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Macroeconomics

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that part of economic theory dealing with the economy as a whole and decision making by large units such as governments and unions

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Microeconomics

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branch of economic theory that deals with behavior and decision making by small units such as individuals and firms

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GDP

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the Gross Domestic Product is the dollar value of all all final goods and services, and structures produced within a country's borders in a 12-month period.

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Money

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anything that serves as a medium of exchange, a measure of value, and a store of value

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Monetary Policy

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actions by the Federal Reserve System to expand or contract the money supply in order to affect the cost and availability of credit

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Federal Reserve

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privately owned, publicly controlled, central bank of the United States

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The Treasury

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the government department responsible for issuing all Treasury bonds, notes and bills

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Discount rate (interest rate)

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interest rate that the Federal Reserve charges on loans to the nation's financial institutions

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Inflation

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rise in the general level of prices

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Deflation

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fall in the general level of prices

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Unemployment

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state of working for less than one hour per week for pay or profit in a non-family owned business, while being available and having made an effort to find a job during the past month

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CPI (consumer price index)

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index used to measure price changes for a market basket of frequently used consumer items

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Fiscal Policy

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use of government spending and revenue collection measures to influence the economy

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Income Tax

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tax imposed by a government directly on income, especially an annual tax on personal income

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Corporate Tax

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a tax on the income or capital of corporations or analogous legal entities

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Social Security Tax

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tax imposed on both employers and employees used to fund the Social Security program

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Budget Deficit

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an indicator of financial health in which expenditures exceed revenue

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Expenditure

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the action of spending funds

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Supply-Side Economics

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economic policies designed to increase aggregate supply or shift the aggregate supply curve to the right

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Demand-Side Economics

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an economic theory that advocates use of government spending and growth in the money supply to stimulate the demand for goods and services and therefore expand economic activity

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Marginal Propensity to consume

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a metric that quantifies induced consumption, the concept that the increase in personal consumer spending (consumption) occurs with an increase in disposable income (income after taxes and transfers)

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Multiplier Effect

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the increase in final income arising from any new injection of spending

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Aggregate Supply

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the total supply of goods and services that firms in a national economy plan on selling during a specific time period

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Aggregate Demand

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the total demand for final goods and services in an economy at a given time

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Stagflation

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persistent high inflation combined with high unemployment and stagnant demand in a country's economy

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Misery Index

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an economic indicator that helps determine how the average citizen is doing economically and it is calculated by adding the seasonally adjusted unemployment rate to the annual inflation rate

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Laffer curve

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a supposed relationship between economic activity and the rate of taxation that suggests the existence of an optimum tax rate that maximizes tax revenue

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Structural Unemployment

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unemployment resulting from industrial reorganization, typically due to technological change, rather than fluctuations in supply or demand

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Cyclical Unemployment

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a factor of overall unemployment that relates to the cyclical trends in growth and production that occur within the business cycle

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Seasonal Unemployment

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unemployment at certain times of the year, because they work in industries where they are not needed all year round

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Frictional Unemployment

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the unemployment which exists in any economy due to people being in the process of moving from one job to another

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Purchasing Power Parity

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a theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries

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Exchange rate

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the value of one currency for the purpose of conversion to another

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Assets

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property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.

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How is money created? By whom?

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Most of the money in our economy is created by banks, in the form of bank deposits - the numbers that appear in your account. Banks create new money whenever they make loans. 97% of the money in the economy today is created by banks, whilst just 3% is created by the government

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How is GDP calculated? What are some of the problems with it?

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GDP = C + I + G + (X - M) or GDP = private consumption + gross investment + government investment + government spending + (exports - imports). Some problems with GDP include: GDP counts "bads" as well as "goods", GDP only counts goods that pass through official, organized markets, so it misses home production and black market activity, and GDP doesn't adjust for the distribution of goods.

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How does the discount rate affect the flow of money in our economy?

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Setting a high discount rate tends to have the effect of raising other interest rates in the economy, since it represents the cost of borrowing money for most major commercial banks and other depository institutions

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What effect do interest rates have on unemployment and inflation?

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rise in interest rates leads to less investment as it costs firms more to borrow (hurdle rates etc), this will effect unemployment. As interest rates are increased, consumers tend to have less money to spend. With less spending, the economy slows and inflation decreases.

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What is the treasury's role in monetary policy?

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to promote maximum employment, stable prices and moderate long-term interest rates. By implementing effective monetary policy, the Fed can maintain stable prices, thereby supporting conditions for long-term economic growth and maximum employment.

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What are the government's options for fiscal policy?

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the government can adjust its spending levels and tax rates to monitor and influence a nation's economy.

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What are the pros and cons of the country borrowing money?

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it is a good way for countries to get extra funds in the short term to invest in economic growth, whereas a con is the risk of accumulating too much debt.

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What are the components that make of aggregate demand?

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Y = C(Y - T) + I(r) + G + NX(e). Y represents income or output. C(Y - T) represents consumption as a function of disposable income, defined as income less taxes. I(r) represents investment as a function of the interest rate, where an increase in the interest rate decreases investment. G represents government spending, which is predominately unaffected by interest rates. Finally, NX(e) represents net exports, defined as exports less imports as a function of the real exchange rate, where an increase in the real exchange rate decreases net exports.

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What is the difference between supply-side and demand side economics?

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What is the best way to stimulate an economy: Supply side theory is aimed at increasing the supply of goods and services available to consumers ,but, Demand side economics is all about increasing demand in the consumer.

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What are the goals of Macroeconomic policies?

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economic growth, low unemployment, and low inflation

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What measurements do we use to determine whether we are meeting our goals?

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One way in which economists measure the performance of an economy is by looking at a widely used measure of total output called gross domestic product (GDP).

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What are the problems of having a budget deficit?

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The govt will have to borrow from the private sector, Selling bonds will increase the national debt, In the future the govt may have to increase taxes or cut spending in order to reduce the deficit, If the govt sells more bonds this is likely to cause interest rates to increase, etc.

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What are some of the debates that our government is having about fiscal policy?

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What is the appropriate time frame over which to balance government budgets, Is the sustainability of government borrowing a big threat to the economy relative to inadequate demand, Can discretionary fiscal policy generate a rise in aggregate demand, etc.

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How do exchange rates work?

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These rates are usually pegged to the U.S. dollar. Their central banks have enough money in their foreign currency reserves to control how much their currency is worth. To keep the exchange rate fixed, the central bank holds U.S. dollars. ... If demand for its currency rises, it does the opposite.

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What are some ways that governments work to try to control the value of their nation's currency?

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to increase the value of their currency governments try to Sell foreign exchange assets and buy their own currency, Higher interest rates, Reduce inflation, Long Term supply side policies.

Economics Unit #3 Study Guide – Flashcards

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