Macroeconomics 2 Flashcards

Terms Definitions
extraordinarily rapid inflation
Agg. Expenditure = what?
Economists who believe that discretionary macro policy adjustment in response to cyclical conditions are likely to increase, rather than reduce, instability. Nonactivists favor steady and predictable policies regardless of business conditions.
horizontal axis
the "left-right" or "west-east" measurement line on graph or grid
cyclical unemployment
fluctuations in unemployment that fluctuate with real GDP
precautionary demand
money held for unplanned expenditures
Social Insurance
Programs are government programs intended to protect families against economic hardship
Explain the historical background of the Federal Reserve

Chapter 14
Demand curve
Relationship between price and quantity demanded
Unemployment associated with the downturn and recession phases of the business cycle.
Cyclical unemployment
stocks of raw materials or manufactured goods being held until they can be used or sold
Expansionary Policy
increase in govt. spending and decrease in taxes to increase aggregate demand. used to grow the economy in a time of bust
the united states has the higest economic rating
How does the interest rate affect investment?
Exports (EX)
Total foreign spending on domestic (U.S.) goods.
Federal Reserve System
privately owned, publicly controlled, central bank of the United States.
Explain why in equilibrium the economy will produce a particular combination of real output in the price level rather than another combination

Chapter 12
economic perspective
A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs associated with their actions.
d: consumption function
positively sloped relationship between real consumption spending and real disposable income
Final goods:
goods intended for the end user
the classical belief that "supply creates its own deman"
Say's law
the giving of something with nothing specific expected in return
an economic theory that emphasizes policies to stimulate production, such as lower taxes. The theory predicts that such incentives stimulate greater economic effort, saving, andinvestment, thereby increasing overall economic output and tax revenues
supply-side economics
price index
general form, cost of a "market basket" of goods and services in the current year/cost of that .... in basic year=#x100=PI
positive economics
statements based on facts and are objective
potential GDP
1) also known as "natural gross domestic product"2) refers to the highest level of real GDP output than can be sustained over the long term3) there is a limit because of natural and institutional constraints
A downturn in the level of economic activity. Often defined precisely as two consecutive quarters in which real GDP falls.
Induced Unemployment
Caused by government Policies such as minimum wage.
monetary neutrality
the proposition that changes in the money supply do not affect real variables
business cycle
the upward or downward movement of economic activity, or real GDP, that occurs around the growth trend
the study of how society manages its scarce resources
buying of government bonds from, or the selling of government bonds to, commercial banks and the general public`
open-market operations
supply factors
changes in the physical and technical agents of production
GPD measured in terms of current market prices - that is, the price level at the time of measurement.
Nominal GDP
Corrections for Spillover Benefits
1) Subsidize consumers
2) Subsidize suppliers
3) Provide goods via government
firms that produce goods and services for profitable sale
business sphere
a curve indicating the quantities that buyers are ready to purchase at various prices
demand curve
reductions in government spending or transfer payments, or increases in taxes, leading to a lower level of economic activity
contradctionary fiscal policy
Any asset that can easily be used to purchase goods and services.
Production at a point lying outside of the production possibility curve is
not possible
price level
a measure of the aerage prices of goods and services in the economy
Net Domestic Product (NDP)
GDP minus the capital consumption allowance.
personal consumption expenditures
payments by households for goods and services
The minimum wage is an example of a price floor. T/F?
Board of Governors
the central authority of the U.S. money and banking system; seven members appointed by the president
what is the most important and stable factor that influences consumption spending
disposable income
Economic Fluctuations
the rise and fall of ecnomic activity relative tot he long-term growth trend of teh economy
in the BOP account, the account that tracks flows arising from international transactions in assets
financial account
an institution such as a bank, savings and loan association, or life insurance company that accepts funds from savesr and makes loans to borrowers
financial intermediary
aids or loans provided with the announced intention of promoting development by the World Bank, regional development banks, or United nations agencies such as the United Nations Development Program
multilateral development assistance
the impact on equilibrium output of simultaneous increases of equal size in government spending and taxes. The multiplier is equal to positive 1, showing that the effect on GDP is equal in size to the original change in government spending and taxes.
balanced budget multiplier
Fed is a
last resort lender. Bank wants to keep reserve as low as possible.
Federal Funds Rate
The interest rate at which banks make overnight loans to one another.
real interest rate
is the nominal interest rate minus the inflation rate
comparative advantage
the ability of one person or nation to produce a good at a lower opportunity cost than another
Price Floor
A legal minimum on the price at which a good can be sold.
intermediate goods
A final good that is used to produce another final good. Example: flour used to make bread.
2 Understatements of Unemployment Rate
(1) Part-Time employment = fully employed
(2) Discouraged workers (unsuccessful at getting jobs too many times before) = Not in Labor Force
the sector consisting of households and nonprofit institutions serving households
households and institutions sector (BEA Definition)
theories about why wages may stay at above-equilibrium levels, despite the existence of a labor surplus
"sticky wage" theories
the final use of a good or service to satisfy current wants
Expansionary Fiscal Policy
Increase in G, or an increase in Net transfer for the purposes of increasing AD
The market demand curve
Is the sum of the quantities demanded by all the buyers at each price of the good.
Define: market failure
A situation in which a market left on its own fails to allocate resources efficiently
who supplies labor and who demands labor
firms demand / households supply
the process of creating an environment that expands people's choices, allowing people to devlop their full potential and lead productive, creative lives in accord withtheir needs and interests
human development (United Nations Development Program)
Why is the rate of unemployment equal to zero in normal times?
Frictional unemployment will always exist due to the nature of some job
the transaction demand for money comes mostly from the fact that...
money is a medium of exchange
1990: large increase in oil prices, collapse of the soviet union
spending on cars and other energy using products decrease
defense spending increase
a set of guidelines for countries about how to construct systems of national accounts
United Nations System of National Accounts (SNA)
social security places a burden on future generations because
future generations are paying for the current working generations retirement
In the short run, following an increase in government purchases...
the interest rate rises because the money demand curve shifts rightward
In the short run, following an increase in government purchases...
a. the aggregate expenditure line shifts upward by more than the increase in government
b. real GDP declines by the change in government purchases times the expenditure
c. the money supply curve shifts rightward because real income rises
d. the interest rate rises because the money demand curve shifts rightward
e. autonomous consumption and investment increase because of the increase in real income
A fall in the value of the dollar relative to other currencies will:
Increase demand for U.S. goods, shifting the U.S. aggregate demand curve to the right.
If there was a federal budget surplus it would make it possible to...
decrease taxes in order to iprove the equity and efficiency of the tax system, reduce the national debt, increase spending on priorities
trade deficit
Marginal Product of Labor
Monetary Policy
Has very long lags
The equilibrium short-run interest rate is determined at the intersection of the demand and supply curves in
the market for
Inflation and stagnation occurring at the same time
The entire relationship between the quantity of some commodity that producers wish to sell and the price of that commodity, other things being equal
in an open economy, planned expenditure equals
Identify the three major spending determinants of aggregate supply

Chapter 12
Securities funds?
Stock brokerage firms
·Offer security advice and buy/sell stocks/bonds for clients
disposable income
personal income less personal taxes
taxes put on imports or exports
W = S + T + M
what happens to AD with a contactionary fiscal card
Labor Unions
Bargain with employers for higher wages and better working conditions for their members
Protect insiders (members of the union) but hurt outsiders, causing unemployment
Labor markets in Europe are more unionized than in the U.S.
Which of the following would be considered a component of government purchases?a. both d and eb. all of the followingc. welfare paymentsd. police salariese. social security payments
the study of individual choice, and how that choice is influenced by economic forces
Describe the net export schedule and its relationship to real GDP

Chapter 11
Production Frontier?
Shows the limits of attainable outputs
A decrease in the overall price level
Demand-Side Economics
Macroeconomic policy that focuses on shifting the aggregate demand curve as a way of promoting full employment and price stability.
resources are abundant to the extent that they exist in plentiful supply for meeting various goals 2
payments to workers, including wages, salaries, and fringe benefits
labor income
a formal, oftwen written, agreement that states the terms of exchange and may be enforceable through a legal system
explicit contract
limit placed on the number of foreign imports
recognition lag
-time needed for policy makers to realize that there is a problem in the economy
is manufactured goods that are used to produce other goods and services
Intermediate Good
A good used entirely to produce another good
At fast food restaurants
decisions entail comparisons of marginal costs and marginal benefits
capacity utilization
the rate at which factories and machines are operating compared to maximum sustainable rate at which the could be used
Describe how a change in taxes shifts consumption and saving schedules

Chapter 10
M2 = ?
M1 +
1) Savings deposits
2) Money Market Deposit Accounts (MMDA's)
3) Small time deposits (<$100,000)
4) Money Market Mutual Funds (MMMF's)
structural unemployment
Occurs when new goods and new technologies call for different skills than the old ones, and workers with older skills cannot find jobs.
If aggregate expenditure at a particular level of income is less than output then...
output will decrease
Real GDP
The production of goods and services valued at constant prices.
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
improvement in people's diet, housing, medical attention, education... that can allow people to have long and enjoyable livs and have the opportunity to accomplish the things that give their lives meaning
living standards growth
Keynesian Theory
Deployment of Fiscal Policy
Expansionary Policies are used when recessionary gap exists, to stimulate aggregate demand. Taxes are cut, government spending increases, and transfer payments rise.
Contractionary policies are used when inflationary gap exists, to suppress aggregate demand. Taxes go up, government spending is cut, and transfer payments decrease (leading to less disposable income)
Nominal Interest Rate
Interest rate reported via change in dollar amount. Not corrected for inflation.
impact of size of population increasing
unemployment rate-unchangedlabor force participation rate- decrease
underground economy
the part of the economy in which transactions take place and in which income is generated that is unreported and therefore not counted in GDP
discouraged workers
workers who like to work but have given up looking for a job
output problem
gives us the amount of stuff produced in a given period of time or amount of space (certain output for given imput) ex. tons per acre, bustles per hr. gallons permin (see workbook)... O=output=other over firt to find the least opportunity cost
Define: externality
The impact of one person's actions on the well-being of a bystander
d: consumption tax
tax on the income that households spend (savings isnt taxed, so this form of taxation increases spending)
Marginal propensity to consume
The marginal propensity to consume (MPC) is the amount by which consumption changes when disposable income (Y - T)
increases by one dollar. To understand the MPC, consider a shopping scenario. A person who loves to shop probably has a large MPC, let’s say (.99). This means that for every extra dollar he or she earns after tax deductions, he or she spends $.99 of it.
The MPC measures the sensitivity of the change in one variable (C) with respect to a change in the other variable (Y - T).
a measure of all domestic incomes earned in prudction
national income (NI)
recurrent fluctuations in the level of national production, with alternating periods of recession and boom
business (trade) cycle
the relationship between two variables when an increase in one is associated with an increase in the other
direct (or positive) relationship
equipment owned by businesses and governments; structures; residences; and software
fixed assets (BEA definition)
new growth theory
modern theories of growth that try to explain the origins of technological process
if interest rates decrease...
firms borrow more funds to fund purchases of capital goods (I increases)
Depreciation (3)
A rise in the exchange rate - the domestic currency has become less valuable so that it takes more units of domestic currency to purchase one unit of foreign currency
At higher interest rates
the quantity of money demanded is lower
Define: property rights
The ability of an individual to own and exercise control over scarce resources
the change in inventories at any given time will always equal
Future value
The amount of money in the future that an amount of money today will yield
a measure of national production above that needed to replace worn=out manufactured capital, found by subtracting depreciation from GDP
net domestic product (NDP)
a school which bases its analysis on micro-level market behavior, but which justifies activist macroeconomic policies by assuming that markets have "imperfections"
new Keynesian macroeconomics
a system in which the overall quality and quantity of the resource base required for sustaining life and well-being do not erode
sustainable socioeconomic system
if excess reserves increase...
banks lend more to firms to buy capital goods (I increases)
As a rule of thmb, good news for the economy is generally bad news for the...
bond market
price that is paid for the use of money over some time period
equilibrium interest rate
What's the effect of Discouraged Workers and Involuntary Part-Time Workers on the Unemployment Rate?
they cause it to be understated
Causes of Changes in LR AS
1. Change in labor supply
2. Changes in capital
3. Changes in natural resources
4. Changes in technology
What are the 3 different types of equilibrium situations?
1- full employment equilibrium
2- below full employment equilibrium or recessionary gap
3- above full employment equilibrium- inflationary gap
The negative slope of the ppf indicates a tradeoff that a society faces between two goods.
The law of increasing opportunity cost.
labor force participation rate
% of the population over 16 that is in the labor force
What does the GDP deflator measure?
average level of prices of goods & services included in GDP
what is transactions demand for money?
money held for the purpose of making everyday market purchases
M1 = ?
Note: Money literally always readily available for use
1) Currency (coins, paper money) + (2) Checkable Deposits
Principle 5: Trade can make everyone better off
-Can be seen as a bad thing
-Ex: Japan and USA (Ford vs. Toyota, Apple vs. Sony)
-Trade between 2 countries can actually make each better off
-Ex: families compete for jobs, groceries, but better than isolation
-Specialize in what they do best, enjoy greater variety in goods and services
-Partners AND competitors
simple money multiplier
What is SRAS=AD?
macroeconomic equilibrium
-independent of the federal government-responsible for monetary policy not fiscal policy-buys and sells government securities in open market-not original seller of government securities
Chapter 6

Distinguish between demand shocks and supply shocks
North American Free Trade Agreement.
increasing r
ER decreases and money decreases
Production Factos
Increase in quantity/quality of life
Increase in human capital per worker
Increase in capital goods per worker
Acceleration Principle
Describes a particular relationship between consumption and investment.
Chapter 7
Describe the meaning and calculation of net exports (Xn)
The perpetual state of insufficiency of resources to satisfy people's unlimited wants
the opportunities people have to pursue important aspects of well-being, such as being healthy and able to participate in society
Sustained fall in general price level - exact opposite of inflation. If demand falls without a contraction of supply, firms must liquidate inventory, even if it's at a loss (demand curve shifts left). If output increases without an increase in demand, prices will plummet (demand curve shifts right).
M1 + saving deposits, small time deposits money, mutual funds, etc...
The practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index (prevents the purchasing power of the nominal quantity from being eroded by inflation).
Market value of final goods and services produced in a certain country within a given time
According to the expectations Phillips curve, unemployment varies with
unanticipated inflation
the property of society getting the most it can from its scarce resources (size of the pie)
Assume that full employment is achieved at 4.5% unemployment. If that is true, an unemployment rate of 3.8% would likely be ...
a) inflationary
b) a labor surplus
c) impossible
a) inflationary
Government purchases function relates to what?
level of income
Patterned forms of behavior that have to do with the supernatural realm
the stock of trust, mutual understanding, shared values, and socially held knowledge that facilitates the social coordination of economic activity
social capital
production using methods that involve a high ratio of labor to capital
labor-intensive production
observations of how a numerical variable changes over time
time-series date
Gold standard
Paper dollars can be exchanged for gold.(limits overall MS to some multiple of the amount of gold in the hands of the US Treasury)
Mixed Economy
An economy in which some economic decisions are made by firms and households and some by the government
net national product (NNP)
gross national product minus depreciation; a nations total product minus what is required to maintain the value of its capital stock.
If the unemployment rate is 6 percent, that means that 6 percent ofa. the population is not workingb. potential workers do not have jobsc. the workforce is not working at that timed. the individuals who are looking for work cannot find jobse. people who w
At short run GdP equiliberium, is it above or below potential output
Self-Regulating Economy
An economy where problems such as unemployment are resolved without government intervention, through the working of the invisible hand.
Doha Round
The latests, uncompleted (as of 2008) sequence of trade negotiations by members of the World Trade Organization; named after Doha, Qatar, where the set of negotiations began.
Things that are produced and then used in the production of other goods and services
Real wage
The firm’s demand for labor is determined by P × MPL = W,
or another way to express this is MPL = W/P, where W/P is the
real wage– the payment to labor measured in units of output rather
than in dollars. To maximize profit, the firm hires up to the point
where the extra revenue equals the real wage.
increases in the level of production in a country or region
economic growth
the price at which trades are made
bond price
a shorthand calculation which states that dividing an annual growht rate into the number 72 yields approximately thenumber of years it will take for an amount to double
rule of 72
government regulations setting limits on wages and prices, oron the rates at which they are permitted to increase
wage and price controls
a decrease in the price of the good leads to an increase of in the demand of the other good
The branch of econ that focuses on the impact of choices on the total, or aggregate, level of economic activity
Investment (I)
The sum of all purchases of newly produced capitaal goods, changes in business invetories, and purchases of new residential housing.Fixed invest. + Inventory invest.
MPC is the...
fraction of additional income that is spent
Normal Good
A good for which, other things equal, an increase in income leads to an increase in demand.
What is included in M2?
1. near-monies
2. savings deposits, including money market deposit accounts
3. small time deposits
4. money market mutual funds
four phases of the business cycle
trough, expansion, peak, recession
What 3 things involve investment>?
New factories and equipment
New housing
net change in inventoreis
Identity the three (3) principal tools of monetary policy?
(1)Open-market operations
(2)Required reserve ratio
(3)Discount rate
an illustration of how stocks can be changed, over time, by flows
stock-flow diagram
the process of moving from a situation of poverty and deprivation to a situation of increased production and plenty, through investments and changse in the organization of work
economic development
defined as the ratio of the money supply to the monetary base, it tells how much the money supply will change for a given change in high-powered money
money multiplier
formula for inflation rate
{[(This year's PI) - (Last year's PI)]/last year's PI}{100}
Import Quota
A limit imposed by a nation on the quantity of a good that may be traded 
quantity theory of money
a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
What people does unemployment include and not include?
1- people actively searching for a job
2- laid off and waiting to be called back
3- waiting to start
1- discouraged workers
2- part-time wanting to be full time
Smoot-Hawley Tariff Act of 1930
Legislation passed in 1930 that established very high tariffs. Its objective was to reduce imports and stimulate the domestic economy, but it resulted only in retaliatory tariffs by other nations
• The market in which banks lend and borrow reserves from each other for very short periods of time, usually overnight.
Federal funds market
the value of the best alternative to a particular economic choice
opportunity cost
in the United States, the government agency that compiles and publishes employment and unemployment statistics
Bureau of Labor Statistics
Compare and contrast the effects of changes in government purchases, taxes, and transfer payments.
Government purchases directly affect aggregate demandTaxes affect income and provide for government purchasesTransfer payments are a form of government spending
Incentive Principle
A person (or a firm or a society) is more likely to take an action if its benefit rises, and less likely to take it if it cost rises.
What is restrictive monetary policy?
fed. decreases M,
less reserves in the bank,
high interest rates,
higher cost of borrowing,
thus AD decreases(shifts left)
is wealth a fixed or stock variable
at one point in time
when the dollar depreciates (looses value)
there is an INCREASE in exports
the number of people age 65 and over for each hundred people aged 15-64
old-age dependency ratio
Which would not be characteristic of a capitalist economy?
A. Government ownership of the factors of production
B. Competition and unrestricted markets
C. Reliance on the market system
D. Free enterprise of choice
A. Government ownership of the factors of production
45 degree line
a line along which the value of GDP is equal to the value of aggregate expenditures
what is the liquidity trap?
portion of the money demand curve that is horizontal, people are willing to hold unlimited amounts of money at some low interest rate
How does GDP relate to quality of life?
Posivite correlation with high GDP, Negative with corruption; High GDP=Low corruption
can fiscial policy affect demand through changing total spending
no fiscal policy has no demand side effects
In moving along a given budget line
the prices of both products and money income are assumed to be constant
Trace the SPICI view of cause-effect that results from easy money (SPICI)
Easy money -> $ supply goes UP -> price of $ goes DOWN -> interest goes DOWN -> consumption and investment UP
why isnt real gdp per capita a good way to measure standard of living
- leisure time and other things not counted in the gdp have different value
- gdp might only be distributed to some people
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