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Macroeconomics_Test_1 - Macroeconomics Test 1 Chapter...

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Unformatted text preview: Macroeconomics Test 1 Chapter 5 Microeconomics •  Microeconomics –  Examines the func7oning of individual industries and the behavior of individual decision ­making units ­firms and households. Macroeconomics •  Deals with the economy as a whole. •  Focuses on the determinants of total na7onal income •  Deals with aggregates such as aggregate consump7on and investment •  Looks at the overall prices instead of individual prices Aggregate Behavior •  The behavior of all households and firms together S7cky Prices •  Prices that do not always adjust rapidly to maintain equality between quan7ty supplied and quan7ty demanded. Business Cycle •  The cycle of short ­term ups and downs in the economy Recession •  A period during which aggregate output declines. Conven7onally, a period in which aggregate output declines for 2 consecu7ve quarters. Depressions •  A prolonged and deep recession Expansion or Boom •  The period in the business cycle from a trough up to a peak during which output and employment grows. Contrac7on/Recession/Slump •  The period in the business cycle from a peak down to a trough during which output and employment fall. Unemployment Rate •  The percentage of the labor force that is unemployed. Infla7on •  An increase in the overall price level. Hyperinfla7on •  A period of very rapid increases in the overall price level Defla7on •  A decrease in the overall price level. Circular Flow •  A diagram showing the income received and payments made by each sector of the economy. Transfer Payments •  Cash payments made by the government to people who do not supply goods, services, or labor in exchange for these payments. –  Social Security Benefits –  Veterans Benefits –  Welfare Benefits Save •  When you receive more than you spend. Dissave •  Receive less than you spend. 3 Market Arenas •  Goods & Services Market •  Labor Market •  Money Market Goods & Services Market •  The market where the government and households purchase goods and services from firms. •  Firms supply. •  Government and Households demand Labor Market •  Households supply labor •  Firms and the government demand labor •  Supply of labor depends on the decisions made by households •  In the U.S. firms are the largest demanders of labor. Money Market (Financial Market) •  Households buy stocks and bonds from firms •  Households demand funds because they have to cover previous purchases. •  Firms borrow in hopes they make more money. •  Government borrows by issuing bonds Money Market (Financial Market) •  Financial Ins7tu7ons coordinate the money flow –  Commercial Banks –  Savings & Loans associa7ons –  Insurance Companies Money Market •  Promissory Note –  What a someone who makes a loan signs •  Treasury Bonds, Notes, or Bills –  Promissory notes issued by firms when they borrow money. Money Market •  Shares of Stock –  Financial Instruments that give to the holder a share in the firm’s ownership and therefore the right to share in the firm’s profit. Money Market •  Dividends –  The por7on of a firm’s profits that the firm pay out each period to its shareholders Money Market •  Stocks, & bonds are simply contracts or agreements between par7es The Role of the Government in the Macroeconomy •  2 main policies –  Fiscal Policy –  Monetary Policy Fiscal Policy •  Governments decision about how much to tax and spend •  Government policies concerning taxes and spending •  Spent on services like Social Security payments and highways Expansionary Fiscal Policy •  Policy in which taxes are cut and or government spending increases. Contrac7onary Fiscal Policy •  Opposite of Expansionary Fiscal Policy •  Does not cut taxes and government spending does not increase. Monetary Policy •  The tools used by the Federal Reserve to control the quan7ty of money, which in turn affects interest rates. •  Chair of the Fed, second most powerful person in the U.S. Great Depression •  The period of severe economic contrac7on and high unemployment that began in 1929 and con7nued throughout the 1930s. Fine Tuning •  The phrase used by Walter Heller to refer to the government’s role in regula7ng infla7on and unemployment. Stagfla7on •  A situa7on of both high infla7on and high unemployment Chapter 6 Measuring Na7onal Output and Na7onal Income Na7onal Income and Product Account •  Data collected and published by the government describing the various components of na7onal income and output in the economy. Gross Domes7c Product •  The total market value of all final goods and services produced within a given period by factors of produc7on located within a country. Final Goods and Services •  Goods and services produced for final use. Intermediate Goods •  Goods that are produced by one firm for us in further processing by another firm. Value Added •  The difference between the value of goods as they leave a stage of produc7on and the cost of the goods as they entered that stage Gross Na7onal Product (GNP) •  The total market value of all final goods and services produced within a given period by factors of produc7on owned by a country’s ci7zens, regardless of where the output is produced. Expenditure Approach •  A method of compu7ng GDP that measure the total amount spent on all final goods and services during a given period. Income Approach •  A method of compu7ng GDP that measure the income ­ Wages, rents, interest, and profits ­ received by all factors of produc7on in producing final goods and services. The Expenditure Approach •  Personal consump7on expenditures {C}: –  Household spending on consumer goods •  Gross Private Domes7c Investment {I}: –  Spending by firms and households on new capital that is, plant, equipment, inventory, and new residen7al structures. •  Government Consump7on and Gross Investment {G} The Expenditure Approach •  Net Exports (EX ­ IM): –  Net spending by the rest of the world, or exports (EX) minus imports (IM) The Expenditure Approach GDP= C + I + G + (EM – IM) PERSONAL CONSUMPTION EXPENDITURES {C} •  The largest part of GDP •  Expenditures by consumers on goods and services •  3 categories of consumer expenditures: –  Durable Goods –  Nondurable Goods –  Services Durable Goods •  Goods that last a rela7vely long 7me, such as cars and household appliances. –  Automobiles –  Furniture –  Household appliances Nondurable Goods •  Goods that are used up fairly quickly, such as food and clothing. –  Food –  Clothing –  Gasoline –  Cigarejes Services •  The things we buy that do not involve the produc7on of physical things, such as legal and medical services and educa7on. •  Expenditures for: –  Doctors –  Lawyers –  Educa7onal Ins7tu7ons Gross Private Domes7c Investment (I) •  Total investment in capital ­ that is, the purchase of new housing, plants, equipment, and inventory by the private (or nongovernment) sector. Nonresiden7al Investment •  Expenditures by firms for machines, tools, plants, and so on. –  Expenditure by firms for •  Machines •  Tools •  Plants Residen7al Investment •  Expenditures by households and firms on new houses and apartment building. Change In Business Inventories •  The amount by which firms’ inventories change during a period. Inventories are the goods that firms produce now but intend to sell later. GDP= Final Sales + Change In business inventories Gross Investment vs. Net Investment •  Deprecia7on •  Gross Investment •  Net Investment Deprecia7on •  Deprecia7on –  The amount by which an asset’s value falls in a last given period. Gross Investment •  Gross Investment –  The total value of all newly produced capital goods (pant, equipment, housing, and inventory) produced in a given period. Net investment •  Gross investment minus deprecia7on Capital (end of period)= Capital(beginning of period) + net investment Government Consump7on and Gross Investment (G) •  Government consump7on and gross investment –  Expenditures by federal, sate, and local governments for final goods and services. ...
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