MacroEconomics Midterm Flashcards

Terms Definitions
Cambridge Version
Business Cycle: Expansions
Output Increases
the results of production
Contractionary Fiscal Policy
Reduces aggregate demand
d: boom
output exceeds potential output
The Great Depression
1929-33-stock market crash-spending decreased-banks failed
real exchange rate
- domestic price/foreign price
the central bank of the US
Distinguish between credit cards and money

Chapter 14
highways, mass transit systems, electric power facilities, “human capital”; increase economy’s future production capacity
public investments
Expenditures on new plant, eqquipment, and structures (capital) in a given time period, plus changes in business inventories.
additional or parallel accounting systems that provide measures of social and environmental factors in physical terms, without necessarily including monetary valuation
satellite accounts
Current Account
record of all transactions between foreign country and domestic one
a situation in which the quantity supplied is greater than the quantity demanded
Stocks of raw materials, goods in process, and finished goods held by firms to mitigate the effect of short-term fluctuations in production or sales.
A Texas oil company extracts petroleum and sells it to a refinery for $1,000. After processing, the refinerysells the gasoline to a wholesaler for $1,500, who then sells it to a gas station for $1,700. The gas station sellsit to customers for $2,500. In t
a continual rise in the price level
Explain two factors that can change the investment spending determinant of aggregate demand

Chapter 12
Human wants being greater than the means to achieve them
d: total spending
C + Ip + G
Residential Construction
Building new homes or dwelling places
(in reference to economic growth) the idea that underlying economic forces will cause poorer countries and regions to "catch up" with richer ones
the amount of principle associated with a bond
face value
the provision by the natural environment of inputs into human production
resource functions
A claim to partial ownership in a firm
Illustrate the market for a good by drawing the industry's demand and supply curves. on the graph, identify the equilibrium price and the equilibrium quantity. be sure to label all axes and curves.
full unemployment
-defined as a situation in which cyclical unemployment is eliminated. -does not imply unemployment rate of zero-usually unemployment rate is 4-5%
Fixed Investment
The creation of new plant and equipment
Index of Leading Indicators
Economic variables that decrease before economic downturn and vice versa before an upturn.
nominal GDP
the production of good and services valued at current prices
law of supply
quantity supplied rises as price rises, other things constantquantity supplied falls as price falls, other things constant
A single bank has a reserve requirement of 10 percent. This means that if a customer deposits $100 million, the bank may lend out:
$90 million
anything that increases the government’s budget deficit during a recession and increases its budget surplus during an expansion without requiring explicit action by policymakers
automatic of built-in stabilizers
personal consumption expenditures
Includes spending by households on durable goods, non-durable goods, and services.

Example: food, drink, clothes, car, doctor, etc.
An economic unit of one or more persons' living under one roof, that has a source of income and uses it in whatever way it deems fit
gross private domestic investment
expenditures for newly produced capital goods and for additions to inventories
a situation in which the quantity supplied is equal to the quantity demanded
market-clearing equilibrium
stocks (or shares in ownership of companies); bonds (or certificates indicating that the holder has loaned money to a government entity, which will repay the loan, withinterest, over time); money market accounts; and other holdings in which wealth can be
financial assets
anything that can be used to produce something else and include: land, labor (the time of workers), capital (machinery, buildings, and other man-made productive assets), and human capital (the educational achievements and skills of workers)
Open-market operation
A purchase or sale of government debt by the Fed.
reasons for downward slop of AD curve
-international substitution effect-real balance effect-interest rates effect
autonomous consumption
"a" is the level of household spending independent of disposable income
Which expression is another way of saying marginal benefit?

A. Profit
B. Loss
C. Total Benefit
D. Extra Benefit
D. Extra Benefit
target rate of unemployment
the lowest sustainable rate of unemployment that policymkaers beleive is achievable given existing demographics and the economy's institutional structure (somewhere around 5%)
Chapter 3

Define demand
The entire relationship between the quantity of product that buyers wish to purchase per period time and the price of that product..
token money
the face value of any piece of currency is unrelated to its intrinsic value, or the value of the physical materials out of which the piece of currency is constructed
an increase in government spending causes
decrease in investment spending
decrease in consumption
increase in saving
--- complete crowding out
The value of final output produced in a given period, measured in the prices of that period (current prices)
nominal GDP
the price of imports relative to exports
terms of trade
a medium of exhange used as money because a government says it has value, and people accept it
fiat money
the average number of deaths among a specific group
mortality rate
a shorthand term for the broad goal of promoting the sustenance and flourishing of lie
Inflation Rate
the percentage rate of a change in the price level
Private Property rights would cause
resource owners to conserve viral resources for the future particularily if they expect the resource to increase in value
induced consumption (MPC*DA)
the economies of the MPC is that disposable induces spending
Keynes believed the fundamental problem that led to the world depression was...
insufficient demand for goods and services
What is inflation?
Inflation is a continual rise in the general price level.
in the short run, equilibrium is found in the
money market graph
Nondurable goods?
Products with lives of less tahn 3 yrs (food and clothing)
the level of output an economy would produce if every resource in the economy were fully utilized
maximum capacity output
the use of monetary policy tools to increase the money supply, lower interest rates, and stimulate a higher lvevel of economic activity
expansionary monetary policy
a designated area of a country within which foreign-owned manufacturers can operate free of many taxes, tariffs, and regulations
foreign trade zone
what is necessary for the invisible hand of market prices to work properly
competitive markets and property rights that are well defined and enforced
Refer to the diagram. Curve B is a
production possibilities curve indication constant opportunity costs.
an increase in real GDP or in real GDP per capita, calculated as a percentage rate of growth per quarter
economic growth
d: capital gains tax
tax on profits earned when a financial asset is sold for more than its acquisition price
a tax which collects a larger share of income from poorer households
regressive income tax
Change in world interest rate
Causes NCO to change on LFM (loanable funds market) graphs, which means it shifts on FCEM (foreign currency exchange market) graps.Increase in World interest rate crowds out domestic investment, causes dollar to depreciate, and causes net exports to rise.
Increased Domestic employment agreement
arguing for a tariff to save US jobs. if imports are reduced then more money will be spent on domestic output making employment rise. Problems: imports might get rid of some jobs but create others. also if all nations cut back on imports than the countries would not make any money on exports. there is also the possibility that the countries affected by the tarrifs will retaliate causing a trade-barrier war. in the long run, an excess of exports caused by the tarriff would make it impossible to raise employment
two effects on the production function when a piece of capital stock w new technology is introduced
1) increase in production (shift upward) through the increase in capital
2) boost to production because of the new productivity enhancing technology
a person who is not employed, but who is actively seeking a job and who is immediately available for work
unemployed person (BLS definition)
Know \"T\" Accounts (Extra Credit)
1/RR x Initial New Deposit = MS1/20% x 10,000 = 50,000
3 Understatements of Gain in Economic Well-Being (Things Unaccounted for in Calculating Real GDP every year)
(1) Improved Goods and Services (i.e iceboxes => fridges)
(2) Added leisure (50 hrs of work-week => 35 hrs)
(3) Other impacts of growth (Effects of Stressful work environment, greater human security, etc. on workers and society)
Personal income is ...
a) equal to GDP minus the capital consumption allowance
b) the portion of income that is available for consumption and saving
c) the amount of income that individuals actually receive
d) income that is earned but not received
c) the amount if income that individuals actually receive
An increase in demand for a good is most likely to cause:
Excess demand (a shortage) before the price changes.
Measuring inflation
price index
Increase demand of goods/services
Sticky Prices
Prices don't change immediately 
Chapter 4

What is negative externality
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
Menu Costs
The costs of changing prices.
National Savings
Private Savings + Public Savings
The difference between government spending and taxes is the
budget deficit
Describe how automatic stabilizers are affected by different tax systems progressive, proportional, and regressive

Chapter 13
As resources become fully employed, price goes ___
in production, a system of organization in which each worker performs only one type of task
an empirical inverse relationship between the unemployment rate and rapid real GDP growth
Okun's "law"
Identify the determinants of Supply
-input prices-technology-expectations of sales-size of markets
private goods
used by owners efficientlyex- cell phones
privately held federal debt
the privately held (non-government-owned) debt of the U.S. government.
full-employment output is also known as...
potential output
financial assets
assets such as stocks or bonds
Chapter 3

Explain the meaning of the rationing function of prices
inferior goods
goods whose demand varies inversely with money income
A phase in the business, cycle, following a recession, in which real GDP increases and unemployment declines
Times of Prosperity = ?
Times of Inflation
gross investment minus an adjustment for depreciation of the capital stock
net investment
the costs of arranging economic activities
transaction costs
a combination of rising inflation and economic stagnation
Progressive Tax
taxes, as a percentage increases as income increases.
Perfect Capital Mobility
Full access to world financial markets.
The study of the functioning of the economy as a whole and also of how macroeconomic policies affect the economy.
Debt Finance
The sale of bonds to raise money.
Long-Run Equilibrium
The condition that exists in the economy when wages and prices have adjusted to their (final) equilibrium levels and workers do not have any relevant miperceptions. Graphically, long-run equilibrium occurs at the intersection of the AD and LRAS curves.
produced in home country and sold in another
occurs when an increase in the price of one good causes a leftward shift in the demand curve for the other (or if a decrease causes a rightward shift)
new firm focused on creating and introducing new product or employing a specific new production/distribution method
start-up firm
interest-rate effect
the tendency for increases in the price level to increase the demand for money, which raise interest rates, and , as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases)
The period of a business cycle during which total production and total employment are increasing.
Disposable Income (DI)
The income households have available to spend or to save after prying taxes and recieving transfer payments
what is included inM1?
currency in circulation, demand deposits, checking accounts M1 makes up most of MS
funds of purchasing power available to facilitate economic activity
financial capital
the sector of the economy that involves the provision of services rather than of tangible goods
tertiary sector
a situation in which the quantity that buyers wish to buy at the stated price is greater than the quantity that sellers are willing to sell at that price
govt. deficit
new borrowing from the public and new money created
Capital Gains
The profits made by selling an asset for more than is purchase price.
Excess Demanded
A situation in which, at the given price, quantity demanded exceeds quantity supplied
Taylor Rule
If actual federal funds rate is below the target rate implied by the Taylot Rule, monetary policy is overly expansionary, there should be a shift to more restrictive policy. Vice versa.
voluntary exchange
engaging in trade and acting in their own self interest
Fiscal Drag (#6)
Refers to automatic growth in the revenues, as income increases, resulting from a progressive tax structure.TRUE
substitute goods
Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.
substitution effect
suggest that at a lower price buyers have the incentive to substitute what is now a less expensive product for similar products ate are now relatively more expensive
The level of real GDP and the price level that equate the aggregate quantity demanded and the aggregate quantity supplied
the correct opportunity cost of holding money is
nominal interest rate i
the number of units of one currency that can be exchanged for a unit of another currency
exchange rate
an international agency charged with overseeing international finance, including exchange rates, international payments, and balance of payments issues
International Monetary Fund (IMF)
the need to have others provide one with care, shelter, food, etc. when one is unable to provide these for oneself
dependency needs
the sector including all entities concerned with producing goods and services for profitable sale. It also includes business serving nonprofit organizations and government enterprises.
business sector (BEA definition)
Federal funds market
Allows banks that fall short of the reserve requirement to borrow funds from banks with excess resrves.
types of unemployment not possible to eliminate
frictional, structural, and seasonal
Growth Not Sustainable (1)
Modern growth has resulted from new ideas
the extensive application of protective tariffs destroys the ability of the international market system to allocate resources effiently
this is because protection raises prices. also the allocation of resources is ineiffient because there is more resources going to the product that has a tarrif on it and less to another product which would make more money. allocation of resources is to use resources in the way that would produce the most bennifits (income)
Flow of Circular Flow Model?
From Resource Market, Money income flows clockwise
From Resource Market, Resources flow (real flow) counterclockwise
A change in quantity supplied of a good that is caused by factors other than a change in the price of that good
Change in supply
an index measuring changes in prices of goods and services bought by households
consumer price index (CPI)
an increase in the value of an asset over time
capital gain
Cost of Living Adjustments (COLAS)
automatic increases in wages or other payments that are tied to the CPI calculations
GNP (Gross National Product)
Similar to GDP, but measures only the income/expenditures of NATIONALS (permanent residents), regardless of where it is earned/spent (at home or in another country).Reflects, in part, the relative attractiveness of a country as a place to produce goods/services.GDP + (income received - income paid)
Income Velocity of Circulation
Number of times that money stock turns over in a year
marginal propensity to save
The fraction of an extra dollar of disposable income saved.
Income Approach to GDP
A methoc of calculating GDP by adding all payments for resources used to produce output in the nation during th year
the amount a bond returns during a year, if held to maturity, expressed in percentage terms. The yield is determined by the coupon amount, the bond price, and the time to maturity.
bond yield to maturity
the law of diminishing returns (GDP)
the more labor input is increases, eventually increases to real GDP are smaller
how do you calculate real GDP per capita?
dividing real GDP by population
Marginal product of labor (MPL)
The marginal product of labor (MPL) is the extra amount of output the
firm gets from one extra unit of labor, holding the amount of
capital fixed and is expressed using the production function:
MPL = F(K, L + 1) - F(K, L).
in order to achieve a high economic freedom rating a country must?
provide secure protection of provatel owned property and evenhanded enforcement of contractrefrain from creating barriers that limit domestic and international traderely more fully on markets rather than governemtns to allocate goods and resources
effects of inflation on savers
$1000 put into savings in 2000 is no longer worth the same $1000 when spent years later after inflation.
Model of Aggregate Demand & Aggregate Supply
The model that most economists use to explain short run fluctuations.
On a short-run macro model diagram, the impact of a decrease in government purchases (G) is illustrated by
a downward shift of the aggregate expenditure line by an amount less than the change in
On a short-run macro model diagram, the impact of a decrease in government purchases (G) is illustrated by
a. a downward shift of the aggregate expenditure line by the full amount of the change in G
b. an upward shift of the aggregate expenditure line followed by an equal downward shift of
that line
c. a leftward shift of the money supply curve
d. a downward shift of the aggregate expenditure line by an amount less than the change in
e. the increase in real income
a person who did any work for pay or profit during the week before they are surveyed by the BLS or who worked fifteen hours or more in a family business
employed person (BLS household survey definition)
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