Macroeconomics Final Vocab Flashcards

Terms Definitions
interest rate increases, consumption
Free Trade
Increases efficiency
Increases demand for goods
Increases foriegn investment
nontariff barriers
include onerous licensing requirements, unreasonable standards pertaining to product quality, or simply bureaucratic hurdles and delays in customs procedures
growth accounting
determines the contribution to economic growth from increases capital, labor, and tech. progress
-school of thought similar to classical economist. seen as descendent from classical economist.-variable Y and V assumed to be effectively constant-believe that contractionary monetary policy will be effective in achieving the desired results but expansionary will not
business cycle
fluctuations in economic activity, such as employment and production
Give four reasons why investment spending tends to be unstable

Chapter 10
Tax revenues exceed government spending.
Budget surplus
the opportunities people have to pursue important aspects of well-being, such as being healthy and able to participate in society
menu costs
the costs associated with changing prices and printing new price lists when there is inflation
the president promised to provide government funded health insurance for everyone but over long run the program will be costly with larger taxes and deficits. the president failed to consider:
Secondary effects
A set of simplifying assumptions about some aspect of the real world
market equilibrium price
quantities demanded equal quantities supplied
Discount Rate
Interest rate the Federal Reserve System charges on loans to financial institutions
Define the multiplier effect in words the ratio using equation

Chapter 10
factors of production
Economic resources: land, capital, labor, and entrepreneurial ability
in the short run, automatic destabizers make the economy _____
less stable
Government Purchases
Government purchases is all spending on the goods and services purchased by government at the federal, state, and local levels.
excludes transfer payments, such as Social Security or unemployment insurance benefits because transfer payments are not purchases of goods and services.
decreases in the quantity or quality of a stock of capital
observation and recording of the specific phenomena of concern
empirical investigation
questions about how things should be
normative questions
Gross Domestic Product
total market value of all goods/services produced within a nations boarders in one year
one must choose between one option and another
monetary policy tools
1) required reserve ratio (r)2) discount rate3) open market operations
Nominal National Income
Total national income measured in current dollas. Also called current-dollar national income
the study of how society manages its scare resources
the goods available are too few to satisfy individuals desires
A resource the United States lacked in the 20th century and had to import was:
statement of assets and claims on assets that summarizes the financial position of the bank at a certain time
balance sheet
follower countries
as it relates to economic growth, countries that adopt advanced technologies that previously were developed and sued by leader countries
The total quantity of goods and services that firms in the economy are willing to supply at varying price levels.
Aggregate supply
Solutions for Spillover Costs
1) Legislation (Prohibition of stuff)
2) Specific taxes
reductions in government spending or transfer payments, or increases in taxes, leading to a lower level of economic activity
contradctionary fiscal policy
increases in the level of production in a country or region
economic growth
the school of thought, named after John Maynard Keynes...
Keynesian economics
a simple, mechanical model that portrays the economy as a collection of profit-maximizing firms and utility-maximizing households interacting through perfectly competitive markets 2
basic neoclassical model
Money Supply
The total value of financial assets in the economy that are considered money.
equation of exchange from quantity theory of money
PY=MVp-price level-GDP deflatory- output- real GDPM- money supply (M1 or M2)V- velocity of money
potential GDP
the level of GDP attained when all firms are producing at capacity
GDP using Expenditure approach
GDP equals consumption (C) plus investment (I) plus government purchases (G) plus net exports (EX-IM)
GDP = C + I + G + (EX-IM)
value added
the increase in value that a firm contributes to a product or service
in the summer of 2004, Coca Cola indroduced a new, low-calorie version of Coca Cola called C2. Despite a major marketing effort, sales of C2 were weak and by the fall many doubted that the product would last. coke's experience with C2 illustrates the econ
Consumer sovereignty.
Federal Reserve Banks
twelve banks, which blend private and public control, that collectively serve as the nation's "central bank"
firms are producing more than they are selling
output will decline
stop hiring workers
inventories are rising
Stock Variable
A variable that measures someting at a particular point in time, such as teh amoung of mone you have with you right now.
outputs that are not used either for consumption or in a further production process
waste products
an institution that brings buyers and sellers into communication with each other, structuring and coordinating their actions
market (second meaning)
a measure of all domestic incomes earned in prudction
national income (NI)
funds not loaned out by a private bank, but kept as vault cash or on deposit at the Federal Reserve 11
bank reserves
Maximum change in Money Supply=
Initial change in excess reserves times multiplier
Natural Rate of Unemployment
The normal rate of unemployment around which the unemployment rate fluctuates.
Law of Diminishing Marginal Returns
The hypothesis that if increasing quantities of a variable factor are applied to a given quantity of fixed factors the marginal product of the variable factor will eventually decrease
the real nominal principle
what matters to people is the purchasing power of money or income
Tax incidence
The manner in which the burden of a tax is shared among participants in a market.
economic resources versus free resources
Economic resources are scarce, free resources are so abundant they can be obtained without charge.
How do you measure inflation?
Calculate the Consumer Price Index (CPI) - updated every 2 yrs
a designated area of a country within which foreign-owned manufacturers can operate free of many taxes, tariffs, and regulations
foreign trade zone
the theory that exchange rates should reflect differences in purchasing power among countries
purchasing power parity (PPP)
a good that is used along with another good
complementary good
People hold money for 2 reasons
1. To undertake transactions
2. As store of assets (Stocks and bonds not M1)
Responsibilities of the Fed
regulate the banking system, acts as a lender of last resort, control the money supply
Principle 3: Rational people think at the margin
-Economists assume people are rational
-Life is not black and white: marginal changes (marginal costs vs. marginal benefits)
-Ex: plane $500/passenger (average), standby passenger $300 = YES because cost is only peanuts/drink (marginal cost) < $300
-Diamonds cost more than water because willingness to pay based on marginal benefit that extra unit would yield (diamonds are rare)
-Rational thinker makes decision if marginal benefit > marginal cost
what is say's law
the idea that toal spending will be sufficient to purcahse the total output produced
investment in a business in a foreign country
foreign direct investment (FDI)
Define Gross Domestic Product, Gross National Product, Net National Product, National Income, Personal Income, and Personal Disposable Income.
-GDP is total domestic production for country in year-GNP is total production for country in year-NNP is GNP-depreciation-National Income is NNP-indirect business taxes and business subsidies-Personal Income is National Income-income retained by firms and government payment on interests-PDI is Personal Income-income taxes
Before they can be used in regular exchanges, the assets that make up M2 must often
be converted to M1 assets
how do banks affect total spending
if banks become pessimistic, they wont lend out as much funds so the rate of planned investment will not change etiher
a person who is not employed, but who is actively seeking a job and who is immediately available for work
unemployed person (BLS definition)
two phenomena the law of supply is based on
1. at higher prices, existing suppliers supply more2. at higher prices, new suppliers enter the market
Which of the following dampens the effect on GDP of a change in government spending?
Money demand changes when real income changes.
Which of the following dampens the effect on GDP of a change in government spending?
a. The money supply changes when real income changes.
b. Taxes change when government spending changes.
c. Money demand changes when real income changes.
d. People do not expect much from the government.
e. Aggregate spending does not respond to changes in the interest rate.
What factor will help the U.S. regain comparative advantages in industries where it has lost comparative advantage?
The U.S. exchange rate falls (U.S. wages will fall and wages will be similar to other countries)
change in the quantity demanded is the result of...
a change in the price of the product
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