C1: Discovering Why Economics Is a Big Deal

Question 1

macroeconomics

Answer 1

noun

the part of economics concerned with large-scale or general economic factors, such as interest rates and national productivity.

Question 2

microeconomics

Answer 2

noun

the part of economics concerned with single factors and the effects of individual decisions.

Question 3

key macroeconomic variables

Answer 3

the cold hard facts that macroeconomists need to see

1. (GDP) stastitics on output: how much stuff is being produced
2. Inflation: at what rate prices are going up
3. Interest Rates: how easy or difficult it is for businesses to get credit and the price of credit
4. Unemployment: how easy or difficult it is for people to find jobs and the percentage of work force employed

Question 4

hy·poth·e·sis

Answer 4

noun

a supposition or proposed explanation made on the basis of limited evidence as a starting point for further investigation.

synonyms:theory, theorem, thesis, conjecture, supposition, speculation, postulation, postulate

Question 5

how is GDP per capita figured

Answer 5

by dividing GDP by the number of people in a country (average income per person)

Question 6

what happens when businesses cut back on production and fewer inputs are needed?

Answer 6

employment falls and unemployment rises

Question 7

aggregate

Answer 7

Collective amount, sum, or mass arrived-at by adding or putting together all components, elements, or parts of an assemblage or group, without implying that the resulting total is whole (contains everything that should be in it)

Question 8

inflation

Answer 8

is the persistant rise in the prices paid for buying chunks of GDP, the prices paid for goods and services

Question 9

economists often refer to the cost of credit or financial capital as the ____ _____.

Answer 9

interest rate

Question 10

prime interest rate

Answer 10

Is the interest rate that commercial banks charge their most creditworthy customers and serves as the primary benchmark to which other rates are somewhat anchored. The prime interest rate, or prime lending rate, is largely determined by the federal funds rate but it it is ultimately set by each individual bank.

Question 11

who sets the prime interest rate

Answer 11

The prime rate is not set by a particular legal entity, and the prime rate used by one institution (bank) may be different from the prime rate in use by another institution. While changes to the Federal Reserve’s prime rate are commonly noted by other U.S. institutions, and may be used to justify changes in the institution’s prime rate, it is not a requirement for the institution to raise its prime rate accordingly.

Each lending institution sets its own prime rate.

Question 12

federal fund rate

Answer 12

The federal funds rate refers to the interest rate that banks charge other banks for lending them money from their reserve balances on an overnight basis. By law, banks must maintain a reserve equal to a certain percentage of their deposits in an account at a Federal Reserve bank. Any money in their reserve that exceeds the required level is available for lending to other banks that might have a shortfall.

Question 13

who sets the federal fund rate?

Answer 13

the Federal Open Market Committee (FOMC), they meet 8 times per year to set the rate. The FOMC cannot force banks to charge that exact rate. Rather, the FOMC sets a target rate. The actual interest rate a lending bank will charge is determined through negotiations between the two banks

Question 14

Law of Diminishing Returns

Answer 14

the marginal return on capital machinery falls as we add more capital to a given labor force.

Example: if you buy one plane why stop at one, why not buy two, or even a 3rd. At some point the return on an additional plane will start to decline because they will be flying at 60% capacity or 60% of the price.

Question 15

Marginal return

Answer 15

is the rate of return for a marginal increase in investment; roughly, this is the additional output resulting from a one-unit increase in the use of a variable input, while other inputs are constant.

Question 16

full capital stock equilibrium

Answer 16

the amount of capital–relative to the workforce–is such that the capital’s marginal return net of depreciation (after dep.) equals the interest rate.

Question 17

interest rate is the price of credit so there is a link between the interest rate and the ____ on ____?

Answer 17

return on capital

Question 18

what three basic questions must a good macroeconomic model explain?

Answer 18

1. GDP
2. A measure of what’s happening to the prices
3. The Interest Rate

Question 19

agent in economics

Answer 19

is an actor and more specifically a decision maker in a model of some aspect of the economy.

Question 20

utility definition in economics

Answer 20

Utility is an economic term referring to the total satisfaction received from consuming a good or service. It will directly influence the demand, and therefore price, of that good or service. A consumer’s utility is hard to measure, however, but it can be determined indirectly with consumer behavior theories, which assume that consumers will strive to maximize their utility (maximize their well-being).

Question 21

economists refer consumers and households interchangeably because?

Answer 21

often decisions about what choices to make are made at the level of the household

Question 22

for a consumer to maximize their utility simply means?

Answer 22

they choose the thing they prefer most

Question 23

firms in economics are?

Answer 23

organizations that turn inputs into outputs

Question 24

inputs

Answer 24

Resources such as labor, raw materials, energy, information, or finance that are put into a system (such as an economy, manufacturing plant, computer system) to obtain a desired output. Inputs are classified under costs in accounting.

Question 25

outputs

Answer 25

is the result of an economic process that has used inputs **to produce a product or service that is available for sale or use (consumed)**.

Question 26

government/policy makers

Answer 26

people who can change policy e.g. decide tax rates, interest rates and government spending

Question 27

monetary policy

Answer 27

refers to policy directed towards **changing the amount of money in circulation** and thereby influencing the interest rates in an economy

Question 28

what are the two types of monetary policy?

Answer 28

1. **Expansionary monetary policy:** involves increasing the supply of money in order to reduce the interest rate and stimulate the economy. In the short run it usually results in higher output but also in higher inflation. 2. **Contractionary monetary policy:** involves reducing the supply of money in order to increase the interest rate and slow down the economy. In the short run it usually results in lower output but also lower inflation.

Question 29

quantitative easing

Answer 29

increasing the money supply in hope of stimulating the economy further, not lowering interest rates, but by increasing liquidity (making it easier to borrow money by making sure there is enough cash to go around) and maybe even generate some inflation.

Question 30

fiscal policy

Answer 30

**refers to any changes in government spending or taxation**. Unlike monetary policy fiscal policy usually isn't delegated to some independent authority, such as the Fed. Instead politicians decide it and civil servants implement it "in-house."

Question 31

the two flavors of fiscal policy

Answer 31

1. **Expansionary fiscal policy**: involves increasing goverment spending, reducing taxation, or both. It's designed to stimulate the economy and in the short run is likely to lead to higher output but agian, possibly higher inflation. 2. **Contractionary fiscal policy:** involves decreasing goverment spending, increasing taxation, or both. It's designed to slow down the economy and in the short run is likely to lead to slower output but also possibly lower inflation.

Question 32

what do economist mean when they say wages and prices are sticky

Answer 32

Wages and prices adjust more slowly than they need to in order to keep the economy on track. Real-world prices don't fall either fast enough or far enough. Firms try to hold prices and cut production. Output falls and unemployment rises as a result.

Question 33

Marginal return

Answer 33

Marginal return is the **rate of return for a marginal increase in investment**; roughly, this is the additional output resulting from a one-unit increase **(1 book**) in the use of a variable input, while other inputs are constant.

Question 34

sup·po·si·tion

Answer 34

noun an uncertain belief

Question 35

net

Answer 35

A net (sometimes written nett) value is the resultant amount after accounting for the sum or difference of two or more variables. In economics, it is frequently used to imply the remaining value after accounting for a specific, commonly understood deduction

Question 36

Marginal

Answer 36

when used in economics, has a similar meaning to ‘additional’. Whenever a business, finance or economics text includes the term, **it is usually referring to something that will be added to what was originally there**