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140 Cards in this Set

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gross domestic product (GDP)
the market value of the final goods and services produced in a country during a given period
final goods or services
goods or services consumed by the ultimate user; because they are the end products of the production process, they are counted as part of GDP
intermediate goods or services
goods or services used up in the production of final goods and services and therefore not counted as part of GDP
capital good
a long-lived good that is used in the production of other goods and services (factories, houses, etc.)
value added
for any firm, the market value of its product or service minus the cost of inputs purchased from other firms
consumer expenditure (consumption)
spending by households on goods and services such as food, clothing, and entertainment
consumer durables
long-lived consumer goods such as cars and furniture; note that new houses are not treated as consumer durables but as part of investment
consumer nondurables
shorter-lived goods like food and clothing
services
largest single component of consumer spending, including everything from haircuts and taxi rides to legal, financial, and educational services
investment
spending by firms on final goods and services, primarily capital goods
business fixed investment
the purchase by firms of new capital goods such as machinery, factories, and office buildings; firms buy capital goods to increase their capacity to produce
residential investment
construction of new homes and apartment buildings
inventory investment
the addition of unsold goods to company inventories; i.e. the goods that a firm produces but doesn't sell during the current period are treated, for accounting purposes, as if the firm had bought those goods from itself
government purchases
purchases by federal, state, and local governments of final goods and services; government purchases do NOT include transfer payments, which are payments made by the government in return for which no current goods or services are received (such as unemployment benefits), nor do they include interest paid on the gov't debt
net exports
exports minus imports
real GDP
a measure of GDP in which the quantities produced are valued at the prices in a base year rather than at current prices; real GDP measures the actual physical volume of production
nominal GDP
a measure of GDP in which the quantities produced are valued at current-year prices; nominal GDP measures the current dollar value of production
factors affecting well-being that are NOT a result of real GDP
- leisure time
- nonmarket services (unpaid homemaking, etc.)
- environmental quality & resource conservation
- quality-of-life indicators
factors affecting well-being that ARE contributed to real GDP
- higher material standard of living
- better health
- longer life expectancy
- higher rates of literacy
consumer price index (CPI)
for any period, measures the cost in that period of a standard basket of goods and services relative to the cost of the same basket of goods and services in a fixed year (base year); (cost of basket at current year $) / (cost of basket at base year $)
price index
a measure of the average price of a given class of goods or services relative to the price of the same goods and services in a base year
rate of inflation
the annual percentage rate of change in the price level, as measured, for example, by the CPI
deflation
a situation in which the prices of most goods and services are falling over time so that inflation is negative
nominal quantity
a quantity that is measured in terms of its current dollar value
real quantity
a quantity that is measured in physical terms - for example, in terms of quantities of goods and services
deflating (a nominal quantity)
the process of dividing a nominal quantity by a price index (such as the CPI) to express the quantity in real terms
real wage
the wage paid to workers measured in terms of purchasing power; the real wage for any given period is calculated by dividing the nominal (dollar) wage by the CPI for that period
indexing
the practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index. Indexing prevents the purchasing power of the nominal quantity from being eroded by inflation
price level
a measure of the overall level of prices at a particular point in time as measured by a price index such as the CPI
relative price
the price of a specific good or service *in comparison to* the prices of other goods and services
bracket creep
a situation where inflation pushes income into higher tax brackets; the result is an increase in income taxes but no increase in real purchasing power
true costs of inflation
- "noise" in price system; difficult for market participants to interpret information conveyed by prices
- distortions of tax system (e.g. provisions of tax code not indexed)
- shoe-leather costs
- unexpected redistributions of wealth
- interference with long-term planning
hyperinflation
a situation in which the inflation rate is extremely high
real interest rate
the annual percentage increase in the purchasing power of a financial asset; the real interest rate on any asset equals the nominal interest rate on that asset minus the inflation rate
nominal interest rate
the annual percentage increase in the nominal value of a financial asset
Fisher effect
the tendency for nominal interest rates to be high when inflation is high and low when inflation is low
diminishing returns to labor
if the amount of capital and other inputs in use is held constant, then the greater the quantity of labor already employed, the less each additional worker adds to production
worker mobility
the movement of workers between jobs, firms, and industries
skill-biased technological change
technological change that affects the marginal products of higher-skilled workers differently from those of lower-skilled workers
labor force
the total number of employed and unemployed people in the economy
unemployment rate
the number of unemployed people divided by the labor force
participation rate
the percentage of working-age population in the labor-force (that is, the percentage that is either employed or looking for work)
unemployment spell
a period during which an individual is continuously unemployed
duration
the length of an unemployment spell
discouraged workers
people who say they would like to have a job but have not made an effort to find one in the past four weeks
frictional unemployment
the short-term unemployment associated with the process of matching workers with jobs
structural unemployment
the long-term and chronic unemployment that exists even when the economy is producing at a normal rate
cyclical unemployment
the extra unemployment that occurs during periods of recession
compound interest
the payment of interest not only on the original deposit but on all previously accumulated interest
average labor productivity
output per employed worker
diminishing returns to capital
if the amount of labor and other inputs employed is held constant, then the greater the amount of capital already in use, the less an additional unit of capital adds to production
entrepreneurs
people who create new economic enterprises
human capital
an amalgam of factors such as education, training, experience, intelligence, energy, work habits, trustworthiness, initiative, and others that affect the value of a worker's marginal product
saving
current income minus spending on current needs
saving rate
saving divided by income
wealth
the value of assets minus liabilities
assets
anything of value that one *owns*
liabilities
the debts one *owes*
balance sheet
a list of an economic unit's assets and liabilities on specific date
flow
a measure that is defined *per unit of time*
stock
a measure that is defined *at a point in time*
capital gains
increases in the value of existing assets
capital losses
decreases in the value of existing assets
national saving
the saving of the entire economy, equal to GDP less consumption expenditures and government purchases of goods and services, or Y-C-G
transfer payments
payments the gov't makes to the public for which it receives no current goods or services in return
private saving
the saving of the private sector of the economy is equal to the after-tax income of the private sector minus consumption expenditures (Y - T - C); private saving can be further broken down into household saving and business saving
public saving
the saving of the gov't sector is equal to net tax payments minus gov't purchases (T - G)
government budget surplus
the excess of gov't tax collections over gov't spending (T - G); the gov't budget surplus equals public saving
government budget deficit
the excess of gov't spending over tax collections (G - T)
life-cycle saving
saving to meet long-term objectives such as retirement, college attendance, ofr the purchase of a home
precautionary saving
saving for protection against unexpected setbacks such as the loss of a job or a medical emergency
bequest saving
saving done for the purpose of leaving an inheritance
financial intermediaries
firms that extend credit to borrowers using funds raised from savers
bond
a legal promise to repay a debt, usually including both the principal amount and regular interest payments
principal amount
the amount originally lent
maturation date
the date at which the principal will be repaid
coupon payments
regular interest payments made to the bondholder
coupon rate
the interest rate promised when a bond is issued; the annual coupon payments are equal to the coupon rate times the principal amount of the bond
stock (or equity)
a claim to partial ownership of a firm
dividend
a regular payment received by stockholders for each share that they own
risk premium
the rate of return that financial investors require to hold risky assets minus the rate of return on safe assets
diversification
the practice of spreading one's wealth over a variety of different financial investments to reduce overall risk
mutual fund
a financial intermediary that sells shares in itself to the public, then uses the funds raised to buy a wide variety of financial assets
money
any asset that can be used in making purchases
medium of exchange
an asset used in purchasing goods and services
barter
the direct trade of goods or services for other goods or services
unit of account
a basic measure of economic value
store of value
an asset that serves as a means of holding wealth
M1
sum of currency outstanding and balances held in checking accounts
M2
All the assets in M1 plus some additional assets that are usable in making payments but at greater cost or inconvenience than currency or checks
bank reserves
cash or similar assets held by commercial banks for the purpose of meeting depositor withdrawals and payments
100 percent reserve banking
a situation in which banks' reserves equal 100 percent of their deposits
reserve-deposit ratio
bank reserves divided by deposits
fractional-reserve banking system
a banking system in which bank reserves are less than deposits so that the reserve-deposit ratio is less than 100%
open-market purchase
the purchase of gov't bonds from the public by the Fed for the purpose of increasing the supply of bank reserves and the money supply
open-market sale
the sale by the Fed of gov't bonds to the public for the purpose of reducing bank reserves and the money supply
open-market operations
open-market purchases and open-market sales
velocity
a measure of the speed at which money changes hands in transactions involving final goods and services, or, equivalently, nominal GDP divided by the stock of money.
V = (P X Y) / M, where V is velocity, P X Y is nominal GDP, and M is the money supply whose velocity is being measured
quantity equation
money times velocity equals nominal GDP; M x V = P x Y
recession (or contraction)
a period in which the economy is growing at a rate significantly below normal
depression
a particularly severe or protracted recession
peak
the beginning of a recession; the high point of economic activity prior to a downturn
trough
the end of a recession; the low point of the economic activity prior to a recovery
expansion
a period in which the economy is growing at a rate significantly above normal
boom
a particularly strong and protracted expansion
potential output, Y* (or potential GDP or full-employment output)
the maximum sustainable amount of output (real GDP) that an economy can produce
output gap, Y - Y*
the difference between the economy's actual output and its potential output at a point in time
recessionary gap
a negative output gap, which occurs when potential output exceeds actual output (Y < Y*)
expansionary gap
a positive output gap, which occurs when actual output is higher than potential output (Y > Y*)
natural rate of unemployment, u*
the part of the total unemployment rate that is attributable to frictional and structural unemployment; equivalently, the unemployment rate that prevails when cyclical unemployment is zero, so that the economy has neither a recessionary nor an expansionary output gap
Okun's law
each extra percentage point of cyclical unemployment is associated with about a 2 percentage point increase increase in the output gap, measured in relation to potential output
menu costs
the costs of changing prices
planned aggregate expenditure (PAE)
total planned spending on final goods and services
consumption function
the relationship between consumption spending and its determinants, in particular, disposable income
autonomous consumption
consumption spending that is not related to the level of disposable income
wealth effect
the tendency of changes in asset prices to affect households' wealth and thus their consumption spending
Marginal propensity to consume (mpc)
the amount by which consumption rises when disposable income rises by $1; we assume that 0 < mpc < 1
autonomous expenditure
the portion of planned aggregate expenditure that is independent of output
induced expenditure
the portion of planned aggregate expenditure that depends on output Y
expenditure line
a line showing the relationship between planned aggregate expenditure and the output
short-run equilibrium output
the level of output at which output Y equals planned aggregate expenditure PAE; short-run equilibrium output is the level of output that prevails during the period in which prices are predetermined
income-expenditure multiplier
the effect of a one-unit increase in autonomous expenditure on short-run equilibrium output; for example, a multiplier of 5 means that a 10-unit decrease in autonomous expenditure reduces short-run equilibrium output by 50 units
stabilization policies
gov't policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps
expansionary policies
gov't policy actions intended to increase planned spending and output
contractionary policies
gov't policy actions designed to reduce planned spending and output
automatic stabilizers
provisions in the law that imply automatic increases in gov't spending or decreases in taxes when real output declines
Board of Governors
the leadership of the Fed, consisting of 7 governors appointed by the president to staggered 14-year terms
Federal Open Market Committee (or FOMC)
the committee that makes decision concerning monetary policy
banking panic
a situation in which news or rumors of the imminent bankruptcy of one or more banks leads bank depositors to rush to withdraw their funds
deposit insurance
a system under which the government guarantees that depositors will not lose any money even if their bank goes bankrupt
federal funds rate
the interest rate that commercial banks charge each other for very short-term (usually overnight) loans; because the Fed frequently sets its policy in terms of the federal funds rate, this rate is closely watched in financial markets
monetary policy rule
describes how a central bank takes action in response to changes in the state of the economy
target inflation rate
the Fed's long-run for inflation
target real interest rate
the Fed's long-run goal for the real interest rate
portfolio allocation decision
the decision about the forms in which to hold one's wealth
demand for money
the amount of wealth an individual chooses to hold in the form of money
money demand curve
shows the relationship between the aaggregate quantity of money demanded M and the nominal interest rate i; because an increase in the nominal interest rate increases the opportunity cost of holding money, which reduces the quantity of money demanded, the money demand curve slopes down
discount window lending
the lending of reserves by the Fed to commercial banks
discount rate
(also known as the primary credit rate) the interest rate that the Fed charges commercial banks to borrow reserves
reserve requirements
set by the Fed, the min. values of the ratio of bank deposits that commercial banks are allowed to maintain