| Question | Answer |
|---|---|
| Tax | Pd-Ps: drives a wedge between the price buyers pay and the price sellers receive |
| Subsidy | Go to the right hand side of equilibrium — government is giving you money so government surplus is negative |
| Laffer Curve | shows relationship between the size of the tax and tax revenue — if tax too much, then the government actually loses money |
| Gross Domestic Product | the market value of all FINAL goods and services produced within a country in a given period of time |
| When firms spend money what does it become | income |
| the circular flow diagram | illustrates gdp as spending, revenue |
| What kind of data is GDP | annually or a quarter (3 months) |
| components that add up to the GDP | Y=C+G+I+NX |
| transfer payments are | social security and unemployment insurance benefits — Government excludes these |
| what does NX stand for | Net Exports |
| How to calculate NX | exports – imports |
| Y stands for | Real GDP |
| nominal gdp | values output using CURRENT prices; not corrected for inflation |
| Real Gdp | values output using the prices of a BASE year; is corrected for inflation |
| g is | economic growth; real gdp this year – real gdp last year/ real gdp last year * 100% |
| what does gdp not do | does not value quality of environment, does not value leisure time, does not value non-market activity, does not value equitable distribution of income |
| Consumer Price Index | measure the typical consumer's cost of living |
| how is consumer price index calculated | Cost of living this year/ cost of living base year *100 |
| definition of consumption | spending by households on goods and services (new housing, haircut, refrigerator) |
| investment | purchase of goods that will be used in the future to produce more goods and services |
| Govt purchases | spending on goods and services by local, state, and federal government (repaving highways) |
| net exports | equal the foreign purchases of domestically produced goods (exports) minus the domestic purchases of foreign goods (imports) (french wine) |
| problems with CPI include | substitution bias (beef too spendy, get chx instead), introduction of new goods (iphone, GPS), unmeasured quality change (quality goes up so does value); CPI overstates increases in COL |
| how to compare dollar amts with inflation | amount in todays dollars = amount in year t dollars * price level today/price level in yr t |
| to find inflation rate change or percentage change in x: | new value of x – old value of x/ old value of x * 100 |
| present value | the amount that would be needed today to yield that future sum at prevailing interest rates |
| PV calculated: | PV = FV/(1+r)^N |
| future value | the amount the sum will be worth at a given future date, when allowed to earn interest at the prevailing rate |
| FV calculated: | FV = PV (1+r)^N |
| compounding | accumulation of a sum of money where the interest earned on the sum earns additional interest |
| the rule of 70 | if a variable grows at a rate of x percent per year, that variable will double in about 70/x years |
| if someone is risk averse they | do not like uncertainty |
| utility | subjective measure of well-being that depends on wealth or numeric value of satisfaction/dissatisfaction (3 out of 5 stars) |
| diminishing marginal utility | a $1000 loss reduces utility more than a $1000 gain increases it |
| adverse selection | a high risk person benefits more from insurance, so is more likely to purchase it (don't have it now) |
| moral hazard | people with insurance have less incentive to avoid risky behavior |
| diversification | reduces risk by replacing a single risk with a large number of smaller, unrelated risks; can reduce firm specific risk (affects only single company), cannot reduce market-risk (affects all companies in stock market) |
| index fund | mutual fund that buys all the stocks in a given stock index |
| revenue raised by inflation tax is known as | seigniorage |
| how to calculate gdp | price level x Quantity |
| monetary neutrality | the proposition that a change in the money supply affects Nominal variables, not real variables |
| unit of account | provides buyers and sellers a common reference point for valuing goods ad services — listed in same units (dollars) ? |
| store of value | transferring purchasing power from the present to the future — savings |
| medium of exchange | provides an accepted method of payment for goods and services — check — reduces transaction costs |
| liquidity | refers to how quickly an asset can be converted into a medium of exchange |
| an item has intrinsic value if it has value outside of its use as | money (commodity) |
| what is money | anything that is generally accepted in payments for goods/services or in the repayment of debts |
| wealth | the total collection of pieces of property that serve to store value |
| income | flow of earnings per unit of time (flow concept) |
| commodity money | valuable, easily standardized and divisible commodities |
| Fiat money | Paper money decreed by government as legal tender |
| checks | instruction to your bank to transfer money from your account |
| electronic payment | online bill payment |
| E-money | electronic money — debit card, stored-valued card, e-cash |
| what falls under M1 | (most liquid assets) currency + travelers checks + demand deposits + other checkable deposits |
| what falls under M2 | everything in M1 + more — savings ; not so liquid |
| Financial system | helps match the saving of one person with the investment of another |
| Financial market | directly provide funds to borrowers |
| Bond | certificate of indebtedness |
| stock | claim to partial ownership in a firm |
| financial intermediaries | institutions through which savers can indirectly provide funds to borrowers |
| Mutual funds | institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds |
| private saving | portion of households income that is not used for consumption or paying taxes = Y-T-C |
| public savin | ax revenue less government spending =T- G |
| national saving | private saving + public saving = Y-C-G |
| saving means | investment in a closed economy |
| budget surplus | an excess of tax revenue over government spending = T-G (=public saving) |
| Budget defecit | a shortfall of tax revenue from government spending =G-T |