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aggregate demand curve
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a graphical depiction of the relationship between the level of desired expenditures in an economy and the price level
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aggregate supply curve
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a graphical depiction of the relationship between the quantity of goods and levels firms wish to supply and the price level
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average labor productivity
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total output divided by the quantity of labor employed in its productions
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barriers to entry
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conditions that prevent firms from freely entering or leaving the marketplace
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business cycle
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fluctuations in aggregate economic activity
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capital goods
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long-lived goods that are themselves produced and are used to produce other goods and services, but are not used up in the production process
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cartel
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a group of firms that collude in a given market to restrain competition, often making quota arrangements among themselvs
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Coase Theorum
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the proposition that if private parties can bargain without coast over the allocation of resources, then they can solve the problem of allocating externalities on their own
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comparative advantage
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the ability to produce a good or service at a lower opportunity cost than other producers
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competitive market
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a market without many buyers and sellers trading a homogeneous good or service in which each buyer and seller is a price taker
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complements
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two goods for which a rise in the price of one leads to a decline in the demand for the other
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Consumer Price Index (CPI)
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an index constructed by comparing the cost of purchasing a fixed basket of goods at different times
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consumer surplus
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the difference between the amount that a buyer would be willing to pay for a good or service and the price actually paid
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consumption
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spending by households on goods and services, with the exception of the purchase of new housing
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crowding out
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the decrease in private investment that occurs as a result of a reduction in government saving or an increase in government borrowing
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currency
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coins and bills in the hands of the public
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cyclical unemployment
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unemployment caused by deviations of output from its potential level
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deadweight loss
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the reduction in total surplus that results from a market distortion such as a tax
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demand curve
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a graphical representation of the quantity of a good or service demanded as a function of the price
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demand schedule
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a table showing the relationship between the price of a good or service and the quantity demanded
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diminishing returns to scale
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the property whereby each additional increase in inputs results in a smaller increase in the quantity produced
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discount rate
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the interest rate that the Federal Reserve charges banks when they must borrow reserves from it
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economic profit
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the difference between the revenue realized by a producer and the opportunity cost of production
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elasticity
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the percentage change in quantity demanded or supplied as a result of a one percent change in price
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entrepreneur
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an individual who takes on the risk of attempting to create new products or services, establish new markets, or develop new methods of production
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equilibrium
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a situation in which the forces in a system are in balance so that the situation is stable and unchanging
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expansion
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a period between a trough and a peak in economic activity
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externality
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when the action of one person affects the well-being of someone else, but where neither party pays nor is paid for these effects
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Federal funds rate
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the rate that banks charge other banks when they lend reserves
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final goods
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goods or services that are purchased by the ultimate user
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financial markets
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the institutions through which individuals with savings can supply these funds to persons or firms that wish to borrow money to purchase consumption goods or invest in physical capital
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fiscal policy
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the use of taxes and spending to influence aggregate demand and through it the level of overall economic activity
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fixed cost
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the cost of production that is independent of the quantity produced
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foreign direct investment
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when a company or individual acquires assets in a foreign country that they will manage directly
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frictional unemployment
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unemployment that results because it takes time for workers to search for the jobs that are best suited to their tastes and skills
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gains from trade
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the benefits that both individuals and nations realize from mutually beneficial exchange
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government purchases
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spending on goods and services by federal, state, and local governments
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Gross Domestic Product (GDP)
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the market value of final goods and services produced in an economy during a specified time
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human capital
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skills and experience that are acquired through education, training, and on the job experience that increase a worker's productivity
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imperfect competition
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the case of a market with a small number of sellers, so that sellers have market power
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inferior good
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a good for which the quzntity demanded falls as buyers' income increases
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inflation
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a general increase in prices
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institutions
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formal and informal rules that structure human interactions
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intermediary
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a third party who acts as a link between two others who wish to transact business
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intermediate good
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a good or service that is used in the process of producing other goods and services
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investment
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spending on capital equipment, inventories, and structures, including household purchases of new housing
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depression
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a severe recession
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Keynesian model
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a model of short-run aggregate economic fluctuations inspired by the analysis of British economist John Maynard Keynes, which attributes short-run deviations in output from potential to variations in the level of aggregate demand or aggregate supply
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labor force
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the sum of those individuals who are employed and those who are seeking paid work but have not found it
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labor force participation rate
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the fraction of the working-age population who are in the labor force
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law of demand
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holding other things equal, the quantity demanded is negatively related to the price
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law of supply
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holding other things equal, the quantity supplied is positively related to the price
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liquidity
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the ease with which a nonmonetary asset may be converted into money
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marginal cost
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the additional cost of production associated with a small increase in the quantity produced
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marginal revenue
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the additional revenue resulting from a small increase in the quantity produced
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market failure
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any situation in which a market does not do what market theorists believe it should - allocate goods and services efficiently; externalities and monoploy/oligopoly are two commonly discussed failures
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market power
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a situation in which one firm, or a group pf them acting as a cartel, can control prices in a market, often by restricting output, and thus have market power; in a theoretical, purely competitive market, this is not possible
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monetary base
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the quantity of currency plus bank reserves
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monetary policy
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the use of the supply of money in the economy in the economy by the Federal Reserve to influence the level of aggregate demand
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money
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an asset that is a medium of exchange, unit of account, and store of value
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money multiplier
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the ratio of the money supply to the monetary base
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money supply
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the quantity of money available to the economy
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monopolistic competition
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a market in which there is free entry or exit, but every producer supplies a differentiated product and faces a downward-sloping demand curve
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monoploy
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the market in which there is a single producer
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natural rate of unemployment
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the level of unemployment that would exist if the economy were producing at its potential output
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net capital outflow
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the difference between the purchases of foreign assets by domestic residents and the purchases of domestic assets by foreign residents
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net exports
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the difference between the value of goods and services sold to foreigners and the value of goods and services purchased from foreigners
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neutrality of money
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the proposition that in the long run, changes in the quantity of money affect the price level but do not affect any real quantities
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nominal GDP
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the production of goods and services valued at current prices
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nominal value
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the nominal value of a product is its value in terms of money. Contrast this with real value, which expresses value in terms of some other good or bundle of goods. Another way to think aof this is that real values are adjusted for inflation; real values convert nominal values as if prices were held constant
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normal good
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a good or service for which demand is positively related to the buyer's income
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normative economics
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economic analysis used to guide decisions about what should be as opposed to what is the case
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Okun's law
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a relationship identified by Arthur Okun between the output gap and the level of cyclical unemployment
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oligopoly
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a market in which there are just a few producers
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open market operations
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a tool used by the Federal Reserve to adjust the money supply by buying or selling U.S. government bonds in the financial market
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opportunity cost
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the cost of any choice is what must be given up by making that choice
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output gap
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the difference between actual output and potential output
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pareto efficiency
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describes an allocation in which the only way to make any individual or group of individuals better off would require making at least one other person worse off
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per capita
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literally per head, used to denote an average value for a population
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portfolio investment
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the purchase of share of stocks or bonds
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positive economics
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the use of the tools of economic analysis to describe and explain economic phenomena and to make predictions about what will happen under particular circumstances
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potential output
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the quantity of output that would be produced by an economy if all of its resources were being employed at normal rates
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price discrimination
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when a business sells the same product to different buyers at different prices
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price elasticity of demand
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the amount by which demand for a given product changes in response to changes in price; specifically, the percentage change in demand that corresponds to a one percent change in the price
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producer surplus
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the difference between the price that producers receive for supplying a good and their marginal cost of producing it
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production possibility frontier (PPF)
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a graphical depiction of the combinations of output that can be produced by an economy
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public good
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a good or service for which it is not possible to establish individual property rights
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rationality
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when individual choices are made by comparing the benefits and costs of different actions and then selecting the action that produces the greatest benefit
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real GDP
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the production of goods and services valued at constant prices
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recession
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a period between a peak and a trough in economic activity
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rent seeking
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using political influence to increase one's economic profits at the expense of others
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reserve requirement
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the amount of reserves that the Federal Reserve requires banks to hold
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reserves
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the fraction of deposit liabilities that banks hold to meet depositor withdrawals
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rival goods
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goods or services characterized by the fact that one person's enjoyment of the good or service reduces the quantity available for others' enjoyment
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savings
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the difference between a person's disposable income and his or her expenditures
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scarcity
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an inescapable fact of human existence that results from the fact that the available resources are always less than our limitless desires
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structural unemployment
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unemployment that results from the mismatch in skills, locations, or other important characteristics between job seekers and the available jobs
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substitutes
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two goods for which an increase in the price of one leads to an increase in the demand for the other
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supply curve
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a graphical representation of the quantity of a good or service supplied as a function of the price
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supply schedule
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a table showing the relationship between the price of a good or service and the quantity supplied
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technology
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knowledge about the techniques by which inputs are transformed into the goods and services that households desire
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total revenue
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the total revenue received by a supplier
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total surplus
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the sum of consumer and producer surplus
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tragedy of the commons
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the depletion of a common resource due to overuse
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unemployment
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the state of actively seeking paid work but being unable to find it
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unemployment rate
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the number of unemployed workers as a fraction of the total labor force
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variable cost
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a cost of production that depends on the quantity produced
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velocity of money
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the ratio of nominal GDP to the money supply; in effect, the average number of transactions supported by each dollar of the money supply
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wealth
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the total value of assets used as a store of value
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