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Economics

 Study  Guide  10-­‐13  

Cooper  Krings  

ATM-­‐  An  electronic  device  that  allows  bank  customers  to  make  transactions  without  seeing  a  bank  
officer.    

BARTER-­‐  The  exchange  of  goods  and  services  without  using  money.    

COMMODITY  MONEY-­‐  Money  that  has  intrinsic  value  based  on  the  material  from  which  it  is  made.    

CURRENCY-­‐  Paper  money  and  coins.    

FIAT  MONEY-­‐Money  that  has  no  tangible  backing  but  is  declared  by  the  government  and  accepted  by  
citizens  to  have  worth.  

FRACTIONAL  RESERVE  BANKING-­‐banking  practice  in  which  banks  keep  only  a  fraction  of  their  
deposits  in  reserve  (as  cash  and  other  highly  liquid  assets)  and  lend  out  the  remainder,  while  
maintaining  the  simultaneous  obligation  to  redeem  all  these  deposits  upon  demand  

MONEY-­‐  Anything  that  people  will  accept  in  exchange  for  goods  and  services.    

NEAR  MONEY-­‐Savings  accounts  and  other  similar  time  deposits  that  can  be  converted  into  cash  
relatively  easily.    

REPRESENTATIVE  MONEY-­‐  Paper  money  that  is  backed  by  something  tangible.    

STORE  OF  VALUE-­‐  Something  that  holds  its  value  over  time.  

DEBIT  CARD-­‐A  card  one  can  use  like  an  ATM  card  to  withdraw  cash  or  like  a  check  to  make  purchases.  

CAPITAL  GAINS-­‐The  profit  made  from  the  sale  of  securities.    

COMMON  STOCK-­‐A  share  of  ownership  in  a  corporation  that  gives  the  holder  voting  rights  and  a  share  
of  profits  

PREFERRED  STOCK-­‐  A  share  of  ownership  in  a  corporation  giving  the  holder  a  share  of  profits  but,  in  
general,  no  voting  rights.  

EQUITY    

BOND-­‐  A  contract  a  corporation  issues  that  promises  to  repay  borrowed  money,  plus  interest,  on  a  
fixed  schedule.  

STOCK-­‐  Shares  of  ownership  in  a  corporation.  

BULL  MARKET-­‐  A  situation  in  which  stock  market  prices  rise  steadily  over  time.  

BEAR  MARKET-­‐  A  situation  in  which  stock  market  prices  decline  steadily  over  time.    
EXCHANGE  RATE-­‐  Determined  by  standard  of  value  per  country.    

DIVERSIFICATION-­‐  The  practice  of  distributing  investments  among  different  financial  assets  to  
maximize  return  and  limit  risk.    

MATURITY-­‐  The  date  at  which  a  bond  is  due  to  be  repaid.    

MONEY  MARKET-­‐  A  market  in  which  short-­‐term  financial  assets  are  bought  and  sold.  

PRIMARY  MARKET-­‐A  market  for  buying  newly  created  financial  assets  directly  from  the  issuing  entity.  

SECONDARY  MARKET-­‐  A  market  in  which  financial  assets  are  resold.  

RISK-­‐  The  possibility  for  loss  on  an  investment.  

RETURN-­‐  The  profit  or  loss  made  on  an  investment.  

BID-­‐  What  buyer  is  willing  to  pay.    

ASK-­‐What  seller  is  willing  to  sell  stock  for.  

PINK  SHEET-­  an  electronic  quotation  system  operated  by  Pink  OTC  Markets  that  displays  quotes  from  
broker-­‐dealers  for  many  over-­‐the-­‐counter  (OTC)  securities.  These  securities  tend  to  be  inactively  
traded  stocks,  including  penny  stocks  and  those  with  a  narrow  geographic  interest.  Market  makers  and  
other  brokers  can  use  Pink  Quote  to  publish  their  bid  and  ask  quotation  prices  

NASDAQ-­‐  (Stock  exchange)  It  is  the  largest  electronic  screen-­‐based  equity  securities  trading  market  in  
the  United  States.  With  approximately  3,700  companies  and  corporations,  it  has  more  trading  volume  
per  hour  than  any  other  stock  exchange  in  the  world  

WALL  STREET-­‐  Home  of  the  New  York  Stock  Exchange  (NYSE,  NASDAQ,  AMEX,  NYMEX,  NYBOT)  

ARBITRAGE-­‐the  practice  of  taking  advantage  of  a  price  differential  between  two  or  more  markets:  
striking  a  combination  of  matching  deals  that  capitalize  upon  the  imbalance,  the  profit  being  the  
difference  between  the  market  prices  

OPTION-­‐  A  contract  giving  an  investor  the  right  to  buy  or  sell  stock  at  a  future  date  at  present  price.  

FUTURE-­‐  A  contract  to  buy  or  sell  stock  on  a  specific  future  date  at  present  price.    

OTC-­  (over-­the-­counter)-­  to  trade  financial  instruments  such  as  stocks,  bonds,  commodities  or  
derivatives  directly  between  two  parties.  It  is  contrasted  with  exchange  trading,  which  occurs  via  
facilities  constructed  for  the  purpose  of  trading  (i.e.,  exchanges),  such  as  futures  exchanges  or  stock  
exchange  

ROUND  TRIP  EXECUTION-­‐  the  buying  and  selling  of  stocks.    

AGGREGATE  SUPPLY-­‐  The  sum  of  all  of  the  supply  in  the  economy.    

AGGREGATE  DEMAND-­‐  The  sum  of  all  the  demand  in  the  economy.    
BUSINESS  CYCLE-­‐  the  series  of  growing  and  shrinking  periods  of  economic  activity,  measured  by  
increases  or  decreases  in  real  GDP.  

LEADING  INDICATORS-­  measures  of  economic  performance  that  usually  change  before  real  GDP  
changes.    

LAGGING  INDICATORS-­‐  measures  of  economic  performance  that  usually  change  after  real  GDP  
changes.    

COINCIDENT  INDICATORS-­‐  measures  of  economic  performance  that  usually  change  at  the  same  time  
as  real  GDP  changes.    

MACRO  EQUIIBRIUM-­‐  is  achieved  when  aggregate  supply  =  aggregate  demand.    

DEPRESSION-­‐  an  extended  period  of  high  unemployment  and  reduced  business  activity.    

RECESSION-­‐    a  prolonged  economic  contraction  lasting  two  or  more  quarters  *6  months  or  more).  

TROUGH-­‐  The  final  phase  of  the  business  cycle—the  point  at  which  real  GDP  and  employment  stop  
declining.    

DPI-­‐  Personal  income  minus  taxes  

GNP-­‐The  market  value  of  all  final  goods  and  services  produced  by  a  country.  GNP  =  GDP  plus  income  of  
goods  and  services  produced  by  U.S.  companies  and  citizens  in  foreign  countries  (but  minus  the  income  
foreign  companies  and  citizens  earn  here)    

REAL  GDP-­‐  states  GDP  corrected  for  changes  in  prices  from  year  to  year.    

NOMINAL  GDP-­‐  states  GDP  in  terms  of  the  current  value  of  goods  and  services.  

STAGFLATION  describes  periods  during  which  prices  rise  at  the  same  time  that  there  is  a  slowdown  in  
business  activity.    

UNDERGROUND  ECONOMY-­‐  describes  market  activities  that  go  unreported  because  they  are  illegal  or  
because  those  involved  want  to  avoid  taxation.    

PRODUCTIVITY-­‐  ratio  of  the  amount  of  output  produced  to  the  amount  of  input.    

PER  CAPITA  GDP-­‐  real  GDP  divided  by  total  population.    

PAR  VALUE-­  the  amount  a  bond  issuer  must  pay  the  buyer  at  maturity.    

YIELD-­‐  the  annual  rate  of  return  on  a  bond.    

COUPON  RATE-­‐  the  interest  rate  a  bond  holder  receives  every  year  until  maturity.    

POVERTY-­‐  the  situation  in  which  a  person’s  income  and  resrouces  do  not  allow  him  or  her  to  achieve  a  
minimum  standard  of  living.  

POVERTY  THRESHOLD-­‐  The  official  minimum  income  needed  to  pay  for  the  basic  expenses  of  living.  
SEASONAL  UNEMPLOYMENT-­‐    employment  linked  to  seasonal  work.    

Demand  for  some  jobs  changes  dramatically  from  season  to  season  

Construction  work  falls  in  winter  

Tourism  peaks  at  certain  times  of  year;  varies  by  region  

Migrant  farm  work  drops  off  in  inter;  migrant  families  suffer.    

 CYCLICAL  UNEMPLOYMENT-­‐  unemployment  caused  by  the  part  of  the  business  cycle  with  decreased  
economic  activity.    

Employers  lay  off  workers  during  low  points  in  business  cycle.  

During  recession  hard  to  find  new  jobs  since  demand  for  labor  drops  

Unemployment  period  varies  by  type;  average  relatively  short  

Over  one  third  of  unemployed  find  work  in  five  weeks  or  less.    

FRICITONAL  UNEMPLOYMENT-­‐  the  temporary  unemployment  of  workers  moving  from  one  job  to  
another.    

Frictional  unemployment  not  a  threat  to  economic  stability.  Includes:  

Childrearing  parents  returning  to  work.  

New  college  graduates  looking  for  first  job.  

Experienced  workers  who  want  to  switch  jobs.  

Reflects  workers’  freedom  to  find  best  job  for  them  at  highest  wage.  

STRUCTURAL  UNEMPLOYMENT-­‐  unemployment  that  exists  when  the  available  jobs  to  not  match  the  
skills  of  available  workers.    

As  businesses  become  more  efficient,  require  fewer  workers  

New  technologies  replace  workers  or  require  them  to  retrain  

New  industries  required  specialized  education  do  not  employ  unskilled  

Change  in  consumer  demand  can  shift  types  of  workers  needed.  

Offshore  outsourcing  sometimes  leaves  people  out  of  work.    

LORENZ  CURVE-­‐  curve  that  shows  the  degree  of  income  inequality  in  a  nation.    

WELFARE-­‐  government  economic  and  social  programs  that  provide  assistance  to  the  needy.    
Some  criticized  for  wasting  government  funds,  harming  recipients.  

WORKFARE-­‐  a  program  that  requires  welfare  recipients  to  do  some  kind  of  work  in  return  for  their  
benefits.    

INFLATION-­‐  a  sustained  rise  in  the  general  price  level,  or  a  sustained  fall  in  the  purchasing  power  of  
money.  

CONSUMER  PRICE  INDEX  (CPI)-­  a  measure  of  changes  in  the  prices  of  goods  and  services  that  
consumers  commonly  purchase.  (ex.  bird  seed,  milk,  epicac,  castor  oil).  

PRODUCER  PRICE  INDEX  (PPI)-­  a  measure  of  changes  in  wholesale  prices.    

HYPERINFLATION-­‐  a  rapid,  uncontrolled  rate  of  inflation  in  excess  of  50  percent.    

DEFLATION-­‐  a  decrease  in  the  general  price  level.    

DEMAND-­PULL  INFLATION-­‐  a  condition  that  occurs  when  total  demand  rises  faster  than  the  
production  of  goods  and  services.    

COST-­PUSH  INFLATION-­  a  situation  in  which  increases  in  production  costs  push  up  prices.    

WAGE-­PRICE  SPIRAL-­‐  a  cycle  that  begins  with  increased  wages,  which  lead  to  higher  production  costs,  
which  in  turn  results  in  higher  prices,  which  result  in  demands    for  even  higher  wages.    
1).  Calculate  Equity  and  Interest  on  Loans.    

What  is  the  total  interest  you  pay  on  the  first  three  months?  
100,000  Loan,  5%,  $5,000  Payment  
1,000  *  .05  =  5,000  
5,000/12=  $416.67  Interest  
1,000-­‐416.67=583.33  
 
99,416.67  *  .05  =  4,970.83  
4970.83/12=  414.24  =  Interest  2nd  month  
1,000-­‐414.24  =  $585.76  
 
Start-­‐>  100,000  
After  1st  Month  -­‐>  99,416.66    ←  100,000-­‐583.22  
After  2nd  Month  -­‐>  98,830.91  ←  99,416.67=  585.76  
4.    Stocks  v.  bonds  

Bonds:  Bonds  are  like  loans,  in  the  sense  that  you  are  essentially  lending  your  money  to  a  
corporation,  company,  or  government  of  your  choosing.  In  return  they  promise  interest  on  the  
money  you  give  them  in  the  form  of  a  bond.  Bonds  are  MUCH  safer  than  stocks  because  you  are  
guaranteed  intrest.  

Stocks:  common,  preferred  

5.  Calculate  GDP  per  capita  and  discuss  what  it  measures.    

Read  GDP  divided  by  total  population.  Calculates  average  cost  of  living  for  one  person.    

6)  Business  Cycle  

•  Expansion-­‐  economic  growth-­‐  GDP  increases.  Unemployment  down,  resources  become  scarce,  
prices  rise.    

•  Peak-­‐  real  GDP  is  the  highest.    

•  Contraction-­‐  recession,  depression,  stagflation  


•  Trough-­‐The  final  phase  of  the  business  cycle—the  point  at  which  real  GDP  and  employment  
stop  declining.    

7.  Describe  what  brought  about  the  Great  Depression  and  Compare  to  today.  

During  the  1920s,  people  were  spending  much  money  to  pay  for  vacations,  household  items,  
etc.  However,  because  people  were  taking  out  loans  to  do  so,  the  banks  eventually  ran  out  of  
money  (bank  runs  occurred).  Today,  in  the  crisis  of  credit,  people  are  doing  the  same  thing  with  
real  estate.  Too  many  people  have  borrowed  money  to  buy  and  renovate  homes,  and  they  have  
not  been  able  to  sell  them.    

8.    Be  able  to  explain  buying  short  and  selling  long.    

Short  selling  is  borrowing  stocks  from  a  third  party  when  they  are  high,  and  then  selling  them  
on  the  market  once  they  drop.  Then  you  buy  the  same  stocks  back  when  the  price  is  low.  You  
return  the  stocks  and  keep  the  profit.  If  the  stocks  go  up,  then  you  loose  that  money  because  
you  have  to  buy  back  the  stocks  for  more  than  you  sold  the  stocks  for.  

10)  List  factors  that  lead  to  increased  or  decreased  productivity.  

Quality  of  Labor-­‐  more  educated,  healthier  workforce  tends  to  be  more  productive.    

Technological  Innovation-­‐  new  machines  and  technologies  help  countries  (especially  during  the  
industrial  revolution)  produce  more  output  from  the  same  amount  of  inputs.    

Energy  Costs-­‐  gas,  electricity,  and  other  fuels  power  the  technologies  that  increase  productivity.  
When  energy  costs  rise3,  the  tools  become  more  expensive,  and  productivity  declines.    

Financial  Markets-­‐  The  easier  it  is  for  funds  to  flow  to  where  they  are  needed,  the  more  
productive  the  economy  becomes.  Banks,  stock  markets,  and  similar  institutions  allow  a  
country’s  funds  to  be  put  to  their  best  use.    

10.  Using  Malthus  Theory  determine  the  expected  food  population  ration  after  a  given  number  of  years  

Human  population  will  always  grow  exponentially,  while  food  will  only  expand  geometrically  
ex:  2:1  ;  2:1;  3:8;  1:1;  5:8;  3:8.  

11.  List  factors  that  lead  to  increased  or  decreased  productivity  

Quality  of  Labor;  Technological  Innovation;  Energy  Costs;  Financial  Markets  (p.372)  
12.  Understand  macroeconomic  equilibrium.  

Macroeconomic  equilibrium  is  the  point  where  the  quality  of  aggregate  demand  equals  the  
quantity  of  aggregate  supply  (p.361)  

13.  List  3  effects  of  Inflation  

Decreasing  Value  of  the  Dollar;  Increasing  Interest  Rates;  Decreasing  Real  Returns  on  Savings  
(p.401)  

14.  Use  the  formula  from  page  398  to  calculate  inflation  

Step  1:  Calculate  each  year’s  consumer  price  index    

Market Price
x 100 = CPI  
Market Price in base year

Step  2:  Use  the  CPI  to  calculate  the  rate  of  inflation  

CPI - CPI for the Preceding year
x 100 = Rate of Inflation  
CPI for Preceding year

15.  List  4  Factors  that  affect  poverty.  



Education:  Higher  level  of  education  will  usually  result  in  a  higher  income  

Discrimination:  White  males  tend  to  have  higher  incomes  than  racial  minorities  and  women.    
Government  initiatives  have  tried  to  stop  discrimination.  

Demographic  Trends:  More  than  half  of  all  marriages  end  in  divorce.    As  a  result  there  are  more  
single  mothers.    Such  demographic  trends  lead  to  higher  poverty  rates  because  single-­‐parent  
families  are  more  likely  to  have  economic  problems  than  two-­‐parent  families.  

Changes  in  the  Labor  Force:  We  have  switched  from  a  labor  force  of  mainly  manufacturing  to  
mainly  service.    Manufacturing  jobs  were  many  and  didnt  not  require  a  skilled  workforce.    
Unskilled  workers  could  earn  a  good  wage.      Workers  in  jobs  like  fast  food  service  tend  to  earn  
less  than  similarly  skilled  workers  in  manufacturing.  (p.390)  

16.  Know  the  4  types  of  unemployment  

Frictional  unemployment:  temporary  unemployment  experienced  by  people  changing  job.  


Seasonal  unemployment:  unemployment  linked  to  seasonal  work.  

Structural  unemployment:  a  situation  where  jobs  exist  but  workers  looking  for  work  do  not  
have  the  necessary  skills  for  these  jobs.  

Cyclical  unemployment:  unemployment  caused  by  a  part  of  the  business  cycle  with  decreased  
economic  activity.  

17.  What  is  the  current  unemployment  rate  and  federal  death  tax  rate?  

Unemployment  rate:  9.4%  Not  seasonally  adjusted  

Federal  death  tax  rate:  In  2010  there  is  no  “death  tax”,  however  in  2011  it  will  be  reinstated  for  
amounts  $1Million  and  above  at  a  rate  of  55%  

18.  State  of  the  Economy  

See  web  page  assignment  

19.  Steps  in  a  wage-­‐price  spiral.  

A  wage-­‐price  spiral  is  a  cycle  that  begins  with  increased  wages,  which  lead  to  higher  production  
costs,  which  in  turn  result  in  demand  for  even  higher  wages.  

Steps:  Workers  receive  a  wage  increase;  The  wage  increase  deives  up  the  production  costs;  
Workers  demand  a  wage  increase  to  pay  higher  prices.  (p.400)  

20.  Discuss  a  foreign  nation’s  economy.  

GDP  Per  Capita:  $6,877  

Leader:  Dmitriy  Medvedev  (President);  Vladimir  Putin  (Prime  Minister)  

Type  of  Government:  Federation  

Top  Export:  Oil  

Currency:  Rouble