Macroeconomic Final

Investment demand curve

A curve that shows the amounts of investments demanded by an economy at a series of real interest rates.

Real Income

A measure of the amount of goods and services nominal income can buy; it is the purchasing power of nominal income, or income adjusted for inflation. (Nominal income/ Price index [in hundredths])

Taylor Rule

A monetary rule proposed by John Taylor that would stipulate exactly how much the federal reserve system should change real interest rates in response to divergences of real GDP from potential GDP and divergences of actual rates of inflation from a target rate of inflation.

Personal Taxes

A reduction in personal income tax rates raises take-home income and increases consumer purchases at each possible price level. Tax cuts shift the aggregate demand curve to the right. Tax increases reduce consumption spending and shift the curve to the left.

Inflation

A rise in general level of prices. When inflation occurs, each dollar of income will buy fewer goods and services than before. Inflation reduces the "purchasing power" of money.

Aggregate Expenditures Schedule

A table of numbers showing the total amount spent on final goods and final services at different levels of real gross domestic product (real GDP)

GDP Gap

GDP gap=Actual GDP- potential GDP, The GDP gap can be either negative (actual GDP < potential GDP) or positive (actual GDP > potential GDP). In the case of unemployment above the natural rate, it is negative because actual GDP falls short of potential GDP.

Expecting rate of return

Dividing the expected profit by the cost of a new machine we can generate a close estimate for rate of return.

When bond prices go up, interest rates go ___________.

Down

The Recession of 2007-2009

During the recession, both after-tax consumption and investment expenditures declined, with planned investment expenditures suffering the largest drop by far.

Cyclical Employment

Employment that is caused by an increase in spending

Determinants of Aggregated Demand

Factors such as consumption spending, investment, Government spending, and net exports that, if they change, shift the aggregate demand curve.

Determinates of Aggregate Supply

Factors such as input prices, productivity, and the legal-institutional environment that, if they change, shift the aggregate supply curve.

Expansionary Monetary Policy

Federal Reserve System actions to increase the money supply, lower interest rates, and expand real GDP; an easy money policy.

Restrictive Monetary Policy

Federal reserve system actions to reduce the money supply, increase interest rates, and reduce inflations; a tight money policy.

When the Federal government uses taxation and spending actions to stimulate the economy it is conducting:

Fiscal Policy

Size of Multiplier depends..

Multiplier = (1/MPS) determines the size in a given economy

Nominal Income

Number of dollars received as wages, rent, interest, or profit

Frictional Employment

workers who are either searching for jobs or waiting to take jobs in the near future. The word "frictional" implies that the labor market does not operate perfectly and instantaneously (without friction) in matching workers and jobs

Consumer Price Index (CPI)

(price of the most recent market basket in the particular year/price estimate of the market basket in 1982-1984) * 100

Government purchases

An increase in government purchases (for example, more transportation projects) will shift the aggregate demand curve to the right, as long as tax collections and interest rates do not change as a result. In contrast, a reduction in government spending (for example, less military equipment) will shift the curve to the left.

Unanticipated inflation

An increase of the price level greater than expected.

Equilibrium GDP

C+Lg+G+Xn= GDP [Consumption, Investment, Government Purchases, Net Exports]

MPC Marginal Propensity to consume

Change in consumption/Change in income

Formula for multiplier

Change in real GDP/Initial change in spending

MPS Marginal Propensity to save

Change in saving/Change in income

Consumer Wealth

Consumer wealth is the total dollar value of all assets owned by consumers in the economy less the dollar value of their liabilities (debts). Assets include stocks, bonds, and real estate. Liabilities include mortgages, car loans, and credit card balances.

Household Borrowing

Consumers can increase their consumption spending by borrowing. Doing so shifts the aggregate demand curve to the right

APC Average propensity to consume

Consumption/Income

If the U.S. Congress passes legislation to raise taxes to control demand-pull inflation, then this would be an example of a(n):

Contractionary fiscal policy

Inflationary expenditure gap

In the aggregate-expenditures model, the amount y which the aggregate expenditures schedule must shift downward to decrease the nominal GDP to its full-employment noninflationary level.

Which combination of fiscal policy actions would most likely offset each other?

Increase taxes and government spending

Okun's Law

Indicates that for every 1 percentage point by which the actual unemployment rate exceeds the natural rate, a negative GDP gap of about 1 percent occurs.

Phases of the business cycle in order

Peak, Recession, Trough, Expansion, Peak.

Cost-push inflation occurs when there is ________

Rising per-unit production costs.

APS Average propensity to save

Savings/Income

Deflation

Such price level declines

Recessionary Expenditure Gap

The amount by which the aggregate expenditures schedule must shift upward to increase real GDP to its full-employment, noninflationary level.

Transaction demand for money

The amount money people want to hold for use as a medium of exchange (to make payments); varies directly with nominal GDP.

Asset demand for money

The amount of money people want to hold as a store of value; this amount varies inversely with the interest rate.

Prime Interest-Rate

The benchmark interest rate that banks use as a reference point for a wide range of loans to businesses and Individuals.

Reserve Ration

The fraction of checkable deposits that each commercial bank or thrift institutions must hold as reserves at its local federal reserve bank or in its own bank vault; also called the reserve requirement.

Federal Fund Rate

The interest rate that U.S.Banks and other depository institutions charge one another on overnight loans made out of their excess reserves.

Discount rate

The interest rate that the federal reserve banks charge on the loans they make to commercial banks and thrift institutions.

Labor Force

The labor force consists of people who are able and willing to work. Both those who are employed and those who are unemployed but actively seeking work are counted as being in the labor force.

Break-Even Income

The level of disposable income that is entirely used because households plan on not saving anything and consuming all of it.

Interest on reserves

The payment by a central bank of interest on the deposits (Required reserves plus excess reserves, if any) held by commercial banks at the central bank.

Interest

The payment made for the use of (borrowed) money.

Nominal Interest Rate

The percentage increase in money that the borrower pays the lender, including that resulting from the built-in expectations fo inflation, if any. Equation: (Real interest rate + inflation premium [The expected rate of inflation])

Open-market operations

The purchases and sales of U.S. Government securities that the federal reserve system undertakes in order to influence interest rates and the money supply; one method by which the federal reserve implements monetary policy.

Multiplier

The ratio of a change in equilibrium GDP to the change in investments or in any other component of aggregate expenditures or aggregate demand; the number by which a change in any such component must be multiplied to find the resulting change in equilibrium GDP.

Paradox of thrift

The seemingly self-contradictory but possibly true statement that increased saving may be both good in the long run when matched with increased investment spending, but may be bad in the short run if there is a recession because it reduces spending on goods and services.

Total Demand for money

The sum of the transactions demanded for money and the asset demand for money

Wealth Effect

The tendency for people to increase their consumption spending when the value of their financial and real assets rise and to decrease their consumption spending when the value of those assets falls.

Per-unit production Cost

Total input cost/Total output

Productivity

Total output/Total input

Cyclical Unemployment

Unemployment that is caused by a decline in total spending

Natural Rate of Unemployment or Full-employment rate of unemployment

Usually around 5 or 6 percent because their are frictional and structural unemployments that are unavoidable. This is the society's unemployment rate that is consistent with full employment.

Discouraged Workers

Workers who do not join the labor force because they were unable to find employment in the past or are having a hard time currently.

Real Interest Rate

percentage increase in purchasing power that the borrower pays the lender.

structural unemployment

unemployment of workers of those who cannot easily obtain new employment because lack of skills or because of geographical location.