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FACTOR MARKET ANALYSIS: An analysis of the structure and equilibrium determination of markets that exchange the services of productive resources. This analysis highlights principles and concepts that tend to be most commonly associated with factor markets (also termed resource markets), including monopsony and bilateral monopoly. Marginal revenue product is a key concept on the demand side of the factor market. Marginal factor cost is a key concept on the supply side of the factor market.

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Lesson 11: Circular Flow | Unit 3: Government Page: 15 of 22

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  • The role the government sector plays in the economy and the circular flow through taxes and spending.
  • How taxes divert household sector income to the government sector to pay for government purchases.
  • That with the government sector included, the circular flow highlights the three basic uses of national income: consumption, saving, and taxes.
  • Why government spending is divided into government purchases of GDP and transfer payments.
  • Why the circular flow is interested in the net tax flow (taxes minus transfer payments) from households to government.
  • When government does not collect enough taxes to pay for purchases, it can borrow through the financial markets.
  • The Federal deficit, which is the borrowing by the federal government to make up the difference between taxes and spending.
  • That federal borrowing is combined with state and local borrowing (or saving) for total government borrowing.
  • Why the government sector diverts part of the circular flow, but does not necessarily change the total amount of GDP.

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SELF CORRECTION, INFLATIONARY GAP

The automatic process in which the aggregate market eliminates an inflationary gap created by a short-run equilibrium that is greater than full employment through increases in wages (and other resource prices). The self-correction mechanism is triggered by short-run resource market imbalances that are closed by long-run price flexibility. The self-correction process of the aggregate market also acts to close a recessionary gap with lower wages (and other resource prices).

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