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An Incomplete Education > Chapter 3: Economics > Flashcards

Chapter 3: Economics Flashcards

1
Q

What is economics often referred to as?

A

The dismal science

This term reflects the perceived bleakness of economic predictions and outcomes.

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2
Q

According to Jacob Viner, what is economics?

A

Economics is what economists do.

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3
Q

What does economics concern itself with?

A

The use of resources, changes in production and distribution, and the efficiency of systems controlling these processes.

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4
Q

What has contributed to the increased interest in economics over recent decades?

A

The relationship between economists and politicians.

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5
Q

What does ‘ceteris paribus’ mean?

A

Other things being equal.

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6
Q

What are the two categories of commodities?

A
  • Goods (tangible)
  • Services (intangible)
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7
Q

What is the difference between consumption and production?

A
  • Consumption: Using commodities
  • Production: Making commodities
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8
Q

What are externalities?

A

Effects or consequences felt outside the closed world of production and consumption.

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9
Q

What are the factors of production?

A
  • Land
  • Labor
  • Capital
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10
Q

What distinguishes a free-market economy from a planned economy?

A

In a free-market economy, decisions by households and businesses determine resource use; in a planned economy, the government makes those decisions.

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11
Q

What does GNP stand for and what does it represent?

A

Gross National Product; total value of everything produced in a national economy in a year.

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12
Q

What is the key difference between GNP and GDP?

A

GNP includes foreign investments and trade; GDP measures production within the country only.

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13
Q

What is human capital?

A

Investments made in workers, such as training and education.

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14
Q

What does an indifference curve show?

A

All varying combined amounts of two commodities that a household finds equally satisfactory.

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15
Q

What is inflation?

A

A rise in the average level of all prices.

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16
Q

What does laissez-faire mean in economics?

A

An economy free of government intervention.

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17
Q

What is the difference between the short run and the long run in economics?

A
  • Short run: Period too short for economic inputs to change
  • Long run: Period long enough for all economic inputs to change
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18
Q

What does macroeconomics study?

A

The big picture, including total output and total employment.

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19
Q

What does microeconomics focus on?

A

Specific resources used by firms or households and income distribution in response to price changes.

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20
Q

What is market failure?

A

When outcomes do not align with the predictions of the laissez-faire system.

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21
Q

What is a mixed economy?

A

An economic system that combines elements of free markets and planned economies.

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22
Q

What are opportunity costs?

A

The cost of using resources in one way instead of another.

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23
Q

What is productivity a measure of?

A

The relationship between output and input.

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24
Q

How is profit calculated?

A

Revenues minus costs.

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25
What is the definition of supply in economics?
The amount of anything that someone wants to sell at a particular price.
26
What is demand in economic terms?
The amount that someone wants to buy at a particular price.
27
What is value added?
The difference between the value of inputs and the value of the product yielded.
28
What is a value-added tax (VAT)?
A tax on the value added at each stage of a product's production.
29
What are the four laws of supply and demand?
* When demand goes up, price goes up * When demand goes down, price goes down * When supply goes up, price goes down * When supply goes down, price goes up
30
What is the theory of perfect competition?
Firms seek maximum profit with total freedom to enter and exit the market, perfect information, and no undue influence.
31
What is the principle of voluntary exchange?
People buy and sell to get what they want.
32
What is the theory of comparative advantage?
Countries should specialize in commodities they can produce most efficiently and trade with others.
33
What does the theory of rational expectations maintain?
People learn from their mistakes.
34
What is the theory of revealed preference?
People's choices are consistent.
35
What does the theory of revealed preference state?
People's choices are always consistent, meaning once a preference is revealed, it will remain the same if options are available.
36
Define economies of scale.
The principle that larger production runs reduce manufacturing costs.
37
What does the Phillips Curve illustrate?
The inverse relationship between inflation and unemployment.
38
Who is considered the first economist?
Adam Smith.
39
What is the 'invisible hand' in Adam Smith's theory?
Competition regulates the marketplace.
40
What major theories did David Ricardo advance?
* Ricardo Effect * Theory of comparative advantage
41
What did Thomas Malthus predict about population growth?
Population growth would always exceed food production, leading to famine, pestilence, and war.
42
What significant distinction did John Stuart Mill make in his work?
The difference between the bind of production and the flux of distribution.
43
What is Joseph Schumpeter known for?
The concept of 'creative destruction' in economics.
44
What was John Maynard Keynes' major work?
The General Theory of Employment, Interest, and Money.
45
What did Keynes argue regarding government intervention?
It is necessary to stimulate the economy during recessions.
46
What is monetarism?
An economic theory that emphasizes controlling the money supply to manage inflation.
47
What do neo-Keynesians argue?
Government spending should be used to influence demand and promote growth.
48
Fill in the blank: The Laffer Curve suggests that high tax rates can lead to _______.
Reduced revenues.
49
What does the Kondratieff Long Wave Cycle describe?
Long-term economic cycles of prosperity followed by stagnation.
50
What is econometrics?
The use of statistical and mathematical models to predict economic trends.
51
What is the role of the Federal Reserve Board?
To direct the country's monetary policy and control the money supply.
52
What effect does the Federal Reserve's tightening have on interest rates?
Interest rates rise and the economy slows down.
53
What did Milton Friedman blame for the Great Depression?
The Federal Reserve's excessive tightening of the money supply.
54
What year was the Federal Reserve created?
1913.
55
What is the Federal Reserve (Fed)?
The Fed is the central bank of the United States, created in 1913 by an act of Congress.
56
What is the relationship between the Fed and U.S. presidents?
Presidents have a love-hate relationship with the Fed, praising it when interest rates fall and criticizing it when they rise.
57
What are the three measures of the money supply defined by the Fed?
The three measures are: * M1: the most liquid money (cash and checking accounts) * M2: includes M1 plus savings accounts and time deposits under $100,000 * M3: includes M2 plus large time deposits and other financial instruments.
58
What happens when the Fed releases less money into the economy?
Interest rates rise, corporate borrowing decreases, production slows, layoffs occur, and consumer spending is cut back.
59
What is disinflation?
Disinflation is when prices rise, but at a slower rate than before.
60
How did the Fed influence interest rates in the 1980s?
A tougher Fed and a sluggish economy brought down inflation, allowing interest rates to fall.
61
What is the significance of global competition on inflation?
Global competition keeps inflation low by exerting downward pressure on wages and prices in wealthier countries.
62
What is the gold standard?
The gold standard is a monetary system where a country's currency or paper money has a value directly linked to gold.
63
What is a stock?
A stock represents a share, or fractional ownership, in a company.
64
What are the two forms of stock?
The two forms are: * Common stock * Preferred stock
65
What is a dividend?
A dividend is the reward or payoff a company gives to stockholders for investing, typically a portion of the profits.
66
What is a capital gain?
A capital gain is the profit made on the sale of ownership in a company when its stock price rises.
67
What is the cardinal rule of the stock market?
Buy low, sell high.
68
What is the Dow Jones Industrial Average (DJIA)?
The DJIA is an index of the price of 30 stocks traded on the New York Stock Exchange, widely used to measure market activity.
69
Fill in the blank: The Fed measures the money supply in three ways: M1, M2, and _______.
M3
70
True or False: The Fed can create a depression by tightening the money supply too much.
True
71
What is the impact of floating currencies?
The value of currencies shifts according to supply and demand on foreign-exchange markets.
72
What economic conditions contributed to high interest rates in the late 1970s and 1980s?
Factors included the Vietnam War, wage and price controls, and oil price increases.
73
What does the term 'institutional investors' refer to?
Institutional investors are large entities like pension funds and banks that significantly influence the stock market.
74
What is the effect of a recession on manufacturers' pricing power?
A recession makes it harder for manufacturers to raise prices.
75
Fill in the blank: The Fed's actions can lead to _______ if it eases the money supply too much.
hyperinflation
76
What role does trade play in economic growth?
Increased trade contributes to higher economic growth and improved living standards.
77
What happens to stock prices during significant market swings?
Stock prices across the board tend to move in line with each other.
78
What does the Dow Jones Industrial Average (DJIA) measure?
An index of the price of 30 stocks that trade on the NYSE ## Footnote The DJIA is the most widely used measure of market activity.
79
What does NASDAQ stand for?
National Association of Securities Dealers' Automated Quotations system ## Footnote NASDAQ is known for being technologically advanced and fast-growing.
80
Which stock exchange is second in trading volume to NYSE?
NASDAQ
81
What does AMEX stand for?
American Stock Exchange ## Footnote AMEX is third in trading volume.
82
What is the Standard & Poor's 500?
An index that tracks large stocks ## Footnote It is one of the widely cited stock market averages.
83
What does the Russell 2000 track?
Small stocks
84
True or False: The stock market is the only market available for trading.
False ## Footnote Other markets include options and futures markets.
85
What is the purpose of the options market?
To buy and sell the rights to buy and sell stocks
86
Fill in the blank: The futures market was originally devised to help out _______.
farmers and manufacturers
87
What type of contracts are primarily traded in the futures market today?
Financial futures
88
How do bond market prices react to changes in interest rates?
If interest rates rise, bond prices fall.
89
What is the historical view of bonds as an investment?
Boring and stable due to steady interest rates.
90
What has changed regarding investor trust in the bond market since the early 1990s?
Low inflation has led to low interest rates and big profit-taking.
91
What is a significant risk for investors holding long-term bonds?
A sharp upturn in interest rates could lead to big losses.
92
What is the old adage regarding investments?
Never invest more than you can afford to lose.
93
Who has become the butt of jokes in recent times according to the text?
Economists
94
Complete the joke: 'The good news is that the bus just went over the edge of the cliff. The bad news is that _______.
there were three empty seats on it.

An Incomplete Education (13 decks)

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