Define the following terms: 1. income- 2. money supply- 3. inflation- 4. recession- answer the following questions in 1-2 sentences 1. what is the cost-push theory of inflation? 2. describe the law of diminishing utility. 3. what is the concept of risk and return? 4. tell me two ways that you can manage risk. for the following statements answer true or false 1. when demand exceeds supply, this is known as the quantity theory of inflation. 2. recessions occur when there is a drop in spending. 3. governments may try to end a recession by increasing the money supply. 4. an income tax is set by your place of employment. 5. if you own a stock, you are known as a shareholder. 6. checking and savings accounts are ways in which to invest your money. 7. purchasing insurance is not a good way to manage your financial risk. short answer-answer in three to four sentences describe how money supply, inflation, and recession are all related.

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.  An income tax is set by and collected by the government. 

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). 

answer; correct answer is investing activity;