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 |