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Guided Reading Activities 1

Name Date Class

For use with textbook pages 5–10

S CARCITY AND THE SCIENCE OF ECONOMICS

RECALLING THE FACTS

Directions: Use the information in your textbook to answer the questions. Use another sheet of paper if necessary.

1. What is the basic economic problem facing all societies?

2. How is need different from want?

3. What do the letters TINSTAAFL stand for, and what does the term mean to consumers?

4. What are the three basic questions societies have to answer about the way their resources are used?

a.

b.

c.

5. List the factors of production and define each one.

a.

b.

c.

d.

6. What are the four key elements of the study of economics? Explain briefly why each one is important.

a.

a.

b.

b.

c.

c.

d.

d.

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2 Guided Reading Activities

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B ASIC ECONOMIC CONCEPTS

OUTLINING

Directions: Locate the following headings in your textbook. Then use the information under the headings to help you write each answer. Use another sheet of paper if necessary.

I. Goods, Services, and Consumers

A. Introduction—What are economic products?

B. Goods—What is the difference between a consumer good and a capital good?

B.

C. Services—What kind of economic product is a service?

B.

D. Consumers—What is a consumer?

II. Value, Utility, and Wealth

A. Introduction—To what does value refer?

B. The Paradox of Value—What is the paradox of value?

B.

C. Utility—What is required for something to have value?

B.

D. Wealth—What is wealth?

III. The Circular Flow of Economic Activity

A. Introduction—What is the key feature of circular flow?

B. Factor Markets—What is a factor market?

C. Product Markets—Where do individuals spend their income from the resources they sell?

B.

IV. Productivity and Economic Growth

A. Productivity—What is productivity?

B. Investing in Human Capital—In what ways can government, businesses, and individuals invest in human capital?

C. Division of Labor and Specialization—How do division of labor and specialization affect productivity?

B.

D. Economic Interdependence—What is economic interdependence?

B.


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E CONOMIC CHOICES AND DECISION MAKING

FILLING IN THE BLANKS

Directions: Use your textbook to fill in the blanks using the words in the box. Some words may be used more than once. Use another sheet of paper if necessary.

trade-offs cost-benefit analysis maximum combinations

free enterprise economy standard of living decision-making grid

production possibilities frontier opportunity cost fully employed

Trade-Offs and Opportunity CostWhenever people make economic decisions, they face 1 , or alternative choices. Using a2 allows consumers to consider various alternatives and decide which one comes closest to meeting their needs. 3 is more than the price tag on a good or service. It is the cost of the next-best alternative use of money, time, or resources.

Production PossibilitiesTo illustrate the concept of 4 , economists use a diagram representing variouscombinations of goods and/or services an economy can produce when all productive resources are5 . By showing the various alternatives, the 6 allowsproducers to decide how to allocate limited resources. The diagram indicates the 7 of goods and/or services that can be produced. If, however, for various reasons some resources are not8 , the producer cannot reach its full production potential and the9 of that failure is whatever is not produced. Economic growth occurs when more resources or increased productivity causes the 10 to move outward.

Thinking Like an EconomistEconomists use various methods to help people make the best choices among the many wants that compete for the use of scarce resources. One of the most important ways is to build economic models. Another is 11 , a way of thinking about a problem that compares the costs of an action to the benefits received. This allows a business, for example, to choose investment projects that give the highest return per dollar spent.

The Road AheadThe study of economics can provide a more detailed understanding of a 12 , where consumers and privately owned businesses, rather than government, make the majority of economic decisions. It provides an understanding of a number of factors that have a bearing on our 13 , which is the quality of life based on the ownership of the necessities and luxuries that make life easier.


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E CONOMIC SYSTEMS

RECALLING THE FACTS


1. Define the term economic system.

2. Describe each type of economic system. Then briefly state its major advantages and disadvantages.

a. Traditional economy

Advantages:

Disadvantages:

b. Command economy

Advantages:

Disadvantages:

c. Market economy

Advantages:

Disadvantages:

d. Mixed economy

Advantages:

Disadvantages:

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E VALUATING ECONOMIC PERFORMANCE

OUTLINING


I. Economic and Social Goals

A. Economic Freedom

1. What are three examples of economic freedom for individuals?

2. What kind of economic freedom do business owners want?

B. Economic Efficiency—What happens if resources are wasted?

C. Economic Equity—What are two examples of economic equity?

D. Economic Security

1. What do American workers want protection from?

2. What kind of protection does Social Security offer?

E. Full Employment

1. What happens when people work?

2. What happens when people do not have jobs?

F. Price Stability

1. What is inflation?

2. What happens to people on fixed incomes when there is inflation?

G. Economic Growth—Why is economic growth needed as a population grows?

H. Future Goals—What may happen to our goals as society evolves?

II. Resolving Trade-Offs Among Goals

A. What is the opportunity cost of a policy of protecting a domestic industry, such as shoe manufacturers?

B. What is the trade-off in increasing the minimum wage?

C. How are trade-offs among goals resolved?


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A MERICAN FREE ENTERPRISE



economic freedom profit capitalism

private property rights voluntary exchange mixed economy

competition consumer sovereignty profit motive

free enterprise modified free enterprise economy

Introduction/Characteristics of Free Enterprise Capitalism1 is an economic system in which private citizens own and use the factors of production to generate profits. The U.S. economy is based on 2 , under which resources are privately owned and competition is allowed to flourish with a minimum of government interference. One characteristic of this kind of economy is 3 , which allows people to choose their occupation, employer, and job location. Another characteristic is 4 , the act of buyers and sellers freely and willingly engaging in market transactions that benefit both the buyer and seller.

Another major feature of capitalism is 5 , the privilege that entitles people to own and control their possessions. The extent to which people or organizations are better off at the end of a period than they were at the beginning is called 6 . The 7 is the incentive that encourages people and organizations to improve their material well-being. Finally, 8 thrives on 9 , which is the struggle among sellers to attract consumers.

The Role of the EntrepreneurThe entrepreneur’s role is to start new businesses and take risks. They are the sparkplugs of a 10 economy. When entrepreneurs are successful, many benefit.

The Role of the ConsumerIn the United States, consumers have power in the economy because they determine which products are produced. The term 11 is another way of saying that the customer is always right. Consumers “vote” with their dollars; that is, they have a say in what is and what is not produced.

The Role of GovernmentThe government’s involvement in the economy reflects people’s desire to modify the economic system. The result is the emergence of the 12 , or 13 , one in which people and businesses carry on their economic affairs freely but are subject to some government intervention and regulation.

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F ORMS OF BUSINESS ORGANIZATION

RECALLING THE FACTS


1. What are the advantages and disadvantages of a sole proprietorship?

Advantages:

Disadvantages:

2. What is the difference between a general partnership and a limited partnership?

3. How is a corporation formed?

4. What are the advantages and disadvantages of a corporation?

Advantages:

Disadvantages:

5. Explain the connection between a bond, principal, and interest.


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B USINESS GROWTH AND EXPANSION

OUTLINING


I. Growth Through Reinvestment

A. Estimating Cash Flows—What does cash flow represent?

B. Reinvesting Cash Flows

1. What can business owners do with cash flow to help their businesses?

2. What can happen when cash flows are reinvested in the business?

II. Growth Through Mergers

A. Introduction—What happens when two firms merge?

B. Types of Mergers—What is the difference between a horizontal merger and a vertical merger?

C. Reasons for Merging—What are five possible reasons for mergers?

D. Conglomerates—What is the main reason for a conglomerate to want diversification?

E. Multinationals—What are the advantages and disadvantages of multinationals?

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N ONPROFIT ORGANIZATIONS


Directions: Use your textbook to fill in the blanks using the words in the box. Use another sheet of paper if necessary.

public utilities professional association credit union

consumer cooperative cooperative collective bargaining

service cooperative labor union nonprofit organization(s)

IntroductionIn addition to businesses that use scarce resources to produce goods and services in hopes of earning a profit, there are 1 that operate to promote the collective interests of their members rather than to seek financial gain for their owners.

Community Organizations and CooperativesNonprofit organizations include community organizations, such as schools, churches, and hospitals. Another example of a nonprofit organization is a 2 , which is a voluntary association of people formed to carry on some kind of economic activity that will benefit its members. The 3 is a voluntary association that buys bulk amounts of goods on behalf of its members. A 4 provides services rather than goods. One example is a 5 that accepts deposits from, and makes loans to, employees of a particular company or agency.

Labor, Professional, and Business OrganizationsAnother important economic institution is the 6 , an organization of workers formed to represent its members’ interests in employment matters. It participates in 7 when it negotiates with management over various job-related matters. Workers may also belong to a 8 —a group of people in a specialized occupation that works to improve the working conditions, skill levels, and public perceptions of the profession.

GovernmentGovernment plays a direct role in the economy when it supplies a good or service. It plays an indirect role when it regulates certain areas of the economy. One such case is the regulation of 9 , where investor- or municipal-owned companies offer important products to the public, such as water or electric service.

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HAT IS DEMAND?

RECALLING THE FACTS


1. What three factors determine the demand for a product?

2. What is microeconomics?

3. What is the purpose of a demand schedule?

4. How is a demand curve similar to a demand schedule? How is it different?

5. What does the Law of Demand state?

6. What does the market demand curve show?

7. What is marginal utility?

8. How does the principle of diminishing marginal utility affect how much people are willing to pay?

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F ACTORS AFFECTING DEMAND

OUTLINING


I. Change in the Quantity Demanded

A. Introduction—What change is graphically represented as movement along the demand curve?

B. The Income Effect

1. What happens when prices drop?

2. How can an increase in price affect demand?

C. The Substitution Effect—What do consumers tend to do when similar products are available and one is more costly than the other?

II. Change in Demand

A. Introduction—What is a change in demand?

B. Consumer Income—What happens if consumer income rises?

C. Consumer Tastes—What factors can affect consumer tastes?

D. Substitutes—What happens to the demand for a product if the price of its substitute goes up?

E. Complements—How does an increase in a product’s price affect demand for the product’s complement?

F. Expectations

1. What happens to the demand for a product if consumers think that a future product will be better?

2. What happens to the demand for a product if consumers think there will be a shortage in the future?

G. Number of Consumers

1. What happens to the market demand curve if there is an increase in the number of consumers?

2. What happens to the market demand curve whenever anyone leaves the market?


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E LASTICITY OF DEMAND



elastic demand elasticity inverse

proportional inelastic unit elastic

elasticity total expenditures

Introduction/Demand ElasticityConsumers are sensitive to changes in prices. A change in price can affect quantity demanded. This cause-and-effect relationship in economics is known as 1 . The extent to which a change in price causes a change in the quantity demanded is called 2 . Demand is 3 when a given change in price causes a relatively larger change in quantity demanded. Sometimes a lower or higherprice does not create much change in demand. When the change in demand is relatively small, the demand isconsidered 4 . When demand is elastic and inelastic, the demand is called5 , the percentage change in quantity equals the percentage change in price. Unitelastic demand causes a(n) 6 change in quantity demanded.

The Total Expenditures TestTo estimate elasticity, one can look at the effect that a price change has on 7 , which is the amount that consumers spend on a product at a particular price. Total expenditures are found by multiplying the price of a product by the quantity demanded. For elastic demand, when the price goes down, total expenditures go up. This is called a(n) 8 relationship. For inelastic demand, total expenditures decline when the price declines. For unit elastic demand, total expenditures remain unchanged when the price decreases. If the change in price and expenditures move in opposite directions, demand is 9 . If they move in the same direction, demand is 10 . If there is no change in expenditures, demand is 11 .

Determinants of Demand ElasticitySeveral factors determine whether a good is elastic or inelastic. When a consumer needs the product and cannot postpone the purchase, demand tends to be 12 . If there are enough substitutes available, consumers can switch back and forth between products in order to get the best price. Demand is then said to be13 . The fewer the substitutes, however, the more inelastic the demand. If thepurchase uses a large portion of income, people are more sensitive to price changes, and demand tends to be14 .

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W HAT IS SUPPLY?

RECALLING THE FACTS


1. What does the Law of Supply State?

2. Explain how each of the following tools can help businesses make production decisions.

a. Supply schedule:

b. Supply curve:

c. Market supply curve:

3. What does a change in quantity supplied respond to?

4. Why does the supply curve shift to the left?

5. Name the seven factors that determine whether supplies increase or decrease.

a. b. c. d. e. f. g.

6. What is supply elasticity?

7. What characterizes an inelastic supply curve?

8. What changes does a unit elastic supply curve show?


T HE THEORY OF PRODUCTION

OUTLINING


I. The Production Function

A. Introduction—What is a production function?

B. The Production Period

1. What is the short run? 2. What is the long run?

C. Total Product—What is total product?

D. Marginal Product—What is marginal product?

II. Three Stages of Production

A. Stage I—Increasing Marginal Returns1. What is the criterion for determining how long total output will rise at an increasingly faster rate?

2. When do companies try to hire more workers?

B. Stage II—Decreasing Marginal Returns

1. What happens to the rate of increase in total production during this stage?

2. What is the principle of diminishing returns?

C. Stage III—Negative Marginal Returns

1. What happens to marginal product during this stage?

2. What happens to total output during this stage?

3. What effect does this stage have on hiring?


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C OST, REVENUE, AND PROFIT MAXIMIZATION



overhead total costs marginal costs equal

variable costs total revenue e-commerce break-even point

marginal analysis marginal revenues fixed costs

Measures of CostCost is divided into several categories. The first is 1 —the costs that an organization incurs even if there is little to no activity. The total of these unchanging costs, or 2 , remains the same. On the other hand, expenses that change—such as one associated with labor and raw materials—are 3 . The sum of these two costs is 4 . Another category of cost is 5 —the extra costs incurred when a business produces one additional unit of a product.

Applying Cost PrinciplesAn entrepreneur engaged in 6 —electronic business or exchange conducted over the Internet—is an example of a business with very low 7 . When a business analyzes its costs, it can find the level of production where it generates just enough revenue to cover its total operating costs, which is called the 8 .

Marginal Analysis and Profit MaximizationBusinesses use two key measures of revenue to find the amount of output that produces the greatest profit.9 is all the revenue that a business receives. Even more important is 10 ,which is the extra revenue associated with the production and sale of one additional unit of output. Economists use11 , a type of decision making that compares the extra benefits to the extra costs of taking an action. Businesses want to know how to generate the maximum profit. They can do so by comparing extra expenses, or 12 , and extra benefits, or 13 . The profit-maximizing quantity of output is reached when the benefit and cost are 14 .

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For use with textbook pages 143–146.

P RICES AS SIGNALS

RECALLING THE FACTS


1. What are the four reasons that prices in a market economy perform the allocation function so well?

a.

b.

c.

d.

2. What is rationing, and when is it most likely to be used?

3. Describe the problems that rationing can lead to.

a.

a.

a.

b.

a.

b.

c.

a.

4. What is a rebate, and how is it used?


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T HE PRICE SYSTEM AT WORK

OUTLINING


I. The Price Adjustment Process

A. A Market Model

1. What are economic models used for?

2. What is the equilibrium price?

B. Surplus—What can we assume about price based on the size of the surplus?

a. C. Shortage—What will happen to the price and quantity supplied in the next trading period as a result of a

shortage?

a. D. Equilibrium Price—What tends to happen to the market once the equilibrium price has been reached?

II. Explaining and Predicting Prices

A. Introduction—What factors are important in predicting changes in prices?

a. B. Change in Supply—What is one of the main reasons for variations in agricultural supplies?

C. Change in Demand—Why did the price of oil increase dramatically when demand increased in 2005and 2006?

a. D. Change in Supply and Demand—Why did the price of oil increase even more after hurricanes Katrina

and Rita?

E. The Importance of Elasticity—How does elasticity affect the size of the price change when supply or demand

changes?

F. Prices and Competitive Markets

1. When is the price system most efficient?

2. What is the great advantage of competitive markets?

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S OCIAL GOALS AND MARKET EFFICIENCY



target price nonrecourse loan price ceiling

social goals “land banks” price floor

deficiency payment impersonal mechanisms economic security

Introduction/Distorting Market OutcomesIn order to achieve the seven broad economic and 1 , we may require policies that distort allocations made in the market. Achieving the goal of 2 occasionally results in legislation changes that can benefit some and be detrimental to others. One of the common ways of achieving3 involves setting prices at “socially desirable” levels. When this happens, prices are not allowed to adjust to their equilibrium levels. One type of control is the 4 , a maximum legal price that can be charged for a product. Another is the 5 , which is the lowest legal price that can be paid for a good or service. An example is the minimum wage.

Agricultural Price SupportsIn the 1930s, farmers borrowed money from the Commodity Credit Corporation, an agency of the Department of Agriculture. In an effort to support American farmers, the CCC used a(n) 6 , which is essentially a price floor for farm products. The farmers borrowed money at the 7 and pledged their crops as security. Since such a loan had neither a penalty nor further obligation if not paid back, it was called a(n) 8 . This loan program’s drawback was that the U.S. Department of Agriculture ended up owning enormous stockpiles of food. The next solution was to give farmers a(n) 9 .In this situation, farmers sold their crops on the open market for the best price they could get. Then the government sent them a check to make up the difference between the actual market price and the 10 . To help offset the cost of farm programs, the Conservation Reserve Program of 1985 offered to pay farmers not to farm. Under the program, farmers agreed to set aside previously farmed acreage into 11 , and they were paid an annual fee in return. However, efforts to make agricul-tural output responsive to market forces have not lowered the overall cost of farm programs.

When Markets TalkMarkets are 12 that bring buyers and sellers together. They are said to “talk” when prices in them move up or down significantly in response to outside events, such as government policy changes.

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C OMPETITION AND MARKET STRUCTURES

RECALLING THE FACTS


1. What is the role of government under Adam Smith’s laissez-faire philosophy?

2. Define market structure.

3. What are the five major conditions that characterize perfectly competitive markets? Explain each condition briefly.

a.

b.

c.

d.

e.

4. List the three imperfect competition market structures:

a.

b.

c.

5. Name and describe the four different types of monopolies.

a.

b.

c.

d.

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M ARKET FAILURES



positive externality market failure unemployed

negative externality distort public goods

inadequate competition externality adequate information

Types of Market FailuresOver time, mergers and acquisitions have had several consequences. One is inefficient resource allocation because 1 tends to reduce the efficient use of scarce resources. 2 may also enable a business to influence politicians in order to get special treatment that enriches its managers and owners. To allocate resources efficiently, consumers, businesspeople, and government officials must have 3 about market conditions. Some information is harder to find than other kinds, and that can lead to a(n) 4 . A difficult problem in any economy is resource immobility, when land, capital, labor, and entrepreneurs do not move to markets in which the returns are the highest and sometimes remain 5 . Another form of 6 shows up in the form of 7 those products that are collectively consumed by everyone and whose use by one individual does not diminish the satisfaction or value received by others. They are usually provided by the government.

Many activities generate some kind of 8 or unintended side effect that either benefits or harms a third party not involved in the activity that caused it. A(n) 9 is the harm, cost, or inconvenience suffered by a third party because of actions by others. A(n) 10 is a benefit received by someone who was not involved in the activity that generated the benefit. A(n) 11 is a(n) 12 because its costs and benefits are not reflected in the market prices that buyers and sellers pay.

Dealing with ExternalitiesThe problem with externalities is that they 13 the decisions made by consumers and producers. Pollution is an example of a(n) 14 . Forcing firms to address pollution problems increases the firms' production costs, resulting the higher prices for the consumer. Education is an example of a(n) 15 . Communities and their economies benefit when their people are better educated.

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T HE ROLE OF GOVERNMENT

OUTLINING


I. Maintain Competition

A. Antitrust Legislation

1. What was the antitrust legislation of the late 1800s trying to restrict?

2. What was the purpose of the Sherman Antitrust Act?

3. What was the purpose of the Clayton Antitrust Act of 1914, and what practice did it outlaw?

B. Government Regulation

1. Under what conditions are monopolies acceptable?

2. What is one example of how local or state government allows and regulates a monopoly?

II. Improve Economic Efficiency

A. Introduction—What are two market failures the government is able to correct?

B. Promote Transparency

1. What is the purpose of public disclosure?

2. What is the advantage to the public of truth-in-advertising laws?

C. Provide Public Goods—What are two examples of needed public goods that are provided by the government?

III. Modified Free Enterprise—What government actions led to a modification of free enterprise?

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S AVINGS AND THE FINANCIAL SYSTEM

RECALLING THE FACTS


1. What are savings?

2. What is a financial asset?

3. What is a financial system?

4. What is a financial intermediary? Name some examples of financial intermediaries.

5. What is the circular flow of funds?

6. What sectors of the economy are the largest borrowers?

7. What are three examples of nonbank institutions that can act as financial intermediaries? Explain the purpose of each one.

a. b. c.

8. What are two pieces of advice analysts offer to investors about consistency and simplicity?

9. What is risk?

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F INANCIAL ASSETS AND THEIR MARKETS

OUTLINING


I. Bonds as Financial Assets

A. Introduction—What is a bond?

a. B. Bond Components—What are the three components of a bond?

a C. Bond Prices—What two factors do investors consider before they decide what to offer for a bond?

a. D. Bond Yields—What is a bond's current yield?

a. E. Bond Ratings—What are three factors bonds are rated on?

a.

II. Financial Assets and Their Characteristics

A. Certificates of Deposit—Why are CDs attractive to small investors?

a. B. Corporate Bonds; Municipal Bonds; Government Savings Bonds—Which type of bond is generally tax-exempt?

a C. Treasury Notes and Bonds; Treasury Bills—What is the difference in maturity between Treasury notes, bonds,

and bills?

a. D. Individual Retirement Accounts—What is an IRA?

a.

III. Markets for Financial Assets

A. Capital Markets—What is the capital market?

a. B. Money Markets—What is a money market?

a. C. Primary Markets—What is a primary market?

D. Secondary Markets—What is the major benefit of the secondary market?

a.

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I NVESTING IN EQUITIES AND OPTIONS



over-the-counter market options Efficient Market Hypothesis

bear market bull market Standard & Poor's 500

New York Stock Exchange futures contract securities exchange

Dow-Jones Industrial Average equities portfolio diversification

mutual funds 401(k) plan

Stocks and Efficient MarketsIn addition to financial assets, investors may also buy 1 , which are shares of common stocks that represent ownership of corporations. Many stock market experts subscribe to the 2 , which poses that stocks are always priced about right because they are followed closely by so many investors. For a cautious investor, then, 3 —the practice of holding a large number of different stocks so that increases in some offset declines in others—is a popular strategy. Because of the advantages of diversification, many investors buy shares in 4 . Investors also take advantage of a popular tax-deferred investment and savings plan offered by their employers known as a 5 . Employees contribute to the plan through payroll deductions.

Stock Markets and Their PerformanceA place where buyers and sellers can meet to trade stocks is called a 6 . The oldest stock exchange is the 7 , while the American Stock Exchange tends to be smaller. Regional stock exchanges are located in major cities, and global stock exchanges are found throughout the world. The majority of stocks in the United States are traded on the 8 , an electronic marketplace for securities that are not traded on an organized exchange. There are two popular indicators of the stock market's per-formance. The 9 uses 30 stocks as indicators. The 10 uses 500 representative stocks. When the market is strong with prices moving up for several months or years in a row, it is called a 11 . When the prices of equities fall sharply for several months or years in a row, the market is known as a 12 .

Trading in the FutureIn a 13 , investors can agree to buy or sell at a specific future date at a predetermined price. A contract that gives the buyer the right to cancel the contract is called an 14 .


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M EASURING THE NATION’S OUTPUT AND INCOME

RECALLING THE FACTS


1. What is gross domestic product?

2. What things may be excluded from GDP? In each case, give a brief explanation why.

a.

b.

c.

d.

3. What are the limitations of the GDP?

4. List the five measures of national income.

a.

b.

c.

d.

e.

5. What are the four sectors of the economy? Explain each one briefly.

a.

b.

c.

d.

6. What is the output-expenditure model?

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P OPULATION AND ECONOMIC GROWTH

OUTLINING


I. Introduction—Why does the government periodically take a census?

II. Population in the United States

A. Counting the Population—What are the two classifications of population?

B.

B. Historical Growth—What has been the trend in the rate of population growth since colonial times?

B.

C. Regional Change—Which parts of the country are growing in population and which are showing losses?

B.

D. Consequences of Growth—What happens when a population shifts toward a certain area while growing overall?

B.

III. Projected Population Trends

A. Age and Gender

1. What is the population pyramid?

2. What is the dependency ratio?

B. Race and Ethnicity

1. What group is currently the largest component in the total population?

2. What other racial/ethnic groups make up the total population?

C. Population Growth—What are the three most important factors affecting the rate of population growth?

B. D. Future Population Growth—What is expected of the rate of future population growth?

B.

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P OVERTY AND THE DISTRIBUTION OF INCOME



Lorenz curve food stamps workfare

welfare negative income tax income assistance

poverty threshold Earned Income Tax Credit discrimination

monopoly power enterprise zones education

PovertyPoverty is a relative measure that depends on prices, the standard of living, and the incomes that others earn. People are living in poverty if their incomes fall below the 1 , even if they have supplements such as food stamps, subsidized housing, and Medicaid. To evaluate the distribution of income, economists use the 2 , which shows how much the actual distribution of income varies from an equal distribution.

Reasons for Income InequalityA number of reasons explain why the incomes of various groups may be different. One is 3 , which puts workers in a better position to get higher-paying jobs. The wealthy can afford to send their children to expensive schools or set them up in a high-paying job. There are also groups that hold 4 and are in a better position to demand higher wages. Another factor is 5 , which may favor some groups over others in hiring and advancement.

Antipoverty ProgramsOver the years, the federal government has instituted a number of programs to help the needy. Most come under the general heading of 6 . Some programs provide direct cash assistance. Supplemental Security Income (SSI) is an 7 program that makes cash payments to blind or disabled persons age 65 or older. Other programs, such as 8 , do not provide direct cash payments. Instead, eligible persons receive government-issued coupons that can be redeemed for food. Many working low-income Americans qualify for special tax credits such as the 9 , which provides federal tax credits and sometimes cash. To help businesses start up in run-down or depressed areas, laws have been set up to establish 10 . Because of rising welfare costs, many states now have 11 programs in which welfare recipients work for their benefits. The 12 , is a proposed type of tax that would make cash payments to certain groups below the poverty line.

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B USINESS CYCLES AND FLUCTUATIONS

OUTLINING


I. Business Cycles: Characteristics and Causes

A. Phases of the Business Cycle—What is the difference between a recession and a depression?

B. Changes in Investment Spending—How do changes in capital expenditures affect business cycles?

C. Innovation and Imitation—What does an innovation usually trigger in industry?

D. Monetary Policy Decisions—What happens when the Fed follows an easy money policy?

E. External Shocks—Give an example of a positive and a negative external shock.

II. Business Cycles in the United States

A. The Great Depression—Why did the government declare a “bank holiday” in 1933?

B. Causes of the Great Depression—How did easy and plentiful credit contribute to the Great Depression?

C. Recovery and Legislation—List two laws or agencies that were established after the Great Depression in an effort to protect people and prevent another depression.

D. Cycles After World War II—What happened to business cycles following World War II?

III. Forecasting Business Cycles

A. Using Everyday Economic Statistics—What is the composite index of leading economic indicators?

B. Using Econometric Models—What is an econometric model?

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I NFLATION

OUTLINING


I. Measuring Prices and Inflation

A. Introduction

1. What is a price index?

2. What is the consumer price index?

B. Market Basket

1. What is a market basket?

2. What is a base year?

C. The Price Index—How is the dollar cost of a market basket converted to an index value?

D. Measuring Inflation

1. What is the difference between creeping inflation and hyperinflation?

2. What is stagflation?

E. Other Price Indexes—What is the producer price index?

II. Causes of Inflation

A. Demand-Pull—In what way does excessive demand cause inflation?

B. Cost-Push—How do labor costs affect inflation?

C. Wage-Price Spiral—What is the wage-price spiral?

III. Consequences of Inflation—What effects does inflation have on an economy?

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U NEMPLOYMENT



unemployed outsourcing GDP gap

cyclical unemployment frictional unemployment unemployment rate

labor force technological unemployment misery index

structural unemployment seasonal unemployment uncertainty

Measuring UnemploymentThe measure of joblessness is the 1 . The Bureau of Labor Statistics defines the civilian labor force, or 2 , as the sum of all persons age 16 and above who are either employed or actively seeking employment. The Bureau of the Census defines the 3 as people available for work who have made a specific effort to find a job in the past month and who, during the most recent survey week, worked less than one hour for pay or profit. The monthly unemployment rate is expressed as a percentage of the entire 4 . The 5 understates unemployment because it does not count workers who are too frustrated to look for work, and considers part-time workers as employed.

Sources of UnemploymentEconomists have identified several kinds of unemployment. One common type is 6 , where workers are between jobs for one reason or another. A more serious type of unemployment is7 —when a fundamental change in the economy reduces the demand for workers and their skills. More recently, businesses have increased the use of 8 . A third kind of unemployment is 9 , which occurs when machines or automated systems replace workers. A fourth kind of unemployment is 10 , which is directly related to swings in the business cycle. A fifth type of unemployment is 11 , resulting from seasonal changes in the weather or in the demand for certain products or jobs.

Costs of InstabilityCosts of economic instability can be measured in economic and human terms. One measure of the economic cost of unemployment is the 12 —the difference between the actual GDP and the potential GDP that could be produced if all resources were fully employed. The 13 is the sum of the monthly inflation and unemployment rates. In an unstable economy, a great deal of 14 exists. An unstable economy can also lead to political instability as well as a rise in crime rates and poverty.

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M ACROECONOMIC EQUILIBRIUM

RECALLING THE FACTS


1. What tools do we use to discover where the balance is in macroeconomics?

2. What is aggregate supply?

3. What is an aggregate supply curve?

4. What factors could decrease aggregate supply?

5. What is aggregate demand?

6. What is an aggregate demand curve?

7. What factors could cause aggregate demand to decrease?

8. What is macroeconomic equilibrium?

9. What determines the point of macroeconomic equilibrium?

10. What is one dilemma facing economic policy makers?

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S TABILIZATION POLICIES

OUTLINING


I. Demand-Side Policies

A. Introduction

1. What is the goal of demand-side policies?

2. What is fiscal policy and from whose theories does it derive?

B. Keynesian Economics—According to Keynes, which sector of the economy creates economic instability?

C. Role of Government—What is Keynes' justification for temporary federal deficits?

D. Automatic Stabilizers—What are automatic stabilizers?

E. Limitations of Fiscal Policy—What is most effective at countering business cycles?

II. Supply-Side Policies

A. Introduction—What are supply-side policies?

B. Smaller Role for Government—What are some ways that the government’s role in the economy can be reduced?

C. Lower Federal Taxes—What is the supply-siders’ argument for lowering tax rates?

D. Limitations of Supply-Side Policies—What is a limitation of supply-side policies?

III. Monetary Policies—Who are monetarists and what kinds of policies do they favor to combat inflation?

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E CONOMICS AND POLITICS



monetarists structural lags supply-side

passive discretionary monetary policy demand-side

economic politics Congress economic theories

Council of Economic Advisers fiscal policies

Introduction/Changing Nature of Economic Policy1 are government attempts to manage the economy through taxing and spending actions. Fiscal policy can take any of three forms. Policy that someone must choose to implement is called2 fiscal policy. When no new or special action is required, that is 3 fiscal policy. When it involves plans and programs to strengthen the economy in the long run, it is called 4 fiscal policy. One reason that 5 fiscal policy is being used less today is that various 6 occur between recognizing that there is a problem and actually doing something about it. The Congressional gridlocks that occurred in the 1990s over views on the budget also contributed to the decline of 7 fiscal policy. The void created by its decline has been filled by the 8 of the Fed.

Economics and Politics TodayChoosing what economic policies will work best is difficult. In recent years, politics and economics seem to have merged in what might be called 9 . Most of the major debates in 10 are overspending, taxing, and other budgetary matters. Economists differ for various reasons. Sometimes they support a certain policy because they think some problems are more critical than others. They also differ because most 11 are a product of the times. The period following the Great Depression produced 12 economists. The 13 who emerged in the 1960s through 1980s gained influence because of the decline of discretionary fiscal policy.14 economics grew from the rejection of “big government” by those who thought a smaller government was the key to economic growth. Today’s politicians are concerned with the economic consequences of what they do. A three-member group called the 15 reports to the president on economic developments and also proposes strategies.

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A BSOLUTE AND COMPARATIVE ADVANTAGE

RECALLING THE FACTS


1. Why is specialization an important reason for trade?

2. What is the difference between exports and imports?

3. What evidence is there to show the importance of international trade to the United States?

4. Under what circumstances does a country have an absolute advantage?

5. What is a production possibilities frontier?

6. Under what circumstances does a country have a comparative advantage?

7. On what assumption is the concept of comparative advantage based?

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B ARRIERS TO INTERNATIONAL TRADE

OUTLINING


I. Restricting International Trade

A. Tariffs—What is a protective tariff? A revenue tariff?

B. Quotas—How are quotas typically used?

II. Arguments for Protection

A. Introduction—What is the difference between what protectionists and free traders want?

B.

B. Aiding National Defense

1. How do protectionists use national defense as an argument to support trade barriers?

2. What is the free traders’ argument in response?

C. Promoting Infant Industries—What is the infant industry argument?

B.

D. Protecting Domestic Jobs—How could tariffs and quotas protect domestic jobs?

B.

E. Keeping the Money at Home

1. What is the response of free traders to this argument?

2. What industries can be hurt by this type of protectionism?

F. Helping the Balance of Payments—What is the balance of payments?

B.

III. The Free Trade Movement

A. The World Trade Organization—What is the role of the World Trade Organization?

B.

B. NAFTA—How has trade changed between the U.S., Canada, and Mexico since NAFTA was created?

B.


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F OREIGN EXCHANGE AND TRADE DEFICITS



flexible exchange rate trade deficit fixed exchange rate

foreign exchange rate trade surplus foreign exchange markets

trade-weighted value of the dollar gold standard trade imbalance

Introduction/Financing International TradeBecause each country has its own currency, trade between nations is made somewhat more complicated. Foreign currencies are bought and sold in 1 . This market includes banks that help secure foreign currencies for importers, as well as banks that accept foreign currencies from exporters. The 2 is the price of one country's currency in terms of another country's currency. There are two types of exchange rates. Under a 3 system, the price of one currency is fixed in terms of another so that the rate does not change. This system was used when the world was on the4 but ended when the United States stopped redeeming foreign-held dollars for gold. Now, under the 5 , the forces of supply and demand establish the value of one country’s currency in terms of another country's currency.

Trade Deficits and SurplusesA country has a 6 whenever the value of the products it imports exceeds the value of the products it exports. It has a 7 , whenever the value of its exports exceeds the value of its imports. Each is dependent on the international value of its currency. The Fed keeps a statistic that measures the international value of the dollar. It is called the 8 , and it is an index that shows the strength of the dollar against a group of major foreign currencies. When the index falls, the dollar is weak. When the index rises, the dollar is strong.

A persistent 9 tends to reduce the value of a country’s currency and can cause a chain reaction that affects income and employment. However, under 10 , trade deficits tend to correct themselves automatically through the price system. A strong currency tends to cause a trade deficit; a weak currency tends to cause a 11 , which eventually pulls up the value of the currency.

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G LOBALIZATION: CHARACTERISTICS AND TRENDS



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Introduction/Characteristics of GlobalizationOne of the most important trends in the world today is 1 —the movement toward a more integrated and interdependent world economy. This is taking place because of the voluntary decisions we make as consumers. Many of the products we use are made by 2 that produce and sell without regard to national boundaries. Globalization extends beyond international business to production as well. One of the more controversial aspects of global production is 3 , or hiring outside firms for non-core operations to lower operating costs. Another aspect of globalization is the growth of international organizations that promote trade between nations. One example is the 4 , which led to the World Trade Organization.

Globalization TrendsWith continued globalization, two trends stand out: growing economic 5 and growing regional integration. As markets develop, producers become more specialized in their activities. If producers who perform a specialized task have a 6 , they will be able to compete more effectively in the market. When countries focus on producing their specialized product, the result is an incredible amount of 7 , in which countries rely heavily upon one another. The European Union was born out the 8 and is one of the most successful examples of regional 9 . The organization was formed in 1951 to coordinate iron and steel production, making it difficult for the member countries to go to war against each other. Another example is the 10 , established in 1994 to set up a regional free trade area in the Americas with no internal barriers to trade. Despite the growth and support for 11 , progress has not always been smooth. While globalization can lead to great economic gains, these gains may not be important to everyone.

interdependence outsourcing ECSC

economic integration globalization Free Trade Area of the Americas

comparative advantage multinationals General Agreement on Tariffs and Trade

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G LOBAL PROBLEMS AND ECONOMIC INCENTIVES

OUTLINING


I. Global Population Growth

A. Malthus: Views on Population—What makes Malthus’ views relevant in today’s world?

B. World Population Growth—What is the annual population growth rate?

C. Economic Incentives—What is one explanation for the high rate of population growth in developing countries?

II. The Demand for Resources

A. Renewable Resources—What is an example of biomass and what makes biomass sources important?

B. Nonrenewable Resources—How is population pressure affecting the supply of fossil fuels?

C. Energy Use in the United States—What is the energy type most commonly consumed in the United States?

D. Markets and Price Incentives—What was the result of the 1973 oil embargo?

III. Pollution and Economic Incentives

A. The Incentive to Pollute

1. Why does pollution occur?

2. How can pollution be controlled?

B. Legislative Standards—What are legislated standards?

C. Pollution Fees—How do pollution taxes motivate companies to stop polluting?


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A PPLYING THE ECONOMIC WAY OF THINKING

RECALLING THE FACTS


1. What are the five steps to economic decision-making as recommended by the National Council on Economic Education?

a. b. c. d. e.

2. What is cost-benefit analysis?

3. What are opportunity costs?

4. What is one advantage of a market economy?

5. What has happened to these competing economic systems?

a. communism in the Soviet Union:

b. socialism:

6. What was the capitalism of the 1930s like?

7. In what ways has that early capitalism been modified?

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