Macro Economics Final Exam

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Positive Economic Statement

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A statement that can proved or disproved

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Normative Economic Statement

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A statement that reflects an opinion

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Opportunity Cost

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The value of the best alternative forgone when an item is chosen

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Sunk Cost

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A cost that has already been incurred, cannot be recovered, and thus is irrelevant for present and future economic decisions

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Law of Comparative Advantage

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The individual with the lowest opportunity cost of producing a particular good should specialize in that good

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Absolute Advantage

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The ability to make something with fewer resources

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Comparative Advantage

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The ability to make something with a lower opportunity cost

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Barter

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The direct exchange of one product to another

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Transfer Payments

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Cash or in-kind benefits given to individuals as outright grants from the government (social security, welfare)

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Externality

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A cost or benefit that affects neither the buyer or seller, but instead affects people not involved in the market transaction

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Fiscal Policy

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The use of government purchases, transfer payments, taxes, and borrowing to influence economic variables

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Monetary Policy

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Regulation of the money supply to influence economic variables

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Normal Good

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Demand increases as income increases

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Inferior Good

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Demand decreases as income increases

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Substitutes

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Such as Pepsi and Coke

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Complements

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Such as milk and cookies

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Transaction Costs

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The costs of time and information required to carry out market exchange

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Price Floor

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Causes surplus

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Price Ceiling

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Causes shortage

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Gross Domestic Product

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The market value of all final goods and services in a nation

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Flow Variable

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A measure of something over an interval of time, such as your income per weel

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Stock Variable

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A measure of something at a particular point in time, such as the amount of money you have with you right now

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Leading Economic Indicators

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Variables that predict or lead to a recession or recovery. Examples: Consumer Confidence, Stock Market Prices, Business Investments, Big-Ticket Purchases

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Coincident Economic Indicators

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Variables that reflect peaks and troughs in economic activity as they occur. Examples: Employment, Personal Income, Industrial Production

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Lagging Economic Indicators

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Variables that follow or trail after changes in economic activity. Examples: Interest Rate, Average Duration of Unemployment

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Demand-Side Economics

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Macroeconomics policy that focuses on shifting the aggregate demand curve as a way of promoting full employment

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Stagflation

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A contraction accompanied by inflation

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Supply-Side Economics

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Macroeconomics policy that focuses on a rightward shift of the aggregate supply curve through tax cuts

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Federal Debt

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A stock variable that measures the net accumulation of annual federal deficits

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Consumption

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Household purchases of final goods and services, except for new residences, which count as investments

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Investments

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The purchase of new plants, new equipment, new buildings, and new residences, plus additions to inventory

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Physical Capital

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Manufactured items used to produce goods and services; includes new plants and new equipment

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Injection

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Any spending other than by households or any income other than from resource earnings; includes investment, government purchases, exports, and transfer payments

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Leakage

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Any diversion of income from the domestic spending stream; includes saving, taxes, and imports

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Underground Economy

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Market transactions that go unreported either because they are illegal or because people involved want to evade taxes

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Frictional Unemployment

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Unemployment that occurs because job seekers and employers need time to find each other

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Seasonal Unemployment

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Unemployment caused by seasonal changes in the demand for certain kinds of labor

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Structural Unemployment

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Unemployment because the skills demanded by employers do not match those of the unemployed, or the unemployed do not live where the jobs are

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Cyclical Unemployment

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Unemployment that fluctuates with the business cycle

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Long-Term Unemployed

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27 weeks of longer

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Disinflation

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A reduction in the rate of inflation

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Demand-Pull Inflation

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A sustained rise in the price level caused by a rightward shift of the aggregate demand curve

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Cost-Push Inflation

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A sustained rise in the price level caused by a leftward shift in of the aggregate supply curve

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COLA

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Cost of living adjustment

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Automatic Stabilizers

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Structural features of government spending and taxation that reduce fluctuations in disposable income

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Discretionary Fiscal Policy

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The deliberate manipulation of government purchases, taxation, and transfer payments to promote macroeconomics goals, such as full employment

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Functional Finance

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A budget philosophy using fiscal policy to achieve the economy's potential GDP, rather than balancing the budgets either annually or over the business cycle

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Crowding Out

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The displacement of interest-sensitive private investment that occurs when higher government deficits drive up market interest rates

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Commodity Money

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Anything that serves both as money and as a commodity; money that intrinsic value such as gold or silver coins

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Fiat Money

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Money that is not redeemable for any commodity; its status as money is conferred initially by government decree but eventually by common experience

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Open Market Operations

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Purchases and sales of government securities by the Fed in an effort to influence the money supply

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M1

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The narrow measure of the money supply, consisting of currency and coins held by the nonbanking public, checkable deposits, and traveler's checks

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M2

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A money aggregate consisting of M1 plus savings deposits, small-denomination time deposits, money market mutual funds, and other miscellaneous near-monies

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Asymmetrical Information

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A situation in which one side of the market has more reliable information than the other side

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Asset

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Anything of value that is owned

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Liability

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Anything that is owned to other people or institutions

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Required Reserves

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The dollar amount of reserves a bank is obligated by regulation to hold as cash in the bank's vault or on account at the Fed

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Liquidity

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A measure of ease with which an asset can be converted into money without a significant loss in value

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Federal Funds Market

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A market for overnight borrowing and lending of reserves among banks; the interbank market for reserves on account at the Fed

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Federal Funds Rate

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The interest rate charged in the federal funds market

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Discount Rate

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The interest rate that the Fed charges banks that borrow reserves

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Functions of Money

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Medium of Exchange
Unit of Account
Store of Value

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Exchange Rate

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The price measured in one country's currency of purchasing one unit of another country's currency

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Arbitrageur

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Someone who takes advantage of temporary geographic differences in the exchange rate by simultaneously purchasing a currency in one market and selling it in another market

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Speculator

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Someone who buys or sells foreign exchange in hopes of profiting from fluctuations in the exchange rate over time