2Nd Econ Hw

Front 1

price ceiling

Back 1

a legal maximum on the price at which a good can be sold ex:$20

Front 2

price floor

Back 2

a legal minimum on the price at which a good can be sold ex:$1.50

Front 3

tax incidence

Back 3

the manner in which the burden of a tax is shared among participants in a market ex:US market

Front 4

disposable income (DI)

Back 4

the income a consumer has left over to spend or save once he has paid out his net taxes. DI = Y - T ex:$10

Front 5

consumption and saving schedules

Back 5

tables that show the direct relationships between disposable income and consumption and saving. ex: As DI increases for a typical household, C and S both increase.

Front 6

consumption function

Back 6

a linear relationship showing how increases in disposable income cause increases in consumption
ex: graph of income and consumption

Front 7

autonomous consumption

Back 7

the amount of consumption that occurs no matter the level of disposable income. In a linear consumption function, this shows up as a constant and graphically it appears as the y intercept ex:$10

Front 8

saving function

Back 8

a linear relationship showing how increases in disposable income cause increases in saving ex: graph of income and saving

Front 9

dissaving

Back 9

another way of saying that saving is less than zero. This can occur at low levels of disposable income when the consumer must liquidate assets or borrow to maintain consumption ex: $-20

Front 10

autonomous saving

Back 10

the amount of saving that occurs no matter the level of disposable income, In a linear saving function, this shows up as a constant and graphically it appears as the y intercept $20

Front 11

marginal propensity to consume (MPC)

Back 11

the change in consumption caused by a change in disposable income, or the slope of the consumption function. MPC = ΔS/ΔDI ex: less shoes bought

Front 12

marginal propensity to save (MPS)

Back 12

the change in saving caused by a change in disposable income, or the slope of the saving function. MPS = ΔC/ΔDI
ex: 30

Front 13

determinants of consumption and saving

Back 13

factors that shift the consumption and saving functions in the opposite direction are Wealth, Expectations, and Household Debt. ex: The factors that change consumption and saving functions in the same direction are Taxes and Transfers.

Front 14

expected real rate of return (r)

Back 14

the rate of real profit the firm anticipates receiving on investment expenditures, This is the marginal benefit of an investment project ex:5%

Front 15

real rate of interest (i)

Back 15

the cost of borrowing to fund an investment. This can be thought of as the marginal cost of an investment project. ex: $20

Front 16

decision to invest

Back 16

a firm invests in projects so long as r ≥ i ex: investing in a business

Front 17

investment demand

Back 17

the inverse relationship between the real interest rate and the cumulative dollars invested. Like any demand curve, this is drawn with a negative slope ex: graph of rate and dollars

Front 18

autonomous investment

Back 18

the level of investment determined by investment demand. It is autonomous because it is assumed to be constant at all levels of GDP ex: 5%

Front 19

market for loanable funds

Back 19

the market for dollars that are available to be borrowed for investment projects. ex: Equilibrium in this market is determined at the real interest rate where the dollars saved (supply) is equal to the dollars borrowed (demand)

Front 20

demand for loanable funds

Back 20

the negative relationship between the real interest rate and the dollars invested by firms ex: negative slope

Front 21

private saving

Back 21

saving conducted by households. S (private) = DI - C ex: household saving

Front 22

public saving

Back 22

saving conducted by the government. S (public) = abs(Tax Revenue - G) ex: government saving

Front 23

supply of loanable funds

Back 23

The higher the real interest rate, the more dollars that are saved. ex: But the more dollars saved, the lower the real interest rate, because the supply increases.

Front 24

multiplier effect

Back 24

describes how a change in any component of aggregate expenditures creates a larger change in GDP ex: 5

Front 25

spending multiplier

Back 25

the magnitude of the spending multiplier effect is calculated as 1/(1-MPC) ex:5

Front 26

tax multiplier

Back 26

the magnitude of the effect that a change in taxes has on real GDP. Tm = MPC/MPS (because it's a simplification, see chapter 13) ex:5

Front 27

balanced budget multiplier

Back 27

when a change in government spending is offset by a change in lump-sum taxes, real GDP changes by the amount of the change in G; the balanced budget multiplier is thus equal to one. ex:5

Front 28

circular flow of economic activity

Back 28

a model that shows how households and firms circulate resources, goods, and incomes through the economy. ex: This basic model is expanded to include the government and the foreign sector

Front 29

closed economy

Back 29

a model that assumes there is no foreign sector (imports and exports) ex: circular flow of economic activity

Front 30

aggregation

Back 30

the process of summing the microeconomic activity of households and firms into a more macroeconomic measure of economic activity ex: circular flow of economic activity

Front 31

Gross Domestic Product (GDP)

Back 31

the market value of the final goods and services produced within a nation in a given period of time ex:$1000

Front 32

final goods

Back 32

goods that are ready for their final use by consumers and firms, ex: a new Harley.

Front 33

intermediate goods

Back 33

goods that require further modification before they are ready for final use, ex: steel used to produce the new Harley

Front 34

Double counting

Back 34

the mistake of including the value of intermediate stages of production in GDP on top of the value of the final good
ex:counting thread and shoes

Front 35

second-hand sales

Back 35

final goods and services that are resold. Even if they are resold many times, final goods and services are only counted once, in the year in which they were produced. ex: old computer

Front 36

nonmarket transactions

Back 36

household work or DIY jobs are missed by GDP accounting. ex: The same is true of government transfer payments and purely financial transactions like the purchase of a share of IBM stock

Front 37

underground economy

Back 37

these inclue unreported illegal activity, bartering, or informal exchange of cash ex: black market

Front 38

aggregate spending (GDP)

Back 38

the sum of all spending from four sectors of the economy GDP = C + I + G + (X - M) ex:$1000

Front 39

aggregate income (AI)

Back 39

the sum of all income earned by suppliers of resources in the economy. With some accounting adjustments, aggregate spending equals aggregate income. $1000

Front 40

nominal GDP

Back 40

the value of current production at the current prices. Valuing 2003 production at 2003 prices creates nominal GDP in 2003 ex: $1000

Front 41

real GDP

Back 41

the value of curent production, but using prices from a fixed point in time. Valuing 2003 production at 2002 prices creates real GDP in 2003 and allows us to compare it back to 2002 ex:$1000

Front 42

base year

Back 42

the year that serves as a reference point for constructing a price index and comparing real values over time ex:2003

Front 43

price index

Back 43

a measure of the average level of prices in a market basket for a given year, when compared to the prices in a reference (or base) year. You can interpret the price index as the current price level as a percentage of the level in the base year. ex:10

Front 44

market basket

Back 44

a collection of goods and services used to represent what is consumed in the economy. ex: pears and apples

Front 45

GDP price deflator

Back 45

the price index that measures the average price level of the goods and services that make up GDP ex:10

Front 46

real rate of interest

Back 46

the percentage increase in purchasing power that a borrower pays a lender ex:5%

Front 47

expected (anticipated) inflation

Back 47

the inflation expected in a future time period. This expected inflation is added to the real (does the book mean nominal?) interest rate to compensate for lost purchasing power ex:$10

Front 48

nominal rate of interest

Back 48

the percentage increase in money that the borrower pays a lender and is equal to the real rate plus the expected inflation ex: 5%

Front 49

business cycle

Back 49

the periodic rise and fall (in four phases) of economic activity) ex:trough

Front 50

expansion

Back 50

a period where real GDP is growing ex: booming economy

Front 51

peak

Back 51

the top of a business cycle where an expansion has ended ex:2004

Front 52

contraction

Back 52

two consecutive quarters of falling real GDP ex:2012

Front 53

trough

Back 53

the bottom of the cycle where a contraction has stopped ex: after great depression

Front 54

depression

Back 54

a prolonged, deep contraction in the business cycle ex: The Great Depression

Front 55

Consumer Price Index (CPI)

Back 55

the price index that measures the average price level of the item in the base year market basket. This is the main masure of consumer inflation ex:9

Front 56

inflation

Back 56

the percentage change in the CPI (or other price index, but usually reported from the CPI) from one period to the next ex:9%

Front 57

nominal income

Back 57

today's income measured in today's dollars. These are dollars unadjusted for the effects of inflation ex:$10

Front 58

real income

Back 58

today's income measured in base year dollars. These inflation-adjusted dollars can be compared from year to year to determine whether purchasing power has increased or decreased.ex:$10

Front 59

employed

Back 59

a person is employed if she has worked for pay at least one hour per week ex: asu worker

Front 60

unemployed

Back 60

a person is unemployed if he is not currently working but is actively seeking work ex:couch potato

Front 61

labor force

Back 61

the sum of all individuals 16 years and older who are either currently employed (E) or unemployed (U) LF = E + U ex:10000

Front 62

out of the labor force

Back 62

a person is classified as out f the labor force if he has chosen to not seek employment
ex: couch potato

Front 63

unemployment rate

Back 63

the percentage of the labor force that falls into the unemployed category. Sometimes called the jobless rate. UR = 100*U/LF ex:10%

Front 64

discouraged workers

Back 64

citizens who have been without work for so long that they become tired of looking for work and drop out of the labor foce. Because these citizens are not counted in the ranks of the unemployed, the reported unemployment rate is understated. ex: people

Front 65

frictional unemployment

Back 65

a type of unemplyment that occurs when someone new enters the labor market or switches jobs. ex: This is a relatively harmless form of unemployment and is not expected to last long.

Front 66

seasonal unemployment

Back 66

a typeof unemployment that is periodic, predictable, and that follows the calendar. ex: Workers and employers alike anticipate these changes in employment and plan accordingly, thus the damage is minimal

Front 67

structural unemployment

Back 67

a type of unemployment that is the result of fundamental, underlying changes in the economy such that some job skills are no longer in demand ex: gas car pumping

Front 68

cyclical unemployment

Back 68

a type of unemployment that rises and falls with the business cycle. ex: This form of unemployment is felt economy-wide, which makes it the focus of macroeconomic policy

Front 69

full employment

Back 69

exists when the economy is experiencing no cyclical unemployment ex:2004

Front 70

natural rate of unemployment

Back 70

the unemployment rate associated with full employment, somewhere between 4-5 percent in the US ex:10%

Front 71

disposable income (DI)

Back 71

the income a consumer has left over to spend or save once he has paid out his net taxes. DI = Y - T ex:$10

Front 72

consumption and saving schedules

Back 72

tables that show the direct relationships between disposable income and consumption and saving. ex: As DI increases for a typical household, C and S both increase.

Front 73

consumption function

Back 73

a linear relationship showing how increases in disposable income cause increases in consumption ex: graph of income and consumption

Front 74

autonomous consumption

Back 74

the amount of consumption that occurs no matter the level of disposable income. In a linear consumption function, this shows up as a constant and graphically it appears as the y intercept ex:100

Front 75

saving function

Back 75

a linear relationship showing how increases in disposable income cause increases in saving ex:graph of income and saving

Front 76

dissaving

Back 76

another way of saying that saving is less than zero. This can occur at low levels of disposable income when the consumer must liquidate assets or borrow to maintain consumption ex:-10

Front 77

autonomous saving

Back 77

the amount of saving that occurs no matter the level of disposable income, In a linear saving function, this shows up as a constant and graphically it appears as the y intercept ex$5

Front 78

marginal propensity to consume (MPC)

Back 78

the change in consumption caused by a change in disposable income, or the slope of the consumption function. MPC = ΔS/ΔDI ex:10

Front 79

marginal propensity to save (MPS)

Back 79

the change in saving caused by a change in disposable income, or the slope of the saving function. MPS = ΔC/ΔDI ex:$10

Front 80

determinants of consumption and saving

Back 80

factors that shift the consumption and saving functions in the opposite direction are ex: Wealth, Expectations, and Household Debt. The factors that change consumption and saving functions in the same direction are Taxes and Transfers.

Front 81

expected real rate of return (r)

Back 81

the rate of real profit the firm anticipates receiving on investment expenditures, This is the marginal benefit of an investment project ex:$10

Front 82

real rate of interest (i)

Back 82

the cost of borrowing to fund an investment. This can be thought of as the marginal cost of an investment project. ex:10%

Front 83

decision to invest

Back 83

a firm invests in projects so long as r ≥ i ex: firm invests in project

Front 84

investment demand

Back 84

the inverse relationship between the real interest rate and the cumulative dollars invested. Like any demand curve, this is drawn with a negative slope ex: graph of rate and dollars

Front 85

autonomous investment

Back 85

the level of investment determined by investment demand. It is autonomous because it is assumed to be constant at all levels of GDP ex: 10

Front 86

market for loanable funds

Back 86

the market for dollars that are available to be borrowed for investment projects. ex: Equilibrium in this market is determined at the real interest rate where the dollars saved (supply) is equal to the dollars borrowed (demand)

Front 87

demand for loanable funds

Back 87

the negative relationship between the real interest rate and the dollars invested by firms ex: graph of rate and dollars

Front 88

private saving

Back 88

saving conducted by households. ex: S (private) = DI - C

Front 89

public saving

Back 89

saving conducted by the government. ex: S (public) = abs(Tax Revenue - G)

Front 90

supply of loanable funds

Back 90

The higher the real interest rate, the more dollars that are saved.ex: But the more dollars saved, the lower the real interest rate, because the supply increases.

Front 91

multiplier effect

Back 91

describes how a change in any component of aggregate expenditures creates a larger change in GDP ex: 10

Front 92

spending multiplier

Back 92

the magnitude of the spending multiplier effect is calculated as 1/(1-MPC) ex:10

Front 93

tax multiplier

Back 93

the magnitude of the effect that a change in taxes has on real GDP. Tm = MPC/MPS (because it's a simplification, see chapter 13) ex:10

Front 94

balanced budget multiplier

Back 94

when a change in government spending is offset by a change in lump-sum taxes, real GDP changes by the amount of the change in G; the balanced budget multiplier is thus equal to one. ex:10