Economics EOCT Review- Part 2

Define macroeconomics.

• A branch of economics dealing with the performance, structure, behavior, and decision-making of an economy as a whole, rather than individual markets.

• This includes national, regional, and global economies.

What is proportional tax?

• The taxing authority charges the same rate of tax from each taxpayer, irrespective of income.

What is a progressive tax?

• A tax that takes a larger percentage from the income of high-income earners than it does from low-income individuals. The United States income tax is considered progressive

What is a regressive tax?

• A tax that takes a larger percentage from low-income people than from high-income people. A regressive tax is generally a tax that is applied uniformly. This means that it hits lower-income individuals harder.

What type of tax is a tax on the manufacture or sale of items such

as gasoline and liquor?

• Luxury Tax- Gasoline • Sin Tax- Tobacco and alcohol

What is the dollar amount of all final goods and services and produced

within a country’s national borders?

• GDP

What is the formula used to measure the inflation rate?

What type of inflation states that labor groups cause inflation? 

• Cost-push inflation

What is the dollar value of all final goods, services, and structures produced in one year with labor and property supplied by

U.S. residents? 

• Gross Nation Product

How do economists define a recession? 

• A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

What type of unemployment is caused by workers between jobs? 

• Frictional unemployment

What type of inflation is caused by all sectors in the economy trying to

buy more than the economy can produce? 

• Demand-pull inflation

What is expansion? 

• Period of growth of real GDP• Recovery from recession

What type of unemployment is caused by changes in the weather? 

• Seasonal unemployment

What is technological unemployment?

• Caused by workers with less skills, talent, or education are replaced by machines and other equipment that do their jobs

What is the wage-price spiral view of inflation?

• Theory that explains the cause-and-effect relationship between rising wages and rising prices, or inflation.

• The wage-price spiral suggests that rising wages increase disposable income. This raises the demand for goods and causes prices to rise.

• Rising prices cause demand for higher wages, which leads to higher production costs and further upward pressure on prices.

How many districts are there in the Federal Reserve System? 

Which district is Atlanta found in? • There are 12 districts in the Federal

Reserve System.• Atlanta is found in the 6th district.

List two reasons for the structure of the Fed. 

1. The Fed is privately owned by its member banks. These are commercial banks that are members of, and hold stock in, the Fed. When member banks joined the Fed, they were required to purchase some of its shares, making them part owners of the Fed.

2. In 1935 Congress established a Board of Governors for the Fed. This board sets general policies for the Fed to follow, regulates certain operations of state-chartered member banks, and conducts some aspects of monetary policy.

List the three major tools of monetary policy used by the Fed. 

• Open market operations• Discount rate• Reserve requirements

List some of the tools of fiscal policy that can be used by the

federal government• Taxing• Spending

Who selects the Board of Governors of the Fed?

• The President appoints the Board of Governors and the Senate approves the appointments.

What things does the Federal Open Market Committee do for the FED?

• Makes decisions about the growth of the money supply and the level of interest rates.

• Reviews the country’s economy and makes decisions about the cost and availability of credit.

What are banks that belong to the Federal Reserve System called? 

• Member banks

What things does the Federal Advisory Council do for the Fed?

• Provides advice on matters concerning the overall health of the economy

List some things that affect aggregate demand.

• Increase/decrease in total consumer spending

• Government raising taxes or decreasing spending- Fiscal Policy

• Net exports• Real interest rate changes• Inflation expectation changes

List some things that affect aggregate supply.

• Supply shocks• Resource price changes• Changes in expectations for inflation• Productivity improvements• Institutional changes• Public goods at low cost

What happens to the money supply when the reserve requirement is

increased? Decreased?• When the reserve requirement is

increased, money supply is smaller because there is less money available for the banks to loan.

• When the reserve requirement decreases, money supply is larger because there is more money is available for the banks to loan.

What happens to the money supply when the discount rate is increased?  Decreased?

• When the discount rate is increased, fewer banks will want to borrow from the Fed. This will decrease the money supply banks have to loan customers and interest rates will go increase.

• When the discount rate is decreased, more banks will want to borrow from the Fed. This will increase the money supply banks have to loan to customers.

What happens to the money supply when the FED buys government

securities?  Sells government securities?

• When the Fed buys government securities, money supply increases, putting downward pressure on interest rates.

• When the Fed, sells government securities, money supply decreases, putting upward pressure on interest rates.

What type of unemployment is the most dangerous?  Describe it.

• Structural unemployment• Occurs when a fundamental change

in the operations of the economy reduces the demand for workers and their skills

• Changes in technology and consumer taste often lead to structural unemployment.

What type of unemployment is caused by ups and downs in the

economy?• Cyclical unemployment

The buying and selling of government securities is which

tool of monetary policy?• Open market operations

If the Fed increases the reserve requirement, what will happen to

the money supply?• When the reserve requirement is

increased, money supply is smaller because there is less money available for the banks to loan.

If the economy is in a recession, what fiscal policy could the

government use to strengthen the economy?

• The government might lower tax rates to try to fuel economic growth.

• If people are paying less in taxes, they have more money to spend or invest.

• Increased consumer spending or investment could improve economic growth and bring the economy out of a recession.

If the Fed sells government securities, what will happen to the money supply?

• When the Fed, sells government securities, money supply decreases, putting upward pressure on interest rates.

If the Fed decreases the reserve requirement, what will happen to

the money supply?• When the reserve requirement

decreases, money supply is larger because there is more money is available for the banks to loan.

If the economy is experiencing deflation, what could the Fed do to

stop it?• To stop deflation, the Fed could

increase money supply and raise prices to intentionally cause inflation, using monetary policy.

What is the difference between debt and deficit?

• Deficit is spending in excess of revenues collected.

• Debt is the total amount borrowed from investors to finance the government’s deficit spending.

Who makes fiscal policy decisions?

• Congress and the administration• The Fed plays no role in determining

fiscal policy.

List some of the countries that belong to OPEC.

• Qatar • Indonesia • Libya • the United Arab Emirates • Algeria • Nigeria • Ecuador • Gabon • Angola

List some of the countries that belong to the European Union.

• Austria• Belgium• Denmark• France • Greece• Italy• Poland• Spain

What type of tariff is designed to raise money?

• Revenue tariff

What are quotas?

• Limit on the amount of a good that can be allowed into a country

Explain what a trade deficit is.

• Balance of payments outcome when spending on imports exceeds revenues received from exports

In what type of economic system are the means of production

privately owned?• Capitalism

List some countries that belong to ASEAN.

• Singapore• Indonesia• Malaysia• Thailand• Philippines • Viet Nam • Cambodia

List the three countries that are part of NAFTA.

• Canada • Mexico• United States

What type of tariff is designed to protect domestic industries?

• Protective tariff

What is the key to trade?

• Specialization

In what type of economic system are the means of production

collectively owned?• Socialism

What is the difference between an absolute and comparative

advantage?• Absolute advantage is when a country

can produce a product more efficiently than another country.

• Comparative advantage is the ability for a country to produce a product relatively more efficiently or at a lower cost than another country.

List the five reasons for protecting the U.S. from foreign goods.

• National defense• Promoting infant industries• Protecting domestic jobs• Keeping the money at home • Helping the balance of payments

In what type of economic system are the basic productive resources

owned by the government?• Communism

What is collateral?

• Property or other security used to guarantee repayment of a loan

Define junk bonds. 

• High-yield or non-investment grade bond

• These bonds are called junk bonds because of their higher default risk in relation to investment-grade bonds.

Explain that people respond to positive and negative incentives in

predictable ways.• 1) Incentive - something that incites or tends

to incite to action or greater effort, as a reward offered for increased productivity. 2) Positive - an economic, legal or institutional measure designed to encourage beneficial activities. 3) Negative - measures or disincentives are mechanisms designed to discourage activities that are harmful to the economy.

Use a rational decision making model to select one option over another.

Create a savings or financial investment plan for a future goal.

What services are offered by a bank?

• House money in checkings or savings deposits

• Store valuable possessions• Offers loans- credit cards, mortgage,

car, personal business, etc.

What services are offered by a credit union?

• Low cost• Employment for members• Share draft accounts• Interest-earning checking accounts

What services are offered by a savings and loan?

• Invests the majority of its fund in home mortagages

• Insure savings and loan deposits

Explain reasons for the spread between interest charged and

interest earned.• 1) The goal of a financial intermediary, or a

business that loans money (bank, etc.), is to make a profit. In order to make a profit one method they use is to charge more to loan money than they pay on deposits. Example - a savings account might offer a 1% return, while a loan on a mortgage might be 5%. The difference between the interest charged and interest earned is profit for the bank.

Give examples of the direct relationship between risk and

return.• 1) Risk – the level of uncertainty of an

investment. 2) Risk and Return – the higher the risk, the higher potential return. The lower the risk, the lower the potential return.

Explain what a savings account is.

• Interest-bearing deposit not requiring prior notice before making a withdrawal

Explain what a US Treasury Bond is.

• Type of bond issued when the government borrows money for periods longer than year

• Have maturities ranging from more than 10 to as many as 30 years

• Come in denominations of $1,000 so small investors can afford to buy them

Explain a Stock Mutual fund.

• An investment fund that is made up of a pool of funds collected from many investors for the purpose of investing in securities (stocks, bonds, money market instruments and similar assets).

• Operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors.

• A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.

Explain stock.

• Certificate of ownership in a corporation

Give examples of who benefits and who loses from inflation.

• 1) Purchasing Power the number of goods/services that can be purchased with a unit of currency.

• 2) Unanticipated inflation – if someone is living on a fixed income and prices rise, their purchasing power diminishes

Define progressive tax.

• Tax where percentage of income paid in tax rises as level of income rises

Define regressive tax.

• Tax where percentage of income paid in tax goes down as income rises

Define proportional tax.

• Tax in which percentage of income paid in tax is the same regardless of the level of income

Explain how an increase in sales tax affects different income groups.

• The poor bear the burden of the regressive tax

List factors that affect credit worthiness.

• 1) Capacity - Capacity refers to the ability of the individual to generate revenues in order to pay back the loan.

• 2) Capital – borrowers accumulation of wealth measured in net worth and assets.

• 3) Character - Character refers to the financial history of the borrower; that is, whet kind of "financial citizen" is this person or business? Character is most often determined by looking at the credit history, particularly as it is stated in the credit score (FICO score). -Factors that will affect your credit score include: 1. Late payments 2. Delinquent accounts 3. Available credit

• 4. Total debt 4) Collateral – something of value that the borrower can give to the lender if they default on the payment

Explain the difference between simple and compound interest rates.

• 1) Simple – interest is earned on principal only. • 2) Compound – interest that is earned on

principal and any accumulated interest

Simple Interest Formula

• Simple interest= P x I x N• P= loan amount • I= interest rate• N= duration of loan

Compound Interest Formula

• = [P (1 + i)n] – P• = P [(1 + i)n – 1]• P= principal• i= nominal annual interest rate in

percentage terms• n= number of compounding periods

Continuous Compound Interest Formula

Health Insurance

• A type of insurance coverage that pays for medical and surgical expenses that are incurred by the insured.

• Health insurance can either reimburse the insured for expenses incurred from illness or injury or pay the care provider directly.

Auto Insurance

• A policy purchased by vehicle owners to mitigate costs associated with getting into an auto accident.

• Instead of paying out of pocket for auto accidents, people pay annual premiums to an auto insurance company.

• The company then pays all or most of the costs associated with an auto accident or other vehicle damage.

Disability Insurance

• a form of insurance that insures the beneficiary's earned income against the risk that disability will make working (and therefore earning) impossible.

Property Insurance

• homeowner's insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one's home, its contents, loss of its use (additional living expenses), or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.

Premium

• the amount that a consumer has to pay to the insurance company for coverage

Asset Protection

• – refers to a protecting the assets of individuals and business entities.

Deductible

• the amount that a consumer has to pay before the insurance company pays their part.

Shared Liability

• where two or more persons are liable in respect of the same liability, in most common law legal systems Asset Protection.

Identify skills that are required to be successful in the workplace.

• Communication Skills, leadership skills, problem solving, ability to self-manage and be self-motivated, etc.

Explain the significance of investment in education, training,

and skill development.

• Human Capital – the skills, ability, training and education of workers. As their human capital increases, so too does the ability to become more marketable in the workforce.