Macroeconomics terms Flashcards

Terms Definitions
Elastic Curve
unemployment rate
=U/(E+U)E+U= labor forceU=unemployedE=employed
goods and services
what firms produce
Describe automatic or built-in stabilizers and their economic importance

Chapter 13
side effects or unintended consequences, either positive or negative, that affect persons, or entites such as the environment, that are not among the economic actors directly involved in the economic activity that caused the effect
Store value
Holding purchasing power over time.
a decline in the price level
real GDP
nominal GDP adjusted for inflation
Chapter 6

Discuss one demand shocks present a major problem for the macro economy
consumption function
The relationship between consumption spending and disposable income.
refraining from consuming in the current period
an economic system whose boundaries are normally understood to be the boundaries of a nation
allocative efficiency
An existing combination is allocative efficient if any other allocation makes one person better off and at least one person is made worse off
classical economist
-believe that resources are completely flexible-economy begins to move too fast; resource prices will increase-economy begins to move too slow; resource prices will decrease-feel the economy will return to full employment quickly-supply creates its own demand-government should not attempt to influence economy-Laissez-fairs economics- in long run, economy will return to long run equilibrium with full employment
when aggregate demand increases
inflation and jobs increase
deposits that banks have received but have not loaned out
GDP and unemployment are related through
Okun's law
Describe recent US fiscal policy using the standardized budget

Chapter 13
economic resources
all natural, human, and manufactured resources that go into the production of goods and services
Economics on the scale of the individual, individual firm, or indiviual industry.
postitive analysis
addreses the economic consequences of a particular even or policy not whether those consedquences are desirable
a formal, oftwen written, agreement that states the terms of exchange and may be enforceable through a legal system
explicit contract
the manipulation of levels of government spending and taxation to raise or lower the level of aggregate demand
fiscal policy
exchange rate
the price at which currencies trade for one another in the market
Inflation between year 1 and year 2 (equation)
Restrictive monetary policy
-useful when economic output is growing too fast-useful when inflation is significant problem-increase reserve requirements, increase discount rate, or sell government securities to increase interest rates and decrease AD-goal is to slow economy, reduce prices and inflation
aggregate demand
is the domestic product demanded by households, firms, governments and the rest of the world, at each given price level in an economy during a given time period
labor-force participation rate
the percentage of the workingage population that is actually in the labor force
when considering whether to hire additional labor firms consider...
the real wage
production possibilities table
lists the different combinations of two products that can be produced with a specific set of resources (and with full employment and productive efficiency)
Define: incentive
Something that induces a person to act
entrepreneurial ability
the human resource that combines the other resources to produce a product, makes non routine decisions, innovates, and bears risks
determinants of consumption spending
1) disposable income
2) wealth
3) interest rate
4) expectations
full employment
emplyment level were there is no cyclical unemployment
refers to a situation in which the price has reached the level
where quantity supplied equals quantity demanded
a situation in which everyone is working up to their potential and consistent with their desires. An economy may be considered to be at full employment even though some people may be temporarily in transition between jobs
full employment
the system of economic rules, norms, and interactions by which economic actors and actions in different parts of the world are connected to one another
global economy
a curve indicating the quantities that buyers are ready to purchase at various prices
demand curve
gross national product (GNP)
GDP plus new income earned abroad
Velocity of Money
The rate at which money changes hands
Nominal Quantity
A quantity that is measured in terms of its current dollar value
any persons 16 years or older 1. who works for pay, either for someone else or in his or her own business for 1 or more hours per week, 2. who works without pay for 15 or more hours per week in a family enterprise, or 3. who has a job bus has been temporarily absent with or without pay.
discount rate
the interest rate on the leans that the Fed makes to banks
An increase in supply will lead to a(n) __________ in the equilibrium price and a(n) __________ in the equilibrium quantity.
decrease; increase
increases in the value of the product for each user, including existing users, as the total # of users rises
network effects
normal-trade-relations (NTR) status
a designation for countries that are allowed to export goods and services into the U.S. at the lowest tariff rates available to any other country allowed to export those goods to the U.S.
We want to know what is going to happen. The condition in which national output is growing with low inflation and full employment of resources.
national income
the total of all sources of private income plus government revenue from taxes on production and imports
the interest rate that banks charge their most trusted commercial borrowers
prime bank rate
the relationship between two variables when an increase in one is associated with an increase in the other
direct (or positive) relationship
the idea that changse in the money supply may affectonly prices, while leaving output unchanged
monetary neutrality
the interest rate determined in the private market for overnight loans of rseerves among banks
federal funds rate
assumptions of fractional reserve banking
To meet full potential expansion...1) no cash drain on economy2) no excess reserves
decrease in income leads to
decrease in both prices and output-decrease in AD; shift left
per-capita output growth
the growth rate of output per person in the economy.
four phases of the business cycle
1. peak2. downturn3. trough4. upturn
Cause of Supply shifting
1. Input cost
2. Technology
3. # of suppliers
4. Shocks
Market in which all the products are made
Goods and Services
what is bracket creep?
movement of taxpayers into higher tax rates as nominal incomes grow
the final use of a good or service to satisfy current wants
the national account that tracks inflows and outflows arising from international trade, earnings, transfers, and transactions in assets 13
balance of payments (BOP) account
EP (Exclusion Principle)
unless you are willing and able to pay for a good/service you are excluded from benefit
Consumption Expenditure, or simply Consumption
Spending by households on goods and services, such as food, clothing, and entertainment.
Okun's rule of thumb
a 1 percentage point change in the unemployment rate will be associated with a 2 percent change in output in the opposite direction
terms of trade
the rate at which units of one product can be exchanged for units of another product
If the Fed wishes to raise the interest rate, it will
decrease the money supply
If the Fed wishes to raise the interest rate, it will
a. increase the money supply
b. decrease the money supply
c. increase money demand
d. decrease money demand
e. simply set a higher market interest rate
the lowest rate of unemployment that can be sustained without causing rapidly rising inflation
non-accelerating inflation rate of unemployment (NAIRU)
top half of laffer curve
increase in tax rate will lead to decrease in total revenue
When money is used to set the value of goods such as cars, VCRs, and TVs, money is serving as a:
unit of account
If the labor demand decreases, what will happen to the real wage, employment, and output, assuming no
change in the labor supply?
The real wage will decrease, employment will decrease, and real output will decrease.
If the labor demand decreases, what will happen to the real wage, employment, and output, assuming no
change in the labor supply?
Real Wage, employment, and real output will all do the same.
Define " the aggregate supply curve."
(Think in terms of the total quantity of goods and services)
A graph that shows the amount of output that will be produced and offered for sale at various price levels.
Year1: Nominal GDP = $3400 and the GDP deflator = 104.0.
Year 2: Nominal GDP = $3500 and the GDP deflator = 109.5.

Based on this information, during the period from year 1 to year 2 ...
a) the price level decreased
b) it was the base year
c) there was a
c) there was a recession
changes in govt. spending on AD curve
when govt. spends more money, the AD curve shifts right, when govt. decreases spending, the AD curve shift left.
A good or service that is an input into another good or service, such as a tire on a truck.
Intermediate good or service

- The truck would be the final good.
- If we included the value of the tire, we would be double counting.
What will be the effects of a decrease in government spending?
a decrease in equilibrium GDP, a decrease in money demand, a decrease in the interest
rate, and an increase in investment spending
What will be the effects of a decrease in government spending?
a. an increase in equilibrium GDP, a decrease in money demand, a decrease in the interest
rate, and an increase in investment spending
b. a decrease in equilibrium GDP, a decrease in money demand, an increase in the interest
rate, and a decrease in investment spending
c. an increase in equilibrium GDP, an increase in money demand, an increase in the interest
rate, and an increase in investment spending
d. a decrease in equilibrium GDP, a decrease in money demand, a decrease in the interest
rate, and an increase in investment spending
e. an increase in equilibrium GDP, an increase in money demand, an increase in the interest
rate, and a decrease in investment spending
GNP equals
national income+depreciation+discrepancy = GNP
Define M2 money

Chapter 14
Something whose value can change
pleasure, happiness, or satisfaction obtained form consuming a good/service
reserves (cash + deposits at fed)
a withdrawawl of potential spending from the income-expenditures stream via saving, tax payments, or imports; a withdrawal that reduces the lending potential of the banking system
What are savings?
supply of loanable funds
Chapter 3

Explain how each determinant of supply shifts the supply curve
As interest rate (i) increases, Investment (I) what?
traditionall defined as occuring when GDP falls for two consecutive calendar quarters, now "officially" marked by the National Bureau of Economic Research
Keynesian Model
Level of aggregate or total expenditures.Change in output price.(C+Ig+G+Xn=GDP)GDP is the sum of personal consumption expenditures (C), gross private domestic investment (Ig), government purchases (G) and net exports (Xn).
Risky Return (Equation)
[(prob of return)(1+i)+(prob of return)(1+i)]*initial investment
Demand Curve
The graphical representation of the relationship between quantity demanded and the price of a commodity, other things being equal
growth accounting
the bookkeeping of the supply-side elements such as productivity and labor inputs that contribute to changes in real GDP over some specific time period
Nations net exports
its exports minus its imports
If the Fed simultaneously raises the discount rate and the reserve requirement, the money supply will:
reductions in per-unit production costs that result from increases in output levels that results in greater GDP
economies of scale
automatic stabilizers
Structural features of our economy that tend to stabilize national output.
- Tax revenues: tax collected rises and falls with GDP
- Unemployment and welfare benefits: The amount spent on these increases with unemployment, and decreases with a rise in employment.
observations of how a numerical variable changes over time
time-series date
payments given to producers to encourage more production, either for export or as a substitute for imports
trade-related subsidies
the study of the economic activities and interactions of indibiduals, households, businesses, and other groups at the sub-national level
Potential Output
All prices and nominal wages are flexible in the LR. –Aggregate output exceeds potential output, nominal wages will eventually rise in response to low unemployment and aggregate output will fall.-If potential output exceeds actual aggregate output, nominal wages will eventually fall in response to high unemployment and aggregate out put will rise. LRAS is vertical potential output.
cost of living for wage and clerical workers (35%)
LR Philips Curve
No relationship between inflation and unemployment
actual investments
the actual amount of investment that takes place; it includes items such as unplanned changes in inventories.
firm specific risk
risk that affects only one firm
Misery Index
unofficial statistic that is the sum of monthly inflation and the unemployment rate; same as discomfort index.
What is GDP?
Gross Domestic Product-
value of all final goods and services produced in the domestic economy
Bonds specify what?
1. Face value
2. Interest or discount
3. Maturity date
real interest rate
the percentage increase in purchasing power that the borrower pays the lender
A curve that depicts the relationship between price and quantity demanded
Demand curve
unattainable point
any combination of goods that cannot be produced using currently
a changein the productive capactiy of an economy
supply shock
a school that stresses the importance of history and uncertainty in determining macroeconomic outcomes
post-Keynesian macroeconomics
the sector of the economy that involves the provision of services rather than of tangible goods
tertiary sector
a good that will undergo further processing
intermediate good
money's three roles
medium of exchange, store of value, and unit of account
federal open market committee
1) controls the federal funds rate-interest rate which banks borrow from and lend to each other2) directs the NY fed to buy and sell bonds3) buy bonds: bonds in banks decrease and reserves increase, so ER increases and so does money
Recessionary Gap
A situation in which actual output is less than potential output, Y
Aggregate Supply
The quantity supplied of all goods and services (Real GDP) at different price levels, ceretis paribus
Reserve Requirement
Formula used to compute the amount of a depository institution's required reserves.
Market Power
The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
interest rate charged by the Fed for loans granted to commercial banks
discount rate
economic growth
The rate at which the economy's total real output of goods and services is expanding.
interest rate
interest per year as a percentage of the aount loaned
what is rational expectations?
hypothesis that people's decisions are based on all avaiable info, including the effects of government intervention
the theory that "insider" workers who are already employed may have the power to prevent "outsider" workers from competing with them and lowering their wages
insider-outsider theory
outputs that are not used either for consumption or in a further production process
waste products
an international agency charged with overseeing international finance, including exchange rates, international payments, and balance of payments issues
International Monetary Fund (IMF)
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Enter your back text here.
what shifts the AS line
changes in basic price factors; wages/oil
Potential Output (Y*)
The real GDP that the economy would produce if its productive resources were employed at their normal levels of utilization. Also called potential GDP.
comparative advantage
the ability to produce a good at a lower opportunity cost than another produce. price for trade must lie between both opportunity costs
What is transactions demand?
wish to hold money to purchase goods
aggregate expenditures schedule
a schedule or curve showing the total amount spent for final goods and services at different levels of real GDP
cost push inflation
a sustained rise int he price level caused by a leftward shift of the aggreagate supply curve
an increase in the value of an asset over time
capital gain
the sector consisting of households and nonprofit institutions serving households
households and institutions sector (BEA Definition)
the value of the best alternative to a particular economic choice
opportunity cost
Define "expansionary fiscal policy," including the means by which it is achieved.
An increase in government spending or a reduction in net taxes aimed at increasing aggregate output(income).
Natural Real GDP
The Real GDP that is produced at the natural unemployment rate. The Real GDP that is produced when the economy is in long-run equilibrium.
The target rate of unemployment is defined as the:
Lowest sustainable rate of unemployment achievable under existing conditions.
d: federal funds rate
the interest rate in the federal funds market
what is the federal funds rate?
interest rate for interbank reserve loans
Contractionary (tight restrictive) Monetary Policy
Fed sells bods. Price of bonds go down so interest rates go up. Discourages buying and discourages ppl to invest.
The typical production possibilities curve is
a downsloping line that is concave to the origin
d: federal funds market
the interest rate paid on loans in a market that it can very easily monitor and control, banks with excess reserves lend them out to other banks for very short periods
a system in which exchange rates are determined by the forces of supply and demand
flexible (floating) exchange rate system
t increase the money supply using the reserve requirements as a tool, what would the Fed typically do?
reduce the required reserve for banks
What is the 'good' type of unemployment and why?
Frictional - it shows opportunity for career change or advancement.
two phenomena the law of demand is based on
1. at lower prices, existing demanders buy more2. at lower prices, new demanders enter the market
M x V = P x Y, where M is the money supply, V is the velocity of money, P is the price level and Y is real output
quantity equation
If the market price is less than the equilibrium price, what is the relationship of quantity supplied to quantity demanded? What will happen to the price?
The market goes into a state of excess demand or shortage; which will force the price to go up.
Pm < Pe  Qs < QD ¨ shortage, P↑
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