ECON 101 Exam 3

actual UER

# unemployed/# civilian employed and unemployed

Natural Rate of unemployment

("full" employment) rate at which econ is working at full capacity with no tendency for inflation or deflation to occur

Consumer spending

(consumption for short) the total value of all consumer goods and services demanded

Investment spending

(represented by letter I) the amount that firms spend on factories, machinery, software, and the like plus the amount that families spend on new homes

Government purchases

(symbol G) paper, computers, airplanes, ships, and labor bought by all levels of government

nominal wage

A nominal wage is the rate of pay employees are compensated. If you are paid $15.00 per hour, your nominal wage is $15.00 per hour. The most important thing to know about a nominal wage is that it is not adjusted for inflation. Inflation is an increase in the general price level in an economy. An increase in the nominal wage shifts the aggregate supply curve inward (to the left), meaning that the quantity supplied at any price level declines. A decrease in the nominal wage shifts the aggregate supply curve outward (to the right), meaning that the quantity supplied at any price level increases

the downward or "reverse" multiplier

A withdrawal of income from the circular flow will lead to a downward multiplier effect. Therefore, whenever there is an increased withdrawal, such as a rise in savings, import spending or taxation, there is a potential downward multiplier effect on the rest of the economy.

Aggregate Demand equation

Aggregate Demand= C+I+G+(X-IM)

CPI

Consumer Price Index. measured by pricing the items on a list representative of a typical urban household budget CPI in a given year = (cost of market basket in a given year/ cost of market basket in base year) X 100

the relation between real and nominal GNP/GDP

GDP real = GDP nominal/P P is the GDP deflator

Nominal GNP/GDP

GNP/GDP valued at current price 'Nominal GDP' A gross domestic product (GDP) figure that has not been adjusted for inflation. Also known as "current dollar GDP" or "chained dollar GDP."

Real GNP/GDP

GNP/GDP valued at some base period prices Real Gross Domestic Product (real GDP) is a macroeconomic measure of the value of economic output adjusted for price changes (i.e., inflation or deflation). This adjustment transforms the money-value measure, nominal GDP, into an index for quantity of total output.

inflation

Inflation is defined as a sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.

Recession

Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.

increase in the multiplier

The multiplier concept can be used any situation where there is a new injection into an economy. Examples of such situations include: When the government funds building of a new motorway When there is an increase in exports abroad When there is a reduction in interest rates or tax rates, or when the exchange rate falls.

Net Exports

U.S. exports minus U.S. imports (X-IM)

Y

Y= Gross Domestic Product = National Income = Aggregate Demand

Yd

Yd= Disposable Income

Yd

Yd= Y- Tx + Tp Disposable Income= GDP - Taxes +Transfer Payments

Gross Domestic Product (GDP)

a related concept (to gross national product) which counts the value of all final goods and services produced within the borders of the US, no matter what the national origin of the producer

GDP Deflator

a weighted average of all prices that appear in GDP where P is a price index with a value=1 for the base year. if prices double p-> 2

M1

coins, paper money, traveler's checks, conventional checking accounts, and certain other checkable deposits in banks and saving institutions

cyclical

difference between actual unemployment rate and the natural unemployment rate. occurs between business cycles- recession and inflation

Price index

expresses the cost of a market basket of goods relative to its cost in some "base" period, which is simply the year used as a basis of comparison.

automatic stabilizers

features of the economy that reduce its sensitivity to shocks. examples: personal income tax, US system of unemployment insurance. Lowers the multiplier

Unemployment Rate

frictional + structural + cyclical

Types of unemployment that form natural unemployment rat

frictional and structural

3 kinds of unemployment

frictional, structural, and cyclical

"crowding out"

government crowds private spending

"stag flation"

inflation with recession, supply curve moves to s--> s1

Transfer Payments

money from the government; welfare, social security

frictional

occurs as a consequence of people voluntarily leaving work for another job or are entering work force for first time

structural

occurs when there is a mismatch btwn skills or location requirements btwn job vacancies and the present skills or locations of unemloyed individuals Ex: Appalachian Region

income-expenditure diagram, or 45 degree line diagram

plots total real expenditure (on the vertical axis) against real income (on the horizontal axis). the 45 degree line marks off points where income and expenditure are equal

PPI

producer price index (price firms pay to other firms)

r=i--pie symbol

real rate= nominal interest rate- inflation rate

M2

savings accounts, money market deposit accounts, and money market mutual fund shares

inflationary gap

the amount by which equilibrium real GDP exceeds the full-employment level of GDP

recessionary gap

the amount by which the equilibrium level of real GDP falls short of potential GDP

real wage

the real wage doesn't show how many dollars a worke ris paid for an hour of work (that's nominal wage) but rather the purchasing power of that money The term real wages refers to wages that have been adjusted for inflation, or, equivalently, wages in terms of the amount of goods and services that can be bought. This term is used in contrast to nominal wages or unadjusted wages.

Gross National Product (GNP)

the sum of money values of all final goods and services produced by domestic firms and organizations and by domestically owned firms operating abroad during a specified period of time, usually one year

aggregate demand

the total amount that all consumers, business firms, government agencies, and foreigners spend on US final goods and services

equilibrium aggregate demand

total level of production equals sum of consumer spending and planned consumer spending