Macroeconomics Vocab 2/2

Front 1

M1

Back 1

The most liquid measure of money supply, including cash, checking deposits, and traveler's checks.

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M2

Back 2

M1 plus savings deposits, small time deposits, and money market and mutual funds balances.

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M3

Back 3

M2 plus large time deposits.

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macroeconomics long run

Back 4

A period of time long enough for input prices to have fully adjusted to market forces, all input and output markets are in equilibrium and the economy is operating at full employment.

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macroeconomics short run

Back 5

A period of time during which the prices of goods and services are changing in their respective markets, but the input prices have not yet adjusted to those changes in the product markets

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marginal

Back 6

The next unit, or increment of, an action.

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marginal analysis

Back 7

Making decisions based upon weighing the marginal benefits and costs of that action. The rational decision-maker chooses an action if the MB is greater or equal to MC

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marginal benefit (MB)

Back 8

The additional benefit received from the consumption of the next unit of a good or service

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marginal cost (MC)

Back 9

the additional cost of producing one more unit of output

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marginal propensity to consume (MPC)

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the change in consumption caused by a change in disposable income. The slope of the consumption function.

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marginal propensity to save (MPS)

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the change in saving caused by a change in disposable income. The slope of the saving function.

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money demand

Back 12

the negative relationship between the real interest rate and the quantity of money demanded as an asset plus the quantity of money demanded for transactions

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marginal productivity theory

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the theory that a citizen's share of economic resources is proportional to the marginal revenue product of his or her labor

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money market

Back 14

the interaction of money demand and money supply determines the "price" of money, the real interest rate.

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money multiplier

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equal to one over the reserve ratio, this measures the maximum amount of new checking deposits that can be created by a single dollar of excess reserves

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money supply

Back 16

the fixed quantity of money in circulation at a given point in time as measured by the central bank

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multiplier effect

Back 17

the idea that a change in any component of aggregate demand creates a larger change in GDP

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national debt

Back 18

the accumulation of all annual budget deficits

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natural rate of unemployment

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the unemployment rate associated with full employment, somewhere between 4-5% in the US

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necessity

Back 20

a good for which the proportional increase is less than the proportional increase in income

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net exports

Back 21

the value of a nation's total exports minus total imports

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net export effect

Back 22

the process of how expansionary fiscal policy decreases net exports due to rising interest rates. Another form of crowding out.

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nominal GDP

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the value of current production a the current prices

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official reserves account

Back 24

the Fed's adjustment of a deficit or surplus in the current and capital account by the addition or subtraction of foreign currencies so that the balance of payments is zero

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open market operation (OMO)

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a tool of monetary policy , it involves the Fed's buying or selling of treasury bonds from or to commercial banks and the general public

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opportunity cost

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the value of the sacrifice made to pursue a course of action

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peak

Back 27

the top of the business cycle where an expansion has ended and is about to turn down

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price index

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a measure of the average level of prices in a market basket for a given year, when compared to the prices in a reference or base year

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production function

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the mechanism for combining production resources, with existing technology, into finished goods and services

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production possibilities

Back 30

the different quantities of goods that an economy can produce with a given amount of scarce resources

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production possibilities frontier (PPF)

Back 31

the graphical device used to show the production possibilities of two goods

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production possibility curve

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a graphical device that shows the combination of two goods that a nation can efficiently produce with available resources and technology

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productivity

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the quantity of output that can be produced per worker in a given amount of time

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progressive tax

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a tax where the proportion of income paid in taxes rises as income rises

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proportional tax

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a tax where the proportion of income paid in taxes is constant no matter the level of income

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protective tariff

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an excise tax levied on an imported good that is produced in the domestic market so that it may be protected from foreign competition

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public goods

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goods that are both nonrival and nonexcludable

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quantity theory of money

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the theory that an increase in the money supply will not affect real output and will only result in higher prices

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quota

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a maximum amount of a good that can be imported into the domestic market

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real GDP

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the value of current production, but using prices from a fixed point in time

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real rate of interest (i)

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the cost of borrowing to fund an investment and equal to the nominal interest rate minus the expected rate of inflation

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recession

Back 42

two or more consecutive quarters of falling real GDP

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recessionary gap

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the amount by which full employment GDP exceeds equilibrium real GDP

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regressive tax

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a tax where the proportion of income paid in taxes decrease as income rises

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relative prices

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the price of one unit of good X measured not in currency, but in the number of units of good Y that must be sacrificed to acquire good X

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renewable resources

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natural resources that can replenish themselves if they are not overharvested

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required reserves

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the minimum amount of deposits that must be held at the bank for withdrawals

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reserve ratio

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the fraction of total deposits that must be kept on reserve

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resources

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also called factors of production, these are commonly grouped into the four categories of labor, physical capital, land or natural resources and entrepreneurial ability

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revenue tariff

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an excise tax levied on goods that are not produced in the domestic market

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saving function

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a positive relationship between disposable income and saving

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scarcity

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the imbalance between limited productive resources and unlimited human wants

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secondhand sales

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final goods and services that are resold

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shortage

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a situation in which, at the going market price, the quantity demanded exceeds the quantity supplied

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short run

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a period of time too short to change the size of the plant, but many other, more variable, resources can be adjusted to meet demand

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specialization

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production of goods, or performance of tasks, based upon comparative advantage

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spending multiplier

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the amount by which real GDP changes due to a change in spending

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spillover benefits

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additional benefits to society, not captured by the market demand curve from the production of a good

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spillover costs

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additional costs to society, not captured by the market supply curve from the production of a good

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stagflation

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a situation seen in the macroeconomy when inflation and the unemployment rate are both increasing. also called cost-push inflation

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sticky prices

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the case when price levels do not change, especially downward, with changes in AD.

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stock

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a certificate that represents a claim to, or share of, the ownership of a firm

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subsidy

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a government transfer, either to consumers or producers, on the consumption or production of a good

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substitute goods

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two goods are substitutes if they provide essentially the same utility to the consumer

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substitution effect

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the change in quantity demanded resulting from a change in the price of one good relative to the price of other goods

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supply curve

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shows the quantity of a good supplied at all prices

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supply schedule

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a table showing quantity supplied for a good at various prices

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supply shock

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an economy-wide phenomenon that affects the costs of firms and results in a shifting AS curve

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supply-side fiscal policy

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fiscal policy centered on incentives to save and invest to prompt economic growth with very little inflation

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surplus

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a situation in which, at the going market price, the quantity supplied exceeds the quantity demanded

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tax bracket

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a range of income on which a given marginal tax rate is applied

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tax multiplier

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the magnitude of the effect that a change in lump sum taxes has on real GDP

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technology

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a nation's knowledge of how to produce goods in the best possible way

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theory of liquidity preference

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Keynes' theory that the interest rate adjusts to bring the money market into equilibrium

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total cost (TC)

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the sum of total fixed and total variable costs at any level of output

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total fixed costs (TFC)

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production costs that do not vary with the level of output

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total product of labor

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the total quantity of output produced for a given quantity of labor employed

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total revenue

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the price of a good multiplied by the quantity of that good sold

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total utility

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the total happiness received from consumption of a number of units of a good

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total variable costs (TVC)

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production costs that change with the level of output

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total welfare

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the sum of consumer surplus and producer surplus

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tradeoffs

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the reality of scarce resources implies that individuals, firms, and governments are constantly faced with difficult choices that involve benefits and costs

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transaction demand

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the amount of money held in order to make transactions

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trough

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the bottom of the cycle where a contraction has stopped and is about to turn up

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underground economy

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the unreported or illegal activity, bartering or informal exchange of cash for goods or services that are not reported in official tabulations of GDP

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utility

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happiness, or benefit, or satisfaction, or enjoyment gained from consumption of goods and services

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utility maximizing rule

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the consumer chooses amounts of goods X and Y, with their limited income, so that the marginal utility per dollar spent is equal for both goods

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utils

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a hypothetical unit of measurement often used to quantify utility, aka happy points

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velocity of money

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the average number of times that a dollar is spent in a year

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world price

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the global equilibrium price of a good when nations engage in trade

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marginal tax rate

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the rate paid on the last dollar earned, calculated by taking the ratio of the change in taxes divided by the change in income

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marginal utility

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the change in an individual's total utility from the consumption of an additional unit of a good or service

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market

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a group with buyers and sellers of a good or service

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market basket

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a collection of goods and services used to represent what is consumed in the economy

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market economy

Back 95

an economic system in which resources are allocated through the decentralized decisions of firms and consumers

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market equilibrium

Back 96

exists at the only price where the quantity supplied equals the quantity demanded. or, the only quantity where the price consumers are willing to pay is exactly the price producers are willing to accept

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market failure

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the inability of the free market to allocate resources efficiently

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market power

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the ability to set a price above the perfectly competitive level

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nonmarket transactions

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household work or do-it-yourself jobs that are missed by GDP accounting

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non-renewable resources

Back 100

natural resources that cannot replenish themselves

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normal goods

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a good for which demand increases with an increase in consumer income

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normal profit

Back 102

the opportunity cost of the entrepreneur's talents. another way of saying the firm is earning zero economic profit

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producer surplus

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the difference between the price received and the marginal cost of producing the good

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productive efficiency

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production of maximum output for a given level of technology and resources

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private goods

Back 105

goods that are both rival and excludable