ECON 2200 - Test 2

Annually Balanced Budget

Federal expenditures and taxes would have to be equal each year.

Production Function

Measures the output that is produced using various combination of inputs and a fixed level of technology.

Investment

Spending by business that adds t the productive capacity of the economy. Investment depends on factors such as its rate of return, the level of technology, and business expectations about the economy.

Consumption

Spending by individuals and households on both durable goods (e.g., autos, appliances, and electronic equipment) and nondurable goods (e.g., food, clothing, and entertainment).

Marginal Prosperity to Save

The change in saving associated with a given change in income.

Recessionary Gap

The increase in aggregate spending needed to bring a depressed economy back to full employment; equal to the GDP gap divided by the multiplier.

Long-run Aggregate Supply (LRAS) Curve

The long-run aggregate supply curve is vertical at full employment because the economy has reached its capacity to produce.

Externally Held Debt

Public debt held by foreigners, which is roughly equal to half of the outstanding U.S. debt held by the public.

Automatic Stabilizers

Tax revenues and transfer payments automatically expand or contract in ways that reduce the intensity of business fluctuations without any overt action by Congress or other policymakers.

Marginal Propensity to Save

The change in saving associated with a given change in income (deltaS/deltaY).

Discretionary Spending

The part of the budget that works its way through the appropriations process of Congress each year and includes such programs as national defense, transportation, science, environment, and income security.

Inflationary Gap

The spending reduction necessary(when expanded by the multiplier) to bring an overheated economy back to full employment.

Real GDP

The total value of final goods and services produced in a country in a year measured using prices in a base year.

If the growth rate in an economy is 2%, its GDP will double in about: a. 70 years b.140 years c. 35 years d. 28 years

c. 35 years

Infrastructure is often defined as a country's: a. private stock of capital b. investment in human capital c. public capital d. financial capital

c. public capital

Crowding-out Effect

Arises from deficit spending requiring the government to borrow, thus driving up interest rates and reducing consumer spending and business investment.

Catch-up Effect

Countries with smaller starting levels of capital experience larger benefits from increased capital, allowing these countries to grow faster than countries with abundant capital.

Balanced Budget Multiplier

Equal changes in government spending and taxation (a balanced budget) lead to an equal change in income (the balanced budget multiplier is equal to 1).

Functional Finance

Essentially ignores the impact of the budget on the business cycle and focuses on fostering economic growth and stable prices, while keeping the economy as close as possible to full employment.

Injections

Increments of spending, including investment, government spending, and exports.

Withdrawals

Activities that remove spending from the economy, including saving, taxes, and imports.

Aggregate Expenditures

Consist of consumer spending, business investment spending, government spending, and net foreign spending (exports minus exports): GDP=C+I+G+(X-M)

Productivity

How effectively inputs are converted into outputs. Labor productivity is the ratio of the output of goods and services to the labor hours devoted to the production of that output. Higher productivity and higher living standards are closely related.

Investment in Human Capital

Improvements to the labor force from investments in skills, knowledge, and the overall quality of workers and their productivity.

Keynesian Macroeconomic Equilibrium

In the simple model, the economy is at rest; spending injections (investment) are equal to withdrawals (saving), or I=S, and there are no net inducements for the economy to change the level of output or income. In the full model, all injections of spending must equal all withdrawals at equilibrium: I+G+X = S+T+M

Discretionary Fiscal Policy

Involves adjusting government spending and tax policies with the express short-run goal of moving the economy toward full employment, expanding economic growth, or controlling inflation.

Expansionary Fiscal Policy

Involves increasing government spending, increasing transfer payments, or decreasing taxes to increase aggregate demand to expand output and the economy.

Contradictory Fiscal Policy

Involves increasing withdrawals from the economy by reducing government spending, transfer payments, or raising taxes to decrease aggregate demand to contract output and the economy.

Internally Held Debt

Public debt owned by U.S. banks, corporations, mutual funds, pension plans, and individuals.

Real GDP per capita

Real GDP divided by population. Provides a rough estimate of a country's standard of living.

Mandatory Spending

Spending authorized by permanent laws that does not go through the same appropriations process as discretionary spending. Mandatory spending includes such programs as Social Security, Medicare, and interest on the national debt.

Multiplier

Spending changes alter equilibrium income by the spending change times the multiplier. One person's spending becomes another's income, and that second person spends some (the MPC), which becomes income for another person, and so on, until income has changed by 1/(1-MPC) =1/MPS. The multiplier operates in both directions.

Multiplier

Spending changes alter equilibrium income by the spending change times the multiplier. One person's spending becomes another's income, and that second person spends some (the MPC), which becomes income for another person, and so on, until income has changed by 1/1(1-MPC) = 1/MPS. The multiplier operates in both directions.

Public Choice Theory

The economic analysis of public and political decision making, looking at issues such as voting, the impact of election incentives on politicians, the influence of special interest groups, and rent-seeking behaviors.

Government Budget Constraint

The government budget is limited by the fact that G-T=(delta)M+(delta)B+(delta)A G= government spending T= Tax revenues, thus (G-T) is the federal budget deficit (delta)M= the change in the money supply (selling bonds to the Federal Reserve) (delta)B= The change in bonds held by public entities, domestic and foreign (delta)A= the sales of government assets

Average Propensity to Save

The percentage of income that is saved (S/Y). It is calculated by dividing savings by income. "S" being savings and "Y" being income.

Total Factor Productivity

The portion of output produced that is not explained by the number of inputs used in production.

Infrastructure

The public capital of a nation, including transportation networks, power-generating plants and transmission facilities, public education institutions, and other intangible resources such as protection of property rights and a stable monetary environment.

Aggregate Supply

The real GDP that firms will produce at varying price levels. In the short run, aggregate supply is positively sloped because many input costs are slow to change (they are sticky), but in the long run, the aggregate supply curve is vertical at full employment because the economy has reached its capacity to produce.

Information Lag

The time policymakers must wait for economic data to be collected, processed, and reported. Most macroeconomic data are not available until at least one quarter (three month) after the fact.

Implementation Lag

The time required to turn fiscal policy into law and eventually have an impact on the economy.

Economic Growth

Usually measured by the annual percentage change in real GDP, reflecting an improvement in the standard of living.

In his essay on population, Malthus argued that any improvement in the standard of living would lead to: a. an increase in the population that would outstrip the growth in food supply. b. a decrease in the population that would lead to utopia. c. an increase in the population matched by an increase in the food supply. d. A decrease in the population matched by a decrease in the food supply

a. an increase in the population that would outstrip the growth in food supply.

A legal system that enforces property rights is important to economic growth because: a. legal protection of ideas and technologies gives people who innovate the ability to protect their work. b. the legal system can help the government with tax collection. c. strong laws demonstrate commitment by legislators to economic growth. d. bankruptcy laws encourage lending.

a. legal protection of ideas and technologies gives people who innovate the ability to protect their work.

If a country's population increases at a higher rate than the growth in its real GDP: a. GDP per capita has increased b. the standard of living in the country has declined c. average output per person remains constant d. the country's rate of inflation has increased

b. the standard of living in the country has declined

Physical capital includes: a. the physical talents of people. b. the ability to take physical resources and use them in creative ways to produce goods and services. c. manufactured products that are used to produce other goods and services. d. land and raw resources that come from land

c. manufactured products that are used to produce goods and services.

Which of the following is NOT a factor in the production function? a. labor b. technology c. money d. capital

c. money

Supply-side Fiscal Policies

Policies that focus on shifting the long-run aggregate supply curve to the right, expanding the economy without increasing inflationary pressures. Unlike policies to increase aggregate demand, supply-side policies take longer to have an impact on the economy.

Saving

The difference between income and consumption; the amount of disposable income not spent.

Short-run Aggregate Supply (SRAS) Curve

The short-run aggregate supply curve is positively sloped because many input costs are slow to change (sticky) in the short run.

Decision Lag

The tie it takes Congress and the administration to decide on a policy once a problem is recognized.

Recognition Lag

The time it takes for policymakers to confirm that the economy is in a recession or a recovery. Short-term variations in key economic indicators are typical and sometimes represent nothing more than randomness in the data.

Rule of 70

Provides an estimate of the number of years for a value to double, and is calculated as 70 divided by the annual growth rate.

Laffer Curve

Shows a hypothetical relationship between income tax rates and tax revenues. As tax rates rise from zero, revenues rise, reach a maximum, then decline until revenues reach zero again at a 100% tax rate.

Fiscal Sustainability

A measure of the present value of all projected future revenues compared to the present value of projected future spending.

Cyclically Balanced Budget

Balancing the budget over the course of the business cycle by restricting spending or raising taxes when the economy is booming and using these surpluses to offset the deficits that occur during recessions.

Diminishing Returns to Capital

Each additional unit of capital provides a smaller increase in output than the previous unit of capital.

Wealth Effect

Households usually hold some of their wealth in financial assets such as savings accounts, bonds, and cash, and a rising aggregate price level means that the purchasing power of this monetary wealth declines, reducing output demanded.

Macroeconomic Equilibrium

Occurs at the intersection of the short-run aggregate supply and aggregate demand curves. At this output level, there is not net pressures for the economy to expand or contract.

Compounding

The ability of growth to build on previous growth. It allows a value such as GDP to increase significantly over time as income increases on top of previous increases in income.

Deficit

The amount by which annual government spending exceeds tax revenues.

Surplus

The amount by which annual tax revenues exceed government expenditures.

Capital-to-Labor Ratio

The capital employed per worker. A higher ratio means higher labor productivity and, as a result, higher wages.

Marginal Propensity to Consume

The change in consumption associated with a given change in income (deltaC/deltaY).

Marginal Propensity to Consume

The change in consumption associated with a given change in income.

Aggregate Demand

The output of goods and services (real GDP) demanded at different price levels.

Average Propensity to Consume

The percentage of income that is consumed (C/Y). It is calculated by dividing consumption spending by income. "C" being consumption spending and "Y" being income.

Public Debt

The total accumulation of past deficits less surpluses; it includes Treasury bills, notes, and bonds, and U.S. Savings Bonds.

Paradox of Thrift

When investment is positively related to income and households intend to save more, they reduce consumption, income, and output, reducing investment so that the result is that consumers actually end up saving less.

The percentage of the world's population that is poor, defined by the $2 per day threshold, is about: a. 10% b. 15% c. 20% d. 30%

d. 30%

If a country has a low capital-to-labor ration, then it tends t have: a. low labor productivity but low wages. b. high labor productivity but low wages. c. high labor productivity and high wages. d. low labor productivity and low wages.

d. low labor productivity and low wages.

Generally, nations with the ____ economic freedom also have the _____ per capital GDP. a. most; mean b. least; highest c. most; lowest d. most; highest

d. most; higest

In the United States, real GDP is measured by: a. the Federal Reserve b. the Congressional Budget Office c. the National Bureau of Economic Research d. the Bureau of Economic Analysis

d. the Bureau of Economic Analysis