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Details Title: Macroeconomics Description: Test 2 Total Flash Cards: 52 Created: 03/19/2007 21:36:35	To study from this set of flash cards, or to create your own your own study flash cards, register HERE. If you are already a registered user, CLICK HERE.
Cards Term SRAS Definition upward sloping b/c nominal wages are sticky in the SR. Changes in commodity prices, nominal wages, and productivity lead to changes in producers’ profits and shifts the SRAS Term Potential Output Definition All prices and nominal wages are flexible in the LR. –Aggregate output exceeds potential output, nominal wages will eventually rise in response to low unemployment and aggregate output will fall. -If potential output exceeds actual aggregate output, nominal wages will eventually fall in response to high unemployment and aggregate out put will rise. LRAS is vertical potential output. Term Aggregate Supply Curve Definition Relationship between aggregate price level and the quantity of aggregate output supplied Term Aggregate Demand Curve Definition Relationship between the aggregate price level and the quantity of aggregate output demanded. Downward sloping for two reasons: -Wealth effect of a change in the aggregate price level – a higher aggregate price level reduces the purchasing power of households’ wealth and reduces consumer spending. -Interest rate effect of a change in the aggregate price level – a higher aggregate price level reduces the purchasing power of households’ and firms’ money holdings, leading to a rise in interest rates and a fall in investment spending and consumer spending -Shifts because of changes in expectations, changes in wealth not due to changes in the aggregate price level, and changes in the stock of physical capital. Term Multiplier Definition 1/(1-MPC) Term MPC Definition The fraction of an additional dollar of disposable income spent on consumption Term MPS Definition 1-MPC Term AS-AD Model Definition Intersection of the SRAS and the aggregate demand curve is the SR macroeconomic equilibrium. It determines the SR equilibrium price level and the level of SR equilibrium aggregate output. Term Supply Shock Definition Causes the aggregate price level and aggregate output to move in opposite directions as the economy moves along the aggregate demand curve Term Stagflation Definition Inflation and falling aggregate output – negative supply shock. Term Demand Shock Definition Causes aggregate price level and aggregate output to move in the same direction as the economy moves along the SRAS. Term Demand shocks have only SR effects on aggregate output because the economy is self-correcting in the LR Definition Demand shocks have only SR effects on aggregate output because the economy is self-correcting in the LR Term Recessionary Gap an eventual fall in nominal wages moves the economy to LR macro-equilibrium where aggregate out put is equal to potential output. Definition Recessionary Gap an eventual fall in nominal wages moves the economy to LR macro-equilibrium where aggregate out put is equal to potential output. Term Inflationary Gap an eventual rise in nominal wages moves the economy to LR macro-equilibrium. Definition Inflationary Gap an eventual rise in nominal wages moves the economy to LR macro-equilibrium. Term Fiscal policy affects aggregate demand directly through government purchases and indirectly through changes in taxes or government transfers that affect consumer spending. Definition Fiscal policy affects aggregate demand directly through government purchases and indirectly through changes in taxes or government transfers that affect consumer spending. Term Monetary policy affects aggregate demand indirectly through changes in the interest rate that affect consumer and investment spending. Definition Monetary policy affects aggregate demand indirectly through changes in the interest rate that affect consumer and investment spending. Term Consumption function Definition shows how an individual household’s consumer spending is determined by its current disposable income Term Aggregate consumption function Definition shows the relationship for the entire economy Term Planned investment spending Definition depends negatively on the interest rate and on existing production capacity; it depends positively on expected future real GDP. Term Accelerator principle Definition says that investment spending is greatly influenced by the expected growth rate of real GDP Term Actual investment spending Definition is the sum of planned investment spending and unplanned inventory investment. Term Income-expenditure equilibrium/ Planned aggregate spending Definition in a simplified model with no government and no trade is the sum of consumer spending and planned investment spending, is equal to real GDP. Term Income-expenditure GDP Definition Y*, unplanned inventory investment is zero. When planned aggregate spending is larger than Y*, unplanned inventory investment is negative. When planned aggregate spending is less than Y*, unplanned inventory investment is positive Term Keynesian cross Definition shows how the economy self-adjusts to income-expenditure equilibrium through inventory adjustments Term Fiscal Policy Definition the use of taxes, government transfers, or government purchases of goods and services to shift the aggregate demand curve. Term Expansionary fiscal policy Definition shift the aggregate deman curve right Term contractionary fiscal policy Definition shift the aggregate demand curve left Term fiscal policy multiplier Definition MPC/(1-MPC) Term Automatic stabilizers Definition rules governing taxes and some transfers that reduce the size of fluctuations automatically. Term Discretionary fiscal policy Definition arises from deliberate actions by policy makers rather than from the business cycle Term Implicit liabilities Definition Social security, medicare, and medicaid, the costs of which are increasing due to the aging of the population and rising medical costs Term Money Definition any asset that can easily be used to purchase goods and services Term money's three roles Definition medium of exchange, store of value, and unit of account Term commodity money Definition consists of goods possessing value aside from their role as money Term commodity-backed money Definition paper currency backed by gold, silver, salt, cigarettes, etc. Term Fiat money Definition money whose value derives solely from its official role Term bank reserves Definition composed of both currency held in vaults and deposits at the Fed, to meet demands for cash Term reserve ratio Definition the ratio of bank reserves to bank deposits. Term monetary base Definition consists of currency in circulation Term money multiplier Definition the ratio of the money supply to the monetary base Term Federal funds market Definition where banks borrow to meet Fed reserve requirements Term Federal funds rate / discount rate Definition the rate that banks are charged to loan money from the Fed Term Open-market operations Definition the Fed's principal tool of monetary policy: the Fed can increase or decrease the monetary base by selling or buying treasury bonds (respectively) Term Money demand curve Definition arises from a trade-off between the opportunity cost of holding money and the liquidity the money provides. The opportunity cost of holding money depends on short-term interest rates, not long-term interest rates. Term Real money demand curve Definition Other things equal, the nominal quantity of money demanded is proportional to the aggregate price level. Term Quantity equation Definition MV=PY the real quantity of money demanded is proportional to the real aggregate spending, where the constant of proportionality is one over the velocity of money. Term Liquidity preference model of the interest rate Definition says that the interest rate is determined in the money market by the money demand curve and the money supply curve Term Target federal funds rate Definition the goal of the Fed by using open-market operations, which other interest rates generally track Term Expansionary monetary policy Definition reduces the interest rate and increases aggregate demand by increasing the money supply, is used to close recessionary gaps Term Contractionary monetary policy Definition increases the interest rate and reduces aggregate demand by decreasing the money supply, used to close inflationary gaps Term Monetary neutrality Definition changes in the money supply have no real effect on the economy in the LR. Monetary policy is ineffectual in the LR. Term In the LR, the equilibrium interest rate matches the supply and demand for loanable funds that arise at potential output in the market for loanable funds. Definition In the LR, the equilibrium interest rate matches the supply and demand for loanable funds that arise at potential output in the market for loanable funds.