Econ Vocab
What is the term for the next best alternative given up when making a choice?
What is opportunity cost?
A market with many sellers and identical products is called this.
What is perfect competition?
What are the three primary functions of money in a modern economy?
Medium of exchange, unit of account, store of value.
What type of fiscal policy should be used during a recession, and what is its intended effect on aggregate demand?
Expansionary fiscal policy; it shifts AD to the right.
What happens to the supply and demand graph when consumer income increases for a normal good?
Demand shifts right; equilibrium price and quantity increase.
What do we call a situation where unlimited wants exceed limited resources?
What is scarcity?
A single firm provides a unique product with no close substitutes and significant barriers to entry protect it from competition. What market structure allows this firm to act as a price maker?
What is a monopoly?
What happens to the money multiplier if the reserve requirement is increased, assuming no excess reserves or cash leakage?
It decreases, reducing the potential for money creation.
If the Federal Reserve conducts open market operations and buys bonds, what happens to the nominal interest rate and investment?
Interest rates decrease; investment increases.
A per unit subsidy is granted to producers in a perfectly competitive market. What happens to the supply curve and equilibrium?
Supply shifts right; price decreases, quantity increases.
What type of good is both non-excludable and non-rival in consumption?
What is a public good?
This market structure features a few dominant firms whose pricing and output decisions are mutually interdependent, often leading to strategic behavior such as price rigidity or non-price competition. What is it?
What is an oligopoly?
A bank receives a $1,000 deposit. The reserve requirement is 10%. What is the maximum amount of new loans that can be created from this deposit?
$900 (the bank must hold $100 in reserves).
Why might expansionary fiscal policy lead to “crowding out” in the loanable funds market?
Increased government borrowing raises real interest rates, reducing private investment.
A price ceiling is imposed below the equilibrium price. What will happen in the market graphically and economically?
A shortage occurs as quantity demanded exceeds quantity supplied.
In a competitive market where external costs exist, firms produce more than the socially optimal quantity. What type of inefficiency does this situation represent?
What is market failure?
Whole Foods, Sprouts, and Fresh Market all sell organic groceries but emphasize different brand identities, store experiences, and product lines. These firms compete in which type of market structure that features many sellers offering similar but not identical products?
What is monopolistic competition?
Explain how the sale of government bonds by the central bank affects the money market and aggregate demand.
Selling bonds decreases the money supply, raises interest rates, reduces investment, and shifts AD left.
What happens to the short-run Phillips Curve when expansionary monetary policy reduces unemployment below the natural rate?
Movement along the curve to a point with lower unemployment and higher inflation.
In the AD-AS model, what happens if the government increases spending without any change in interest rates or taxes?
AD shifts right; price level and real GDP both increase.
The practice of exploiting price differentials in different markets; for example, buying an asset cheaply in London and selling it for a higher price in New York.
What is Arbitrage?
A utility company that can provide electricity at a lower cost than two competing firms due to massive fixed infrastructure costs is an example of what?
What is a natural monopoly?
What is the long-run effect of an increase in the money supply on output, interest rates, and the price level according to classical theory?
Output returns to full employment (no change), interest rates rise back, and price level increases (inflation).
A country has a large budget deficit and rising inflation. Explain the appropriate mix of fiscal and monetary policy to stabilize the economy and the likely trade-off.
Contractionary fiscal (cut spending/raise taxes) and contractionary monetary (sell bonds/increase reserve ratio); reduces inflation but may raise unemployment.
A per-unit tax is imposed on a good. Show and explain the impact on producer surplus, consumer surplus, and deadweight loss.
Supply shifts left; CS and PS fall, deadweight loss is created due to inefficiently low output.