Unit 4 & 5 test review Flashcards

the average price of goods. (typically in a market basket.)

A selected group of consumer g/s whose prices are tracked for the purpose of calculating a consumer price index. (measures cost of living.)

a measure of the average change over time in the prices paid by consumers for a market basket of g/s.

The % increase in the average price level of g/s over a period of time.

General, sustainable upward movement of average prices for goods & services. Can also mean a sustained fall in the purchasing power of money.

Occurs when price levels go down over time.

A certain, and expected, amount of gradual inflation every year, typically from 2-3%.

Occurs when inflation is very high and rapidly increasing.

Quantity theory, Demand-Pull theory, and Cost-Push theory.

Too much money in circulation in the economy. Meaning Money supplied must be carefully monitored.

Increase in overall demand.

Causes:

-Rapid Economic Expansion: consumers spend more= steady increase in demand=higher prices.

-Increased Govt. Spending: Govt. spends more freely

-Future Expectations: increase prices expected in future inflation.

Factors of production cost more.

Causes:

- External shocks: conflict, war, natural disaster

Purchasing power/income: reduces amount of g/s money can buy.

Interest Rates: as price increases interest rates increase. Interest rates are raised to ensure they receive profit.

Savings: saved money will lose its value it once had before.

People will not loan money, and it leads to decline in real GDP.

Describes fluctuations in economic GROWTH & DECLINE.

Real GDP is increasing. Unemployment is low. Consumer Behavior increases. Business Behavior increases, expansion of the company. Both are confident in spending. The Housing Market is increasing, new homes being built. Inflation & Interest Rates are increasing.

Maximum economic output. Marks the turning point into a period of decline.

Real GDP is decreasing. Unemployment increases. Consumer Behavior decreases. Business Behavior decreases, close stores. Both lose confidence in spending. The Housing Market is decreasing, foreclosures may occur. Inflation & Interest Rates both decrease.

Recession: Prolonged contraction lasting 6-18 months

Depression: Long, severe recession(18 months or longer.) High unemployment& low factory output.

Stagflation: Decline in real GDP (output) & rise in price level (inflation). Economy is un-moving.

Minimum economic output. Marks turning point to a period of recovery or growth.

Shows a clearer picture of the overall growth/trend of economic activity over time.

Leading (Before a change in phases): Housing Market (Contraction = “Buyer’s Market”; Expansion = “Sellers Market”

Coincident (Simultaneous with changes in phases): Unemployment

Lagging (After a change in phases): Inflation & Interest Rates

Business Decisions

Interest Rates

Consumer Expectations

External Shocks

hire more and spend more. This contributes to economic expansion (Rise in real GDP).

Spend less=impact on unemployment=GDP increases.

influence consumer spending. If downturn expect an economic down-turn they may save more and spend less causing a decrease in GDP. When they are confident about the economy they often spend more, increasing GDP.

Increased interest rates make it harder for consumers/businesses to borrow money. This may contribute to economic decline.

Negative: disruption in oil supply, droughts, stock market crash, terrorist attack

Positive: Sudden innovation in science or technology, discovery of mineral deposit, surplus crop

The budget reflects decisions to tax and spend, to borrow and lend, and to consume and invest.

a 12-month accounting period that a business uses for financial and tax reporting purposes.

govt. required to spend on certain programs.

govt spending that there is a choice in

Entitlements: people that meet a certain criteria for entitlements.

"Mean-tested": Benefits are dependent on income

Social Security: Monthly benefits retired or survivors or disabled people & their families receive.

Medicare: programs paying for hospital care and medical services. usually for over 65.

Medicaid: Benefits low income families, disabled, elderly by assisting with medical care costs.

National Defense, Transportation, Education, Energy, etc.

Spending more than you make

The total of every time we overspent. All annual deficits since 1776.

spending on wars, increased govt. spending during recession, and taxes decreased.

Bonds. You're loaning money to the govt. to be later compensated with interest.

required payment to local, state or national govt.

Income received by govt.

something that is taxed. Four main types: Income, corporate, property, and sales.

1. Generate revenues to support functions of government
2. Pay for infrastructure and other public services
3. Promote social & economic goals
4. Used to redistribute income

EQUITY(fair): Established by how uniformly a tax is applied and the fairness of the burden it imposes.

ABILITY TO PAY: Individuals & entities should be taxed based on their ability to pay.

BENEFITS RECEIVED:Individuals who benefit directly from public goods/services
should pay for them in proportion to the amount of benefits received.

SIMPLICITY: Determined by how easy it is for the taxpayer to understand and how easy it is for the government to collect.

EFFICIENCY: Judged by how well the tax achieves the goal of raising revenue for the
government with the least cost in terms of administration.

A tax for which the % of income paid in taxes remains the same for ALL income levels. Pros: Simplicity. Fair because everyone pays the same rate regardless of income.(Equitable) Cons: The tax burden is disproportionate & a larger burden on lower incomes.(Ability-to-pay)

A tax for which the % of income paid in taxes increases as income increases. Pros: Fair because it requires those with a greater ability to pay taxes to pay more than those who do not. Cons: can discourage investment, entrepreneurship, and economic growth, as individuals may have less incentive to earn more if a significant portion is taxed at higher rates. May encourage tax evasion to minimize tax liabilities. Not simply--complex.

Percentage of income paid in taxes decreases as income increases. Pros: straightforward & easy to administer, typically involve a fixed tax rate. Some argue regressive taxes on certain goods can discourage undesirable consumption. "user pays" principle. Everyone pays the same tax rate on the taxed goods or services. Cons: Impose a greater financial burden on lower-income individuals.

a document used by employees to inform their employers about how much money to withhold from their paychecks in order to pay federal income tax.

money taken from (or withheld) from pay before the worker received it.

taxes that are withheld from an employee's paycheck by their employer and are used to fund various government programs and benefits (primarily Social Security & Medicare).

a document used by employers to report an employee's annual earnings and the amount of taxes already withheld from their pay.(Needed for filing taxes)

form used to report income and taxes owed to the government.

the total amount of money an individual/entity earns before any deductions, taxes, or expenses are subtracted.

an expense that can be subtracted from a taxpayer's gross income to determine their taxable income.

the portion of income subject to taxation.

a refund of overpaid taxes that is issued by the government to a taxpayer.

Date taxes are due each year

Tax incidence refers to the redistribution of the burden of a tax onto other individuals/groups. Ultimately, it reflects who bears the ACTUAL cost of a tax.

Corporations often pass the burden of increased taxes on to consumers employees, and/or shareholders.

Consumers bear the burden of taxes on in-elastically demanded goods Suppliers bear the burden of taxes on elastically demanded goods.

Property owners who rent out space to tenants, businesses, and so on may pass the burden of various property taxes onto renters.

to increase the money supply just fast enough to keep up with economic growth – but no faster.

A minimum percentage of deposits banks must keep in reserve at all times.(Banks cannot loan out all the money they take in).

Banks can borrow money from the Federal Reserve Bank to shore up their reserves. The interest rate on these loans is known as discount rate.

Involves the buying and selling of government bonds. (The Fed’s most used tool)

used in a recession (or when predicting a recession) to speed the economy up.

Expand economy, increase output, reduces unemployment .

used to slow the economy down and avoid inflation. (If producers cannot expand production enough to meet demand → will raise prices → which leads to inflation)

Slows economy to avoid inflation, decrease output, decrease demand.

Increase spending; Increases demand-output increases-employment increases. Cut Taxes; individuals keep money-consumers/businesses spend more- businesses raise prices&production increases.

slow economy to avoid inflation-decreases output- decreases demand.

Decrease Spending; Decreases demand-production decreases- unemployment increases. Increase taxes; individuals/businesses have less money to spend-demand decreases-production decreases.

Taxes increase = Tax revenue increases.

explains how money is spend as it moves through the economy.

Difficulty Changing Spending Levels & Concerns; Mandatory vs. Descretionary. Changing spending is likely to cause deficit spending resulting in increased national debt.

Predicting The Future; Difficult to predict speed of changes in business cycle OR future behaviors of individuals.

Delayed Results; Changes take time! Tracking trends, determining courses of action, implementing and then reanalyzing takes time. Political Pressures; President/Members of congress often do what benefits the people who elect them versus what is good for the economy.

Coordinating Fiscal Policy branches & levels of branches & levels of
government must work together, which is difficult. Smaller economies differ widely. Short & long-term effects of changes my vary.

The Federal Reserve follows an easy money policy, encourages economic growth & lowers the unemployment rate.

The Fed adopts a tight money policy to slow economic growth& decrease inflation rate.

RESERVE RATIO DECREASE! Banks decrease reserves,
which increases lending, which increases money in the money supply, which increases spending) INTEREST RATES DECREASE! (People are more willing to borrow money, money supply then expands) OPEN MARKET OPERATIONS Buy Bonds. (Federal Reserve buys bonds, which increases reserves, which increases lending, which increases the money in the money supply)

RESERVE RATIO INCREASE (Banks increases reserves, which decreases lending, which decreases money in the money supply, which
decreases spending) INTEREST RATES INCREASE! (People are less willing to borrow money, money supply then decreases) OPEN MARKET OPERATIONS Sell Bonds. (Federal Reserve sells bonds, which takes money out of the money supply)