question

Self-regulating economy

answer

problems are resolved without government intervention

question

Keynesian economics

answer

economic slumps are caused by inadequate spending and can be mitigated by government intervention

question

Monetary Policy

answer

type of stabilization policy that changes quantity of money to alter interest rates, which affects overall spending

question

Fiscal Policy

answer

type of stabilization policy that changes government spending and taxes to affect overall spending

question

Business Cycle

answer

short-run alternation between economic downturns and upturns

question

Depression

answer

very deep and prolonged downturn

question

Recessions

answer

periods of downturns when output and employment are falling

question

Expansions (recoveries)

answer

periods of upturns when output and employment are rising

question

Business-cycle peak

answer

point at which the economy turns from expansion to recession

question

Business-cycle trough

answer

where economy turns from recession to expansion

question

Long-run economic growth

answer

the sustained rise in the quantity of goods and services the economy produces

question

Trade deficit

answer

value of goods bought is greater than goods sold

question

Trade surplus

answer

value of goods bought is less than goods sold

question

Paradox of Thrift

answer

when a recession occurs people stop spending money because they think that will help, but they actually hurt the economy even worse

question

Disposable income

answer

an individual's income after taxes and transfers

question

Gross Domestic Product (GDP)

answer

the total value of all final goods and services produced in an economy

question

Final goods and services

answer

sold to the end user

question

Intermediate goods and services

answer

are inputs for production of final goods

question

Aggregate spending

answer

the sum of consumer spending, investment spending, government purchases of goods and services, and exports minus imports. GDP = C + I + G + (X - IM)

question

Private Savings

answer

disposable income minus consumer spending

question

Value added

answer

the difference between the value of its sales and the value of intermediate goods and services it purchases from other businesses (bonds, transfers not counted)

question

National Accounts

answer

keep track of the flows of money between different parts of the economy

question

Real GDP

answer

the total value of final goods and services produced in the economy during a given year, calculated using the prices of a selected base year = Nominal GDP(year x) * (GDP Deflator-base year)/(GDB Deflator-year x)

question

Nominal GDP

answer

the value of all final goods and services produced in the economy during a given year, calculated using the current years prices

question

Chained Dollars

answer

method of calculating GDP by averaging the use of year 1 for both and using year 2 for both times

question

GDP per capita

answer

average GDP per person

question

Aggregate Price Level

answer

measure of the overall level of prices in the economy

question

Market Basket

answer

what economists calculate to measure the aggregate price level

question

Price Index

answer

the ratio of current cost of the market basket to the cost in a base year = Cost of market basket in a given year/Cost of market basket in base year * 100

question

Inflation Rate

answer

yearly percentage change in a price index (based on Consumer Price Index- most common measure of aggregate price level) = Price index for year 2 - year 1/Price index for year 1 * 100

question

Producer Price Index

answer

measures changes in the prices of goods purchased by producers

question

GDP deflator

answer

100 times the ratio of nominal GDP to real GDP in that year- the higher the number the higher the price level = Nominal GDP/Real GDP * 100

question

Unemployment

answer

total number of people looking for work but aren't currently employed. Unemployment rate = Unemployed/Labor force * 100

question

Labor Force

answer

sum of employment and unemployment

question

Labor Force participation rate

answer

labor force/population age 16+ *100

question

Discouraged Workers

answer

given up looking for a job, but want a job- haven't looked recently and aren't in the labor force

question

Marginally attached workers

answer

want to work, have looked recently but aren't looking now- not in labor force

question

Underemployed

answer

people with part-time jobs that want full-time positions

question

Jobless Recovery

answer

real GDP is growing at a below-average rate and unemployment is rising

question

Frictional Unemployment

answer

unemployment due to the time that workers spend in the job search

question

Structural Unemployment

answer

unemployment that results when there are more people seeking jobs in one field than there are jobs at current wage

question

Natural rate of unemployment

answer

the unemployment rate that arises from the effects of frictional plus structural unemployment

question

Cyclical Unemployment

answer

the difference between the actual and natural rates of unemployment- caused by recession

question

Natural unemployment

answer

= Frictional unemployment + Structural unemployment

question

Actual unemployment

answer

= natural unemployment + cyclical unemployment

question

Real Wage

answer

= Wage Rate/Price Level

question

Real Income

answer

= Income/Price Level

question

Shoe-leather costs

answer

increased costs of transactions caused by inflation- high inflation rates discourage people from holding money, the wear and tear on shoes from running around when people try to avoid holding money

question

Menu cost

answer

is the real cost of changing a listed price- workers spend time changing prices in the store- less important with technology advances

question

Unit-of-account costs

answer

arise from the way inflation makes money a less reliable unit of measurement- buying land for 100,000 and selling it for 110,000 and the inflation rate is 10%, no profit but US tax law would say profit was made

question

Nominal Interest Rate

answer

interest rate expressed in dollar terms = Real Interest + Inflation

question

Real interest rate

answer

nominal interest rate minus inflation

question

Disflation

answer

process of bringing the inflation rate down

question

Rule of 70

answer

how long real GDP per capita takes to takes to double = 70/Annual Growth Rate

question

Labor Productivity

answer

the output per worker or per hour = Real GDP/# of Workers

question

Physical capital

answer

human-made resources like machinery, buildings, and investments

question

Human capital

answer

improvement in labor because of education and knowledge advances

question

Aggregate production function

answer

hypothetical function that shows how productivity (real GDP per worker) depends on quantities of physical capital, human capital, and the state of technology- exhibits diminishing returns to physical capital = T x (Physical capital per worker) ^0.4 x (Human capital per worker) ^0.6

question

GDP growth rate

answer

= final/original - 1

question

Growth Accounting

answer

estimates the contribution of each major factor in the aggregate production function to economic growth

question

Total factor productivity

answer

the amount of output that can be achieved with a given amount of factor inputs

question

Research and Development (R&D)

answer

spending to create new technologies and apply them to practical use

question

Externality

answer

a cost that firms and individuals impose on others without having to provide compensation

question

Budget Surplus

answer

government collects more tax revenue than it spends

question

Budget Deficit

answer

government spends more than it collects in taxes

question

Budget balance

answer

S(government) = Taxes- Government Spending - Transfers

question

National Savings

answer

the sum of private savings plus the budget balance, is the total amount of savings generated within the economy

question

Capital inflow

answer

the net inflow of funds into a country

question

Investment spending (closed economy)

answer

= National Savings

question

Investment spending (open economy)

answer

= National Savings + Capital inflow

question

Loanable Funds Market

answer

hypothetical market that examines the market outcome of the demand for funds generated by borrowers and the supply of funds supplied by lenders

question

Rate of return

answer

(revenue from project - cost of project)/cost of project *100

question

Crowding out

answer

occurs when a government deficit drives up the interest rate leading to reduced investment spending

question

Nominal interest rate

answer

= real interest rate + inflation

question

Fisher effect

answer

an increase in expected future inflation drives up the nominal interest rate, leaving the expect real interest rate unchanged (both curves on loanable funds market graph shift up)

question

Present Value

answer

= FV (1+r)

question

Wealth

answer

value of accumulated savings

question

Financial asset

answer

paper claim that entitles the buy to future income from the seller

question

Physical asset

answer

a claim on a tangible object that gives the owner the right to dispose of the object as he or she wishes

question

Liability

answer

requirement to pay income in the future

question

Transaction costs

answer

expense of negotiating and executing a deal

question

Financial risk

answer

uncertainty about future outcomes that involve financial gains or losses

question

Loan

answer

lending agreement between a particular lender and a particular borrower

question

Default

answer

when a borrower fails to make payments

question

Loan-backed security

answer

asset created by pooling individual loans and selling shares in that pool

question

Financial intermediary

answer

an institution that transforms funds it gathers to financial assets

question

Mutual fund

answer

intermediary that creates a stock portfolio and then resells shares of this portfolio to individual investors

question

Pension fund

answer

mutual fund that holds assets in order to provide retirement income to its members

question

Bank deposit

answer

a claim on a bank that obliges the bank to give the depositor cash when demanded

question

Efficient markets hypothesis

answer

prices of financial assets embody all publicly available information

question

Random Walk

answer

fluctuations in markets are unpredictable

question

Planned Aggregate Spending (AE)

answer

= A +MPC (YD) + I(planned) = C + I(planned)

question

GDP

answer

= AEplanned + I(unplanned) = C + I(planned) + I(unplanned)

question

Change in Y (GDP)

answer

= 1/(1-MPC) x Change in AAS

question

Marginal Propensity to Consume (MPC)

answer

the increase in consumer spending when disposable income rises by $1

question

Marginal Propensity to Save (MPS)

answer

the increase in household savings when disposable income rises by $1

question

Autonomous change in aggregate spending (AAS)

answer

initial change in the desired level of spending by firms, households, or government at a given level of real GDP

question

Multiplier

answer

ratio of the total change in real GDP = 1/(1-MPC) = (Change in Y(GDP))/(Change in Autonomous change in aggregate spending)

question

Consumption function

answer

an equation showing how an individual household's consumer spending varies with the household's current disposable income

question

Aggregate consumption function

answer

relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending

question

Planned investment spending

answer

the investment spending that businesses intend to undertake

question

Accelerator Principle

answer

a higher growth rate of real GDP leads to higher planned investment spending, but a lower growth rate of real GDP leads to lower planned investment spending

question

Inventories

answer

stocks of goods held to satisfy future sales

question

Inventory investment

answer

value of the change in total inventories held in the economy

question

Unplanned inventory

answer

actual sales are more or less than businesses expected, leading to unplanned changes in inventories

question

Actual investment spending

answer

= I(planned) + I(unplanned)

question

Income-expenditure equilibrium

answer

when aggregate output is equal to planned aggregate spending

question

Income-expenditure equilibrium GDP

answer

level of real GDP at which GDP equals planned aggregate spending

question

Keynesian Cross

answer

identifies income-expenditure equilibrium as the point where planned aggregate spending line crosses the 45-degree line

question

Aggregate Demand Curve

answer

shows the relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government and the rest of the world

question

Wealth effect

answer

the effect on consumer spending caused by the effect of a change in aggregate price level on the purchasing power of consumers' assets

question

Interest rate effect

answer

effect on consumer spending and investment spending caused by the effect of a change in the aggregate price level on the purchasing power of consumers' and firms' money holdings

question

Aggregate Supply Curve

answer

shows the relationship between the aggregate price level and the quantity of aggregate output supplied in the economy

question

Nominal wage

answer

the dollar amount of the wage paid

question

Sticky wages

answer

nominal wages that are slow to fall even in the face of high unemployment and slow to rise during labor shortages

question

Long-run aggregate supply curve

answer

shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices were fully flexible

question

Potential output

answer

the level of real GDP the economy would produce if all prices were fully flexible

question

Automatic stabilizers

answer

rules that cause fiscal policy to be expansionary when the economy contracts and contractionary when the economy expands

question

Discretionary fiscal policy

answer

policy that is the result of deliberate actions by policy makers

question

Medium of exchange

answer

an asset that individuals acquire for the purpose of trading rather than for their own consumption

question

Store of value

answer

holding purchasing power over time

question

Monetary aggregate

answer

an overall measure of the money supply, like M1 and M2

question

Near-moneys

answer

financial assets that cannot be directly used as a medium of exchange but can readily be converted into cash

question

Discount Window

answer

an arrangement where the Federal Reserve lends money to banks in trouble

question

Money multiplier

answer

the ratio of money supply to the monetary base

question

Federal funds market

answer

allows banks to fall short of the reserve requirement to borrow funds from banks with excess reserves

question

Federal funds rate

answer

the interest rate determined in the federal funds market

question

Open-market operation

answer

purchase or sale of government debt by the Fed, this is most used when dealing with monetary policy

question

Commercial bank

answer

accepts deposits and is covered by deposit insurance

question

Investment bank

answer

trades in financial assets (stocks and bonds) and is not covered by insurance because this activity is more risky

question

Active Stabilization Policy

answer

the use of government policy to reduce the severity of recessions and rein in excessively strong expansions

question

Multiplier effect of changes in Government Spending

answer

1/(1-MPC) *Change

question

Multiplier effect of changes in Taxes and Transfers

answer

MPC/(1-MPC) *Change

question

Cyclically adjusted budget balance

answer

estimate of what the budget balance would be if real GDP were exactly equal to potential GDP

question

Public Debt

answer

government debt held by individuals and institutions outside the government

question

Money

answer

asset that can easily be used to purchase goods and services

question

Fiat money

answer

medium of exchange whose value derives entirely from its official status as a means of payment

question

M1

answer

currency in circulation, travelers checks, checkable bank deposits

question

Bank Reserves

answer

currency banks hold in vaults plus deposits at the Federal Reserve

question

Reserve Requirements

answer

rules set by the Federal Reserve that determine the minimum reserve ratio for a bank

question

Discount rate

answer

the rate of interest the Fed charges on loans to banks

question

Short-run macroeconomic equilibrium

answer

the point at which the quantity of aggregate output supplied is equal to the quantity demanded by domestic households, businesses, the government and the rest of the world

question

Demand Shock

answer

an event that shifts the aggregate demand curve caused by things like changes in expectations or wealth, the effect of the size of existing stock of physical capital, or the use of fiscal or monetary policy. Cause price level and output to move in same direction

question

Supply Shock

answer

an event that shifts the SRAS curve caused by things like commodity prices, nominal wages, or productivity. Cause price level and output to move in opposite directions

question

Stagflation

answer

the combination of a decrease in output and an increase in aggregate price level

question

Long-run macroeconomic equilibrium

answer

when the point of short-run macroeconomic equilibrium is on the long-run aggregate supply curve

question

Output Gap

answer

the percentage difference between actual aggregate output and potential output = Actual Aggregate output - Potential output/Potential output

question

Social Insurance

answer

government programs that are intended to protect families against economic hardships

question

Expansionary Fiscal Policy

answer

fiscal policy that increases aggregate demand- make budget surpluses smaller and deficits bigger- takes on three forms: - Increase in government purchases - Tax Cuts - Increase in transfers

question

Contractionary Fiscal Policy

answer

fiscal policy that decreases aggregate demand, make budget surpluses bigger and deficits smaller- takes on three forms: - Decrease in government purchases - Increase in taxes - Decrease in transfers

question

Lump-Sum taxes

answer

taxes that don't depend on the taxpayer's income- This helps so keep the size of the multiplier the same

question

Fiscal Years

answer

basis for how U.S. government budget is calculated- runs from October 1 to September 30

question

Debt-GDP ratio

answer

shows the ability of governments to pay off their debt

question

Implicit Liabilities

answer

spending promises made by government that are effectively a debt despite the fact that they aren't included in usual debt statistics- like social security, Medicare, and Medicaid

question

Currency in circulation

answer

cash held by the public

question

Checkable bank deposits

answer

bank accounts on which people can write checks

question

Money supply

answer

total value of financial assets in the economy that are considered money (currency in circulation, traveler's checks, and checkable bank deposits)

question

Unit of account

answer

a measure used to set prices and make economic calculations

question

Commodity money

answer

a good used as a medium of exchange that has other uses

question

Commodity-back money

answer

a medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods, like a bond or note

question

M2

answer

includes M1, near moneys like money-market funds (CDs), time deposits, and savings deposits

question

Reserve Ratio

answer

the fraction of bank deposits that a bank holds has reserves

question

T-account

answer

a tool for analyzing a business' financial position by showing the business' assets and liabilities - Assets- reserves, loans, bonds - Liabilities- deposits it holds For Federal Reserve: -Assets- Government Debt (T-Bills) -Liabilities- Monetary Base

question

Bank Run

answer

many bank depositors try to withdraw their funds due to fear of bank failure

question

Deposit insurance

answer

guarantees that depositors will get paid back even if the bank cannot come up with the funding, most banks are part of the FDIC

question

Capital requirements

answer

requirement that owners of banks hold substantially more assets than the value of bank deposits- used to reduce the incentive for excessive risk taking

question

Excess reserves

answer

anything left in reserves that is more than the requirement =Amount/Reserve Ratio

question

Monetary base

answer

sum of currency in circulation and bank reserves

question

Central bank

answer

institution that oversees and regulates the banking system and controls the monetary base, like the Federal Reserve (two parts): - The Board of Governors- 7 members, appointed by President, serve 14 years - 12 Regional Federal Reserve Banks the provide banking and supervisory services to commercial banks - Chairman of Fed serves for 4 years

question

Leverage

answer

financing investments with borrowed funds

question

Balance sheet effect

answer

reduction in a firm's net worth due to falling asset prices

question

Vicious cycle of deleveraging

answer

asset prices fall → creditors want loans back → leads to more sale of assets to repay loans → leads to defaults, more prices declines, and more creditors wanting loans back

question

Subprime lending

answer

loaning to people who don't meet the usual criteria for borrowing and for being able to afford their payments

question

Securitization

answer

process of assembling pools of loans and selling shares from these pools

question

Short-term interest rates

answer

rates on financial assets that mature within less than a year

question

Long-term interest rates

answer

rates on financial assets that mature a number of years into the future

question

Money demand curve (MD)

answer

shows the relationship between the interest rate and the quantity of money demanded

question

Liquidity preference model of the interest rate

answer

the rate is determined by the supply and demand for money

question

Money supply curve

answer

shows how the quantity of money supplied varies with the interest rate

question

Expansionary monetary policy

answer

monetary policy that increases aggregate demand

question

Contractionary monetary policy

answer

monetary policy that decreases aggregate demand

question

Taylor rule for monetary policy

answer

a rule that sets the federal funds rate according to the level of the inflation rate and either the output gap or the unemployment rate

question

Inflation targeting

answer

when the central bank sets an explicit target for the inflation rate and sets monetary policy in order to hit that target

question

Zero lower bound for interest rates

answer

sets limits to the power of monetary policy- interest rates cant fall below zero

question

Monetary Neutrality

answer

changes in the money supply have no real effects on the economy

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