# Shared Flashcard Set

## Details

Macroeconomics final
chapters 11, 12, 13.1, 13.2, 18, 19
84
Economics
05/15/2010

Term
 gross domestic product
Definition
 1) market value of the final goods and services produced in an economy during a given time period2) GDP 3) measure value of an economy's production
Term
 potential GDP
Definition
 1) also known as "natural gross domestic product"2) refers to the highest level of real GDP output than can be sustained over the long term3) there is a limit because of natural and institutional constraints
Term
 nominal values
Definition
 refer to current prices and current quantities
Term
 real values
Definition
 refers to constant prices and current quantities
Term
 which GDP is comparable over time
Definition
 Real GDP
Term
 GDP equation (expenditures)
Definition
 GDP=C+G+I+(X-M)
Term
 cyclical unemployment
Definition
 caused by recession
Term
 frictional unemployment
Definition
 when the worker leaves job by choice
Term
 structural unemployment
Definition
 caused by a change in technology
Term
 GDP deflator
Definition
 a price index for final goods purchased by the entire economy
Term
 consumer price index
Definition
 1) price index provides information on the cost of living for an entire economy2) represents the average cost of goods purchased3) measures the average price of final goods purchased by households
Term
 CPI-U
Definition
 measures urban households cost of living (85%)
Term
 CPI-W
Definition
 cost of living for wage and clerical workers (35%)
Term
 how to calculate CPI
Definition
 1) determine base period prices P(0) and quantities Q(0)2) calculate the cost of the basket during the base period P(0)*Q(0)3) determine current prices P(t)4) calculate the current cost of the basket P(t)*Q(0)5) calculate the CPI
Term
 aggregate demand
Definition
 total amount that all consumers, business firms, govt agencies, and foreigners spend on US final goods and services
Term
 investment spending
Definition
 amount that firms spend on factories, machinery, software and the like, plus the amount families spend on new houses
Term
 Aggregate supply
Definition
 the total supply of goods and services that firms in a national economy plan on selling during a specific time period
Term
 macroeconomic equilibrium
Definition
 for an economy in the short run is established when aggregate demand intersects with short run aggregate supply
Term
 impact of inflation on multiplier
Definition
 inflation reduces impact of multiplier
Term
 productivity
Definition
 a measure of output from a production process, per unit of input
Term
 increases in productivity
Definition
 increase the standard of living
Term
 trough
Definition
 the lower turning point of a business cycle
Term
 peak
Definition
Term
 expansion
Definition
Term
 recession
Definition
 occurs with decline of economic growth
Term
 economic growth
Definition
 1) is sustainable increase in productive capacity 2) long run growth is regular continuous increases in potential GDP
Term
 legal reserves
Definition
 LR=r*D
Term
 r
Definition
 required reserve ratio given by law
Term
 R
Definition
 reserves (cash + deposits at fed)
Term
 D
Definition
 checkable deposits
Term
 ER
Definition
 excess reserves (R-LR)
Term
 banks continue to lend until
Definition
 1) eligible customers do not desire loans2) borrowers withdraw cash from their deposits
Term
 simple money multiplier
Definition
 1/r
Term
 potential deposit creation
Definition
 ER*(1/r)
Term
 what happens to AD with an expansionary fiscal policy
Definition
 increases
Term
 what happens to AD with a contactionary fiscal card
Definition
 decreases
Term
 is government spending easily observed
Definition
 yes, as firm revenues or as payments and taxes are observed in take home pay
Term
 are fiscal policy operations have an immediate impact
Definition
 yes
Term
 government spending multiplier
Definition
 1/(1-MPC)
Term
 tax multiplier
Definition
 -MPC/(1-MPC)
Term
 balanced budget multiplier
Definition
 1
Term
 the economy has a recessionary gap
Definition
 Y
Term
 expansionary fiscal policy
Definition
 1) increases output and lowers unemployment 2) increase govt spending, and lower taxes3) associated with recessionary gap
Term
 contractionary fiscal policy
Definition
 1) increase T, lower G2) Y>potential GDP
Term
 monetary policy goals
Definition
 1) full employment2) stable prices3) moderate business cycle fluctuations 4) promote long run economic growth
Term
 monetary policy tools
Definition
 1) required reserve ratio (r)2) discount rate3) open market operations
Term
 increasing r
Definition
 ER decreases and money decreases
Term
 discount rate
Definition
 interest rate charged by the fed for banks to borrow funds overnight1) increase D.R. banks borrow less, ER and money decreases
Term
 open market operations
Definition
 federal open market committee directs NY fed to buy and sell bonds1) buying bonds: bonds in banks decrease and reserves increase, ER increases and so does money
Term
 interest rates represent
Definition
 the cost to borrow \$1 for 1 year
Term
 federal funds rate
Definition
 annualized rate bankers pay to borrow \$1 overnight from another bank
Term
Definition
 so will GDP and employment
Term
 to find change in investment
Definition
 (gap)/(expenditure multiplier)
Term
 if excess reserves increase...
Definition
 banks lend more to firms to buy capital goods (I increases)
Term
 if interest rates decrease...
Definition
 firms borrow more funds to fund purchases of capital goods (I increases)
Term
 to close a recessionary gap
Definition
 1) decrease the required reserve ratio2) decrease the discount rate3) buy us bonds from banks
Term
 to close the inflationary gap, the fed can...
Definition
 1)increase the required reserve ratio2) increase the federal funds rate3) sell US bonds
Term
 balance of payments
Definition
 records an economies trading, borrowing and lending: in the US, the BOP records the transactions in the goods sector and the financial sector
Term
 3 BOP accounts
Definition
 1) current account2) capital account3) official settlements account
Term
 current account
Definition
 (net exports)+(net interest income)+(net transfers)=CA
Term
 capital account
Definition
 (foreign US investment)-(US investment abroad)=capital accounts
Term
 official settlements account
Definition
 (change in US foreign exchange holdings)
Term
 the capital account records
Definition
 the difference between foreign purchases of US assets and the US purchases of foreign assets
Term
 official settlements account represents
Definition
 US investment abroad in foreign money less the holdings in the US \$ by foreigners
Term
 exchange rates
Definition
 is the price of one currency in terms of another currency
Term
 appreciation
Definition
 occurs when there is an increase in purchasing power relative to another currency
Term
 depreciation
Definition
 increases AD, causing AE to raise, and US price levels to rise along with GDP increasing and unemployment falling
Term
 demand for foreign currencies increase if:
Definition
 1) us interest rates are lower relative to the rest of the world2) us GDP growth is higher3) US inflation is higher
Term
 supply of foreign currencies increase if:
Definition
 1) US interest rates increase relative to the rest of the world
Term
 aggregate expenditures
Definition
 spending on final goods in an economy 1) AE=C+I+G+(X-M)
Term
 AE equilibrium
Definition
 when GDP=AE
Term
 aggregate supply
Definition
 value of domestic product produced by firms at each given price level
Term
 factors of AS
Definition
 1) price level movement along curve2) input prices increase, profit rates fall, AS shifts to left3) nominal wages increase, profits lower, AS shifts to the left4) better technology-increase labor productivity, increase profit rates, increase AS5) additional resources, AS increases
Term
 macroeconomic equilibrium
Definition
Term
 potential GDP
Definition
 1) GDP at full employment 2) represented by straight line up and down3) independent of input prices-no movement 4) nominal wages-no impact/movement 5) technology-shift to right6) better resources-shift to right
Term
 output gaps (inflationary gap)
Definition
 1) Real GDP>Potential GDP2) nominal wages increase3) aggregate supply decreases-increase in unemployment 4) aggregate expenditure decreases
Term
 output gaps (recessionary gap)
Definition
 1) real GDP
Term
 impact of inflation on the multiplier
Definition
 1) inflation reduces impact of multiplier2) some spending power is lost as prices increase
Term
 money is...
Definition
 1) convenient2) eliminates barter and need for a double coincidence of wants3) reduces transaction costs4) increases division of labor and labor specialization
Term
 does money have a store value
Definition
 yes
Term
 required reserves ratio
Definition
 state bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes
Term
 the fed
Definition
 1) US central banking system2) national banks are required to join the system3) fed is owned by its member banks
Term
 the fed does..
Definition
 1) provide the money supply2) regulate interest rates3) set required reserve ratio
Term
 federal open market committee
Definition
 1) controls the federal funds rate-interest rate which banks borrow from and lend to each other2) directs the NY fed to buy and sell bonds3) buy bonds: bonds in banks decrease and reserves increase, so ER increases and so does money
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