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real gross domestic product (GDP)
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the market value of final goods and services produced in an economy, stated in the prices of a given year
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frictional unemployment
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natural unemployment caused by people entering the job market and people quitting a job just long enough to look for and find another one - increases because of regulations (France) decreases because of information (monster.com)
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Keynesians
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in favor of activist government policies because they believe input prices are sticky and when the economy is in a recession government intervention is necessary to shift the AD curve back up
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peak
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the top of a business cycle
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current seasonally adjusted unemployment rate for 2009
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7.6%
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hyperinflation
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when inflation hits triple digits - 100% or more per year
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Classicals
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favor laissez-faire or nonactivist government policies - prices flexible in both directions
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net investment
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gross investment minus depreciation
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wealth accounts
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a balance sheet of an economy's stock of assets and liabilities
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relationship between bond price and interest rate
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move oppositely (one indicates the other and vice versa)
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signal extraction problem
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caused by inflation, leads firms to be unsure whether an increase in price is due to an increase in demand or an increase in inflation and whether or not they should expand their output in response
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labor force participation rate
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measures the labor force as a percentage of the total population at least 16 years old
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GDP deflator
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an index of the price level of aggregate output, or the average price of the components in total output (or GDP) relative to a base year
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GDP growth rate of the last 50 years
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3.3%
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examples of direct finance
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stocks and bonds
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depreciation
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the decrease in an asset's value
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3 economic conditions measured by GDP
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1) living standards2) economic growth3) business cycles
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natural rate of unemployment (u* or target rate of unemployment)
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the lowest sustainable rate of unemployment that policy makers believe is achievable given existing demographics and the economy's institutional structure - no cyclical unemployment exists, only structural and frictional
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intermediate products
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products used as input in the production of some other product
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subprime mortgage
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a high risk home loan in which teh home buyer (low-income) is more likely to default - FNMA and FHLMC
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transfer payments
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payments to individuals that do not involve production by those individuals (Social Security, unemployment insurance, etc.)
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business cycle
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the upward or downward movement of economic activity, or real GDP, that occurs around the growth trend
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recession
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a decliine in real output that persists for more than two consecutive quarters of a year
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money illusion
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when people irrationally interpret nominal changes as real changes
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labor force
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those people in an economy who are willing and able to work
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inflation
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a CONTINUAL rise in the price level
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unemployment rate from December 2008
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7.2%
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3 effects of high GDP
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1) higher literacy rates2) lower infant mortality3) more women's rights
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second "rotunda point"
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inflation is a monetary phenomenon
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the four expenditure categories
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1) consumption2) investment3) government spending4) net exports
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GDP growth rate of the last 10 years
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2.9%
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future price level uncertainty
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the value of future dollars is affected by inflation, making wage contracts and loan agreements difficult and riskier in the long-term (you don't know how the interest rate will hold up in response to normal inflation in the future)
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basis of the loanable funds market
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every dollar borrowed requires a dollar saved
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downturn
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the phenomenon of economic activity starting to fall from a peak
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gross domestic product (GDP)
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the total market value of all final goods and services produced in an economy in a one-year period
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long run unembloyment average (last 50 years)
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5.9%
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structural unemployment
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natural unemployment caused by the institutional structure of an economy or by economic restructuring making some skills obsolete - "creative destruction"
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price index
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a number that summarizes what happens to a weighted composite of prices of a selection of goods (often called a market basket of goods) over time
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first "rotunda point"
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voluntary trade helps both sides
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trough
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the bottom of a business cycle
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nominal output
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total amount of goods and services produced measured at current prices
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boom
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very high peak, representing a big jump in output
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jumk bonds
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bonds with a very high default risk (and therefore higher interest rate) ex: Ford
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value added
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the increase in value that a firm contributes to a product or service
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net foreign factor income
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the income from foreign domestic factor sources minus foreign factor income earned domestically - we must add the foreign income of our citizens and subtract the income of residents who are not citizens to calculate GNP
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expansion
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an upturn that lasts at least two consecutive quarters of a year
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investment
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spending for the purpose of additional production (business spending on factories and equipment for production, the change in business inventories, purchases of factories, tractors, computers, etc...NOT STOCKS AND BONDS, THEY ARE CONSIDERED SAVING)
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net exports
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spending on goods and services produced in the US that foreigners buy (exports) minus goods and services produced abroad that US citizens buy (imports)
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producer price index (PPI)
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index of prices that measures average change in the selling prices RECEIVED by domestic producers of goods and services over time
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3 effects on supply of loanable funds (savings)
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1) interest rate - higher prices/rates mean a higher quantity supplied2) time preference - goods and services are more valuable the sooner they are delivered3) consumption smoothing - people like smooth consumption patterns (we save in the middle of our life when income is high and use our savings when income fails at retirement or in emergencies)
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cyclical unemployment
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unemployment resulting from fluctuations in economic activity (affected by retractions/recessions)
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government spending
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goods and services that government buys (TRANSFER PAYMENTS NOT INCLUDED)
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final output
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goods and services purchased for their final use
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3 key pieces of information on a bond
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1) borrower2) date of maturity3) value at maturity (face value)
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formula to translate nominal output to real output
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nominal output/price index x 100
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real output
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the total amount of goods and services produced, adjusted for price-level changes
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factors that influence demand
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1) price (inverse - causes a change in quantity demanded)2) substitues price (direct)3) complements (inverse)4) consumer income (normal vs. inferior goods)5) sales taxes (inverse)6) consumer preferences (depends)
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consumption
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spending by households on goods and services (food, shampoo, televisions, furniture, services of doctors and lawyers, etc.)
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consumer price index (CPI)
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measures the prices of a fixed basket of consumer goods, weighted according to each component's share of an average consumer's expenditures
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3 effects on the demand for loanable funds (investment)
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1) price2) capital productivity - if capital tools are more productive, firms are willing to pay more for loanable funds3) consumption smoothing
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factors that influence supply
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1) price (direct - change in quantity supplied)2) resource prices (inverse)3) technology (direct)4) regulations (inverse)5) weather (natural disasters)
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4 sources of aggregate income
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1) compensation of employees2) rents (income from property received from households, not firms)3) interest4) profits
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net domestic product (NDP)
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GDP minus depreciation - accounts for production used to replace worn-out plant and equipment that is not available for purchase for consumption, investment, or government spending
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securitization
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bundling financial assets together to form a new combined security (provides diversification and marketability)
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employment-population ratio
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the number of people who are working as a percentage of people available to work
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default risks
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the risk that the borrower or seller of a bond will default and not be able to pay back the bond (rated by Moody's, S&P, and Fitch into AAA, BBB, BB....D)
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deflation
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a CONTINUAL fall in the price level
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personal consumption expenditure (PCE) deflator
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measure of prices of goods that consumers buy that allows yearly changes in the basket of goods that reflect actual consumer purchasing habits
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potential output
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the output that would materialize at the target rate of unemployment and the target rate of capacity utilization
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examples of indirect finance
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banks
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okun's rule of thumb
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a 1 percentage point change in the unemployment rate will be associated with a 2 percent change in output in the opposite direction
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gross national product (GNP)
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the aggregate final output of citizens and businesses of an economy in a one-year period
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depression
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a large recession (>12% unemployment for one year)
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full employment output (Y*)
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the output level when unemployment is equal to the natural rate (u=u*)
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unemployment rate
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the percentage of people in the economy who are willing and able to work but who are not working
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