Econ Flashcards
Memorization
What is the definition of employment?
The total number of people currently employed, either full-time or part-time.
What is unemployment?
The total number of people who are actively looking for work but aren’t currently employed.
What is frictional unemployment?
Unemployment that occurs due to the time workers spend searching for jobs.
What causes cyclical unemployment?
Fluctuations in the business cycle, causing unemployment to rise during economic downturns.
Name three costs associated with inflation.
Shoe-leather costs, menu costs, and unit-of-account costs.
Define structural unemployment.
It is when more people are looking for jobs than there are jobs available at the current wage.
Who benefits when inflation is higher than expected?
Borrowers benefit by repaying loans with money that’s worth less.
What is disinflation, and why is it challenging?
Disinflation is lowering the inflation rate, which often leads to higher short-term unemployment.
Why is real GDP per capita used to measure economic growth?
It is adjusted for inflation, reflecting living standards.
What does the Rule of 70 calculate?
It estimates the number of years it will take GDP per capita to double.
What are the three main sources of productivity growth?
Physical capital, human capital, and technological progress.
Define physical capital.
Human-made resources like machinery and buildings.
What is human capital?
It is the skills, knowledge, and experience individuals gain through education and training.
What does the aggregate production function describe?
The relationship between total output (GDP) and the inputs (labor, capital, human capital, technology)
What are diminishing returns in the context of capital?
Each extra unit of capital adds less to output when other inputs are fixed.
Name three ways governments promote economic growth.
Subsidies for infrastructure, education, and research & development.
What is the convergence hypothesis?
The idea that poorer economies will grow faster than richer ones, potentially leading to similar income levels over time.
What is the savings-investment spending identity in a closed economy?
Total savings equals total investment spending.
How does the savings-investment spending identity differ in an open economy?
National savings equals domestic investment plus net foreign investment.
Define net foreign investment (NFI).
The net outflow of domestic funds minus the inflow of foreign funds.
What is the purpose of the loanable funds market?
It matches savers (supply of funds) with borrowers (demand for funds), where the interest rate is the cost of borrowing.
What happens at the equilibrium interest rate in the loanable funds market?
The quantity of funds supplied equals the quantity demanded.
What is present value, and why is it important for investment decisions?
The value today of money to be received in the future, which helps determine if an investment is worthwhile.
Explain the Fisher Effect.
It states that expected inflation will increase nominal interest rates, keeping the real interest rate unchanged.
What is the difference between nominal interest rate and real interest rate?
Nominal is unadjusted for inflation, while real interest rate is adjusted for inflation.
What is a bond?
A loan with fixed interest and repayment of the original amount.
Define financial intermediary, and give an example.
An institution that collects funds from savers to lend to borrowers, like banks and mutual funds.
How do mutual funds help individual investors?
By pooling their money to invest in a diversified portfolio of stocks, reducing individual risk.
What is the concept of crowding out in economics?
When government borrowing drives up interest rates, reducing private investment spending.
What does the global loanable funds market describe?
A worldwide market where capital flows between countries equalize interest rates globally.
