question

GDP (AD) formula

answer

C + I + G + Xn

question

GDP (AD)

answer

The expenditure approach to measuring GDP correlates well with aggregate demand

question

GDP (AS) formula

answer

W + I + R + P

question

GDP (AS)

answer

The income approach to measuring GDP correlates well with aggregate supply

question

Calculating Nominal GDP

answer

The quantity of various goods produced in a nation times their current prices, added together

question

GDP Deflator

answer

A price index for all final goods and services used to adjust nominal GDP to arrive at real GDP. Called the "deflator" because nominal GDP will usually overstate the value of a nation's output if there has has been inflation.

question

Real GDP

answer

(Nominal GDP / GDP deflator) * 100

question

GDP Growth Rate formula

answer

[(Current year's GDP - Last year's GDP)/ Last year's GDP] * 100

question

GDP Growth Rate

answer

The GDP growth rate is a percentage change in a nation's real output between one year and the next

question

The Inflation Rate via the CPI formula

answer

[(This year's CPI - Last year's CPI)/Last year's CPI] * 100

question

The Inflation Rate via the CPI

answer

The inflation rate is the percentage change in the CPI from one period to the next

question

Real Interest Rate

answer

Nominal Interest Rate - Inflation Rate

question

Unemployment Rate formula

answer

(Number of unemployed / Number in the labor force) * 100

question

Unemployment Rate

answer

The labor force includes all non-institutionalized people of working age who are employed or seeking employment

question

Money Multiplier formula

answer

1/ RRR where RRR equals the required reserve ratio

question

Money Multiplier Application

answer

An initial injection of $1000 of new money into a banking system with a reserve ratio of 0.1 will generate up to $1,000 * 10 = $10,000 in total money

question

Quantity Theory of Money formula

answer

MV = PQ = Y

question

Quantity Theory of Money

answer

A monetarist's view that explains how changes in the money supply (M) will affect the price level (P) and/or real output assuming the velocity of money (V) is fixed in the short run

question

Disposable Income formula

answer

MPS + MPC = 1

question

Disposable Income

answer

The fraction of an increase in disposable income that is spent (MPC) plus the fraction that is saved (MPS) must equal 1

question

Spending Multiplier formula

answer

1/(1- MPC) or 1/MPS

question

Spending Multiplier

answer

This tells you how much total spending an initial injection of spending in the economy will generate

question

Spending Multiplier example

answer

If the MPC = .8 and the government spends $100 million, then the total increase in spending in the economy = $100 * 5 = $500 million

question

Tax Multiplier formula

answer

-MPC/MPS

question

Tax Multiplier

answer

This tells you how much total spending will result from an initial change in the level of taxation. It's negative because when taxes decrease, spending increases, and vise versa. The tax multiplier will always be smaller than the spending multiplier

question

Absolute Advantage

answer

A country or individual has an absolute advantage in the production of a good when the country can produce the good using fewer resources than another country or individual

question

Aggregate Demand (AD)

answer

A schedule or curve that shows the total quantity demand for all goods and services of a nation at various price levels at a given period of time

question

Aggregate Supply (AS)

answer

The total amount of goods that all the firms in all the industries in q country will produce at various price levels at a given period of time

question

Appreciation

answer

An increase in the value of one currency relative to another, resulting from an increase in demand for or a decrease in supply of the currency on the foreign exchange market

question

Balance of Payment

answer

Measures all the monetary exchanges between one nation and all other nations. Includes the current account and the capital account

question

Bonds

answer

A certificate of debt issued by a company or a government to an investor

question

Budget Deficit

answer

When a government spends more than it collects in tax revenues in a given year

question

Business Cycle

answer

A model showing the short-run periods of contraction and expansion in output experienced by an economy over a period of time

question

Capital

answer

Human-made resources (machinery and equipment) used to produce goods and services; goods that do not directly satisfy human wants

question

Types of Capital

answer

Human capital (education, know-how) Physical capital (tools you can touch and operate)

question

Capital/Financial Account

answer

Measures the flow of funds for investment in real assets(such as factories or office buildings) or financial assets(such as stocks and bonds) between a nation and the rest of the world

question

Ceteris Paribus

answer

"Other things being equal," used as a reminder that all variables other than the ones being studied are assumed to be constant

question

Circular Flow Diagram

answer

A model of the macroeconomy that shows the interconnectedness of businesses, households, government, banks, and the foreign sectors. money flows in a circular, and goods, services, and resources flow in the opposite direction

question

Classical Economic Theory

answer

The view that an economy will self-correct from periods of economic shock if left alone (laissez-faire)

question

Comparative Advantage

answer

When an individual, a firm, or a nation is able to produce a particular product at a lower opportunity cost than another individual, firm, or nation. It is the basis on which nations trade with each other

question

Consumer Price Index (CPI)

answer

An index that measures the price of a fixed market basket of consumer goods bought by a typical consumer, the CPI is used to calculate the inflation rate in a nation

question

Consumption

answer

A component of a nation's aggregate demand; measures the total spending by domestic households on goods and services

question

Contractionary Fiscal Policy

answer

A demand-side policy whereby government increases taxes or decreases its expenditures in order to reduce aggregate demand(could be used to bring down high inflation rates)

question

Contractionary Monetary Policy

answer

A demand-side policy whereby the central bank reduces the supply of money, increasing interest rates and reducing aggregate demand(could be used to bring down high inflation rates)

question

Crowding-Out Effect

answer

The rise in interest rates and the resulting decrease in investment spending in the economy caused by increased government borrowing in the loanable funds market(disadvantageous side effect of expansionary fiscal policy)

question

Cost-Push Inflation

answer

Inflation resulting from a decrease in AS(from higher wage rates and raw material prices, such as the price of oil) and accompanied by a decrease in real output and employment (Stagflation or Adverse aggregate supply shock)

question

Current Account

answer

Measures the balance of trade in goods and services and the flow of income between one nation and all other nations; it also records monetary gifts or grants that flow into or out of a country. [equal to a country's net exports]

question

Cyclical Unemployment

answer

Unemployment caused by a fall in aggregate demand in a nation *during a recession* Not included in the natural rate of unemployment.

question

Deflation

answer

A decrease in the average price level of a nation's output over time

question

Demand Deposit

answer

A deposit in a commercial bank against which checks may be written. Also known as a "checkable deposit"

question

Net Exports (Xn)

answer

Exports - Imports

question

Demand-Pull Inflation

answer

Inflation resulting from an increase in AD without a corresponding increase in AS

question

Depreciation

answer

A decrease in the value of one currency relative to another, resulting from a decrease in demand for or an increase in the supply of the currency on the foreign exchange market

question

Devaluation

answer

When a governement intervenes in the market for its own currency to weaken it relative to another currency

question

Discount Rate

answer

One of the three tools of monetary policy, it is the interest rate that the federal government charges on the loans it makes to commercial banks

question

Economic Growth

answer

An increase in the potential output of goods and services in a nation over time

question

Economic Resources

answer

Land, Labor, Capital, and Entrepreneurial ability that are used in the production of goods and services (the are "economic" resources because they are scarce) *factors of production*

question

Excess Reserves

answer

The amount by which a bank's actual reserves exceed its requires reserves. banks can lend the excess which expands the money reserve. Determines equilibrium interest rate

question

Exchange Rate

answer

The price of one currency in terms of another currency *determines in the forex market*

question

Exports

answer

The spending by foreigners on domestically produced goods and services *counts as an injection into a nation's circular flow of income*

question

Federal Funds Rate (FFR)

answer

The interest rate banks charge one another on overnight loans made out of theie excess reserves *FFR is the interest rate targeted by the Fed through its open-market operations*

question

Fiscal Policy

answer

Changes in government spending and tax collections implemental by government with amtge aim of either increasing or decreasing aggregate demand to achieve the marcoeconomic objectives of full employment and price-level stability

question

Floating Exchange Rate System

answer

When a currency's exchange rate is determined by the free interaction of supply and demand in international forex markets

question

Forex Market (Foreign Exchange Market)

answer

The market in which internationsl buyers and sellers exchange fireign currencies fir one another to buy and sell goods, services, amd assets from various countries *where a currency's exchange rate relative to other currencies is determined*

question

Fractional Reserve Banking

answer

A banking system in ehich banks hold only a fraction of deposits as required reserves and can lend some of the money deposited by their customers to other borrowers

question

Frictional Unemployment

answer

Unemployment of workers who have employable skills, such as those who are voluntarily moving between jobs or recent graduates eho are looking for their first job

question

Full Employment

answer

"potential output" When an economy is producing at a level of output at which almost all the nation's resources are employes *natural rate is unemployment rate which includes only frictional and structural unemployment*

question

Gross Domestic Product (GDP)

answer

The total market value of all final goods and sevices produced during a guven time period within a country's borders. *Equal to the total income of the nation's households or the expenditured on the nation's output*

question

Human Capital

answer

The valued skilla intergrates into labor through education, training, knowledge, and health. *an important determinant of aggregate supply and the level of economic growth in a nation*

question

Imports

answer

Spending on goods and services produced in foreign nations *counts as a leakage from a nation's curcular flow of income*

question

Inflation

answer

A rise in the average level of prices in the economy over time (percentage change in the CPI)

question

Inflationary Gap

answer

The difference between a nation's equilibrium level of output and its full employment level of output when the nation is overheating (producing beyond its full employment level)

question

Inflation Spirl

answer

The rapid increase in average price level resulting from demand-pull inflation leading to higher waged, causing cost push inflation

question

Interest rate

answer

The opportunity cost of money. Either the cost of borrowing money or the cost of spending money. Conversely, this is the price a lender is paid for allowing someone else to use money for a time

question

Invesentment

answer

A component of aggregate demand, in includes all spending on capital equipment, inventories, and technology by firms *doesn't include financial investment(purchase of financial assets) Includes household purchasimg of newly constructed residences*

question

Law of Increasing Opportunity Cost

answer

As more of a particular product is produced, the opportunity cost, in terms of what must be given up of other goods to produce each unit of the product, increase *explains the convex shape of a nation's production possibilities curve*

question

Loanable Funds Market

answer

The market in which the demand for private investment an the supply of household savings intersect to determine the equilibrium real interest rate

question

Long Run

answer

*flexible wage period* The period of time over which the wage rate and price level of inputs in a nation are flexible. In the long run, any changes in AD are cancelled out due to the flexibility of wages and prices and an economy will return to its full employment level of output

question

Long Runs Aggregate Supply (LRAS)

answer

The level of output to which an economy will always return in the long run, curve intersects the horizontal axis at the full employment or potential level of output

question

M1

answer

A component of money supply including currency and checkable deposits

question

M2

answer

Amore broadly defined component of the money supply. *equal to M1 plus saving deposits, money-market deposits, mutual funds, and small-time deposits*

question

M3

answer

The broadest component of the money supply *equal to M2 plus large time deposits*

question

Marcoeconomics

answer

The study of entire nations' economies and the interactions between households, firms, government, and foreigners

question

Macroeconomics Equilibrium

answer

The level of output at which a nation is producing at any particular period of time. Recession = below full employment level Overheating = beyond its full employment level

question

Fixed Exchange Rate System

answer

When a government or central bank takes action to manage or fix the value of its currency relative to another currency on the forex market

question

Marginal Analysis

answer

Decision-making which involves a comparison of marginal (extra) benefits and marginal costs

question

Marginal Propensity to Consume (MPC)

answer

The fraction of any change in income spent on domestically produced goods and services; equal to the change in consumption divided by the change in disposable income

question

Marginal Economic to Save (MPS)

answer

The fraction of any change in income that is saved; equal to the change in savings divided by the change in disposable income

question

Market Economic System

answer

A system of resource allocation in which buyers and sellers meets in market to determine the price and quantity of goods, service, and productive resource

question

Microeconomics

answer

The study of the interactions between consumers and producers in markets for individual products

question

Monetarism

answer

The macroeconomic view that the main cause of change in aggregate output and the price level are fluctuations in the money supply

question

Monetary Policy

answer

The central bank's manipulation of the supply o money aimed at raising or lowering interest rate to stimulate or contract the level of aggregate demand to promote the macroeconomic objectives of price-level stability and full employment

question

Money

answer

Any object that can be used to facilitate the exchange of goods and service in a market

question

Money Demand

answer

The sum of the transaction demand and the asset demand for money. *Inversely related to the nominal interest rate *

question

Money Market

answer

The market where the supply of money is set by the central bank; includes the downward-sloping money-demand curve and a vertical money-supply curve. The "price" of money is the nominal interest rate

question

Money Supply

answer

The vertical curve representing the total supply of excess in a nation's banking system *determined by the monetary policy actions of the central bank*

question

Multiplier Effect

answer

The increase in total spending in an economy resulting from an initial injection of new spending. The size of the multiplier effect depends upon the spending multiplier

question

Natural Rate of Unemployment (NRU)

answer

The level of unemployment that prevails in an economy that is producing at its full employment level of output. US NRU is close to 5% *includes structural and frictional unemployment*

question

Net Exports

answer

A component of aggregate demand that equals the income earned from the sale of exports to the rest of the world minus expenditures by domestic consumers on imports

question

Official Reserves

answer

To balance the two accounts in the balance of payment (current and financial accounts), a country's official foreign exchange reserves measures the net effect of all the money glows from the other accounts

question

Open-Market Operations

answer

The central bank's buying and selling of government bonds on the open market from commercial banks and the public. This is aimed at increasing or decreasing the level of reserves in the banking system and thereby affects the interest rate and the level of aggregate demand

question

Opportunity Cost

answer

What must be given up to have anything else. Not necessary money, but rather what you could do with the resources instead

question

Phillips curve (long run)

answer

A curve vertical at the natural rate of unemployment showing that in the long run there is no trade-off between the price level and the level of unemployment in an economy

question

Phillips Curve (short run)

answer

A downward-sloping curve showing the short-run inverse relationship between the level of inflation and the level of unemployment

question

Production Possibilities Curve (PPC)

answer

A graph that shows the various combinations of output that the economy can produce given the available factors of production and the available production technology

question

Productivity

answer

The output per unit of input of a resource. An important determinant of the level of aggregate supply in a nation

question

Protectionism

answer

The use of tariffs, quotas, or subsides to give domestic producers a competitive advantage over foreign producers

question

Rational Expectations Theory

answer

The hypothesis that business firms and households expect monetary and fiscal policies to have certain effects on the economy and take, in pursuit of their own self-interest, actions which make these policies ineffective at changing real output

question

Recession

answer

A contraction in total output of goods and services in a nation between two periods of time. Caused by either decrease in aggregate demand or aggregate supply

question

Recessionary Gap

answer

The difference between an economy's equilibrium level of output and its full employment level of output when an economy is in recession

question

Required Reserves

answer

The proportion of a bank's total deposits it is required to keep in reserve with the central bank. Determined by the required reserve ratio.

question

Scarcity

answer

Something is scarce when it is both desired and limited in supply

question

Self-Correction

answer

The idea that an economy producing at an equilibrium level of output that is below or above its full employment will return on its own to its full employment level if left to its own devices. Requires flexible wages and prices and is associated with classical economy views

question

Stagflation

answer

A macroeconomic situation in which both inflation and unemployment increase, cause by a negative supply shock

question

Structural Unemployment

answer

Unemployment caused by changes in the structure of demand for goods and in technology; outdated skills and unable to meet demand

question

Supply Shock

answer

Anything that leads to a sudden, unexpected change in aggregate supply. Can be negative (decrease AS) or positive (increase AS). Can be a change in energy prices, wages, or business taxes, or may result from a natural disaster or a new discovery of important resource

question

Trade Deficit

answer

When a country's total spending on imported goods and services exceeds its total revenues from the sale of exports to the rest of the world

question

Trade Surplus

answer

When a country's sake of exports exceeds its spending on imports

question

Wealth

answer

An important determinant of consumption; it is the total value of a household's assets minus all its liabilities

REA AP Macroeconomics Crash Course – Flashcards

Unlock all answers in this set

Haven't found what you were looking for?

Search for samples, answers to your questions and flashcards