Download FE - Unit 5 Notes/Study Guide

Free Enterprise – Study Guide # 5
1.
The study of Economics is divided into two main categories:
--economic issues which address the behavior and decision making of small
units, such as businesses and individuals. Ex: the study of ____________ __________
--economic issues which address the behavior of the economy as a whole and
decision making by large units, in particular the government. Ex: the study of
_______________________________.
2.
The government’s role in the economy is fivefold:
--make and enforce laws to protect both consumers and producers.
--supply public goods and services
--use of goods and services
--control of competition in the marketplace
--promote achievement of our nations six major economic goals—freedom,
efficiency, growth, stability, security, and equity.
3.
As a promoter of the achievement of our nation’s economic goals, the government has as a major function
a responsibility to __________________ the economy.
4.
The economy of the U.S. ____________ and _______________ on a regular basis. This series of rising
and falling is known as the _________________. The highest point of this cycle is characterized by a period of
_________________________ and the lowest by a period of _________________ or ___________________.
The business cycle is divided into four stages:
--a period of growth in the economy
--a period of slowdown in the economy
--the highest point of expansion (prosperity or boom)
--the lowest point of contraction (recession or depression)
5.
To keep the economy on a middle course between the high and low points of this cycle, the government
uses three controls, or economic policies:
--taxing and/or government spending to stabilize economy (Congress)
--increasing or decreasing the money supply to stabilize economy (The Fed)
--setting limits on wages and/or prices (President or Congress)
6.
Because the U.S. operates using a free enterprise/market economy, ____________________ and
________________________ (organized groups of citizens with common interests and goals) can have some
influence on the economic policies chosen. ___________________ and ___________________ are two ways
citizens can become involved in economic policy making. Interest groups include organizations such as _______
, ___________, and the __________. Interest groups hire _______________, spokespersons who will express
the group’s point of view to Congress and the president. Because the number one goal of a politician is to
_____________________________________________, and because we are a ________________________,
politicians do listen to and respond to their constituents. As an old adage accurately states, “It’s the
___________________________ that gets the __________________.”
7.
Government economists try to keep one step ahead of the change in the _____________________ so
that they will know which economic policy to apply to keep the economy ___________________________. One
way they attempt to do this by keeping an eye on ____________________________________. These are
signals which indicate what direction the economy may be headed and include such things as _______________,
_________________, ______________________ , __________________, ____________________________,
____________________________, ________________________ and ________________________________.
8.
Not only does the government keep an eye on leading economic indicators, but wise _____________
do also. Keeping an eye (or ear) on leading economic indicators helps them to make sound borrowing, investing
and spending decisions.
9.
Three other important leading economic indicators are:
--(NI)--total annual income earned by everyone in the economy.
--(DPI), the total annual amount of after-tax income earned by individuals, and in a
one-year period.
--(GDP)--the dollar amount of all ________________ goods and services produced
___________________________ in a ______________________________.
10.
Of all the leading economic indicators, the most important is _______. To measure the ___________,
all _________________ goods and services produced in a __ _month period are multiplied by their __________
to get the dollar value of production.
11.
When the __________ grows, consumers realize that this increased production will allow them to satisfy
more of their __________________ (the more we produce, the more we consume). When it does not grow,
consumers become unhappy and dissatisfied with ___________________________ or its leaders. Among other
things, fewer goods being produced means the _____________ of these goods may go up, and/or it may mean
fewer ______________________ are required to produce them. Historically, during periods of economic decline,
everyone suffers—consumers, producers, and especially ________________, officials who are currently in office.
12.
Because it would be too complicated and time consuming to physically compile such a listing as this,
government statisticians generally use _________________ techniques and other methods to estimate both the
_______________ and the _________________________ of individual products counted in the GDP.
13.
Two classifications of products that are EXCLUDED when counting the GDP are:
--sales of used goods (ex. used car)
--products used to make other products ( ex. tires for new cars)
Intermediate products are eliminated from the GDP because if they
weren’t, they would end up being _________________, making the
GDP seem ______________ than it really is.
14.
The GDP also EXCLUDES ____________________________________, which are transactions that do
not take place in the market such as the value of people’s services when they perform their own _________
__________________________. The largest group of non-market transactions excluded from the GDP includes
the services that ___________________________ provide. If homemakers received pay for the ____________,
__________________,
_______________,
__________________ and other household chores they
perform, billions of dollars would be spent every year for these services.
15.
Still other activities take place in the market, but they are excluded from the GDP because they are
________________ and _______________________. These include ___________________,
_________,
_______________
and
______________________. Unreported illegal activities, plus some legal ones
that are not disclosed for tax reasons, are part of the __________________________________.
16.
Another characteristic of the GDP is that it represents total production ___________________________,
regardless of who owns the ______________________. Japanese automobiles produced in Kentucky are
_______________________________ in the GDP. Cars produced in U.S. owned plants located in Mexico are
___________________________ in the GDP.
17.
Using the GDP, economists and government leaders can make sound decisions about our nation’s
economy, but it can also use the GDP to ________________________ its growth to that of another
______________ or to compare its growth from ____________________ to the next.
18.
Determining the _______________________ (per unit or per person) GDP is done by dividing GDP by the
nation’s ______________________ Per capita GDP is used to determine a nation’s _____________________.
If per capita GDP ____________________________, it is an indication that the _________________________
for a nation’s citizens has also risen. We can then use per capita GDP to compare our standard of living to that of
other _________________________.
19.
________________, a leading economic indicator, is an increase in the average price level of all goods
and services. The opposite of that is __________________, or a decline in the average price level of all goods
and services. ___________________ occurs when demand (the total spending by consumers, businesses, and
government) ___________________ faster than the ________________ of goods and services, causing prices to
_______________ to ___________________ and _________________ levels. ________________
on the
other hand, occurs when the _________________________ of goods and services ___________________ more
rapidly than ____________________.
20.
Both inflation and deflation have an impact on a consumer’s ________________________________, the
amount of goods a consumer is able to buy. They also have an impact on _________________. When
_________________ go up, _________________ go up.
21.
A major problem when counting GDP is that it is subject to ______________ because of _____________.
With _______________________ the GDP may appear to grow from one year to the next without actually doing
so. Since GDP is _______________________________________________, if only _____________ goes up
and not __________________ we really didn’t produce more, the inflated dollar amount makes it look like we did.
22.
To ________________________________ caused by inflation, economists construct a _____________,
a statistical measurement of changes in prices over time. The most important price index used to calculate the
rate of inflation (how much the price of goods went up from one year to the next) is the _________________
________________________ (CPI). Economists use the ________ to help measure the ___________________
rate. This index shows the _______________________ of ____________________in the price of a “market
basket” of goods today compared with the same goods of an earlier time.
23.
Just as with the counting of the GDP, it is not practical to count every single item. A _______________
(“market basket”) of items proves to be just as accurate. Price changes for about _______________ items in
_____________ categories of goods and services are taken from _________geographic areas around the
country. These include items such as a gallon of ________, a gallon of __________, ________on a two bed room
apartment, ___________ service, ______________ service, and other items used by the typical American family
on a regular basis throughout a given year. Once the number and categories of goods are established, they
remain the same from year to year. When calculating the CPI a beginning or _______________ is established
and the cost of the market basket in that years has an assigned index value of 100. The percentage of change in
the cost of these items from year to year becomes the __________________ rate. This data is compiled by the
______________________________________.
24.
Several explanations have been offered for the causes of inflation, including:
--consumers, businesses and the government try to buy more than the economy
can produce. This leads to shortages, which in turn leads to higher prices. “Too
many dollars chasing too few goods.”
--when the Fed lowers the discount rate, the federal govt. tends to borrow
huge sums to finance its deficit spending. Consumers are crowded out of
the borrowing market because the government’s borrowing drives interest
rates back up. (Apply the law of supply and demand. When the demand
for borrowing is greater than the supply of money available, interest rates
rise which increases inflation.)
--increases in production costs (wages, natural resources, capital resources)
necessitate an increase in prices by business if they wish to maintain their profit
margin. The increase is passed on to the consumer, thereby causing inflation to
rise.
--higher prices force workers to ask for higher wages, which forces
producers to raise prices again, when causes workers to ask for even
higher wages. It continues to spiral upward, causing inflation to keep rising.
25.
Because purchasing power _________ as prices ______________, the dollar loses its value over time. In
1993, the dollar bought less than 6 cents worth of the same goods and services that it bought in 1900.
Decreased purchasing power is especially hard on ______________ people and others on ___________
incomes. Their money buys __________________ each month. Those not on fixed incomes have a better
chance to increase their income through _____________________, particularly if they work for a company that
provides a COLA (___________________________________________). COLA increases are based on the
____________________ determined by the _______.
26.
Rising inflation also means higher ________________________, which in turn causes the sales of many
products purchased on credit to _____________ (cars, homes, boats etc.) Likewise, businesses cut back on
factory orders to reduce the __________________________. Eventually this leads to ________________,
adding unemployment to the problem of inflation.
27.
From time to time, unusual circumstances may cause _________________ or a decrease in the general
price level. Only two significant periods of deflation have occurred in the past century: 1) the recession of the late
1910s just following ____________. 2) During the ______________________ of the 1930s.
28.
Several terms describe the severity of inflation:
--inflation in the range of 1-3% per year
--inflation ranging from 100-300% per year
--inflation above 500% (final stage before a monetary collapse)
29.
The record for hyperinflation was set in ________________ , when huge amounts of currency were
printed to pay the government’s bills during _____________. By the end of the war, it claimed that ______
____________________ (828 followed by 27 zeros) pengos (the Hungarian monetary unit) equaled one prewar
pengo. Countries such as _________________,
_________________, and the former
_______________________ have had brief bouts of hyperinflation, but luckily the U.S. has never reached such
proportions. Rates during the 1970s and early 1980s did reach as high as _________________%.