Macro Econ Midterm 2 Vocab

Front 1

Steady-State

Back 1

Where investment is just enough to cover depreciation
[sf(k) = dk ],
then capital per worker will remain constant:
Dk = 0.

Front 2

Golden Rule Level of Capital Accumulation

Back 2

The Golden Rule level of capital, the steady state value of k that maximizes consumption.

Front 3

Okun’s Law

Back 3

An approximate linear relationship between unemployment and real GDP

Front 4

Aggregate Supply

Back 4

The total amount of goods and services that firms are willing to sell at a given price level in an economy.

Front 5

Aggregate Demand

Back 5

The amount of goods and services in the economy that will be purchased at all possible price levels

Front 6

Supply Shocks

Back 6

Exogenous changes in agg. supply

Front 7

Leading Indicators

Back 7

Leading indicators are indicators used to predict the future of the economy

Front 8

Demand Shocks

Back 8

A sudden event that increases or decreases demand for goods or services temporarily

Front 9

Stabilization Policy

Back 9

Policy actions aimed at reducing the severity of short-run economic fluctuations.

Front 10

Keynesian Cross

Back 10

A simple closed economy model in which income is determined by expenditure.

Front 11

Tax Multiplier

Back 11

The change in income resulting from a $1 increase in T :

dy/dt = -MPC/(1-MPC)

Front 12

IS Curve

Back 12

a graph of all combinations of r and Y that result in goods market equilibrium

Front 13

LM Curve

Back 13

graph of all combinations of r and Y that equate the supply and demand for real money balances.

Front 14

Government Purchases Multiplier

Back 14

The increase in income resulting from a $1 increase in G

Front 15

Theory of Liquidity Preference

Back 15

Says the interest rate is determined by money supply and money demand.

Front 16

Pigou Effect

Back 16

decreased P => increased (M/P)

=> incr. consumers’ wealth ­
=> incr. C
=> IS shifts right
=> incr. Y

Front 17

Debt-Deflation Theory

Back 17

decr. P (if unexpected)
=> transfers purchasing power from borrowers to lenders
=> borrowers spend less,
lenders spend more
=> if borrowers’ propensity to spend is larger than lenders’, then aggregate spending falls,
the IS curve shifts left, and Y falls