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Governments role is restricted to protect private

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Government’s role is restricted to protect private property, so owners of resources have the ability to exploit them, and providing a legal framework in which the free market can function effectively
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Businesses – sole proprietorships’, partnerships and corporations are private producing units of the economy Sole proprietorship – business entity which legally has no separate existence from its owner Partnership – unincorporated entity that has shared ownership Corporation – legal entity that has received a charter form a state or federal government Adam Smith – known as father of modern economics, believe that markets free of government intervention benefit society as a whole. Wrote two books: The Theory of Moral Sentiments and The Wealth of Nations Known for his Laissez Faire Economic Theory – a belief in free market that is absent of government intervention in the economy “Invisible Hand” – refers to the way in which people act according to their self interests and that economic problems can correct themselves without government intervention - From his book The Wealth of Nations Aggregate Supply (AS) Curve – a graph or illustration that depicts the number of goods that will sell at a given price. If consumer expectations are anchored, inflation will remain low, and any shock to it will return rapidly o Factors that cause the (AS) curve to shift to the left Decrease in available resources Decrease in technology and productivity o Factors that cause the (AS) curve to shift to the right Increase in available resources Increase in technology and productivity Aggregate Supply Shock - is a large, unexpected change in the cost of resources force the Fed to choose between maintaining inflation or stabilizing output Aggregate supply shocks change an economy’s aggregate supply curve Increasing the supply of money in the economy will increase the nominal Gross Domestic Product (GDP) Greater money supply increases consumption and investment levels, which increases production Market Baskets – certain goods and services that are measured on an ongoing basis to measure inflation Inflation - the increase in the average level of prices of goods and service over time, refers to the change in buying power of money over time Unanticipated inflation: negatively effects: general uncertainty about the economy, unhealthy speculation, and investments that do not perm as well as anticipated Occurs when the economy’s output exceeds its potential GDP, then, without price or wage controls inflation will occur Inflation causes the economy to run less efficiently Annual percentage rate of change in price level reflected by price indexes (fixed “market baskets”) Inflation often rises before a recession ends High inflation rates reduce business investments o Tax cuts lose their incentive with high rates of inflation because the real value of $1000 tax cut
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