Econ Final

recession

A recession is a period in which the economy is growing at a slower than normal rate. . also called a "contraction" . typically defined as two consecutive quarters of negative real GDP growth . a depression is a particularly severe recession

deposit insurance

Deposits in depository institutions are insured against loss of both the amount of deposit and the accrued interest by various insurance funds.

marginal propensity to consume

MPC = Marginal Propensity to Consume - the ratio of the change in consumption spending to a given change in income. MPC = change in C/change in Y

demand for money

The desire to hold money rather than trade it away. High demand for money means money is traded away reluctantly. Low demand for money means money is traded away quickly.

real interest rate

The interest rate expressed in dollars of constant value (adjusted for inflation) and equal to the nominal interest rate less the expected rate of inflation.

business cycle

The pattern of fluctuation from positive growth to negative growth and back to positive growth is called the business cycle. . The peak is the high-point of the business cycle, the period when the growth rate turns negative. . The trough is the low-point of the business cycle, the period when the growth rate turns positive.

autonomous expenditure

The portion of planned aggregate expenditure that is independent of output.

federal open market committee

Twelve-member committee made up of the seven members of the Board of Governors; the president of the Federal Reserve Bank of New York; and, on a rotating basis, the presidents of four other Reserve Banks. The FOMC meets eight times a year to set Federal Reserve guidelines regarding the purchase and sale of government securities in the open market as a means of influencing the volume of bank credit and money in the economy.

depression

a long-term economic state characterized by unemployment and low prices and low levels of trade and investment

expansion

a period of economic growth as measured by a rise in real GDP

fiscal policy

changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives

automatic stabilizers

changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action

o Expansionary gap

is a positive output gap; Y* < Y v o Expansionary gaps lead to inflation

consumption function

is an equation relating planned consumption spending to disposable income • )( *TYmpcCC−+=C

planned aggregate expenditure

is planned spending on final goods and services. • Four components of planned aggregate expenditure o Consumption (C) by households o Planned investment spending (IP) by domestic firms on new capital goods o Government purchases (G) are made by federal state and local governments o Net exports (NX) is exports minus imports PAE = C + IP + G + NX

output gap

is the difference between potential output and actual output at a point in time • Output gap = Y - Y*

recessionary gap

o Recessionary gap is a negative output gap; Y* > Y Recessionary gaps mean output and employment are less than their sustainable level

okun's law

relates cyclical unemployment changes to changes in the output gap . A two percentage point increase in the output gap a one point increase in unemployment Mathematically: (Y -Y*)/Y* = -2(u - u*), where u is the actual unemployment rate (in decimal form) and u* is the natural rate.

federal reserve system

the central bank of the United States, the central bank of the United States

menu costs

the costs of changing prices

Cyclical unemployment

the difference between total unemployment, u, and u* o During recessions, cyclical unemployment rises so u > u* o If expansionary gap, u < u*

income-expenditure multiplier

the effect of a one-unit increase in autonomous aggregate demand on short-run equilibrium output

reserve ratio

the fraction of deposits that the Federal Reserve determines banks must keep on reserve

federal funds rate

the interest rate on loans between banks that the Federal Reserve Board influences by affecting the supply of money available

short-run equilibrium output

the level of output at which output Y equals planned expenditure; the level of output that prevails during the period in which prices are predetermined

potential output

the maximum sustainable amount of real GDP that an economy can produce . How much the economy should be able to produce . Also called full-employment GDP . Its possible to use capital and labor at greater than normal rates and exceed Y* - for a limited time period

induced expenditure

the portion of planned aggregate expenditure that depends on output Y

wealth effect

the tendency of changes in asset prices to affect households' wealth and thus their spending on consumption goods and services

natural rate of unemployment

, u*, is the sum of frictional and structural unemployment o Occurs when actual output equals potential output o Zero percent of the workforce is cyclically unemployed