Economic Terms and Concepts

Question 1

Define “Price Elasticity”

Answer 1

If the price gets too high, a consumer will forego the purchase. (It’s a nonessential item)

Question 2

Define “Deflation”

Answer 2

A decrease in overall price levels of goods and services.

Question 3

Define “Disinflation”

Answer 3

A slowdown in the rate of inflation/rate of price increase of goods and services.

Question 4

What is “Inflation?”

Answer 4

Prices go up, but productivity stays the same :(

Question 5

What are the 3 primary measures for Inflation Rate?

Answer 5

1. CPI - Consumer Price Index
2. PPI - Producer Price Index
3. GDP Deflator

Question 6

What does the Consumer Price Index (CPI) do?

Answer 6

Measures overall price levels for a basket of goods and services consumers purchase

(e.g. housing, food, transportation, education, medical care, apparel, etc.)

Question 7

What does the Producer Price Index (PPI) do?

Answer 7

Measures inflation rate for raw materials used in the manufacturing process

Question 8

Define “Nominal GDP”

Answer 8

Measures the value of goods and services in current prices.

Question 9

What economic factor can make Nominal GDP misleading?

Answer 9

Inflation

Question 10

Define “Gross Domestic Product (GDP)” and its time measurement

Answer 10

Total final output of a country by its citizens AND foreigners in the country over a period of time.

Quarterly or annually

Question 11

Define “Gross National Product (GNP)”

Answer 11

Measures total final output by the citizens of a country, whether produced domestically or in a foreign country.

(No foreigners)

Question 12

Define “Real GDP”

Answer 12

Measures the value of goods and services at a base year price.

(Only changes when quantity of goods and services change, not price)

Question 13

(1) describe what the Leading Economic Indicators (LEI) do and (2)How many are there?

Answer 13

They help anticipate the state of the US economy in the near future and there are 10.

Question 14

Who calculates the LEI?

Answer 14

The Conference Board

Question 15

Define “Cyclical Unemployment”

Answer 15

When there is an overall downturn in business activity and fewer goods are being produced.

(Decrease in demand for labor)

Question 16

Define “Natural Rate of Unemployment”

Answer 16

Lowest unemployment rate where labor and product markets are in balance.

(Price and wage inflation is stable)

Question 17

Define “Full Employment”

Answer 17

The rate of employment that exists when there is efficiency in the labor market.

Question 18

Define “Structural Unemployment”

Answer 18

When there is inequality between the supply of adequately skilled workers and the demand for workers

Question 19

Define “Frictional Unemployment”

Answer 19

When people are voluntarily unemployed because they are seeking other job opportunities and haven’t gotten it yet.

Question 20

What does the Business Cycle measure?

Answer 20

Economic activity (GDP) over time

Question 21

Define the “Equilibrium Price”

Answer 21

The theoretical price of a product or service where supply and demand meet

Question 22

What is “Utility?”

Answer 22

The benefit firms and consumers receive when allocating or spending financial resources

Question 23

What does the GDP Deflator do?

Answer 23

Measures the current price of goods and services (nominal GDP) relative to a base year (real GDP)

The measure of price increases or decreases

Question 24

What does LIBOR stand for, and what is it?

Answer 24

London Inter-Bank Offer Rate

Rate that banks charge each other, usually in Eurodollars

Question 25

What are the 2 types of interest rates?

Answer 25

1. Fixed Rate
2. Variable Rate

Question 26

What does Open Market Operations refer to?

Answer 26

The process by which the Federal Reserve will buy or sell US Treasury securities

US Treasury Securities = T-Bills, Bonds, Notes, etc.

Question 27

Explain “Federal Reserve Requirements”

Answer 27

The Federal Reserve requires a percentage of a bank’s customer deposits to be in the vault.

(Keeps a certain amount of money out of the market)

Question 28

What are “Excess Reserves?”

Answer 28

They represent the amount of cash or deposits with the Federal Reserve in excess of the minimum amount required

Question 29

What are the 3 tools of fiscal policy

Answer 29

1. Taxes
2. Spending
3. Deficit Management

Question 30

What are the 3 goals of the Federal Deposit Insurance Corporation (FDIC)

Answer 30

1. Insure Deposits
2. Manage Receiverships
3. Supervise financial institutions for financial stability and consumer protection