Income is the flow of
cash received from work (in the form of wages), capital (in the form of
interest for profit), land (in the form of rent).
The money supply is
the total amount of money in circulation in an economy. How we define “money”
in this sense can vary from physical cash, to include bank accounts, to things
that are even less liquid such as short-term bonds.
Recession is a period
of shrinkage in the size of the economy, usually defined by a negative growth
rate of GDP. The general rule for determining whether a recession is happening
is two consecutive quarters of negative GDP growth.
Inflation is the rate
at which the aggregate price of goods in an economy increases. It is often
represented by the change in price of a representative basket of goods.
Cost-push theory
states that inflation is driven by higher costs of factors of production
(capital, labor), which in turn weakens supply while demand remains consistent,
which increases prices. It is the theory that inflation is primarily driven by
the supply curve moving to the left due to increased costs of production.
The law of diminishing
utility (more accurately called the law of diminishing marginal utility), is
the general (but not universal) rule in utility theory that each additional unit of an
identical good adds a smaller (but usually still positive) additional utility.
In other words, the first unit gives you more utility than the second unit, but
since you have more total utility with two, you’d rather have two than one.
The concept of risk and return is that, as a general rule, an investor must
expose herself to a higher level of risk in order to achieve a higher return on
her assets. This increase expected return is known as the “risk premium”.
Two ways to manage risk would be to:
 1) Diversify your investments. Buying a
wide variety of securities, bonds, or any other financial instrument lowers the
overall volatility of the portfolio, and decreases your exposure to unexpected
volatility in any one holding.
2) Another way to manage risk is to protect your investment using insurance. Insurance helps you avoid the risk of huge and unacceptable losses through a much smaller, periodic expense.
1. This is false. The quantity theory of inflation states that an increase in
the money supply causes an increase of the same percentage in the price levels.
2. This is true. Recessions generally happen when a sharp drop in spending has
occurred.
3. Governments may try to end a recession by increasing the money supply. This
is true. Governments usually do this by manipulating the interest rate of the
central bank. This is known as quantitative easing.
4. False. Â An income tax is set by and collected by the
government.Â
5. True, Stocks, or
shares, are held by shareholders.
6. False. A checking
or saving account is a way to save your money. Investment in macroeconomics is
defined by purchasing capital or some other asset to generate income, and
saving is lending money to these capital investors to earn a return. A checking
or savings account enables you to earn a very small return on your savings.
7. False. Purchasing
insurance is a wise way to manage your financial risk, as it puts a limit on
how much you can lose due to unforeseen incidents such a sudden valuation
change in an owned stock or severe damage to your home. Insurance can take many forms,
from more formal home insurance to protective options on stocks you own.
Inflation is an
increase in the aggregate price level of the economy. This increase in the
aggregate price level is attributed in part to more cash in circulation in an
economy (the money supply). Recession is a period in which the aggregate
demand, due to a decline in general economic activity including spending, for
goods declines. This can cause negative inflation, in which aggregate prices
drop due to less demand. Governments may try to stimulate an economy in
recession by increasing the money supply, usually through the central bank’s
interest rate (lower interest rates translate to higher money supply).Â
