question

inflation

answer

a general increase in prices across an economy

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purchasing power

answer

ability to purchase goods or services

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price index

answer

measurement that shows how the average price of a standard group of goods changes over time

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Consumer Price Index

answer

price index determined by measuring the price of a standard group of goods meant to represent the "market basket" of a typical urban consumer; computed monthly by the Bureau of Labor Statistics

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market basket

answer

representative collection of goods and services

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inflation rate

answer

percentage rate of change in price level over time (usually 3% or below)

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CPI formula

answer

(updated cost/base period cost) x 100

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core inflation rate

answer

the rate of inflation excluding the effects of food and energy prices

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hyperinflation

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inflation that is out of control (100+% inflation rate); money loses its value, leads to economic collapse

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causes of inflation

answer

- growth of money supply - changes in aggregate demand - changes in aggregate supply

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quantity theory

answer

too much money in economy causes inflation; key is to increase supply of money at same rate economy is growing in order to minimize inflation

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aggregate demand

answer

amount of goods and services that can be purchased at all possible price levels

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aggregate supply

answer

amount of goods and services that can be sold at all other possible price levels

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wage-price spiral

answer

when rising wages cause higher prices, and higher prices cause higher wages

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effects of inflation

answer

- purchasing power: if inflation rate is positive, will lower purchasing power - income: if wage doesn't increase as much as inflation does - interest rates: interest rate - inflation rate = actual increase; if inflation rate - interest rate = break event

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fixed income

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income that does not increase even when prices go up; people with a fixed income are affected the most by inflation

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deflation

answer

a sustained drop in price level

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frictional unemployment

answer

when people take time to find a new job; most common kind of unemployment; - unemployment insurance gives income to laid-off workers seeking jobs, which may contribute to frictional unemployment

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structural unemployment

answer

when workers' skills do not match those needed for the job available

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5 causes of structural unemployment

answer

1) development of new technology 2) discovery of new resources 3) changes in consumer demand 4) globalization 5) lack of education

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globalization

answer

shift from local to global markets as countries seek foreign trade and investment; leads to relocation of jobs/facilities

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seasonal unemployment

answer

when industries slow/shut down because of harvest schedules, vacations, or when industries make seasonal shifts in their production schedule; normal part of healthy economy

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cyclical unemployment

answer

unemployment that rises during economic downturns and falls when economy improves

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factors outside economy

answer

1) attacks/wars 2) natural disasters

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Current Population Survey

answer

carried out monthly by the Bureau of Labor Statistics; interviews 60k families about employment that month

question

unemployment

answer

percentage of nation's labor force that is unemployed; (unemployed divided by labor force); usually adjusted for seasonal unemployment

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labor force

answer

16 and older actively looking for job (not retirees, handicapped, prisoners, etc.)

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full employment

answer

when there is no cyclical unemployment (95%+ employed)

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underemployment

answer

working at a job for which one is overqualified or working part-time when full-time work is desired

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discouraged worker

answer

someone who wants a job but has given up looking; not counted in unemployment rate

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national income accounting

answer

system used to collect/organize statistics on production, income, investments and savings; used by Department of Commerce to make National Income and Product Accounts (NIPA)

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gross domestic product

answer

dollar value of all goods and services produced within a country's borders in a given year

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intermediate goods

answer

products used to produce final goods (not included in GDP) (i.e. memory chip in laptop)

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expenditure approach

answer

way to calculate GDP; sum of the amount spent on consumer goods and services, business goods and services, government goods and services, and net exports.

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durable goods

answer

consumer goods that last for a long time

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nondurable goods

answer

consumer goods that last for a short period of time

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net exports

answer

exports - imports

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income approach

answer

way to calculate GDP; sum of all incomes in an economy (b/c income = what people earn for producing the goods and services)

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nominal GDP

answer

GDP measured in current prices

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real GDP

answer

GDP expressed in unchanging prices; takes into account price increases and reflects accurate output

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what GDP doesn't take into account

answer

nonmarket activities, underground economy, negative externalities and quality of life

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nonmarket activities

answer

caring for children, washing dishes; only accounted in GDP if paying someone else to do these things for them

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underground economy

answer

black market, under the table wages, but also selling a bike to a friend or earning money from baby-sitting

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negative externalities

answer

unintended economic side effects (i.e. pollution, which affects price of plants)

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quality of life

answer

greater GDP doesn't necessarily mean greater quality of life

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gross national product

answer

annual income earned by a nation's firms and services; market value of all goods and services produced by Americans in one year

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depreciation

answer

loss of value of capital equipment as a result of wear and tear; not accounted for in GNP

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net national product

answer

GNP - cost of depreciation

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national income

answer

NNP adjusted for minor discrepancies in data

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personal income

answer

NI - (money that firms reinvest + income taxes firms pay + social security taxes)

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disposable personal income

answer

PI - (individual income + social security taxes)

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price level

answer

average of all prices in the economy

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effects of price level

answer

price level rises = real GDP/aggregate supply rises price level rises = aggregate demand goes down price level rises = purchasing power declines

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business cycle

answer

a period of macroeconomic expansion followed by a period of macroeconomic contraction

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expansion

answer

period of economic growth

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economic growth

answer

steady, long-term increase in real GDP

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peak

answer

height of an economic expansion; when real GDP stops rising

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contraction

answer

period of economic decline (real GDP falling)

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trough

answer

lowest point of an economic contraction; where GDP stops falling; new period of expansion begins

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recession

answer

a prolonged economic contraction (6-18 months); if GDP falls or at least 6 straight months; unemployment is 6-10%

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depression

answer

a long and severe recession; high unemployment, low economic output

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stagflation

answer

decline in real GDP (output) with a rise in price level (inflation)

question

business cycles affected by:

answer

1. business investment 2. interest rates and credit 3. consumer expectations (of contraction/expansion) 4. external shocks (can be good or bad)

question

leading indicators

answer

economic variables used to predict future trends in business cycle (i.e. stock market)

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fiscal policy

answer

the use of government spending/revenue to influence the economy (expand/slow economic growth, get full employment, maintain stable prices)

question

federal budget

answer

document estimating federal government's revenue and authorizing spending for coming year; takes 18 months to prepare

question

fiscal year

answer

12-month period used for budgeting purposes (gov. = Oct. 1-Sep. 30)

question

4 steps federal budget process

answer

1. each federal agency sends to Office of Management and Budget estimate of how much it expects to spend in next fiscal year 2. executive branch creates budget in Jan/Feb; OMB usually gives less to each agency than it requests 3. Congress debates budget with help of Congressional Budget Office (gives independent economics data); Senate/House Budget Committees adjust budget; initial budget must be adopted by May 15; final resolution must be passed by September 25; if no appropriation bills submitted by Sep. 30, short-term funding must be passed; if no short-term funding, government shuts down 4. president either: a) sign bills into law b) vetoes (requires 2/3 override) c) works with Congress to create new budget

question

appropriations bill

answer

authorizes specific amount of spending by the government

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expansionary policy

answer

fiscal policy that encourages economic growth (thru increased spending, tax cuts, etc.) - more goods/services = more jobs - gov. spending = inc. aggregate demand = higher prices = more production = more jobs = lower unemployment - lower taxes = more money to spend

question

contractionary policy

answer

fiscal policy that reduces economic growth (thru decreased spending, higher taxes, etc.) - if demand exceeds supply - spend less = slower GDP growth

question

problems with fiscal policy

answer

- entitlements (Medicaid, Social Security, etc.) have to be in budget every year - interest for national debt must still be paid - takes time to see effect, economy might already be moving in other direction - political struggles (contractionary unpopular) - agencies/branches have to coordinate with each other - different states' economic status quos may differ

question

classical economics

answer

idea that free markets regulate themselves ("invisible hand")

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productive capacity

answer

maximum output an economy can sustain over time without increasing inflation (need more demand to reach productive capacity); full-employment output

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demand-side economics

answer

idea that demand for goods drives the economy

question

Keynesian economics

answer

using demand-side economics as basis for encouraging government action to help economy; government can and should use fiscal policy to help economy

question

2 fundamental macroeconomic problems

answer

1. periods of recession 2. periods of inflation

question

Repubs vs. Dems in how to stimulate economy

answer

Repubs = tax cuts Dems = expansive government programs

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how government can reduce inflation

answer

increase taxes or increase spending (which decreases demand)

question

multiplier effect

answer

idea that every one dollar change in fiscal policy creates a change greater than one dollar in the national income

question

transfer payments

answer

transfers of cash from government to consumers

question

automatic stabilizers of economic growth

answer

tools of fiscal policy that increases or decreases automatically depending on changes in GDP and personal income; taxes and transfer payments

question

supply-side economics

answer

idea that the supply of good drives the economy

question

Laffer curve

answer

high rates of taxation discourage workers from working so tax revenues will fall; 50% yields the highest revenue

Econ Unit 4: Macroeconomics – Flashcards

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