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GDP = C + I + G + Xn

answer

The expenditure approach to measuring GD correlates well with aggregate demand (AD)

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GDP = W + I + R + P

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The income approach to measuring GDP correlates well with aggregate supply

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Calculating Nominal GDP

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

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GDP Deflator

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A price index used to adjust nominal GDP to arrive at real GDP. Called the "deflator" because nominal GDP will usually overstate the value of a nation's output if there has been inflation. The Consumer Price Index (CPI) is another commonly used price index.

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Real GDP

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Nominal GDP/GDP Deflator x 100

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GDP Growth Rate:

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( Current year's GDP - Last year's GDP)/ (Last year's GDP) x 100. The GDP growth rate is a percentage change in a nation's real output between one year and the next.

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The Inflation Rate via the CPI

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(This year's CPI - Last year's CPI)/(Last year's CPI) x 100. The inflation rate is the percentage change in the CPI from one period to the next.

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Real Interest Rate

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Nominal interest rate - inflation rate

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Unemployment Rate

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(Number of unemployed/Number in the labor force) x 100. The labor force includes all non-institutionalized people of working age who are employed or seeking employment.

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Money Multiplier

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1/RRR where RRR equals the required reserve ratio. Application: an initial injection of $1,000 of new money into a banking system with a reserve ratio of 0.1 will generate up to $1,000 x (10) = $10,000 in total money.

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Quantity Theory Of Money

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

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MPC + MPS = 1

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

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Spending Multiplier

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= 1/(1-MPC) or 1/MPS. This tells you how much total spending an initial interjection of spending in the economy will generate. For example, if the MPC = .8 and the government spends $100 million, then the total increase in spending in the economy = $100 x 5 = $500 million.

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Tax Multiplier = (-MPC)/MPS

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

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Absolute Advantage

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

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Aggregate Demand (AD)

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

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Aggregate Supply (AS)

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

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Appreciation

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

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Balance Of Payments

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

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Bonds

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

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Budget Deficit

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

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Business Cycle

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

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Capital

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Human-made resources (machinery and equipment) used to produce goods and services; goods that do not directly satisfy human wants. Sometimes separated into human capital (education, know-how) and physical (tools you can touch and operate).

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Capital Account (AKA Financial Account)

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

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Ceteris Paribus

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

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Circular Flow Diagram

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

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Classical Economic Theory

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The view that an economy will self-correct from periods of economic shock if left alone. AKA "laissez-faire"

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Comparative Advantage

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

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Consumer Price Index (CPI)

answer

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

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Consumption.

answer

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

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Contractionary Fiscal Policy

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A demand-side policy whereby government increases taxes or decreases its expenditures in order to reduce aggregate demand. Could be used in a period of high inflation to bring down the inflation rate.

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Contractionary Monetary Policy

answer

A demand-side policy whereby the central bank reduces the supply of money, increase interest rates and reducing aggregate demand. Could be used to bring down high inflation rates.

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Cost-Push Inflation

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Inflation resulting from a decrease in AS (from higher wage rates and raw material prices, such as the price of oil) and accompanied by a decrease in real output and employment. Also reffered to as "stagflation" or "adverse aggregate supply shock".

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Crowding-Out Effect

answer

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

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Current Account

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Measures the balance of trade in goods and services and the flow on income between one nation and all other nations. It also records monetary gifts or grants that flow into or out of a country. Equal to a country's net exports (its exports minus its imports).

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Cyclical Unemployment

answer

Unemployment caused by a fall in aggregate demand in a nation. Not included in the natural rate of unemployment. When a nation is in a recession, there will be cyclical unemployment.

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Deflation

answer

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

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Demand Deposit

answer

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

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Demand-Pull Inflation

answer

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

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Depreciation

answer

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

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Devaluation

answer

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

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Discount Rate

answer

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

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Economic Growth

answer

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

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Economic Resources

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Land, labor, capital, and entrepreneurial ability that are used in the production of goods and services. They are "economic" resources because they are scarce (limited in supply and desired). Also known as "factors of production".

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Excess Reserves

answer

The amount by which a bank's actual reserves exceed its required reserves. Banks can lend excess reserves; when they do, they expand the money supply. The amount of excess reserves in the banking system determines equilibrium interest rate.

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Exchange Rate:

answer

The price of one currency in terms of another currency, determined in the forex market.

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Exports

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

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Federal Funds Rate (FRR)

answer

The interest rate banks charge one another on overnight loans made out of their excess reserves. The FFR is the interest rate targeted by the FEd through it's open market operations.

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Fiscal Policy

answer

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

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Floating Exchange Rate System:

answer

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

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Forex Markets (Foreign Exchange Market)

answer

The market in which international buyers and sellers exchange foreign currencies for one another to buy and sell goods, services, and assets from various countries. It is where a currency's exchange rate relative to other currencies is determined.

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Fractional Reserve Banking

answer

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

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Frictional Unemployment

answer

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

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Full Employment

answer

When an economy is producing at a level of output at which almost all the nation's resources are employed. The unemployment rate when an economy is at full employment equals the natural rate, and includes only frictional and structural unemployment. Full-employment output is also referred to as "potential output".

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GDP (Gross Domestic Product)

answer

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

question

GDP Deflator

answer

The price index for all final goods and services used to adjust the nominal GDP into real GDP

question

Human Capital

answer

The value skills integrated into labor through education, training, knowledge, and health. An important determinant of aggregate supply and the level of economic growth in a nation.

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Imports

answer

Spending on goods and services produced in foreign nations. Counts as a leakage from a nation's circular flow of income.

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Inflation

answer

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

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Inflationary Gap

answer

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

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Inflationary Spiral

answer

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

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Interest Rate

answer

The opportunity cost of money. Either the cost of borrowing money or the cost of spending money (e.g., the interest rate is what would be given up by not saving money). Conversely, this is the price a lender is paid for allowing someone else to use money for time.

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Investment

answer

A component of aggregate demand, it includes all spending on capital equipment, inventories, and technology by firms. This does not include financial investment, which is the purchase of financial assets (stocks and bonds). Also includes household purchasing of newly constructed residences.

question

Law of Increased Opportunity Cost

answer

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

question

Loanable Funds Market

answer

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

question

Long Run

answer

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

question

Long Run Aggregate Supply (LRAS)

answer

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

question

M1

answer

A component of money supply including currency and checkable deposits

question

M2

answer

A more broadly defined component of money supply, equal to M! plus savings deposits, money-market deposits, mutual funds, and small-time deposits.

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M3

answer

The broadest component of the money supply. Equal to M2 plus large time deposits.

question

Macroeconomics

answer

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

question

Macroeconomics Equilibrium

answer

The level of output at which a nation is producing at any particular period of time. May be below its full employment level (if the economy is in a recession) or beyond its full employment level (if economy is overheating).

question

Managed or Fixed Exchange Rate System

answer

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

question

Marginal Analysis

answer

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

question

Marginal Propensity To Consume (MPC)

answer

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

question

Marginal Propensity TO Save (MPS)

answer

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

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Market Economic System

answer

A system of resource allocation in which buyers and sellers meet in markets to determine the price and quantity of goods, services, and productive resources.

question

Microeconomics

answer

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

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Monetarism

answer

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

question

Monetary Policy

answer

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

question

Money

answer

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

question

Money Demand

answer

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

question

Money Market

answer

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

question

Money Supply

answer

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

question

Multiplier Effect

answer

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

question

Natural Rate Of Unemployment (NRU)

answer

The level of unemployment that prevails in an economy that is producing at a full employment level of output. Includes structural and frictional unemployment. While countries NRUs can vary, the NRUs in the US tend to be close to 5 percent.

question

Net Exports

answer

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

question

Official Reserves

answer

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

question

Open-Market Operations

answer

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

question

Opportunity Cost

answer

What must be given up to have anything else. Opportunity costs are not neccesarily monetary costs, but rather include what you could do with the resources you use to undertake any activity or exchange.

question

Phillips Curve (long run)

answer

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

question

Phillips Curve (short run)

answer

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

question

Production Possibilities Curve (PPC)

answer

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

question

Productivity

answer

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

question

Protectionism

answer

The use of tariffs, quotas, or subsidies to give domestic producers a competitive advantage over foreign producers. Meant to protect domestic production and employment from foreign competition.

question

Rational Expectations Theory

answer

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

question

Recession

answer

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

question

Recessionary Gap

answer

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

question

Required Reserves

answer

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

question

Scarcity

answer

Something is scarce when it is both desired and limited in supply. Scarcity is the basic economic problem.

question

Self-Correction

answer

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

question

Stagflation

answer

A macroeconomic situation in which both inflation and unemployment increase. Caused by a negative supply shock.

question

Sticky Wage and Price Model

answer

The short run Aggregate-Supply Curve is sometimes referred to as the "sticky wage and price model", because worker's wage demands take time to adjust to changes in the overall price level, and therefore, in the short run an economy may produce well below or beyond its full employment level of output.

question

Structural Unemployment

answer

Unemployment caused by changes in the structure of demand for goods and in technology; workers who are unemployed because they do not match what is in demand by producers in the economy or whose skills have been left behind by economic advancement

question

Supply Shock

answer

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

question

Trade Deficit

answer

When a country's total spending on imported goods and services exceeds its total revenues from the sale of exports to the rest of the world. Synonymous with a surplus in the current account of the balance of the payments and with a negative net export component of the GDP.

question

Trade Surplus

answer

When a country's sale of exports exceeds its spending on imports. Synonymous with a surplus in the current account of the balance of payments.

question

Wealth

answer

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

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