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ECON FINAL WINTER
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What are the four factors of production?
Land (natural resources), labor (human effort), capital (goods used to produce), and entrepreneurship (organizing resources).
Name three antitrust acts mentioned in the text after Sherman.
The Clayton Act (1914), Federal Trade Commission Act (1914), and Robinson-Patman Act (1936).
What does the Sherman Antitrust Act of 1890 address?
Declared trusts and similar arrangements illegal to preserve competition.
Define monopoly.
An industry with a single firm that controls price and supply.
What is an initial public offering (IPO)?
The first sale of a corporation’s stock to the public.
What is the difference between common and preferred stock?
 
Common is true ownership and last paid if firm fails
 
preferred gets dividends first and typically no voting rights.
What is stock?
Shares or portions of ownership in a corporation.
Which agency was created to regulate securities and require corporate transparency?
The Securities and Exchange Commission (SEC).
What is speculative bubble?
When stock prices rise above true value due to expectations.
What is a financial market?
Organizations that channel household savings to businesses and government.
What is a thrift (S & L) primarily associated with?
Savings and loan associations for mortgage and savings services.
What is a commercial bank?
A financial institution that accepts deposits and makes commercial loans.
What banking practice allows banks to lend more than they hold in reserves?
Fractional reserve banking.
What does M-2 include?
M-1 plus money available to spend after a short delay (near-money).
What does M-1 include?
Currency, traveler’s checks, and checking accounts (money for immediate spending).
What is fiat money?
Money with no intrinsic backing, accepted by faith in its value.
What is representative money?
Money that represents a commodity held in storage (e.g., past US notes).
What is commodity money?
Money that is itself a commonly used good (e.g., historically full-bodied coins).
What is the interest rate described as in the text?
The price of money.
What happens if money supply grows faster than production?
A general rise in prices (inflation).
What is the difference between tight and loose monetary policy?
 
Tight reduces the money supply (fight inflation)
 
loose increases it (encourage growth).
Which tool does the Fed use most often to change the money supply?
Open market operations.
What are open market operations?
Fed purchases/sales of government securities to inject or withdraw money.
Name three tools the Fed can use to change the money supply.
Changing the discount rate, changing the reserve requirement, and open market operations.
Write the money multiplier formula given initial deposit D and reserve requirement rr.
Increase in money supply = D Ă— 1/rr.
Define a “run on the bank.”
When many depositors withdraw funds simultaneously, threatening bank solvency.
What does it mean for the Fed to act as the government’s fiscal agent?
It holds the Treasury’s accounts and helps finance government operations.
What is “elastic currency”?
A money supply that can be expanded or contracted.
In what three ways is the Fed independent?
Politically independent, financially independent, and operationally independent.
Name one function of the Federal Open Market Committee (FOMC).
Buys and sells government securities to affect the money supply.
What is the reserve requirement?
A specified percentage of deposits banks must keep on hand.
How many members are on the Fed’s Board of Governors?
Seven members.
Into how many Federal Reserve districts was the nation divided?
Twelve districts.
How many organizations create money in the United States today?
Three: US Treasury, financial institutions, and the Federal Reserve Bank.
What is a central bank?
A bank the government uses to control and accommodate national finances (e.g., the Federal Reserve).
What did the Employment Act of 1946 declare a government priority?
Maximum employment.
What is cyclical unemployment linked to?
The business cycle (recessionary downswings).
How does seasonal unemployment arise?
Job changes due to seasons (e.g., harvest work).
What is structural unemployment?
When a worker’s skills do not match available jobs.
What is frictional unemployment?
Temporary unemployment while between jobs for various reasons.
Name the four kinds of unemployment listed.
Frictional, structural, seasonal, and cyclical unemployment.
What is underemployment?
Working part-time or below one’s skill level with insufficient income.
What is a discouraged worker?
Someone not counted as unemployed because they stopped looking for work.
Who is excluded from the labor force in official unemployment statistics?
Minors, elderly, armed forces, institutionalized, and those not seeking work by choice.
Define the unemployment rate.
The percentage of the labor force that is not employed but is looking for work.
How does technology theory explain recoveries?
Bursts of inventiveness spark investment spending and recovery.
What does the monetary theory of business cycles focus on?
Changes in the money supply affecting expansion and contraction.
Name two non-economic theories mentioned that attempt to explain business cycles.
Sunspot theory (Jevons) and psychological theory.
What is an economic depression per the text?
An extended severe trough with especially bad conditions.
What happens to big-ticket sales in a recession?
They decline as buyers become uncertain.
What characterizes the peak phase?
Limited resources, rising prices, rising wages, and higher interest rates.
During expansion, what happens to GDP and unemployment?
GDP rises and unemployment falls.
What are the four phases of the business cycle?
Expansion, Peak, Recession, Trough.
Name three problems associated with governmental borrowing.
Addiction to borrowing, lack of debt reduction, and destruction of future productivity/opportunity costs.
How did Keynesians expect borrowing to help the economy?
Debt would “prime” demand and later be repaid by taxation.
Why can governmental borrowing become a long-term problem?
It can be addictive politically and imposes opportunity costs on future generations.
What is “pump priming” in Keynesian thought?
Using government debt (spending) to stimulate the economy, expecting future taxes to pay it off.
Name two problems of using taxation as a fiscal tool.
Undermining the work ethic and market confusion (taxes on savings/investment).
What principle is associated with regressive or user-fee taxes?
Benefit principle.
Give an example of a regressive tax from the text.
Tax on gasoline.
What is a regressive tax?
A tax that takes a smaller percentage as income increases.
How can a progressive income tax act automatically in the economy?
As an automatic stabilizer.
Which principle supports progressive taxation?
Ability-to-pay principle.
What is a progressive tax?
A tax that takes a greater percentage as income increases.
Give an example of a proportional tax type mentioned.
 
A “flat tax” (general term
 
no specific example in text).
What is a proportional (flat) tax?
A tax where everyone pays the same percentage of earnings.
Name three sources of tax revenue listed.
Personal income taxes, FICA (social security), and corporate taxes (also excise taxes).
What are four problems associated with governmental spending as fiscal policy?
Time lags, uncertain multiplier, political constraints, and financing choices (tax/borrow).
What two fiscal steps do proponents urge during economic decline?
Increase government spending and/or cut taxes to boost demand.
Who developed the concept of fiscal policy?
British economist John Maynard Keynes.
Where does additional government spending typically come from?
Taxation and borrowing.
Why is the multiplier uncertain?
It cannot be gauged with precision in the real world.
Name one timing problem with fiscal policy.
Time lags (procrastination, debate, and political maneuvering).
Write the expenditure multiplier formula given the MPC.
Total change in national income = amount initially received × 1/(1 – MPC).
How are MPS and MPC related?
MPS = 1 – MPC.
What is the marginal propensity to save (MPS)?
The portion of each dollar the average person saves.
What is the marginal propensity to consume (MPC)?
The portion of each dollar the average person spends.
Which governmental spending category is the largest portion?
Social security, unemployment, and labor (transfer payments).
About what percentage of total US spending is government spending, per the text?
About 20%.
Which economist argued government should regulate demand to smooth the business cycle?
John Maynard Keynes.
What is fiscal policy?
The government’s ability to affect GDP and employment through spending, taxes, and borrowing.
Why are wage-price controls usually ineffective?
They don’t address the underlying cause (money growth) and cause distortions.
According to the text, what is the root cause of inflation?
Money growth — continual increase in the money supply.
What is demand-pull inflation?
Inflation caused by an increase in aggregate demand.
What is cost-push inflation?
Inflation caused by a decrease in supply or rising production costs.
Give another limitation of the CPI.
It does not adjust fully for quality changes.
Name one limitation of the CPI.
It assumes all urban households buy the same basket of goods.
What economic concept ties present wages/prices to an adjustment figure?
Indexing.
How is the rate of inflation calculated?
((Recent CPI – Earlier CPI) / Earlier CPI) × 100.
What is the CPI’s base concept used for comparisons?
A base period.
What index measures price changes for about 400 goods and services?
The Consumer Price Index (CPI).
Which national measure tracks price changes for all goods in the economy?
The GDP deflator.
Name one group that can win from inflation.
Borrowers.
How does inflation affect consumers overall?
Over time, inflation robs consumers of purchasing power.
How can savers be harmed by inflation?
Prices can increase faster than interest earned, causing lost savings.
Why do creditors lose during inflation?
Repayments are worth less in terms of purchasing power.
What adjustment ties wages to inflation to protect purchasing power?
Cost of living adjustment (COLA).
Who is hurt most by inflation among people with fixed incomes?
Persons living on fixed incomes.
What term describes extremely high, runaway inflation?
Hyperinflation.
What is inflation?
A sustained rise in the average price level.
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