Shared Flashcard Set

Details

Macro Test
final exam time
25
Economics
Undergraduate 2
05/08/2012

Additional Economics Flashcards

 


 

Cards

Term
Theory of liquidity preference
Definition
theory that interest rate adjusts to bring money supply and money demand into balance
Term
Equilibrium interest rate
Definition
quantity of money demanded exactly balances the amount supplied
Term
Fiscal policy
Definition
setting the level of government spending and taxation by policymakers
Term
Multiplier effect
Definition
shifts in aggregate demand that come when expansionary fiscal policy increases income, increasing consumer spending
Term
Investment accelerator
Definition
positive feedback from demand to investment
Term
Crowding-out effect
Definition
while increases in government purchases increases demand for goods and services, it also causes interest rates to increase, decreasing investment spending, in turn putting downward pressure on aggregate demand
Term
Marginal propensity to consume (MPC)
Definition
the fraction of extra income that households consume rather than save   ex: ¾ MPC - every dollar made, .75 spent and .25 saved
Term
Automatic stabilizers
Definition
changes in fiscal policy stimulating aggregate demand when the economy hit’s a recession, without policy makers having to take deliberate action
Term
Phillips Curve
Definition
short run trade-off between inflation and unemployment
Term
Expected inflation
Definition
measures how much people expect the overall price level to change
Term
Unemployment rate formula
Definition
Unemployment rate = natural rate of unemployment - a (actual inflation - expected inflation)
Term
Natural-rate hypothesis
Definition
the claim that unemployment eventually returns to its normal or natural rate regardless of inflation
Term
Supply shock
Definition
an event that directly alters a firms costs and prices, shifting the economies aggregate supply curve and thus the Phillips curve
Term
Sacrifice ratio
Definition
the number of percentage points of annual output lost in process of reducing inflation by 1%
Term
Rational expectations
Definition
the theory that people use all the information they have when forecasting the future
Term
The Wealth Effect:
Definition
lower price level raises real value of household’s money holding, raising their wealth. Higher real wealth results in increase in consumer spending = increase in goods and services demanded
Term
The Interest Rate Effect:
Definition
lower price level reduces amount of money people hold. As people try to lend out excess money holdings, interest rate falls. Lower interest rates - stimulates investment spending = increase in goods and services demanded   
Term
The Exchange Rate Effect:
Definition
when lower price level reduces interest rate, investors move funds overseas in search of higher returns. Movement of funds - real value of domestic currency to fall in foreign-currency exchange. Domestic goods less expensive than foreign - stimulates net export spending = increase in goods and services
Term
Aggregate-demand Curve
Definition
Shows the number of goods and services that household, firms, government, and customers abroad want to purchase at each price level
Term
Aggregate-Supply Curve
Definition
Quantity of goods and services that companies chose to produce and sell at each price level
Term
Natural Rate of Output
Definition
production of goods and services that economy achieves when unemployment is at its natural rate
Term
Short-run Aggregate Supply
Definition
decrease in price level = decrease in quantity of output, this can be from sticky wages and prices
Term
Quantity of Output Supplied Formula
Definition
Quantity of output supplied = natural rate of output + A (actual price level - expected price level)
Term
Stagflation
Definition

period of falling output and rising prices

 

Term

Three reasons the aggregate-demand curve slopes downward:                   

Definition
The wealth effect, the interest rate effect, the exchnage rate effect
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