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461 Cards in this Set
- Front
- Back
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Macroeconomics
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study of the economy as a whole
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Real GDP
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measures total income of everyone in the economy adjusted for the level of prices
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Inflation rate
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measures how fast prices are rising
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Unemployment rate
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percentage of those in the labor force who do not have jobs
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Recessions
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sustained period of falling real income
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Depressions
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very severe recession
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Deflation
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decrease in overall level of prices
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Models
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simplified representation of reality, often using diagrams or equations, that shows how variables interact
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Endogenous variables
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variable that is explained by a particular model; variable whose value is determined by the model’s solution
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Exogenous variables
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variable that a particular model is taken as given; variable whose value is independent of the model’s solution
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Market clearing
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model that assumes that prices freely adjust to equilibrate supply and demand
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Flexible Prices
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prices that adjust quickly to equilibrate supply and demand
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Sticky Prices
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prices that adjust sluggishly and do not always equilibrate supply and demand
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Microeconomics
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study of individual markets and decision makers
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Macroeconomics
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study of the economy as a whole
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Real GDP
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measures total income of everyone in the economy adjusted for the level of prices
|
|
|
Inflation rate
|
measures how fast prices are rising
|
|
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Unemployment rate
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percentage of those in the labor force who do not have jobs
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Recessions
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sustained period of falling real income
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Depressions
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very severe recession
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Deflation
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decrease in overall level of prices
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Models
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simplified representation of reality, often using diagrams or equations, that shows how variables interact
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Endogenous variables
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variable that is explained by a particular model; variable whose value is determined by the model’s solution
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Exogenous variables
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variable that a particular model is taken as given; variable whose value is independent of the model’s solution
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Market clearing
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model that assumes that prices freely adjust to equilibrate supply and demand
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Flexible Prices
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prices that adjust quickly to equilibrate supply and demand
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Sticky Prices
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prices that adjust sluggishly and do not always equilibrate supply and demand
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Microeconomics
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study of individual markets and decision makers
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Gross Domestic Product
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total income earned domestically, including income earned by foreign owned factors of production; total expenditure on nation’s output of goods and services
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Consumer Price Index
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measure of overall level of prices that shows the cost of a fixed basket of consumer goods relative to the cost of the same basket in a base year (CPI)
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National Income Accounting
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accounting system that measures GDP and many other related stats
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Stocks
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variable measured as a quantity at a point in time; shares of ownership in a corporation
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Flows
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variable measured as a quantity per unit of time
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Value Added
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value of a firm’s output minus the value of intermediate goods the firm purchased
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Imputed Value
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estimate of the value of a good or service that is not sold in the marketplace ad therefore does not have a market price
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GDP Deflator
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ratio of nominal GDP to real GDP; measure of overall level of prices that shows the cost of the currently produced basket of goods relative to the cost of that basket in a base year
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National Income accounts identity
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equation showing that GDP is the sum of consumption, investment, government purchases, and net exports
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Consumption
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goods and services produced by consumers
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Investment
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goods purchased by individuals and firms to add to their stock of capital
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Government purchases
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goods and services bought by the government
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Net exports
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exports minus imports
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Labor force
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those in the population who have a job or are looking for a job
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Labor-force participation rate
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percentage of adult population in the labor force
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Factors of production
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input used to produce goods and services such as capital or labor
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Production function
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mathematical relationship showing how the quantities of the factors of production determine the quantity of goods and services produced; Y=F(K,L)
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Constant returns to scale
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property of a production function whereby a proportionate increase in all factors of production leads to an increase in output of the same proportion
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Factor prices
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amount paid for one unit of a factor of production
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Competition
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situation in which there are many individuals or firms, so that the actions of any one of them do not influence market prices
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Profit
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income of firm owners; firm revenue minus firm costs
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Marginal Product of Labor
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amount of extra output produced when the labor input is increased by one unit
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Diminishing marginal product
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characteristic of a production function whereby the marginal product of a factor falls as the amount of the factor increases while all other factors are held constant
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Real wage
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payment to labor measured in units of output rather than dollars; W/P
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Marginal product of capital
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amount of extra output produced when the capital input is increased by one unit (MPK)
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Real rental price of capital
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amount paid to rent one unit of capital
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Economic profit
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amount of revenue remaining for the owners of a firm after all the factors of production have been compensated
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Accounting profit
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amount of revenue remaining for the owners of a firm after all the factors of production except capital have been compensated
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Cobb-Douglas production function
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production function of the form F(K,L) = AK^alphaL^-1-alpha; where K is capital, L is labor, A and alpha are parameters
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Disposable income
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income remaining after the payment of taxes
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Consumption function
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relationship showing the determinants of consumption; ex: relationship between consumption and disposable income, C=C(Y-T)
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Marginal Propensity to Consume
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increase in consumption resulting from a one-dollar increase in disposable income
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Interest Rate
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market price at which resources are transferred between the present and the future; return to saving and the cost of borrowing
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Nominal interest rate
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return to saving and cost of borrowing without adjustment for inflation
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Real interest rate
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return to saving and the cost of borrowing after adjustment for inflation
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National Saving
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nation’s income minus consumption and government purchases; sum of private and public saving
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Private saving
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disposable income minus consumption
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Public saving
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government receipts minus government spending
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Loanable funds
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flow or resources available to finance capital accumulation
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Crowding out
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reduction in investment that results when expansionary fiscal policy raises the interest rate
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Inflation
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an increase in the overall level of prices
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Hyperinflation
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extremely high inflation
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Money
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stock of assets used for transactions
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Store of value
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way of transferring purchasing power from the present to the future; one of the functions of money
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Unit of account
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measure in which prices and other accounting records are recorded; on of the functions of money
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Medium of exchange
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item widely accepted in transactions for goods and services; one of the functions of money
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Fiat money
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money that is not intrinsically useful and is valued only because it is used as money
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Commodity money
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money that is intrinsically useful and would be valued even if it did not serve as money
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Gold standard
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monetary system in which gold serves as money or in which all money is convertible into gold at a fixed rate
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Money supply
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quantity of money available in an economy
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Monetary policy
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central bank’s choice regarding supply of money
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Central bank
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institution responsible for the conduct of monetary policy, such as the Federal Reserve in the US
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Federal reserve
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central bank of the US
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Open-market operations
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purchase or sale of government bonds by the central bank for the purpose of increasing or decreasing the money supply
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Currency
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sum of outstanding paper money and coins
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Demand deposits
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assets that are held in banks and can be used on demand to make transactions such as checking accounts
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Quantity equation
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identity stating that the product of the money supply and the velocity of money equals nominal expenditure (MV=PY); coupled with the assumption of stable velocity, an explanation of nominal expenditure called the quantity theory of money
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Velocity of money
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ratio of nominal expenditure to the money supply; rate at which money changes hand
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Real money balances
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quantity of money expressed in terms of the quantity of goods and services it can be; M/P
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Money demand function
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function showing determinants of the demand for real money balances; equation
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Quantity theory of money
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doctrine emphasizing that changes in the quantity of money lead to changes in nominal expenditure
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Seigniorage
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revenue raised by the government through the creation of money; inflation tax
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Nominal interest rate
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return to saving and cost of borrowing without adjustment for inflation
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Real interest rates
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return to saving and the cost of borrowing after adjustment for inflation
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Fisher equation
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equation rate that is set by the central bank’s willingness to buy and sell the domestic currency for foreign currencies at a predetermined price
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Fisher effect
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one-for-one influence of expected inflation on the nominal interest rate
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Ex ante real interest rate
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real interest rate anticipated when a loan is made; nominal interest rate minus expected inflation
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Ex post real interest rates
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real interest rate actually realized; nominal interest rate minus actual inflation
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Shoeleather costs
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cost of inflation from reducing real money balances, such as the inconvenience of needing to make more frequent trips to the bank
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Menu costs
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cost of changing a price
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Real variables
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all variables measured in physical units, such as quantities and relative prices
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Nominal variables
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variables expressed in terms of money
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Classical dichotomy
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theoretical separation of real and nominal variables in the classical model that implies that nominal variables do not influence real variables
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Monetary neutrality
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property stating that a change in the money supply does not influence real variables
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Capital budgeting
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accounting procedure that measures both assets and liabilities
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Cyclically adjusted budget deficit
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budget deficit adjusted for the influence of the business cycle on government spending and tax revenue; the budget deficit that would occur of the economy’s production and employment were at their natural levels
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Ricardian equivalence
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theory according to which forward-looking consumers fully anticipate the future taxes implied by government debt, so that government borrowing today coupled with a tax increase in the future to repay the debt has the same effect on the economy as a tax increase today
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Reserves
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money that banks have received from depositors but have not used
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100-percent-reserve banking
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system in which banks keep all deposits on reserve
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Balance sheet
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accounting statement that shows assets and liabilities
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Fractional-reserve banking
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system in which banks keep only some of their deposits on reserve
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Financial intermediation
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process by which resources are allocated from those individuals who wish to save some of their income for future consumption to those individuals and firms who wish to borrow to buy investment goods for future production
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Monetary base
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sum of currency and bank reserves; high power money
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Reserve-deposit ratio
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the fraction of deposits that banks hold in reserve, determined by the business policies of banks and laws
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Currency-deposit ratio
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the amount of currency people hold as a fraction of their holdings of demand deposits
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Money multiplier
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increase in the money supply resulting from a one-dollar increase in the monetary base
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High-powered money
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sum of currency and bank reserves; monetary base
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Open-market operations
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purchase or sale of government bonds by the central bank for the purpose of increasing or decreasing the money supply
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Reserve requirements
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regulations imposed on banks by the central bank that specify a minimum reserve-deposit ratio
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Discount rate
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interest rate that the Fed charges when it makes loans to banks
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Excess reserves
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reserves held by banks above the amount mandated by reserve requirements
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Portfolio theories
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theories that explain how much money people choose to hold and that stress the role of money as a store of value
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Dominated asset
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asset that offers an inferior return compared to another asset in all possible realizations of future uncertainty
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Transaction theories of money demand
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explain how much money people choose to hold and that stress the role of money as a medium of exchange
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Baumol-Tobin model
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model of money demand positing that people choose optimal money holdings by comparing the opportunity cost of the forgone interest from holding money and the benefit of making less frequent trips to the bank
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Near money
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assets that are almost as useful as money for engaging in transactions and therefore are close substitutes for money
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Discouraged workers
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are counted as being out of labor force and do not show up in unemployment statistics
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Efficiency wage theories
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hold that high wages make workers more productive
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Insiders vs. Outsiders
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the unemployment caused by unions and by the threat of unionization is an instance of conflict between different groups of workers
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Structural Unemployment
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the unemployment resulting from wage rigidity and job rationing (unemployment due to a fundamental mismatch between the number of people who want to work and number of jobs available
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Wage rigidity
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the failure of wages to adjust to a level at which labor supply equals labor demand (caused by efficiency wage theory, monopoly power of unions and minimum wage laws)
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Unemployment Insurance
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unemployed workers can collect a fraction of their wages for a certain period after losing their jobs
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Sectoral Shift
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a change in the composition or demand among industries or regions
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Frictional Unemployment
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unemployment caused by the time it takes workers to search for a job (because different jobs require different skills and pay different wages, unemployed workers may not accept the first job offer they receive)
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Natural Rate of Unemployment
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the average rate of unemployment around which economy fluctuates
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Stabilization Policy
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policy actions aimed at reducing the severity of short-run economic fluctuations. Because output and employment fluctuate around their long-run natural levels, stabilization policy dampens the business cycle by keeping output and employment as close to their natural levels as possible.
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Supply Shocks
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exogenous variables that shift the aggregate supply curve
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Demand Shocks
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exogenous variables that shift the aggregate demand curve
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Shocks
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an exogenous change (change in government purchases, taxes and the money supply) in an economic relationship, such as the aggregate demand or aggregate supply curve
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Aggregate Supply
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the relationship between the quantity of goods and services supplied and the price level
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Aggregate Demand
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the relationship between the quantity of output demanded and the aggregate price level. The aggregate demand curve tells us the quantity of goods and services people want to buy at any given level of prices.
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Leading Indicators
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economic variables that fluctuate in advance of economy’s output and thus signal the direction of economic fluctuations.
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Okun’s Law
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negative relationship between unemployment and GDP. Because employed workers help to produce goods and services and unemployed workers do not, increase in the unemployment rate should be associated with decrease in real GDP.
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Theory of Liquidity Preference
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a simple model that says that the interest rates adjust to equilibrate the supply and demand for real money balances
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Tax Multiplier
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the change in aggregate income resulting from a one-dollar change in taxes
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Government Purchases Multiplier
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the change in aggregate income resulting from a one-dollar change in government purchases
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Keynesian Cross
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simple model of income determination, based on the ideas of Keynes’s General Theory, which shows how changes in spending can have a multiplied effect on aggregate income
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LM curve
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positive relationship between the interest rate and the level of income (while holding the price level fixe3d) that arises in the market for real money balances
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IS curve
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negative relationship between the interest rate and the level of income that arises in the market for goods and services
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IS-LM Model
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model of aggregate demand that shows what determines aggregate income for a given price level by analyzing the interaction between the goods market and the money market
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Debt-deflation theory
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theory according to which an unexpected fall in the price level redistributes real wealth from debtors to creditors and therefore, reduces total spending in the economy
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Pigou effect
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increase in consumer spending that results when a fall in the price level raises real money balances, and thereby, consumers’ wealth
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Monetary transmission mechanism
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process by which changes in the money supply influence the amount that households and firms wish to spend on goods and services
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Hysteresis
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long-lasting influence of history such as on the natural rate of unemployment
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Natural-rate hypothesis
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premise that fluctuations in aggregate demand influence output, employment, and unemployment only in the short run, and that in the long run these variables return to the levels implied by the classical model
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Rational expectations
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approach that assumes that people optimally use all the available information—including information about current and prospective policies—to forecast the future
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Sacrifice ratio
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number of percentage points of a year’s real GDP that must be forgone to reduce inflation by 1 percentage point
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Cost-push inflation
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inflation resulting from shocks to aggregate supply
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Demand-pull inflation
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inflation resulting from shocks to aggregate demand
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Adaptive expectations
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approach that assumes that people form their expectation of a variable based on recently observed values of the variable
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Phillips curve
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negative relationship between inflation and unemployment; in its modern form, a relationship among inflation, cyclical unemployment, expected inflation, and supply shocks, derived from the short-run aggregate supply curve
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Sticky price model
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model of aggregate supply emphasizing the slow adjustment of the prices of goods and services
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Imperfect information model
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model of aggregate supply emphasizing that individuals do not always know the overall price level because they cannot observe the prices of all goods and services in the economy
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NAIRU
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non-accelerating inflation rate of unemployment
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Sticky-wage model
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model of aggregate supply emphasizing the slow adjustment of nominal wages
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Macroeconomics
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study of the economy as a whole
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Real GDP
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measures total income of everyone in the economy adjusted for the level of prices
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Inflation rate
|
measures how fast prices are rising
|
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Unemployment rate
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percentage of those in the labor force who do not have jobs
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Recessions
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sustained period of falling real income
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Depressions
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very severe recession
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Deflation
|
decrease in overall level of prices
|
|
|
Models
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simplified representation of reality, often using diagrams or equations, that shows how variables interact
|
|
|
Endogenous variables
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variable that is explained by a particular model; variable whose value is determined by the model’s solution
|
|
|
Exogenous variables
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variable that a particular model is taken as given; variable whose value is independent of the model’s solution
|
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Market clearing
|
model that assumes that prices freely adjust to equilibrate supply and demand
|
|
|
Flexible Prices
|
prices that adjust quickly to equilibrate supply and demand
|
|
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Sticky Prices
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prices that adjust sluggishly and do not always equilibrate supply and demand
|
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Microeconomics
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study of individual markets and decision makers
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|
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Gross Domestic Product
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total income earned domestically, including income earned by foreign owned factors of production; total expenditure on nation’s output of goods and services
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Consumer Price Index
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measure of overall level of prices that shows the cost of a fixed basket of consumer goods relative to the cost of the same basket in a base year (CPI)
|
|
|
National Income Accounting
|
accounting system that measures GDP and many other related stats
|
|
|
Stocks
|
variable measured as a quantity at a point in time; shares of ownership in a corporation
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|
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Flows
|
variable measured as a quantity per unit of time
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Value Added
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value of a firm’s output minus the value of intermediate goods the firm purchased
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Imputed Value
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estimate of the value of a good or service that is not sold in the marketplace ad therefore does not have a market price
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GDP Deflator
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ratio of nominal GDP to real GDP; measure of overall level of prices that shows the cost of the currently produced basket of goods relative to the cost of that basket in a base year
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National Income accounts identity
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equation showing that GDP is the sum of consumption, investment, government purchases, and net exports
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Consumption
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goods and services produced by consumers
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Investment
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goods purchased by individuals and firms to add to their stock of capital
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Government purchases
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goods and services bought by the government
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Net exports
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exports minus imports
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Labor force
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those in the population who have a job or are looking for a job
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Labor-force participation rate
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percentage of adult population in the labor force
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Factors of production
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input used to produce goods and services such as capital or labor
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Production function
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mathematical relationship showing how the quantities of the factors of production determine the quantity of goods and services produced; Y=F(K,L)
|
|
|
Constant returns to scale
|
property of a production function whereby a proportionate increase in all factors of production leads to an increase in output of the same proportion
|
|
|
Factor prices
|
amount paid for one unit of a factor of production
|
|
|
Competition
|
situation in which there are many individuals or firms, so that the actions of any one of them do not influence market prices
|
|
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Profit
|
income of firm owners; firm revenue minus firm costs
|
|
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Marginal Product of Labor
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amount of extra output produced when the labor input is increased by one unit
|
|
|
Diminishing marginal product
|
characteristic of a production function whereby the marginal product of a factor falls as the amount of the factor increases while all other factors are held constant
|
|
|
Real wage
|
payment to labor measured in units of output rather than dollars; W/P
|
|
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Marginal product of capital
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amount of extra output produced when the capital input is increased by one unit (MPK)
|
|
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Real rental price of capital
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amount paid to rent one unit of capital
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Economic profit
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amount of revenue remaining for the owners of a firm after all the factors of production have been compensated
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Accounting profit
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amount of revenue remaining for the owners of a firm after all the factors of production except capital have been compensated
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Cobb-Douglas production function
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production function of the form F(K,L) = AK^alphaL^-1-alpha; where K is capital, L is labor, A and alpha are parameters
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Disposable income
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income remaining after the payment of taxes
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Consumption function
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relationship showing the determinants of consumption; ex: relationship between consumption and disposable income, C=C(Y-T)
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Marginal Propensity to Consume
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increase in consumption resulting from a one-dollar increase in disposable income
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Interest Rate
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market price at which resources are transferred between the present and the future; return to saving and the cost of borrowing
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Nominal interest rate
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return to saving and cost of borrowing without adjustment for inflation
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Real interest rate
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return to saving and the cost of borrowing after adjustment for inflation
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National Saving
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nation’s income minus consumption and government purchases; sum of private and public saving
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Private saving
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disposable income minus consumption
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Public saving
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government receipts minus government spending
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Loanable funds
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flow or resources available to finance capital accumulation
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Crowding out
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reduction in investment that results when expansionary fiscal policy raises the interest rate
|
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Inflation
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an increase in the overall level of prices
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Hyperinflation
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extremely high inflation
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Money
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stock of assets used for transactions
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|
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Store of value
|
way of transferring purchasing power from the present to the future; one of the functions of money
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|
|
Unit of account
|
measure in which prices and other accounting records are recorded; on of the functions of money
|
|
|
Medium of exchange
|
item widely accepted in transactions for goods and services; one of the functions of money
|
|
|
Fiat money
|
money that is not intrinsically useful and is valued only because it is used as money
|
|
|
Commodity money
|
money that is intrinsically useful and would be valued even if it did not serve as money
|
|
|
Gold standard
|
monetary system in which gold serves as money or in which all money is convertible into gold at a fixed rate
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Money supply
|
quantity of money available in an economy
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Monetary policy
|
central bank’s choice regarding supply of money
|
|
|
Central bank
|
institution responsible for the conduct of monetary policy, such as the Federal Reserve in the US
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Federal reserve
|
central bank of the US
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|
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Open-market operations
|
purchase or sale of government bonds by the central bank for the purpose of increasing or decreasing the money supply
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Currency
|
sum of outstanding paper money and coins
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Demand deposits
|
assets that are held in banks and can be used on demand to make transactions such as checking accounts
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Quantity equation
|
identity stating that the product of the money supply and the velocity of money equals nominal expenditure (MV=PY); coupled with the assumption of stable velocity, an explanation of nominal expenditure called the quantity theory of money
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Velocity of money
|
ratio of nominal expenditure to the money supply; rate at which money changes hand
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Real money balances
|
quantity of money expressed in terms of the quantity of goods and services it can be; M/P
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Money demand function
|
function showing determinants of the demand for real money balances; equation
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Quantity theory of money
|
doctrine emphasizing that changes in the quantity of money lead to changes in nominal expenditure
|
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Seigniorage
|
revenue raised by the government through the creation of money; inflation tax
|
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Nominal interest rate
|
return to saving and cost of borrowing without adjustment for inflation
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Real interest rates
|
return to saving and the cost of borrowing after adjustment for inflation
|
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Fisher equation
|
equation rate that is set by the central bank’s willingness to buy and sell the domestic currency for foreign currencies at a predetermined price
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|
Fisher effect
|
one-for-one influence of expected inflation on the nominal interest rate
|
|
|
Ex ante real interest rate
|
real interest rate anticipated when a loan is made; nominal interest rate minus expected inflation
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Ex post real interest rates
|
real interest rate actually realized; nominal interest rate minus actual inflation
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Shoeleather costs
|
cost of inflation from reducing real money balances, such as the inconvenience of needing to make more frequent trips to the bank
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|
Menu costs
|
cost of changing a price
|
|
|
Real variables
|
all variables measured in physical units, such as quantities and relative prices
|
|
|
Nominal variables
|
variables expressed in terms of money
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|
|
Classical dichotomy
|
theoretical separation of real and nominal variables in the classical model that implies that nominal variables do not influence real variables
|
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Monetary neutrality
|
property stating that a change in the money supply does not influence real variables
|
|
|
Capital budgeting
|
accounting procedure that measures both assets and liabilities
|
|
|
Cyclically adjusted budget deficit
|
budget deficit adjusted for the influence of the business cycle on government spending and tax revenue; the budget deficit that would occur of the economy’s production and employment were at their natural levels
|
|
|
Ricardian equivalence
|
theory according to which forward-looking consumers fully anticipate the future taxes implied by government debt, so that government borrowing today coupled with a tax increase in the future to repay the debt has the same effect on the economy as a tax increase today
|
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Reserves
|
money that banks have received from depositors but have not used
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100-percent-reserve banking
|
system in which banks keep all deposits on reserve
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|
Balance sheet
|
accounting statement that shows assets and liabilities
|
|
|
Fractional-reserve banking
|
system in which banks keep only some of their deposits on reserve
|
|
|
Financial intermediation
|
process by which resources are allocated from those individuals who wish to save some of their income for future consumption to those individuals and firms who wish to borrow to buy investment goods for future production
|
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Monetary base
|
sum of currency and bank reserves; high power money
|
|
|
Reserve-deposit ratio
|
the fraction of deposits that banks hold in reserve, determined by the business policies of banks and laws
|
|
|
Currency-deposit ratio
|
the amount of currency people hold as a fraction of their holdings of demand deposits
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Money multiplier
|
increase in the money supply resulting from a one-dollar increase in the monetary base
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|
High-powered money
|
sum of currency and bank reserves; monetary base
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Open-market operations
|
purchase or sale of government bonds by the central bank for the purpose of increasing or decreasing the money supply
|
|
|
Reserve requirements
|
regulations imposed on banks by the central bank that specify a minimum reserve-deposit ratio
|
|
|
Discount rate
|
interest rate that the Fed charges when it makes loans to banks
|
|
|
Excess reserves
|
reserves held by banks above the amount mandated by reserve requirements
|
|
|
Portfolio theories
|
theories that explain how much money people choose to hold and that stress the role of money as a store of value
|
|
|
Dominated asset
|
asset that offers an inferior return compared to another asset in all possible realizations of future uncertainty
|
|
|
Transaction theories of money demand
|
explain how much money people choose to hold and that stress the role of money as a medium of exchange
|
|
|
Baumol-Tobin model
|
model of money demand positing that people choose optimal money holdings by comparing the opportunity cost of the forgone interest from holding money and the benefit of making less frequent trips to the bank
|
|
|
Near money
|
assets that are almost as useful as money for engaging in transactions and therefore are close substitutes for money
|
|
|
Discouraged workers
|
are counted as being out of labor force and do not show up in unemployment statistics
|
|
|
Efficiency wage theories
|
hold that high wages make workers more productive
|
|
|
Insiders vs. Outsiders
|
the unemployment caused by unions and by the threat of unionization is an instance of conflict between different groups of workers
|
|
|
Structural Unemployment
|
the unemployment resulting from wage rigidity and job rationing (unemployment due to a fundamental mismatch between the number of people who want to work and number of jobs available
|
|
|
Wage rigidity
|
the failure of wages to adjust to a level at which labor supply equals labor demand (caused by efficiency wage theory, monopoly power of unions and minimum wage laws)
|
|
|
Unemployment Insurance
|
unemployed workers can collect a fraction of their wages for a certain period after losing their jobs
|
|
|
Sectoral Shift
|
a change in the composition or demand among industries or regions
|
|
|
Frictional Unemployment
|
unemployment caused by the time it takes workers to search for a job (because different jobs require different skills and pay different wages, unemployed workers may not accept the first job offer they receive)
|
|
|
Natural Rate of Unemployment
|
the average rate of unemployment around which economy fluctuates
|
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Stabilization Policy
|
policy actions aimed at reducing the severity of short-run economic fluctuations. Because output and employment fluctuate around their long-run natural levels, stabilization policy dampens the business cycle by keeping output and employment as close to their natural levels as possible.
|
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|
Supply Shocks
|
exogenous variables that shift the aggregate supply curve
|
|
|
Demand Shocks
|
exogenous variables that shift the aggregate demand curve
|
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|
Shocks
|
an exogenous change (change in government purchases, taxes and the money supply) in an economic relationship, such as the aggregate demand or aggregate supply curve
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Aggregate Supply
|
the relationship between the quantity of goods and services supplied and the price level
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Aggregate Demand
|
the relationship between the quantity of output demanded and the aggregate price level. The aggregate demand curve tells us the quantity of goods and services people want to buy at any given level of prices.
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Leading Indicators
|
economic variables that fluctuate in advance of economy’s output and thus signal the direction of economic fluctuations.
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|
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Okun’s Law
|
negative relationship between unemployment and GDP. Because employed workers help to produce goods and services and unemployed workers do not, increase in the unemployment rate should be associated with decrease in real GDP.
|
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Theory of Liquidity Preference
|
a simple model that says that the interest rates adjust to equilibrate the supply and demand for real money balances
|
|
|
Tax Multiplier
|
the change in aggregate income resulting from a one-dollar change in taxes
|
|
|
Government Purchases Multiplier
|
the change in aggregate income resulting from a one-dollar change in government purchases
|
|
|
Keynesian Cross
|
simple model of income determination, based on the ideas of Keynes’s General Theory, which shows how changes in spending can have a multiplied effect on aggregate income
|
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LM curve
|
positive relationship between the interest rate and the level of income (while holding the price level fixe3d) that arises in the market for real money balances
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IS curve
|
negative relationship between the interest rate and the level of income that arises in the market for goods and services
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IS-LM Model
|
model of aggregate demand that shows what determines aggregate income for a given price level by analyzing the interaction between the goods market and the money market
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Debt-deflation theory
|
theory according to which an unexpected fall in the price level redistributes real wealth from debtors to creditors and therefore, reduces total spending in the economy
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Pigou effect
|
increase in consumer spending that results when a fall in the price level raises real money balances, and thereby, consumers’ wealth
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Monetary transmission mechanism
|
process by which changes in the money supply influence the amount that households and firms wish to spend on goods and services
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Hysteresis
|
long-lasting influence of history such as on the natural rate of unemployment
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Natural-rate hypothesis
|
premise that fluctuations in aggregate demand influence output, employment, and unemployment only in the short run, and that in the long run these variables return to the levels implied by the classical model
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Rational expectations
|
approach that assumes that people optimally use all the available information—including information about current and prospective policies—to forecast the future
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Sacrifice ratio
|
number of percentage points of a year’s real GDP that must be forgone to reduce inflation by 1 percentage point
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Cost-push inflation
|
inflation resulting from shocks to aggregate supply
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Demand-pull inflation
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inflation resulting from shocks to aggregate demand
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Adaptive expectations
|
approach that assumes that people form their expectation of a variable based on recently observed values of the variable
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Phillips curve
|
negative relationship between inflation and unemployment; in its modern form, a relationship among inflation, cyclical unemployment, expected inflation, and supply shocks, derived from the short-run aggregate supply curve
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Sticky price model
|
model of aggregate supply emphasizing the slow adjustment of the prices of goods and services
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Imperfect information model
|
model of aggregate supply emphasizing that individuals do not always know the overall price level because they cannot observe the prices of all goods and services in the economy
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NAIRU
|
non-accelerating inflation rate of unemployment
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Sticky-wage model
|
model of aggregate supply emphasizing the slow adjustment of nominal wages
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Macroeconomics
|
study of the economy as a whole
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Real GDP
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measures total income of everyone in the economy adjusted for the level of prices
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Inflation rate
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measures how fast prices are rising
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Unemployment rate
|
percentage of those in the labor force who do not have jobs
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Recessions
|
sustained period of falling real income
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Depressions
|
very severe recession
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Deflation
|
decrease in overall level of prices
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Models
|
simplified representation of reality, often using diagrams or equations, that shows how variables interact
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Endogenous variables
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variable that is explained by a particular model; variable whose value is determined by the model’s solution
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Exogenous variables
|
variable that a particular model is taken as given; variable whose value is independent of the model’s solution
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Market clearing
|
model that assumes that prices freely adjust to equilibrate supply and demand
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Flexible Prices
|
prices that adjust quickly to equilibrate supply and demand
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Sticky Prices
|
prices that adjust sluggishly and do not always equilibrate supply and demand
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Microeconomics
|
study of individual markets and decision makers
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Gross Domestic Product
|
total income earned domestically, including income earned by foreign owned factors of production; total expenditure on nation’s output of goods and services
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Consumer Price Index
|
measure of overall level of prices that shows the cost of a fixed basket of consumer goods relative to the cost of the same basket in a base year (CPI)
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National Income Accounting
|
accounting system that measures GDP and many other related stats
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Stocks
|
variable measured as a quantity at a point in time; shares of ownership in a corporation
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Flows
|
variable measured as a quantity per unit of time
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Value Added
|
value of a firm’s output minus the value of intermediate goods the firm purchased
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Imputed Value
|
estimate of the value of a good or service that is not sold in the marketplace ad therefore does not have a market price
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GDP Deflator
|
ratio of nominal GDP to real GDP; measure of overall level of prices that shows the cost of the currently produced basket of goods relative to the cost of that basket in a base year
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|
National Income accounts identity
|
equation showing that GDP is the sum of consumption, investment, government purchases, and net exports
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Consumption
|
goods and services produced by consumers
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Investment
|
goods purchased by individuals and firms to add to their stock of capital
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Government purchases
|
goods and services bought by the government
|
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Net exports
|
exports minus imports
|
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Labor force
|
those in the population who have a job or are looking for a job
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|
Labor-force participation rate
|
percentage of adult population in the labor force
|
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|
Factors of production
|
input used to produce goods and services such as capital or labor
|
|
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Production function
|
mathematical relationship showing how the quantities of the factors of production determine the quantity of goods and services produced; Y=F(K,L)
|
|
|
Constant returns to scale
|
property of a production function whereby a proportionate increase in all factors of production leads to an increase in output of the same proportion
|
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|
Factor prices
|
amount paid for one unit of a factor of production
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|
Competition
|
situation in which there are many individuals or firms, so that the actions of any one of them do not influence market prices
|
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|
Profit
|
income of firm owners; firm revenue minus firm costs
|
|
|
Marginal Product of Labor
|
amount of extra output produced when the labor input is increased by one unit
|
|
|
Diminishing marginal product
|
characteristic of a production function whereby the marginal product of a factor falls as the amount of the factor increases while all other factors are held constant
|
|
|
Real wage
|
payment to labor measured in units of output rather than dollars; W/P
|
|
|
Marginal product of capital
|
amount of extra output produced when the capital input is increased by one unit (MPK)
|
|
|
Real rental price of capital
|
amount paid to rent one unit of capital
|
|
|
Economic profit
|
amount of revenue remaining for the owners of a firm after all the factors of production have been compensated
|
|
|
Accounting profit
|
amount of revenue remaining for the owners of a firm after all the factors of production except capital have been compensated
|
|
|
Cobb-Douglas production function
|
production function of the form F(K,L) = AK^alphaL^-1-alpha; where K is capital, L is labor, A and alpha are parameters
|
|
|
Disposable income
|
income remaining after the payment of taxes
|
|
|
Consumption function
|
relationship showing the determinants of consumption; ex: relationship between consumption and disposable income, C=C(Y-T)
|
|
|
Marginal Propensity to Consume
|
increase in consumption resulting from a one-dollar increase in disposable income
|
|
|
Interest Rate
|
market price at which resources are transferred between the present and the future; return to saving and the cost of borrowing
|
|
|
Nominal interest rate
|
return to saving and cost of borrowing without adjustment for inflation
|
|
|
Real interest rate
|
return to saving and the cost of borrowing after adjustment for inflation
|
|
|
National Saving
|
nation’s income minus consumption and government purchases; sum of private and public saving
|
|
|
Private saving
|
disposable income minus consumption
|
|
|
Public saving
|
government receipts minus government spending
|
|
|
Loanable funds
|
flow or resources available to finance capital accumulation
|
|
|
Crowding out
|
reduction in investment that results when expansionary fiscal policy raises the interest rate
|
|
|
Inflation
|
an increase in the overall level of prices
|
|
|
Hyperinflation
|
extremely high inflation
|
|
|
Money
|
stock of assets used for transactions
|
|
|
Store of value
|
way of transferring purchasing power from the present to the future; one of the functions of money
|
|
|
Unit of account
|
measure in which prices and other accounting records are recorded; on of the functions of money
|
|
|
Medium of exchange
|
item widely accepted in transactions for goods and services; one of the functions of money
|
|
|
Fiat money
|
money that is not intrinsically useful and is valued only because it is used as money
|
|
|
Commodity money
|
money that is intrinsically useful and would be valued even if it did not serve as money
|
|
|
Gold standard
|
monetary system in which gold serves as money or in which all money is convertible into gold at a fixed rate
|
|
|
Money supply
|
quantity of money available in an economy
|
|
|
Monetary policy
|
central bank’s choice regarding supply of money
|
|
|
Central bank
|
institution responsible for the conduct of monetary policy, such as the Federal Reserve in the US
|
|
|
Federal reserve
|
central bank of the US
|
|
|
Open-market operations
|
purchase or sale of government bonds by the central bank for the purpose of increasing or decreasing the money supply
|
|
|
Currency
|
sum of outstanding paper money and coins
|
|
|
Demand deposits
|
assets that are held in banks and can be used on demand to make transactions such as checking accounts
|
|
|
Quantity equation
|
identity stating that the product of the money supply and the velocity of money equals nominal expenditure (MV=PY); coupled with the assumption of stable velocity, an explanation of nominal expenditure called the quantity theory of money
|
|
|
Velocity of money
|
ratio of nominal expenditure to the money supply; rate at which money changes hand
|
|
|
Real money balances
|
quantity of money expressed in terms of the quantity of goods and services it can be; M/P
|
|
|
Money demand function
|
function showing determinants of the demand for real money balances; equation
|
|
|
Quantity theory of money
|
doctrine emphasizing that changes in the quantity of money lead to changes in nominal expenditure
|
|
|
Seigniorage
|
revenue raised by the government through the creation of money; inflation tax
|
|
|
Nominal interest rate
|
return to saving and cost of borrowing without adjustment for inflation
|
|
|
Real interest rates
|
return to saving and the cost of borrowing after adjustment for inflation
|
|
|
Fisher equation
|
equation rate that is set by the central bank’s willingness to buy and sell the domestic currency for foreign currencies at a predetermined price
|
|
|
Fisher effect
|
one-for-one influence of expected inflation on the nominal interest rate
|
|
|
Ex ante real interest rate
|
real interest rate anticipated when a loan is made; nominal interest rate minus expected inflation
|
|
|
Ex post real interest rates
|
real interest rate actually realized; nominal interest rate minus actual inflation
|
|
|
Shoeleather costs
|
cost of inflation from reducing real money balances, such as the inconvenience of needing to make more frequent trips to the bank
|
|
|
Menu costs
|
cost of changing a price
|
|
|
Real variables
|
all variables measured in physical units, such as quantities and relative prices
|
|
|
Nominal variables
|
variables expressed in terms of money
|
|
|
Classical dichotomy
|
theoretical separation of real and nominal variables in the classical model that implies that nominal variables do not influence real variables
|
|
|
Monetary neutrality
|
property stating that a change in the money supply does not influence real variables
|
|
|
Capital budgeting
|
accounting procedure that measures both assets and liabilities
|
|
|
Cyclically adjusted budget deficit
|
budget deficit adjusted for the influence of the business cycle on government spending and tax revenue; the budget deficit that would occur of the economy’s production and employment were at their natural levels
|
|
|
Ricardian equivalence
|
theory according to which forward-looking consumers fully anticipate the future taxes implied by government debt, so that government borrowing today coupled with a tax increase in the future to repay the debt has the same effect on the economy as a tax increase today
|
|
|
Reserves
|
money that banks have received from depositors but have not used
|
|
|
100-percent-reserve banking
|
system in which banks keep all deposits on reserve
|
|
|
Balance sheet
|
accounting statement that shows assets and liabilities
|
|
|
Fractional-reserve banking
|
system in which banks keep only some of their deposits on reserve
|
|
|
Financial intermediation
|
process by which resources are allocated from those individuals who wish to save some of their income for future consumption to those individuals and firms who wish to borrow to buy investment goods for future production
|
|
|
Monetary base
|
sum of currency and bank reserves; high power money
|
|
|
Reserve-deposit ratio
|
the fraction of deposits that banks hold in reserve, determined by the business policies of banks and laws
|
|
|
Currency-deposit ratio
|
the amount of currency people hold as a fraction of their holdings of demand deposits
|
|
|
Money multiplier
|
increase in the money supply resulting from a one-dollar increase in the monetary base
|
|
|
High-powered money
|
sum of currency and bank reserves; monetary base
|
|
|
Open-market operations
|
purchase or sale of government bonds by the central bank for the purpose of increasing or decreasing the money supply
|
|
|
Reserve requirements
|
regulations imposed on banks by the central bank that specify a minimum reserve-deposit ratio
|
|
|
Discount rate
|
interest rate that the Fed charges when it makes loans to banks
|
|
|
Excess reserves
|
reserves held by banks above the amount mandated by reserve requirements
|
|
|
Portfolio theories
|
theories that explain how much money people choose to hold and that stress the role of money as a store of value
|
|
|
Dominated asset
|
asset that offers an inferior return compared to another asset in all possible realizations of future uncertainty
|
|
|
Transaction theories of money demand
|
explain how much money people choose to hold and that stress the role of money as a medium of exchange
|
|
|
Baumol-Tobin model
|
model of money demand positing that people choose optimal money holdings by comparing the opportunity cost of the forgone interest from holding money and the benefit of making less frequent trips to the bank
|
|
|
Near money
|
assets that are almost as useful as money for engaging in transactions and therefore are close substitutes for money
|
|
|
Discouraged workers
|
are counted as being out of labor force and do not show up in unemployment statistics
|
|
|
Efficiency wage theories
|
hold that high wages make workers more productive
|
|
|
Insiders vs. Outsiders
|
the unemployment caused by unions and by the threat of unionization is an instance of conflict between different groups of workers
|
|
|
Structural Unemployment
|
the unemployment resulting from wage rigidity and job rationing (unemployment due to a fundamental mismatch between the number of people who want to work and number of jobs available
|
|
|
Wage rigidity
|
the failure of wages to adjust to a level at which labor supply equals labor demand (caused by efficiency wage theory, monopoly power of unions and minimum wage laws)
|
|
|
Unemployment Insurance
|
unemployed workers can collect a fraction of their wages for a certain period after losing their jobs
|
|
|
Sectoral Shift
|
a change in the composition or demand among industries or regions
|
|
|
Frictional Unemployment
|
unemployment caused by the time it takes workers to search for a job (because different jobs require different skills and pay different wages, unemployed workers may not accept the first job offer they receive)
|
|
|
Natural Rate of Unemployment
|
the average rate of unemployment around which economy fluctuates
|
|
|
Stabilization Policy
|
policy actions aimed at reducing the severity of short-run economic fluctuations. Because output and employment fluctuate around their long-run natural levels, stabilization policy dampens the business cycle by keeping output and employment as close to their natural levels as possible.
|
|
|
Supply Shocks
|
exogenous variables that shift the aggregate supply curve
|
|
|
Demand Shocks
|
exogenous variables that shift the aggregate demand curve
|
|
|
Shocks
|
an exogenous change (change in government purchases, taxes and the money supply) in an economic relationship, such as the aggregate demand or aggregate supply curve
|
|
|
Aggregate Supply
|
the relationship between the quantity of goods and services supplied and the price level
|
|
|
Aggregate Demand
|
the relationship between the quantity of output demanded and the aggregate price level. The aggregate demand curve tells us the quantity of goods and services people want to buy at any given level of prices.
|
|
|
Leading Indicators
|
economic variables that fluctuate in advance of economy’s output and thus signal the direction of economic fluctuations.
|
|
|
Okun’s Law
|
negative relationship between unemployment and GDP. Because employed workers help to produce goods and services and unemployed workers do not, increase in the unemployment rate should be associated with decrease in real GDP.
|
|
|
Theory of Liquidity Preference
|
a simple model that says that the interest rates adjust to equilibrate the supply and demand for real money balances
|
|
|
Tax Multiplier
|
the change in aggregate income resulting from a one-dollar change in taxes
|
|
|
Government Purchases Multiplier
|
the change in aggregate income resulting from a one-dollar change in government purchases
|
|
|
Keynesian Cross
|
simple model of income determination, based on the ideas of Keynes’s General Theory, which shows how changes in spending can have a multiplied effect on aggregate income
|
|
|
LM curve
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positive relationship between the interest rate and the level of income (while holding the price level fixe3d) that arises in the market for real money balances
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IS curve
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negative relationship between the interest rate and the level of income that arises in the market for goods and services
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IS-LM Model
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model of aggregate demand that shows what determines aggregate income for a given price level by analyzing the interaction between the goods market and the money market
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Debt-deflation theory
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theory according to which an unexpected fall in the price level redistributes real wealth from debtors to creditors and therefore, reduces total spending in the economy
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Pigou effect
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increase in consumer spending that results when a fall in the price level raises real money balances, and thereby, consumers’ wealth
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Monetary transmission mechanism
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process by which changes in the money supply influence the amount that households and firms wish to spend on goods and services
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Hysteresis
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long-lasting influence of history such as on the natural rate of unemployment
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Natural-rate hypothesis
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premise that fluctuations in aggregate demand influence output, employment, and unemployment only in the short run, and that in the long run these variables return to the levels implied by the classical model
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Rational expectations
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approach that assumes that people optimally use all the available information—including information about current and prospective policies—to forecast the future
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Sacrifice ratio
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number of percentage points of a year’s real GDP that must be forgone to reduce inflation by 1 percentage point
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Cost-push inflation
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inflation resulting from shocks to aggregate supply
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Demand-pull inflation
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inflation resulting from shocks to aggregate demand
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Adaptive expectations
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approach that assumes that people form their expectation of a variable based on recently observed values of the variable
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Phillips curve
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negative relationship between inflation and unemployment; in its modern form, a relationship among inflation, cyclical unemployment, expected inflation, and supply shocks, derived from the short-run aggregate supply curve
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Sticky price model
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model of aggregate supply emphasizing the slow adjustment of the prices of goods and services
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Imperfect information model
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model of aggregate supply emphasizing that individuals do not always know the overall price level because they cannot observe the prices of all goods and services in the economy
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NAIRU
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non-accelerating inflation rate of unemployment
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Sticky-wage model
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model of aggregate supply emphasizing the slow adjustment of nominal wages
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