Section 2: Macroeconomics

Aggregate Demand Curve

Aggregate Demand Curve is the sum of all the demands (C+ I+G+(x-m)) for all final goods and services.

Budget Deficit

Budget Deficit is the excess of central government spending over its tax receipts over one year.

Budget Surplus

Budget Surplus is the excess of central government tax receipts over its spending over one year.

Crowding Out

Crowding Out is a situation where government spending displaces private spending. The government competes for the same money businesses and consumers want, driving up interest rates.

GDP per capita

GDP per capita is GDP divided by the population.

Accelerator Model

In The Accelerator Model, the level of investment depends on the rate of change in national income, and as a result tends to be subject to substantial fluctuations.

Investment

Investment is the business purchase of goods and services or additions to capital stock (new buildings, new plant, new vehicles, new machinery), and additions to inventory.

Long-run Aggregate Supply

Long-run Aggregate Supply is the relationship between real output and the price level at full employment. It is defined as that period in time when all markets are in equilibrium, including the labor market. (The natural rate of unemployment).

Long-run

Long-run is when factor prices do adjust to final price changes the macro economy is in the long-run.

Macroeconomic Equilibrium

Macroeconomic Equilibrium occurs at the price level where aggregate demand equals aggregate supply.

Macroeconomics

Macroeconomics is the branch of economics which studies the workings of the economy as a whole. It involves aggregates that concern economic growth, unemployment, inflation, distribution of wealth, and income and external stability.

Per capita

Per capita means per head.

Price Level

Price Level means the average of all prices, measured using an index. We use price levels to give us the 'real' total output or expenditure.

Recession

Recession is a business cycle contraction, a general slowdown in economic activity; by definition, two or more quarters of negative growth in Gross Domestic Product.

Recessionary Gap

Recessionary Gap is where an economy is operating below its full employment equilibrium. There are unemployed resources. Under this condition, the level of real GDP is currently lower than its full employment, which puts downward pressure on prices in the long-run.

Short-run Aggregate Supply

Short-run Aggregate Supply is the period of time before factor prices adjust to a change in prices.

Short-run

Short-run is when prices of final goods and services change, but factor prices do not - there is a time lag.

The Business Cycle

The Business Cycle is the periodic fluctuations of national output around its long term trend. Often occurs at a generally upward growth path (productive potential). *Economies tend to move through stages including "boom" and "bust.

Gross National Product (GNP)

The sum total of all final goods and services produced by a country in a given period of time, usually one year, plus the value of net factor (property) income from abroad.

Aggregate Demand

Aggregate Demand is the relationship between the aggregate quantity of goods and services demanded - or Real GDP - and the price level. (C+ I+G+(x-m))

Aggregate Supply

Aggregate Supply is the total supply or availability of goods and services in the economy. It is made of goods and services produced locally as well as overseas (imports).

Austerity Measures

Austerity Measures involves decreasing government spending and increasing taxes in order to reduce a budget deficit.

Circular Flow of Income

Circular Flow of Income is the flow of income between households and firms. Expenditures on goods and services flow from households to firms, and income flows from firms to households. Leakages may flow out of the economy, but flow back in by injections.

Contractionary Fiscal Policy

Contractionary Fiscal Policy involves decreasing government spending or increasing taxes, which leads to a decrease in aggregate demand.

Demand-pull Inflation

Demand-pull Inflation refers to the sustained increase in the general price level resulting from an increase in aggregate demand.

Demand-side policies

Demand-side policies are government policies that attempt stabilize the economy by altering the level of aggregate demand. Consists of Fiscal and Monetary policies.

Depreciation

Depreciation is the wearing out of capital goods, also called capital consumption.

Discretionary Fiscal Policy

Discretionary Fiscal Policy involves deliberate changes in government spending and tax rates to influence aggregate demand.

Expansionary Fiscal Policy

Expansionary Fiscal Policy involves increasing government spending or decreasing taxes, which leads to an increase in aggregate demand.

Expansionary Monetary Policy (Quantitative Easing)

Expansionary Monetary Policy (Quantitative Easing) involves an increase in the money supply in order to lower interest rates and increase Consumption and Investment. It is used to counter a recession.

Factor Prices

Factor Prices are the cost of all factors of production used in the production process, before the adjustment for taxes and subsidies.

Fiscal Policy

Fiscal Policy is government policy on taxation, government spending, and transfer payments and their affect on aggregate demand and aggregate supply. It can be either expansionary or contractionary to either increase or decrease economic activity and influence aggregate demand.

Full Employment (Level of National Income)

Full Employment (Level of National Income) is the level at National Income at which everyone who wants to work is able to. There is in other words sufficient demand to employ everyone.

Inflationary Gap

Inflationary Gap is a macroeconomic condition that describes the distance between the current level of real GDP and the full employment (long run equilibrium) real GDP.

Marginal Propensity to Consume (MPC)

Marginal Propensity to Consume is the percentage change in consumption brought about by an increase in additional income.

Marginal Propensity to Save (MPS)

Marginal Propensity to Save (MPS) is the percentage change in savings brought about by an increase in additional income.

Market Prices

Market Prices are distorted by indirect taxes and subsidies and do not reflect the incomes generated by them.

Automatic Fiscal Stabilizers

Automatic fiscal stabilizers is fiscal policy that works with discretionary government policy. The progressive tax system will automatically increase the rate of taxation as income rises and decrease the rate of taxation as income decreases.

Contractionary Monetary Policy

Contractionary Monetary Policy involves decreasing the money supply in order to increase interest rates and decrease Consumption and Investment.

Cost-push Inflation

Cost-push Inflation refers to the sustained increase in the general price level resulting from increased cost in the inputs of the factors of production.

Gross Domestic Product (GDP)

Gross Domestic Product is the total market value of all final goods and services produced in a country over a given period of time, usually one year, before depreciation.

Growth Recession

Growth Recession is slow growth, lower than the long-term average growth trend and not enough to accommodate full-employment.

Keynesian Model

In the Keynesian Model, the economy is inherently unstable and can remain in a recessionary or inflationary period indefinitely. The government needs to intervene to correct this imbalance. During a recession/deflationary period the government needs to induce spending or "prime the pump" (aggregate demand). During an inflationary period the government needs to use measures to decrease spending (aggregate demand). *The aggregate supply curve goes from horizontal to vertical

Neo-Classical Model

In the Neo-Classical Model, economy is inherently stable, and although there may be periods where the economy slows down, it will self-correct. The government should intervene as little as possible. Markets operate more efficiently when the government stays out of the economy. *According to this model the SRAS curve is upward-sloping

Monetary Policy

Monetary Policy refers to changes in the money supply and interest rates to affect aggregate demand and aggregate supply. Decisions are made by the central bank.

Multiplier Effect

Multiplier Effect suggests that an initial change in aggregate demand can have a much greater final impact on equilibrium national income. It is the change in real GDP divided by the change in autonomous expenditure.

National Expenditure

National Expenditure is the sum total of all spending in an economy over one year by the four components of aggregate demand: Consumer Expenditure, Investment, Government Spending, and Net Exports (C+I+G+(x-m)).

National Income

National Income is the income accrued by a country's residents for supplying productive resources. It is the sum of all forms of wages, rent, interest and profits over a given period of time.

National Output

National Output is the sum total of all final goods and services over a time period of usually one year. This is calculated by summing the value-added at each stage of production, thus avoiding "double-counting intermediate goods".

Natural rate of employment

Natural rate of employment is the level of unemployment which still exists when the labor market clears. So there is no cyclical unemployment, only structural and frictional and seasonal. Increase in demand at this level will cause inflation.

Net Domestic Product (NDP)

Net Domestic Product is GDP that is adjusted for depreciation.

Net National Product (NNP)

Net National Product is GNP that is adjusted for depreciation.