MacroEconomics Test Flashcards

Terms Definitions
A certificate of indebtedness
Disposable income
(Y - T)
Patents and Copyrights
Increases innovation
Increases monopolies
Decreases output
Government intervention to alter market structure or prevent abuse of market power
an inflation rate exceeding 50%/ month
expansion on business cycle
output grows quickly
the property of distributing economic prosperity uniformly among the members of society
Describe the non-economic costs of unemployment

Chapter 9
Perfect Competition
-Perfect info.
-Many buyers and sellers
-No single individual or firm can influence price
Formula for studying GDP expenditure
(Investments+Government+Exports = Savings+Net Taxes+Imports)
a market for immediate delivery
spot market
the process by which poorer countries close the gap with richer countries in terms of real GDP/ capita
a set of simple ,prespecified and publicly announced guidelines for conducting monetary policy
dependent variable
A variable that responds to change
consumption schedule
a schedule showing the amounts households plant o spend for consumer goods at different levels of DI
The part of economic theory dealing with the economy as a whole and decision making by large units such as governments and unions.
Use the real balances interest rate foreign purchased effects to explain why the aggregate demand curve slopes downward

Chapter 12
Value of trade
1. Differences in preferences
2. Benifits from division of labor
2008-?: oil prices rise, housing bubble bursts; financial crisis
spending decreases
Net Exports
NX = exports – imports
Exports represent foreign spending on the economy’s goods and services

Imports are the portions of C, I, and G that are spent on goods and services produced abroad.
resources are scarce to the extent that they are not sufficient to allow all goals to be accomplished at once
questions about how things should be
normative questions
(in reference to economic growth) the idea that underlying economic forces will cause poorer countries and regions to "catch up" with richer ones
Crowding Out
A decrease in investment that results from government borrowing
Bank reserves
The currency banks hold in their vaults plus their deposits at the Federal Reserve.
change in price
only effects quantity demanded or supplied, not actual curve
Transfer Payment
A payment to an individual or institution not made in exchange for a good or service
Real Income
Income that has been adjusted for inflation and decreasing purchasing power.
labor force
the total number of workers including both the employed and unemployed
quantity supplied
a specific amount that will be supplied at a specific price
If the reserve ration is .1, the simple money multiplier is equal to 5. T/F?
time between need for fiscal action and the time action is taken
administrative lag
labor-force participation rate
the percentage of the working-age population actually in the labor force
The study of how people work together to transform resources into goods and services to satisfy their most pressing wants, and how they distribute these goods and services among themselves.
Exmaple of Spillover Cost
Pollution: Chemical Manufacturer dumps wastes into lake, fish suffer spillover costs
restrictions on the flows of people into and out of a country
migration controls
when banks keep their interest rates blow "what the market would bear" and deny loans to some potential borrowers, in the interest of maintaining their own profitability
credit rationing
the value of what a producer sells less the value of the intermediate inputs it uses. This is equal to the incomes paid out by the producer
When prices of oil rises unexpectedly, the equilibrium price level..(BLANK)......and the unemployment rate..(BLANK) the short run.
rises, rises
Discount rate
The rate of interest the Fed. charges on loans to banks.
depreciation of dollar
-occurs if each dollar "buys" fewer units of a foreign currency-US good becomes less expensive to foreign consumers-foreign goods become more expensive to US consumers -will increase AD for US goods and services
Acceleration Hypothesis
The hypothesis that when real GDP is held above potential, the persisten inflationary gap will cause inflation to accelerate
"Net foreign factor income"
Difference between the GNP and GDP
nominal output
the total amount of goods and services measured at current prices
What relates positive economics to normative economics?
The art of economics
financial services industry
the broad category of firms that provide financial products and services to help households and businesses earn interest, receive dividends, obtain capital gains, insure against losses, and plan for retirement
2002-2007: changes in fiscal and fed rerve policies
consumption spending increases
Federal Budget Deficit
A flow variable that measures the amount by which federal government outlays exceed federal government revenues in a particular period, usually a year
the percentage of the labor force made up of people who do not have paid jobs, but who are immediately available and activelylooking for paying jobs
unemployment rate
a price index derived by dividing nominal GDP by real GDP
implicit price deflator
the sector consisting of entities located outside the borders of the United States
foreign sector (BEA definition)
the relationship between two variables if an increase in one is associated with a decrease in the other
negative (or inverse) relationship
3 Types of Reserves
- Required Reserves:What the bank has to have- Excess Reserves: What's left over- Actual Reserves: What the bank has on handActual - Required = Excess
if the underground economy is sizable then GDP will
underestimate the economys performance
Diminishing returns
The benefit of one extra unit of input is less than the last extra unit of input.
economic expansion leads to
a decrease in the unemployment rate, which increases wages
If the Fed wants to increase the money supply, it should:
Buy bonds.
d: interest payment
the amount you earn from the purchase price of the bond minus the amount you actually paid
natural rate hypothesis
the claim that U evenually reurns to its normal or natural rate regardless of the rate of inflation
the sector that includes all federal, state, and local government entities
government sector (BEA definition)
a shift of the demand curve in response to some determinant other than the item's price
change in demand
an index of well-being made by combining measures of health, education, and income. This index is calculated by the United Nations Develpment Program
Human Development Index (HDI)
Not a cost of inflation (1)
1. A fall in purchasing power
consumer price index
a measure of the overall cost of the goods and services bought by a typical consumer
Classical economic theory is based on wages and prices ____ but in a modern economy, wages and prices are often ____.
a) rising, falling
b) falling, rising
c) being flexible, sticky
d) set by government, set by market forces
c) being flexible, being sticky
the more capital goods we have the...
less consumption goods we have
the component of GDP that represents spending by households
consumption (C) (traditional macro model)
State the final impact of cost-push inflation on the price-level and real output.
Stagflation; higher price level, lower output level.
personal consumption expenditure (PCE) deflator
a measure of prices of goods that consumers buy that allows yearly changes in the basket of goods that reflect actual consumer purchasing habits
demand for loanable funds is equal to...
planned investment spending + the government deficit
a set of goals declared by the United Nations in 2000, emphasizing eradication of extreme poverty; promotion of education, gender equity, and heath; environmental sustainability; and partnerships between rich and poor countries
Millennium Development Goals (MDG's)
GDP deflator (gross domestic product deflator)
an index of the price level of agregate output, or the average price of the components in total output (or GDP), relative to a base year
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
In the fall of 2004 the price of tomatoes dramatically increased. What could have caused this change?
Hurricanes during the late summer damaged the Florida crop, shifting supply left.
what must the economy do in order to operate on the opportunities curve
it must ultize full employment and productive effiency.
Aggregate Demand
Purchasing Power equation
PP=Price/Price Index
Classical economists believed thata. the government should play an active role in controlling the economyb. the government can best help the economy by leaving it alonec. the economy is controlled by the governmentd. laissez faire will hurt the economye.
positive economics
Uses descriptive statements, propositions, and predictions about the world.
seasonal unemployment
the component of unemployment attributed to seasonal factors
benefits from trade restrictions
-domestic producers-domestic government
the limited nature of society's resources 
Chapter 6

Present two reasons why prices are often inflexible in the short run
Risk Averse
Does Not like to gamble
Producers' stocks of finished and in-process goods
when the aggregate price level falls
components of Aggregate Demand
consumption, investment, govt. spending, net exports will shift the curve up or down. (increase in got. spending will move the curve right, increase in money supply will move the curve right, increase in taxes will shift the curve left, decrease in govt. spending will shift the curve left, decrease in money supply will shift curve left etc.)
laissez faire
free from the government, market decides everything , wages dont go down to adjust the price
Output Gap
Actual national income minus potential national income, Y-Y*.
market basket
representative group of good sand services for CPI
Apply the concepts of recessionary and inflationary gaps to two historical event in the United States

Chapter 11
Final goods
Used by consumer; Not intermediate goods
can fiscal policy have demand side effects in the short run
The purchase of new plants, new equipment, new building, and new residences, plus net additions to inventories
production using methods that involve a high ratio of labor to capital
labor-intensive production
the study of how economic activities at all levels create a national (and global) economic environment
a situation in whichthe quantity that sellers wish to sell at the stated price is greater than the quantity that buyers will buy at that price
Public Saving
The tax revenue that the government has left after paying for its spending
Fischer Effect
tendency for nominal interest rates to be high when inflation is high and low when inflation is low
law of demand
inverse relationship between price and quantity demanded. price increase-quantity demanded decrease and vice versa
Consumption Expenditure
Household expenditure on all goods and services. Represented by the symbol C.
Full Employment
the condition in which virtually all who are able and willing to work are employed.
2007 Recession
low interest rates for house subprime housing leases. Mortgages bundled into large MSB. Rates go up people cant afford houses try to sell. People worry about banks interest rates go up. Fiscal policy and buy outs occur
shift in supply
the graphic representation of the effect of a change in a factor other than price on supply
The law of supply states that quantity supplied of a good is inversely related to the good's price. T/F?
government spending in excess of tax revenues
budget deficit
increasing returns
a situation in which a given percentage increase in the amount of inputs a firm uses leads to an even larger percentage increase in the amount of output the firm produces
The use of statistics to quantify and test economic models.
Pursuit of Annually Balanced Budget:
Intensify the Business Cycle
a measure of the money supplyequal to currency, checkable deposits, and travelers checks
people who desire and are available for a job, but give discouragement as the reason for no longer looking for work
discouraged workers
Suppose the money supply grew by 5%, velocity stayed constant, and inflation was 2% , by how much nominal GDP increased that year?
Reserve requirements
Are rules set by the Federal Reserve that determine the minimum reserve ratio for a bank
nominal exchange rate
-compare value of one currency in relation to another
potential GDP growth formula
growth rate(t+1)=growth rate in labor hours(t+1)+growth rate of labor productivity(t+1)
A product that can be produced at a profit will be produced.  If not, then not.
list five leading indicators
money supply, stock prices, interest rate speed, number of new building permits issured for private housing units, index of consumer expectations
At all points on the aggregate production curve:
Income equals production.
money market deposit account (MMDA)
an interest-bearing account containing a variety of interest-bearing short-term securities
d: crowding out
decline in one sectors spending caused by an increase in some other sectors spending
The value of final output produced in a given period, adjusted for changing prices.
real GDP
equipment owned by businesses and governments; structures; residences; and software
fixed assets (BEA definition)
when a central bank buys government debt as it is issued
monetizing the deficit
the annual number of deaths per 1,000 population
death rate
Political Business cycle
the effects on the economy of using monetary or fiscal policy to stimulate the economy before an election to improve reelection prospects
when the expenditure approach is used to measure GDP the major components of GDP are waht?
consumption, governemtn spending, gross private investment, and net exports
growth rate of labor hours equals
[(LH2-LH1)/(LH1)]*100where LH is labor hours (current and previous)
an increase in demand for labor will...
increase wages and employment
The standard supply/demand framework:
Can be modified to explain real-world events.
lower interest rate causes
higher consumption, and causes a shift of the consumption function, rise in autonomous consumption spending
sunk cost
a cost that is beyond recovery at the moment a decision must be made
the ease of use of an asset as a medium of exchange
a situation in which countries or regions compete in providing low-cost business environments, resulting in deterioration in labor, environmental, or safety standards
race to the bottom
Marginal Propensity to Consume (MPC)
The fraction of extra income a household consumes rather than saves
When the economy is at its full employment Real GDP, the unemployment rate is equal to ...
a) zero
b) the frictional rate
c) the natural rate
d) the structural rate
c) the natural rate
the faster the rate of __A___, the greater the growth rate of __B__, the faster the rise in __C__
A) technological change
B) productivity
C) living standards
the lowest rate of unemployment that can be sustained without causing rapidly rising inflation
non-accelerating inflation rate of unemployment (NAIRU)
def. of Resource Cost-Income Approach
the dollar flow of income and indirect cost from final goods
do our wants change?
yes as we grow older we want cars instead of toys
what does output depend on
1) amount of resources for labor to use
2) technology which determines how much output we can produce with these resources
an action by central banks to buy or sell foreign exchange reserves in order to keep exchange rates at desired levels
foreign exchange market intervention
the law of increasing opportunity costs
the more you produce the more you must give up. At first the resources are easy to convert but then they become increasingly hard to convert. the more that is produce the greater the oportunity cost.
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.
In states that impose a minimum wage above the national minimum wage, it is more likely that the minimum wage acts as a binding:
Price floor, causing excess supply in the market.
Why do we use Inflation rate as a measure?
Implies a measure of the uncertainty regarding the purchasing power of income
the multiplier
K is
units of capital
Compounding (Equation)
Yt=Pt (1 + i)^t
Chapter 3

Explain the economic effects of the government set price ceiling on product price and quantity
households, familiesk, and communities
core sphere
GDP Gap (Equation)
SR output - NRO
nominal GDP
current quantities at current prices
How we are paid for each
Explain what changes the government spending determinant of aggregate demand

Chapter 12
Evaluating economics on a large scale.
in production, a system of organization in which each worker performs only one type of task
the adding up of individual economic variables to obtain economywide totals
when determining comparative advantage we must
compute opportunity cost
federal budget
the budget of the federal government
a person who, operating within the context of a market economy, assumes various risks in the hopes of earning profits by finding new ways to organize factors of production
inferior good
one whose demand curve shifts leftward when the incomes of buyers increase and rightward when the incomes of buyers decrease
Draw a graph to illustrate the relationships among consumption, saving and disposable income

Chapter 10
Doha Round
the latest uncompleted sequence of trade negotiations by member of the WTO
Typically, a person's MPC is relatively high during young adulthood, decreases during the middle-age years, and increases when the person is near or in retirement
Life-cycle hypothesis
Budget Surplus?
Taxes (Gov. Revenues) > Government Spending/Expenditures
actions taken to increase the quantity or quality of a resource now, in order to make benefits possible inthe future
observations of how a numerical variable changes over time
time-series date
gross investment minus an adjustment for depreciation of the capital stock
net investment
money multiplier
the amount the money supply expands with each dollar increase in reserves. MM=1/RR
"market effieceny"
the quantity demanded is exactly equal to the quantity supplied and the market is in equilibrium
Participation rate
Labor force / Population 16 and over
right of the 45 degree line intersection with consumption
households save
Monetary Wealth
The value of a person's monetary assets. Wealth, as distinguished from monetary wealth, refers to the value of all assets owned, both monetary and nonmonetary. In short, a person's wealth equals his or her monetary wealth (e.g. $1000 cash) plus nonmonetary wealth (eg. car or house)
The president of this Federal Reserve Bank is always a member of the FOMC
New York
YD = Y + TRbar - TA
Disposable Income
part of the business cycle in which output and employment bottom out at their lowest levels
trade bloc
a group of countries having common identity, economic interests, and trade rules
d: leakages
income earned but not spent by households during a given year (taxes and savings)
Intermediate goods:
used as components or ingredients in the production of other goods
stagflation is:
combo of high prices and falling output
a simple, mechanical model that portrays the macroeconomy as being made up of businesses that produce and invest, andhouseholds and governments that (only) consume
traditional macroeconomic model
unemployment that arises as people are in transition between jobs
frictional unemployment
a group of macroeconomists who theorized that people's expectations about Fed policy would cause predictable monetary policies to be ineffective in changing output levels
rational expectations school
federal funds rate
the interest rate on reserves that banks lend to each other
The ease with which an asset can be converted into the economy's medium of exchange.
Traditional Economy
An economy in which behaviour is based mostly on tradition
Core Inflation
The rate of increase of all prices except energy and food.
quantity demanded increases as...
the price of the product falls
Long-Run Economic Growth
The sustained upward trend in the economy's output over time.
public sector
The part of the economy that contains all government entities; government.
law of supply
as price rises, the quantity supplied rises; as price alls, the quantity supplied falls
A measure comparing the prices of all goods and services produced in the economy during a given year to the prices of those goods and services purchased in a base year
GDP deflator
market risk
risk that affects all companies in the stock market
the theory that an employer can motivate owrkers to put forth more effort by paying them somewhat more than what they could get elsewhere
efficiency wage theory
proposed by the World Bank, this is equal to gross saving less depreciation of both manufactured and natural capital
genuine saving
a discount rate that reflects social rather than market valuation of future costs and benefits; usually lower than the market discount rate
social discount rate
a line used to portray an income distribution, drawn on a graph with percentiles of households on the horizontal axis and the cumulative percentage of income on the vertical axis
Lorenz Curve
productive efficiency
when the only way to produce more of one goods is to give up something else
economic theory for public goods
market will not produce good efficiently and government production would be necessary.
Pefectly Competitive Market
Market where there are many buyers and sellers so that each person has a negligable impact on market price
the diversification for stability argument
used by highly specialized economies who are dependent on the international market for income. tariff and quota protection are argued as a necessity to enable industrial diversification. this way, these countries wont be so dependent on exports. the problem is the economic cost of diversification may be great
What are the 2 types of economic systems?
Market System
Command System
This theory helps us explain how specialization works.

Ricardo's theory that specialization and free trade will benefit all trading parties, even those that may be "absolutely" more efficient producers.
Theory of comparative advantage.
what is refinancing?
issuance of new debt in payment of debt issued earlier
the number of times a dollar would have to change hands during a year to support nominal GDP
velocity of money
a curve showing the maximum amount of twooutputs that society could produce from given resources, over a given time period
productoin-possibilities frontier (PPF)
transaction demand for money
the demand for money based on teh desire to facilitate transactions
Gross Domestic Product (GDP)
The total value of goods and services produced in the economy during a given period
What are the admissible values for the marginal propensity to consume (c)?
0 < c < 1
marginal propensity to save (MPS)
the fraction of any change in disposable income that households save; equal to the change in saving divided by the change in disposable income
total income equals total expenditure
because every dollar a buyer spends is a dollar of income for the seller.
a tax which collects a larger share of the income from those most able to pay
progressive income tax
rotation of a curve
Change in a curve that occurs when its slope changes with one point on the curve fixed
The noninstitutional adult civilian population can be broken down into ...
a) employed persons and unemployed persons
b) persons working and persons not working
c) persons working in manufacturing and persons working in services
d) persons in the labor fo
d) persons in the labor force and persons not in the labor force
4 Phases of Business Cycle (Time on X-axis, Level of Real Output on Y-axis)
(1) Peak
(2) Recession
(3) Trough
(4) Recovery
Economics can best be described as the science that studies
how individuals and societies deal with the problem of scarcity.
The market system's answer to the fundamental question &quot;What will be produced?&quot; is essentially:
A) &quot;Goods and service that can be produced using large amounts of capital.&quot;
B) &quot;Goods and services that are profitable.&quot;
C) &q
B) &quot;Goods and services that are profitable.&quot;
What is the final impact of expansionary fiscal policy on the price-level and real output?
An increase in income, an increase in the demand for money, and an increase ion the interest rate. Also called the crowding -out effect.
If the required reserve ratio is 20 percent, banks loan out all excess reserves, people hold no currency, and the Fed sells $5,000 worth of bonds to banks, what is the ultimate impact on the money supply?
The money supply will decrease by $25,000
What are the Fed's policy options or tools?
change in rr, change in discount rate, and Open Market Operations
formula for GDP
during expansions, output..
rises quickly
Macroeconomic Policy Objectives
o Full Employmento Price Stabilityo High and sustainable rate of economic growth
Normal Proft?
Cost of entrepreneaur's contributions
open economy
an economy that trades internationally
required reserves
=amount of new deposit*reserve ratio
In macroeconomics,a. we study one market at a timeb. we try to understand how the entire economy behavesc. we focus on large, important products and ignore the restd. we study one nation's economy onlye. we aggregate all national economies into a world ec
The difference between the long-run and short-run frameworks is that the long-run framework focuses on demand while the short-run framework focuses on supply. T/F?
is opportunity cost always present with a choice is made?
cost of linving adjustment; the increase ina transfer payment or wage that feflects the increase in the price level
something whose quantity can be measured at a point in time
Federal Revenue
income takes (bulk), gift taxes, social security taxes, death takes, customs duties, etc. Money the govt. spends.
Structural Unemployment
Unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one.
Macroeconomics focus on
problems, theories, policis, and different view on how the economy works.
Supply-Side Economics
Economic policies designed to increase aggregate supply or shift aggregate supply curve to the right
Make three clarifying points about the multiplier

Chapter 10
Purchase the goods and services that are the end products of the economic system.
• Wars, changes in climate, population booms, clustering of innovations, changes in consumer confidence, changes in government spending, or changes in international exchange rates.
externally induced cycles
buying and selling assets with the expectation of profiting from appreciation of depreciation in asset values
selling products at prices that are below the cost of production
lowering an exchange rate within a fixed exchange reate system
a resource that regenerates itself through short-term processes
renewable resource
normative economics
statements that describe what ought to be
aggregate supply
value of domestic product produced by firms at each given price level
positive statement
A statement of fact or a hypothesis
Cost-Benefit Principle
An individual (firm or society) should take an action if and only if the extra benefits from taking the action are at least as great as the extra cost.
inflation tax
the revenue the government raises by creating money
Supply Curve
A graph of the relationship between the price of a good and the quantity supplied.
buying of government bonds from, or the selling of government bonds to, commercial banks and the general public
open-market operations
creative destruction
the creation of new products and production methods completely destroys the market positions of firms that are wedded to existing products and older ways of doing business
That part of national income not spent on consumption
demand curve
a schedul or graph showing the quanitity of a good that buyers wish to buy at each price
a curve indicating the quantities that sellers are willing to supply at various prices
supply curve
programs designed to transfer income to recipients if and when certain events occur
social insurance programs
loose or expansionary monetary plicy intended to counteract recessionary tendencies in the economy 11
accommodating monetary policy
whats counted in GDP
1) finished goods (avoids double counting)
free rider problem
people who benefit from good without paying for it
Technological change
is an increase in the quantity of output firms can produce using a given quantity of inputs; is more important for economic growth than capital per hours worked
per-unit production costs
the average production cost of a particular level of output; total input cost divided by units of output
marginal cost
the additional cost to you over and above the costs you have already incurred
Induced expenditures are defined as expenditures that:
Change as income changes.
Who makes up the FOMC?
·The Board of Governors
·The president of the New York Federal Reserve Bank
·Four of the remaining presidents of Federal Reserve Banks on a 1-year rotating basis
the larger the MPC the larger the
change in output
Double counting
The mistake of including th value of intermediate goods plus the value of final goods in GDP
people who seek to enjoy the benefit of a public good without paying for it
free riders
funds not loaned out by a private bank, but kept as vault cash or on deposit at the Federal Reserve 11
bank reserves
the total demand for all goods and services in a national economy 1
aggregate demand
outputs that are not used either for consumption or in a further production process
waste products
Consumer Price Index (CPI)
Most common index used to calculate nominal GDP. Base period is 1982-84.
CPI = Cost of mkt basket current year  x 100
Cost of market basket 1982-84  
Unit of Account
The measure people use to post prices and record debts
Real GDP vs. Nominal GDP
Real: Includes inflation; requires a BASE YEAR & BASE PRICES FROM THE BASE YEAR.Nominal: Does not include inflation; uses CURRENT YEAR & CURRENT PRICES.
The above data suggests
a policy of tax reduction will increase consumption
Market Failure
A situation in which a market left on its own fails to allocate resources efficiently
Real GDP per capita
Read GDP divided by teh population, measure of an economy's standard of living.
an equation where the two sides are equal by definition
identity (accounting identity)
an approach to production in which a process is broken down into smaller tasks, with each worker assigned only one or a few tasks
division of labor
competitive edge on production costs
nations have different laws where they can produce cheaper - child labor/worker safety
The cost of Entrepreneurial ability to a firm is called:
Normal Profit

This is a cost not a profit
Suppose you are told that AE = 7000 + 0.75Y. Using this equation and the multiplier, what will equilibrium income be?
$28,000 (AE=Y)
1980: dramatic increase in oil prices
spending on cars and other energy using products decreases
What is demand pull inlfation?
when people keep demanding same amount no matter the price
Components of Planned TE
C + I + G + (X - M)
If the economy was operating below full employment, it could return to full employment...
through open market purchases, through increases in government spending or tax cuts, by itself, through falling wages and prices
what will a rise in the interest rate cause
decrease in consumption spending
increase in savings
decrease in planned investment
the agency in the United States in charge of compiling and publishing the national accounts
Bureau of Economic Analysis (BEA)
economic growth is severely impeded in economies
with a lack of clear property rights
An effective way to explain the process of how the money market reaches equilibrium is to begin with an
interest rate that is
not the equilibrium value and watch the forces that move it toward equilibrium
What are the 3 lags associated with stabilization policy?
1- recognition lag- takes time to recognize problem
2- implementation lag- takes time to implement policy
3- response lag- takes time for policy to have effect on economy
Gross domestic product is a measure of both
the marekt value of the ouput produced during a period and the cost of producing that output
National Income =
What are externalities
side effects

_______ _______changes in government expenditures and taxation
to achieve macroeconomic goals.
Fiscal policy
anything from individuals receive disutility or dissatisfaction.
occurs when the ingredients for producing things people desire are insufficient to satisfy all wants
financial markets
financial institutions though which savers can directly provide funds for borrowers
Marginal Analysis
Involves comparing marginal benefits and marginal costs.
Which of the following statements about unanticipated inflation is true?a. It reduces average purchasing power in the economy.b. It reduces total purchasing power in the economy.c. It redistributes purchasing power in the economy.d. It reduces nominal wag
Shocks to aggregate demand affect aggregate output in the short-run but not the long-run
Cross elasticity is ..... for Complements?
exists when marginal benefits equal marginal costs.

Graph: MB = MC; where MB and MC intersect.
Unemployment Rate
Unemployed / unemployed + employed (aka labor force)
the process of bringing down inflation that is embedded in expectations.
Economics models _______, not ________
behavior, though processes
Rational individuals...
choose their comparative advantage or specialize
trade policy
a government policy that directly influences the quantity of goods and services that a country imports or exports
Deadweight Loss
The reduction in economic surplus resulting from a market not being in competitive equilibrium.
Producer Surplus
The difference between the lowest price a firm would be willing to accept for a good or service and the price it actually receives.
Situation in which an economy is producing the goods and services in which it has a comparitive advantage
Suppose the economy consists of two distinct groups: wage earners and goods sellers. If the price levelincreases by 30 percent and real wages increase by 30 percent,a. there will be no redistribution of purchasing power between goods sellers and wageearne
Pertaining to the Demand and Supply Curve, The FLATTER it is the more .... it is?
Independent relationship
A zero association between two variables. When one variable changes, the other variable remains unchanged.
Any arrangement in which buyers and sellers interact to determine the price and quantity of goods and services exchanged.
the satisfaction one receives from a good.
Number of people who work part time because they cannot find full-time jobs.
Capital goods
goods we use to produce other goods
transaction costs
all of the costs associated with exchange, including the informational costs and enforcing the contract
the field of studies that shows how people make decisions regarding the allocation of resources over time and the handling of risk
real GDP
the production of goods and services valued at constant prices
firm-specific risk
risk that affects only a single company
Economic Surplus
The sum of consumer surplus and producer surplus.
A factor of production that has been produced for use in the production of other goods and services
Suppose that a labor union leader is trying to bargain for an increase in union workers' real wages of 5percent. If he expected the price level to rise at a rate of 3 percent this year, how much would nominal wagesneed to increase for him to accomplish hi
AS-AD model
The aggregate supply curve and the aggregate demand curve are used together to analyze economic fluctuations
A normative statement describes how the world ?
Ought to be.
Autonomous Expenditures
Element of expenditure that do not change systematically with national income
Cyclical Unemployment
Due to a general downturn of the economy. Like now, in a recession.
Name 3 government revenues.
personal income taxes, payroll taxes, and corporate taxes
velocity of money
the rate at which money changes hands
Economic Growth
The ability of the economy to produce increasing quantities of goods and services.
comparative advantage
In producing a good or service, the situation that occurs if the oppurtunity cost of producing that good or service is lower for that economy than any other
Price elasticity of demand is ..... And Price of supple is ..... ?
~ Negative~ Positive
Net Tax Rate
The increase in net tax revenue generated when national income rises by one dollar. Also called the marginal propensity to tax.
unit of account costs
arise from the way inflation makes money a less reliable unit of measurement
a change in the price of one causes a shift in demand for the other in the same direction as the price change
What is a progressive tax?
average tax rate rises with income
Perfectly Competitive Market
A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.
A Technological advancement will shift the....?
Supply curve to the Right.
The principle that the opportunity cost increases as production of one output expands
Law of increasing opportunity costs
Change in supply
An increase or a decrease in the quantity supplied at each possible price. An increase in supply is a rightward shift in the entire supply curve. A decrease in supply is a leftward shift in the entire supply curve.
Factor other than price changes on demand curve
shifting curve left or right
What is shortage?
when the amount of a good offered for sale is less that the demand by buyers at the existing price
law of increasing oppurtunity cost
As an economy moves along its production possibilities curve in the direction of producing more of a particular good, the oppurtunity cost of additional units of that good will increase
Desired Aggregate Expenditure (AE)
The sum of desired or planned spending on domestic output by households, firms, governments, and foreigners.
What is the Laffer curve?
A graph that shows how tax rates affect tax revenue
What are Determinants of Demand?
~ Tastes~ Income~ The price of related goods
What is a foreign exchange market?
the market in which the currencies of difference countries are bought and sold
What are the benefits of trade?
you can produce more than the maximum output of the PPC
If the elasticity of supply is zero, then...?
The Quantity Supplied is the same regardless of price.
If a good is a necessity, demand for the good would tend to be?
Inelastic. Becuase no matter the price the demand for the good will remain becuase it is a necessity.
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