Unit 1 Test Review Chapters 1 & 2 Introduction to Economics

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1 Unit 1 Test Review Chapters 1 & 2 Introduction to Economics Scarcity is the fundamental problem of economics. Land, labor, capital, entrepreneurs are the four factors of production. Actions in one part of the country or world that have an economic impact on what happens elsewhere are examples of economic interdependence. For something to have value, it must have utility. Economic interdependence is people's reliance on each other to provide goods and services. The situation in which some necessities have little value while some non-necessities have a much higher value is known as paradox of value. The dollar value of all final goods and services and the most comprehensive measure of a country's total production output is called Gross Domestic Product (GDP). The United States can best be described as having a modified private enterprise system. A market economy does not provide for everyone's basic needs. The concept of voluntary exchange means people freely and willingly engage in market transactions. The characteristics of capitalism are private property rights, economic freedom, and profit motive. A mixed economy is another term for a modified private enterprise economy, Consumers exercise their power in the American economy by deciding what to purchase. The government plays the role of protector, consumer, regulator, and promoter of economic goals in the United States. An economy at its production possibilities frontier is operating at full potential. The fundamental problem that economics tries to solve is how to satisfy unlimited wants with limited resources. The government's role in a mixed economy is that it is the regulator charged with preserving competition. Capitalism is a economic system in which private citizens own the factors of production Profit motive is the driving force that encourages people and organizations to improve their material well-being The struggle among sellers to attract consumers while lowering costs is known as competition Scarcity is a condition that results from society not having enough resources to produce all the things people would like to have. Capital is a factor of production that includes tools, equipment, machinery, and factories used in the production of goods and services. Land is a factor of production that includes natural resources not created by humans. Gross Domestic Product is the dollar value of all final goods, services, and structures produced within a country's borders in a 12-month period. Opportunity cost is the cost of the next best alternative when a choice is made. A production possibilities frontier is a diagram representing various combinations of goods and services an economy can produce when all resources are fully employed. The free enterprise economy is where consumers and privately owned businesses answer the three basic economic questions Standard of living is the quality of life based on the possession of the necessities and luxuries that make life easier. An economic system is an organized way of providing for the wants and needs of a society. A market economy is a economic system in which basic economic decisions are made by people and firms acting in their own best interests. A command economy is a economic system in which basic economic decisions are made by a central authority. Revised 6/01/2011

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3 Unit-2 Test Review Chapters 4 & 5 Supply & Demand For most products and services, increased price results in demand for fewer products. When an increase in the price of one item causes a decrease in the demand for another the two products are considered complements. When the need for a product is not urgent, demand tends to be elastic. The Law of Demand states that more will be purchased at low prices than at high ones. The demand curve is always downward sloping. The demand curve will shift to the right in response to an increase in demand. The cost of labor, expectations that prices are about to increase and the numbers of sellers offering the product for sale can change or shift the market supply curve. Total cost is the sum of fixed and variable costs. Rent and mortgage payments, Insurance and property taxes would be counted as fixed costs. In a market economy, a high price is a signal for producers to offer more and consumers to buy less. The Law of Supply states that the quantity supplied varies directly with its price. The supply curve is upward sloping. Decreasing the price of the product would cause a change in the quantity demanded. At a given price, a surplus occurs when the quantity supplied is greater than the quantity demanded. The federal minimum wage law demonstrates a societal choice for economic equity over efficiency. When economic and/or political conditions are unstable the demand for gold will normally increase. Price floors that are artificially high are likely to create a surplus and example of which is minimum wage. A demand schedule is a listing that shows the quantity demanded at all possible prices at a given time. Diminishing marginal utility can best be described as the decrease in satisfaction or usefulness received from each additional unit of a product. The desire, ability, and willingness to buy a product is called demand. Marginal utility is the extra usefulness or satisfaction a person gets from acquiring or using one more unit of a product. A change in quantity demanded is illustrated by movement along the demand curve. Substitutes are products that can be used in place of other products. Complements are products that tend to be used together. Supply is the amount of a product that would be offered for sale at all possible prices that could prevail in the market. Quantity supplied is the amount that producers bring to the market at any given price. A subsidy can best be described as a government payment to an individual, business, or other group to encourage or protect a certain type of economic activity. Supply elasticity measures the way in which quantity supplied responds to a change in price. Elasticity measures how a dependent variable such as quantity responds to a change in an independent variable such as price. Inelastic describes demand when a given change in price causes a relatively smaller change in the quantity demanded. Elastic describes demand when a given change in price causes a relatively larger change in the quantity demanded.

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5 Unit-3 Test Review Chapters 3, 7 & 12 Introduction to Business & Financial Markets The most common form of business organization in the United States is a sole proprietorship. Basic ownership of a corporation, including voting rights, takes the form of common stock. The Securities and Exchange Commission regulates the sale of stock in a corporation. A vertical merger is a merger of corporations involved in different steps of manufacturing or marketing process. If you own a key resource you are basically a monopoly. A corporation that has at least four businesses, each making unrelated products, none of which is responsible for a majority of its sales, is called a conglomerate. Horizontal mergers involve two or more firms that produce the same kind of product. Diversification is a major reason for conglomerate mergers. Mergers and acquisitions might result in inadequate competition. The financial institutions that bring together funds that savers provide and then lend those funds to others are called financial intermediaries. Coupon rate, maturity, and par value are considered the main components of bonds. A bond's principal, or total amount borrowed, is called its par value. High return on an investment is associated with high risk. The great majority of stocks in the United States are traded on the over-the-counter market or OTC The Dow-Jones Industrial Average reflects 30 stocks traded on. the New York Stock Exchange The par value of a bond is the total amount borrowed. Junk bonds are exceptionally risky. Bonds pay a fixed interest rate over a specified period of time. The most recognized measure of stock performance is the Dow-Jones Industrial Average, which measures 30 representative stocks on the NYSE. When a major car company lowers its prices, other car makers will probably lower their prices. An advantage of a corporation is that owners have limited liability for debt. Most stocks in the United States are traded on the over-the-counter market. A monopoly based on the absence of other sellers in a certain location is called a geographic monopoly. Municipal bonds, or MUNIS, are usually a safe investment A stock transaction that is made immediately at the market price is made in the spot market. The chief disadvantage of a sole proprietorship is that the owner has unlimited liability. A government document granting permission to create a corporation is called a charter.

6 Saving is necessary for capital formation. The sectors of the economy that provide the most savings are households and businesses. NASDAQ, Over the Counter Market and the OTC are different names for the same computerized trading system which is not a stock exchange. A combination of two or more businesses to form a single firm is called a merger. Vertical mergers are combinations of firms involved in different steps of manufacturing or marketing process. Horizontal mergers can best be described as a business combination involving firms that produce the same kind of product. A long-term, tax-sheltered time deposit that an employee can set up as part of his own retirement plan is called an IRA. Municipal bonds are bonds that are issued by state and local governments. Junk bonds are exceptionally risky bonds. Equities is another term for stocks which represent ownership shares in corporations. Securities exchanges are places where buyers and sellers meet to trade securities. The over-the-counter market or electronic marketplace is for securities that are

7 The Unit-4 Test Chapters 8, 13 & 14 Employment, GDP and Cycles Workers who have the skills to operate machines and who require a minimum amount of training are known as semiskilled labor. glass ceiling is described as an invisible barrier that hinders women and minorities from advancement up the corporate ladder. Strikes, pickets and boycotts are methods used by unions in labor disputes. Right-to-work laws prohibit mandatory union membership. Professional labor is classified as workers with knowledge-based education and managerial skills. An index that reports on price changes for about 90,000 goods and services is the consumer price index (CPI) The consumer sector is the largest sector of the macroeconomy. The United States experienced almost no growth in real GDP per capita between 1929 and Cyclical Unemployment is directly related to swings in the business cycle. The forty percent of the population with the lowest income controls less than 2 percent of the nation's wealth. The stock market crash of 1929 marked the beginning of the Great Depression. The Lorenz curve is used to demonstrate the degree of income inequality. Recession and expansion are the two phases of the business cycle. An unwanted harm, or inconvenience caused by an economic action is called a negative externality. A depression is a severe recession with high unemployment, acute shortages, and excess manufacturing capacity. To an economist, full employment is reached when the unemployment rate drops below 5 (4.5%) percent. According to the excessive monetary growth theory of inflation, extra money in the economy is spent, leading to a demand-pull effect on inflation. About 30 million Americans are currently living in poverty. A condition of acute shortages, high unemployment, and excess capacity at manufacturing facilities is known as a depression. After passing through a trough, the business cycle enters a period of expansion To determine Gross National Product, add to GDP all payments received by Americans outside the U.S. and subtract payments made to foreign-owned resources in the U.S. Producer price index is an index of prices received by domestic producers for their output. Consumer price index is a price index of about 90,000 items in 364 categories. GDP adjusted to remove the distortion of inflation is called real GDP. Business cycles are simply defined as systematic upturns and downturns of real GDP. A recession is a period during which real GDP declines for two quarters in a row, or six consecutive months. A depression is a severe economic state with high unemployment, acute shortages, and excess manufacturing capacity. The unemployment rate is calculated by the number of unemployed persons divided by the total number of persons in the civilian labor force. Technological unemployment can best be describes as workers with less skills, talent, or education are replaced by machines that do their jobs. Structural unemployment occurs when a fundamental change in the operations of the economy reduces the demand for workers and their skills.

8 Unit 5 Study Guide Chapters 9 &10 Taxes & Spending Ann earns $10,000 annually and pays a tax of $1,000. Jerome earns $60,000 during the same period and pays taxes of $20,000. The tax they both paid was a progressive tax. Elementary and secondary education is the largest category of spending for most local governments. The sequence for the approval of the federal budget is from the president to Congress then back to the president. Intergovernmental expenditures is the largest category of state spending. The three criteria for effective taxes are equity, simplicity, and efficiency. An exception or oversight in the tax law that allows some people and businesses to avoid paying taxes is called a tax loophole. Individual income taxes are the single largest source of revenue for the federal government. The payroll taxes that are deducted directly from people's paychecks are Medicare and Social Security. The gift tax is used to prevent people from avoiding the estate tax. The largest source of revenue for states is sales taxes. Government health expenditures include a joint federal-state insurance program for low-income persons is called Medicaid. The OMB assembles the budget under presidential guidelines. Federal money given to a senior citizen as a Social Security payment is an example of an entitlement payment. Intergovernmental revenues are generally intended for education and public welfare. All levels of government combined consume about one-third of the nation's output. The individual income tax is a progressive tax. Public sector spending first began to rise significantly in the1940s. The president formulates the federal budget. FICA includes taxes to pay for Social Security and Medicare. A high tax designed to raise revenue and reduce consumption of a socially undesirable product is a sin tax. A regressive tax is a tax that imposes a higher percentage rate of taxation on persons with low incomes than on those with high incomes. A tax that imposes a higher percentage rate of taxation on persons with high incomes than on those with low incomes is considered a progressive tax. A tax on donations of money or wealth is called a gift tax. An estate tax is a tax on the transfer of property when a person dies. A tax on the manufacture or sale of selected items is considered an Excise tax. Intergovernmental revenues are funds collected by one level of government that are distributed to another level of government for expenditures. Property tax is a tax on real estate, buildings, and anything permanently attached to them. The second largest source of revenue for state governments is sales tax. A 12-month financial planning period that may or may not coincide with the calendar year is a fiscal year. The federal budget is an annual plan outlining proposed revenues and expenditures for the coming year. Mandatory spending is spending authorized by law that continues without the need for annual approvals of Congress. Discretionary spending are programs that must receive annual authorization. Spending in excess of revenues collected is considered deficit spending The amount borrowed to finance deficit spending is the federal debt. Entitlements are broad social programs for eligible individuals.

9 Unit 6 Test Money & The Fed Test Review 1. Money loses its value when it is too plentiful. 2. The FDIC was established to protect the savings of the American people. 3. In order for money to have value, it must be portable, durable and divisible. 4. The Federal Reserve System was established in The Federal Reserve is made up of 12 district banks and 25 branch banks. 6. The Fed's Federal Open Market Committee is the Fed's primary monetary policymaking body. 9. When a bank keeps $12 from a $100 deposit as legal reserves, it is using a fractional reserve system. 10. A bank uses excess reserves to make loans. 11. The Fed has defined different categories of money, M1 and M2, according to the money's function. 12. Early colonists in Virginia used tobacco as commodity money. Fiscal Policy can best be described as the use of taxing and spending to influence economic activity. 13. To be a successful medium of exchange, money must be portable, durable and easily divisible. 14. The United States currently operates under the inconvertible fiat money standard. 15. Under a gold standard people feel more secure about their money, the government cannot print too much paper currency, but the government risks draining its gold reserves. 16. The federal agency that insures bank deposits in the event of a bank failure is the FDIC. 17. All of the following are actions by the Fed would promote an easy money policy; lowering the discount rate, buying government securities and announcing that it anticipates adopting an easy money policy. 18. All of the following are actions by the Fed that would promote a tight money policy; increasing the reserve requirement, selling government securities and having an official testify to Congress that a tight money policy is likely 19. The quantity theory of money holds that excessive increases in the monetary supply lead to inflation. 20. At times the Fed monetizes the debt in order to keep interest rates from rising. 21. The Fed remains largely independent from politics except that the president and Congress appoint new members to vacant seats on the Board of Governors. 22. Liabilities are debts and obligations. 23. Assets are properties, possessions, and claims on others. 24. The Federal Reserve notes used as currency today are inconvertible fiat money. 25. Something accepted by all parties as payment for goods and services is considered a medium of exchange 26. A common denominator that can be used to express worth in terms that most individuals understand is measure of value. 27. Money by government decree is known as fiat money 28. Member banks are commercial banks that are members of, and hold stock in, the Fed. 29. Federal Open Market Committee makes decisions about the growth of the money supply and the level of interest rates. 30. Currency is the paper component of the money supply 31. The expansion and/or contraction of the money supply in order to influence the cost and the availability of credit is known as monetary policy 32. Excess reserves are legal reserves in excess of the reserve requirement. 33. Liquidity is known as the potential to be converted into cash very quickly. 34. Real rate of interest is the market rate of interest minus the rate of inflation. 35. Balance sheet is a condensed statement showing all assets and liabilities.

10 Unit 7 Chapters 17 & 18 The Global Economy Test Review A protective tariff is used to give inefficient domestic industries an advantage. The United States trade deficit causes the value of the dollar to fall in foreign exchange markets. Socialism is characterized by government ownership of most productive resources. The basis for international trade stems from the differences in production costs from one country to another. The United States imports trillions of dollars in products each year. The fact that free nations choose to trade is proof that international trade is beneficial. The ability of a country to produce a product with greater output per unit of input is absolute advantage. The ability of a country to produce a good at a relatively lower opportunity cost is comparative advantage. The most frequent argument used to support trade barriers is that they protect domestic jobs. The North American Free Trade Agreement liberalized free trade among Canada, the United States, and Mexico in the 1990s. In recent years international trade has been flourishing. Foreign exchange is necessary in international trade because each country has its own monetary system. The U.S. trade deficit will cause the value of the dollar to fall in foreign exchange markets. A major disadvantage of capitalism is that it ignores poor people and the less productive members of society. During the 1990s Japan experienced stagnation and recession. Advantages of socialism include equitable distribution of benefits. For most of the 1900s, the world depended on fixed exchange rates. Devaluation of a country s currency is the major problem most associated with running a trade deficit. Today, most economists view trade deficits as needing no legislation because they are largely self-correcting Absolute advantage and comparative advantage are terms related to nations engaged in trade. Trade barriers are enacted to protect domestic industry. Protectionists cite the following reasons to justify high tariffs: protecting infant industries, helping the balance of payments and protecting domestic jobs. Socialism is an economic system in which the government owns and runs the majority of the basic productive resources. Communism is a political and economic framework where all property is collectively owned and labor is organized for the common advantage of the community. Capitalism economic system in which the means of production are privately owned. Exports are goods and services that a country produces and then sells to other countries. Imports are goods and services that one country buys from other countries. A country's ability to produce a given product with greater output per unit of input than another country is considered absolute advantage. A country's ability to produce a product relatively more efficiently than another country is considered comparative advantage. International trade is the exchange of goods and services among the nations of the world. A tariff is a tax placed on imports to increase their price in the domestic market. Selling products abroad for less than it cost to produce them at home is considered dumping. Balance of payments is the difference between the money a country pays to, and receives from, other nations when it engages in international trade. The price of one country's currency in terms of another country's currency is considered the foreign exchange rate. A trade surplus occurs when the value of exported products exceeds the value of imported products.

11 A trade deficit occurs when the value of imported products exceeds the value of exported products.