Term
|
Definition
| measures total income of everyone in the economy (adjusted for price level change) |
|
|
Term
|
Definition
| measures how fast prices are rising |
|
|
Term
|
Definition
| fraction of labor force that is out of work |
|
|
Term
|
Definition
| those variables that a model tries to explain (output of model) |
|
|
Term
|
Definition
| those variables that the model takes as a given (input of model) |
|
|
Term
|
Definition
| to show how the exogenous variables affect the endogenous variables |
|
|
Term
|
Definition
| the assumption that supplied and quantity demanded will fall into balance, or equilibrium, through price adjustments to where the curves intersect |
|
|
Term
| The reason market clearing is viewed as naive... |
|
Definition
| The issue of sticky versus flexible wages and prices. Market clearing voids this issue, which can play a major role in certain markets. Continuous market clearing is not realistic for some markets, as some prices/wages are only adjusted periodically (ie magazine prices), and are consequently "sticky", while market clearing assumes flexible wages/prices. |
|
|
Term
| Central principle of microeconomics |
|
Definition
| all households/firms operate to maximize/optimize utility |
|
|
Term
| GDP is computed every three months by: |
|
Definition
| The Bureau of Economic Analysis |
|
|
Term
| The two ways to view GDP are: |
|
Definition
1. As the total income of everyone in the economy
2. As the total expenditure on the economy's total output of goods and services
|
|
|
Term
|
Definition
| the market value of all goods and services produced within an economy in a given period of time |
|
|
Term
|
Definition
| an estimation of the value of goods and services that do not have a market value (ie housing owned, not rented, or government services) |
|
|
Term
| GDP is an imperfect measure of economic activity because (2): |
|
Definition
1. imputations are approximate
2. there are many values of goods and services that are left out altogether |
|
|
Term
|
Definition
the value of goods and services measured at current prices
**Can increase either because prices rise or quantities rise |
|
|
Term
|
Definition
| a tally of the economy's output without being influenced by changes in prices; the value of goods and services measured using a constant set of prices (aka base year prices) |
|
|
Term
|
Definition
|
|
Term
|
Definition
| reflects what is happening to the overall level of prices in the economy |
|
|
Term
| The four components of expenditure are: |
|
Definition
1. Consumption
2. Investment
3. Gov't purchases
4. Net exports (IM-EX) |
|
|
Term
|
Definition
Goods and services bought by households; includes:
-nondurable goods (food & clothing)
-durable goods (cars & TVs)
-services (restaurants) |
|
|
Term
|
Definition
Goods bought for future use; includes:
-business fixed investment (purchase of new plant/equipment by firms)
-residential fixed investment (purchase of new housing by households and landlords)
-inventory investment (increase in inventory for firms and businesses) |
|
|
Term
|
Definition
|
|
Term
| Letting Y stand for GDP, Y = ? |
|
Definition
C + I + G + NX
(this is aka the national income accounts identity) |
|
|
Term
| GNP (Gross national product) = |
|
Definition
| GDP + factor payments from abroad - factor payments to abroad |
|
|
Term
| NNP (net national product) = |
|
Definition
GNP - depreciation of capital
*In the national income accounts, depreciation is called consumption of fixed capital |
|
|
Term
| Disposable personal income = |
|
Definition
| personal income - personal tax and nontax obligations (ie parking ticket) |
|
|
Term
| We are interested in disposable personal income because... |
|
Definition
| it tells us how much households and noncorporate businesses have to spend after satisfying their tax obligations to the government |
|
|
Term
| Consumer Price Index (CPI) |
|
Definition
| the price of the basket of goods purchased by a typical consumer relative to the price of the same basket in a base year |
|
|
Term
| Producer Price Index (PPI) |
|
Definition
| the basket of goods typically consumed by firms rather than consumers |
|
|
Term
|
Definition
| measures the change in price of consumer basket excluding those goods that fall under food and energy (because food and energy products exhibit substantial short-run volatility) |
|
|
Term
| GDP deflator measures the prices of all goods and services produced, whereas CPI measures... |
|
Definition
| the prices of only the goods and services bought by consumers |
|
|
Term
| An increase in price of the goods and services bought only by firms or the government will show up in ______, but not in _______. |
|
Definition
| Firm and government product inflation will show up in GDP deflator, but not the CPI |
|
|
Term
| GDP deflator includes only those goods produced... |
|
Definition
|
|
Term
| An increase in price of a foreign good.... |
|
Definition
| could affect CPI, but not the GDP deflator |
|
|
Term
| The _______ assigns fixed weights to the prices of different goods, whereas the _______ assigns changing weights. |
|
Definition
| The CPI assigns fixed weights, while the GDP deflator assigns changing weights. |
|
|
Term
|
Definition
| A price index with a fixed basket of goods |
|
|
Term
|
Definition
| A price index with a changing basket of goods |
|
|
Term
| A Laspeyres index ignores consumers' ability to __________, so it tends to overstate inflation. |
|
Definition
| substitute more expensive goods for less expensive alternatives |
|
|
Term
|
Definition
| # unemployed/# in labor force |
|
|
Term
| Labor-force participation rate = |
|
Definition
| # in labor force/# in adult population |
|
|
Term
What determines the total production of goods and services (2)?
|
|
Definition
1. Quantity of inputs (called factors of production)
2. Ability to turn input into output |
|
|
Term
|
Definition
the inputs used to produce goods and services
The two most important:
1. Capital (K)
2. Labor (L) |
|
|
Term
|
Definition
|
|
Term
| Marginal product of labor (MPL) |
|
Definition
the extra amount of output gained from one extra unit of labor
MPL = F(K, L + 1) - F(K, L) |
|
|
Term
| Diminishing Marginal Product |
|
Definition
| holding the amount of capital fixed, the product of labor decreases as the amount of labor input increases |
|
|
Term
| Marginal Product of Capital (MPK) |
|
Definition
the amount of extra output the firm gets from an extra unit of capital, holding the amount of labor constant
MPK = F(K+1, L) - F(K, L) |
|
|
Term
| Real rental price of capital |
|
Definition
| The cost of capital measured in units of goods, rather than in dollars |
|
|
Term
| Marginal Propensity to Consume (MPC) |
|
Definition
| the amount by which consumption changes when disposable income increases by $1 |
|
|
Term
|
Definition
| measures the cost of funds used to finance investment |
|
|
Term
|
Definition
| the interest rate as usually reported; it is the rate of interest that investors pay to borrow money |
|
|
Term
|
Definition
| the nominal interest rate adjusted for inflation; nominal interest rate - inflation rate |
|
|
Term
| These are not made in exchange for the economy's output of goods and services, so they are NOT calculated in the variable "G" (government spending). |
|
Definition
| Transfer payments (social security or welfare) |
|
|
Term
| Transfer payments are the opposite of.... |
|
Definition
|
|
Term
|
Definition
| S = Y - C - G; the output that remains after the demands of consumers and the gov't have been satisfied |
|
|
Term
|
Definition
| Y - T - C (disposable income minus consumption) |
|
|
Term
|
Definition
T - G (T = taxes - transfer payments)
*(government revenue - government spending) |
|
|
Term
| National saving is the sum of... |
|
Definition
Private and public saving
SO,
S = (Y-T-C) + (T-G) |
|
|
Term
| Government purchases are said to _________ _________ investment. |
|
Definition
|
|
Term
| Reasons investment demand changes (2): |
|
Definition
1. An increase could occur through technological innovation
2. Government encouragement/discouragement through tax laws |
|
|
Term
|
Definition
| output - domestic spending |
|
|
Term
| In terms of investment and national saving, S = |
|
Definition
|
|
Term
| Another name for net exports is: |
|
Definition
|
|
Term
| With the equation S - I = NX, the left side of the equation is also referred to as: |
|
Definition
| Net capital outflow, or net foreign investment |
|
|
Term
| Net capital outflow (S - I) = |
|
Definition
|
|
Term
|
Definition
|
|
Term
| Starting from balanced trade, a fiscal policy that reduces national saving (increase in G or decrease in T to stimulate consumption) leads to a: |
|
Definition
|
|
Term
| If S - I and NX are positive, we have a: |
|
Definition
|
|
Term
| Net capital outflow is the difference between... |
|
Definition
| domestic saving and domestic investment |
|
|
Term
| Policies that increase investment or decrease saving tend to... |
|
Definition
|
|
Term
| Policies that decrease investment or increase saving tend to cause a... |
|
Definition
|
|
Term
| A trade deficit could be a reflection of: |
|
Definition
|
|
Term
|
Definition
| the relative price of the currencies of two countries |
|
|
Term
|
Definition
| the strengthening of a currency |
|
|
Term
|
Definition
| the weakening of a currency |
|
|
Term
|
Definition
| the relative price of the goods of two countries; also known as "terms of trade" |
|
|
Term
|
Definition
(nominal exchange rate)(price of domestic good)
/
(price of foreign good) |
|
|
Term
| If the real exchange rate is high, foreign goods are: |
|
Definition
|
|
Term
| If the real exchange rate is low, foreign goods are: |
|
Definition
|
|
Term
| If the real exchange rate is low, the quantity of our net exports demanded will be... |
|
Definition
|
|
Term
| If the real exchange rate is high, the quantity of our net exports demanded will be... |
|
Definition
|
|
Term
| Net exports are a function of... |
|
Definition
|
|
Term
| When the real exchange rate is lower, ___________ are less expensive relative to ____________, and _____________ are greater. |
|
Definition
| domestic goods are less expensive relative to foreign goods, and net exports are greater. |
|
|
Term
| The trade balance must equal the.... |
|
Definition
|
|
Term
|
Definition
| the consumption function and fiscal policy. |
|
|
Term
| Investment is fixed by (2): |
|
Definition
| the investment function and the world interest rate. |
|
|
Term
| What happens if the US gov't reduces national saving by increasing spending or cutting taxes? |
|
Definition
| The reduction in S lowers S - I, and thus NX, creating a trade deficit. Change in policy shifts saving to the left, lowering supply of dollars, which causes the equilibrium real exchange rate to rise, making the dollar more valuable. Domestic goods are, therefore, more expensive relative to foreign goods. |
|
|
Term
| What happens to the real exchange rate if foreign governments increase spending or cut taxes? |
|
Definition
| This change in fiscal policy reduces world saving and raises the world interest rate. The raise in the world interest rate reduces investment I, which raises S-I, and thus NX. The raise in the world interest rate causes a trade surplus. This change in policy shifts the saving line to the right, raising the supply of dollars to be invested abroad. The equilibrium real exchange rate falls, so the dollar becomes less valuable, making domestic goods less expensive relative to foreign goods. |
|
|
Term
|
Definition
|
|
Term
|
Definition
| restricting the amount of goods and services that can be imported |
|
|
Term
| Protectionist policies diminish: |
|
Definition
|
|
Term
| International trade benefits... |
|
Definition
|
|
Term
| Given the real exchange rate, if the domestic price level rises, P, then the nominal exchange rate, e, will... |
|
Definition
|
|
Term
|
Definition
| real exchange rate x (foreign price level)/(domestic price level) |
|
|
Term
| One consequence of high inflation is: |
|
Definition
|
|
Term
| Just as growth in the amount of money raises the price of domestic goods, it also raises the price of: |
|
Definition
| foreign curreny in terms of the domestic currency. |
|
|
Term
| % change in nominal exchange rate, e = |
|
Definition
| % change in real exchange rate + (change in foreign inflation rate - change in domestic inflation rate) |
|
|
Term
|
Definition
| a famous hypothesis in economics which states that the same good cannot sell different prices in different locations at the same time |
|
|
Term
|
Definition
| people who specialize in buying low in one market and selling high in another |
|
|
Term
|
Definition
| the law of one price applied to the international marketplace; this states that if international arbitrage is possible, then a dollar (or any other currency) must have the same purchasing power in every country |
|
|
Term
| Purchasing-power parity does not provide a perfectly accurate description of the world because (2): |
|
Definition
1. Many goods are not easily traded
2. Even tradable goods are not always perfect substitutes |
|
|
