Econ Exam 3

Front 1

Aggregate Demand

Back 1

The output of goods and services demanded at different price levels

Front 2

Aggregate Demand Curve

Back 2

Plots the relationship between price level and RGDP demanded, assuming that income follows passively along and assuming that all other factors of aggregate demand are constant

Front 3

Determinants of Aggregate Demand

Back 3

Consumption spending, gov't spending, investment spending, net exports

Front 4

Why does the AD curve slope down?

Back 4

1) When the price of a product declines, consumers spendable income rises
2) When the price of a product falls, consumers will purchase more of the product

Front 5

Aggregate Supply

Back 5

The real GDP that firms will produce at varying price levels. In the short run, aggregate supply is positively sloped because many input costs are slow to change, but in the long run, the aggregate supply curve is vertical at full employment since the economy has reached its capacity to produce

Front 6

Aggregate Supply Curve

Back 6

Plots the relationship between price level and RGDP supplied, assuming businesses can sell what they produce & all other factors of As are constant

Front 7

Determinants of Aggregate Supply

Back 7

Price level, cost of production (wages, cost of other inputs, technology, taxes)

Front 8

Three different slopes of AS curve

Back 8

1) vertical AS curve: PL increase. economy already producing at or beyond portential GDP; full emp; expansionary gap
2) horizontal AS curve: PL remains same. recessionary gap.
3) 45 degree AS curve: PL increase. Somewhere inbetween recessionary & expansionary

Front 9

Full GDP multiplier

Back 9

Total change in GDP divided by initial change in spending

Front 10

Fundamental Idea

Back 10

There is a tendency for spending and RGDP to be equal because when spending increases, inventories fall, & firms raise prices & output to where spending and output are equal (where inventories are not changing).

Front 11

Self-Correcting Mechanism

Back 11

A process that is automatically triggered whenever an economy is in a recessionary or expansionary gap that works through changes in wages which influence the supply side & cause a shift in the AS curve such that RGDP moves towards PGDP.

Front 12

How does the self-correcting mechanism work?

Back 12

1) Recessionary gap: more workers than jobs --> wages fall --> cost of production falls --> AS increases
2) Expansionary gap: more jobs than workers --> wages rise --> cost of production rises --> AS decreases

Front 13

Stabilization policies

Back 13

Policies to keep RGDP close to PGDP.
High employent
Low & steady inflation

Front 14

Fiscal Policy

Back 14

The gov't spending, revenue collection, & transfer payments at all levels of government

Front 15

Discretionary Spending

Back 15

The negotiable part of the budget that works its way through the appropriations process of the legislature.
(national defense, transportation, funding science research)

Front 16

Mandatorary Spending

Back 16

Spending that is authorized by permanent law that does not get voted on each year. To change mandatory spending the legislature must vote to change the law. (social security, medicare & medicaid, interest on nat'l debt, some income security)

Front 17

Transfer payments

Back 17

a redistribution of income from the gov't to individuals

Front 18

Demand side of fiscal policy

Back 18

Includes altering gov't spending, transfer payments, or taxes with the purpose of altering aggregate demand

Front 19

Expansionary fiscal policy

Back 19

Involves increasing government spending, increasing transfer payments, or decreasing taxes to increase aggregate demand to expand output and the economy.

Front 20

Contractionary fiscal policy

Back 20

Involves increasing withdrawals from the economy to reducing government spending, transfer payments, or raising taxes to decrease aggregate demand to contract output and the economy

Front 21

Supply side of fiscal policy

Back 21

the school of thought which believes the economy can be affected by changes in aggregate supply

Front 22

Information Lag

Back 22

the time policymakers must wait for economic data to be collected, processed, and reported. Most economic data are not available until at least one quarter (three months) after the fact

Front 23

Recognition Lag

Back 23

The time it takes for policymakers to confirm that the economy is trending in or out of a recession. Short term variations in key economic indicators are typical and sometimes represent nothing more than randomness in data.

Front 24

Decision Lag

Back 24

The time it takes Congress and the administration to decide on a policy once a problem is recognized

Front 25

Implementation Lag

Back 25

The time required to turn fiscal policy into law and eventually have an impact on the economy.

Front 26

Automatic Stabilizers

Back 26

Tax revenues and transfer payments automatically expand or contract in ways that reduce the intensity of business fluctuation without any overt action by Congress or other policymakers.

Front 27

How do automatic stabilizers work?

Back 27

When the economy is growing at a solid rate, tax receipts rise (because individuals and firms are increasing their taxable incomes), at the same time, transfer payments decline (because fewer people require welfare or unemployment assistance). Rising tax revenues and declining transfer payments act as a brake to slow the growth of GDP.

Front 28

Debt ceiling

Back 28

the maximum amount of debt that a government can take on.

Front 29

Fiscal Cliff

Back 29

a bundle of U.S. federal tax increases and spending cuts that are due to take effect at the end of 2012 and early 2013

Front 30

Deficit

Back 30

The amount by which gov't outlays exceed tax revenue

Front 31

Surplus

Back 31

The amount which tax revnue exceeds gov't outlays

Front 32

National debt

Back 32

The total accumulation of all deficits & surpluses

Front 33

Bills

Back 33

Mature in less than 1 year

Front 34

Notes

Back 34

Mature in between 1-10 years

Front 35

Bonds

Back 35

Mature in greater than 10 years

Front 36

Size of National debt

Back 36

in 2009, nearly $12 trillion but public debt was only $8 trillion

Front 37

"Normal" Monetary Policy

Back 37

Fed buys very short-term securities (bills)

Front 38

Why study money?

Back 38

Money is crucial for a well-functioning modern economy.

Front 39

Money

Back 39

anything that is accepted in exchange for other goods and services or for the payment of debt

Front 40

Fiat money

Back 40

Money without intrinsic value but nonetheless accepted as money because the government has decreed it to be money

Front 41

Functions of money

Back 41

medium of exchange, measure of value, and a store of value

Front 42

Liquidity

Back 42

How quickly & easily an asset can be turned into cash

Front 43

M1

Back 43

Currency that's in circulation & checking deposits

Front 44

M2

Back 44

Currency that's in circulation, checking deposits, & savings deposits

Front 45

Bank reserves

Back 45

A bank's holdings of deposits as either cash in their vault or on deposit with the FED

Front 46

Required Reserves

Back 46

The fraction of deposits that a bank is legally required to hold a reserves. (not lend out; approx 10%)

Front 47

Excess Reserves

Back 47

Reserves in excess the reserve requirement

Front 48

T-Accounts

Back 48

An account of entity's changes in assets & liabilities due to transactions over some time

Front 49

Money Multiplier

Back 49

Measures the potential or maximum amount the money supply can increase when new deposits enter the system
1/reserve requirement

Front 50

Federal Reserve System

Back 50

The central bank of the United States. Composed of the Board of Governors and twelve regional federal reserve banks

Front 51

Federal Open Market Committee

Back 51

Twelve member committee composed of members of the board of governors of the Fed and selected presidents of the regional Federal Reserve banks; oversees open market operations; the main tool of monetary policy

Front 52

Open Market Operations

Back 52

The buying and selling of U.S. government securities, usually Treasury bonds, to adjust reserves in the banking system

Front 53

Keynesian Money Transmission Mechanism

Back 53

Ms increases --> interest decreases --> investment increases --> aggregate demand increases --> RGDP increases

Front 54

Monetarist Money Transmission Mechanism

Back 54

Ms increases --> interest decreases --> Investment and consumption increase --> aggregate demand increases --> RGDP & PL increase

Front 55

Quantitative Easing

Back 55

A form of monetary policy used by the fed to stimulate the economy. It does this by buying financial assets other than short term securities to bank reserves in the hopes that banks will lend them out and increase the money supply

Front 56

QE1

Back 56

nov 2008: 600 billion
march 2009: 300 billion
june 2010: 300 billion

Front 57

QE2

Back 57

1st quarter of 2011: 600 billion

Front 58

QE3

Back 58

40 billion/month until they decide to stop