IB Econ Macro from Economics:Principles and Policy Flashcards

Terms Definitions
Define unemployment rate
the number of unemployed people expressed as a percentage of the labor force
describe one type of market failure
if a monopoly exists, that would be a market failure because there is a lack of business competition, undermining the "economic freedom" goal
how does our govt attempt to fix a market failure involving prices
by placing price floors or ceilings
Draw a diagram to show a price floor in the "real world". describe a negative effect of this price floor
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
List and define the US economic goals.
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 4)economic growth--people have a better standard of living over time5)economic security--there is a safety net for those in need6)economic equity--"fair" distribution of resources
what is the GDP formula?
if nominal GDP were to increase this year vs last year, will our standard of living necessarily increase? explain.
not necessarily because nominal GDP has not adjusted for inflation. it could be that the new GDP is only higher because prices are higher
what are two common causes of increased AD?
increased govt. spending or increased consumer spending
From a Neo-Classical perspective, describe a situation where an increase in AD would NOT cause inflation.
if AD and LRAS both moved
What 2 things would a Keynesian suggest to expand/improve our economy.
increased govt. spendingmonetary policy + fiscal policy
Full employment may occur @ Yf. What does Yf represent in macro terms?
that our economy is @ full capacity
what is a possible negative effect of deflation
people stop buying things because prices will get lower and businesses will fail because of this lack of demand
what would cause a LRAS increase? what effect would this have on the economy if the AD didn't move.
efficiency of economy has gone upunemployment increaseprices decrease
What are 2 Neo-classical solutions to a high unemployment rate?
1) move LRAS by decreasing input costs for businesses2)remove welfare, etc. to encourage people to get jobs instead of mooching off the govt
if our country is experiencing disinflation and frictional unemployment (ceteris peribus), what should the Fed do? why?
nothing. absolutely diddly-squat. disinflation is good, it meets the goal of price stability. also, frictional unemployment is always present in any economy.
in general, what do "leading economic indicators" (LEI) forecast?
tell us what the economy will be like in the near future
market failure
when a market allowed to operate freely has negative consequences
price floor
min. set price usually set by govt.e.g. min wage, milk
price ceiling
max. set price, usually set by govt.e.g. rent control
positive economics
statements of fact, data from reliable sourcese.g. "Federal min wage was $5.15/hr from '97 to '07"
normative economics
opinion of interpretation of information/data e.g. "the min. wage should be increased to help poor."
economic system
a set of rules that govern the production & distribution of goods/services
What are the 3 basic economic questions
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?
what are the components/requirements of a capitalist/market economy?
_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 $$_voluntary exchange--no one can force you to buy anything_available credit (loans)--people must be able to loan money-helps people take advantage of other aspects*most important aspect of a capitalist economy
what are the components/requirements of a command/control (commuist) economy?
_govt answers all basic economic questions
monetary policy
govt. controlling $$ supply to fight inflation & unemployment
who is in charge of monetary policy?
the federal reserve
loose money
more $$ put into supplyaka "easy money"
tight money
taking $ out of supply
Go through the process of loosening $
1) Fed uses tool to lower interest rates2) banks are able to offer lower rates on loans3) more people are able to get a loan4) people have more $ and spend it5) the demand curve shifts to the right6) unemployment decreases, prices increase
Go through the process of tightening $
1) Fed uses tool to raise interest rates2)banks raise interest rates3)fewer people are going to borrow $4) people have less $ to spend5) demand curve shifts to the left6) 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
what are 2 tools the Fed uses to raise/lower interest rates?
discount ratereserve requirement
total spending in a nation per year
what are the Leading Economic Indicators (LEIs)?
1) S&P 5002)initial unemployment claims--first time people go apply for unemployment benefits3)avg. weekly work hours4) # of new applications for building permits
lagging economic indicators
data changes after overall economy has changed--tells us how econ has been for past 6 months1) unemployment rate2)consumer price index (CPI)stagflation--inflation & unemployment are high (very rare!)
euphemism for loan
annual percentage rate--yearly interest rate
finance charge
interest added on to your loan balance
how can you avoid paying interest?
by paying off balance every month
what do coincident economic indicators show/describe?
what the economy is doing currently
what are the 4 coincident economic indicators?
1.GDP 2.personal income 3.industrial production (what factories are making) 4.retail sales
what is a fico score? What are its possible values
measures liklihood a borrower will repay a loan/between 300 and 850
what are good things to borrow money for?
anything that can help you make more $ than you'd pay in finance charges:/home/education
what are some risky things to borrow money for?
starting a business (most die w/in 2 yrs)/investing on margin
home equity
the amount of a house the home owner owns
a new mortgage replaces your previous one
1 firm/Debeer's diamonds/very high price control/very very high barriers for new firms
a few firms/Coke&Pepsi/possible price control/comewhat(possibly) high barriers for new firms
monopolistic competition
numerous firms/fast food restaurants/some price control/some barriers for new firms
perfect competition
infinite # of firms/lemonade stands in summertime/none/none
what is the purpose of the FTC?
the Federal Trade Commission keeps business competition (secures economic goal of price stability)
How does the FTC operate?
a board of 5 people, businesses must ask their permission before mergering or "buying out"/can impose conditions to merger
when 2 companies conspire to "fix" prices--usually by limiting supply
anti-trust laws
illegalizes cartels and trusts
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