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158 Cards in this Set
- Front
- Back
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GDP
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value of final goods and services produced in a given time period
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final good
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good bought by its final user
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intermediate good
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item produced by one firm, bought by another firm
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consumption expenditure
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total payment for goods and services
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investment
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purchases of new plant, equipment, and buildings or additions to inventory
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government expenditure
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goods and services government buys
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net exports
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value of exports minus value of imports
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two ways GDP can be measured
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1) total expenditure on goods and services
2) total income earned producing goods and services |
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aggregate expenditure
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total expenditure - consumption expenditure plus investment plus government expenditure plus net exports
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depreciation
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decrease in the value of a firms capital that results from wear and tear
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gross investment
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total amount spent buying new capital and replacing depreciated capital
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net investment
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amount by which the value of capital increases
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two purposes of real GDP
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1) compare standard of living over time
2) compare standard of living across countries |
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business cycle
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periodic but irregular up and down movement of total production and other measures of economic activity
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expansion
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period which real GDP increases
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recession
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period which real GDP decreases for at least two successive quarters
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two problems of using real GDP to compare standards of living across countries
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1) must be converted into the same currency units
2) goods and services must be valued at the same prices |
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cycle
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tendency for a variable to alternate between upward and downward movement
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trend
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tendency for a variable to move in one general direction
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working-age population
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total number of people aged 16 and over who are not in jail, hospital, or some other form of institutional care
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labor force
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sume of the employed and the unemployed
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employed
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person who has a full time or part time job
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unemployed
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person available to work but is either without work but has made efforts to find a job, is waiting to be called back, or is waiting to start a new job within 30 days
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marginally attached worker
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person who currently is neither working nor looking for work but has indicated that they want and are available for a job plus they have looked sometime in the last year
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frictional unemployment
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unemployment that arises from the normal labor turnover from people entering and leaving the labor force and from ongoing creation and destruction of jobs
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structural unemployment
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unemployment that arises when changes in technology or international competition change the skills need
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cyclical unemployment
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higher than normal unemployment at a business cycle trough and the lower than normal unemployment at a business peak
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natural unemployment
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unemployment that arises from fictions and structural change when no cyclical unemployment
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full employment
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unemployment rate equals the natural unemployment rate
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output gap
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gap between real GDP and potential GDP
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price level
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average level of prices and the value of money
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inflation
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persistently rising price level
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deflation
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persistently falling price level
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Consumer Price Index (CPI)
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average of the prices paid by urban consumers for a fixed basket of consumer goods and services
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economic growth rate
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annual percentage change of real GDP
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Rule of 70
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the number of years it takes for the level of any variable to double is 70 divided by the annual percentage growth rate
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aggregate production function
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tells us how real GDP changes as the quantity of labor changes when all other influences on production remain the same
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demand for labor
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relationship between the quantity of labor demanded and the real wage rate
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real wage rate
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money wage rate divided by the price level. The quantity of goods and services that an hour of labor earns
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supply of labor
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relationship between quantity of labor supplied and the real wage rate
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classical growth theory
(Malthusian) |
growth of real GDP per person is temporary. We will run out of resources, real GDP per person will decline, and we will return to a primitive standard of living. Thus, we must contain population growth
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Neoclassical growth theory
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real GDP per person grows because technological change induces saving and investment. Growth ends if technological change stops
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New growth theory
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real GDP per person grows because of the choices people make in the pursuit of profit and that growth will persist indefinitely. The pace at which new discoveries are made depends on how many people are looking for a new technology and how intensively they are looking
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Five ways to achieve faster growth
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1) stimulate saving
2) stimulate research and development 3) improve the quality of education 4) provide international aid to developing countries 5) encourage international trade |
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financial capital
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funds firms use to buy physical capital
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gross investment
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total amount spent on new capital
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net investment
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change in the value of capital. Gross investment minus depreciation
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wealth
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value of all the things that you own. Increases due to saving or when the market value of assets rise
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saving
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amount of income that is not paid in taxes or spent on consumption goods and services. It increases wealth
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financial institution
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firm that operates on both sides of the markets for financial capital. Thus the firm is a borrower and a lender
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net worth
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market value of what a financial institution has lent minus the market value of what it has borrowed
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solvent
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positive net worth
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insolvent
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negative net worth
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illiquid
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when a firm has made long time loans with borrowed funds and is faced with a sudden demand to repay more of what it has borrowed than it has in cash
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nominal interest rate
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number of dollars in interest in a year expressed as a percentage of the number of dollars borrowed and lent
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real interest rate
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nominal interest rate adjusted to remove the effects of inflation
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disposable income
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income earned minus net taxes
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When disposable income increases, other things remaining the same, consumption expenditure....?
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consumption expenditure increases but by less than the increase in income
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M1 consists of?
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currency and travelers checks plus checking deposits
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M2 consists of?
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M1 plus time deposits, savings deposits, and money market mutual funds
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depository institution
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financial firm that takes deposits
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Who insures deposits up to $250,000 per depositor per bank
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the Federal Deposit Insurance Corporation (FDIC)
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Federal Reserve System (Fed)
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the central bank of the United States. It regulates depository institutions and conducts monetary policy - adjusting money in circulation and influencing interest rates
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monetary base
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the sum of currency and depository institution deposits at the Fed
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required reserve ratio
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the minimum percentage of deposits that depository institutions are required to hold as reserves
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Three factors limiting the quantity of loans and deposits that the banking system can create?
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1) the monetary base
2) desired reserves 3) desired currency holding |
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desired reserves
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reserves that a bank plans to hold
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required reserves
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minimum quantity of reserves that bank must hold
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money multiplier
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ratio of the change in the quantity of money to the change in monetary base
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exchange rate
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the price at which one currency exchanges for another currency
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real exchange rate
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relative price of US-produced goods and services to foreign-produced goods and services
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flexible exchange rate
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exchange rate that is determined by demand and supply in the foreign exchange market with no direct intervention by the central bank
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fixed exchange rate
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exchange rate that is determined by a decision of the government or the central bank and is achieved by central bank intervention
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net borrower
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country that is borrowing more from the rest of the world than it is lending
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net lender
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country that is lending more to the rest of the world than it is borrowing
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debtor nation
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a country that during its entire history has borrowed more from the rest of the world that it has lent
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creditor nation
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a country that during its entire history has invested more in the rest of the world than other countries have invested in it
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net exports
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exports of goods and services minus imports of goods and services
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long-run aggregate supply
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relationship between the quantity of real GDP supplied and the price level when the money wage rate changes in step with the price level to maintain full employment. Vertical line
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short-run aggregate supply
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relationship between the quantity of real GDP supplied and the price level when the money wage rate, the prices of other resources, and potential GDP remain the same
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A change in the price level changes the ___, illustrated by a movement ___. It does not change aggregate supply
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A change in the price level changes the quantity of real GDP supplied, illustrated by a movement along the short-run aggregate supply curve. It does not change aggregate supply
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Aggregate supply changes when?
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Aggregate supply changes when an influence on production other than the price level changes. Influences include changes in potential GDP and changes in the money wage rate
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An increase in the quantity of capital increases?
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An increase in the quantity of capital increases potential GDP
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An advance in technology causes an?
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An advance in technology causes an increase in potential GDP
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When the money wage rate changes short-run aggregate supply (does/does not) change but long-run aggregate supply (does/does not) change
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When the money wage rate changes short-run aggregate supply DOES change but long-run aggregate supply DOES NOT change
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aggregate demand
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the relationship between the quantity of real GDP demanded and the price level
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real wealth
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amount of money in the bank, bonds, stocks, and other assets that people own measure in terms of goods and services
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when the price level rises, but other things remain the same, real wealth?
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when the price level rises, but other things remain the same, real wealth decreases
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When the price level rises, intrest rates?
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When the price level rises, intrest rates rise
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disposable income
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aggregate income minus taxes plus transfer payments.
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the greater the disposable income, the ___ the quantity of consumption goods and services and the ___ the aggregate demand
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the greater the disposable income, the greater the quantity of consumption goods and services and the greater the aggregate demand
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Fed influences economy with monetary policy by?
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changing interest rates and the quantity of money
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Aggregate demand increases (AD curve shifts right) when?
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Aggregate demand increases when expected future income, inflation, or profit increases; government expenditure increases; taxes are cut; transfer payments increase; the quantity of money increases and the interest rate falls; the exchange rate falls, or foreign income increases
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Aggregate demand decreases (AD curve shifts left) when?
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when expected future income, inflation, or profit decreases; government expenditure decreases, taxes increase, transfer payments decrease, the quantity of money decreases and interest rate rises; the exchange rate rises; or foreign income increases
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short run macroeconomic equilibrium
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when the quantity of real GDP demanded equals the quantity of real GDP supplied; intersection of the AD curve and the SAS curve
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long run economic equilibrium
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when real GDP equals potential GDP; economy is on its LAS curve
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output gap
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gap between real GDP and potential GDP
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inflationary gap
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when real GDP exceeds potential GDP
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recessionary gap
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when potential GDP exceeds real GDP
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stagflation
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combination of recession and inflation
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classical school of thought
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the economy is self-regulating and always at full employment
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new classical school of thought
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business cycle fluctuations are efficient responses of a well functioning economy that is bombarded by shocks that arise from the uneven pace of tech change
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Aggregate demand increases (AD curve shifts right) when?
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Aggregate demand increases when expected future income, inflation, or profit increases; government expenditure increases; taxes are cut; transfer payments increase; the quantity of money increases and the interest rate falls; the exchange rate falls, or foreign income increases
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Aggregate demand decreases (AD curve shifts left) when?
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when expected future income, inflation, or profit decreases; government expenditure decreases, taxes increase, transfer payments decrease, the quantity of money decreases and interest rate rises; the exchange rate rises; or foreign income increases
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short run macroeconomic equilibrium
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when the quantity of real GDP demanded equals the quantity of real GDP supplied; intersection of the AD curve and the SAS curve
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long run economic equilibrium
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when real GDP equals potential GDP; economy is on its LAS curve
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output gap
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gap between real GDP and potential GDP
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inflationary gap
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when real GDP exceeds potential GDP
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recessionary gap
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when potential GDP exceeds real GDP
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stagflation
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combination of recession and inflation; combination of rising price level and decreasing real GDP
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classical school of thought
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the economy is self-regulating and always at full employment; emphasizes the potential for taxes to stunt incentives and create inefficiency
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new classical school of thought
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business cycle fluctuations are efficient responses of a well functioning economy that is bombarded by shocks that arise from the uneven pace of tech change
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Keynesian school of thought
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left alone, the economy would rarely operate at full employment and to achieve/maintain full employment active help from fiscal policy and monetary policy is required; Expectations are the most significant influence on aggregate demand; fiscal/monetary policy should actively offset changes in aggregate demand
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New Keynesian school of thought
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the wage rate and the price of goods/services are sticky
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Monetarist school of thought
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the economy is self-regulating and it will normally operate at full employment, provided that monetary policy is not erratic and the pace of money growth is kept steady; Taxes should be kept low
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disposable income
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aggregate income minus taxes, plus transfer payments
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induced expenditure
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consumption expenditure minus imports, which varies with real GDP
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autonomous expenditure
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sum of investment, government expenditure, and exports, which does not vary with real GDP
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demand-pull inflation
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inflation that starts because aggregate demand increases. Such as cut in interest rate, increase in quantity of money, increase in government expenditure, tax cut, increase in exports, or increase in investment
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cost-push inflation
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inflation that is kicked off by an increase in costs from either an increase in the money wage rate or an increase in the money prices of raw materials
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Phillips curve
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relationship between inflation and unemployment
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short-run Phillips curve
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relationship between inflation and unemployment holding the expected inflation rate and natural unemployment rate constant
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long-run Phillips curve
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relationship between inflation and unemployment when the actual inflation rate equals the expected inflation rate
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federal budget
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annual statement of the outlays and receipts of the government with the laws and regulations that approve and support them. Purpose is to finance federal government programs and achieve macroeconomic objectives
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fiscal policy
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use of the federal budget to achieve macroeconomic objectives such as full employment, sustained economic growth, and price level stability
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Employment Act of 1946
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recognized role of government actions to keep unemployment low, the economy expanding, and inflation in check
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Full Employment and Balanced Growth Act of 1978
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set the specific target of 4 percent for the unemployment rate
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Council of Economic Advisers
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monitors the economy and keeps the President/public well informed about the current state of the economy
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Receipts
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governments tax revenues
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outlays
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governments payments
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deficit
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amount by which the governments outlays exceed its receipts
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transfer payments
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payments to individuals, businesses, other levels of government, and the rest of the world. Includes social security, medicare, medicaid, unemployment checks, welfare payments, farm subsidies, grants
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budget surplus
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when receipts exceed outlays
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government debt
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TOTAL amount that the government has borrowed; the sum of past budget deficits minus the sume of past budget surpluses
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Laffer curve
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relationship between the tax rate and the amount of tax revenue collected
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generational accounting
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measures the lifetime tax burden and benefits of each generation
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present value
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amount of money that if invested today wil grow to equal a given future amount when interest rate that it earns is taken into account
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fiscal imbalance
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present value of the governments commitments to pay benefits minus the present value of its tax revenues
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generational imbalance
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the division of the fiscal imbalance between the current and future generations
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automatic fiscal policy
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fiscal policy action that is triggered by the state of the economy with no action by government such as the increase in unemployment benefits triggered by the massive rise in the unemployment rate
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discretionary fiscal policy
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fiscal policy action initiated by an act of Congress
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tax multiplier
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the quantitative effect of a change in taxes on real GDP
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recognition lag
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time it takes to figure out that fiscal policy actions are needed
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law-making lag
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time it takes Congress to pass laws
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impact lag
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time it takes from passing a tax/spending change to its effects on the real GDP being felt
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Feds monetary policy objectives
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"maximum employment, stable prices, and moderate long-term interest rates"
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Beige Book
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summarized data that describes the current state of the economy
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output gap
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percentage deviation of real GDP from potential GDP
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monetary policy instrument
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variable that the Fed can directly control or at least very closely target such as the monetary base or the interest rate at which banks borrow and lend
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federal funds market
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the market in which the banks borrow and lend overnight
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federal funds rate
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the interest rate of the federal funds market
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tariff
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a tax on a good that is imposed by the importing country when an imported good crosses its international boundry
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five effects of tariffs
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1) rise in prices
2) decrease in purchases 3) increase in domestic production 4) decrease in imports 5) tariff revenue *US consumers lose more than US producers gain, society loses |
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import quota
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restriction that limits the maximum quantity of a good that may be imported in given time period
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subsidy
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payment by the government to a producer
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export subsidy
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payment by government to the producer of an exported good to increase the supply of exports. Illegal under a number of international trade agreements
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infant-industry argument
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it is necessary to protect a new industry to enable it to grow into a mature industry
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dumping
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when a foreign firm sells its exports at a lower price than it costs to produce in order to gain a global monopoly
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