| Ability-to-Pay Principle | The amount of taxes that people pay should be based on their ability to pay (that is, their incomes).
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| Absolute Advantage | The ability of a country to produce a good at a lower cost than its trading partners.
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| Accelerator Principle | If sales or consumption is rising at a constant rate, gross investment will stay the same; if sales rise at a decreasing rate, both gross investment and GDP will fall.
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| Accounting Profit | Sales minus explicit cost. Implicit costs are not considered.
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| Aggregate Demand | The sum of all expenditures for goods and services.
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| Aggregate Demand Curve | Curve showing planned purchase rates for all goods and services in the economy at various price levels.
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| Aggregate Supply | The nation's total output of goods and services.
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| Aggregate Supply Curve | Curve showing the level of real GDP produced at different price levels during a time period, ceteris paribus.
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| Allocative Efficiency | Occurs when no resources are wasted; it is not possible to make any person better off without making someone else worse off.
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| Anticipated Inflation | The rate of inflation that we believe will occur; when it does, we are in a situation of fully anticipated inflation.
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| Antitrust Laws | These laws, including the Sherman and Clayton acts, attempted to enforce competition and to control the corporate merger movement.
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| Appreciation | An increase in the value of a currency in terms of other currencies.
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| Arbitration | An arbitrator imposes a settlement on labor and management if they cannot reach a collective bargaining agreement.
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| Asset Demand | Holding money as a store of value instead of other assets such as stocks, bonds, savings accounts, certificates of deposit, or gold.
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| Automatic Stabilizers | Programs such as unemployment insurance benefits and taxes that are already on the books to help alleviate recessions and hold down the rate of inflation.
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| Autonomous Consumption | The minimum amount that people will spend on the necessities of life.
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| Average Fixed Cost | Fixed cost divided by output.
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| Average Propensity to Consume | The percentage of disposable income that is spent; consumption divided by disposable income.
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| Average Propensity to Save | The percentage of disposable income that is saved; saving divided by disposable income.
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| Average Tax Rate | The percentage of taxable income that is paid in taxes; taxes paid divided by taxable income.
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| Average Total Cost (ATC) | Total cost divided by output.
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| Average Variable Cost (AVC) | Variable cost divided by output.
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| Backward-Bending Labor Supply Curve | As the wage rate rises, more and more people are willing to work longer and longer hours up to a point. They will then substitute more leisure time for higher earnings.
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| Balanced Budget | When federal tax receipts equal federal government spending.
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| Balance of Payments | The entire flow of U.S. dollars and foreign currencies into and out of the country.
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| Balance of Trade | The difference between the value of our imports and our exports.
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| Balance on Capital Account | A category that itemizes changes in foreign asset holdings in one nation and that nation's asset holdings abroad.
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| Balance on Current Account | A category that itemizes a nation's imports and exports of goods and services, income receipts and payments on investment, and unilateral transfers.
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| Bank | A commercial bank or thrift institution that offers checkable deposits.
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| Bank Run | Attempts by many depositors to withdraw their money out of fear that that bank was failing, or that all banks were failing.
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| Barrier to Entry | Anything that prevents the entry of new firms into an industry.
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| Barter | The exchange of one good or service for another good or service; a trade.
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| Base Year | The year with which other years are compared when an index is constructed: for example, a price index.
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| Benefits-Received Principle | The amount of taxes people pay should be based on the benefits they receive from the government.
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| Bonds | (See Government Bonds or Corporate Bonds.)
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| Boom | Period of prolonged economic expansion.
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| Break-Even Point | The low point on the firm's average total cost curve. If the price is below this point, the firm will go out of business in the long run.
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| Budget Deficit | When federal tax receipts are less than federal government spending.
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| Budget Surplus | When federal tax receipts are greater than federal government spending. Business Cycle*Increases and decreases in the level of business activity that occur at irregular intervals and last for varying lengths of time.
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| CPI | (See Consumer Price Index.)
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| Capital | All means of production (mainly plant and equipment) created by people.
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| Capital Account | The section of a nation's international balance of payments statement in which the foreign purchases of that nation's assets and that nation's purchases of assets abroad are recorded.
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| Capitalism | An economic system in which most economic decisions are made by private owners and most of the means of production are privately owned.
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| Capital/Output Ratio | The ratio of capital stock to GDP.
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| Cartel | A group of firms behaving like a monopoly.
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| Certificate of Deposit (CD) | A time deposit (almost always of $500 or more) with a fixed maturity date offered by banks and other financial institutions.
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| Change in Demand | A change in the quantity demanded of a good or service at at least one price that is caused by factors other than a change in the price of that good or service.
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| Change in Supply | A change in the quantity supplied of a good or service at at least one price that is caused by factors other than a change in the price of that good or service.
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| Circular Flow Model | Goods and services flow from business firms to households in exchange for consumer expenditures, while resources flow from households to business firms in exchange for resource payments.
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| Classical Economics | Laissez-faire economics. Our economy, if left free from government interference, tends toward full employment. The prevalent school of economics from about 1800 to 1930.
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| Closed Shop | An employer may hire only union members; outlawed under the Taft-Hartley Act.
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| Collective Bargaining | Negotiations between union and management to obtain agreements on wages, working conditions, and other issues.
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| Collusion | The practice of firms to negotiate price and/or market share decisions that limit competition in a market.
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| Commercial Bank | A firm that engages in the business of banking, accepting deposits, offering checking accounts, and making loans.
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| Communism | An economic system characterized by collective ownership of most resources and central planning.
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| Comparative Advantage | Total output is greatest when each product is made by the country that has the lowest opportunity cost.
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| Competition | Rivalry among business firms for resources and customers.
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| Complementary Goods | Goods and services that are used together; when the price of one falls, the demand for the other rises (and conversely).
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| Concentration Ratio | The percentage share of industry sales by the four leading firms.
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| Conglomerate Merger | Merger between two companies in unrelated industries.
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| Constant-Cost Industry | An industry whose total output can be increased without an increase in long-run-per-unit costs; an industry whose long-run supply curve is flat.
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| Constant Dollars | Dollars expressed in terms of real purchasing power, using a particular year as the base of comparison, in contrast to current dollars.
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| Constant Returns to Scale | Cost per unit of production are the same for any output.
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| Consumer Price Index | The most important measure of inflation. This tells us the percentage rise in the price level since the base year, which is set at 100; represented by CPI.
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| Consumer Surplus | The difference between what you pay for some good or service and what you would have been willing to pay.
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| Consumption | The expenditure by individuals on durable goods, nondurable goods, and services; represented by C.
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| Consumption Function | As income rises, consumption rises, but not as quickly.
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| Contraction | The downturn of the business cycle, when real GDP is declining.
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| Corporate Bonds | This is a debt of the corporation. Bondholders have loaned money to the company and are its creditors.
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| Corporate Stock | Share in a corporation. The stockholders own the corporation.
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| Corporation | A business firm that is a legal person. Its chief advantage is that each owner's liability is limited to the amount of money he or she invested in the company.
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| Cost-of-Living Adjustments (COLAs) | Clauses in contracts that allow for increases in wages, Social Security benefits, and other payments to take account of changes in the cost of living.
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| Cost-Push Inflation | Rising costs of doing business push up prices.
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| Craft Unions | Labor unions composed of workers who engage in a particular trade or have a particular skill.
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| Credit Unions | Financial institution cooperatives made up of depositors with a common affiliation.
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| Creeping Inflation | A relatively low rate of inflation, such as the rate of less than 4 percent in the United States in recent years.
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| Crowding-In Effect | An increase in private sector spending stimulated by federal budget deficits financed by U.S. Treasury borrowing.
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| Crowding-Out Effect | Large federal budget deficits are financed by Treasury borrowing, which then crowds private borrowers out of financial markets and drives up interest rates.
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| Crude Quantity Theory of Money | The belief that changes in the money supply are directly proportional to changes in the price level.
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| Currency | Coins and paper money that serve as a medium of exchange.
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| Current Account | The section of a nation's international balance of payments that records its exports and imports of goods and services, its net investment income, and its net transfers.
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| Cyclical Unemployment | When people are out of work because the economy is operating below the full-employment level. It rises sharply during recessions.
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| Decreasing Cost Industry | An industry in which an increase in output leads to a reduction in the long-run average cost, such that the long-run industry supply curve slopes downward.
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| Deficit | (See Budget Deficit.)
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| Deflation | A decline in the price level for at least two years.
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| Deflationary Gap | Occurs when equilibrium GDP is less than full-employment GDP.
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| Demand | A schedule of quantities of a good or service that people will buy at different prices; represented by D.
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| Demand Curve | A graphical representation of the demand schedule showing the inverse relationship between price and quantity demanded.
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| Demand Deposit | A deposit in a commercial bank or other financial intermediary against which checks may be written.
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| Demand, Law of | When the price of a good is lowered, more of it is demanded; when the price is raised, less is demanded.
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| Demand-Pull Inflation | Inflation caused primarily by an increase in aggregate demand: too many dollars chasing too few goods.
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| Demand Schedule | A schedule of quantities of a good or service that people are willing to buy at different prices.
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| Depository Institutions Deregulation and Monetary Control Act of 1980 | This made all depository institutions subject to the Federal Reserve's legal reserve requirements and allowed all depository institutions to issue checking deposits.
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| Depreciation | A fall in the price of a nation's currency relative to foreign currencies.
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| Depression | A deep and prolonged business downturn; the last one occurred in the 1930s.
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| Deregulation | The process of converting a regulated firm or industry into an unregulated firm or industry.
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| Derived Demand | Demand for resources derived from demand for the final product.
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| Devaluation | Government policy that lowers the nation's exchange rate so that its currency is worth less than it had been relative to foreign currencies.
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| Diminishing Marginal Utility | Declining utility, or satisfaction, derived from each additional unit consumed of a particular good or service.
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| Diminishing Returns, Law of | If units of a resource are added to a fixed proportion of other resources, marginal output will eventually decline.
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| Direct Tax | Tax on a particular person. Most important are federal personal income tax and payroll (Social Security) tax.
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| Discounting | The method by which the present value of a future sum or a future stream of sums is obtained.
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| Discount Rate | The interest rate charged by the Federal Reserve to depository institutions.
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| Discouraged Workers | People without jobs who have given up looking for work.
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| Diseconomies of Scale | An increase in average total cost as output rises.
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| Disequilibrium | When aggregate demand does not equal aggregate supply.
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| Disinflation | Occurs when the rate of inflation declines.
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| Disposable Income | Aftertax income. Term applies to individuals and to the nation.
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| Dissaving | When consumption is greater than disposable income; negative saving.
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| Dividends | The part of corporate profits paid to its shareholders.
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| Division of Labor | The provision of specialized jobs. Durable Goods*Things that last at least a year or two.
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| E-commerce | Buying and selling on the Internet.
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| Economic Cost | Explicit costs plus implicit costs.
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| Economic Goods | Goods that are scarce, for which the quantity demanded exceeds the quantity supplied at a zero price.
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| Economic Growth | An outward shift of the production possibilities frontier brought about by an increase in available resources and/or a technological improvement.
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| Economic Problem | When we have limited resources available to fulfill society's relatively limitless wants.
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| Economic Profit | Sales minus explicit costs and implicit costs.
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| Economic Rent | The excess payment to a resource above what it is necessary to pay to secure its use.
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| Economics | The efficient allocation of the scarce means of production toward the satisfaction of human wants.
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| Economies of Scale | Reductions in average total cost as output rises.
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| Efficiency | Conditions under which maximum output is produced with a given level of inputs.
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| Elasticity of Demand | Measures the change in quantity demanded in response to a change in price.
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| Entrepreneurial Ability | Ability to recognize a business opportunity and successfully set up a business firm to take advantage of it.
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| Equation of Exchange | Shows the relationship among four variables: M (the money supply), V (velocity of circulation), P (the price level), and Q (the quantity of goods and services produced). MV = PQ.
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| Equilibrium | When aggregate demand equals aggregate supply.
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| Equilibrium Point | Point at which quantity demanded equals quantity supplied; where demand and supply curves cross.
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| Equilibrium Price | The price at which quantity demand is equal to quantity supplied.
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| Euro | The common currency in most of Western Europe.
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| European Union (EU) | An organization of European nations that has reduced trade barriers among themselves.
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| Excess Reserves | The difference between actual reserves and required reserves.
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| Exchange | The process of trading one thing for another.
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| Exchange Rates | The price of foreign currency; for example, how many dollars we must give up in exchange for marks, yen, and pounds.
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| Excise Tax | A sales tax levied on a particular good or service; for example, gasoline and cigarette taxes.
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| Expected Rate of Profit | Expected profits divided by money invested.
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| Expenditures Approach | A way of computing GDP by adding up the dollar value at current market prices of all final goods and services.
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| Explicit Costs | Dollar costs incurred by business firms, such as wages, rent, and interest.
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| Exports | Goods and services produced in a nation and sold to customers in other nations.
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| Externality | A consequence of an economic activity, such as pollution, that affects third parties.
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| FDIC | (See Federal Deposit Insurance Corporation.)
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| Factors of Production | The resources of land, labor, capital, and entrepreneurial ability.
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| Featherbedding | Any labor practice that forces employers to use more workers than they would otherwise employ; a make-work program.
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| Federal Deposit Insurance Corporation | Insures bank deposits up to $100,000.
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| Federal Funds Rate | The interest rate banks and other depository institutions charge one another on overnight loans made out of their excess reserves.
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| Federal Open Market Committee (FOMC) | The principal decision-making body of the Federal Reserve, conducting open market operations.
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| Federal Reserve Note | Paper*money issued by the Federal Reserve.
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| Federal Reserve System | Central bank of the United States, whose main job is to control our rate of monetary growth.
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| Fiat Money | Paper money that is not backed by or convertible into any good; it is money because the government says it is money.
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| Financial Intermediaries | Firms that accept deposits from savers and use those deposits to make loans to borrowers.
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| Firm | A business that employs resources to produce a good or service for profit and owns and operate one or more plants.
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| Fiscal Policy | Manipulation of the federal budget to attain price stability, relatively full employment, and a satisfactory rate of economic growth.
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| Fiscal Year | Budget year. U.S. federal budget fiscal year begins on October 1.
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| Fixed Costs | These stay the same no matter how much output changes.
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| Fixed Exchange Rate | A rate determined by government and then maintained by buying and selling quantities of its own currency on the foreign exchange market.
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| Floating Exchange Rate | An exchange rate determined by the demand for and the supply of a nation's currency.
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| Foreign Exchange Market | A market in which currencies of different nations are bought and sold.
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| Foreign Exchange Rate | The price of one currency in terms of another.
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| Fractional Reserve Banking | A system in which depository institutions held reserves that are less than the amount of total deposits.
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| Free Trade | The absence of artificial (government) barriers to trade among individuals and firms in different nations.
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| Frictional Unemployment | Refers to people who are between jobs or just entering or reentering the labor market.
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| Fringe Benefits | Nonwage compensation, mainly medical insurance, that workers receive from employers.
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| Full Employment | When a society's resources are all being used with maximum efficiency.
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| Full-Employment GDP | That level of spending (or aggregate demand) that will result in full employment.
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| GATT (General Agreement on Tariffs and Trade) | An agreement to negotiate reductions in tariffs and other trade barriers.
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| GDP | (See Gross Domestic Product.)
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| GDP deflator | A price index used to measure price changes in the items that go into GDP.
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| GDP gap | The amount of production by which potential GDP exceed actual GDP.
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| Gold Standard | A historical system of fixed exchange rates in which nations defined their currency in terms of gold, maintained a fixed relationship between their stock of gold and their money supplies, and allowed gold to be freely exported and imported.
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| Government Bonds | Long-term debt of the federal government.
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| Government Expenditures | Federal, state, and local government outlays for goods and services, including transfer payments.
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| Government Purchases | All goods and services bought by the federal, state, and local governments.
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| Gross Domestic Product (GDP) | The nation's expenditure on all the goods and services produced in the country during the year at market prices; represented by GDP.
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| Gross Investment | A company's total investment in plant, equipment, and inventory. Also, a nation's plant, equipment, inventory, and residential housing investment.
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| Herfindahl-Hirschman Index | A measure of concentration calculated as the sum of the squares of the market share of each firm in an industry.
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| Horizontal Merger | Conventional merger between two firms in the same industry.
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| Household | An economic unit of one or more persons living under one roof.
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| Hyperinflation | Runaway inflation; in the United States, double-digit inflation.
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| Imperfect Competition | All market structures except perfect competition; includes monopoly, oligopoly, and monopolistic competition.
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| Implicit Costs | The firm's opportunity costs of using resources owned or provided by the owner.
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| Imports | Goods and services bought by people in one country that are produced in other countries.
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| Income | A flow of money to households. Income Approach*Method of finding GDP by adding all the incomes earned in the production of final goods and services.
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| Income Effect | A person's willingness to give up some income in exchange for more leisure time.
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| Incomes Policy | Wage controls, price controls, and tax incentives used to try to control inflation.
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| Increasing Costs, Law of | As the output of a good expands, the opportunity cost of producing additional units of this good increases.
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| Increasing Returns to Scale | A situation in which a firm's minimum long-run average total cost decrease as the level of output rises.
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| Indirect Tax | Tax on a thing rather than on a particular person; for example, sales tax.
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| Induced Consumption | Spending induced by changes in the level of income.
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| Industrial Union | A union representing all the workers in a single industry, regardless of each worker's skill or craft.
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| Inelastic Demand | A demand relationship in which a given percentage change in price results in a smaller percentage change in quantity sold.
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| Inferior Goods | Goods for which demands decrease when people's incomes rise.
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| Inflation | A general rise in the price level.
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| Inflationary Gap | Occurs when equilibrium GDP is greater than full-employment GDP.
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| Innovation | An idea that eventually takes the form of new, applied technology or a new production process.
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| Interest | The cost of borrowed funds.
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| Interest Rate | Interest paid divided by amount borrowed.
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| Interlocking Directorates | When one person serves on the boards of at least two competing firms.
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| Intermediate Goods | Goods used to
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| Investment | The purchase or construction of any new plant, equipment, or residential housing, or the accumulation of inventory; represented by I.
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| Jurisdictional Dispute | A dispute involving two or more unions over which should represent the workers in a particular shop or plant.
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| Keynesian Economics | As formulated by John Maynard Keynes, this school believed the private economy was inherently unstable and that government intervention was necessary to prevent recessions from becoming depressions.
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| Kinked Demand Curve | The demand curve for a noncollusive oligopolist, which is based on the assumption that rivals will follow a price decrease and will ignore a price increase.
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| Labor | The work and time for which employees are paid.
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| Labor Force | The total number of employed and unemployed people.
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| Labor Union | Worker organization that seeks to secure economic benefits for its members.
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| Laffer Curve | Shows that at very high tax rates, very few people will work and pay taxes; therefore government revenue will rise as tax rates are lowered.
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| Laissez-Faire | The philosophy that the private economy should function without any government interference.
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| Land | Natural resources used to produce goods and services.
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| Law of Demand | An increase in a product's price will reduce the quantity of it demanded, and conversely for a decrease in price.
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| Law of Diminishing (Marginal) Returns | The observation that, after some point, successive equal-sized increases of a resource, added to fixed factors of other resources, will result in smaller increases in output.
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| Law of Increasing Costs | As the output of one good expands, the opportunity cost of producing additional units of this good increases.
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| Law of Supply | An increase in the price of a product will increase the quantity of it supplied; and conversely for a decrease in price.
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| Legal Reserves | Reserves that depository institutions are allowed by law to claim as reserves; vault cash and deposits held at Federal Reserve district banks.
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| Legal Tender | Coins and paper money officially declared to be acceptable for the settlement of financial debts.
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| Less Developed Countries (LDCs) | Economies in Asia, Africa, and Latin America with relatively low per capita incomes.
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| Leveraged Buyouts | A primarily debt-financed purchase of a controlling interest of a corporation's stock.
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| Limited Liability | The liability of the owners of a corporation is limited to the value of the shares in the firm that they own.
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| Liquidity | Money or things that can be quickly and easily converted into money with little or no loss of value.
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| Liquidity Preference | The demand for money.
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| Liquidity Trap | At very low interest rates, said John Maynard Keynes, people will neither lend out their money nor put it in the bank, but will simply hold it.
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| Loanable Funds | The supply of money that savers have made available to borrowers.
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| Long Run | When all costs become variable costs and firms can enter or leave the industry.
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| Lorenz Curve | Data plotted to show the percentage of income enjoyed by each percentage of households, ranked according to their income.
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| M | The money supplyÑcurrency, checking deposits, and checklike deposits (identical to M1).
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| M1 | Currency, checking deposits, and checklike deposits.
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| M2 | M1 plus savings deposits, small-denomination time deposits, and money market mutual funds.
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| M3 | M2 plus large-denomination time deposits.
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| Macroeconomics | The part of economics concerned with the economy as a whole, dealing with huge aggregates like national output, employment, the money supply, bank deposits, and government spending.
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| Malthusian Theory of Population | Population tends to grow in a geometric progression (1, 2, 4, 8, 16), while food production tends to grow in an arithmetic progression (1, 2, 3, 4, 5).
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| Marginal Cost (MC) | The cost of producing one additional unit of output.
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| Marginal Physical Product (MPP) | The additional output produced by one more unit of input.
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| Marginal Propensity to Consume (MPC) | Change in consumption divided by change in income.
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| Marginal Propensity to Save (MPS) | Change in saving divided by change in income.
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| Marginal Revenue (MR) | The revenue derived from selling one additional unit of output.
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| Marginal Revenue Product (MRP) | The demand for a resource, based on that resource's marginal output and the price at which it is sold.
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| Marginal Tax Rate | Additional taxes paid divided by taxable income.
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| Marginal Utility | The additional utility derived from consuming one more unit of some good or service.
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| Margin Requirement | The maximum percentage of the cost of a stock purchase that can be borrowed from a bank, stockbroker, or any other financial institution, with stock offered as collateral; this percentage is set by the Federal Reserve.
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| Market | Any place where buyers and sellers exchange goods and services.
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| Market Failure | A less than efficient allocation of resources.
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| Maximum Profit Point | A firm will always produce at this point; marginal cost equals marginal revenue.
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| MC = MR Rule | For a firm to maximize its profits, marginal cost must equal marginal revenue.
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| Measure of Economic Welfare | A measure developed by James Tobin and William Nordhaus that modifies GDP by excluding "economic bads" and "regrettable necessities" and adding household, unreported, and illegal production.
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| Mediation | A third party acts as a go-between for labor and management during collective bargaining.
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| Medium of Exchange | Items sellers generally accept and buyers generally use to pay for a good or service; the primary job of money.
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| Merchandise Trade Balance | The difference between the value of merchandise exports and the value of merchandise imports.
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| Microeconomics | The part of economics concerned with individual units such as firms and households and with individual markets, particular prices, and specific goods and services.
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| Minimum Wage | An hourly wage floor set by government that firms must pay their workers.
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| Mixed Economy | An economy in which production and distribution is done partly by the private sector and partly by the government.
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| Monetarism | A school of economics that places paramount importance on money as the key determinant of the level of prices, income, and employment.
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| Monetary Policy | Control of the rate of monetary growth by the Board of Governors of the Federal Reserve.
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| Monetary Rule | The money supply may grow at a specified annual percentage rate, generally about 3-4 percent.
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| Money | Main job is to be a medium of exchange; also serves as a standard of value and a store of value.
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| Money Supply | Currency, checking deposits, and checklike deposits (M or M1).
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| Monopolistic Competition | An industry that has many firms producing a differentiated product.
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| Monopoly | An industry in which one firm produces all the output. The good or service produced has no close substitutes.
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| Monopsony | A market in which a single buyer has no rivals.
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| Multinational Corporation | A corporation doing business in more than one country; often it owns production facilities in at least one country and sells in many countries.
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| Multiplier | Any change in spending (C, I, or G) will set off a chain reaction leading to a multiplied change in GDP. Equation is 1y(1 / MPC).
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| NNP | (See Net National Product.)
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| National Debt | (See Public Debt.)
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| National Income | Net domestic product minus indirect business taxes.
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| Natural Monopoly | An industry in which a single firm can provide cheaper service than could several competing firms.
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| Negative Income Tax | Cash payments by the government to the poorÑan income tax in reverse. The cash payments decrease as income levels increase.
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| Net Exports | One country's exports to other countries minus its imports from other countries.
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| Net Investment | Gross investment minus depreciation.
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| Net National Product | Gross domestic product minus depreciation.
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| Net Productivity of Capital | The expected annual profit rate.
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| Net Worth | The difference between assets and liabilities.
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| Nominal Interest Rate | The real interest rate plus the inflation rate.
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| Noncompeting Groups | Various strata of labor that do not compete for jobs; for example, doctors and secretaries, skilled and unskilled workers.
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| Nondurable Goods | Goods that are expected to last or be used for less than one year.
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| Normal Good | A good whose demand varies directly with income; nearly all goods are normal goods.
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| Normal Profits | The return to the businessowners for the opportunity cost of their implicit inputs.
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| North American Free Trade Agreement (NAFTA) | A free trade area consisting of the United states, Canada, and Mexico.
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| Oligopoly | An industry with just a few firms.
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| Oligopsony | A market in which there are only a few buyers.
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| Open Economy | An economy linked to the rest of the world through international trade.
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| Open-Market Operations | The purchase or sale of Treasury securities by the Federal Reserve; main monetary policy weapon.
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| Open Shop | When no one is forced to join a union even though the union represents all the workers in contract negotiations.
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| Opportunity Cost | The forgone value of what you give up when you make a choice.
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| Output Effect | When the price of any resource rises, the cost of production rises, which, in turn, lowers the supply of the final product. When supply falls, price rises, consequently reducing output.
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| P | The price level, or the average price of all goods and services produced during the current year.
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| Paradox of Thrift | If everyone tries to save more, they will all end up saving less.
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| Partnership | A business firm owned by two or more people.
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| Payroll Tax | (See Social Security Tax.)
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| Per Capita Real GDP | Real GDP divided by population.
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| Perfect Competition | An industry with so many firms that no one firm has any influence over price, and firms produce an identical product.
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| Perfectly Elastic Demand Curve | A perfectly horizontal demand curve; the firm can sell as much as it wishes at that price.
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| Perfectly Elastic Supply Curve | A perfectly horizontal supply curve; the slightest decrease in price causes the quantity supplied to fall to zero.
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| Perfectly Inelastic Demand Curve | A perfectly vertical demand curve; no matter what the price is, the quantity demanded remains the same.
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| Perfectly Inelastic Supply Curve | A perfectly vertical supply curve; quantity supplied remains constant no matter what happens to price.
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| Permanent Income Hypothesis | Formulated by Milton Friedman, it states that the strongest influence on consumption is one's estimated lifetime income.
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| Personal Income | Income received by household, including both earned income and transfer payments.
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| Phillips Curve | Curve showing inverse relationship between the unemployment rate and the rate of inflation.
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| Plant | A store, factory, office, or other physical establishment that performs one or more functions in the production, fabrication, and sales of goods and services.
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| Poverty | A situation in which the basic needs of an individual or family exceed the means to satisfy them.
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| Poverty Rate | The percentage of the population with incomes below the official poverty line established by the federal government.
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| Present Value | The value today of the stream of expected future annual income that a property generates.
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| Price | The amount of money needed to buy a particular good, service, or resource.
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| Price Ceiling | Government-imposed maximum legal price.
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| Price Discrimination | Occurs when a seller charges two or more prices for the same good or service.
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| Price Floor | Government-imposed minimum price (used almost exclusively to keep agricultural commodity prices up).
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| Price Index | An index number that shows how the weighted average price of a market basket of goods changes through time.
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| Price Leadership | One firm, often the dominant firm in an oligopolistic industry, raises or lowers price, and the other firms quickly match the new price.
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| Price Level | A measure of prices in a given month or year in relation to prices in a base year.
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| Price System | Mechanism that allocates resources, goods, and services based on supply and demand.
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| Prime Rate | Rate of interest that banks charge their most creditworthy customers.
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| Product Differentiation | The distinction between or among goods and services made in the minds of buyers.
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| Production | Any good or service for which people are willing to pay.
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| Production Possibilities Curve | The potential total output combinations of any two goods for an economy.
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| Production Possibilities Frontier | A curve representing a hypothetical model of a two-product economy operating at full employment.
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| Productivity | Output per unit of input; efficiency with which resources are used.
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| Profit | The difference between total revenue and total cost.
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| Progressive Tax | Places greater burden on those with best ability to pay and little or no burden on the poor (for example, federal personal income tax).
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| Proportional Tax | A tax whose burden falls equally among the rich, the middle class, and the poor.
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| Proprietorship | A business firm owned by just one person.
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| Protective Tariff | A tariff designed to shield domestic producers of a good or service from the competition of foreign producers.
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| Public Debt | The amount of federal securities outstanding, which represents what the federal government owes (the accumulation of federal deficits minus surpluses over the last two centuries).
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| Public Goods | Goods or services produced by the government; they can be jointly consumed by many individuals simultaneously at no additional cost and with no reduction in quality or quantity.
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| Q | Output, or number of goods and services produced during the current year.
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| Quantity Theory of Money | Crude version: Changes in the money supply cause proportional changes in the price level. Sophisticated version: If we are well below full employment, an increase in M will lead to an increase in output. If we are close to full employment, an increase in M will lead mainly to an increase in P.
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| Quotas | Numerical limits imposed on the quantity of a specific good that may be imported.
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| Rational Expectations Theory | This is based on three assumptions: (1) that individuals and business firms learn through experience to anticipate the consequences of changes in monetary and fiscal policy; (2) that they act immediately to protect their economic interests; and (3) that all resource and product markets are purely competitive.
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| Real Balance Effect | The influence a change in household purchasing power has on the quantity of real GDP that consumers are willing to buy.
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| Real GDP | GDP corrected for inflation; actual production.
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| Real Income | Income adjusted for price changes.
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| Real Interest Rate | Nominal interest rate minus inflation rate.
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| Real Wages | Nominal wages corrected for inflation.
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| Recession | A decline in real GDP for two consecutive quarters.
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| Recovery | Phase of business cycle during which real GDP increases from trough level to level of previous peak.
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| Regressive Tax | Falls more heavily on the poor than on the rich; for example, Social Security tax.
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| Rent | (See Economic Rent.)
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| Rent Control | Government-set price ceiling on rent.
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| Required Reserve Ratio | Percentage of deposits that must be held as vault cash and reserve deposits by all depository institutions.
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| Required Reserves | Minimum vault cash or reserves; held at the Federal Reserve District Bank.
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| Reserves | Vault cash and deposits of banks held by Federal Reserve district banks.
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| Resources | Land, labor, capital, and entrepreneurial ability used to produce goods and services.
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| Retained Earnings | Earnings that a corporation keeps for investment in plant and equipment or for other purposes, rather than distributed to shareholders.
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| Right-to-Work Laws | Under the Taft-Hartley Act, states are permitted to pass these laws, which prohibit the union shop. (Union membership cannot be made a condition of securing employment.)
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| Rule of Reason | Mere size is no offense. Market conduct rather than market share should determine whether antitrust laws have been violated.
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| Saving | Disposable income not spent for consumer goods; equal to disposable income minus personal consumption expenditures.
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| Saving Function | As income rises, saving rises, but not as quickly.
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| Say's Law | Supply creates its own demand.
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| Scarcity | The inability of an economy to generate enough goods and services to satisfy all human wants.
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| Seasonal Unemployment | Unemployment resulting from the seasonal pattern of work in certain industries, with workers regularly laid off during the slow season and rehired during the busy season.
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| Secondary Boycott | A boycott of products or a company that sells the products of a company that is being struck.
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| Sherman Act | The federal antitrust law enacted in 1890 that prohibited monopolization and conspiracies to restrain trade.
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| Shortage | The amount by which the quantity demanded of a product exceeds the quantity supplied at a particular (below-equilibrium) price.
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| Short Run | The length of time it takes all fixed costs to become variable costs.
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| Shut Down | Cessation of a firm's operations as output falls to zero.
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| Shut-Down Point | The low point on the firm's average variable cost curve. If price is below the shut-down point, the firm will shut down in the short run.
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| Socialism | An economic system in which the government owns most of the productive resources except labor; it usually involves the redistribution of income.
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| Social Security Tax | A tax paid equally by employee and employer, based on employee's wages. Most proceeds are used to pay Social Security retirement and Medicare benefits.
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| Specialization | Division of productive activities so that no one is self-sufficient.
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| Stagflation | A period of either recession or stagnation accompanied by inflation.
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| Stock | (See Corporate Stock.)
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| Strike | When a collective bargaining agreement cannot be reached, a union calls for a work stoppage to last until an agreement is reached.
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| Structural Unemployment | When people are out of work for a couple of years or longer.
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| Substitute Goods | Products or services that can be used in place of each other. When the price of one falls, the demand for the other falls, and conversely with an increase of price.
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| Substitution Effect | If the price of a resource, say labor, goes up, business firms tend to substitute capital or land for some of their now-expensive workers. Also, the substitution of more hours of work for leisure time as the wage rate rises.
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| Supply (s) | A schedule of quantities that people will sell at different prices.
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| Supply, Law of | When the price of a good is lowered, less of it is supplied; when the price is raised, more is supplied.
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| Supply-Side Economics | Main tenets: economic role of federal government is too large; high tax rates and government regulations hurt the incentives of individuals and business firms to produce goods and services.
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| Surplus | The amount by which the quantity supplied of a product exceeds the quantity demanded at a specific (above-equilibrium) price.
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| Surplus Value | A Marxian term: the amount by which the value of a worker's daily output exceeds the worker's daily wage.
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| Tariff | A tax on imported goods.
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| Terms of Trade | The ratio of exchange between an imported good and an exported good.
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| Time Deposit | A deposit in a financial institution that requires notice of withdrawal or must be left for some fixed period of time.
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| Total Cost | The sum of fixed and variable costs.
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| Total Revenue | The price of a good or service multiplied by the number of units sold.
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| Transactions Demand for Money | The demand for money by individuals and business firms to pay for day-to-day expenses.
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| Transfer Payment | Payment by one branch of government to another or to an individual. Largest transfer payment is Social Security.
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| Transmission Mechanism | The series of changes brought about by a change in monetary policy that ultimately changes the level of GDP.
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| Unanticipated Inflation | A rate of inflation that is either higher or lower than expected.
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| Underemployment | Failure to use our resources efficiently. A situation in which workers are employed in positions requiring less skill and education than they have or other resources are employed in their most productive use.
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| Underground Economy | Unreported or illegal production of goods and services that is not counted in GDP.
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| Unemployment | The total number of people over 16 who are ready, willing, and able to work, who have been unsuccessfully seeking employment.
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| Unemployment Rate | Number of unemployed divided by the labor force.
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| Union Shop | All employees must join the union, usually within 30 days after they are hired.
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| Utility | The satisfaction you derive from a good or service that you purchase. How much utility you derive is measured by how much you would be willing to pay.
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| Variable Costs | These vary with output. When output rises, variable costs rise; when output declines, variable costs fall.
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| Velocity (V) | The number of times per year each dollar in the money supply is spent.
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| Vertical Merger | The joining of two firms engaged in different parts of an industrial process, or the joining of a manufacturer and a retailer.
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| Wage | The price paid for the use or services of labor per unit of time.
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| Wage and Price Controls | Rules established by the government that either place a ceiling on wages and prices or limit their rate of increase.
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| Wealth | Anything that has value because it produces income or could produce income.
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| Workfare | A plan that requires welfare recipients to accept jobs or to enter training programs.
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| World Trade Organization (WTO) | The successor organization to GATT, which handles all trade disputes among member nations.
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