Basic Concepts

Question 1

Economics

Answer 1

The study of how to allocate scarce resources among competing ends

Question 2

Macroeconomics

Answer 2

Branch of economics that deals with the whole economy and issues that affect most of society

Question 3

Microeconomics

Answer 3

Branch of economics that looks at decision making at the firm, household, and individual levels and studies behavior in markets for particular goods and services

Question 4

Gross Domestic Product (GDP)

Answer 4

The total value of all final goods and services produced in a year within that country

Question 5

National Income (NI)

Answer 5

The sum of income earned by the factors of production owned by a country’s citizens

Question 6

Personal Income (PI)

Answer 6

The money income received by households before personal income taxes are subtracted

Question 7

Disposable Income (DI)

Answer 7

Personal income minus personal income taxes

Question 8

Expenditure Approach

Answer 8

Adds up spending by households, firms, the government, and the rest of the world (GDP=C+I+G+(X-M))

Question 9

Income Approach

Answer 9

Makes use of the fact that expenditures on GDP ultimately become income (GDP=NI+Depreciation-Subsidies+Net Income of Foreigners)

Question 10

Depreciation

Answer 10

The decline in the value of capital over time due to wear or obsolescence

Question 11

Subsidy Payments

Answer 11

Payments made by the government to farmers

Question 12

Net Domestic Product

Answer 12

GDP minus depreciation (Indicates how much output is left over for consumption and additions to capital stock after replacing the capital used up in the production process)

Question 13

Deflation

Answer 13

A sustained decrease in the general price level

Question 14

Nominal

Answer 14

Actual number

Question 15

Real

Answer 15

Purchasing power

Question 16

Money Illusion

Answer 16

Noting an increase in income but not the change in prices of all products

Question 17

Menu Costs

Answer 17

Cost of changing price listings

Question 18

Consumer Price Index (CPI)

Answer 18

Government’s gauge of inflation (CPI=(Cost of Base Year Basket/Cost of Current Year Basket) x 100)

Question 19

Inflation Between Years

Answer 19

((CPI in Year 1/CPI in Year 2)-1) x 100

Question 20

Real GDP

Answer 20

(Nominal GDP/CPI for the same year) x 100

Question 21

Producer Price Index (PPI)

Answer 21

Similar calculations as CPI, but applies to the prices of wholesale goods

Question 22

Gross Domestic Product Deflator

Answer 22

An alternative general price index that reflects the importance of products in current market baskets (GDP Deflator= (Cost of Current Basket at current prices/Cost of Current Basket at base year prices) x 100)

Question 23

Labor Force

Answer 23

Includes employed and unemployed adults

Question 24

Unemployed

Answer 24

A labor force participant must be willing and able to work, and must have made an effort to seek work in the past four weeks

Question 25

Labor Force Participation Rate (LFPR)

Answer 25

The number of people in the labor force divided by the working-age population

Question 26

Unemployment Rate

Answer 26

Unemployed divided by the total number in the labor force and then converted into a percent

Question 27

Frictional Unemployment

Answer 27

Occurs as unemployed workers and firms search for the best available worker-job matches (New laborers, people seeking jobs due to moving)

Question 28

Structural Unemployment

Answer 28

The result of a skills mismatch (Being replaced by a robot or other software)

Question 29

Cyclical Unemployment

Answer 29

Results from downturns in the business cycle (Losing a job during a recession or depression)

Question 30

Seasonal Unemployment

Answer 30

The result of changes in hiring patterns due to the time of the year (Ski resorts, lifeguards)

Question 31

Discouraged Workers

Answer 31

Those who are willing and able to work, but become so frustrated in their attempts to find work that they stop trying

Question 32

Natural Rate of Unemployment

Answer 32

The typical rate of unemployment in a normally functioning economy (4-5% in the United States)

Question 33

Dishonest Workers

Answer 33

Claim to be unemployed in order to receive unemployment benefits when they actually do not want a job or are working in an unreported job

Question 34

Full Employment

Answer 34

The level of employment that corresponds with the natural rate of unemployment

Question 35

Okun’s Law

Answer 35

Estimate that for every one percentage point increase in the unemployment rate above the natural rate, output falls by 2-3 percentage points

Question 36

[Short-Run] Aggregate Supply ([SR]AS)

Answer 36

Indicates the total value of output that producers are willing and able to supply at alternative price levels in a given time period

Question 37

Aggregate Demand (AD)

Answer 37

Total demand for goods and services in an economy

Question 38

Price Level

Answer 38

Average level of all prices

Question 39

Long-Run Aggregate Supply Curve (LRAS)

Answer 39

Stands at the level of output that corresponds with full employment

Question 40

Say’s Law

Answer 40

The idea that supply creates its own demand

Question 41

Theory of Rational Expectations

Answer 41

Suggests that people learn to anticipate government policies designed to influence the economy, thereby making the policies ineffectual