Economics Final Review and Notes PDF

Economics Notes: What is Economics? -​ Economics is the study of how people make choices to satisfy their wants Example: you must choose how to spend your time -​ GNP: Gross National Product, All products and outside -​ GDP: Gross Domestic Product, All products made within US limits...

Economics Notes: What is Economics? -​ Economics is the study of how people make choices to satisfy their wants Example: you must choose how to spend your time -​ GNP: Gross National Product, All products and outside -​ GDP: Gross Domestic Product, All products made within US limits Scarcity & Shortages -​ Scarcity occurs when there are limited quantities of resources to meet unlimited needs or desires (long term) -​ Shortages occur when producers will not or cannot offer goods or services at current prices (short term) The Factor of Production -​ Land: all natural resources that are used to produce goods and services -​ Labor: any effort that a person devotes to a task for which that person is paid -​ Capital: any human made resource that is used to create other goods and services Risk vs Return -​ On average stocks have a high rate of return; the increase or decrease in the original purchase price of an investment -​ Higher rate of return=greater risk; leads to uncertainty about the outcome of an investment -​ Stocks provide portfolio diversification; money invested in a variety of investments Types of Investments -​ Stocks -​ Binds -​ Exchanged traded funds -​ Real estate -​ Mutual funds 3 Basic Indicators= Markets -​ Dow Jones Industrial Average (DOW): Lists the 30 leading industrial blue chip stocks -​ Standard and Poor Composite Index: Covers market activity for 500 stocks, More accurate than DOW because it evaluates a greater variety of stock -​ National Association of Security Dealers Automated Quotations (NASDAQ): Monitors fast moving technological companies, Speculative stocks, Show dramatic ups and downs Ticker Symbols -​ 1, 2, 3 characters= New York Stock Exchange -​ 4 characters= NASDAQ Ups and Downs -​ The term bull market means the market is doing well because investors are optimistic about the economy and are purchasing stocks -​ The term bear market means the market is doing poorly and investors are not purchasing stocks or selling stocks already owned How Do You Buy & Sell Investments? -​ Full service broker -​ Discount broker -​ Online broker -​ Investment advisors New York Stock Exchange -​ NYSE -​ Oldest and largest: began in 1792 and has 2800 companies -​ Average stock price is $44.00 -​ Strict requirements American Stock Exchange -​ Began in 1849 -​ 2nd largest exchange -​ Its requirements are not as strict as NYSE allowing younger and smaller company to list -​ Average stock price is $24.00 NASDAQ -​ National Association of Securities Dealers Automated Quotations -​ Stocks are traded in an over the counter electronic market -​ 4000 companies -​ Company requirements aren't as strict -​ More volatile because companies are young and new Trade Offs and Opportunity Costs -​ Trade offs are all the alternatives that we give up whenever we choose one course of action over the others -​ The most desirable alternative given up as a result of a decision is known as opportunity costs -​ All individuals and groups of people make decisions that involve trade offs The Decision Making Grid -​ Economists encourage us to consider the benefits and costs of our decisions Thinking at the Margin -​ When you decide how much more or less to do you are thinking at the margin Example: how much you decide to study, the benefit: your grade, opportunity cost: the hours of sleep you missed out on Production Possibilities -​ A production possibilities graph shows alternative ways that an economy can use its resources -​ The production possibilities frontier is the one that shows the maximum possible output for that economy Efficiency -​ Using resources in such a way as to maximize the production of goods and services -​ An economy producing output levels on the production possibilities frontier is operating efficiently Growth -​ If more resources become available, or if technology improves, an economy can increase its levels of output and grow -​ When this happens, the entire production possibilities curve “shifts to the right” Exchange Trade Fund -​ A pool of multiple stocks under a single ticker, like an umbrella -​ Blue chip stocks -​ Mid cap socks -​ Small cap stocks -​ Bonds -​ Latest are BTC ETFs Bonds -​ A security representing a loan of money from a lender to a borrower for a set of time which pays a fixed rate of interest -​ Federal government -​ Municipalities Mutual Funds -​ An investment that pools money from several investors to buy a particular type of investment, such as stocks -​ Examples: index fund, mid cap, small cap, chip funds Economic Goals -​ Societies answer the three economic questions based on their values -​ Economic efficiency: present in capitalism; making the most of resources -​ Economic freedom: present in capitalism; freedom from government intervention in the production and distribution of goods and services -​ Economic security and predictability: present in communism; assurance that goods and services will be available, payments will be made on time, and a safety net will protect individuals in times of economic disaster -​ Economic equity: present in communism; fair distribution of wealth -​ Economic growth and innovation: present in capitalism; innovation leads to economic growth, and economic growth leads to a higher standard of living -​ Other goals: present in capitalism; societies pursue additional goals, such as environmental protection Four Economic Systems -​ An economic system is the method used by a society to produce and distribute goods and services -​ Traditional economics rely on habitat, custom, or ritual to decide what to produce, how to produce it, and to whom to distribute it -​ In centrally planned economies the central government makes all decisions about the production and consumption of goods and services -​ In a market economy, economic decisions are made by individuals and are based on exchange or trade -​ Mixed economies are systems that combine tradition and the free market with limited government intervention (most countries) Why do Markets Exist? -​ Markets exists because none of us produces all the goods and services we require to satisfy our wants and needs -​ A market is an arrangement that allows buyers and sellers to exchange goods and services freely -​ Specialization is the concentration of the productive efforts of individuals and firms on a limited number of activities What is a Mutual Fund? -​ Stocks and bonds are purchased by investment managers as investment institution allows access to millions of dollars to investment managers -​ Investment managers purchases shares of different company’s stocks varying in number of shares and sometimes concentrating in company’s size (growth stocks-  dividend, blue chip stocks- $90 to $2000 a share, mid cap stocks- $30 to $89, small caps- less than $20 a share, international, energy, etc.) -​ Sometimes they purchase company stocks from a specific sector like energy or technology -​ Average of net gain/loss each day is how you measure the profitability of the mutual fund but usually it is tracked quarterly or yearly -​ In a 401K you may pick 4, 5, or even 10 different funds in order to diversify your portfolio, depending on how many funds are available for you to invest in 401K 1.​ Investment vehicle which is employer initiated 2.​ Employee consents to enter into plan 3.​ Employee can contribute from 1% to 20% of his/her salary 4.​ Withdrawal without penalty of age 59.5 5.​ Supposed to supplement your financial needs along with social security Benefits of a 401K -​ Retired account -​ Tax shield -​ Company may match your contributions -​ Its portable Traditional IRA (Individual Retirement Account) 1.​ Account opened by yourself in brokerage firm 2.​ Access to purchase and sell stocks, mutual funds and bonds yourself 3.​ Up to $5000 each year may be deposited in account 4.​ You are taxed on earnings after you begin to access account at 59.5 5.​ You may deposit funds from a 401K before the age 59.5 without being taxed Roth IRA 1.​ Account opened by yourself in brokerage firm 2.​ Access to purchase and sell stocks, mutual funds and bonds yourself 3.​ Up to $5000 each year may be deposited in account 4.​ You are not taxed when you begin to withdraw funds from account at 59.5, unless you deposit money from a 401K 5.​ Now Roth IRA’s can purchase BTC in right exchange Benefits of Free Enterprise 1.​ Profit Motive: the drive for the improvement of material well being 2.​ Open opportunity: the ability for anyone to compete in the marketplace 3.​ Legal equality: equal rights to all 4.​ Private property rights: the right to control your possessions as you wish  5.​ Free contact: the right to decide what agreements in which you want to take part 6.​ Voluntary exchange: the right to decide what and when you want to buy and sell a product 7.​ Completion: the rivalry among sellers to attract consumers The Consumer’s Role -​ A fundamental purpose of the free enterprise system is to give consumers the freedom to make their own economic choices -​ Through their economic dealings with producers, consumers make their desires known. When buying products, they indicate to producers what to produce and how much to make -​ Consumers can also make their desires known by joining interest groups, which are private organizations that try to persuade public officials to vote according to the interests of the group’s members The Government’s Role -​ Americans expect the government to protect them from potential problems that arise from the production of various products of the products themselves Public Disclosure Laws -​ Laws that require companies to provide consumers with important information about their products, such as fuel efficiency of automobiles, side effects of medication Public Interest -​ Both state and federal governments’ involvement in concerns of the public as a whole such as environmental protection, sanitary food protection Tracking Business Cycles -​ Macroeconomics: the study of behavior and decision making of entire economies -​ A business cycle is a period of a macroeconomic expansion followed by a period of contraction -​ One measure of a nation's macroeconomy is gross domestic product, which is the total value of all final goods and services produced in a particular economy Promoting Economic Strength -​ Policy makers pursue three main outcomes as they seek to stabilize the economy -​ One aim of federal economic policy is to provide jobs for everyone who is able to work Growth -​ For each generation of Americans to do better than previous ones, the economy must grow to provide additional goods and services Stability -​ Stability gives consumers, producers, and investors confidence in the economy and in our financial institutions, promoting economic freedom and growth Unemployment gets measured every month Encouraged Innovation -​ The government encourages the development of new technologies in several ways -​ Technology is the process used to produce a good or service -​ Federal agencies fund many research and development projects; also, new technology often evolves out of government research -​ A patent gives the investor of a new product the exclusive right to produce and sell it for 20 years Public Goods -​ A public good is shared good or service for which it would be impractical to make consumers pay individually and to exclude nonpayers -​ Public goods are funded by the public sector, the part of the economy that involves transactions of the government -​ A free rider is someone who would not choose to pay for a certain good or service but who would get the benefits of it anyway if it is provided as a public good Market Failures -​ A market failure is a situation in which the market, on its own, does not distribute resources efficiently Externalities -​ An externality is an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume The Poverty Problem -​ The poverty threshold is an income level below that which is needed to support families or household -​ The poverty threshold is determined by the federal government and is adjusted periodically -​ Welfare is a general term that refers to a government aid to the poor Redistribution Programs -​ Cash transfers are direct payments of money to eligible people Temporary Assistance for Needy Families -​ This program allows individual states to decide how to best use federally provided funds Social Security -​ Social security provides direct cash transfers of retirement income to the nation’s elderly and living expenses to the disabled Stability -​ Unemployment compensation provides money to eligible workers who have lost their jobs Workers’ Compensation -​ Workers’ compensation provides a cash transfer of state funds to employees injured while on the job In Kind Benefits -​ In kind benefits are goods and services provided by the government for free or at greatly reduces prices (school lunch) Medical Benefits -​ Health Insurance is provided by the government for the elderly and disabled (Medicare) and for the poor people who are not covered by their employer’s insurance (Medicaid) Education Benefits -​ Federal state and local governments all provide educational opportunities for the poor What is the Law of Demand -​ The law of demand states that consumers buy more if a good when its prices decreases and less when its prices increases -​ The law of demand is the result of 2 separate behavior patterns that overlap, the substitution effect and the income effect -​ These 2 effects describe different ways that a consumer can change his or her spending patterns for other goods The Substitution & Income Effect -​ The substitution effect occurs when consumers react to an increase in good’s price by consuming less of that good and more of other goods -​ The income effect happens when a person changes his or her consumption of goods and services as a result of a change in real income The Demand Schedule -​ A demand schedule is a table that lists the quantity of a good a person will buy at each different price -​ A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at each different price What is Elasticity of Demand? -​ Elasticity of demand is a measure of how consumers react to a change in price -​ Demand for good that consumers will continue to buy despite a price increase is inelastic -​ Demand for a good that is very sensitive to changes in prices is elastic Factors Affecting Elasticity -​ Several different factors can affect the elasticity of demand for a certain good 1.​ Availability of Substitutes: If there are few substitutes for a good, then demand will not likely decrease as price increases. The opposite is also usually true. 2.​ Relative Importance: Another factor determining elasticity of demand is how much of your budget you spend on the good 3.​ Necessities vs Luxuries: Whether a person considers a good to be a necessity or a luxury has a great impact on the good’s elasticity of demand for that person 4.​ Change Over Time: Demand sometimes becomes more elastic over time because people can eventually find substitutes Elasticity & Revenue -​ The elasticity of demand determines how a change in prices will affect a firm's total revenue or income -​ A company’s total revenue is the total amount of money the company receives from selling its goods or services -​ Firms need to be aware of the elasticity of demand for the good or service they are providing -​ If a good has an elastic demand, raising prices may actually decrease the firm's total revenue The Law of Supply -​ According to the law of supply, suppliers will offer more of a good at a higher price How Does the Law of Supply Work? -​ Economists use the term quantity supplied to describe how much of a good is offered for sale at a specific price -​ The promise of increased revenues when prices are high encourages firms to produce more -​ Rising prices draw new firms into a market and add to the quantity supplied of a good Supply Schedules -​ A market supply schedule is a chart that lists how much of a good all suppliers will offer at different prices Supply Curves -​ A market supply curve is a graph of the quantity supplied of a good by all suppliers at different prices Input Costs & Supply -​ Any change in the cost of an input such as raw materials, machinery, or labor used to produce a good, will affect supply -​ As input costs increase the firm's marginal costs also increase, decreasing profitability of supply -​ Input costs can also decrease. New technology can greatly decrease costs and increase supply Government Influences on Supply -​ Subsidies: A subsidy is a government payment that supports a business or market subsidies cause the supply of a good to increase -​ Taxes: The government can reduce the supply of some goods by placing an excise tax on them. An excise tax is a tax on the production or sale of a good -​ Regulation: Regulation occurs when the government steps into a market to affect the price, quantity, or quality of a good. Regulation usually raises costs -​ Tariffs: A tax on foreign imports The Global Economy -​ The supply of imported goods and services has an impact on the supply of the same goods and services here -​ Government import restrictions will cause a decrease in the supply of restricted goods Future Expectations of Prices -​ Expectation of higher prices will reduce supply now and increase supply later. Expectation of lower prices will have the opposite effects Number of Suppliers -​ If more firms enter a market, the market supply of goods will rise. If firms leave the market, supply will decrease Balancing the Market -​ The point at which the quantity demanded and quantity supplied come together is known as equilibrium Market Disequilibrium -​ If the market price or quantity supplied is anywhere but at the equilibrium price, the market is in a state called disequilibrium Two Causes for Disequilibrium -​ Excess Demanded: Occurs when quantity demanded is more than quantity supplied -​ Excess Supply: Occurs when a quantity supplied exceeds quantity demanded -​ Interactions between buyers and sellers will always push the market back towards equilibrium Price Ceilings -​ A price ceiling is a maximum price that can be legally charged for a good -​ An example of a price ceiling is rent control, a situation where a government sets a maximum amount that can be charged for rent in an area Price Floors -​ A price floor is a minimum price, set by the government that must be paid for a good or service -​ One well known price floor is the minimum wage which sets a minimum price that an employer can pay a worker for an hour of labor A Central Bank -​ The issue of a central bank has been debated since 1790, when the first bank of the U.S was created -​ Debate was centered around the amount of control a central bank should have over the nations banking system -​ Following the panic of 1907, a series of serious bank runs, congress decided that a central bank was needed The Federal Reserve Act of 1913 -​ The federal reserve system, often referred to as the fed, is a group of 12 regional, independent banks. -​ Initially the federal reserve system did not work well because the actions of one regional would counteract the actions of another A Stronger Fed -​ In 1913 congress adjusted the federal reserve structure so that the system could respond more effectively to crises -​ Today’s fed has more centralized powers so that regional banks can work together while still representing their own concerns The Board of Governors -​ The federal reserve system is overseen by the seven member Board of Governors of the federal reserve -​ Actions taken by the federal reserve called monetary policy Federal Reserve Districts -​ The federal reserve system consists of 12 federal reserve districts with one federal reserve bank per district -​ The federal reserve banks monitor and report on economic activity in their districts Member Banks -​ All nationally chartered banks are required to join the def -​ Member banks contribute funds to join the system and receive stock in and dividends from the system in return. This ownership of the system by banks, not government, gives the fed a high degree or political independence The Federal Open Market Committee -​ The FOMC, which consists of the Board of Governors and 5 of the 12 district bank presidents, makes key decisions about interest rates and the growth of the U.S money supply Money Creation -​ The process by which money enters into the circulation Reserve Requirements -​ The fed has 3 tools available to adjust the money supply of the nation -​ The first tool is adjusting the required reserve ratio Tool #1: Reserve Requirements -​ Recession: Reducing reserve requirements: a reduction of the RRR would free up reserves for banks, allowing them to make more loans; a RRR reduction would also increase the money multiplier. -​ Both of these effects would lead to a substantial increase in the money supply -​ Inflation: Increasing Reserve Requirements: Even a slight increase in the RRR would require banks to hold more money in reserve, shrinking the money supply; this method is not used often because it would cause too much disruption in the banking system Tool #2: Discount Rate -​ The discount rate is the interest rate that banks pay to borrow money from the fed -​ Recession: Reducing the Discount Rate: If the fed wants to encourage banks to loan out more of their money, it may reduce the discount rate, making it easier or cheaper for banks to borrow money if their reserves fall too low -​ Reducing the discount rate causes banks to lend out more money which leads to an increase in the money supply -​ Inflation: Increasing the Discount Rate: If the Fed wants to discourage banks from loaning out more of their money, it may make it more expensive to borrow money if their reserves fall too low  -​ Increasing the discount rate causes banks to lend out less money which leads to a decrease in the money supply Tool #3: Open Market Operations -​ The most important monetary tool is open market operations. Open market operations are the buying and selling of government securities to alter the money supply -​ Bond purchase: in order to increase the money supply, the federal reserve bank of New York buys government securities on the open market; the bonds are purchased with money drawn from the fed funds. When this money is deposited in the bank of the bond seller, the money supply increases. -​ Bond Sales: when the fed sells bonds it takes money out of the money supply -​ When bond dealers buy bonds they write a check and give it to the fed. The fed processes the check and the money is taken out of the circulation How Monetary Policy Works -​ Monetarism is the belief that the money supply is the most important factor in macroeconomic performance The Money Supply and Interest Rate -​ The market for money is like any other, ad therefore the price for money-the interest rate-is high when money supply is low and is low when the money supply is large Interest Rates and Spending -​ If the fed adopts an easy money policy, it will increase the money supply -​ This will lower interest rates and increase spending, causing the economy to expand. -​ If the Fed adopts a light money policy, it will decrease the money policy. This will push the interest rates up and will decrease spending The Problem of Timing -​ Good timing: properly timed economic policy will minimize inflation at the peak of the business cycle and the effects of recessions in troughs -​ Bad timing: if stabilization policy is not timed properly, ot can actually make the business cycle worse Section 1: Multiple Choice (35 Questions) 1.​ What does GDP measure?​ a) Products produced by a nation, including outside its borders​ b) Products made within a country’s borders​ c) Amount of government spending​ d) None of the above 2.​ Which is an example of a natural resource?​ a) Money​ b) Trees​ c) Factories​ d) Labor 3.​ What is portfolio diversification?​ a) Investing in one type of stock​ b) Spreading investments across different assets​ c) Selling all investments at once​ d) Buying only real estate 4.​ The Dow Jones Industrial Average tracks how many stocks?​ a) 100​ b) 500​ c) 30​ d) 50 5.​ Which market is associated with technological stocks?​ a) NYSE​ b) S&P 500​ c) NASDAQ​ d) FTSE 6.​ A bull market is characterized by:​ a) Rising prices​ b) Falling prices​ c) No price change​ d) Government intervention 7.​ What is the main goal of a centrally planned economy?​ a) Freedom​ b) Government control​ c) Fair competition​ d) Efficiency 8.​ The opportunity cost is:​ a) The cost of all possible choices​ b) The least desirable alternative​ c) The most desirable alternative given up​ d) The financial price of a decision 9.​ Thinking at the margin involves:​ a) Making all decisions at once​ b) Deciding how much more or less to do​ c) Ignoring costs​ d) Focusing only on long-term goals 10.​What does the production possibilities frontier represent?​ a) Economic inefficiency​ b) Maximum output possible​ c) Total labor hours​ d) Government spending 11.​Public disclosure laws are meant to:​ a) Protect businesses from competition​ b) Require producers to provide consumer information​ c) Limit consumer spending​ d) Increase taxes 12.​Inelastic goods are:​ a) Necessities with unchanging demand​ b) Luxury goods with fluctuating demand​ c) Goods that change supply quickly​ d) Products unrelated to price changes 13.​The law of supply states that:​ a) As prices decrease, supply increases​ b) As prices increase, supply increases​ c) Supply and demand are always equal​ d) None of the above 14.​Which is an example of a price ceiling?​ a) Rent control​ b) Minimum wage​ c) Interest rates​ d) Profit tax 15.​What does the Federal Reserve System manage?​ a) National defense​  b) Tax collection​ c) Monetary policy​ d) International trade 16.​Public goods are typically funded by:​ a) Private businesses​ b) The government​ c) Non-profit organizations​ d) Individual consumers 17.​A market failure occurs when:​ a) Resources are efficiently distributed​ b) Resources are not distributed efficiently​ c) The government creates too many regulations​ d) Supply exceeds demand 18.​Which is NOT a benefit of free enterprise?​ a) Legal equality​ b) Profit motive​ c) Government monopoly​ d) Voluntary exchange 19.​Scarcity refers to:​ a) Short-term lack of resources​ b) Long-term limited resources with unlimited wants​ c) Overproduction of goods​ d) Temporary demand fluctuations 20.​Which of these is considered capital?​ a) A factory machine​ b) Forests​ c) Workers​ d) Stock certificates 21.​What type of investment has the highest risk and return?​ a) Bonds​ b) Real estate​ c) Stocks​ d) ETFs 22.​What does the poverty threshold measure?​ a) Average income​ b) Basic needs income level​  c) Taxable income​ d) National debt 23.​The S&P 500 tracks how many stocks?​ a) 30​ b) 100​ c) 500​ d) 1000 24.​What type of economy relies on customs and traditions?​ a) Mixed​ b) Market​ c) Traditional​ d) Centrally planned 25.​Government subsidies typically:​ a) Decrease supply​ b) Increase supply​ c) Increase demand​ d) Have no effect on supply 26.​Which is NOT a factor of production?​ a) Land​ b) Labor​ c) Technology​ d) Capital 27.​A centrally planned economy is often associated with:​ a) Capitalism​ b) Socialism​ c) Laissez-faire policies​ d) A market system 28.​Which of these is an indicator of inflation?​ a) Decrease in unemployment​ b) Increase in prices​ c) Decrease in GDP​ d) Increase in government spending 29.​What is the main purpose of the stock market?​ a) Government revenue​ b) Trading financial assets​ c) Setting tax rates​ d) Managing monetary policy  30.​The business cycle includes all EXCEPT:​ a) Expansion​ b) Peak​ c) Decline​ d) Regulation 31.​What is the primary role of entrepreneurs?​ a) Consume goods​ b) Manage land and labor​ c) Combine resources to produce goods​ d) Enforce laws 32.​Which is the BEST example of a public good?​ a) A highway​ b) A clothing store​ c) A factory​ d) A smartphone 33.​The most common goal of monetary policy is:​ a) Reducing government spending​ b) Controlling inflation​ c) Encouraging imports​ d) Increasing taxes 34.​What term describes a sustained rise in general price levels?​ a) Inflation​ b) Deflation​ c) Recession​ d) Stagnation 35.​When the supply of a product exceeds demand, this usually results in:​ a) Lower prices​ b) Higher prices​ c) No change in prices​ d) Increase in production Section 2: True/False (15 Questions) 36.​The law of demand states that as prices rise, demand increases. (False) 37.​A mixed economy combines aspects of market and planned economies. (True) 38.​The Federal Reserve directly controls tax policy. (False) 39.​A bear market indicates falling stock prices. (True) 40.​Public goods are exclusive to private ownership. (False) 41.​Opportunity cost is the second-best alternative given up. (True) 42.​Elastic goods have demand that changes significantly with price. (True) 43.​GDP includes products made by citizens outside a country’s borders. (False) 44.​Rent control is an example of a price floor. (False) 45.​Poverty is defined solely by unemployment rates. (False) 46.​Diversification reduces investment risk. (True) 47.​Bull markets are typically optimistic periods. (True) 48.​Efficiency is an economic goal to maximize resource use. (True) 49.​Scarcity can be eliminated with technological advancements. (False) 50.​Labor includes unpaid volunteer work. (False)