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Macroeconomics ECON102
Saylor.org
96
Economics
Undergraduate 1
06/21/2015

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Term
GDP =
Definition
GDP = C (personal consumption expenditures) + Ig (gross private domestic investment) + G (government purchases) + Xn (net exports)
Term
Real GDP =
Definition
Real GDP = Nominal GDP / Price index (in hundredths)
Term
National Income
Definition
National Income includes all income earned by US-owned resources, whether located at home or abroad.
Term
Inflation Rate =
Definition
Inflation Rate = 100 ⋅ (CPI_new −CPI_old) / CPI_old
Term
Demand-pull inflation
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.
Term
Cost-Push (Supply-side) inflation
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.
Term
Rule of 70
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.
Term
Structural [unemployment]
Definition
Changes over time in consumer demand and technology change the“structure” of total demand for labor
Term
GDP Gap
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).
Term
Okun’s Law
Definition
For every 1 percentage point that the actual unemployment rate exceeds the natural rate, a GDP gap of about 2% occurs.
Term
The government has two tools for regulating fiscal policy
Definition
A change in government spending or changes in taxes.
Term
The Board of Governors
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.”
Term
Three tools of monetary policy:
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.
Term
M1
Definition
M1 is the narrowest definition of money supply. It includes currency (coins + paper money) and checkable deposits (demand deposits in banks or thrifts).
Term
M2
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.
Term
M3
Definition
M3 is M2 plus large time deposits.
Term
To decrease the supply of money
Definition
To decrease the supply of money, 1) sell government securities, 2) increase the reserve ratio, or 3) increase the discount rate.
Term
Supply-side economists
Definition
Believe that changes in aggregate supply are active forces in determining the levels of both inflation and unemployment.
Term
Monetarists
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.
Term
MPC
Definition
According to Keysian Consumers, MPC is the marginal propensity to consume
Term
GDP
Definition
GDP is the Market Value of all Final Goods and Services Newly Produced on Domestic Soil During a Given Time Period
Term
Production Method for measuring GDP
Definition
Measure the Value Added summed across all firms (value added = sale price less cost of raw materials)
Term
Income Method for measuring GDP
Definition

Labor Income (wages/salary) +Capital Income (rent, interest, dividends, profits)+ Government Income (taxes)”

Term
Expenditure Method for measuring GDP
Definition
Spending by consumers (C) + Spending by businesses (I) + Spending by government (G) + Net Spending by foreign sector (NX)
Term
GDP Does Not Measure
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
Term
Gross domestic product (GDP) = = =
Definition
“Gross domestic product (GDP) = income = production = spending”
Term
National income identity
Definition
The condition that production = consumption + investment + government purchases + net exports
Term
Flow variable
Definition
A variable that is measured over a specific period of time. e.g. income
Term
Stock variable
Definition
A variable that is independent of time. e.g. checking account balance
Term
GDI
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.
Term
Three other issues are important in comparing real GDP or GNP for different countries
Definition
The adjustment of these figures for population, adjusting to a common currency, and the incorporation of nonmarket production
Term
GNP can be calculated
Definition
GNP can be calculated with either the expenditure approach or the income approach.
Term
The GNP excludes
Definition
Excludes intermediate goods, second hand sales as well as financial transactions.
Term
The difference between GDP and GNP
Definition
Net unilateral transfers and factor income of foreigners.
Term
Gross private domestic investment is made of
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.
Term
By convention, a private house is considered
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.
Term
Net private domestic investment is equal to
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.
Term
Net national product (NNP)
Definition
Equal to gross national product minus capital consumption allowance:NNP = GNP-CCA.
Term
National income
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.
Term
Macroeconomics studies
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.
Term
GDP Deflator
Definition
Value of Current Output at Current Prices / Value of Current Output at Base Year Prices
Term
The Production Function of GDP
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)
Term
Substitution effect
Definition
Movement along the labor supply curve
Term
Income effect
Definition
A right-shift in the labor supply curve
Term
Flow variable
Definition
A variable that is measured over a specific period of time. e.g. income
Term
Stock variable
Definition
A variable that is independent of time. e.g. checking account balance
Term
GDI
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.
Term
Three other issues are important in comparing real GDP or GNP for different countries
Definition
The adjustment of these figures for population, adjusting to a common currency, and the incorporation of nonmarket production
Term
GNP can be calculated
Definition
GNP can be calculated with either the expenditure approach or the income approach.
Term
The GNP excludes
Definition
Excludes intermediate goods, second hand sales as well as financial transactions.
Term
The difference between GDP and GNP
Definition
Net unilateral transfers and factor income of foreigners.
Term
Gross private domestic investment is made of
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.
Term
By convention, a private house is considered
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.
Term
Net private domestic investment is equal to
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.
Term
Net national product (NNP)
Definition
Equal to gross national product minus capital consumption allowance:NNP = GNP-CCA.
Term
National income
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.
Term
Macroeconomics studies
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.
Term
GDP Deflator
Definition
Value of Current Output at Current Prices / Value of Current Output at Base Year Prices
Term
The Production Function of GDP
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)
Term
Substitution effect
Definition
Movement along the labor supply curve
Term
Income effect
Definition
A right-shift in the labor supply curve
Term
Phases of a business cycle
Definition
Peak, contraction, recession, trough, recovery, and expansion.
Term
Cyclical unemployment
Definition
Attributable solely to a deficiency in the level of economic activity
Term
Discouraged workers
Definition
Causes the official rate of unemployment to be understating the real extent of unemployment
Term
Aggregate demand policies
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.
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.”
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.”
Term
1933 Glass-Steagall Act
Definition
Set up deposit insurance (FDIC)
Term
Exogenous change
Definition
In an economic model, an exogenous change is one that comes from outside the model and is unexplained by the model. Antonym: endogenous
Term
Balance of payments (BOP)
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.
Term
Current account
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.
Term
Capital account
Definition
Whereas the current account reflects a nation's net income, the capital account reflects net change in ownership of national assets.
Term
Balancing item
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.
Term
Short Run Aggregate Supply (SRAS) is _____ sloping
Definition
Short Run Aggregate Supply (SRAS) is upward sloping
Term
When the aggregate demand and short-run aggregate supply curves intersect above/below potential output
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.
Term
Expansionary/Contractionary policy
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.
Term
AS Curve is downward sloping because of
Definition
Wealth effect, savings/interest rate effect, foreign exchange effect
Term
Countercyclical fiscal policies
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.
Term
General glut
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.
Term
Liquidity trap
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.
Term
Taylor rule
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.
Term
Tax incidence
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.
Term
Consumption function
Definition
The relationship between consumption and disposable personal income
Term
Marginal propensity to consume (MPC)
Definition
The ratio of the change in consumption (ΔC) to the change in disposable personal income (ΔYd)
Term
Current income hypothesis
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.
Term
Autonomous aggregate expenditures
Definition
Expenditures that do not vary with the level of real GDP
Term
Induced aggregate expenditures
Definition
Expenditures that vary with real GDP
Term
Multiplier
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
Term
Wealth effect
Definition
The tendency for price level changes to change real wealth and consumption
Term
Interest rate effect
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.
Term
International trade effect
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.
Term
Aggregate expenditures
Definition
Sum of planned levels of consumption, investment, government purchases, and net exports at a given price level.
Term
Converging economy
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
Term
Procyclical indicators
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.
Term
Countercyclical indicators
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.
Term
University of Michigan Consumer Sentiment Index (MCSI)
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.
Term
The simple multiplier
Definition
The number of times total income increases corresponding to an increase in the investment is known as investment multiplier
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