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CLEP Macro Economics

Economic efficiency full employment and full

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Economic Efficiency –Full Employment and Full Production must be achieved to be in the state of economic efficiency occurs when goods and services are made and consumed at the best levels for the society. Nothing more can be achieved with the resources available Important social goal, leads to economic growth and stability Production proceeds at the lowest possible per-unit cost o However, because goods and services are scarce, full employment and full production economy cannot have an unlimited output of goods and services. Choices must be made Principle of Efficiency – efficiency leads to economic prosperity for all, core economic principle Socially Optimal Quantity - the amount of goods that result in the greatest economic surplus Menu Costs – cost associated with changing prices Cost such as those associated with changing signs and menus Menu costs help stabilize prices Wealth Effect – increase in spending due to perceived increase in wealth People spend more when they are RICHER or if they perceive themselves as richer Short-Run Equilibrium Output – the level of output where output equals planned aggregate expenditure Prevails when prices are predetermined Short-Run Equilibrium - When the inflation rate is equal to past expectations and pricing and output is equal to the level that is consistent to the inflation rate If there is a gap in the output, the inflation rate will adjust to fill the gap Autonomous Expenditure – portion of planned aggregate expenditure that is not based on output Does not change with output levels Autonomous expenditure and induced expenditure combine to equal the aggregate expenditure Inertia – slow change in inflation from year to year in industrialized nations Long-Run Aggregate Supply Line (LRAS) – a vertical line on the aggregate-supply-aggregate demand diagram that represents an economy’s potential output Short-Run Aggregate Supply Line (SRAS) – a horizontal line on the aggregate-supply-aggregate demand diagram that represents inflation Inflation that is a result of consumer expectation and history On the demand curve, the PRICE of the item is placed on the vertical axis of the graph As the price of an item increases, demand for the item decreases, resulting in less sold (output)
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On the demand curve, the QUANTITY of output for the item is placed on the horizontal axis of the graph The difference between a change in demand and a change in the quantity demanded is that a change in the quantity demanded is directly related to a change in the products price Right Shift – in the demand curve indicates that demand has increased Market Equilibrium – occurs when the supply curve and the demand curve intersect Is achieved when both producers and consumers are satisfied with their quantities at market price (M1) - Money Classification - includes the total of all physical currency (or money that can be quickly turned into cash) including traveler’s checks and in-demand transaction accounts (checking accounts and similar accounts) Does not include money in the U.S. Treasury, bank vaults, or in the Federal Reserve Banks
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Economic Efficiency Full Employment and Full Production...

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