Week 1

Question 1

paradox of thrift

Answer 1

• when households anticipate a recession they cut spending to prepare
• decrease in spending leads to an increase in lay-offs
• causes a recession - self-fulfilling prophesy

Question 2

self-regulating economy

Answer 2

• popular pre-1930s
• economic problems will be solved without government intervention through the invisible hand

Question 3

Keynesian economics

Answer 3

• popular post-1930s
• economic slumps can be mitigated through government intervention

Question 4

monetary policy

Answer 4

uses changes in the quantity of money to change interest rates and affect overall spending

Question 5

fiscal policy

Answer 5

uses changes in government spending and taxes to affect overall spending

Question 6

recession/contraction

Answer 6

period of economic downturn, decreased output and employment

Question 7

recovery/expansion

Answer 7

period of economic upturn, increased output and employment

Question 8

business cycle

Answer 8

short run alternation between recessions and expansions

Question 9

business cycle peak

Answer 9

point at which the economy turns from expansion to recession

Question 10

business cycle trough

Answer 10

point at which economy turns from expansion to recession

Question 11

business cycle graph

Answer 11

Question 12

inflation

Answer 12

overall increase in price level

Question 13

deflation

Answer 13

overall fall in price level

Question 14

price stability

Answer 14

overall price level changes slowly or not at all

Question 16

short run relationship between inflation and business cycle

Answer 16

• economy depressed: increases unemployment, decreases inflation
• economy booming: decreases unemployment, increases inflation

Question 17

long run relationship between inflation and business cycle

Answer 17

inflation mainly determined by changes in money supply

Question 19

problem with inflation

Answer 19

discourages people from holding onto cash because value decreases

Question 20

problem with deflation

Answer 20

encouraes people to hold onto cash because more attractive than investment

Question 21

national income and product accounts (NIPA)

Answer 21

• measures UK’s economic performance
• compares UK income/output to other nations
• tracks economic conditions throughout business cycle

Question 22

consumer spending

Answer 22

household spending on goods and services

Question 23

stock

Answer 23

share in ownership of company held by shareholder

Question 24

bond

Answer 24

borrowing in form of IOU that pays interest

Question 25

government transfer

Answer 25

payment by government to individuals for which no goods and services are provided in return

Question 26

disposable income

Answer 26

* income + government transfers - taxes * available income to spend or save

Question 27

expanded circular flow diagram

Answer 27

Question 28

private savings

Answer 28

disposable income - consumer spending

Question 29

financial markets

Answer 29

* banking, stock, bond marketws * channel private savings and foreign lending into investment, government and foreign borrowing

Question 30

government borrowing

Answer 30

total amount of funds borrowed by federal, state and local government in financial markets

Question 31

government purchase of g+s

Answer 31

total expenditure on g+s by federal, state, and local governments

Question 32

exports

Answer 32

g+s sold to other countries

Question 33

imports

Answer 33

g+s bought from other countries

Question 34

inventories

Answer 34

stocks of goods and raw materials held to facilitate business operations

Question 35

investment spending

Answer 35

spending on productive physical capital and on changes to inventories

Question 36

GDP

Answer 36

market value of all final g+s produced in a country in a year

Question 37

what are the 3 ways to calculate GDP?

Answer 37

1. total value of all final g+s produced 2. total spending on domestic g+s produced 3. total factor income earned by households

Question 38

what isn't included in GDP?

Answer 38

1. used goods 2. financial assets/inputs 3. any spending on goods not produced in nation 4. intermediate g+s

Question 39

value added method

Answer 39

value of sales - value of intermediate g+s

Question 40

final g+s

Answer 40

g+s sold to final user

Question 41

intermediate g+s

Answer 41

g+s sold from one firm to another that are inputs for production of final g+s

Question 42

spending method

Answer 42

GDP = C + I + G + X - M * C = consumer spending * I = investment spending * G = government spending * X = exports * M= imports

Question 43

net exports

Answer 43

X - M

Question 44

real GDP

Answer 44

* total value of final g + s produced in economy in given year using base year * takes inflation into account

Question 45

nominal GDP

Answer 45

* total value of final g + s produced in economy in given year * doesn't take inflation into account

Question 46

chained dollars

Answer 46

method of calculating changes in GDP using average between growth rate of earlier base year and later base year

Question 47

GDP per capita

Answer 47

average GDP per person

Question 48

aggregate price level

Answer 48

measure of overall level of prices in economy

Question 49

market basket

Answer 49

hypothetical set of consumer purchases of g+s

Question 50

price index

Answer 50

cost of purchasing a given market basket in a given year

Question 51

price index in a given year equation

Answer 51

Question 52

inflation rate

Answer 52

yearly percentage change in price index

Question 53

consumer price index (CPI)

Answer 53

measures the cost of market basket of a typical household

Question 54

inflation rate equation

Answer 54

Question 55

producer price index (PPI)

Answer 55

measures changes in price of g+s purchased by producers

Question 56

GDP deflator

Answer 56