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47 Cards in this Set
- Front
- Back
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aggregate behavior
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sum of individual decisions that macroeconomists look at
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sticky prices
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prices that don't adjust immediately to maintain equality between quantity supplied and quantity demanded
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Great Depression
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1929 - 1930s a time of high unemployment 13 million out of 51 million!
US produced about 27 percent fewer goods than in 1929 Stock prices collapse in 1929 |
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Why did classical economists believe that recessions were self correcting?
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As unemployment rises, wages go down which increases the amount of laborers hired
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How did Keynes explain the prolonged recession during the Depression?
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He said that a recession is not based on individual wages but on aggregate demand for goods and services
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The Employment Act of 1946
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Government gained the responsibility of controlling the economy's up and down turns;
government begins using its powers to tax and spend and their ability to affect interest rates and money supply |
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fine tuning
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a belief forwarded in the 1960s by Walter Heller that he was confident that the government could fine tune government's role in regulating inflation and unemployment
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1970s and 1980s Disillusionment and stagflation
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periods of sharp inflation when there is persistent unemployment (stagnation)
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3 of the major concerns of macroeconomics
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Inflation, Output Growth, Unemployment
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Inflation
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overall increase in price level
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what is the overall macroeconomic goal?
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neither deflation nor inflation but stability
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recession
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when aggregate output declines
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if the growth rate of production is greater than the growth rate of the population...is this a good thing?
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Yes because overall there is more produced per person which indicates people are leading better lives overall.
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unemployment rate
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the percentage of the labor force that is unemployed
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fiscal policy
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government policies concerning taxes and expenditures
expansionary fiscal policies - government should cut taxes and raise spending to get economy out of a slump contractionary fiscal policies - government should raise taxes and cut spending to bring the economy out of inflation |
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monetary policy
who determines the quantity of money in the economy? |
The Federal Reserve
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what does the quantity of money affect?
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affects overall price level, interest rates and exchange rates, unemployment rate and level of output
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what's the theory behind tax cuts?
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It's all about stimulating aggregate supply in order to stimulate aggregate output and income
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what was the goal behind the tax reforms in 1981 and in 1986?
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To increase the incentive to work, save and invest by lowering tax rates
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what sector does the government comprise?
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the public sector
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what sector do the firms comprise?
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the private sector
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transfer payments
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social security benefits, veterans' benefits and welfare payments = payments from the government not for services provided
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what is dissaving?
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spending your income as well as funds you have saved
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leakage from the circular flow
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one element decides to withdraw some into savings
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what are the three market arenas?
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Goods-and-services Market
Labor Market Money Market |
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goods-and-services markets
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firms purchase from each other
households purchase from firms US imports DVDs, autos, oil US exports computers, airplanes and agricultural goods |
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labor market
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households supply labor and government and firms demand labor
The international scene has also played a big part in the labor market because vegetable and fruit farmers in California would be hard pressed to get their goods out without migrant workers For years Turkey has provided Germany with "Guest Workers" for jobs that prosperous Germans want to avoid |
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who does what in a money market?
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households purchase stocks and bonds from firms expecting to earn income in the form of dividends on stocks and interest on bonds
firms and households borrow hoping to earn more in the future |
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who coordinates the borrowing and lending of households, firms, government?
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commercial banks, savings and loan associations, insurance companies
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How does the government borrow? how do firms borrow?
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the government issues treasury bonds, notes or bills in exchange for money
corporations issue corporate bonds |
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share of stocks
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financial instrument that gives the holder a share in the firm's ownership. When the company does well, the stock accrues in value. When the company does poorly, the stock devalues.
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when is the value of a stock realized?
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When you sell it
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dividends
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when the stock does well, the company may payout a portion of its earnings instead of retaining them to invest in more capital
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why do interest rates differ between different borrowers?
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interest depends on the perceived risk to the lender. The shorter the loan and the newer the borrower, the higher the interest rate.
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how do macroeconomists try to explain aggregate behavior?
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They assume that the same factors that affect individual decisions, affect the aggregate of individuals. For example if the average wage goes down, so does aggregate consumption and labor supply
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What does GDP stand for?
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Gross Domestic Product
= measure of economy's prosperity/ the amount of FINAL, NEW goods and services that it produces |
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what is a business cycle?
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it is the short run fluctuations of an economy
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What are 3 ways that the government can affect the macroeconomy?
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Fiscal policy - decisions on taxes and government spending
Monetary Policy - control of the money supply Growth or Side-Policies - policies that focus on increasing the long-run growth rate |
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What was the GDP of the US in 2002?
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10.4 Billion dollars
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Why does the GDP only include final goods and services?
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because including intermediate goods, which are used to make further goods, would just double the tallying of the GDP.
The value/price of the intermediate steps are added to the product along the way |
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Why are old/used goods not included in GDP?
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They were already counted in the older GDP
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how about stocks and bonds, do they count in the GDP?
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exchange of stocks and bonds for money when there are no goods involved is not counted as GDP. However if you pay a broker for selling your stocks that is included because he is providing you the service of managing your stocks
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What are the three basic factors of production?
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land, labor and capital
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What is the difference between GDP and GNP?
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GDP is the profit made from production of goods in a country using the land, labor and capital within the country while the GNP is the profit made by the country's citizens. So at a Honda Plant in Ohio, the output is counted in the US GDP, the workers wages are counted in the US GNP while the profits of the company are counted in the Japanese GNP because those profits were earned by Japanese factory owners.
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What are the two approaches for calculating GDP?
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expenditure approach - add up the total amount spent on all final goods during a given period
income approach - add wages, rents, interest and profits received by all factors of production in producing of final goods |
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What are 4 different types of expenditure categories?
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Personal Consumption Expenditures = spending on consumer goods
Gross private domestic investments = spending by firms and households on new capitals (i.e. plants, equipment, inventory, new housing) Government consumption and gross investment Net Exports = net spending from the rest of the world |
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Personal Consumption Expenditures
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Durable goods = automobiles, furniture and household appliances that last a long time
Nondurable goods = food, gasoline services = doctors, education, lawyers |
