycle—the point at which real GDP and
employment stop declining.

7. Describe what brought about the Great Depression and Compare to today.

During the 1920s, people were spending much money to pay for vacations, household
items, etc. However, because people were taking out loans to do so, the banks eventually
ran out of money (bank runs occurred). Today, in the crisis of credit, people are doing the
same thing with real estate. Too many people have borrowed money to buy and renovate
homes, and they have not been able to sell them.

8. Be able to explain buying short and selling long.

Short selling is borrowing stocks from a third party when they are high, and then selling
them on the market once they drop. Then you buy the same stocks back when the price is
low. You return the stocks and keep the profit. If the stocks go up, then you loose that
money because you have to buy back the stocks for more than you sold the stocks for.

10. Using Malthus Theory determine the expected food population ration after a given
number of years

Human population will always grow exponentially, while food will only expand
geometrically ex: 2:1 ; 2:1; 3:8; 1:1; 5:8; 3:8.

11. List factors that lead to increased or decreased productivity.

• Quality of Labor- more educated, healthier workforce tends to be more productive.

• Technological Innovation- new machines and technologies help countries (especially
during the industrial revolution) produce more output from the same amount of
inputs.
• Energy Costs- gas, electricity, and other fuels power the technologies that increase
productivity. When energy costs rise3, the tools become more expensive, and
productivity declines.
• Financial Markets- The easier it is for funds to flow to where they are needed, the
more productive the economy becomes. Banks, stock markets, and similar
institutions allow a country’s funds to be put to their best use.
12. Macroeconomic Equilibrium

Macroeconomic equilibrium is the point where the quality of aggregate demand equals
the quantity of aggregate supply (p.361)

13. 3 Effects of Inflation

Decreasing Value of the Dollar; Increasing Interest Rates; Decreasing Real Returns on
Savings (p.401)

14. Use Formula from page 398 to calculate inflation.

Step 1: Calculate each year’s consumer price index

Step 2: Use the CPI to calculate the rate of inflation

15. 4 Factors that Affect Poverty

• Education
• Discrimination
• Demographic Trends
• Changes in the Labor Force.

16. 4 Types of Unemployment

See Above

17. Steps in a Wage-Price Spiral

A wage-price spiral is a cycle that begins with increased wages, which lead to higher
production costs, which in turn result in demand for even higher wages.

Steps: Workers receive a wage increase; The wage increase deives up the production
costs; Workers demand a wage increase to pay higher prices. (p.400)
18. List 4 Actions in the Last 25 Years to Control Deficits and Debt

• Gramm-Rudman Hollings – Elimnate the deficit by 1991

• Budget Enforcment Act – Ensure new laws do not increase deficit
• Omnibus Budget Reconciliation Act – Cut deficit by $500 billion over 5 years
• Balanced Budget Agreement – Balance the budget by 2002

19. 4 Causes of Deficit Spending

• National Emergencies
• Need for public goods and services
• Stabilization of the economy
• Role of government in society.

20. Using Keynesian Theory Explain the Spending Multiplier Effect (Chart Page 455).

Two aspects of Keynes' model had implications for policy:

First, there is the "Keynesian multiplier", first developed by Richard F. Kahn in

1931. Exogenous increases in spending, such as an increase in government outlays,
increases total spending by a multiple of that increase. A government could stimulate a
great deal of new production with a modest outlay if:

1. The people who receive this money then spend most on consumption goods
and save the rest.
2. This extra spending allows businesses to hire more people and pay them,
which in turn allows a further increase consumer spending.

This process continues. At each step, the increase in spending is smaller than in
the previous step, so that the multiplier process tapers off and allows the attainment of
equilibrium. This story is modified and moderated if we move beyond a "closed
economy" and bring in the role of taxation: the rise in imports and tax payments at each
step reduces the amount of induced consumer spending and the size of the multiplier
effect.

Second, Keynes re-analyzed the effect of the interest rate on investment. In the
classical model, the supply of funds (saving) determined the amount of fixed business
investment. That is, since all savings was placed in banks, and all business investors in
 need of borrowed funds went to banks, the amount of savings determined the amount that
was available to invest. To Keynes, the amount of investment was determined
independently by long-term profit expectations and, to a lesser extent, the interest rate.
The latter opens the possibility of regulating the economy through money supply
changes, via monetary policy. Under conditions such as the Great Depression, Keynes
argued that this approach would be relatively ineffective compared to fiscal policy. But
during more "normal" times, monetary expansion can stimulate the economy.

21. 5 Limitations of Fiscal Policy

• Policy lags
• Timing issues
• Rational expectations theory
• Political issues
• Regional issues.

22. Choose a Country and Discuss It’s Economics: Russia

DP Per Capita: $6,877

Leader: Dmitriy Medvedev (President); Vladimir Putin (Prime Minister)

Type of Government: Federation

Top Export: Oil

Currency: Rouble
 Questions I Missed

As supply increases, prices go down, and real GDP:

Increases

When did the great Depression Begin?

3rd quarter of 1929

Which of these is the usual measure of a nation’s standard of living?

Real GDP per capita

What are the different parts of a business cycle?

Expansion, Peak, Contraction and Trough

List 4 factors that lead to increased or decreased productivity.

Quality of Workforce, Cost of Energy, Availability of Technology, Financial Markets

How is net national product calculated?

By subtracting depreciation of capital stock from the GNP

Which of the following eras experienced deflation?

1930’s United States

The refund of payroll taxes that the working poor receive is called the

Earned Income Credit

People who lose their jobs though no fault of their own are eligible to receive

Unemployment Insurance

Inflation originated on the supply side of an economy.

Demand-pull inflation

How many items typically are in a US Market Basket

200

Which of the following would not benefit from Medicare?

All Could Benefit

Which of the following best explains why all financial institutions offer different interest rates on
their savings and loan instruments

___
List all of the Federal Reserve Banks.

Boston

New York

Philadelphia

Cleveland

Richmound

Atlanta

Chicago

St. louis

Minneapolis

Kansas City

Dallas

San Francisco

Washington D.C.