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SU 3
Macroeconomics
105
Accounting
Undergraduate 4
05/16/2015

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Term
macroeconomics
Definition
study of the economy as a whole. Compare to microeconomics, which studies economic activity at the business-level.
Term
Other differences between macroeconomics and microeconomics
Definition
a. Individuals paying taxes to the government isn’t studied in micro, but it is in macro. b. The foreign sector is relevant in macroeconomics because of imports and exports.
Term
nominal gross domestic product (GDP)
Definition
total output of final goods and services produced in the domestic market during a period (usually one year). Calculated w/out regard to ownership of productive resources.
Term
real GDP/ total expenditures
Definition
total output of final goods and services produced in the domestic market during the period using constant prices. Real GDP is nominal GDP adjusted for changing prices.
Term
net GDP
Definition
GDP - depreciation or capital consumption
Term
potential GDP
Definition
maximum output that can occur in the domestic economy without creating upward pressure on the general level of prices
Term
GDP gap
Definition
difference between real GDP and potential GDP; goods not produced and services not provided by idle workers
Term
gross national product (GNP)
Definition
total output of all goods and services produced world-wide using U.S. resources.
Calculated by the Bureau of Economic Analysis (subset of U.S. Dept. of Commerce).
Term
net national product (NNP)
Definition
the total output of all goods and services world-wide using U.S. resources, but does NOT use a depreciation value. It’s the same as GNP - depreciation
Term
national income (NI)
Definition
total payments for economic resources included in the production of all goods and services which include payments for wages, rents, interest, and profits
Term
personal income (PI)
Definition
measures the total payments for economic resources received by individuals
Term
personal disposable income (PDI)
Definition
PDI = PI - income taxes. PDI = APC + APS.
PDI or DI is divided between (a) consumption and interest payments and (b) savings.
Term
Who is included in unemployment calculations? What is the cutoff age?
Definition
Workers 16 years old and older.
Term
cyclical unemployment
Definition
loss of jobs due to economic downturn (total unemployment - natural unemployment)
Term
structural unemployment
Definition
loss of jobs due to loss of or downsizing of industry
Term
frictional unemployment
Definition
due to workers leaving voluntarily for different jobs
Term
aggregate demand/expenditure (AE) or (AD for the AD-AS model)
Definition
total spending of individuals, businesses, governments, and net foreign spending on goods and services at different prices at the economy level
Term
How do increased imports affect the AE curve?
Definition
Shift it to the left because demand for domestic products decreases.
Term
How do increased tax rates affect the AE curve?
Definition
Shift it to the left because demand decreases when PDI decreases due to increased taxes.
Term
aggregate supply (AS)
Definition
total output of goods and services at different price levels at the economy level
Term
How would a decrease in the labor supply affect the AS curve?
Definition
A large decrease in an economy’s labor force would most likely shift the aggregate supply curve left (lower it), because labor is an economic resource and would affect overall supply by lowering it.
Term
What is investing in macroeconomics?
Definition
Investing includes residential and nonresidential construction, business durable equipment, and business inventory.
Term
What is saving in macroeconomics?
Definition
Putting money into banks, stocks or bonds. What we would normally call "investing" in layman's terms.
Term
average propensity to consume (APC)
Definition
% of PDI spent on consumption goods
Term
average propensity to save (APS)
Definition
% of PDI saved
Term
inflation vs. deflation
Definition
inflation- sustained increase in the general level of prices. The reported rate of inflation is therefore an average of the increase across all prices in the economy.
deflation- general decrease in prices
Term
Consumer Price Index (CPI)
Definition
compares relative price changes over time (comparing the market basket's price this year relative to the base year (1982-84)). Also, it is used by the federal govt. to measure inflation.
Term
What does inflation do to income?
Definition
Inflation distorts reported income because depreciation is not reflective of current fixed-asset replacement costs.
Term
What does the Fed do to expand the economy? What does it do to contract the economy.
Definition
To expand, buy government bonds, thereby pumping money into the economy. Also, lower the discount rate. To contract, sell government bonds to take money out of the economy, and raise the discount rate.
Term
discount rate
Definition
rate at which the Fed loans money to banks. If banks pay lower interest, they loan more, which increases the money supply and thereby expands the economy.
Term
federal funds rate
Definition
rate at which banks loan money to each other
Term
fiscal policy
Definition
established by Congress and deals with government spending (G) and taxes (T)
Term
monetary policy
Definition
controlled by the Fed and deals with achieving national objectives through control of the money supply, inflation, and the real interest rate.
Term
globalization
Definition
movement toward a more integrated and interdependent world economy
Term
World Bank
Definition
main objective is to promote general economic development worldwide, and focusing on lending to developing countries for infrastructure
Term
International Monetary Fund (IMF)
Definition
maintain order in the international monetary system, mainly by providing funds to economies in financial crisis
Term
foreign direct investment
Definition
a domestic entity invests in foreign production facilities
Term
General Agreement on Tariffs and Trade (GATT)
Definition
setup to encourage international trade by eliminating tariffs, subsidies, import quotas, and other trade barriers
Term
Do imports and/or exports factor into GDP calculations?
Definition
Yes. Exports - imports factor into GDP calculations.
Term
U.S. Export Statistics
Definition
U.S. exports more agricultural services than it imports, but it imports more mfg. goods and industrial materials than it exports. U.S. exports make up about 10% of worldwide exports.
Term
World's three largest exporters
Definition
Largest is China, followed by Germany, and the U.S.
Term
risks of outsourcing production overseas
Definition
quality risks, security risk, and currency exchange risks.
Term
expenditures approach
Definition
GDP is sum of all expenditures in the economy
C + I + G + NX
Term
income approach
Definition
More complex, but also produces national income and net domestic product; arrives at same total GDP as does expenditures approach.
Term
net domestic product (NDP)
Definition
income generated in U.S. no matter who owns the resources that generated it
Term
Corn Chowder Associates
Definition
capital consumption allowance added back to NDP to derive GDP in the income approach
Term
real GDP calculation
Definition
nominal GDP / CPI (in hundredths)
Term
peak
Definition
economy is at or near full employment and at or near maximum output for the current level of resources and technology.
Term
recession
Definition
defined as a period during which real GDP falls and unemployment rises.
Term
depression
Definition
If the recession is severe enough, prices will fall (deflation) and the phase will be considered a depression.
Term
trough
Definition
economy reaches the lowest ebb
Term
recovery
Definition
output and employment rise. Eventually, the price level rises also (inflation).
Term
Stalin's Red Influence Promoted Communism (national income (NI))
Definition
salaries and wages
rents
interest
proprietor and partnership incomes
corporate profits
Term
I Bought Two Nets For Fishing Income (NDP)
Definition
Indirect business taxes and net foreign factor income.
NDP = GDP – capital consumption allowance (amount of capital stock consumed in the process of generating income (depreciation of capital))
Term
income approach calculation
Definition
salaries and wages
rents
interests
proprietor and partnership incomes
corporate profits
NI
indirect business taxes
net foreign factor income
NDP
capital consumption allowance/depreciation
GDP
Term
causes of a recession (CIM)
Definition
consumer confidence declines
innovations have a destabilizing effect on the economy
miscalculation in fiscal or monetary policy.
Term
Creativity Increases Germany's Net eXports
Definition
C- largest portion; determine by incomes
I- most volatile portion; inversely related to interest rate
G- transfer payments; Soc. Sec. not included)
Net exports (NX) = exports (X) – imports (M)
Term
leading vs. lagging indicators
Definition
Economists using leading economic indicators for forecasts and lagging indicators report past economic activity.
Term
leading vs. lagging indicators
Definition
Economists using leading economic indicators for forecasts and lagging indicators report past economic activity.
Term
leading indicators (GDP in same direction)
Definition
Avg. workweek for mfg. workers
New orders for consumer goods
New orders for nondefense capital goods
Building permits for houses
Stock prices
The money supply
Spread between short-term and long-term interest rates
Consumer expectations
Term
Leading indicators (GDP in opposite direction)
Definition
Initial claims for unemployment insurance
Vendor performance
Term
growth
Definition
change in real GDP over a period of time (real GDP growth > population growth = rising standard of living), or as increase in real GDP over a period of time.
Term
How are the short- and long-run AD curves distinguished?
Definition
Short- and long-run not distinguished.
Term
How are the short- and long-run AS curves distinguished?
Definition
Short-run- upward slope. Curve rises gradually as more inputs are added to the production process.
Long-run- vertical, or inelastic. Any change in price level is matched by a change in wages when the economy is in full employment.
Term
WASP (determinants of supply (AS))
Definition
-Workforce competence = more education and training = more productivity
-Amount of capital. more capital = more automation = more productivity.
-State of technology = more technology = more productivity.
-Productivity (real GDP / hours worked). More work per hour = more productivity.
Term
factors in economic growth
Definition
Supply factors- increase in productivity and increase in the quantity and quality of natural resources
Demand factors- increase in total spending (someone has to buy the additional output produced)
Efficiency factor- efficient allocation of resources
Term
demand-side policies
Definition
The government can deploy the tools of fiscal policy and monetary policy to either stimulate or suppress demand.
Term
supply-side policies
Definition
the government can also implement policies to increase the country's stock of investment capital. Business use this capital to increase their productive capacity, thereby stimulating aggregate supply.
Term
purchasing power of money
Definition
measured by how many goods and services can be acquired in exchange for your money
Term
How is inflation stated and calculated.
Definition
rate of inflation stated in % terms, calculate using a price index.
Inflation rate calculation: (current-yr. price index - prior-yr. price index) / prior-yr. price index
Term
CPI calculation
Definition
(cost of market basket in current year / cost of market basket in base year) * 100
Term
Who calculates the CPI? How often?
Definition
Bureau of Labor Statistics. Monthly.
Term
nominal income
Definition
amount of money received by a consumer as wages, interest, rent, and profits.
Term
real income
Definition
purchasing power of the income received, regardless of how its was denominated. Real income shrinks when nominal income does not keep pace with inflation.
Term
Effects of inflation on the macroeconomy
Definition
When inflation is unexpected, it can cause economic chaos.
The efficiency of business relationships is reduced. Such efficiency relies on stable pricing.
Term
In what areas does inflation affect financial reporting?
Definition
inventory and depreciation
Term
LIFO
Definition
When prices are rising, CoGS is increased and operating income is decreased, so income taxes are also decreased.
Term
FIFO
Definition
If FIFO is used, CoGS consists of older, less costly inventory during times of inflation thereby boosting operating income.
Term
historical cost
Definition
Depreciable base of a long-lived asset is its historical cost. When prices are rising, the amounts reported as depr. exp. are thus considerably lower than they would be if stated in terms of replacement costs. Reported operating income is higher in the current period, but replacing such assets as they are retired is more expensive.
Term
demand-pull inflation
Definition
demand outpaces the supply of goods to satisfy it. Occurs when economy approaches full employment and demand continues to increase.
Term
cost-push inflation
Definition
generated by increased per-unit production costs, which are passed on to consumers in the form of higher prices
Term
stagflation
Definition
slow economic growth is accompanied by high inflation
Term
unemployment rate
Definition
(# of unemployed / size of labor force) * 100. This rate is generated from the Current Population Survey, a monthly survey of households conducted by the U.S. Census Bureau on behalf of the Bureau of Labor Statistics. Full and part-time employees are considered equally employed.
Term
groups excluded from unemployment rate calculations
Definition
Those under 16 and/or incarcerated or institutionalized.
The second group excluded from the size of the labor force consists of those classified as not in the labor force.
Term
to be unemployed means to be...
Definition
willing and able to work and seeking employment.
Term
primary economic cost of unemployment
Definition
lost value to the economy (GDP gap) is the primary economic cost of unemployment; the goods not produced and services not provided by idle workers can never be regained.
Term
social costs of unemployment
Definition
loss of skills, personal and family stress, violence and other crime and social upheaval.
Term
fiscal policy
Definition
government acts as one of the players in the marketplace, taking in revenues (taxes) and making purchases (the annual budget).
Term
discretionary fiscal policy
Definition
involves spending that is under the control of individuals within the government
Term
nondiscretionary fiscal policy
Definition
that which is enacted in law
Term
tools of fiscal policy
Definition
tax policy, govt. spending, transfer payments
Term
Keynesian theory
Definition
calls for expansionary fiscal policy during times of recession (to stimulate AD) and contractionary policy during boom (overheated) times (to prevent inflation).
Term
expansionary fiscal policy
Definition
Cut taxes, increase govt. spending, increase transfer payments. (do the opposite in contractionary fiscal policy)
Term
inflationary gap
Definition
amount by which the economy's AE at the full-employment GDP exceed those that are necessary to achieve the full-employment GDP.
Term
uses of money
Definition
medium of exchange, unit of account, store of value
Term
interest
Definition
amount paid back to lender in addition to sum that was borrowed as compensation to the lender for having made the loan.
Term
determinants of loan interest rate
Definition
prime rate and the creditworthiness of the borrower.
Term
real interest rate
Definition
nominal interest rate - inflation rate.
Term
inflation premium
Definition
charged to compensate for lost purchasing power due to inflation.
Term
M1 money
Definition
most liquid forms of money (currency and checking accounts)
Term
M2 money
Definition
includes M1 and less liquid forms of money
Term
goals of monetary policy
Definition
gradual, steady economic growth with price stability (manageable inflation (2-3%))
Term
tools of monetary policy (OFD)
Definition
open-market operations-purchase Treasury securities (to loosen the money supply for predicted recession (inject money) and take securities off the market (fed. funds rate falls)), or sell Treasury securities (to tighten the money supply for predicted high inflation and give securities in exchange (fed. funds rate rises))
federal funds rate- rate at which banks loan to each other to keep each other above the required reserve ratio
discount rate- rate at which the Fed loans money to commercial banks short-term
Term
How does the Fed change the money supply through the reserve ratio?
Definition
To loosen the money supply, required reserve ratio lowered so banks can loan out more of their reserves and create more money. To tighten it, reserve ratio raised.
Term
effects of increased discount rate
Definition
Increased disc. rate = fewer borrowings = decreased money supply; vice versa.
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