Macroeconomics terms-McGraw Hill – Flashcards
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business cycle
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Recurring increases and decreases (fluctuations) in the level of in economic activity over periods of years; consists of peak, recession, trough, and expansion phases. (such as employment and production)
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economics
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the study of how society manages its scarce resources
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efficiency
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the property of society getting the most it can from its scarce resources
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equality
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the property of distributing economic prosperity uniformly among the members of society
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externality
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the impact of one person's actions on the well-being of a bystander
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incentive
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something that induces a person to act
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inflation
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A rise in the general level of prices in an economy.
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marginal changes
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small incremental adjustments to a plan of action
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market economy
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an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
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market failure
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a situation in which a market left on its own fails to allocate resources efficiently
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market power
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the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
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opportunity cost
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whatever must be given up to obtain some item
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productivity
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the quantity of goods and services produced from each unit of labor input
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property rights
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the ability of an individual to own and exercise control over scarce resources
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rational people
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people who systematically and purposefully do the best they can to achieve their objectives
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scarcity
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the limited nature of society's resources
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circular-flow diagram
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a visual model of the economy that shows how dollars flow through markets among households and firms
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macroeconomics
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the study of economy-wide phenomena, including inflation, unemployment, and economic growth
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microeconomics
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the study of how households and firms make decisions and how they interact in markets
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normative statements
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claims that attempt to prescribe how the world should be
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positive statements
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claims that attempt to describe the world as it is
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production possibilities frontier
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a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
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absolute advantage
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the ability to produce a good using fewer inputs than another producer
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comparative advantage
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the ability to produce a good at a lower opportunity cost than another producer
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exports
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goods produced domestically and sold abroad
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imports
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goods produced abroad and sold domestically
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opportunity cost
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whatever must be given up to obtain some item
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competitive market
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a market in which there are many buyers and many sellers so that each has a negligible impact on the market price
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complements
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two goods for which an increase in the price of one leads to a decrease in the demand for the other
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demand curve
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a graph of the relationship between the price of a good and the quantity demanded
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demand schedule
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a table that shows the relationship between the price of a good and the quantity demanded
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equilibrium
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a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
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equilibrium price
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the price that balances quantity supplied and quantity demanded
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equilibrium quantity
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the quantity supplied and the quantity demanded at the equilibrium price
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inferior good
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a good for which, other things equal, an increase in income leads to a decrease in demand
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law of demand
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the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises
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law of supply
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the claim that, other things equal, the quantity supplied of a good rises when the price of the good rises
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law of supply and demand
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the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance
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market
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a group of buyers and sellers of a particular good or service
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normal good
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a good for which, other things equal, an increase in income leads to an increase in demand
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quantity demanded
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the amount of a good that buyers are willing and able to purchase
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quantity supplied
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the amount of a good that sellers are willing and able to sell
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shortage
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a situation in which quantity demanded is greater than quantity supplied
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substitutes
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two goods for which an increase in the price of one leads to an increase in the demand for the other
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supply curve
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a graph of the relationship between the price of a good and the quantity supplied
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supply schedule
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a table that shows the relationship between the price of a good and the quantity supplied
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surplus
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a situation in which quantity supplied is greater than quantity demanded
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consumption
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spending by households on goods and services, with the exception of purchases of new housing
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GDP deflator
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a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
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government purchases
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(G) Expenditures by government for goods and services tat government consumes in providing public goods and services that government consumes in providing public goods and for public (social) capital that has a long lifetime; the expenditures of all governments in the economy for those final goods and services. (spending on goods and services by local, state, and federal governments).
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gross domestic product (GDP)
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The total market value of all final goods and services produced annually, within the boundaries within a country (ex.United States), whether by U.S.-or foreign-supplied resources.
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investment
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spending on capital equipment, inventories, and structures, including household purchases of new housing
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macroeconomics
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the study of economy-wide phenomena, including inflation, unemployment, and economic growth
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microeconomics
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the study of how households and firms make decisions and how they interact in markets
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net exports
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spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)
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nominal GDP
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the production of goods and services valued at current prices
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real GDP
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The Real Gross Domestic Product adjusted for inflation gross domestic in a year divided by the GDP price index for that year, index expressed as a decimal.
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consumer price index (CPI)
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a measure of the overall cost of the goods and services bought by a typical consumer
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indexation
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the automatic correction by law or contract of a dollar amount for the effects of inflation
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inflation rate
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the percentage change in the price index from the preceding period
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nominal interest rate
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the interest rate as usually reported without a correction for the effects of inflation
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producer price index
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a measure of the cost of a basket of goods and services bought by firms
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real interest rate
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the interest rate corrected for the effects of inflation
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catch-up effect
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the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
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diminishing returns
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the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases
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human capital
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the knowledge and skills that workers acquire through education, training, and experience
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natural resources
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the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits
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physical capital
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the stock of equipment and structures that are used to produce goods and services
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productivity
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the quantity of goods and services produced from each unit of labor input
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technological knowledge
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society's understanding of the best ways to produce goods and services
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bond
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a certificate of indebtedness
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budget deficit
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a shortfall of tax revenue from government spending
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budget surplus
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an excess of tax revenue over government spending
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crowding out
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a decrease in investment that results from government borrowing
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financial intermediaries
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financial institutions through which savers can indirectly provide funds to borrowers
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financial markets
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financial institutions through which savers can directly provide funds to borrowers
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financial system
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the group of institutions in the economy that help to match one person's saving with another person's investment
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market for loanable funds
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the market in which those who want to save supply funds and those who want to borrow to invest demand funds
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mutual fund
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an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds
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national saving (saving)
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the total income in the economy that remains after paying for consumption and government purchases
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private saving
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the income that households have left after paying for taxes and consumption
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public saving
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the tax revenue that the government has left after paying for its spending
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stock
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a claim to partial ownership in a firm
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compounding
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the accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future
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diversification
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the reduction of risk achieved by replacing a single risk with a large number of smaller, unrelated risks
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efficient markets hypothesis
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the theory that asset prices reflect all publicly available information about the value of an asset
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finance
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the field that studies how people make decisions regarding the allocation of resources over time and the handling of risk
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firm-specific risk
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risk that affects only a single company
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fundamental analysis
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the study of a company's accounting statements and future prospects to determine its value
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future value
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the amount of money in the future that an amount of money today will yield, given prevailing interest rates
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informational efficiency
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the description of asset prices that rationally reflect all available information
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market risk
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risk that affects all companies in the stock market
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present value
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the amount of money today that would be needed, using prevailing interest rates, to produce a given future amount of money
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random walk
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the path of a variable whose changes are impossible to predict
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risk aversion
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a dislike of uncertainty
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collective bargaining
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the process by which unions and firms agree on the terms of employment
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cyclical unemployment
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the deviation of unemployment from its natural rate
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discouraged workers
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individuals who would like to work but have given up looking for a job
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efficiency wages
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above-equilibrium wages paid by firms to increase worker productivity
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frictional unemployment
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unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills
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job search
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the process by which workers find appropriate jobs given their tastes and skills
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labor force
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the total number of workers, including both the employed and the unemployed
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labor-force -participation rate
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the percentage of the adult population that is in the labor force
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natural rate of unemployment
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the normal rate of unemployment around which the unemployment rate fluctuates
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strike
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the organized withdrawal of labor from a firm by a union
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structural unemployment
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unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
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unemployment insurance
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a government program that partially protects workers' incomes when they become unemployed
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unemployment rate
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the percentage of the labor force that is unemployed
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union
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a worker association that bargains with employers over wages, benefits, and working conditions
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central bank
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an institution designed to oversee the banking system and regulate the quantity of money in the economy
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commodity money
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money that takes the form of a commodity with intrinsic value
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currency
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the paper bills and coins in the hands of the public
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demand deposits
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balances in bank accounts that depositors can access on demand by writing a check
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discount rate
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the interest rate on the loans that the Fed makes to banks
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federal funds rate
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the interest rate at which banks make overnight loans to one another
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Federal Reserve (Fed)
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the central bank of the United States
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fiat money
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money without intrinsic value that is used as money because of government decree
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fractional-reserve banking
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a banking system in which banks hold only a fraction of deposits as reserves
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liquidity
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the ease with which an asset can be converted into the economy's medium of exchange
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medium of exchange
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an item that buyers give to sellers when they want to purchase goods and services
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monetary policy
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the setting of the money supply by policymakers in the central bank
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money
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the set of assets in an economy that people regularly use to buy goods and services from other people
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money multiplier
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the amount of money the banking system generates with each dollar of reserves
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money supply
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the quantity of money available in the economy
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open-market operations
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the purchase and sale of U.S. government bonds by the Fed
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reserve ratio
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the fraction of deposits that banks hold as reserves
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reserve requirements
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regulations on the minimum amount of reserves that banks must hold against deposits
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reserves
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deposits that banks have received but have not loaned out
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store of value
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an item that people can use to transfer purchasing power from the present to the future
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unit of account
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the yardstick people use to post prices and record debts
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classical dichotomy
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the theoretical separation of nominal and real variables
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Fisher effect
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the one-for-one adjustment of the nominal interest rate to the inflation rate
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inflation tax
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the revenue the government raises by creating money
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menu costs
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the costs of changing prices
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monetary neutrality
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the proposition that changes in the money supply do not affect real variables
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nominal variables
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variables measured in monetary units
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quantity equation
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the equation M × V = P × Y relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services
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quantity theory of money
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a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
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real variables
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variables measured in physical units
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shoeleather costs
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the resources wasted when inflation encourages people to reduce their money holdings
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velocity of money
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the rate at which money changes hands
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appreciation
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an increase in the value of a currency as measured by the amount of foreign currency it can buy
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balanced trade
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a situation in which exports equal imports
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closed economy
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an economy that does not interact with other economies in the world
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depreciation
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a decrease in the value of a currency as measured by the amount of foreign currency it can buy
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net capital outflow
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the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners
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net exports
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the value of a nation's exports minus the value of its imports; also called the trade balance
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nominal exchange rate
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the rate at which a person can trade the currency of one country for the currency of another
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open economy
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an economy that interacts freely with other economies around the world
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purchasing-power parity
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a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries
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real exchange rate
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the rate at which a person can trade the goods and services of one country for the goods and services of another
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trade balance
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the value of a nation's exports minus the value of its imports; also called net exports
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trade deficit
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an excess of imports over exports
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trade surplus
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an excess of exports over imports
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capital flight
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a large and sudden reduction in the demand for assets located in a country
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trade policy
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a government policy that directly influences the quantity of goods and services that a country imports or exports
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aggregate-demand curve
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a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level
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aggregate-supply curve
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a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level
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depression
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a severe recession
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model of aggregate demand and aggregate supply
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the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend
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natural rate of output
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the production of goods and services that an economy achieves in the long run when unemployment is at its normal rate
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recession
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a period of declining real incomes and rising unemployment
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stagflation
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a period of falling output and rising prices
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automatic stabilizers
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changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action
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crowding-out effect
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the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending
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fiscal policy
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the setting of the level of government spending and taxation by government policymakers
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multiplier effect
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the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending
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theory of liquidity preference
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Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance
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natural-rate hypothesis
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the claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation
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Phillips curve
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a curve that shows the short-run trade-off between inflation and unemployment
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rational expectations
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the theory that people optimally use all the information they have, including information about government policies, when forecasting the future
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sacrifice ratio
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the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point
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supply shock
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an event that directly alters firms' costs and prices, shifting the economy's aggregate-supply curve and thus the Phillips curve
