Term
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Definition
| GDP = C (personal consumption expenditures) + Ig (gross private domestic investment) + G (government purchases) + Xn (net exports) |
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Term
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Definition
| Real GDP = Nominal GDP / Price index (in hundredths) |
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Term
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Definition
| National Income includes all income earned by US-owned resources, whether located at home or abroad. |
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Term
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Definition
| Inflation Rate = 100 ⋅ (CPI_new −CPI_old) / CPI_old |
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Term
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Definition
| More spending than the economy’s capacity to produce. The excess demand increases the prices of the limited real output, causing prices to rise. |
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Term
| Cost-Push (Supply-side) inflation |
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Definition
| Per-unit production costs (total input cost ÷ units of output) rise, reducing the amount of companies willing to sell products at the current price level. Then, supply decreases, causing the price level to increase. |
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Term
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Definition
| If we divide 70 by the annual rate of inflation, this quotient is the number of years it takes for inflation to double the price level. |
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Term
| Structural [unemployment] |
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Definition
| Changes over time in consumer demand and technology change the“structure” of total demand for labor |
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Term
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Definition
| This is the amount by which actual GDP falls short of potential GDP (the GDP that can be attained at the natural rate of unemployment). |
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Term
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Definition
| For every 1 percentage point that the actual unemployment rate exceeds the natural rate, a GDP gap of about 2% occurs. |
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Term
| The government has two tools for regulating fiscal policy |
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Definition
| A change in government spending or changes in taxes. |
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Term
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Definition
| Seven members, appointed by the President with confirmation of the Senate. “There are several entities that help the Board of Governors. The Federal Open Market Committee (FOMC) is made up of the 7 members of the BoG plus 5 of the presidents of the Federal Reserve Banks. It sets the Fed’s monetary policy and directs open- market operations. There are also three Advisory Councils (made of private citizens) that meet with the BoG to give their views on banking and monetary policy.” |
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Term
| Three tools of monetary policy: |
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Definition
| 1) Open-market operations – these are the most important means the Fed as to control the money supply. It refers to the buying and selling of government bonds (securities) by the Federal Reserve Banks. Buying bonds increases the money supply; selling them decreases it. 2) The reserve ratio – the Fed can also increase or decrease the Reserve ratio. Increasing the Reserve ratio decreases banks’ excess reserves, causing the money supply to decrease. Decreasing it increases banks’ excess reserves, increasing the money supply. This is really powerful, and so it is not used very often. 3) The discount rate – the discount rate is the rate that Federal Reserve Banks charge for loans to commercial banks. When commercial banks borrow from FRBs, their reserves increase. Therefore, if the discount rate increases, banks are less encouraged to borrow, keeping their excess reserves the same and therefore restricting the money supply. |
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Term
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Definition
| M1 is the narrowest definition of money supply. It includes currency (coins + paper money) and checkable deposits (demand deposits in banks or thrifts). |
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Term
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Definition
| M2 includes M1 plus near-monies (highly liquid financial assets which do not directly function as a medium of exchange but can be readily converted into currency or checkable deposits without risk of financial loss). Near-monies are noncheckable savings accounts, money market deposit accounts, small time deposits, and money market mutual funds. |
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Term
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Definition
| M3 is M2 plus large time deposits. |
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Term
| To decrease the supply of money |
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Definition
| To decrease the supply of money, 1) sell government securities, 2) increase the reserve ratio, or 3) increase the discount rate. |
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Term
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Definition
| Believe that changes in aggregate supply are active forces in determining the levels of both inflation and unemployment. |
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Term
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Definition
| Monetarists believe that the economy is stable in the long run at the natural rate of unemployment, and the observed instability of the economy is caused by inappropriate monetary policy. |
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Term
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Definition
| According to Keysian Consumers, MPC is the marginal propensity to consume |
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Term
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Definition
| GDP is the Market Value of all Final Goods and Services Newly Produced on Domestic Soil During a Given Time Period |
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Term
| Production Method for measuring GDP |
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Definition
| Measure the Value Added summed across all firms (value added = sale price less cost of raw materials) |
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Term
| Income Method for measuring GDP |
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Definition
Labor Income (wages/salary) +Capital Income (rent, interest, dividends, profits)+ Government Income (taxes)” |
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Term
| Expenditure Method for measuring GDP |
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Definition
| Spending by consumers (C) + Spending by businesses (I) + Spending by government (G) + Net Spending by foreign sector (NX) |
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Term
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Definition
| GDP Does Not Measure: Non-Market Activity (home production, leisure, black market activity), Environmental Quality/Natural Resource Depletion, Life Expectancy and Health, Income Distribution, Crime/Safety, quality improvements, land purchases, housing resale |
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Term
| Gross domestic product (GDP) = = = |
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Definition
| “Gross domestic product (GDP) = income = production = spending” |
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Term
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Definition
| The condition that production = consumption + investment + government purchases + net exports |
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Term
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Definition
| A variable that is measured over a specific period of time. e.g. income |
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Term
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Definition
| A variable that is independent of time. e.g. checking account balance |
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Term
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Definition
| Depreciation and production-related taxes, such as sales taxes, make up part of the cost of producing goods and services and must be accounted for in estimating GDI. |
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Term
| Three other issues are important in comparing real GDP or GNP for different countries |
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Definition
| The adjustment of these figures for population, adjusting to a common currency, and the incorporation of nonmarket production |
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Term
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Definition
| GNP can be calculated with either the expenditure approach or the income approach. |
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Term
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Definition
| Excludes intermediate goods, second hand sales as well as financial transactions. |
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Term
| The difference between GDP and GNP |
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Definition
| Net unilateral transfers and factor income of foreigners. |
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Term
| Gross private domestic investment is made of |
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Definition
| 1) new construction, 2) new capital (machines, trucks and equipment), and 3) changes in inventory. It excludes investment made by government and investment made outside the country. |
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Term
| By convention, a private house is considered |
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Definition
| ...an investment. The reason is that a private house may later be rented and it is not possible to know for which purpose, rental or private use, a house is built in the first place. |
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Term
| Net private domestic investment is equal to |
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Definition
| Net private domestic investment is equal to gross private domestic investment less capital consumption allowance. It is the most sensitive component of GDP. When it is negative it implies that the capital stock is being depleted and production has to be decreasing. Economic growth is implied in a positive net private domestic investment. |
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Term
| Net national product (NNP) |
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Definition
| Equal to gross national product minus capital consumption allowance:NNP = GNP-CCA. |
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Term
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Definition
| The sum of all forms of gross income, similar to the gross salary appearing in a paycheck of an employee, thatis before various taxes and other deductions are taken out. |
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Term
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Definition
| The determinants of Y (= aggregate supply) and C+I+G+NX (aggregate demand), and shows how, in equilibrium, prices/wages/interest rates/exchange rates have to adjust such that AS = AD. |
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Term
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Definition
| Value of Current Output at Current Prices / Value of Current Output at Base Year Prices |
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Term
| The Production Function of GDP |
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Definition
| Y = A*F(K,N); where A is Total Factor Productivity (TFP), and F is a function of the inputs Capital (K, often measured as the replacement cost of capital) and Labor (N, often measured by the number of workers) |
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Term
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Definition
| Movement along the labor supply curve |
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Term
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Definition
| A right-shift in the labor supply curve |
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Term
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Definition
| A variable that is measured over a specific period of time. e.g. income |
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Term
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Definition
| A variable that is independent of time. e.g. checking account balance |
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Term
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Definition
| Depreciation and production-related taxes, such as sales taxes, make up part of the cost of producing goods and services and must be accounted for in estimating GDI. |
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Term
| Three other issues are important in comparing real GDP or GNP for different countries |
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Definition
| The adjustment of these figures for population, adjusting to a common currency, and the incorporation of nonmarket production |
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Term
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Definition
| GNP can be calculated with either the expenditure approach or the income approach. |
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Term
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Definition
| Excludes intermediate goods, second hand sales as well as financial transactions. |
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Term
| The difference between GDP and GNP |
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Definition
| Net unilateral transfers and factor income of foreigners. |
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Term
| Gross private domestic investment is made of |
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Definition
| 1) new construction, 2) new capital (machines, trucks and equipment), and 3) changes in inventory. It excludes investment made by government and investment made outside the country. |
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Term
| By convention, a private house is considered |
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Definition
| ...an investment. The reason is that a private house may later be rented and it is not possible to know for which purpose, rental or private use, a house is built in the first place. |
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Term
| Net private domestic investment is equal to |
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Definition
| Net private domestic investment is equal to gross private domestic investment less capital consumption allowance. It is the most sensitive component of GDP. When it is negative it implies that the capital stock is being depleted and production has to be decreasing. Economic growth is implied in a positive net private domestic investment. |
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Term
| Net national product (NNP) |
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Definition
| Equal to gross national product minus capital consumption allowance:NNP = GNP-CCA. |
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Term
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Definition
| The sum of all forms of gross income, similar to the gross salary appearing in a paycheck of an employee, thatis before various taxes and other deductions are taken out. |
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Term
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Definition
| The determinants of Y (= aggregate supply) and C+I+G+NX (aggregate demand), and shows how, in equilibrium, prices/wages/interest rates/exchange rates have to adjust such that AS = AD. |
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Term
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Definition
| Value of Current Output at Current Prices / Value of Current Output at Base Year Prices |
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Term
| The Production Function of GDP |
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Definition
| Y = A*F(K,N); where A is Total Factor Productivity (TFP), and F is a function of the inputs Capital (K, often measured as the replacement cost of capital) and Labor (N, often measured by the number of workers) |
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Term
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Definition
| Movement along the labor supply curve |
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Term
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Definition
| A right-shift in the labor supply curve |
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Term
| Phases of a business cycle |
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Definition
| Peak, contraction, recession, trough, recovery, and expansion. |
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Term
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Definition
| Attributable solely to a deficiency in the level of economic activity |
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Term
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Definition
| Causes the official rate of unemployment to be understating the real extent of unemployment |
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Term
| Aggregate demand policies |
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Definition
| When the intersection of aggregate demand and aggregate supply occurs in the Keynesian horizontal range a recession and excessive unemployment are present: the recommended policy would be to stimulate aggregate demand. When the intersection is in the classical vertical range, inflation is present: the recommended policy would be to contract aggregate demand. |
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Term
| “Supply side policies can be shown by attributing periods of stagflation (high prices and low level of output) to upward shifts of aggregate supply. The recommended policy would then not be an increased aggregate demand which adds to inflation, but instead a shift in aggregate supply downward by cutting costs of production.” |
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Definition
| “Supply side policies can be shown by attributing periods of stagflation (high prices and low level of output) to upward shifts of aggregate supply. The recommended policy would then not be an increased aggregate demand which adds to inflation, but instead a shift in aggregate supply downward by cutting costs of production.” |
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Term
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Definition
| Set up deposit insurance (FDIC) |
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Term
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Definition
| In an economic model, an exogenous change is one that comes from outside the model and is unexplained by the model. Antonym: endogenous |
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Term
| Balance of payments (BOP) |
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Definition
| The balance of payments (BOP) of a country is the record of all economic transactions between the residents of a country and the rest of the world in a particular period. These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. |
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Term
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Definition
| Consists of the balance of trade, net primary income or factor income (earnings on foreign investments minus payments made to foreign investors) and net cash transfers, that have taken place over a given period of time. |
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Term
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Definition
| Whereas the current account reflects a nation's net income, the capital account reflects net change in ownership of national assets. |
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Term
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Definition
| May be positive or negative, is simply an amount that accounts for any statistical errors and assures that the current and capital accounts sum to zero. |
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Term
| Short Run Aggregate Supply (SRAS) is _____ sloping |
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Definition
| Short Run Aggregate Supply (SRAS) is upward sloping |
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Term
| When the aggregate demand and short-run aggregate supply curves intersect above/below potential output |
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Definition
| When the aggregate demand and short-run aggregate supply curves intersect below potential output, the economy has a recessionary gap. When they intersect above potential output, the economy has an inflationary gap. |
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Term
| Expansionary/Contractionary policy |
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Definition
| Policy makers can choose to try to close a gap by using stabilization policy. Stabilization policy designed to increase real GDP is called expansionary policy. Stabilization policy designed to decrease real GDP is called contractionary policy. |
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Term
| AS Curve is downward sloping because of |
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Definition
| Wealth effect, savings/interest rate effect, foreign exchange effect |
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Term
| Countercyclical fiscal policies |
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Definition
| Keynes advocated policies which acted against the tide of the business cycle—deficit spending when a nation's economy suffers from recession, or when recovery is long-delayed and unemployment is persistently high, and the suppression of inflation in boom times by either increasing taxes or cutting back on government outlays. |
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Term
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Definition
| An excess of supply in relation to demand, specifically, when there is more production in all fields of production in comparison with what resources are available to consume (purchase) said production. |
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Term
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Definition
| A situation, described in Keynesian economics, in which injections of cash into the private banking system by a central bank fail to decrease interest rates and hence make monetary policy ineffective. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. |
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Term
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Definition
| A monetary-policy rule that stipulates how much the central bank should change the nominal interest rate in response to changes in inflation, output, or other economic conditions. In particular, the rule stipulates that for each one-percent increase in inflation, the central bank should raise the nominal interest rate by more than one percentage point. |
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Term
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Definition
| Or tax burden is the analysis of the effect of a particular tax on the distribution of economic welfare. Tax incidence is said to "fall" upon the group that ultimately bears the burden of, or ultimately has to pay, the tax. |
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Term
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Definition
| The relationship between consumption and disposable personal income |
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Term
| Marginal propensity to consume (MPC) |
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Definition
| The ratio of the change in consumption (ΔC) to the change in disposable personal income (ΔYd) |
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Term
| Current income hypothesis |
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Definition
| Holds that consumption is a function of current disposable personal income, whereas the permanent income hypothesis holds that consumption is a function of permanent income, which is the income households expect to receive annually during their lifetime. The permanent income hypothesis predicts that a temporary change in income will have a smaller effect on consumption than is predicted by the current income hypothesis. |
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Term
| Autonomous aggregate expenditures |
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Definition
| Expenditures that do not vary with the level of real GDP |
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Term
| Induced aggregate expenditures |
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Definition
| Expenditures that vary with real GDP |
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Term
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Definition
| The number by which we multiply an initial change in aggregate demand to get the full amount of the shift in the aggregate demand curve. multiplier = 1/(1 − MPC) = 1/MPS |
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Term
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Definition
| The tendency for price level changes to change real wealth and consumption |
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Term
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Definition
| A lower interest rate, all other things unchanged, will increase the level of investment. Similarly, a higher price level reduces the real quantity of money, raises interest rates, and reduces investment. |
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Term
| International trade effect |
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Definition
| A change in the domestic price level will affect exports and imports. A higher price level makes a country’s exports fall and imports rise, reducing net exports. A lower price level will increase exports and reduce imports, increasing net exports. |
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Term
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Definition
| Sum of planned levels of consumption, investment, government purchases, and net exports at a given price level. |
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Term
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Definition
| Economy of a country that has demonstrated the ability to catch up to the technology leaders by investing in both physical and human capital |
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Term
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Definition
| Move in the same direction as the general economy: they increase when the economy is doing well; decrease when it is doing badly. Gross domestic product (GDP) is a procyclic indicator. |
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Term
| Countercyclical indicators |
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Definition
| Move in the opposite direction to the general economy. The unemployment rate and the wage share are countercyclic: in the short run they rise when the economy is deteriorating. |
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Term
| University of Michigan Consumer Sentiment Index (MCSI) |
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Definition
| A consumer confidence index published monthly by the University of Michigan. It uses an ongoing, nationally representative survey based on telephonic household interviews to gather information on consumer expectations regarding the overall economy. |
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Term
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Definition
| The number of times total income increases corresponding to an increase in the investment is known as investment multiplier |
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