MACROECONOMICS STUDY SETS
3 Sources of funding available to governments
1) Explicit fees, called user charges, for government services (fundamental source of revenue)
Centralized Command and Control (Central Planning)
A common type of economic system by a centralized authority (king, queen, dictator, central government) The authority decides what items to produce & how many, determines how scarce resources will be, identifies who will be able to obtain the items.
The Price System and Markets
An economic system in which relative prices constantly change to reflect changes in demand and supply. Prices act as signals of relative scarcity to persons in the system
Once we pick a market basket of goods, we can construct a price index that compares the cost of that market basket today with the cost of the same market basket in a _____________ year
Base Year
The year that is chosen as the point of reference for comparison of prices in other years
Base Year
Why does a rise in a nation's GDP understate the actual rise in the standard of living?
Because GDP does not capture leisure
______________goods are goods that will later be used to produce consumer goods
Capital
A positive difference between the purchase price and the sale price of an asset. If a share of stock is bought for $5 and then sold for $15, the capital gain is $10
Capital Gain
______________enable us to produce larger quantities of consumer goods or to produce them less expensively that we otherwise could.
Capital Goods (use productive resources) Economic activity is forward-looking (not instant utility or satisfaction from our activity)
A negative difference between the purchase price and the sale price of an asset
Capital Loss
The government decides how much workers will be paid
Command Economy
The government decides what goods and services will be produced.
Command Economy
The __________ _________ Index is the most often used price index in the United States. The Producer Price Index is also widely mentioned
Consumer Price
A statistical measure of a weighted average of prices of a specified set of goods and services purchased by typical consumers in urban areas
Consumer Price Index (CPI) A fixed-quantity price index, meaning that the BLS implicitly ignores changes in consumption patterns that occur between years in which it revises the index. Government uses CPI to adjust the value of Social Security benefits to account for inflation. CPI remains the most widely reported price index
The use of goods and services for personal satisfaction
Consumption
Calculation of Price Index
Cost of Market Basket today / Cost of market basket in base year (x) 100
Clauses in contracts that allow for increased in specified nominal values to take account of changes in the cost of living
Cost of living adjustment (COLA's)
Calculating the Price index for a (2) good Market Basket
Cost of market basket (divided) by cost of market basket in base year (Times) X 100
Unemployment resulting from business recessions that occur when aggregate (total) demand is insufficient to create full employment
Cyclical Unemployment
A relationship between two variables that is positive, meaning that an increase in one variable is associated with an increase in the other and a decrease in one variable is associated with a decrease in another
Direct Relationship
Individuals who have stopped looking for a new job because they are convinced that they will not find a suitable one
Discouraged Workers
Calculation of Unemployment Rate
Divide the number of unemployed by the number of people in the labor force and multiply by 100
Economic evaluation of tax rate changes that recognizes that the tax base declines with ever-higher tax rates, so that tax revenues may eventually decline if the tax rate is raised sufficiently.
Dynamic Tax Analysis (a likely response to an increase in a tax rate is a decrease in the tax base)
_______________Is a social science that involves the study of how individuals choose among alternatives to satisfy their ___________, which are what people would buy if their incomes were ________________
Economics Wants Unlimited
The case in which a given level of inputs is used to produce the maximum output possible. Alternatively, the situation in which a given output is produced at minimum cost.
Efficiency
A state in which opposing forces or influences are balanced - A condition in which all influences acting cancel each other, so that a static or balanced situation results
Equilibrium
Exchange and Markets
Exchanges in markets are voluntary. Voluntary exchange is the act of trading between individuals on a voluntary basis, making both parties subjectively better off. The terms of exchange are usually the price paid and are determined by supply and demand
A tax levied on purchases of a particular good or service
Excise Tax
The term used for goods and services that are produced domestically and sold in abroad
Exports
Whereas overall labor force participation on net has risen only modestly since World War II, there has been a major increase in _______________ labor force participation.
Female
Rewards or penalties for engaging in a particular activity
Incentives
The duration of unemployment affects the unemployment rate. If the duration of employment increases, the measured unemployment rate will _______________, even though the number of unemployed workers may remain the same.
Increase
A variable whose values is determined independently of, or outside, the equation under study
Independent Variable
Any point below the production possibility curve
Inefficient Point
Any point below the production possibilities curve
Inefficient point
A sustained increase in the average of all prices of goods and services in an economy
Inflation (An upward movement in the average level of prices)(opposite of deflation)
Trade-offs are represented graphically by a _________ curve showing the maximum quantity of one good or service that can be produced, given a specific quantity of another, from a given set of resources over a specified period of time - for example, one year
PPC
Indicates the maximum quantity of one good, given the quantity produced of the other good
PPC (Production Possibility Curve) - defines the notion of efficiency
The highest point of the economy, before a recession begins, is called the ______.
Peak
The ________ _________ _________ Index uses annually updated weights from consumer spending surveys to measure average prices faced by consumers
Personal Consumption Expenditure
A statistical measure of average prices that uses annually updated weights based on surveys of consumer spending
Personal Consumption Expenditure (PCE) Index The PCE changing expenditure patterns, PCE is the primary inflation indicator because feds believe that the updated weights in the PCE index make it more accurate that the CPI as a measure of consumer price changes. Indexes are updated yearly
What does monetary policy involve?
Policies that affect bank lending, interest rates, and financial capital markets.
A straight line that touches a curve at only one point
Tangent Line
A ________ imposed on firm's sales shifts the supply curve upward, so the equilibrium quantity declines, and the market price rises. If demand and supply curves have typical shapes, consumers pa part of the tax through the increase in price, and firms pay the remainder.
Tax
The value of goods, services, wealth, or incomes subject to taxation
Tax Base
A specified interval of income to which a specific and unique marginal tax rate is applied
Tax Bracket
The distribution of tax burdens among various groups in society
Tax Incidence
The proportion of a tax base that must be paid to a government as taxes
Tax Rate
Price System
The alternative to command and control. (also called the market system) in short describes an economic system that answers the 3 basic economic questions via decentralized decision making.
A sustained decrease in the average of all prices of goods and services in an economy
Deflation (downward movement in the average level of prices)
A variable whose value changes according to changes in the value of one or more independent variables
Dependent Variable
An especially lengthy period of significant decline in real GDP
Depression
The type of unemployment that rises as the economy goes into a recession is called
cyclical
Consider an economy where the natural rate of unemployment is equal to 3%. If the actual unemployment rate is equal to 6%, then
cyclical unemployment rate is 3%
A economy is said to be at full employment level if the actual rate of unemployment ______.
equals the natural rate of unemployment.
By providing information and reducing the costs of job search, the Internet's impact on the job market is to reduce
frictional unemployment
Firms sell and households buy in the _______________market
goods and services
A visual representation of the relationship between variables
graph
The size of total production in an economy is measured by the
gross domestic product. (GDP)
The ___________ _____ _____________pictures the economy as consisting of two groups—households and firms—that interact in markets
circular flow diagram
When you have 2 axis in a graph, they span a
plane
A ___________ is a simplified representation of how two or more variables interact with each other.
theory
an institution that brings together buyers and sellers of goods or services, who may be either individuals or businesses
Market
How do individuals decide how much of a good to consume
Microeconomics
_____________________ focuses on the actions of individual agents within the economy, like households, workers, and businesses
Microeconomics
______________, the study of the decision-making process of individuals (or households) and firms, and _________________, the study of the performance of the economy as a whole, are the two main branches into which the study of economics is divided
Microeconomics Macroeconomics
____________, the study of the decision-making processes of individuals (or households) and firms, and __________, the study of the performance of the economy as a whole, are the two main branches into which the study of economics is divided.
Microeconomics, Macroeconomics
Which of the following measures will lower the natural rate of unemployment?
More high school graduates enter college without looking for employment right away.
A tax system in which, as income increases, a higher percentage of the additional income is paid as taxes. The marginal tax rate exceeds the average tax rate as income rises.
Progressive Taxation
____________________ has a command economy
North Korea
A line that can be divided into segments of equal length each associated with a number
Number Line
The highest valued, next best alternative that must be sacrificed to obtain something or to satisfy a want
Opportunity Cost The extent of the trade-off is represented by the opportunity cost
The value of the next best alternative good that could have been produced
Opportunity cost
The intersection of the y axis and the x axis in a graph
Origin
Points _____________ the production possibilities curve are unattainable. Points _______________ are attainable but represent an inefficient use or underuse of available resources
Outside Inside
Because many resources are better suited for certain productive tasks than for others, the production possibilities curve is bowed ____________, reflecting the law of increasing additional cost.
Outward
A tax system in which, regardless of an individual's income, the tax bill comprises exactly the same proportion
Proportional tax
45-degree reference line
The line along which planned real expenditures equal real GDP per year
Economics
The study of how people allocate their limited resources to satisfy their unlimited wants. As such, economics is the study of how people make choices.
Resources
Things that have value and, more specifically, are used to produce goods and services to satisfy people's wants
Aggregates
Total amounts or quantities. Aggregate demand, for example is total planed expenditures throughout a nation
In a ________________ economy, which is the oldest economic system and can be found in parts of Asia, Africa, and South America, economic affairs are organized the way they have always been done
Traditional
____________ _________________ are those associated with any activity whose goal is to enter into, carry out, or terminate contracts. In the labor market, these costs involve time spend looking for a job, being interviewed, negotiating the terms of employment
Transaction Costs
Inflation at a rate that comes as a surprise, either higher or lower than the rate anticipated.
Unanticipated Inflation (Inflation greater than anticipated) Whenever inflation rates are underestimated (higher than anticipated) it benefits borrowers because the nominal interest rate they are being charged does not fully compensate creditors.
____________________ persons are adults who are willing and able to work and are actively looking for a job but have not found one. The unemployment rate is computed by dividing the number of unemployed by the total _______________________
Unemployed Labor Force
The total of number of adults (aged 16 years or older) who are willing and able to work and who are actively looking for work but have not found a job
Unemployment
Which of the following is true of the U.S. unemployment rate?
Unemployment rates during the recessions of the early 1980s and of 2007-2009 were significantly high
Which of the following statements regarding unemployment rates in the U.S. is correct?
Unemployment rates for people with college degrees have been lower than unemployment rates for people with high school degrees
A constant tax assessed on each unit of a good that consumers purchase
Unit tax
labor force participation rate
(Labor Force)/Adult Population
Determine number of employed adults from labor force and unemployed adults
(labor force) - (unemployment) = employed adults
Suppose that a nation has a labor force of 100 people. In January, Amy, Barbara, Carine, and Denise are unemployed; in February, those four find jobs, but Evan, Francesco, George, and Horatio become unemployed. Suppose further that every month, the previous four who were unemployed find jobs and four different people become unemployed. Throughout the year, however, the same three people — Ito, Jack, and Kelley— continually remain unemployed because their skills are a poor match with employers' requirements. Calculate this nation's frictional unemployment rate.
4.00% Frictional unemployment rate = [(Frictional Unemployment)/(Labor Force)] x 100
Calculate the nation's unemployment rate
7.00% [(Frictional + Structural)/(Labor Force)] x 100
Economic System
A society's institutional mechanism for determining the way in which scarce resources are used to satisfy human desires.
Assessing taxes by charging a tax rate equal to a fraction of the market price of each unit purchased
Ad Valorem Taxation
The inflation rate that we believe will occur. When it does occur, we are in a situation of fully anticipated inflation
Anticipated Inflation
Wants
Are all of the items that people would buy if their incomes were unlimited
The _____________ ______ _________ is the total tax payment divided by total income, and the marginal tax rate is the change in the tax payment divided by the change in income
Average Tax Rate
The total tax payment divided by total income. It is the proportion of total income paid in taxes
Average Tax Rate
In a graph, each line is called an
Axis
A production possibilities curve is drawn holding the quantity and quality of all resources ____________ over the time period under study.
Fixed
A quantity measured per unit of time; something that occurs over time, such as the income you make per week or per year of the number of individuals who are fired every month
Flow
The unemployment that occurs as workers move between jobs is called________________ unemployment
Frictional
________________ unemployment occurs because of transaction costs in the labor market. For example, workers do not have full information about vacancies and must search for jobs.
Frictional
Unemployment due to the fact that workers must search for appropriate job offers. This takes time, and so they remain temporarily unemployed
Frictional Unemployment
3 Major types of Unemployment
Frictional, Structural and Cyclical Frictional - Continuous flow of individuals from job to job Structural - Can be caused by structural changes, structural emp is not related to the movement of workers from low to high paying jobs Cyclical - related to business fluctuations/changes in business conditions primarily due to recessions and depressions.
An arbitrary level of unemployment that corresponds to "normal" friction in the labor market
Full Employment (a concept that implies some sort of balance or equilibrium in an ever-shifting labor market)
The __________ _________ measures what is happening to the average price level of all new, domestically produced final goods and services in our economy
GDP Deflator
A price index measuring the changes in prices of all new goods and services produced in the economy
GDP Deflator or Annual total national income (broadest price index reported in the U.S.) GDP NOT based on a fixed market basket of goods and services, changes with peoples consumption and investment patterns. The GDP deflator reflect both price changes and the publics market responses to those price changes.
the expanding cultural, political, and economic connections between people around the world
Globalization
The limit on government spending and transfers imposed by the fact that every dollar the government spends, transfers, or uses to repay borrowed funds must ultimately be provided by the user charges and taxes it collects
Government Budget Constraint
Whenever inflation is ________ than anticipated creditors love and debtors gain. Whenever the rate of inflation is _______ than anticipated, creditors gain and debtors lose
Greater; less
In which of the following situations is the natural rate of unemployment in an economy likely to be high?
If government regulations make it harder to start up new businesses
When does the natural rate of unemployment in an economy tend to be low?
If it is easy for workers to learn about new jobs
A relationship between two variables that is negative, meaning that an increase in one variable is associated with a decrease in the other and a decrease in one variable is associated with an increase in the other
Inverse Relationship
Microeconomics
Is the part of economic analysis that studies decision making undertaken by individuals (or households) and by firms. It is like looking through a microscope to focus on the small parts of our economy. Microeconomics Analysis - The study of decision making by individuals and by firms - as the basis of macroeconomic analysis
An individual in the labor force who quits voluntarily
Job Leaver
An individual in the labor force whose employment was involuntarily terminated
Job Loser
The unemployed are classified as _____________ _________________, ___________________, __________________ ________________, and _____________ ________________ to the labor force. The flow of people departing jobs and people acquiring jobs determines the stock of the unemployed as well as the stock of employed.
Job losers Re-entrants Job leavers New entrants
Taxes are individual income taxes, corporate income taxes, social security taxes, and excise taxes on items such as gasoline and alcoholic beverages
Key taxes for the Federal Government
Sales taxes, property taxes, and personal and corporate income taxes
Key taxes for the state and local Governments
(Adult, non-institutionalized, non-military population) x (labor force participation rate) = labor force
Labor Force
Individuals aged 16 years or older who either have jobs or are looking and available for jobs; the number of employed plus the number of unemployed
Labor Force (defined as the proportion of the measured labor force)
The percentage of noninstitutionalized (not in prisons, mental institutions) working-age individuals who are employed or seeking employment
Labor force participation rate
The fact that the opportunity cost of additional units of a good generally increases as people attempt to produce more of that good. This accounts for the bowed-out shape of the production possibilities curve.
Law of increasing additional cost
Economics is typically divided into 2 types of analysis
Macroeconomics & Microeconomics
Identify the definition of macroeconomics
Macroeconomics studies the actions and decisions of the economy as a whole
The change in the tax payment divided by the change in income, or the percentage of additional dollars that must be paid in taxes. The marginal tax rate is applied to the highest tax bracket of taxable income reached.
Marginal Tax Rate (incremental)
The levels of frictional and structural unemployment are used in part to determine our (somewhat arbitrary) measurement of the ______________ rate of unemployment
Natural
The rate of unemployment that is estimated to prevail in long-run macroeconomic equilibrium, when all workers and employers have fully adjusted to any changes in the economy
Natural rate of unemployment (if correctly estimated, the natural rate of unemployment should NOT include cyclical unemployment) (Only includes frictional & structural)
Economics is a social science that involves the study of how individuals choose among alternatives to satisfy their _________, which are what people would buy if their incomes were____________
Needs, Unlimited
An individual who has never held a full-time job lasting two weeks or longer but is now seeking employment
New Entrant
The ______ value of any economic statistic means the statistic is measured in terms of actual prices that exist at the time.
Nominal
The market rate of interest observed in contracts expressed in today's dollars
Nominal Rate of Interest (nominal rate of interest is equal to the real rate of interest plus an inflationary premium)
The _____________ value of anything is simply its price expressed in today's dollars
Nominal Value
The cost of todays market basket of goods (today) expressed as a percentage of the cost of the same market basket during a base year (later)
Price index (= cost of market basket today (divided) by cost of market basket in base year (X) 100 - the base year will always be 100
A statistical measure of a weighted average of prices of goods and services that firms produce and sell
Producer Price Index (PPI) - (product price indexes) goods used in the production of other goods, and one for finished goods
A curve representing all possible combinations of maximum outputs that could be produced, assuming a fixed amount of productive resources of a given quality
Production Possibilities Curve (PPC)
The value of money for buying goods and services. If you money income stays the same but the price of one good that you are buying goes up, your effective purchasing power falls.
Purchasing Power ( A dollar's purchasing power is the real goods and services that you can buy) (a decline in the purchasing power of money)
The nominal rate of interest minus the anticipated rate of inflation
Real Rate of Interest
The ___________ value of anything is its value expressed in purchasing power, which varies with the overall price level.
Real Value (Contract of Nominal Value)
A significant decline in real GDP
Recession
An individual who used to work full-time but left the labor force and has now reentered it looking for a job
Reentrant
A tax system in which as more dollars are earned, the percentage of tax paid on them falls. The marginal tax rate is less that the average tax rate as income rises.
Regressive Taxation
Earnings that a corporation saves, or retains, for investment in other productive activities; earnings that are not distributed to stockholders
Retained Earnings (profits not given out by stockholders)
The change in the y value divided by the corresponding change in the x value of a curve; the "incline" of the curve
Slope
While GDP focuses on production that is bought and sold in markets, ______ includes all elements that affect people's well-being, whether they are bought and sold in the market or not.
Standard of Living
Economic evaluation of the effects of tax rate changes under the assumption that there is no effect on the tax base, meaning that there is an unambiguous positive relationship between tax rates and tax revenues
Static Tax Analysis
The ___________ __________ of the relationship between tax rates and tax revenues implies that higher tax rates always generate increased tax collections. The dynamic view indicates that higher tax rates cause the tax base to decrease, so that tax revenues will rise by a smaller amount
Static View
The quantity of something, measured at a given point in time - for example, an inventory of goods or a bank account. Stocks are defined independently of time, although they are assessed at a point in time
Stock
___________ unemployment occurs when there is a poor match of workers' skills and abilities with available jobs, perhaps because workers lack appropriate training or government labor rules reduce firms' willingness to hire.
Structural
Unemployment resulting from a poor match of workers? abilities and skills with current requirements of employers.
Structural Unemployment
The ______ unemployed are individuals who have no jobs because they lack skills valued by the labor market, either because demand has shifted away from the skills they do have, or because they never learned any skills.
Structurally
The total pool of applied knowledge concerning how goods and services can be produced
Technology
_______________ has the task of identifying a market basket of goods and services of the typical consumer
The Bureau of Labor Statistics (BLS) The BLS uses the time period of 1982-1984 as it's bas of market prices.
Identify a feature of a market economy
The economy is driven by private enterprises
Food items purchased from grocery stores and taken home to prepare for meals
The expenditure weight for home-consumed food
What does the exchange rate measure?
The value of one currency in terms of another currency
The horizontal axis in a graph
X Axis
The vertical axis in a graph
Y Axis
Determine unemployment rate from unemployed adults and labor force
[(unemployed adults)/(labor force)] x 100
Internet job sites, like Monster.com, have led potential employees to find jobs via the internet almost instantly. This has caused
a fall in frictional unemployment
Macroeconomics
is the part of the economic analysis that studies the behavior of the economy as a whole. It deals with economy wide phenomena such as changes in unemployment, in the general price level, and in national income. Macroeconomics analysis focuses on aggregates, those aggregates are the result of choices made by individuals and firms
Households sell and business firms buy in the _________ market.
labor
Full employment means
there is a level of unemployment consistent with "normal" frictions in the labor market
The economy of Finland is at full employment when
there is some unemployment due to friction in the labor market, but there is no cyclical unemployment.
Purpose of Economics
to explain choices
The purpose of a theory is to take a complex, real-world issue and simplify it down to its essentials. If done well, this enables the analyst to _________________
understand the issue and any problems around it.