macro final

deficit spending

Borrowed funds to finance government purchases.

frictional unemployment

Brief periods of unemployment experienced by people moving between jobs or into the labor market

different types of demand for money

(Everyone has an amount of money they'll need to be readily accessible to perform these functions. For example, an individual or company doesn't want to put so much of their money in long-run high yield investments if doing so risks not being able to afford the everyday purchases in the meantime. Many of these kinds of investments have penalties or barriers to withdraw or liquidate before the agreed time.)

disposable income

After-tax income of households; personal income less personal taxes.

consumption

Expenditure by consumers on final goods and services.

graphing and using the aggregate model

1) Instead of prices in dollars, we put a general "price level" on the y axis. 2) Instead of the quantity of a specific good, we put Real GDP on the x axis to represent the output of ALL goods/services. 3) Price and Quantity in the economy are still defined by equilibrium. 4) We introduce the idea of the "Full-Employment Rate of Output" which is how much output you have to produce in an economy for full-employment to be reached. 5) The idea here is simple. If an economy produces less than enough to employ enough workers (due to too little demand) then you are in a recession. The "gap" on on our graph is the recessionary gap. 6) The Long-run Aggregate Supply (LRAS) line is how much output you need to produce in an economy to reach full-employment. Any equilibrium to the left of that line shows a recessionary gap and has unemployment above what it would be at full-employment. Any point to the right has unemployment below full-employment and leads to an inflationary GDP gap.

bonds

A certificate establishing debt and the interest paid on that debt issued by businesses and governments

recession

A decline in total output (real GDP) for two or more consecutive quarters.

deflation

A decrease in the average level of prices of goods and services. Deflation occurs when there is too little demand given the volume of products produced within an economy. Deflation happens every time a country goes through a recession. There isn't enough demand for current production so prices have to fall to entice buyers. This can create a negative feedback loop in an economy if too many customers put off making purchases to wait for further price drops.

Consumer price index (CPI)

A measure (index) of changes in the average price of consumer goods and services, also known as inflation. This figure is published by the Bureau of Labor Statistics to help estimate inflation in the United States.

the federal reserve

A quasi-governmental organization of banks, known as the U.S. central bank, which makes decisions about the money supply. The U.S. central bank decides whether to raise or lower interest rates and, in this way, influences macroeconomic policy. The Federal Reserve's mandate is low unemployment and low/stable inflation (price stability). While the Board of Governors of the Fed is an independent government agency, the Federal Reserve Banks are set up like private corporations. It is both a private and public agency.

labor fore

All "non-institutionalized" persons over age 16 who are either working for pay or actively seeking paid employment. (Full-time or part-time)

business cycle

Alternating periods of economic growth and contraction.

the business cycle

Alternating periods of economic growth and contraction. While the periods between growth and expansion are not usually the same, every economy goes through periods of relative growth and contraction.

injection

An addition of spending to the circular flow within an economy.

inflation chpt 15

An increase in average prices in an economy. Remember from our Aggregate Demand/Supply model, there are only 2 ways to see inflation. 1) Supply decreases with a supply-side shock (shifts left). 2) Demand increases with a demand-side shock (shifts right).

inflation

An increase in the average level of prices of goods and services. Remember, prices can change due to shifts in the demand curve or shifts in the supply curve. Inflation occurs when there isn't enough being produced within an economy to go around given current demand (demand is the willingness and ability to purchase). Another way to say this is too many dollars chasing too few goods.

demand-pull inflation

An increase in the price level initiated by excessive aggregate demand relative to the full-employment rate of output.

discouraged worker

An individual who isn't actively seeking employment but would look for or accept a job if one were available.

budget surplus

Any excesses in government revenues over its expenditures.

core inflation rate

Changes in the CPI, excluding food and energy prices. Economists compare overall inflation against core inflation as a way to see if prices are changing mostly due to food and energy prices or if everything in an economy is seeing price changes.

M1 Money Supply

Currency and funds available in "transaction accounts" like a checking account. In other words, ready to spend.

transactions demand

Demand for money to be used to make everyday purchases

M2 Money Supply

Everything in M1 plus money in less "liquid" accounts, such as certain kinds of savings accounts and money market funds. If M1 is money that is "ready to spend," M2 is money that requires more effort to liquidate before spending. Withdrawing money from M2 accounts may also come with fees or penalties depending on the established contract.

investment

Expenditures on (production of) new plants, equipment, and structures (capital) in a given time period, plus changes in business inventories.

automatic stabilizer

Federal expenditure or revenue item that automatically responds counter-cyclically to changes in national income, like unemployment benefits and income taxes.

lenders

Have money now and want to turn it into more money in the future.

speculative demand

Money held for speculative ventures. These could be money making opportunities that require fast timing.

real income

Income in "constant dollars"; nominal income adjusted for inflation. Also known as "inflation adjusted". Any dollar value considered "real" is adjusted for inflation.

leakage

Income not spent directly on domestic output but instead diverted from the circular flow—for example, saving, imports, taxes.

barter

The direct trade of one good/service for another. For example, trade a haircut for a hamburger. You probably did this a lot on the playground or in the school cafeteria growing up.

Marginal propensity to save (MPS)

The fraction of each additional (marginal) dollar of disposable income not spent on consumption; 1 − MPC.

money

Money is a technology! It is anything that can do each of the following: Holds/stores value. Money is something that's good at being held for future purchases. It also is a way to store the value of a good or service that has been produced and traded. For example, you can store the value someone received for a haircut you provided them. Serves as a benchmark for price comparisons. You can tell one thing is desired more or is more scarce than something else by the price in that currency. For example, you can tell that a haircut is valued differently than a hamburger by comparing the prices. Facilitates market transactions with relative ease because it is widely accepted as payment. For example, you couldn't pay with a haircut if the seller is bald. The best forms of money are widely accepted forms of payment.

precautionary demand

Money that is set aside and ready to be used in case of an emergency.

borrowers

Need money now, and will repay it in the future.

income transfers

Payments to individuals for which no current goods or services are exchanged. Examples of this are Social Security and unemployment benefits.

underemployed

People seeking full-time paid employment who work only part time or are employed at jobs below their capability.

marginal prpensity to consume (mpc)

The fraction of each additional (marginal) dollar of disposable income spent on consumption; the change in consumption divided by the change in disposable income.

expansionary monetary policy

a policy that increases the supply of money and the quantity of loans in an economy. Decreasing required reserves for banks helps them loan out more (assuming they want to), and lowering the interest rate can increase investment spending in an economy. These are a few ways to increase the money supply and the accessibility of dollars in an economy. This is inflationary policy.

fiscal stimulus

Tax cuts or increases in government spending. This is intended to increase (shift) aggregate demand to the right.

fiscal restraint

Tax hikes or reductions in government spending. This is intended to reduce (shift) aggregate demand to the left.

saving

That part of disposable income not spent on current consumption; disposable income less consumption.

excess reserves

Those reserves held by banks that exceed the required reserves.

contractionary monetary policy

a policy that reduces the supply of money and loans in an economy. Increasing the reserve requirement of banks slows down access to loans, and increasing the interest rate makes saving more attractive. Both of these are examples of a few ways to reduce the supply and accessibility of dollars in an economy. This is deflationary policy.

price stability

The absence of significant changes in the average price level; historically defined as a rate of inflation of less than 3 percent. This has historically been achieved with unemployment close to 4%, but is whatever coincides with the Full-Employment rate of output and employment is. If unemployment is too far above full-employment, prices fall faster than desired. If unemployment is too far below full-employment, prices will rise faster than desired.

inflationary GDP gap

The amount by which equilibrium GDP exceeds full-employment GDP. When an economy is producing more than the full-employment amount of output due to an increase in aggregate demand. An economy can't due this for very long similar to how a car engine can't redline for too long. Eventually, resource prices are bid up (increased prices for labor and raw materials) leading to decreases in supply and a return to long-run supply.

recessionary GDP gap

The amount by which equilibrium GDP falls short of full-employment GDP. When an economy isn't producing enough to justify keeping so many workers employed due to a decrease in aggregate demand.

nominal income

The amount of money income received in a given time period, measured in current dollars. This is not adjusted in any way to account for price changes over time.

Demand for Money

The amount of money individuals or businesses are willing and able to hold given different interest rates. The interest rate is the "price" of holding money instead of holding something else.

Portfolio Decision

The choices of what to do with money not currently being spent. For example, keep it in cash, in a checking account, in a savings account, in the stock market, or purchase a good/service that can appreciate in value (like land or gold). The decision is somewhat speculative since you have to estimate the consequences of the decision and it is possible to make more or less than anticipated. In general, the choice is made through our understanding/estimates of the opportunity costs.

unemployment

The inability of labor force participants to find jobs. This means we only count those who are over 16 and actively seeking paid work as unemployed. So a full-time college student isn't unemployed if they aren't looking for work but as soon as they graduate and begin looking for employment they are counted as unemployed until they find a full-time position.

federal funds rate

The interest rate for those loans banks make to one another.

natural rate of unemployment

The long-term rate of unemployment determined by structural forces in labor and product markets. This means the natural rate of unemployment is the unemployment rate if the economy were to only have structural unemployment and frictional unemployment. It doesn't include the seasonal and cyclical components since those get "smoothed out" in the long run.

full employment

The lowest rate of unemployment compatible with price stability, variously estimated at between 4 percent and 6 percent unemployment. Economists consider the economy to be at full employment when the actual unemployment rate is equal to the natural unemployment rate. When the economy is at full employment, real GDP is equal to potential real GDP or the LRAS curve.

required reserves

The minimum amount of reserves banks are required to have and not lend out to borrowers. This is established by the "reserve ratio" set by the Federal Reserve.

Interest Rate

The price paid for the use of money

unemployment rate

The proportion of the labor force that is unemployed. Unemployment Rate = Unemployed Persons / Labor Force

yield

The return on a bond. This is based on the interest rate.

national debt

The total accumulated debt of a national government.

fiscal policy

The use of government taxes and spending to alter macroeconomic outcomes.

full-employment GDP

The value of total market output (real GDP) produced at full employment.

full-employment GDP

The value of total market output (real GDP) produced at full employment. This is also referred to as an economy's "Potential GDP" because it is the highest amount of production that can be sustained over a long period of time with current factors of production. Producing less than this amount means you have more people unemployed and not producing. This is represented by the long-run aggregate supply on our aggregate model graph. Remember, suppliers make $0 on everything they make but don't sell. When demand dries up in an economy, producers cut output and layoff workers to save money. It is still hypothetically possible to produce as much as was being produced before (remember the PPF), but there is no reason to produce so much if your customers aren't going to buy it.

financial system

This is a set of institutions that permit the "exchange of funds". These systems allow for money to flow from savers to borrowers in different ways. So an individual, a business, or even a government who has extra money can allow others to use that money. Unlike a gift, the access to the money can be bought by signing a contract to pay it back with interest. The risk is that the borrower won't be able to pay it back as established by the contract. The benefit to the lender is the accrued interest. The benefit to the borrower is the ability to make investments in the short run that was otherwise unattainable. Like being able to buy a machine on credit that will increase output for your business. If the return on that investment is greater than the cost, it was worth paying the interest. Parts of a financial system can include (but are not limited to) banks, insurance companies, and stock exchanges. The bank, for example, can connect you (a saver) with someone or a business that wants to use your money while you don't need it (a borrower). The bank charges the borrower an interest rate for using the money in their reserves and pays you an interest rate to supply money to those reserves. The law of supply and law of demand dictates what interest rate the borrower and the saver receive. The Federal Reserve influence that interest rate with monetary policy.

cylical unemployment

Unemployment attributable to a lack of job vacancies—that is, to an inadequate level of aggregate demand. This is part of the business cycle and occurs when we go through a recession.

structural unemployment

Unemployment caused by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs. Structural unemployment problems are how you can have a lot of unemployed people and still have a lot of job openings going unfilled. They either can't get to where the jobs are or don't know how to do the jobs.

Seasonal Unemployment

Unemployment due to seasonal changes in employment or labor supply.

monetary policy

Using credit controls and changing the money supply to influence the macroeconomy, mostly through aggregate demand.

crowding out

When government expenditures compete for resources that privately owned businesses use to produce. This is one reason governments attempt to reduce spending automatically when an economy approaches full employment. The government only wants to spend while private purchases are down so it won't be crowding out but filling in.

aggregate supply (AS)

the total quantity (real GDP) producers are willing and able to supply at alternative prices levels in a given time period, ceteris paribus

aggregate demand (AD)

the total quantity of output (real GDP) demanded at alternative price levels in a given time period, ceteris paribus

money illusion

the use of nominal dollars rather than real dollars to gauge changes in one's income or wealth