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Macroeconomics
Test 2
52
Economics
Undergraduate 1
03/19/2007

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Term
SRAS
Definition
upward sloping b/c nominal wages are sticky in the SR. Changes in commodity prices, nominal wages, and productivity lead to changes in producers’ profits and shifts the SRAS
Term
Potential Output
Definition
All prices and nominal wages are flexible in the LR. –Aggregate output exceeds potential output, nominal wages will eventually rise in response to low unemployment and aggregate output will fall.
-If potential output exceeds actual aggregate output, nominal wages will eventually fall in response to high unemployment and aggregate out put will rise. LRAS is vertical potential output.
Term
Aggregate Supply Curve
Definition
Relationship between aggregate price level and the quantity of aggregate output supplied
Term
Aggregate Demand Curve
Definition
Relationship between the aggregate price level and the quantity of aggregate output demanded. Downward sloping for two reasons:
-Wealth effect of a change in the aggregate price level – a higher aggregate price level reduces the purchasing power of households’ wealth and reduces consumer spending.
-Interest rate effect of a change in the aggregate price level – a higher aggregate price level reduces the purchasing power of households’ and firms’ money holdings, leading to a rise in interest rates and a fall in investment spending and consumer spending
-Shifts because of changes in expectations, changes in wealth not due to changes in the aggregate price level, and changes in the stock of physical capital.
Term
Multiplier
Definition
1/(1-MPC)
Term
MPC
Definition
The fraction of an additional dollar of disposable income spent on consumption
Term
MPS
Definition
1-MPC
Term
AS-AD Model
Definition
Intersection of the SRAS and the aggregate demand curve is the SR macroeconomic equilibrium. It determines the SR equilibrium price level and the level of SR equilibrium aggregate output.
Term
Supply Shock
Definition
Causes the aggregate price level and aggregate output to move in opposite directions as the economy moves along the aggregate demand curve
Term
Stagflation
Definition
Inflation and falling aggregate output – negative supply shock.
Term
Demand Shock
Definition
Causes aggregate price level and aggregate output to move in the same direction as the economy moves along the SRAS.
Term
Demand shocks have only SR effects on aggregate output because the economy is self-correcting in the LR
Definition
Demand shocks have only SR effects on aggregate output because the economy is self-correcting in the LR
Term
Recessionary Gap an eventual fall in nominal wages moves the economy to LR macro-equilibrium where aggregate out put is equal to potential output.
Definition
Recessionary Gap an eventual fall in nominal wages moves the economy to LR macro-equilibrium where aggregate out put is equal to potential output.
Term
Inflationary Gap an eventual rise in nominal wages moves the economy to LR macro-equilibrium.
Definition
Inflationary Gap an eventual rise in nominal wages moves the economy to LR macro-equilibrium.
Term
Fiscal policy affects aggregate demand directly through government purchases and indirectly through changes in taxes or government transfers that affect consumer spending.
Definition
Fiscal policy affects aggregate demand directly through government purchases and indirectly through changes in taxes or government transfers that affect consumer spending.
Term
Monetary policy affects aggregate demand indirectly through changes in the interest rate that affect consumer and investment spending.
Definition
Monetary policy affects aggregate demand indirectly through changes in the interest rate that affect consumer and investment spending.
Term
Consumption function
Definition
shows how an individual household’s consumer spending is determined by its current disposable income
Term
Aggregate consumption function
Definition
shows the relationship for the entire economy
Term
Planned investment spending
Definition
depends negatively on the interest rate and on existing production capacity; it depends positively on expected future real GDP.
Term
Accelerator principle
Definition
says that investment spending is greatly influenced by the expected growth rate of real GDP
Term
Actual investment spending
Definition
is the sum of planned investment spending and unplanned inventory investment.
Term
Income-expenditure equilibrium/
Planned aggregate spending
Definition
in a simplified model with no government and no trade is the sum of consumer spending and planned investment spending, is equal to real GDP.
Term
Income-expenditure GDP
Definition
Y*, unplanned inventory investment is zero. When planned aggregate spending is larger than Y*, unplanned inventory investment is negative. When planned aggregate spending is less than Y*, unplanned inventory investment is positive
Term
Keynesian cross
Definition
shows how the economy self-adjusts to income-expenditure equilibrium through inventory adjustments
Term
Fiscal Policy
Definition
the use of taxes, government transfers, or government purchases of goods and services to shift the aggregate demand curve.
Term
Expansionary fiscal policy
Definition
shift the aggregate deman curve right
Term
contractionary fiscal policy
Definition
shift the aggregate demand curve left
Term
fiscal policy multiplier
Definition
MPC/(1-MPC)
Term
Automatic stabilizers
Definition
rules governing taxes and some transfers that reduce the size of fluctuations automatically.
Term
Discretionary fiscal policy
Definition
arises from deliberate actions by policy makers rather than from the business cycle
Term
Implicit liabilities
Definition
Social security, medicare, and medicaid, the costs of which are increasing due to the aging of the population and rising medical costs
Term
Money
Definition
any asset that can easily be used to purchase goods and services
Term
money's three roles
Definition
medium of exchange, store of value, and unit of account
Term
commodity money
Definition
consists of goods possessing value aside from their role as money
Term
commodity-backed money
Definition
paper currency backed by gold, silver, salt, cigarettes, etc.
Term
Fiat money
Definition
money whose value derives solely from its official role
Term
bank reserves
Definition
composed of both currency held in vaults and deposits at the Fed, to meet demands for cash
Term
reserve ratio
Definition
the ratio of bank reserves to bank deposits.
Term
monetary base
Definition
consists of currency in circulation
Term
money multiplier
Definition
the ratio of the money supply to the monetary base
Term
Federal funds market
Definition
where banks borrow to meet Fed reserve requirements
Term
Federal funds rate / discount rate
Definition
the rate that banks are charged to loan money from the Fed
Term
Open-market operations
Definition
the Fed's principal tool of monetary policy: the Fed can increase or decrease the monetary base by selling or buying treasury bonds (respectively)
Term
Money demand curve
Definition
arises from a trade-off between the opportunity cost of holding money and the liquidity the money provides. The opportunity cost of holding money depends on short-term interest rates, not long-term interest rates.
Term
Real money demand curve
Definition
Other things equal, the nominal quantity of money demanded is proportional to the aggregate price level.
Term
Quantity equation
Definition
MV=PY
the real quantity of money demanded is proportional to the real aggregate spending, where the constant of proportionality is one over the velocity of money.
Term
Liquidity preference model of the interest rate
Definition
says that the interest rate is determined in the money market by the money demand curve and the money supply curve
Term
Target federal funds rate
Definition
the goal of the Fed by using open-market operations, which other interest rates generally track
Term
Expansionary monetary policy
Definition
reduces the interest rate and increases aggregate demand by increasing the money supply, is used to close recessionary gaps
Term
Contractionary monetary policy
Definition
increases the interest rate and reduces aggregate demand by decreasing the money supply, used to close inflationary gaps
Term
Monetary neutrality
Definition
changes in the money supply have no real effect on the economy in the LR. Monetary policy is ineffectual in the LR.
Term
In the LR, the equilibrium interest rate matches the supply and demand for loanable funds that arise at potential output in the market for loanable funds.
Definition
In the LR, the equilibrium interest rate matches the supply and demand for loanable funds that arise at potential output in the market for loanable funds.
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