Macroeconomics Final Review Answers – Flashcards
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Economics
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the study of how people, institutions, and society make economic choices under conditions of scarcity.
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Macroeconomics
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the parts of economics concerned with the economy as a whole; with such major aggregates as the household, business, and government sectors; and with measure of the total economy.
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Circular Flow Model
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the flow of resources from household to firms and of products from firms to households. These flows are accompanied by reverse flows of money firms to households and from households to firms.
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Opportunity Cost
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the value of the good, service or time forgone to obtain something else.
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Law of Demand
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the principle that, other things equal, an increase in a products price will reduce the quantity of it demanded, and conversely for a decrease in price.
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Demand Curve
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a curve illustrating the inverse relationship between the price of a product and the quantity of it demanded, other things equal.
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Supply Curve
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a curve illustrating the direct relationship between the price of a product and the quantity of it supplied, other things equal.
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Market Equilibrium
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is set by the interaction of supply and demand. Equilibrium price is the price at which the quantity demanded by consumers and the quantity that firms are willing to supply of a good or service are the same.
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Change in Demand
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a change in the quantity demanded of a good or service at every price; a shift of the demand curve to the left or right.
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Change in Quanitity Demand
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a change in the quantity demanded due to an increase or decrease in the price of the product under consideration; a movement from one point to another on a fixed demand curve.
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GDP
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is the total market value of all final goods and services produced in the economy in one year. (GDP= C+Ig+G+Xn)
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GDP=C+Ig+G+Xn
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(c) Personal Consumption Expeditures (Ig) Gross Private Domestic Investment (G) Government Purchases (Xn) Net Exports
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Total Market Value
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The unit of measure for real domestic output or real GDP is the market value or $
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Final Goods and Services
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Final goods are bought and used by the final consumer
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Produced in One Year
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GDP is a measure of what is produced or made in one year.
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Arguments for/against growth
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Against: increase in the supplies of labor, entrepreneurial ability, energy and resources being depleted, ecological space, farmland being lost to urbanization. For: Growth lessens the burden of scarcity, will result in rising real wages, incomes, and standards of living, and create more jobs, decrease unemployment, Expand real GDP, per capita, over time.
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Real GDP
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GDP that has been deflated or inflated to reflect changes in the price level; price level in a base period. (i.e., GDP that is adjusted for inflation)
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Nominal GDP Calculations
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based on prices that prevailed when the output was produced; measure in terms of the price level at the time of measurement (i.e., GDP that is unadjusted for inflation). Unit of Outputs (5) X Price($10)= $50 Real GDP ($10)X5= $50 {units of output X initial Price}
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Business Cycle
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recurring increases and decreases in the level of economic activity over periods of time.
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Recession
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a period of declining GDP, accompanied by lower income and higher unemployment.
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Structural Unemployment
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associated with the mismatch between jobs and the skills or locations of those unemployed.
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Frictional Unemployment
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"between jobs" associated with people searching for jobs or waiting to take jobs in the near future
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Cyclical Unemployment
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begins with the recessionary phase of the business cycle; caused by a decline in total spending.
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Discouraged Workers
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are people of legal employment age who are not actively seeking employment or who does not find employment after long-term unemployment.
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Demand-Pull Inflation
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"too much spending cashing too few goods." Increase in the price level (inflation) caused by excessive spending.
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Cost-Push Inflation
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rising prices caused by factors that raise the average cost of a particular level of output.
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Aggregate Demand
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a schedule or curve that shows the total quantity of goods and service demanded (purchased) at different price levels
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Aggregate Supply
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a schedule or curve that shows the total quantity of goods and services supplied (produced) at different price levels.
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Factors that Shift AD and AS
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Consumer, Investment and Net Export Spending. Price level will change the amount of total spending and therefore change the amount of real GDP demanded by the economy and shift (increase) AD and changes in unit production cost effects profits, thereby leading firms to alter the amount of output (AS) they are willing to produce at each price level.
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Fiscal Policy
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changes in government spending or taxation to promote full employment, price-level stability, and economic growth.
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Expansionary Fiscal Policy
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an increase in government spending, a decrease in taxes or some combination of the two for the purpose of increasing AD and real output
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Contractionary Fiscal Policy
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a decrease in government spending, and increase in taxes, or some combination of the two for the purpose of decreasing aggregate demand and halting inflation
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Discretionary Fiscal Policy
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deliberate changes in taxes (tax rates) and government spending by Congress to promote full employment, price stability, and economic growth
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Nondiscretionary Fiscal Policy
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anything that increases the government's budget deficit (or reduces its budget surplus) during a recession and increases it budget surplus (or reduces its budget deficit) during expansion without requiring explicit action by policy makers.
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Automatic or Built-In Stabilizers
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anything that increases the government's budget deficit (or reduces its budget surplus) during a recession and increases it budget surplus (or reduces its budget deficit) during expansion without requiring explicit action by policy makers.
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Money Market
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the market in which the demand for and the supply of money determine the interest rate (or series of interest rates) in the economy.
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Equilibrium Interest Rate
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combine the demand for the money with the supply of money to determine the equilibrium rate of interest.
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Fiscal Policy Lags
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is the time between the beginning of recession or inflation and the certain awareness that is actually happening.
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Crowding Out Effect
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an Expansionary Fiscal Policy (government budget, deficit spending) to raise the interest rate and reduce investment spending.
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Budget Deficit
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the amount by which expenditures of the Federal Government exceed its revenues in any year.
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Public Debt
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the total amount of money owed by the Federal Government to the owners of the government securities; equal to the sum of past government budget deficits less government budget surpluses.
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Functions of Money
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MEDIUM OF EXHANGE, an item that sells generally accept and buyers generally use to pay for goods and services. UNIT OF ACCOUNT, a standard of measurement (dollars) unit in terms of which prices can be stated and the relative value of goods and service compared. STORE OF VALUE, asset set aside to purchase items in the future; allows people to transfer purchasing power from the present to the future.
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Components of M1 Money Supply
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currency (coins and paper money) and travelers checks plus checking deposits (all deposits in commercial banks and "thrift" or savings that can be withdrawn) owned by individuals and businesses
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Federal Reserve System
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a central component of the U.S. banking system, consisting of the Board of Governors (7 member group that supervises and controls the money and banking system of the U.S.) that directs the activity of the 12 Federal Reserve Banks (12 banks chartered by the U.S. government to control the money supply and perform other functions), which in turn control the lending activity of the nation's banks and thrift institutions
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Federal Reserve System Structure and Functions
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issuing currency, setting reserve requirements and holding reserves, lending money to financial institutions, providing for check collection, acting as fiscal agent, supervising banks and controlling the money supply.
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Independence of the Fed
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protected from political pressures and can effectively control the money supply and interest rates in order to maintain price-level stability.
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Fractional Reserve Banking System
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a banking system in which banks and thrifts are required to hold less than 100% of their checkable-deposit liabilities as reserves.
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Transactions
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cash/money convenient for purchasing goods and services; occurs during a sale.
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Asset Demand for Money
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demand for money as a medium of exchange; amount of money people want to hold as a store of value; make purchases with money and hold it as an asset.
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Fiscal Policy
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changes in the government spending and-tax collections designed to achieve a full-employment and noninflationary domestic output; also called discretionary fiscal policy.
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Monetary Policy
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a central bank's changing of the money supply to influence interest rates and aid the economy in achieving price-level stability, full employment, and economic growth.
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Monetary Policy Tools
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Open-Market Operations, Reserve Ration, Discount Rate, Term Auction Facility.
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Discount Rate
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the interest rate the Federal Reserve Banks charge on loans they make to commercial banks and thrifts
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Federal Funds Rate
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the interest rate banks and thrifts charge one another on overnight loans made out of their excess reserves.
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"AD/AS" Question
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Aggregate Demand- a schedule or curve that shows the total quantity of goods and service demanded (purchased) at different price levels and Aggregate Supply- a schedule or curve that shows the total quantity of goods and services supplied (produced) at different price levels.
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"Money" Question
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any item that is generally acceptable to sellers in exchange for goods and services.
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"Monetary Policy" Question
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a central bank's changing of the money supply to influence interest rates and assist the economy in achieving price stability, full employment, and economic growth.
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"Fiscal Policy" Question
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changes in the government spending and-tax collections designed to achieve a full-employment and noninflationary domestic output; also called discretionary fiscal policy.
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"GDP" Question
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- the market value of the final goods and services produced within a country. GDP= C + Ig + G + Xn Personal Consumption Expeditures ( C) Gross Private Domestic Investment (Ig) Government Purchases (G) Net Exports (Xn)
