Macroeconomics Exam #2 Review – Flashcards
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aggregate behavior
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behavior of all households and firms together, refers to sums
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sticky prices
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prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded
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business cycle
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cycle or short-term ups and downs in the economy
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aggregate output
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total quantity of goods and services produced in an economy
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recession
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period during which aggregate output for two consecutive quarters
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depression
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prolonged and deep recession
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expansion or boom
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period in the business cycle from a trough up to a peak during which output and employment grow
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contraction/recession/slump
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period in the business cycle from a peak down to a trough during which output and employment fall
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unemployment rate
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percentage of the labor force that is unemployed; key indicator of economy's health
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inflation
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increase in overall price level
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hyperinflation
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period of very rapid increase in overall price level
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deflation
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decrease in overall price level
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circular flow
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diagram showing the income received and payments made by each sector of the economy
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goods & services market
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- households purchase good & services from firms - firms purchase goods & services from each other - all sectors demand from this market
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labor market
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- firms and the government purchase labor from households - households supply labor
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money market
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"financial market" - households purchase stocks and bonds from firms - households supply funds - households demand/borrow funds from this market to finance purchases - firms borrow to build new facilities - government borrows by issuing bonds
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transfer payments
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cash payments made by the government to people who do not supply goods, services or labor - social security, veterans' benefits, welfare, etc
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treasury bonds, notes and bills
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promissory notes issued by the federal government when it borrows money
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corporate bonds
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promissory notes issued by firms when they borrow money
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shares of stock
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financial instruments that give to the holder a share of the firm's ownership and therefore the right to share in the firm's profits
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dividends
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portion of a firm's profits that the firm pays out each period to its shareholders
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fiscal policy
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government policy concerning taxes and spending
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monetary policy
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tools used by the federal reserve to control the quantity of money, which in turn affects interest rates
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great depression
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period of severe economic contraction and high unemployment that began in 1929 and through the '30s
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fine-tuning
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phrase referring to the government's role in regulating inflation and unemployment
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classical theory
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stated that recession would fix itself, lower wages, fix unemployment "market clears"
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general theory
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john maynard keynes, it's not the prices and wages that determine the level of unemployment- it's the level of aggregate demand for goods and services
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stagflation
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high inflation and high unemployment
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National Income and Product Accounts
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data collected and published by the government describing the various components of national income and output in the economy
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gross domestic product (GDP)
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total market value of all final goods and services within a given period by factors of production located within a country
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final goods and services
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goods and services produced for final use
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intermediate goods
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goods that are produced by one firm for use in further processing by another firm
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value added
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difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage
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gross national product (GNP)
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total market value of all final goods and services produced within a given period by factors of a production owned by a country's citizens, regardless of where the output is produced
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expenditure approach
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method of computing GDP that measures the total amount spent on all final goods and services during a given period
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income approach
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method of computing GDP that measures the income - wages, rent, interest and profits- received by all factors of production in producing final goods and services
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personal consumption expenditures (C)
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expenditures by consumers on goods and services
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durable goods
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goods that last a relatively long time, such as cars and household appliances
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nondurable goods
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goods that are used up fairly quickly, such as food and clothing
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services
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things we buy that do not involve the production of physical things, such as legal and medical services and education
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gross private domestic investment (I)
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total investment in capital- that is, the purchase of new housing, plants, equipment, and inventory by the private (or nongovernmental) sector
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nonresidential investment
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expenditures by firms for machines, tools, plants and so on
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residential investment
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expenditures by households and firms on new houses and apartment buildings
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change in business inventories
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amount by which firms' inventories change during a period; inventories are the goods that firms produce now but intend to sell later
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depreciation
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amount by which an asset's value falls in a given period
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gross investment
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total value of all newly produced capital goods (plant, equipment, housing, and inventory) produced in a given period
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net investment
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gross investment - depreciation
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government consumption and gross investment (G)
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expenditure y federal, state and local governments for final goods and services
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net exports (EX - IM)
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difference between exports (sales to foreigners of US-produced goods and services) and imports (US purchases of goods and services from abroad) figure can be positive or negative
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national income
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total income earned by the factors of production owned by a country's citizens
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consumption of employees
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wages, salaries, various supplements- employer contributions to social insurance and pension funds, for example- paid to households by firms and by the government
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proprietors' income
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income of unincorporated business
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rental income
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income received by property owners in the form of rent
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corporate profits
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income of corporations
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net interest
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interest paid by business
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indirect taxes - subsidies
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taxes such as sales taxes, customs duties, and license fees less subsidies that the government pays for which it receives no goods or services in return
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net business transfer payments
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net transfer payments by business to others
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surplus of government enterprises
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income of government enterprises
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net national product (NNP)
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gross national product - depreciation; a nation's total product - what is required to maintain the value of its capital stock
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statistical discrepancy
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data measurement area
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personal income
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total income of households
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disposable personal income or after-tax income
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personal income - persona income taxes; the amount that households have to spend or save
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personal saving
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amount of disposable income that is left after total personal spending in a given period
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personal saving rate
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percentage of disposable personal income that is saved; if the personal savings rate is low, households are spending a large amount relative to their incomes; if it is high, households are spending cautiously
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current dollars
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current prices that we pay for goods and services
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nominal GDP
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gross domestic product measured in a current dollars
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weight
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importance attached to an item within a group of items
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base year
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year chosen for the weights in a fixed-weight procedure
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fixed-weight procedure
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procedure that uses eights from a given base year
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underground economy
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part of the economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP
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gross national income (GNI)
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GNP converted into dollars using an average of currency exchange rates over several years adjusted for rates of inflation
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Employed
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person 16+ who - works 1+ ours a week for pay OR - works unpaid 15+ hours in a family business OR - temporarily absent from paid job, with or without pay
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Unemployed
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person 16+ who - is not employed AND - has made efforts to find work during the last 4 weeks AND - is available for work
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Not in Labor Force (NLF)
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a person who is not looking for work either because they do not want a job or gave up looking & is not employed
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Labor Force Equation
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employed + unemployed
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Unemployment Rate Equation
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(unemployed/labor force)*100
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Labor Force Participation Rate (LFPR) Equation
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(labor force/population)*100
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Civilian, Non-Institutionalized 16+ Population Equation
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labor force + not in labor force
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Marginally Attached Workers
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a person who is not working, available for work, wants to work and has looked recently, but not looking at the time of survey
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Discouraged Workers
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sub-group of marginally attached; a person who is not working, wants work, available to work, but gives discouragement as the reason for no longer looking
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Involuntarily PT for Economic Reasons
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settle for PT work (<35 hours/week) as no FT work available
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Underemployment Rate
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(unemployed + marginally attached + involuntarily PT)/(labor force + marginally attached) all *100
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Discouraged Worker Effect
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decline in the measured unemployment rate that results when people who want work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployef and the labor force
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Frictional Unemployment
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portion of unemployment due to 'normal working labor market'; people in transition between jobs face short-term job skill/matching problem
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Structural Unemployment
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portion of unemployment due to changes in structure of economy with significant job losses in certain industries; people's skills, experience, education or location do not match what employers are looking for anymore
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recommended Policy for handling structural unemployment
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- retraining programs by gov't - gov't subsidies to encourage industries - form loyalty to employees
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cyclical unemployment
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increase in unemployment during recessions, depression; overall decline of economic activity
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Natural Rate or Unemployment Equation
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frictional + structured
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consumer price index (CPI)
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price index compute each month by the Bureau of Labor Statistics using a bundle that is meant to represent the "market basket" purchased monthly by the typical urban consumer
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Producer Price Indexes (PPIs)
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measures of rice that producers receive for products at all stages in the production processes
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Real Interest Rate
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the difference between the interest rate on a loan and the inflation rate
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Output Growth
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growth rate of the output of entire economy
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Per-Capita Output Growth
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growth rate of output per person in the economy
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Productivity Growth
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growth rate of output per worker
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Calculating Nominal GDP Year 1
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P1*Q1
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Calculating Nominal GDP Year 2
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P2*Q2
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Calculating Real GDP, Year 1 Base Year
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P1*Q1 - RGDP1 P1*Q2 - RGDP2
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Calculating Growth Rate in REAL GDP using Year 1 Base Year
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Growth Rate = (RGDP2-RGDP1)/(RGDP1) all *100 = G(1)
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Calculating Real GDP using Year 2 as Base Year
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P2*P1 - RGDP1 P2*Q2- RGDP2
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Calculating Growth Rate in REAL GDP using Year 2 Base Year
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Growth Rate = (RGDP2-RGDP1)/(RGDP1) all *100 = G(2)
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Approximating "True" Growth Rate Across Two Base Years
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G=[G(1)+G(2)]/2
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Aggregate output
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total quantity of goods and services produced/supplied in an economy in a given period
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aggregate income
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total income received by all factors of production in a given period
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Aggregate Output (Income) (Y)
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combined term used to remind you of the exact equality between aggregate output and aggregate income
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consumption function
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relationship between consumption and income - C = a + bY - b is slope (change in C/change in Y)
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Marginal Propensity to Consume (MPC)
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fraction of a change in income that is consumed or spent
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Aggregate saving (S)
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part of aggregate income that is not consumed - S = Y - C
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Identity
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something that is always true
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Marginal Propensity to Save (MPS)
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fraction of a change in income that is saved - MPC + MPS = 1
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Planned Investment (I)
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additions to capital stock and inventory that are planned by firms
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Actual Investment
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actual amount of investment that takes place; it includes items such as unplanned changes in inventories
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equilibrium
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occurs when there is no tendency for change; occurs when planned aggregate expenditure is equal to aggregate output - Y = AE - Y = C + I
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Planned Aggregate Expenditure (AE)
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total amount the economy plans to spend in a given period; equal to consumption plus investment
