Proportional Tax
…Social Security (wherein the tax rate decreases as income increases). Proportional Tax Example The United States’ sales tax is an example of a proportional tax. No matter their income level,…
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The Coase Theorem
…each other to reach a compromise than file a lawsuit. The Coase Theorem Example There is a fish market next to a coffee shop and the smell from the fish…
Labor Arbitrage
…of any work that can be performed on a computer (such as computer programming) or that makes use of college education, have been significantly reduced. Often, a prosperous nation (such…
Ceteris Paribus
…Example For example, when determining the cause of an increase in demand for a product, we could say that the price of a complementary product increases, Ceteris Paribus, then the…
Regulatory Capture
…Examples Here are a few notable examples of regulatory capture to help you understand how this phenomenon occurs: The fracking industry in Pennsylvania: there is a revolving door between industry…
Foreign Aid
…extraction from the recipient country, or to gain other kinds of commercial access. US Aid may often time buy assistance for American citizens in that nation, alter the course of…
5 Macroeconomic Goals
…most central banks aim to achieve. For example, the U.S. Federal Reserve targets the inflation rate at roughly 2%. Five Macroeconomic Goals 1. Non-Inflationary Growth In other words, this is…
Aggregate Supply And Demand
…in a given economy at a given time and price level. Aggregate Demand Formula Aggregate Demand is the total of Consumption, Investment, Government Spending and Net Exports (Exports-Imports). Aggregate Demand…
The Financial System
The Securities and Exchange Commission (SEC) in the United States financial system is a regulatory body that monitors the financial system, exchange, and securities market. Securities are types of financial…
Discretionary Fiscal Policy
…cut the VAT in 2009, this was intended to produce a boost in spending. The output is determined by the level of aggregate demand (AD), so a discretionary fiscal policy…
Marginal Revenue
…the revenue obtained from the last unit sold. Marginal Revenue can remain uniform at a particular level of output. However, the MR will eventually slow down as the production level…
Relative Poverty
…with higher median income levels, the level at which a household is considered to be in a state of relative poverty is also higher. Those who fall into the category…
Inheritance Tax
…an income tax). Inheritance Tax Explained Since there is a difference between an inheritance tax and an estate tax, most people commonly refer to them as death taxes. Inheritance Tax…
Progressive Tax
…just 33 cents of demand. This demonstrates that progressive taxes help the economy. Progressive Tax Examples Here are a few examples of highly prevalent progressive taxes: 1. Estate Taxes If…
Regressive Tax
…of their income as a result of it. For example: If two people spend $150 on shoes and pay a 5% sales tax (just as an example), they both pay…
Average Variable Cost
In the field of economics, the term “average variable cost” describes the variable cost for each unit. Variable costs are those that vary with changes in output. Examples of variable…
Moral Hazard
…risks. Moral Hazard Examples There are many diverse examples of moral hazard, but here are some common scenarios: 1. Government Bank Bail-Outs If governments declare that they will bail out…
Theory of Production: Short-Run Analysis
The Theory of Production explains the principles by which a business firm decides how much of each commodity that it sells (its “outputs” or “products”) it will produce. And how…
The Natural Rate of Unemployment
The Natural Rate of Unemployment (NRU) is the rate of unemployment after the labor market is in equilibrium, when real wages have found their free-market level and when the aggregate…
Supply and Demand
…demanded than supplied so the buyer would have to spend more to buy goods. If the sellers set their prices too low, then they will sell their entire supply before…
Pricing Stocks
…PDV Approach to Pricing Stocks Nobody knows for sure what a company’s future earnings and future dividends will be. Stocks and bonds do not carry equal risk. Bonds are considered…
Aggregate Demand and Aggregate Supply Equilibrium
The Aggregate Demand and Aggregate Supply Equilibrium provides information on price levels, real GDP, and changes to unemployment, inflation, and growth as a result of new economic policy. For example,…
Liquidity Preference Theory
…types – Transactionary, Precautionary and Speculative. 1. Transactionary Demand People prefer to be liquid for day-to-day expenses. The amount of liquidity desired depends on the level of income, the higher…
Equitable Distribution of Income
…percent tower stunningly higher. They average over 39 times more income than the bottom 90 percent. But that gap pales in comparison to the divide between the nation’s top 0.1…
Interest Rate Risk
…risk-less asset since investors demand compensation for taking on higher risk. Interest Rate Risk Structure Highly rated investment-grade bonds are those with the lowest risk of default. Junk Bonds have…
Objectives of Central Banks
…central bank’s policies, which led to high levels of inflation. Eventually, these consequences promoted the idea of an independent central bank that is accountable for its policies and decisions. A…
Wealth Effect
…this fairly simple idea: Perceived wealthLevel of consumptionIncreases Increases Decreases Decreases Why Does the Wealth Effect Occur? The Wealth Effect happens for psychological reasons. Consumers view themselves as more wealthy…
Bonds
…face value (at par). Example of a coupon bond: Ex: $1000 coupon bond sells at approximately $1000 Coupon rate = Dollar value of yearly coupon payments/face value of the bond…
Intrinsic Value Theory
…at the process of producing an item. They determine the costs involved in that production process to measure the item’s intrinsic value. Intrinsic Value Theory Example The actual value of…
Theory of Efficiency
…outcome is considered more efficient if a Pareto optimal outcome can be reached by arranging sufficient compensation from those who are made better off to those who are made worse…
The McFadden Act
…political because local banks pushed for laws protecting them from competition from the larger banks. There was public hostility towards the large banks. Technology had already made banking more competitive….
Quota
…compete against lower-priced foreign goods. 3. Unfair Trade Some countries apply quotas to protect local industries from dumping. Dumping occurs when producers in foreign countries have unfair advantages to lower…
Banking Regulations in the United States
…Insurance Commission (FDIC) guarantees all bank deposit accounts up to $250,000. 2. Bank Panics Bank panics is the plural of bank runs (because there is a fear of contagion across…
Peak Oil: Will We Ever Run Out?
…Demand tell us, the price of oil will continue to rise. To combat this, on the demand side, we can try to find substitutes to use instead of oil. While…
Direct Finance
…it to a borrower against a higher interest rate. This enables the borrower to take advantage of lower interest rates. For example, in a household that buys a newly issued…
The Pigou Effect
…during deflation. Arthur Cecil Pigou defined real wealth as the sum of the money supply and government bonds divided by the price level. He argued that Keynes’ General Theory was…