Economic Concepts Flashcards
To manage growth and attempt to prevent both an accelerated expansion and contraction, what two general methods does the government use to regulate the level of economic activity?
“Loosening” fiscal and monetary policy refers to a strategy to promote economic expansion.
“Tightening” fiscal and monetary policy refers to a strategy for economic contraction.
Which indexes are measures of inflation?
Consumer Price Index (CPI)
Producer Price Index (PPI)
List the three primary tools the Fed uses to influence the money supply and interest rates.
- Raising or lowering the reserve requirement that banks must hold
- Raising or lowering the discount rate which is the interest rate charged to banks for loans received from the Fed
- Engaging in open market operations, which includes buying and selling government securities by the Fed
The price at which quantity supplied equals quantity demanded is considered what?
Equilibrium
What determines a good or service’s price elasticity?
How demand for a good or service may change in response to a price increase
List the four phases of the business cycle.
- Expansion phase
- Peak phase
- Contraction or recession phase
- Trough phase
What are “complements”?
Goods that are different in purpose but typically consumed together
Name some of the causes of a shift in the demand curve.
Government lowers taxes
Consumers decrease their savings rate
Incomes increase
When does the income effect occur?
As a result of prices changing at a greater rate than income
The demand curve depicts what two factors?
Price and quantity demanded
What two tools does Congress have to exercise fiscal policy?
The power to tax
The power to spend
List the two reasons why, when the price of a good or service increases, consumers will tend to buy less.
Substitution effect
Income effect
Are necessities considered elastic or inelastic?
Inelastic
Define “supply and demand.”
Supply is the quantity of a good or service that producers are willing to offer at a certain price. Demand tells us how much of a good or service buyers are willing to buy at a certain price.
Which government entity conducts U.S. monetary policy?
The Federal Reserve Board (The Fed)
Differentiate between “Gross Domestic Product (GDP)” and “Gross National Product (GNP).”
GDP is the total value of all goods and services produced within the United States over the course of a year (regardless of ownership).
GNP is the total value of goods and services produced by U.S. residents’ labor and property (regardless of where produced).
The supply curve depicts what two factors?
Price and quantity supplied
When does the substitution effect occur?
When consumers are faced with rising prices and choose to purchase a similar, but lower priced, product or service instead
What’s the difference between a depression and a recession?
Recession = GDP declining for 6 consecutive months (i.e., 2 quarters)
Depression = GDP declining for 18 months (i.e., 6 consecutive quarters)
What is an “exchange rate”?
The price of a country’s currency within the context of another country’s currency
Define “substitutes.”
Goods that provide something similar
