Term
| Expenditure Method to calculate GDP |
|
Definition
C+Ig+G+Xn= GDP
C=Consumer Spending
Ig=Gross investment
G=Government spending
Xn = Net exports (Xn = Exports-imports)
Also Net exports CAN be a negative number |
|
|
Term
|
Definition
NDP = C+In+G+Xn
GDP uses Ig. In = Ig-depreciation
Alternate is NDP = GDP - depreciation |
|
|
Term
|
Definition
| GDP unadjusted for inflation |
|
|
Term
|
Definition
Inflation adjusted GDP - Much better economic indicator
Price level is held constant with real GDP
Real OUTPUT for the economy
Real GDP = (Nominal GDP/GDP Price Index) * 100 |
|
|
Term
| What is the business cycle and what are the 4 phases |
|
Definition
Business cycle = economic fluctuations
Cycles = Expansion(growth) - peak - recession - trough |
|
|
Term
| Karl Marx Theory of recession |
|
Definition
Argued that workers were not getting paid enough for their work, based his work on the concept of exploitation of labor
Said true value of anything p[roduced is the value that goes into it - workers often not paid true value of their labor |
|
|
Term
| Joseph Schumpeter recession theory |
|
Definition
| Looked at long run economic changes in the economy and explained them by the major advances in technology giving us major business cycles |
|
|
Term
|
Definition
Believes supply creates its own demand, argues the economy is self healing and always returns to full employment
Government intervention not needed |
|
|
Term
|
Definition
Published "General theory of employment, interest and money"
GDP expenditure method comes from Keynes theory
Demand driven
Government intervention may be useful in severe crisis
Argues there is a multiplier effect |
|
|
Term
| Predicting Recession - Economic Indicator 1 |
|
Definition
Leading indicators - These change before we move into a new stage of the business cycle
Average hours worked per week, unemployment claims, stock prices, new plant and equipment orders, building permits, consumer expectations, delivery time of goods |
|
|
Term
| Predicting Recession - Economic Indicator 2 |
|
Definition
Coincidental Indicators - Change during the business cycle
Ex: Payroll employment, industrial production, personal income |
|
|
Term
| Predicting Recession - Economic Indicator 3 |
|
Definition
Lagging indicators - change after the business cycle or "lag behind"
Ex: Labor cost per unit of output, inventory to sales ratio, unemployment duration, consumer debt, outstanding commercial loans, prime interest rate |
|
|
Term
|
Definition
| Two parties: The employed and the officially unemployed |
|
|
Term
|
Definition
| all people who are actively looking for jobs |
|
|
Term
|
Definition
| all fulltime and part time workers |
|
|
Term
| Economic indicators of a recession |
|
Definition
1) Leading indicators
2) Coincident indicators
3) Lagging indicators |
|
|
Term
|
Definition
| officially_unemployed / total_labor_force |
|
|
Term
|
Definition
| People who have been unemployed for an extended period of time, can't find a job so they give up and are NOT part of the labor force |
|
|
Term
|
Definition
Part of social security act of 1935
50% qualify foor it - people hvave to actively look for a job to receive compensation or be laid off
Is a buffer/cushion for the economy because personal income doesn't fall as much in a recession because consume spending stays up |
|
|
Term
|
Definition
Frictional employment: Most common type of unemployment (people waiting for a job or in betwee n jobs)
Structural unemployment - due to changes in structure of work place - IE technology changing and automation or corporate downsizing
Both unavoidable in a regular economy
Cyclical is the third type and is due to recession |
|
|
Term
| Natural Rate of Employment |
|
Definition
| Frictional_unemployment + Structural_unemployment |
|
|
Term
|
Definition
100% - natural_rate_of_unemployment
Ex = Natural_rate = 4% SO
100% - 4% = 96% |
|
|
Term
|
Definition
| What we can produce at full employment |
|
|
Term
|
Definition
| Potential_gdp - actual_gdp |
|
|
Term
|
Definition
1) Social cost - Suicide rate, divorce rate, prison population size, etc increasing when unemployment is rising
2) Lost Production - has to do with Okun's Law |
|
|
Term
|
Definition
For every 1% that the unempoyment rate exceeds the natural rate of unemployment there is a 2.5% GDP Gap
Ex: GDP gap = 2.5 * (actual_unemployment_rate - natural_rate_unemployment)
So, 2.5 (10% - 4%) = 15% |
|
|
Term
|
Definition
| Case where we have a sustained increase in the average price level |
|
|
Term
|
Definition
| Decrease in the average price level (negative inflation) |
|
|
Term
|
Definition
| Period when inflation rate is falling |
|
|
Term
|
Definition
| Recession with inflation - when unemployment rate and inflation rate both rising |
|
|
Term
|
Definition
when demand (for goods and services) is increasing, prices go up, output goes up
Most common reason for inflation and more problematic in a strong economy |
|
|
Term
|
Definition
Reduction in supply - business costs are going up, supply falls, prices rise, unemployment rise
Cause of recession in 1970s and 80s |
|
|
Term
| Who loses from inflation? |
|
Definition
1) People no a fixed income
2) People whos income is not keeping up with rate of inflation
3) Savers are worse off
4) Lenders and creditors lose from unexpected inflation |
|
|
Term
|
Definition
| Most common for the US, single digit annual inflation - predictable |
|
|
Term
|
Definition
| Double digit annual inflation - happened in the 70s and 80s and is harmful and unpredictable |
|
|
Term
|
Definition
When monthly rate of inflation is >50%
Hungary in 1946 is the worst case of hyper inflation
Always caused by excessive increase in the money supply by the Government |
|
|
Term
|
Definition
| Money that has no intrinsic value - we have nothing backing our currency except our faith in it |
|
|
Term
| MPC - marginal Propensity to consume |
|
Definition
Change in consumer spending/ change in disposable income
Ex: If MPC is .65 and the families income goes up $1, then they will save .65 cents and spend .35
Ex2: income goes up by $1000, and then consumer spending goes to $900 the MPC is .9 (900/100) - change in spending / change in income |
|
|
Term
| MPS - marginal Propensity to Save |
|
Definition
What consumers save with each extra dollar of income
MPS + MPC always = 1 |
|
|
Term
Multiplier Effect and
Expenditure Multiplier Formula |
|
Definition
Spending creates more spending.
1 / (1-MPC) ALSO 1/MPS
ex: MPC = .8 or 1/.2 = 5
This means per each $1 change in spending, GDP changes by $5 |
|
|
Term
| How to find the multiplier effect change in equilibrium of the GDP |
|
Definition
| Expenditure_multiplier * change_in_spending |
|
|
Term
|
Definition
| Average price of all goods and services demanded |
|
|
Term
| Reason Aggregate demand slopes down |
|
Definition
Wealth effect - consumer spending hgiher at a lower price level
Interestate rate effect -
Foreign purchase effect = Net exports tend to be lower at a higher general price |
|
|
Term
| Determinants of aggregate demand |
|
Definition
Consumer spending
Gross investment
Government spending
Net exports |
|
|
Term
| Determinants of aggregate supply |
|
Definition
Resource prices
Prices of imported resources
Prices of raw materials
Technology and productivity |
|
|
Term
| SRAS - Aggregate demand increases |
|
Definition
GRowth with inflation, unemployment down, aggregate supply up
Demand pull inflation |
|
|
Term
| SRAS - Aggregate Demand falls |
|
Definition
Real GDP is going down
Unemployment rising
Recession |
|
|
Term
| SRAS - Agg supply increase |
|
Definition
General price level drops
Real GDP is higher,
Falling unemployment
Deflation |
|
|
Term
| SRAS - Aggregate supply decreases |
|
Definition
Real GDP goes down
Price level rises
Unemployment rises
Recession with inflation
Stagflation |
|
|
Term
| LRAS - Agg demand increases |
|
Definition
| Only thing affected is equilibrium general price level is higher |
|
|
Term
|
Definition
| Once again only thing affected is the equilibrium general price is lower |
|
|
Term
| LRAS - Agg supply increase |
|
Definition
General price level falls
Unemployment drops
GDP rises |
|
|
Term
| LRAS - Aggregate supply decreases |
|
Definition
Price level goes up
Real GDP falls
Unemployment rises
Recession with inflation |
|
|
Term
|
Definition
| Government_spending - tax_revenues |
|
|
Term
|
Definition
|
|
Term
| 3 Basic Budget philosophies |
|
Definition
Annually balanced budget
Cyclically balanced budget
Functional Finance |
|
|
Term
|
Definition
Required government spending to equal tax revenues EACH Year
Potential problem - too strict at certain times, so its procyclical
Recession -income drops, tax revenues drop, unemployment rises, Government sepnding risses |
|
|
Term
| Cyclically Balanced Budget |
|
Definition
Less strict than annually balanced budget
During good yearrs, when we have a strong economy, run budget surpluses and will store them
Good times pay for the bad times, always have a balanced budget |
|
|
Term
|
Definition
Basically, don't worry about it - Focus on a growing economy and low unemployment
Just do whatever is necessary to keep the economy growing |
|
|
Term
|
Definition
| War and recession are the historical causes of debt |
|
|
Term
| Debt related Problems - Crowding out effect |
|
Definition
| When real interest rates go up, business investments go down |
|
|
Term
| Debt related problems - Impact on net exports |
|
Definition
| International and financial investment goes up, demand for dollars go up and dollar appreciates - SO exports tend to fall and imports tend to rise so NET EXPORTS goes down |
|
|
Term
| Can the federal government go bankrupt |
|
Definition
Debt is never due, it rolls over
2) Power to tax
3) Power to print money |
|
|
Term
|
Definition
1) Serves as a basic medium of exchange|
2) Way to store value, savings
3) Serves as a standard for deferred payment |
|
|
Term
| Defining the money supply - M1 |
|
Definition
| M1 includes all money in checking accounts, checkable deposits, and money in circulation outside of banks |
|
|
Term
|
Definition
| M2 includes everything in M1 definition, but also includes, savings accounts, money market accounts, mutual funds |
|
|
Term
| Federal reserve bank money supply chart |
|
Definition
| Line is straight vertical |
|
|
Term
|
Definition
| Top left to bottom right- growing economy shifts to the right |
|
|
Term
| Money demand type 1 - Transactions demand |
|
Definition
|
|
Term
| Money demand type 2 - Asset Demand |
|
Definition
1) Precautionary part of asset demand is demand cash to be safe
2) Speculative part of asset demand - some people hold more money for opportunities that may arise |
|
|
Term
|
Definition
| Insurance for Banks basically - prevents what happened during the great depression |
|
|
Term
|
Definition
| Money supply (straight verticle line) and money demand (top left to bottom right line) |
|
|
Term
|
Definition
| Interest rate goes up (decreases they go down) |
|
|
Term
| Federal reserve shifts money supply curve to the right |
|
Definition
| Interest rate sgo down, but money can be increased because they control it so money goes up |
|
|
Term
| Federal reserve shifts money supply to the left |
|
Definition
| Interest rates rise, but less money circulating making money more valuable |
|
|
Term
|
Definition
| Interest rate larger banks charge their larger/best customers |
|
|
Term
| Fractional Reserve Banking |
|
Definition
| Part of deposit can be used in the bank, the rest must be kept in required reserves |
|
|
Term
|
Definition
Percent which a bank is supposed to keep from each deposit as a reserve so
If $100,000 deposit and 20% is required reserve, $20,000 is rr and $80,00 is known as excess reserve |
|
|
Term
| Tools used by the federal reserve to control money supply |
|
Definition
1) Required reserve ratio
2) Discount rate - Interest rate federal reserve bank charges commercial banks for a loan
3) Open market operations - Federal reserve buys and sells Government securities
4) Federal Funds Rate - Loan rate commercial banks charge each other for an overnight loan - 1/2 point below discount rate - considered a short term interest rate |
|
|
Term
| Expansionary Moneytary Policy (easy money policy) |
|
Definition
| Feds use one of their tools to shift supply curve to the right |
|
|
Term
| Contractinoary Monetary Policy (Tight money policy) |
|
Definition
| Result is oppositve of the expansionary polciy- shifts money supply curve to the left |
|
|
Term
| If facing a recession or unemployment, which policy would the Feds use |
|
Definition
| Expansionary or easy money policy |
|
|
Term
| If facing inflation what would the Feds use |
|
Definition
| Tight money or Contractinoary monetary policy |
|
|
