Macroeconomic Terms

Central Bank

A bank for banks. The United State's central bank is the Federal Reserve System.

Automatic Stabilizer

A feature of the economy that reduces its sensitivity to shocks, such as sharp increases or decreases in spending.

Systemically Important "too big to fail"

A financial institution in which, by virtue of its size of interconnectedness, can threaten the entire system if it runs into trouble.

Unconventional Monetary Policy

A generic term referring to unusual forms (or volumes) of central bank lending and to unusual types of open-market operations

Intermediate good

A good purchased for resale or for use in producing another good

Unemployment Insurance

A government program that replaces some of the wages lost by eligible workers who lose their jobs.

Fiscal Policy

A government's plan for spending and taxation, it can be used to steer aggregate demand in the desired direction

Subprime

A mortgage that the borrower fails to meet the traditional credit standards of "prime" borrowers.

Capital

A nation's availability to supply plant, equipment, and software. It is the result of past decisions to make investments in these items.

Mortgage

A particular type of loan used to buy a house. The house usually serves as a collateral for the mortgage.

Recession

A period of time during which the total output of the economy declines

Full Employment

A situation in which everyone who is willing and able to work can find a job. At full employment, the measured unemployment rate is still positive.

Equilibrium

A situation in which neither consumers nor firms have any incentive to change their behavior. They are content to continue with things as they are.

Barter

A system of exchange in which people directly trade one good for another, without using money as an intermediate step.

Deposit Insurance

A system that guarantees that depositors will not lose money even if their bank goes bankrupt.

Fractional Reserve Banking

A system under which bankers keep as reserves only a fraction of the funds they hold on deposit.

Monetary Policy

Actions taken by the Federal Reserve to influence aggregate demand by changing interest rates and the money supply. It is aimed at affecting the economy.

Supply-side Tax Cuts

Aim to push the economy's aggregate supply curve outward to the right. When successful, they can expand the economy and reduce inflation at the same time--a hight desirable outcome.

Balance Sheet

An accounting statement listing the values of all assets on the left side and the values of liabilities and net worth on the right side.

Money-fixed asset

An asset whose value is a fixed number of dollars.

Induced Increase in Consumption

An increase in consumer spending that stems from an increase in consumer incomes. It is represented on graph as movement along a a fixed curve consumption function.

Autonomous Increase in Consumption

An increase in consumer spending without any increase in consumer incomes. It is represented by a shift of the entire consumption function.

Bubble

An increase in the price of an asset or assets that goes far beyond what can be justified by improving fundamentals, such as dividends and earnings for shares of stock or incomes and interest rates for houses.

Liability

An item of value that an individual or firm owes. Many liabilities are known as debts.

Asset

An item of value that an individual or firm owns.

Commodity Money

An object in use as a medium of exchange that also has a substantial value in alternative (non monetary) uses.

Discouraged Worker

An unemployed person who gives up looking for work and is therefore no longer counted as part of the labor force.

Excess Reserves

Any reserves held in excess of the legal minimum.

How can growth rate of potential GDP be calculated?

By adding: growth rate of labor input + growth rate of labor productivity

Nominal GDP

Calculated by valuing all outputs at current prices

Real GDP

Calculated by valuing outputs of different years at common prices. Therefore, real GDP is a far better measure than nominal GDP of changes in total production

Aggregation

Combining many individual markets into one overall market

Risk Premium

Compensation to the lender for the the probability if the borrower fails to repay the loan in full or on time.

Stabilizing Policy

Government programs designed to prevent or shorten recessions and to counteract inflation

How do you calculate GDP?

Hours of work x Labor Productivity

Stagflation

Inflation that occur while the economy is growing slowly or in a recession

Property Rights

Laws and/or conventions that assign owners the rights to use their property as they see fit (within the law)

Near Moneys

Liquid assets that are close substitutes for money.

Fiat Money

Money that is decreed as such by the government. It is of little value as a commodity, but it maintains its value as a medium of exchange because people have faith that the issuer will stand behind the pieces of printed paper and limit their production.

Convergence Hypothesis

Nations with low levels of productivity tend to have high productivity growth rates, so that international productivity differences shrink over time.

Run on a bank

Occurs when many depositors withdraw cash from their accounts all at once

Relative Price

Price in terms of some other item rather than in terms of dollars.

Multiplier

Ratio of the change in equilibrium GDP (Y) divided by the original change in spending that causes the change in GDP (CHANGE IN Y) / (CHANGE IN I)

Deflation

Refers to a sustained decrease in the general price level

Inflation

Refers to a sustained increase in the general price level

Quantitative Easing

Refers to open-market purchases of assets other than Treasury bills.

Systemic Risk

Refers to risks to the entire system of banks of financial institutions. It arises because these institutions, especially the largest ones, are interlinked in many ways.

Liquidity

Refers to the ease with which it can be converted into cash.

Self-Correcting Mechanism

Refers to the way money wages react to either a recessionary gap or an inflationary gap. Wage changes shift the aggregate supply curve and therefore change equilibrium of GDP and the level of equilibrium price level.

Aggregate Demand Curve

Shoes the quantity of domestic product that is demanded at each possible value of the price level

Expenditure Schedule

Shows the relationship between national income (GDP) and total spending

Consumption Function

Shows the relationship between total consumer expenditures and total disposable income in the economy, holding all other determinants of consumer spending constant.

Production Function

Shows the volume of output that can be produced from given inputs (such as labor and capital), given the available technology in an economy.

Aggregate Supply Curve

Shows, for each possible price level, the quantity of foods and services that all the nation's businesses are willing to produce during a specified per of of time, holding all other determinants of aggregate quantity supplied constant.

Transfer Payments

Sums of money that the government gives certain individuals as outright grants rather than as payments for services rendered to employers. Some common examples are Social Security and unemployment benefits.

Inflationary Gap

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

Productivity

THe amount of output produced by a unit of input.

Labor Force

THe number of people holding or seeking jobs.

Cyclical Unemployment

THe portion of unemployment that is attributable to a decline in the economy's total production. Cyclical unemployment rises during recessions and falls as prosperity is restored.

Risk of Default

THe risk that the borrowers may not pay in full or on time.

Open-Market Operations

The Fed's purchases or sales of government securities, normally Treasury bills, through transactions in the open market.

Recessionary Gap

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

Labor Productivity

The amount of output a worker turns out in an hour (or a week, or a year) of labor. If output is measured by GDP, it is GDP per hours of work.

Human Capital

The amount of skill embodied in the workforce. It is most commonly measured by the amount of education and training.

M2

The broadly defined money supply. The sum of M1 and most forms of savings account balances, plus shares in money market mutual funds.

Central Bank Independence

The central bank's ability to make decisions without political interference.

Interest Rate Spread

The difference between an interest rate on a risky asset and the corresponding interest rate on a risk-free Treasury security.

Net Exports (X-IM)

The difference between exports (X) and imports (IM). It indicates the difference between what we sell to foreigners and what we buy form them.

Capital Gain

The difference between the price at which an asset is sold and the price at which it was bought.

Investment

The flow of resources into the production of new capital. It is the labor, steel, and other inputs devoted to the construction of factories, warehouses, railroads and other pieces of capital during some period of time.

Government Purchases (G)

The goods and services purchased by all levels of the government.

Moral Hazard

The idea that when people are insured against the consequences of a risk, they will engage in riskier behavior.

Discount Rate

The interest rate the Fed charges on loans that it makes to banks.

Federal Funds Rate

The interest rates that banks pay and receive when they borrow reserves from one another.

Required Reserves

The minimum amount of reserves (in cash of the equivalent) required by law. Normally, required reserves are proportional to the volume of deposits.

M1

The narrowly defined money supply. The sum of all coins and paper money in circulation, plus certain checkable deposit balances at banks and savings institutions.

Unemployment Rate

The number of unemployed people, expressed as a percentage of the labor force.

Induced Investment

The part of investment spending that rises when GDP rises and falls when GDP falls

Nominal Rate of Interest

The percentage by which the money the borrower pays back exceeds the money that was borrowed, making no adjustment for any decline in the purchasing power of this money that results from inflation.

Real Rate of Interest

The percentage increase in purchasing power that the borrower pays to the lender for the privilege of borrowing. It indicates the increased ability to purchase goods and services that the lender earns.

Capital Formation

The process of building up the capital stock. Synonymous with investment.

Personal Saving Rate

The ratio of consumer saving to disposable income.

Money Multiplier

The ratio of newly created bank deposits to new reserves

Marginal Propensity to Consume (MPC)

The ratio of the change in consumption relative to the change in DI that produces the change in consumption. On graph, it appears as the slop of the consumption function.

Potential GDP

The real GDP that the economy would produce if its labor and other resources were fully employed.

Money and it's 3 attributes

The standard object used in exchanging goods and services. In short, money is the medium of exchange. (1) Medium of exchange (2) Unit of account (3) Store of value

Investment Spending (I)

The sum of the expenditures of business firms on new plant, equipment, software and households on new homes. Financial "investments" are not included and neither are resales of existing physical assets.

Disposable Income (DI)

The sum of the incomes of all individuals in the economy after all taxes have been deducted and all transfer payments have been added.

National Income

The sum of the incomes that all individuals in the economy earn in the forms of wages, interest, rents and profits. It excludes government transfer payments and is calculated before any deductions are taken for income taxes.

Gross Domestic Product

The sum of the money values of all final goods and serves produced in the domestic economy and sold on organized markets during a specific period of time, usually a year

Consumer Expenditure (C)

The total amount spent by consumers on newly produced goods and services (excluding purchases of new homes, which are considered investment goods)

Net Worth

The value of all assets minus the value of all liabilities.

Purchasing Power

The volume of goods and services a given sum of money will buy.

Real Wage

The wage rate adjusted for inflation. Specifically, it is the nominal wage divided by the price index. The real wage thus indicates the volume of goods and services that the nominal wages will buy. REAL WAGE = (Nominal Wage) / (Price level) * 100

Final goods and services

Those that are purchased by their ultimate users

Frictional Unemployment

Unemployment that is due to normal turnover in the labor market. It includes people who are temporarily employed between jobs because they are moving or chaining occupations, or are unemployed for similar reasons.

Leverage

When an asset is bought with borrowed money to supplement his or her own funds. Usually measured by the ratio of assets to equity.

Insolvent

When the value of a company's liabilities exceeds the value of its assets, when its net worth is negative.

Structural Unemployment

Workers who have lost their jobs because they have been displaced by automation, because their skills are no longer in demand or because of similar reasons.

Real GDP per capita

the ratio of real GDP divided by population