Macroeconomics 2301

Simple Money Multiplier

(mm) is the rate at which banks multiply money when all currency is deposited into banks and they hold no excess reserves.

assess the impact of the change on real GDP, unemployment, and the price level. The five steps are as follows:

1. Begin with the model in long-run equilibrium. 2. Determine which curve(s) are affected by the change(s), and identify the direction(s) of the change(s). 3. Shift the curve(s) in the appropriate direction(s). 4. Determine the new short-run and/or long-run equilibrium points. 5. Compare the new equilibrium(s) with the starting point.

The total of these four yields aggregate demand (AD) in a given period:

AD = C + I + G + NX

Inferior Goods

An inferior good is purchased out of necessity rather than choice. As income goes up, consumers page 78 buy less of an inferior good because they can afford something better.

Efficient

An outcome is efficient when an allocation of resources maximizes total surplus.

Normal Goods

Consumers buy more of a normal good as income rises, holding other things constant. When income goes up, the demand for restaurant meals increases and the demand curve shifts to the right. Similarly, if income falls and the demand for restaurant meals goes down, the demand curve shifts to the left.

Economists study how decisions are made. are concerned with positive analysis

Examples of economic decisions include whether or not you should buy or lease a car, sublet your apartment, and buy that Gibson guitar you've been eyeing. And, just as individuals must choose what to buy within the limits of the income they possess, society as a whole must determine what to produce from its limited set of resources.

Scientific Method

First, researchers observe a phenomenon that interests them. Based on these observations, they develop a hypothesis, which is an explanation for the phenomenon. Then, they construct a model to test the hypothesis. Finally, they design experiments to test how well the model (which is based on the hypothesis) works. After collecting the data from the experiments, they can verify, revise, or refute the hypothesis. After many tests, they may agree that the hypothesis is well supported enough to qualify as a theory. Or, they may determine that it is not supported by the evidence and that they must continue searching for a theory to explain the phenomenon.

Real GDP

GDP adjusted for changes in prices.

in equilibrium, both long-run and short-run aggregate supply are equal to aggregate demand:

LRAS = SRAS = AD

Indirect Incentive

Lower gasoline prices also work as an indirect incentive, since lower prices might encourage consumers to use more gas. much harder to recognize if the amount of welfare a person receives is higher than the amount that person can hope to make from a job, the welfare recipient might decide to stay on welfare rather than go to work. The indirect incentive to stay on welfare creates an unintended consequence

Nominal GDP

The GDP calculated from current prices

Great Recession

The U.S. recession that began in 2007 and lasted into 2009 lasted for 19 months, and real GDP fell by almost 9% in the last three months of 2008. In addition, the recovery from the Great Recession has been very slow.

Maturity Due

The date on which the loan repayment is due

In the long run, supply and demand become more elastic, or flatter. When consumers have additional time to make choices, they find more ways to avoid high-priced goods and more ways to take advantage of low prices. Additional time also gives producers the opportunity to produce more when prices are high and less when prices are low

The demand curve is also more elastic in the long run Increased elasticity on the part of both producers and consumers magnifies the unintended consequences we observed in the short run

Law of Supply and Demand

The law of supply and demand states that the market price of any good will adjust to bring the quantity supplied and the quantity demanded into balance.

GDP deflator

The price level we use to adjust GDP data includes the prices of the final goods and services counted in GDP. The GDP deflator serves to "deflate" all the price inflation out of nominal GDP so that we can see real GDP

Thomas Carlyle - "dismal science"

Thomas Malthus stated : because our planet had limited resources, continued population growth would ultimately lead to widespread starvation.

Aggregate

Total

^Entitlement Programs

What mandatory outlays are sometimes called, since citizens who meet certain requirements are then entitled to benefits under current laws

non-binding price ceiling

When a price ceiling is above the equilibrium price,

binding price ceiling

When a price ceiling is below the market price

Full Employment Output (Y*)

When the unemployment rate is equal to its natural rate—that is, when no cyclical unemployment exists—the output level produced in the economy

The aggregate production function now includes an allowance for technological advancement:

Y = A × F (natural resources, human capital, physical capital)

If we include institutions in the aggregate production function, we have:

Y = A × F (natural resources, human capital, physical capital, institutions)

Aggregate demand derives from four components: C, I, G, and NX

Y = C + I + G + NX

Market

a collection of buyers and sellers of a particular product or service buyers create the demand for the product, while the sellers produce the supply the interaction of the buyers and sellers in a market that establishes the price and the quantity produced of a particular good or the amount of a service offered. exist whenever goods and services are exchanged. Some markets are online, and others operate in traditional "brick and mortar" stores.

Spending Multiplier

a formula to determine the total impact on spending from an initial change of a given amount. The multiplier depends on the marginal propensity to consume: the greater the marginal propensity to consume, the greater the spending multiplier

Demand Curve

a graph of the relationship between the prices in the demand schedule and the quantity demanded at those prices. often drawn as a straight line always place the independent variable, which is the price, on the y axis, and the dependent variable, which is the quantity demanded, on the x axis. The relationship between the price and the quantity demanded produces a downward-sloping curve

supply curve

a graph of the relationship between the prices in the supply schedule and the quantity supplied at those prices

Store of Value

a means for holding wealth.

Investor Confidence

a measure of what firms expect for future economic activity. If confidence is high, they are more likely to borrow for investment at any interest rate

Government Budget

a plan for both spending and raising funds for the government. In this way, it is similar to a budget plan you may create for your own personal finances

Interest Rate

a price of loanable funds. It is like the price of toothpaste or computers or hoodies; it is simply quoted differently—as a percentage of the original loan amount

Bond

a security that represents a debt to be paid. If you own a bond, it means that someone owes you money—it is a formal IOU. Bonds are a tool of direct finance because they enable borrowers to go directly to savers for funds

Institution

a significant practice, relationship, or organization in a society. Institutions are the official and unofficial conditions that shape the environment in which decisions are made. Discussions often focus on institutions such as the laws and regulations in a nation. But other institutions such as social mores and work habits are also important.

Supply shocks

a surprise event that changes a firm's production costs. When supply shocks are temporary, they shift only the short-run aggregate supply curve. But supply shocks can be negative or positive. Negative supply shocks lead to higher production costs; positive supply shocks reduce production costs.

Demand Schedule

a table that shows the relationship between the price of a good and the quantity demanded.

Security

a tradable contract that entitles its owner to certain rights.

Unemployment Insurance

also known as federal jobless benefits, is a government program that reduces the hardship of joblessness by guaranteeing that unemployed workers receive a percentage of their former income while they are unemployed unemployment insurance serves to reduce the severity of the overall economic contraction.

Total Surplus

also known as social welfare, is the sum of consumer surplus and producer surplus.

Social Welfare

also known as total surplus, is the sum of consumer surplus and producer surplus.

The Billion Prices Project BPP

an academic initiative at the Massachusetts Institute of Technology that monitors daily price fluctuations of approximately 5 million items sold by roughly 300 online retailers in more than 70 countries.

Balance Sheet

an accounting statement that summarizes a firm's key financial information.

Laffer Curve

an illustration of the relationship between tax rates and tax revenue. (Arthur Laffer)

Fischer Equation

approximate the real interest rate by subtracting the inflation rate from the nominal interest rate in an equation

Price Controls

are an attempt to set prices through government involvement in the market. enacted to ease perceived burdens on society

Excess Reserves

are any reserves held in excess of those required. excess reserves = total reserves - required reserves

Checkable Deposits

are deposits in bank accounts from which depositors may make withdrawals by writing checks. These deposits represent purchasing power that is very similar to currency, since personal checks are accepted at many places.

Federal Funds

are deposits that private banks hold on reserve at the Federal Reserve. These deposits are part of the reserves that banks set aside, along with physical currency in their vaults.

Incentives

are factors that motivate a person to act or exert effort. help economists explain how decisions are made EX: the choice to study for an exam you have tomorrow instead of spending the evening with your friends is based on the belief that doing well on the exam will provide a greater benefit

Automatic Stabilizers

are government programs that automatically implement countercyclical fiscal policy in response to economic conditions. automatic stabilizers can eliminate recognition lags and implementation lags, and thereby alleviate some concerns of destabilizing fiscal policy.

Black Markets

are illegal markets that arise when price controls are in place. This means that sellers will go underground and charge higher prices to deliver customers the bread they want

Price Ceiling

are legally established maximum prices for goods or services. create many unintended effects that policymakers rarely acknowledge.

Price Floors

are legally established minimum prices for goods or services. minimum wage law

Discount Loans

are loans from the Federal Reserve to private banks.

Transfer Payments

are payments made to groups or individuals when no good or service is received in return. With a transfer payment, the government transfers funds from one group in society to another. These include income assistance (welfare) and Social Security payments to retired or disabled persons

Inputs

are resources used in the production process. When the prices of inputs change, so does the seller's profit margin. If the cost of inputs declines, profit margins improve. Improved profit margins make the firm more willing to supply the good. Conversely, higher input costs reduce profits. For instance, at Starbucks, the salaries of store employees, or baristas as they are commonly called, are a large part of the production cost. An increase in the minimum wage would require Starbucks to pay its workers more. This would raise the cost of making coffee, cut into Starbucks' profits, and make Starbucks less willing to supply coffee at the same price.

Excise Taxes

are taxes levied on a particular good or service.

Liabilities

are the financial obligations a firm owes to others. (right side of the balance sheet)

Asset

are the items that a firm owns. (left side of the balance sheet) indicate how the banking firm uses the funds it has raised from various sources

Government Outlays

are the part of the government budget that includes both spending and transfer payments.

Reserves

are the portion of bank deposits that are set aside and not lent out. Reserves include both currency in the bank's vault and funds that the bank holds in deposit at its own bank, the Federal Reserve. Banks also hold U.S. Treasury securities and other government page 524 securities as substantial assets in their portfolio

Endogenous Factors

are the variables that can be controlled for in a model. the wind tunnel enabled the Wright brothers to see how well each wing design—an important part of the model—performed under controlled conditions.

Exogenous Factors

are the variables that cannot be controlled for in a model. the weather (wind, air pressure, and other atmospheric conditions) was an exogenous factor because it was something that the Wright brothers could not control.

Substitutes

are two goods that are used in place of each other. When the price of a substitute good rises, the quantity demanded falls and the demand for the related good goes up.

Complements

are two goods that are used together. When the price of a complementary good rises, the demand for the related good goes down.

Markets

bring buyers and sellers together to exchange goods and services. As commerce spread throughout the ancient world, trade routes developed. Markets grew from infrequent gatherings, where exchange involved trading goods and services for other goods and services, into more sophisticated systems that use cash, credit, and other financial instruments. Today, when we think of markets we often think of eBay or Craigslist, where goods can be transferred from one person to another with the click of a mouse. For instance, if you want to find a rare DVD of season 1 of Entourage, there is no better place to look than eBay, which allows users to search for just about any product, bid on it, and then have it sent directly to their homes.

Positive Statement

can be tested and validated; it describes "what is." the statement "the unemployment rate is 7.0%" is a positive statement because it can be tested by gathering data

Frictional Unemployment

caused by delays in matching available jobs and workers. Frictional unemployment is another type of natural unemployment: no matter how healthy the economy may be, there is always some frictional unemployment.

trade-offs

choosing one thing means giving up something else exist when a decision-maker has to choose a course of action

Mandatory Outlays

comprise government spending that is determined by ongoing long-term obligations. Social Security & Medicare comprise government spending that is determined by ongoing long-term obligations. (the largest portion of the federal budget)

Discretionary Outlays

comprise spending that can be altered when the government is setting its annual budget. Examples of discretionary spending include monies for bridges and roads, payments to government workers, and defense spending. When you think of examples of government spending, you may think of these discretionary items. But total discretionary spending accounts for less than 40% of the U.S. government budget.

Fiscal Policy

comprises the use of government's budget tools, government spending, and taxes to influence the macroeconomy.

durable consumption goods

consumed over a long period

non-durable consumption goods

consumed over a short period

Labor Force

defined as someone who is already employed or actively seeking work. If a jobless person has not sought a job in four weeks, that person is not counted in the unemployment statistics. Individuals not included in the official definition include retirees, page 220 stay-at-home parents, people who are in jail, military personnel, children under age 16, and many full-time students.

Aggregate Production Function

describes the relationship among all the inputs used in the macroeconomy and the total output (GDP) of that economy. In its simplest form, the aggregate production function tells us that GDP is a function of three broad types of resources, or factors of production, which are the inputs used in producing goods and services. These inputs are physical capital, human capital, and natural resources. GDP = Y = F( physical capital, human capital, natural resources)

Models

economists use models, or simplified versions of reality. Models help us analyze the component parts of the economy. A good model should be simple to understand, flexible in design, and able to make powerful predictions. provide frameworks that enable us to predict the effect that changes in prices, production processes, and government policies have on real-life behavior.

Private Property Rights

encompass the rights of individuals to own property, to use it in production, and to own the resulting output.

Macroeconomic Policy

encompasses government acts to influence the macroeconomy.

Negative Incentives

encourage action. For instance, the fear of receiving a speeding ticket keeps motorists from driving too fast, and the dread of a trip to the dentist motivates people to brush their teeth regularly

Monopoly

exists when a single company supplies the entire market for a particular good or service.

Demand

exists when an individual or a group wants something badly enough to pay or trade for it.

Competitive Market

exists when there are so many buyers and sellers that each has only a small impact on the market price and output. the impact is so small that it is negligible. similar goods and many participants...the price and quantity sold are determined by the market rather than by any one person or business.

Hyperinflation

extremely high rate of inflation, and it completely stymies economic activity. In Zimbabwe, for example, average citizens could barely afford necessities like bread and eggs.

Financial Intermediaries

firms that help to channel funds from savers to borrowers. Banks are one example of a financial intermediary

Production Function

for a firm describes the relationship between the inputs the firm uses and the output it creates. For example, at a single McDonald's restaurant the daily output depends on the number of employees; anything needed to make the final product such as hamburger patties, French fries, and so on; and the capital tools that employees have to work with, including things such as space for cooking, cash registers, and drink dispensers q = f(human capital, physical capital)

Final Goods

goods that are sold to final users. The sale of the cell phone is included as part of GDP.

inflation

growth in the overall level of prices in an economy inflation causes GDP to go up even if there is no change in the quantity of goods and services produced

Nominal Wage

his or her wage expressed in current dollars. The nominal wage is similar to nominal GDP. It is the wage expressed in current dollars, like $60 per hour or $120,000 per year

Rational Expectations Theory

holds that people form expectations on the basis of all available information. If people form expectations rationally, they use more than just today's current level of inflation to predict next year's. Rational expectations are different from adaptive expectations in that they are forward-looking, while adaptive expectations only consider past experience.

Adaptive Expectations Theory

holds that people's expectations of future inflation are based on their most recent experience. If the inflation rate is 5% in 2013, then adaptive expectations theory implies that people will also expect a 5% inflation rate in 2014.

Marginal Benefit

how to justify the added effort

Direct Incentive

if one gas station lowers its prices, it most likely will get business from customers who would not usually stop there easy to recognize "Cut my grass and I'll pay you $30"

Government Spending (GS)

includes spending by all levels of government on final goods and services. For example, every government employee receives a salary, which is considered a part of GDP. Similarly, governments spend money purchasing buildings, equipment, and supplies from private-sector firms. Governments also make expenditures on public works projects, including national defense, highway construction, schools, and post offices.

Total income tax revenue depends on the level of income and the tax rate:

income tax revenue = tax rate × income

Phillips Curve

indicates a short-run inverse relationship between inflation and unemployment rates.

Nominal Interest Rate

interest rate before it is corrected for inflation; it is the stated interest rate

Real Interest Rate

interest rate that is corrected for inflation; it is the rate of return in terms of real purchasing power

Technological Advancements

introduces new techniques or methods so that firms can produce more valuable outputs per unit of input. We can either produce more with the same resources or use fewer resources to produce the same quantity. For example, the assembly line was an important technological advance. Henry Ford adopted and improved the assembly line method in 1913 at the Ford Motor Company. In this new approach to the factory, workers focused on well-defined jobs such as screwing on individual parts

Open Market Operations

involve the purchase or sale of bonds by a central bank. When the Fed wants to increase the money supply, it buys securities; in contrast, when it wishes to decrease the money supply, it sells securities

Monetary Policy

involves adjusting the money supply to influence the macroeconomy.

Austerity

involves strict budget regulations aimed at debt reduction. These austerity measures are what drove the Greek citizens to protest, because the measures included wage cuts and pension freezes for public workers, as well as an increase in the sales tax to 23%

Active Monetary Policy

involves the strategic use of monetary policy to counteract macroeconomic expansions and contractions.

Barter

involves the trade of a good or service without a commonly accepted medium of exchange. If you want food in a barter economy, you must find a grocer who also happens to want whatever you have to trade. Maybe you can only offer your labor services, but the grocer wants a cash register. In that case, you have to try to page 517 find someone who has a cash register and also wants to trade it for your labor. This takes more than a coincidence; it takes a double coincidence

Commodity Money

involves the use of an actual good in place of money. Examples include gold, silver, and the tobacco of colonial Virginia. But commodities are often difficult to carry around when the holder needs to make purchases. Thus, due to transportation costs, money evolved into certificates that represented a fixed quantity of the commodity. These certificates became the medium of exchange but were still tied to the commodity, since they could be traded for the actual commodity if the holder demanded it.

Supply-Side Fiscal Policy

involves the use of government spending and taxes to affect the production (supply) side of the economy.

Depreciation

is a fall in the value of a resource over time. Depreciation is natural with capital, and it erodes the capital stock. Without new investment, capital declines over time, so some positive investment is needed to offset depreciation

Social Security

is a government-administered retirement funding program. The program requires workers to contribute a portion of their earnings into the Social Security Trust Fund with the promise that they'll receive these back (including a modest growth rate) upon retirement. The goal of the program is to guarantee that no American worker retires without at least some retirement income.

Medicare

is a mandated federal program that funds health care for retired people. This program was established in 1965 with the goal of providing medical insurance for all retired workers. Like Social Security, the law requires current workers to pay Medicare taxes with the promise of receiving insurance upon retirement. In 2003, Medicare was extended into reimbursements for prescription drugs for retirees as well.

Rent Control

is a price ceiling that applies to the housing market. While this may be a laudable goal, rent control doesn't work. In fact, it doesn't help poor residents of a city to find affordable housing or gain access to housing at all. In addition, these policies contribute to dangerous living conditions.

Price Level

is an index of the average prices of goods and services throughout the economy. It goes up when prices generally rise, and it falls when prices across the economy fall

Negative Statement

is an opinion that cannot be tested or validated; it describes "what ought to be." the statement "an unemployed worker should receive financial assistance to help make ends meet" is a matter of opinion

Cyclical Unemployment

is caused by recessions, or economic downturns. This type of unemployment generates the greatest concern among economists and policymakers. It is the most serious type of unemployment because it means that jobs are not available for many people who want to work.

Countercyclical Fiscal Policy

is fiscal policy that seeks to counteract business-cycle fluctuations. The hope is that countercyclical fiscal policy can reduce the fluctuations inherent in a business cycle.

Endogenous Growth

is growth driven by factors inside the economy. There must be some reason that assembly lines, sewing machines, air conditioning, personal computers, and the Internet were all developed in the United States. These advances spurred economic growth and improved people's lives. Why did they all occur here? Modern growth theory seeks to understand why such innovations occur in one place and not another.

Exogenous Growth

is growth that is independent of any factors in the economy. In this view, the innovations are not due to any inherent characteristics of the economies that experience them. Similarly, in this view, poor nations are poor because the random technology innovations happened elsewhere

Net Investment

is investment minus depreciation. In order to increase the capital stock, net investment must be positive.

Commodity-Backed Money

is money that can be exchanged for a commodity at a fixed rate.

Fiat Money

is money that has no value except as the medium of exchange; there is no inherent or intrinsic value to the currency. In the United States, our currency is physically just pieces of green paper. This paper has value because the government has mandated that we can use the currency to pay our debts. On U.S. dollar bills, you can read the statement "This note is legal tender for all debts, public and private."

welfare economics

is the branch of economics that studies how the allocation of resources affects economic well-being.

Stagflation

is the combination of high unemployment rates and high inflation.

Ceteris Paribus "Other things being equal"

is the concept under which economists examine a change in one variable while holding everything else constant. If the Wright brothers had changed many variables simultaneously and found that the wing worked better, they would have had no way of knowing which change was responsible for the improved performance. For this reason, engineers generally modify only one element at a time and test only that one element before moving on to test additional elements.

Deadweight Loss

is the decrease in economic activity caused by market distortions.

Owner's Equity

is the difference between a firm's assets and its liabilities. When a firm has more assets than liabilities, it has positive owner's equity. Overall, the right side of the balance sheet identifies the bank's sources of funds.

Consumer Surplus

is the difference between the willingness to pay for a good and the price that is paid to get it.

Producer Surplus

is the difference between the willingness to sell a good and the price that the seller receives.

Opportunity Cost

is the highest-valued alternative that must be sacrificed in order to get something else. You should choose the option that results in the lowest opportunity cost... Each time we make a choice, we experience an opportunity cost, or a lost chance to do something else. EX: choosing what you really want to do over something that does not interest you as much

Convergence

is the idea that per capita GDP levels across nations will equalize as nations approach the steady state.

Monetary Neutrality

is the idea that the money supply does not affect real economic variables.

Technology

is the knowledge that is available for use in production. Though technology is often embodied in machines and productive techniques, it is really just knowledge. New technology enables us to produce more while using fewer of our limited resources

Willingness to pay

is the maximum price a consumer will pay for a good. also known as the reservation price the price beyond which the consumer decides to walk away from the transaction.

Willingness to Sell

is the minimum price a seller will accept to sell a good or service.

M2

is the money supply measure that includes everything in M1 plus savings deposits, money market mutual funds, and small-denomination time deposits (CDs). money supply (M) = currency + deposits

M1

is the money supply measure that is essentially composed of currency and checkable deposits. also includes traveler's checks, but these account for a very small portion of M1.

Currency

is the paper bills and coins that are used to buy goods and services.

Human Capital

is the resource represented by the quantity, knowledge, and skills of the workers in an economy. It is possible to expand human capital by increasing the number of workers available, by educating the existing labor force, or both.

Economics

is the study of how people allocate their limited resources to satisfy their nearly unlimited wants. Ask: how do individuals and societies make decisions about scarce resources?

Microeconomics

is the study of the individual units that make up the economy. EX: Jim was laid off from his last job and is currently unemployed. EX: Apple decides to open up 100 new stores.

Macroeconomics

is the study of the overall aspects and workings of an economy; such as inflation, growth, employment, interest rates, and the productivity of the economy as a whole EX: The national savings rate is less than 2% of disposable income. EX: The government passes a jobs bill designed to stabilize the economy during a recession. consider what happens when the national output of goods and services rises and falls, when overall national employment levels rise and fall, and when the overall price level goes up and down.

Market Demand

is the sum of all the individual quantities demanded by each buyer in the market at each price. A price change causes a movement along a given demand curve, but it cannot cause a shift in the demand curve. there are many different variables that can shift demand. These include changes in buyers' income, the price of related goods, changes in buyers' taste and preferences, expectations regarding the future price, and the number of buyers.

Market Supply

is the sum of the quantities supplied by each seller in the market at each price. price change causes a movement along the supply curve, not a shift in the curve.

Quantitative Easing

is the targeted use of open market operations in which the central bank buys securities specifically targeted in certain markets.

Aggregate Demand

is the total demand for final goods and services in an economy.

Aggregate Supply

is the total supply of final goods and services in an economy.

Trade

is the voluntary exchange of goods and services between two or more parties. creates value because participants in markets are able to specialize in the production of goods and services that they have a comparative advantage in making. Voluntary trade among rational individuals creates value for everyone involved. Imagine you are on your way home from class and you want to pick up a gallon of milk. You know that milk will be more expensive at a convenience store than it will be at the grocery store five miles away, but you are in a hurry to study for your economics exam and are willing to pay up to $5.00 for the convenience of getting it quickly. At the store, you find that the price is $4.00 and you happily purchase the milk. This ability to buy for less than the price you are willing to pay provides a positive incentive to make the purchase. But what about the seller? If the store owner paid $3.00 to buy the milk from a supplier, and you are willing to pay the $4.00 price that he has set in order to make a profit, the store owner has an incentive to sell. This simple voluntary transaction has made both sides better off.

Structural Unemployment

is unemployment caused by changes in the industrial makeup (structure) of the economy. Although structural unemployment can cause transitional problems, it is often a sign of a healthy, growing economy.

Medium of Exchange

is what people trade for goods and services. Modern economies generally have a government-provided medium of exchange. In the United States, the government provides our dollar currency. But even in economies without government provision, a preferred medium of exchange usually emerges

Gross Domestic Product GDP

market value of all final goods and services produced within a nation during a specific period of time—typically, a year. GDP is the primary measure used to gauge a nation's output. But it also measures a nation's income. sum of all the output from coffee shops, doctor's offices, software firms, fast-food restaurants, and all the other firms that produce goods and services within a nation's borders.

Secondary Markets

markets in which securities are traded after their first sale. Secondary markets are like used car markets, but the "used" assets are securities. There's nothing wrong with a used security; it just means that the buyer is not purchasing the security directly from the firm whose name is on it

Chained CPI

measure of the CPI in which the typical consumer's basket of goods is updated monthly. While it's more difficult to measure and takes longer to estimate, the chained CPI is a better indicator of inflation for the typical consumer

Economic Growth

measured page 179 as the percentage change in real per capita GDP economic growth ≈ %Δ in nominal GDP − %Δ price level − %Δ population

Real Wage

nominal wage adjusted for changes in the price level. The real wage is more informative because it describes what the worker earns in terms of purchasing power. So while a salary of $100,000 a year may sound high, if the CPI doubles, that salary will not go very far.

Equilibrium

occurs at the point where the demand curve and the supply curve intersect....perfectly balanced

Economic Expansion

occurs from the bottom of a trough to the next peak, when the economy is growing faster than usual jobs are relatively easy to find and average income levels climb

Contractionary Monetary Policy

occurs when a central bank acts to decrease the money supply. A central bank often undertakes contractionary monetary policy when the economy is expanding rapidly and the bank fears inflation.

Expansionary Monetary Policy

occurs when a central bank acts to increase the money supply in an effort to stimulate the economy. Hypothetically (and unrealistically), the Fed could do this by dropping currency out of a helicopter. But it typically expands the money supply through open market purchases: it buys bonds.

Interest Rate Effect

occurs when a change in the price level leads to a change in interest rates and, therefore, in the quantity of aggregate demand. Remember that every dollar borrowed requires a dollar saved

International Trade Effect

occurs when a change in the price level leads to a change in the quantity of net exports demanded.

Moral Hazard

occurs when a party that is protected from risk behaves differently from the way it would behave if it were fully exposed to the risk. FDIC insurance means that neither banks nor their depositors have an incentive to monitor risk; no matter what happens, they are protected from the consequences of risky behavior.

Unemployment

occurs when a worker who is not currently employed is searching for a job without success the level of unemployment in the United States has been relatively high in recent years—during and after the Great Recession, which began at the end of 2007.

Fractional Reserve Banking

occurs when banks hold only a fraction of deposits on reserve. The alternative is 100% reserve banking. Banks in a 100% reserve system don't loan out deposits; these banks are essentially just safes, keeping deposits on hand until depositors decide to make a withdrawal.

Direct Finance

occurs when borrowers go directly to savers for funds. If you want a loan to start or expand a small business, you might go to a bank. But large established firms can skip financial intermediaries and go directly to the lenders when they need funds.

Passive Monetary Policy

occurs when central banks purposefully choose to only stabilize money and price levels through monetary policy.

Double Coincidence of Wants

occurs when each party in an exchange transaction happens to have what the other party desires. A double coincidence is pretty unusual, and this is why a medium of exchange naturally evolves in any exchange environment.

Budget Deficit

occurs when government outlays exceed revenue.

Budget Surplus

occurs when government revenue exceeds outlays. The most recent federal budget surpluses came page 469 in the four years from 1998 to 2001 When the budget is in deficit, the balance is negative; when the budget is in surplus, the balance is positive.

Bank Run

occurs when many depositors attempt to withdraw their funds at the same time.

Deflation

occurs when overall prices fall; it is negative inflation

Consumption Smoothing

occurs when people borrow and save in order to smooth consumption over their lifetime.

Money Illusion

occurs when people interpret nominal changes in wages or prices as real changes.

Dissaving

occurs when people withdraw funds from their previously accumulated savings

Crowding-Out

occurs when private spending falls in response to increases in government spending.

Indirect Finance

occurs when savers lend funds to financial intermediaries, which then loan these funds to borrowers. In this case, savers are indirectly financing the investments of firms.

Contractionary Fiscal Policy

occurs when the government decreases spending or increases taxes to slow economic expansion.

Expansionary Fiscal Policy

occurs when the government increases spending or decreases taxes to stimulate the economy toward expansion.

Creative Destruction

occurs when the introduction of new products and technologies leads to the end of other industries and jobs, as some jobs become obsolete

Diminishing Marginal Product

occurs when the marginal product of an input falls as the quantity of the input rises. Diminishing marginal product generally applies across all factors of production at both the microeconomic and the macroeconomic levels.

Surplus

occurs whenever the quantity supplied is greater than the quantity demanded. In competitive markets, surpluses and shortages are resolved through the process of price adjustment. Buyers who are unable to find enough salmon at $5.00 per pound compete to find the available stocks; this drives the price up. Likewise, businesses that cannot sell their product at $15.00 per pound must lower their prices to reduce inventories; this drives the price down.

Shortage

occurs whenever the quantity supplied is less than the quantity demanded.

Marginal Product

of an input is the change in output divided by the change in input. MPinput x = change in output from a change in input x

New Classical Critique

of fiscal policy asserts that increases in government spending and decreases in taxes are largely offset by increases in savings. But if savings increases, then consumption falls, and this outcome mitigates the effects of the government spending.

Imperfect Market

one in which either the buyer or the seller has an influence on the market price. Empire State Building affords a unique view of Manhattan. Not surprisingly, the cost of taking the elevator to the top of the building is not cheap. But many customers buy the tickets anyway because they have decided that the view is worth the price. From this, we see that when sellers produce goods and services that are different from their competitors', they gain some control, or leverage, over the price that they charge. The more unusual the product being sold, the more control the seller has over the price. Specialized products, such as popular video games, front-row concert tickets, or dinner reservations at a trendy restaurant, give the seller substantial pricing power.

Progressive Income Tax System

one in which people with higher incomes pay a larger portion of their income in taxes than people with lower incomes do. Notice that the tax rate climbs with income level.

Services

outputs that provide benefits without the production of a tangible product.

Stocks

ownership shares in a firm

unintended consequences

people who were supposed to use government assistance as a safety net until they can find a job use it instead as a permanent source of income.

Savings Rate

personal saving as a portion of disposable (after-tax) income

Price Gouging Laws

place a temporary ceiling on the prices that sellers can charge during times of emergency. Over 30 states in the United States page 116 have laws against price gouging. Like all price controls, price gouging laws have unintended consequences.

Labor Force Participation Rate

portion of the population that is in the labor force

Banks

private firms that accept deposits and extend loans

Investment (I)

private spending on tools, plant, and equipment used to produce future output. Investment can be something as simple as the purchase of a shovel, a tractor, or a personal computer to help a small business produce goods and services for its customers also includes more complex endeavors such as the construction of large factories. For example, when Pfizer builds a new factory for the manufacturing of a new drug, it is making an investment. When Walmart builds a new warehouse, that expense is an investment. And when a family purchases a newly built house, that expense also counts as an investment.

Incidence (of taxation)

refers to the burden of taxation on the party who pays the tax through higher prices, regardless of whom the tax is actually levied on.

Equity

refers to the fairness of the distribution of benefits within the society.

Scarcity

refers to the limited nature of society's resources, given society's unlimited wants and needs. Even the most abundant resources, like the water we drink and the air we breathe, are not always abundant enough everywhere to meet the wants and needs of every person.

Comparative Advantage

refers to the situation where an individual, business, or country can produce at a lower opportunity cost than a competitor can. harnesses the power of specialization it is possible to be a physician, teacher, or plumber and not worry about how to do everything yourself. The physician becomes proficient at dispensing medical advice, the teacher at helping students, and the plumber at fixing leaks

Economic Thinking

requires a purposeful evaluation of the available opportunities to make the best decision possible.

Marginal Thinking

requires decision-makers to evaluate whether the benefit of one more unit of something is greater than its cost. requires a decision-maker to weigh the extra benefits against the extra costs. people weigh the costs and benefits of their actions and choose to do the things with the greatest payoff.

Market Economy

resources are allocated among households and firms with little or no government interference. "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest." producers earn a living by selling the products that consumers want. Consumers are also motivated by self-interest; they must decide how to use their money to select the goods that they need or want the most. This process, which Adam Smith called the invisible hand, guides resources to their highest-valued use.

Three Factors for Economic Growth

resources, technology, and institutions

Business cycles

short-run fluctuations in economic activity.

Recession

short-term economic downturns that typically last about 6 to 18 months

Economics

social science that uses the scientific method accomplished by the use of economic models that focus on specific relationships in the economy In order to create these models, economists make many simplifying assumptions. This approach helps identify the key relationships that drive the economic decisions that we are interested in exploring

Rule of 70

states that if the annual growth rate of a variable is x %, the size of that variable doubles every 70 ÷ x years. an approximation, but it works well with typical economic growth rates

Law of Demand

states that, all other things being equal, quantity demanded falls when prices rise, and rises when prices fall. as price goes down, quantity demanded goes up

law of supply

states that, all other things being equal, the quantity supplied of a good rises when the price of the good rises, and falls when the price of the good falls.

Keynesian Economists

stress the importance of aggregate demand and generally believe that the economy needs help in moving back to full employment equilibrium.

Classical Economists

stress the importance of aggregate supply and generally believe that the economy can adjust back to full employment equilibrium on its own.

Market Demand

sum of all the individual quantities demanded by each buyer in a market at each price

Capital Gains Taxes

taxes on the gains realized by selling an asset for more than its purchase price. For example, if your parents bought a house in 1980 for $80,000 and then sold it in 2012 for $230,000, they made a $150,000 capital gain on the sale of the house, and this capital gain is taxed.

Transfer Payments

that the government makes to households, such as welfare payments or unemployment insurance, are not direct purchases of new goods and services. These transfer payments merely move income from one group to another.

Equilibrium Quantity

the amount at which the quantity supplied is equal to the quantity demanded. the market clears or that the price clears the market.

quantity demanded

the amount of a good or service that buyers are willing and able to purchase at the current price. When the price of a good increases, consumers often respond by purchasing less of the good or buying something else. For instance, many consumers who would buy salmon at $5.00 per pound would likely buy something else if the price rose to $20.00 per pound. Therefore, as price goes up, quantity demanded goes down

quantity supplied

the amount of a good or service that producers are willing and able to sell at the current price. Higher prices cause the quantity supplied to increase. Conversely, lower prices cause the quantity supplied to decrease.

Treasury Securities

the bonds sold by the U.S. government to pay for the national debt. Treasury securities are sold through auctions to large financial firms

Wealth Effect

the change in the quantity of aggregate demand that results from wealth changes due to price-level changes. For example, if you and your friends have $60 to buy pizza, you can afford to buy four $15 pizzas. But if inflation causes the price of pizzas to rise to $20, you can only afford three pizzas. Similarly, a rise in prices all over the economy reduces real wealth in the economy, and then the quantity of aggregate demand falls. In contrast, if prices fall, real wealth increases, and then the quantity of aggregate demand also increases.

Steady State

the condition of a macroeconomy when there is no new net investment. Once an economy reaches the steady state, there is no change in either capital or real income. The steady state is a direct implication of diminishing returns: when the marginal return to capital declines, at some point there is no incentive to build more capital. And this is not a very encouraging situation. You can think of the steady state as the "stagnant state," because when the economy reaches its steady state, real GDP is no longer increasing and economic growth stops

Menu Costs

the costs of changing prices. While some businesses can change prices easily—for example, gas pumps and signs at gas stations are designed for this purpose—businesses such as restaurants can find it expensive to print new menus when their prices change.

Securitization

the creation of a new security by combining otherwise separate loan agreements.

Time Preferences

the fact that people prefer to receive goods and services sooner rather than later. Because people have time preferences, someone must pay them to save

Resources (Factors of Production)

the inputs used to produce goods and services. The discovery or cultivation of new resources is a source of economic growth. Economists divide resources into three major categories: natural resources, physical capital, and human capital Natural resources include physical land and the inputs that occur naturally in or on the land. Coal, iron ore, diamonds, and lumber are examples of natural resources. Less obvious examples are mountains, beaches, temperate weather patterns, and scenic views—resources that residents enjoy consuming and that sometimes lead to tourism as a major industry. Geography, or the physical location of a nation, is also a natural resource that can contribute to economic growth. Geographic location facilitates trade and affects other important variables such as weather and disease control. The second category of resources is physical capital, or just capital. Recall that capital comprises the tools and equipment used in the production of goods and services. Examples of capital include factories, tractors, roads and bridges, computers, and shovels. The purpose of capital is to aid in the production of future output.

Federal Funds Rate

the interest rate on loans between private banks.

Discount Rate

the interest rate on the discount loans made by the Federal Reserve to private banks. The Fed sets this interest rate since it is a loan directly from a branch of the U.S. government to private financial institutions.

Minimum Wage

the lowest hourly wage rate that firms may legally pay their workers. a binding minimum wage results in unemployment in the short run higher minimum wage will lower the quantity of labor demanded

Loanable Funds Market

the market where savers supply funds for loans to borrowers. This market is not a single physical location but includes places like stock exchanges, investment banks, mutual fund firms, and commercial banks

Unit of Account

the measure in which prices are quoted.

Consumer Price Index (CPI)

the measure of the price level based on the consumption patterns of a typical consumer. When you read or hear about inflation in the media, the report almost certainly focuses on this measure. The CPI is essentially the price of a typical "basket" of goods purchased by a representative consumer in the United States.

Gross National Product GNP

the output produced by workers and resources owned by residents of the nation. Thus, shoes produced by Nike in Thailand would count as part of U.S. GNP, since the owners of Nike are citizens (and residents) of the United States.

Unemployment Rate (u)

the percentage of the labor force that is unemployed

Economic Contraction

the period extending from the peak downward to the trough. During this phase, the economy is growing at a slower rate than usual more people lose their jobs and income levels often fall.

Marginal Propensity to Consume (MPC)

the portion of additional income that is spent on consumption.

Required Reserve Ratio (RR)

the portion of deposits that banks are required to keep on reserve. required reserves = rr × deposits

Equilibrium Price

the price at which the quantity supplied is equal to the quantity demanded. This is also known as the market-clearing price.

Dodd-Frank Act

the primary regulatory response to the financial turmoil that contributed to the Great Recession. (July 2010) This act established several new oversight bodies and regulations on financial institutions with the stated aim of reducing risk in financial markets.

Output

the production that a firm creates. The important point is that in a normal production process, funds must be spent today and then repaid in the future—after the output sells. But for this sequence of events to occur, businesses must make promises to deliver payments in the future: page 259 these include payments to workers and lenders

Consumption (C)

the purchase of final goods and services by households, with the exception of new housing. include everything from groceries to automobiles include things such as haircuts, doctor's visits, and help from a real estate agent.

Shoeleather Costs

the resources that are wasted when people change their behavior to avoid holding money. In times past, these costs referred to the actual expense of replacing shoes that might get worn out as a result of making many trips to the bank. Today, these include fuel costs and the time and effort that people expend when they make multiple trips to a bank or ATM.

Default Risk

the risk that the borrower will not pay the face value of the bond on the maturity date. All else equal, the greater the default risk, the lower the price of a bond.

Margin

the size of a victory

Debt

the sum total of accumulated budget deficits.

Marginal Tax Rate

the tax rate paid on an individual's next dollar of income.

Average Tax Rate

the total tax paid divided by the amount of taxable income. the average tax rate is below the marginal tax rate. This is generally the case in a progressive tax system, and it is due to the fact that the marginal tax rate applies to the last few dollars taxed, but not to all income.

Retail Price

the true value that the cell phone creates in the economy

Natural Rate of Unemployment (u*)

the typical rate of unemployment that occurs when the economy is growing normally. Maintaining this natural rate is a more appropriate goal for policymakers

Wealth

the value of one's accumulated assets. Your wealth is the total value of everything you own, including the money in your wallet and in your bank accounts

Face Value / Par Value

the value of the bond at maturity—the amount due at repayment. For notation purposes, we'll call the face value pm since it is the price, or value, of the bond at maturity.

Positive Incentives

those that encourage action. For example, end-of-the-year bonuses motivate employees to work hard throughout the year, higher oil prices cause suppliers to extract more oil, and tax rebates encourage citizens to spend more money include bonus points, gold stars, public praise, and extra credit. For positive incentives to work, they generally need to be coupled with negative incentives......Students know that if they do not complete these requirements they will get a lower grade, perhaps even fail the class.

Intermediate Goods

those that firms repackage or bundle with other goods for sale at a later stage. For example, the cellphone case and keyboard are intermediate goods because the phone manufacturer combines them with other intermediate goods, such as the operating system, to produce the cell phone

Discouraged Workers

those who are not working, have looked for a job in the past 12 months and are willing to work, but have not sought employment in the past 4 weeks.

It is important to distinguish between shifts in versus movements along the aggregate demand curve

three effects related to movements along the aggregate demand curve. These three effects originate with a change in the economy's price level shifts in the demand curve occur when people demand more goods and services at a given price level. These shifts can come from any of the components of aggregate demand: consumption, investment, net exports, and government spending five causes of aggregate demand shifts: changes in real wealth, expected income, expected future prices, foreign income and wealth, and the value of the dollar.

Marginal Analysis

to break down decisions into smaller part Often, the choice is not between doing and not doing something, but between doing more or less of something. For instance, if you take on a part-time job while in school, you probably wrestle with the question of how many hours to work. If you work a little more, you can earn additional income. If you work a little less, you have more time to study. Working more has a tangible benefit (more money) and a tangible cost (poor grades)

Marginal Cost

what was the added value of making the effort

Financial Markets

where firms and governments obtain funds, or financing, for their operations. These funds come primarily from household savings across the economy

Net Exports (NX)

which are exports minus imports of final goods and services When spending on imports is larger than spending on exports, net exports are negative. Net exports are typically negative for the United States.

Underemployed Workers

workers who have part-time jobs but who would like to have full-time jobs. These workers are not counted as unemployed