question

economics

answer

the study of how people, firms, and societies use their scarce productive resources to best satisfy their unlimited material wants

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scarcity

answer

the imbalance between limited productive resources and unlimited human wants. Because economic resources are scarce, the goods and services a society can produce are also scarce.

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trade-offs

answer

scarce resources imply that individuals, firms, and governments are constantly faced with difficult choices that involve benefits and costs

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opportunity cost

answer

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

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marginal

answer

the next unit or increment of an action

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marginal benefit (MB)

answer

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

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marginal cost (MC)

answer

the additional cost incurred from the consumption of the next unit of a good or service.

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marginal analysis

answer

making decisions based upon weighing the marginal benefits and costs of that action. The rational decision maker chooses and action if the MB is at least equal to the MC

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production possibilities

answer

different quantities of goods that an economy can produce with a given amount of scarce resources. Graphically, the trade-off between the production of two goods is portrayed as a Production Possibility Curve or Frontier (PPF)

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production possibility frontier (PPF)

answer

a graphical illustration that shows the maximum quantity of one good that can be produced, given the quantity of the other good being produced

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law of increasing costs

answer

the more of a good that is produced, the greater the opportunity cost of producing the next unit of that good

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absolute advantage

answer

exists if a producer can produce more of a good than all other producers

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comparative advantage

answer

a producer has comparative advantage if he can produce a good at lower opportunity cost than all other producers

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specialization

answer

when firms focus their resources on production of goods for which they have comparative advantage, they are said to be specializing

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productive efficiency

answer

production of maximum output for a given level of technology and resources. All points on the PPF are productively efficient

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allocative efficiency

answer

production of the combination of goods and services that provides the mot net benefit to society. The optimal quantity of a good is achieved when the MB equals the MC of the next unit. This only occurs at one point on the PPF

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economic growth

answer

occurs when an economy's production possibilities increase. This can be a result of more resources, between resources, or improvements in technology

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market economy (capitalism)

answer

an economic system based upon the fundamentals of private property, freedom, self-interest, and prices

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Law of Demand

answer

holding all else equal, when the price of a good rises, consumers decrease their quantity demanded for that good

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all else equal

answer

to predict how a change in one variable affects a second, we hold all other variables constant. This is also referred to as the "ceteris paribus" assumption

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absolute (or money) prices

answer

the price of a good measured in units of currency

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relative prices

answer

the number of units of any other good Y that must be sacrificed to acquire the first good X. Only relative prices matter.

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Substitution effect

answer

when consumers react to an increase in a good's price by consuming less of that good and more of other goods (different definition than book)

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income effect

answer

the change in quantity demanded that results from a change in the consumer's purchasing power (or real income)

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demand schedule

answer

a table showing quantity demanded for a good at various prices

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demand curve

answer

a graphical depiction of the demand schedule. The demand curve is downward sloping, reflecting the Law of Demand

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determinants of demand

answer

the external factors that shift demand to the left or right

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normal goods

answer

a good for which higher income increases demand

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inferior goods

answer

a good for which higher income decreases demand

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substitute goods

answer

two goods are consumer substitutes if they provide essentially the same utility to the consumer. A Honda Accord and a Toyota Camry might be substitutes for many consumers.

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Complementary goods

answer

two goods are consumer complements if they provide more utility when consumed together than when consumed separately. A 35mm camera and a roll of film are complementary goods

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law of supply

answer

holding all else equal, when the price of a good rises, suppliers increase their quantity supplied for that good.

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supply schedule

answer

a table showing quantity supplied for a good at various prices

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supply curve

answer

a graphical depiction of the supply schedule. The supply curve is upward sloping, reflecting the Law of supply

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determinants of supply

answer

one of the external factors that influences supply. When these variables change, the entire supply curve shifts to the left or right

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market equilibrium

answer

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

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shortage

answer

also known as excess demand, a shortage exists at a market price when the quantity demanded exceeds the quantity supplied. The price rises to eliminate a shortage.

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disequilibrium

answer

any price where quantity demanded is not equal to quantity supplied.

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surplus

answer

also known as excess supply, a surplus exists at a market price when the quantity supplied exceeds the quantity demanded. The price falls to eliminate a surplus

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total welfare

answer

the sum of consumer surplus and producer surplus. The free market equilibrium provides maximum combined gain to society.

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consumer surplus

answer

the difference between your willingness to pay and the price you actually pay. It is the area below the demand curve and above the price.

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producer surplus

answer

the difference between the price received and the marginal cost of producing the good. IT is the area above the supply curve and under the price.

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circular flow of economic activity

answer

a model that shows how households and firms circulate resources, goods, and incomes through the economy. This basic model is expanded to include the government and the foreign sector

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closed economy

answer

a model that assumes there is no foreign sector (imports and exports)

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aggregation

answer

the process of summing the microeconomic activity of households and firms into a more macroeconomic measure of economic activity

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Gross Domestic Product (GDP)

answer

the market value of the final goods and services produced within a nation in a given period of time

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final goods

answer

goods that are ready for their final use by consumers and firms, eg, a new Harley.

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intermediate goods

answer

goods that require further modification before they are ready for final use, eg, steel used to produce the new Harley

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Double counting

answer

the mistake of including the value of intermediate stages of production in GDP on top of the value of the final good

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second-hand sales

answer

final goods and services that are resold. Even if they are resold many times, final goods and services are only counted once, in the year in which they were produced.

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nonmarket transactions

answer

household work or DIY jobs are missed by GDP accounting. The same is true of government transfer payments and purely financial transactions like the purchase of a share of IBM stock

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underground economy

answer

these include unreported illegal activity, bartering, or informal exchange of cash

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aggregate spending (GDP)

answer

the sum of all spending from four sectors of the economy GDP = C + I + G + (X - M)

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aggregate income (AI)

answer

the sum of all income earned by suppliers of resources in the economy. With some accounting adjustments, aggregate spending equals aggregate income.

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nominal GDP

answer

the value of current production at the current prices. Valuing 2003 production at 2003 prices creates nominal GDP in 2003

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real GDP

answer

the value of curent production, but using prices from a fixed point in time. Valuing 2003 production at 2002 prices creates real GDP in 2003 and allows us to compare it back to 2002

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base year

answer

the year that serves as a reference point for constructing a price index and comparing real values over time

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price index

answer

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. You can interpret the price index as the current price level as a percentage of the level in the base year.

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market basket

answer

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

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GDP price deflator

answer

the price index that measures the average price level of the goods and services that make up GDP

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real rate of interest

answer

the percentage increase in purchasing power that a borrower pays a lender

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expected (anticipated) inflation

answer

the inflation expected in a future time period. This expected inflation is added to the real interest rate to compensate for lost purchasing power

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nominal rate of interest

answer

the percentage increase in money that the borrower pays a lender and is equal to the real rate plus the expected inflation

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business cycle

answer

the periodic rise and fall (in four phases) of economic activity)

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expansion

answer

a period where real GDP is growing

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peak

answer

the top of a business cycle where an expansion has ended

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contraction

answer

two consecutive quarters of falling real GDP

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trough

answer

the bottom of the cycle where a contraction has stopped

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depression

answer

a prolonged, deep contraction in the business cycle

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Consumer Price Index (CPI)

answer

the price index that measures the average price level of the item in the base year market basket. This is the main measure of consumer inflation

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inflation

answer

the percentage change in the CPI (or other price index, but usually reported from the CPI) from one period to the next

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nominal income

answer

today's income measured in today's dollars. These are dollars unadjusted for the effects of inflation

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real income

answer

today's income measured in base year dollars. These inflation-adjusted dollars can be compared from year to year to determine whether purchasing power has increased or decreased.

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employed

answer

a person is employed if she has worked for pay at least one hour per week

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unemployed

answer

a person is unemployed if he is not currently working but is actively seeking work

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labor force

answer

the sum of all individuals 16 years and older who are either currently employed (E) or unemployed (U) LF = E + U

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out of the labor force

answer

a person is classified as out of the labor force if he has chosen to not seek employment

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unemployment rate

answer

the percentage of the labor force that falls into the unemployed category. Sometimes called the jobless rate. UR = 100*U/LF

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discouraged workers

answer

citizens who have been without work for so long that they become tired of looking for work and drop out of the labor foce. Because these citizens are not counted in the ranks of the unemployed, the reported unemployment rate is understated.

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frictional unemployment

answer

a type of unemplyment that occurs when someone new enters the labor market or switches jobs. This is a relatively harmless form of unemployment and is not expected to last long.

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seasonal unemployment

answer

a type of unemployment that is periodic, predictable, and that follows the calendar. Workers and employers alike anticipate these changes in employment and plan accordingly, thus the damage is minimal

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structural unemployment

answer

a type of unemployment that is the result of fundamental, underlying changes in the economy such that some job skills are no longer in demand PERHAPS better definition: job skills do not match jobs available (could be geographic)

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cyclical unemployment

answer

a type of unemployment that rises and falls with the business cycle. This form of unemployment is felt economy-wide, which makes it the focus of macroeconomic policy

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full employment

answer

exists when the economy is experiencing no cyclical unemployment

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natural rate of unemployment

answer

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

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disposable income (DI)

answer

the income a consumer has left over to spend or save once he has paid out his net taxes. DI = Y - T DI = C + S

question

consumption and saving schedules

answer

tables that show the direct relationships between disposable income and consumption and saving. As DI increases for a typical household, C and S both increase.

question

consumption function

answer

a linear relationship showing how increases in disposable income cause increases in consumption

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autonomous consumption

answer

the amount of consumption that occurs no matter the level of disposable income. In a linear consumption function, this shows up as a constant and graphically it appears as the y intercept

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saving function

answer

a linear relationship showing how increases in disposable income cause increases in saving

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dissaving

answer

another way of saying that saving is less than zero. This can occur at low levels of disposable income when the consumer must liquidate assets or borrow to maintain consumption

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autonomous saving

answer

the amount of saving that occurs no matter the level of disposable income, In a linear saving function, this shows up as a constant and graphically it appears as the y intercept

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marginal propensity to consume (MPC)

answer

the change in consumption caused by a change in disposable income, or the slope of the consumption function. MPC = ΔS/ΔDI

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marginal propensity to save (MPS)

answer

the change in saving caused by a change in disposable income, or the slope of the saving function. MPS = ΔC/ΔDI

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determinants of consumption and saving

answer

factors that shift the consumption and saving functions in the opposite direction are Wealth, Expectations, and Household Debt. The factors that change consumption and saving functions in the same direction are Taxes and Transfers.

question

expected real rate of return (r)

answer

the rate of real profit the firm anticipates receiving on investment expenditures, This is the marginal benefit of an investment project

question

real rate of interest (i)

answer

the cost of borrowing to fund an investment. This can be thought of as the marginal cost of an investment project.

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decision to invest

answer

a firm invests in projects so long as r ≥ i

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investment demand

answer

the inverse relationship between the real interest rate and the cumulative dollars invested. Like any demand curve, this is drawn with a negative slope

question

autonomous investment

answer

the level of investment determined by investment demand. It is autonomous because it is assumed to be constant at all levels of GDP

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market for loanable funds

answer

the market for dollars that are available to be borrowed for investment projects. Equilibrium in this market is determined at the real interest rate where the dollars saved (supply) is equal to the dollars borrowed (demand)

question

demand for loanable funds

answer

the negative relationship between the real interest rate and the dollars invested by firms

question

private saving

answer

saving conducted by households. S (private) = DI - C

question

public saving

answer

saving conducted by the government. S (public) = abs(Tax Revenue - G)

question

supply of loanable funds

answer

Bad book definition. Here's mine that synthesizes the book definition with more info: The higher the real interest rate, the more dollars that are saved. But the more dollars saved, the lower the real interest rate, because the supply increases.

question

multiplier effect

answer

describes how a change in any component of aggregate expenditures creates a larger change in GDP

question

spending multiplier

answer

the magnitude of the spending multiplier effect is calculated as 1/(1-MPC)

question

tax multiplier

answer

the magnitude of the effect that a change in taxes has on real GDP. Tm = MPC/MPS (because it's a simplification, see chapter 13)

question

balanced budget multiplier

answer

when a change in government spending is offset by a change in lump-sum taxes, real GDP changes by the amount of the change in G; the balanced budget multiplier is thus equal to one.

question

aggregate demand (AD)

answer

the inverse relationship between all spending on domestic output and the average price level of the output. AD measures the sum of consumption spending by households, investment spending by firms, government purchases of goods and services, and the net exports bought by foreign consumers

question

Foreign sector substitution effect

answer

when the average price of US output increases, consumers naturally begin to look for similar items produced elsewhere

question

wealth effect

answer

as the average price level rises, the purchasing power of wealth and savings begins to fall. Higher prices therefore tend to reduce the quantity of domestic output purchased.

question

determinants of AD

answer

AD is a function of the four components of domestic spending (C, I, G (X-M). If any of these components increases (decreases,) holding the others constant, AD increases (decreases) or shifts to the right (left)

question

short-run aggregate supply (SRAS)

answer

the positive relationship between the level of domestic output produced and the average price level of that output.

question

macroeconomic short run

answer

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. In the short run, the SRAS curve is typically drawn as upward sloping

question

macroeconomic long run

answer

a period of time long enough for input prices to have fully adjusted to market forces. In this period, all product and input markets are in a state of equilibrium and the economy is operating at full employment (GDPf). Once all markets in the economy have adjusted and there exists this long-run equilibrium, the LRAS curve is vertical at GDPf.

question

determinants of AS

answer

AS is a function of many factors that impact the production capacity of the nation. If these factors make it easier, or less costly, for a nation to produce, AS shifts to the right. If these factors make it more difficult, or more costly, for a nation to produce, AS shifts to the left

question

macroeconomic equilibrium

answer

occurs when the quantity of real output demanded is equal to the quantity of real output supplied. Graphically this is at the intersection of AD and SRAS. Equilibrium can exist at, above, or below full employment

question

recessionary gap

answer

the amount by which full-employment GDP exceeds equilibrium GDP

question

inflationary gap

answer

the amount by which equilibrium GDP exceeds full-employment GDP

question

demand pull inflation

answer

this inflation is the result of stronger consumption from all? (combined, perhaps?) sectors of AD as it continues to increase in the upward sloping range of AS. The price level begins to rise and inflation is felt in the economy.

question

deflation

answer

a sustained falling price level, usually due to weakened aggregate demand and a constant AS

question

recession

answer

in the AD and AS model, a recession is described as falling AD with a constant AS curve. RGDP falls far below full employment levels and the unemployment rate rises

question

supply-side boom

answer

when the AS curve shifts outward and th AD curve stays constant, the price level falls, RGDP increases and the unemployment rate falls

question

stagflation

answer

a situation in the macroeconomy when inflation and the unemployment rate are both increasing. This is most likely the cause of falling AS while AD stays constant

question

supply shocks

answer

a supply shock is an economy-wide phenomenon that affects the costs of firms, and the position of the AS curve, either positively or negatively.

question

Phillips curve

answer

a graphical device that shows the relationship between inflation and the unemployment rate. In the SR it is downwards sloping and in the LR it is vertical at the natural rate of unemployment

question

fiscal policy

answer

deliberate changes in government spending and net tax collection to affect economic output, unemployment, and the price level. Fiscal policy is typically designed to manipulate AD to "fix" the economy.

question

expansionary fiscal policy

answer

increases in government spending or lower net taxes meant to shift the aggregate expenditure function upward and shift AD to the right.

question

contractionary fiscal policy

answer

decreases in government spending our higher net taxes meant to shift the aggregate expenditure function downward and shift AD to the left

question

sticky prices

answer

if price levels do not change, especially downward, with changes in AD, then prices are thought of as sticky or inflexible. Keynesians believe the price level does not usually fall with contractionary policy

question

budget deficit

answer

exists when government spending exceeds the revenue collected from taxes

question

budget surplus

answer

exists when the revenue collected from taxes exceeds government spending

question

automatic stabilizers

answer

mechanisms built into the tax system that automatically regulate, or stabilize, the macroeconomy as it moves through the business cycle by changing net taxes collected by the government. These stabilizers increase a deficit during a recessionary period and increase a budget surplus during an inflationary period, without an discretionary change on the part of the government

question

crowding out effect

answer

when the government borrows funds to cover a deficit, the interest rate increases and households and firms are "crowded out" of the market for loanable funds. The resulting decrease in C and I dampens the effect of expansionary fiscal policy.

question

net export effect

answer

a rising interest rate increases foreign demand for US dollars. The dollar then appreciates in value, causing net exports from the US to fall. Falling NX decreases AD, which lessens the impact of the expansionary fiscal policy. This is a variation of crowding out

question

productivity

answer

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

question

human capital

answer

the amount of knowledge and skills that labor can apply to the work that they do and the general level of health that the labor force enjoys.

question

nonrenewable resources

answer

natural resources that cannot replenish themselves. Coal is a good example

question

renewable resources

answer

natural resources that can replenish themselves if they are not overharvested. lobster is a good example

question

technology

answer

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

question

investment tax credit

answer

a reduction in taxes for firms that invest in new capital like a factory or piece of equipment

question

supply-side fiscal policy

answer

fiscal policy centered on tax reductions targeted to AS so that real GDP increases with very little inflation. The main justification is that lower taxes on individuals and firms increase incentives to work, save, invest, and take risks.

question

stock

answer

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

question

equity financing

answer

the firm's method of raising funds for investment by issuing shares of stock to the public

question

bond

answer

a certificate of indebtedness from the issuer to the bond holder

question

debt financing

answer

a firm's way of raising investment funds by issuing bonds to the public

question

fiat money

answer

paper and coin money used to make transactions because the government declares it to be legal tender. Because it has no intrinsic value, it is backed by the public's trust that the government maintains its value

question

functions of money

answer

money serves three functions. It serves as a medium of exchange, a unit of account, and a store of value.

question

present value

answer

if r is the current interest rate, the present value of $1 received one year from now is $1/(1+r)

question

future value

answer

if r is the current interest rate, the future value of $1 invested today for a period of one year is $1 x (1+r)

question

money supply

answer

the quantity of money in circulation as measured by the fed as M1, M2, and M3. Assumed to be fixed at a given point in time.

question

M1

answer

the most liquid of money definitions and the basis for all other more broadly defined measures of money M1 = cash + coins + checking deposits + traveler's checks

question

liquidity

answer

a measure of how easily an asset can be converted to cash. The more easily it can be converted to cash, the more liquid the asset.

question

transaction demand

answer

the amount of money held in order to make transactions. This is not related to the interest rate, but increases as nominal GDP increases

question

asset demand

answer

the amount of money demanded as an asset. As nominal interest rates rise, the opportunity cost of holding money begins to rise and you are more likely to lessen your asset demand for money

question

money demand

answer

the demand for money is the sum of money demanded for transactions and money demanded as an asset. It is inversely related to the nominal interest rate.

question

theory of liquidity preference

answer

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

question

fractional reserve banking

answer

a system in which only a fraction of the total money deposits in banks is held in reserve as currency

question

reserve ratio (rr)

answer

the fraction of a bank's total deposits that are kept on reserve

question

reserve requirement

answer

regulation set by the Fed that states the minimum reserve ratio for banks. This is one tool of monetary policy

question

excess reserves

answer

the cash reserves held by banks above and beyond the minimum reserve requirement

question

balance sheet or T-account

answer

a tabular way to show the assets and liabilities of a bank. Total assets must equal liabilities.

question

asset of a bank

answer

anything owned by the bank or owed to the bank is an asset of the bank. Cash on reserve is an asset and so are loans made to citizens.

question

liability of a bank

answer

anything owned by depositors or lenders is a liability to the bank. Checking deposits of citizens or loans made to the bank are liabilities to the bank

question

money multiplier

answer

this measures the max amount of new checking deposits that can be created by a single dollar of excess reserves. M=1/(reserve ratio)=1(rr). The money multiplier is smaller if (a) at any stage the banks keep more than the required dollars in reserve, (b) at any stage borrowers do not redeposit funds into the bank and keep some as cash, and (c) customers are not willing to borrow

question

expansionary monetary policy

answer

designed to fix a recession and increase aggregate demand, lower the unemployment rate, and increase real GDP which may increase the price level

question

contractionary monetary policy

answer

designed to avoid inflation by decreasing aggregate demand, which lowers the price level and decreases RGDP back to full employment

question

open market operations (OMOs)

answer

a tool of monetary policy, it involves the Fed's buying (or selling) of securities from (or to) commercial banks and the general public.

question

federal funds rate

answer

the interest rate paid on short-term loans made from one bank to another. When this rate is a target for an OMO, bonds are bought or sold accordingly until the interest rate target has been met.

question

discount rate

answer

the interest rate commercial banks pay on short-term loans from the Fed

question

quantity theory of money

answer

a theory that asserts that the quantity of money determined the price level and that the growth rate of money determines the rate of inflation

question

equation of exchange

answer

the equation says that nominal GDP (P*Q) is equal to the quantity of money (M) multiplied by the number of times each dollar is spent in a year (V). MV=PQ

question

velocity of money

answer

the average number of times that a dollar is spent in a year. V is defined as PQ/M.

question

domestic price

answer

the equilibrium price of a good in a nation without trade

question

world price

answer

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

question

balance of payments statement

answer

a summary of the payments received by the US from foreign countries and the payments sent by the US to foreign countries

question

current account

answer

this account shows current import and export payments of both goods and services and investment income sent to foreign investors of US and investment income received by US citizens who invest abroad.

question

capital (or financial account)

answer

this account shows the flow of investment on investment on real or financial assets between a nation and foreigners

question

official reserves account

answer

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

question

exchange rate

answer

the price of one currency in terms of a second currency

question

appreciating (depreciating) currency

answer

when the value of a currency is rising (falling) relative to another currency, it is said to be appreciating (depreciating)

question

determinants of exchange rates

answer

external factors that increase the price of one currency relative to another

question

revenue tariff

answer

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

question

protective tariff

answer

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

question

import quota

answer

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

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