Macroeconomics Final Key Concepts CH: 1-10,12,13

National Income

All income, including wages, salaries and benefits, profits, rental income, and interest

Federal funds rate

The interest rate financial institutions charge each other for overnight loans used as reserves

If the marginal propensity to consume is 0.75 and taxes are decreased by a lump sum of $400 billion, what will be the increase in income?

$1.2 muthafudgin trillion

In which year was the unemployment rate the highest in the United States?

1935

GDP per Capita

A Country's GDP divided by its population. Provides a useful measure of a country's relative standard of living

Double-Dip Recession

A Recession that begins after only a short period of economic recovery from the previous recession

Cost-of-living index

A cost-of-living index requires information on how consumers will respond to changes in product prices and income.

Deflation

A decline in overall prices throughout the economy. This is the opposite of inflation

How would decreasing productivity be illustrated?

A different aggregate supply curve to the left of the original curve

Price Floor

A government set minimum price that can be charged for a product or service. When the price floor is set above equilibrium, it leads to surpluses

Inflation

A measure of changes in the cost of living. A general rise in prices throughout the economy

Consumer Price Index (CPI)

A measure of the average change in prices paid by urban consumers for a typical market basket of consumer goods and services To find CPI, dividing the cost of a typical market basket of consumer goods and services in the current year by its cost in the base year and multiplying by 100.

Producer Price Index (PPI)

A measure of the average changes in the prices received by domestic producers for their output

Gross Domestic Product (GDP)

A measure of the economy's total output; it is equal to the total market value of all final goods and services produced by resources in a given year

Fiscal Sustainability

A measure of the present value of all projected future revenues compared to the present value of projected future spending

Positive question

A question that can be answered using available information or facts

Normative question

A question that is based on societal beliefs on what should or should not take place

Leakages

A reduction in the amount of money that is used for lending that reduces the money multiplier. It is caused by banks choosing to hold excess reserves and from individuals, businesses, and foreigners choosing to hold more cash

Disinflation

A reduction in the rate of inflation. An economy going through disinflation is still facing inflation, but at a declining rate

Taylor rule

A rule for the federal funds target that suggests that the target is equal to 2% + Current Inflation Rate +1/2(inflation gap) + 1/2(output gap). Alternatively, it is equal to 2% plus the current inflation rate plus 1/2 times the difference between the current inflation rate and the Fed's inflation target rate plus 1/2 times the output gap (current GDP minus potential GDP)

Solvency Crisis

A situation when a bank's liabilities exceed its assets

Federal Open Market Committee (FOMC)

A twelve-member committee that is composed of members of the Board of Governors of the Fed and selected presidents of the regional Federal Reserve Banks. It overseas open market operations (the buying and selling of government securities), the main tool of monetary policy

Withdrawals

Activities that remove spending from the economy, including saving, taxes, and imports

Personal Income

All income, including wages, salaries, and other labor income; proprietors income; rental income; personal interest and dividend income; and transfer payments received, with personal contributions for social insurance subtracted out

Business Cycles

Alternating Increases and decreases in economic activity that are typically punctuated by periods of recession and recovery

Hyperinflation

An extremely high rate of inflation; above 100% per year

GDP deflator

An index of the average prices for all goods and services in the economy, including consumer goods and services, and exports. It is the broadest measure of inflation in the national income and product accounts (NIPA)

Crowding-out effect

Arises from deficit spending requiring the government to borrow, thus driving up interest rates and reducing consumer spending and business investment

Cyclically Balanced Budget

Balancing the budget over the course of the business cycle by restricting spending or raising taxes when the economy is booming and using these surpluses to offset the deficits that occur during recessions

Locations of all 12 Federal Reserve Banks

Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Fransisco

Catch-up effect

Countries with smaller starting levels of capital experience larger benefits from increased capital, allowing these countries to grow faster than countries with abundant capital

When the reserve requirement increases, the money multiplier:

Decreases

Fractional reserve banking system

Describes a banking system in which a portion of bank deposits are held as vault cash or in an account with the regional Federal Reserve Bank, while the rest of the deposits are loaned out to generate the money creation process

Diminishing returns to capital

Each additional unit of capital provides a smaller increase in output than the previous unit of capital

Efficiency wages

Efficiency wages are above the market equilibrium rate so as to reduce turnover, boost morale, and increase productivity.

Balanced budget multiplier

Equal changes in government spending and taxation ( a balanced budget) lead to an equal change in income (BBM = to 1)

Functional Finance

Essentially ignores the impact of the budget on the business cycle and focuses on fostering economic growth and stable prices, while keeping the economy as close as possible to full employment

Which of the following appears in the full aggregate expenditures model but not in the simple aggregate expenditures model?

Exports

Net Exports

Exports minus imports for the current period

Contractionary monetary policy

Fed actions designed to decrease excess reserves and the money supply to shrink income and employment, usually to fight inflation

Tight money or restrictive monetary policy

Fed actions designed to decrease excess reserves and the money supply to shrink income and employment, usually to fight inflation

Absolute advantage

One country can produce more of a good than another country

Easy money, quantitative easing, or accommodative monetary policy

Fed actions designed to increase excess reserves and the money supply to stimulate the economy

Expansionary monetary policy

Fed actions designed to increase excess reserves and the money supply to stimulate the economy

Annually Balanced Budget

Federal expenditures and taxes would have to be equal each year

Production efficiency

Goods and services are produced at their lowest resource (opportunity) cost

Personal Consumption expenditures

Goods and services purchased by residents of the United States, whether individuals or businesses; they include durable goods, nondurable goods, and services It is a measure of the changes in consumer prices, focusing on consumer expenditures in the GDP accounts.

The full aggregate expenditure model takes into consideration ______,_______,and __ _____ _______. But the simple aggregate expenditure model does not

Government spending, taxes, and the foreign sector

Net Domestic Product

Gross Domestic Product minus depreciation, or the capital consumption allowance

Wealth Effect

Households usually hold some of their wealth in financial assets such as savings accounts, bonds, and cash, and a rising aggregate price level means that the purchasing power of this monetary wealth declines, reducing output demanded

Productivity

How effectively inputs are converted into outputs. Labor productivity is the ratio of the output of goods and services to the labor hours devoted to the production of that output. Higher productivity and higher standards are closely related

Circular flow diagram

Illustrates how households and firms interact through product and resource markets and shows that economic aggregates can be determined by either examining spending flows or income flows to households

Investment in Human Capital

Improvements to the labor force from investments in skills, knowledge, and the overall quality of workers and their productivity

Comparative advantage

One country has a lower opportunity cost of producing a good than another country

Keynesian macroeconomic equilibrium

In the simple model, the economy is at rest; spending injections (investment) are equal to withdrawals (saving), or I = S, and there are no net inducements for the economy to change the level of output or income. In the full model, all injections of spending must equal all withdrawals at equilibrium: I + G + X = S + T + M

Informal Economy

Includes all transactions that are conducted but are not licensed and/or generate income that is not reported to the government

Government Spending

Includes the wages and salaries of government employees; the purchases of products and services from private businesses and the rest of the world; and government purchases of new structures and equipment

Injections

Increments of spending, including investment, government spending, and exports

Gross Private Domestic Investment (GDPI)

Investments such as structures, equipment, and software, and changes in private business inventories

Discretionary Fiscal Policy

Involves adjusting government spending and tax policies with the express short-run goal of moving the economy toward full employment, expanding economic growth, or controlling inflation

Expansionary Fiscal Policy

Involves increasing government spending, increasing transfer payments, or decreasing taxes to increase aggregate demand to expand output and the economy

Contractionary Fiscal Policy

Involves increasing withdrawals from the economy by reducing government spending, transfer payments, or raising taxes to decrease aggregate demand to contract output and the economy

What happens to long-run aggregate supply when there is an increase in the money supply?

It stays the same

What is likely to happen to short-run aggregate supply if workers expect lower inflation in the near future?

It would cause the short-run aggregate supply curve to shift to the right.

Monetary Rule

Keeps the growth of money stocks such as M1 or M2 on a steady path, following the equation of exchange, to set a long-run path for the economy that keeps inflation in check

Countries holding U.S. Banknotes

Latin America = 18% Europe = 28%

Production Function

Measures the output that is produced using various combinations of inputs and a fixed level of technology

Money Multiplier

Measures the potential or maximum amount the money supply can increase (or decrease) when new deposits enter (exit) the system and is defined as 1 divided by the reserve requirement. The actual money multiplier will be less, because some banks hold excess reserves

When a supply shock occurs, what is the Federal Reserve's best target?

Nominal Income or output

Macroeconomic equilibrium

Occurs at the intersection of the short-run aggregate supply and aggregate demand curves. At this output level, there are no net pressures for the economy to expand of contract

Asymmetric Information

Occurs when one party to a transaction has significantly better information than another party

In the equation of exchange, nominal GDP is represented by, where M is the supply of money, P is the price level, and Q is the economy's real output level:

P x Q

Disposable Personal Income

Personal Income minus Taxes

Supply-side fiscal policies

Policies that focus on shifting the long-run aggregate supply curve to the right, expanding the economy without increasing inflationary pressures. Unlike policies to increase aggregate demand, supply-side policies take longer to have an impact on the economy Main tool = decreasing marginal tax rates

Rule of 70

Provides an estimate of the number of years for a value to double, and is calculated as 70 divided by the annual growth rate

Externally held debt

Public debt held by foreigners, which is roughly equal to half of the outstanding U.S. debt held by the public

Internally held debt

Public debt owed by U.S. banks, corporations, mutual funds, pension plans, and individuals

Real GDP per capita

Real GDP divided by population. Provides a rough estimate of a country's standard of living

Excess Reserves

Reserves held by banks above the legally required amount

Cost-push inflation

Results when a supply shock hits the economy, reducing short-run aggregate supply, and thus reducing output and increasing the price level

Demand-pull inflation

Results when aggregate demand expands so much that equilibrium output exceeds full employment output and the price level rises

Laffer Curve

Shows a hypothetical relationship between income tax rates and tax revenues. As tax rates rise from zero, revenues rise, reach a maximum, then decline until revenues reach zero again at 100% tax rate

Yield Curve

Shows the relationship between the interest rate earned on a bond and the length of time until the bond's maturity date

Mandatory Spending

Spending authorized by permanent laws that does not go through the same appropriations process as discretionary spending. Programs include: Social Security, Medicare, and interest on the national debt

Investment

Spending by businesses that adds to the productive capacity of the economy. Investment depends on factors such as its rate of return, the level of technology, and business expectations about the economy

Consumption

Spending by individuals and households on both durable and nondurable goods

Mulitplier

Spending changes alter equilibrium income by the spending change times the multiplier. One person's spending becomes another's income, and that second person spends some (the MPC), which becomes income for another person, and so on, until income has changed by 1/(1 - MPC) = 1/MPS. The multiplier operates in both directions

Automatic Stabalizers

Tax revenues and transfer payments automatically expand or contract in ways that reduce the intensity of business fluctuations without any overt action by Congress or other policymakers

Natural Rate of Unemployment

That level of unemployment at which price and wage decisions are consistent; a level at which the actual inflation rate is equal to people's inflationary expectations and where cyclical unemployment is zero

Compounding

The ability of growth to build on previous growth. It allows a value such as GDP to increase significantly over time as income increases on top of previous increases in income

Price Level

The absolute level of a price index, whether the consumer price index, the producer price index, or the GDP deflator

In the short run, what happens to the aggregate price level when the money supply decreases?

The aggregate price level falls

In the long run, what happens to the aggregate price level when the Fed increases reserve requirements?

The aggregate price level falls.

Deficit

The amount by which annual government spending exceeds tax revenues

Surplus

The amount by which annual tax revenues exceed government expenditures

Open market operations

The buying and selling of U.S. government securities, such as Treasury bills and bonds, to adjust reserves in the banking system

Capital-to-labor ratio

The capital employed per worker. A higher ratio means higher labor productivity and, as a result, higher wages

Federal Reserve System

The central bank of the United States

Inflation targeting

The central bank sets a target on the inflation rate and adjusts monetary policy to keep inflation in that range

Marginal Propensity to consume

The change in consumption associated with a given change in income

Marginal propensity to save

The change in saving associated with a given change in income

Saving

The difference between income and consumption; the amount of disposable income not spent

Producer Surplus

The difference between market price and the price at which firms are willing to supply the product. It is equal to the area below market price and above the supply curve

Consumer Surplus

The difference between market price and what consumers (as individuals or the market) would be willing to pay. It is equal to the area above market price and below the demand curve

Public Choice theory

The economic analysis of public and political decision making, looking at issues such as voting, the impact of election incentives on politicians, the influence of special interest groups, and rent-seeking behaviors

Government Budget Constraint

The government budget is limited by the fact that G - T = (Delta)M + (delta)B + (delta)A

equation of exchange

The heart of classical monetary theory uses the equation M x V = P x Q, where M is the money supply of money, V is the velocity of money, P is the price level, and Q is the economy's output level

Recessionary Gap

The increase in aggregate spending needed to bring a depressed economy back to full employment; equal to the GDP gap divided by the multiplier

Discount rate

The interest rate the Federal Reserve charges commercial banks and other depository institutions to borrow reserves from a regional Federal Reserve Bank

Long-run aggregate supply (LRAS) curve

The long-run aggregate supply curve is verticle at full employment because the economy has reached its capacity to produce

Allocative efficiency

The mix of goods and services produced is just what the society desires

Aggregate Demand

The output of goods and services (Real GDP) demanded at different price levels

Discretionary Spending

The part of the budget that works its way through the appropriations process of Congress each year and includes such programs as national defense, transportation, science, environment, and income security

Reserve Ratio

The percentage of a bank's total deposits that are held in reserves, either as cash in the vault or as deposits at the regional Federal Reserve Bank

Average Propensity to consume

The percentage of income that is consumed

Total Factor Productivity

The portion of output produced that is not explained by the number of inputs used in production

How did Milton Friedman define permanent income?

The present value of an individual's future stream of income

Infrastructure

The public capital of a nation, including transportation networks, power-generating plants and transmission facilities, public education institutions, and other intangible resources such as protection of property rights and a stable monetary environment

Aggregate Supply

The real GDP that firms will produce at varying price levels. In the short run, aggregate supply is positively sloped because many input costs are slow to change, but in the long run, the aggregate supply curve is verticle at full employment because the economy has reached its capacity to produce

Deadweight loss

The reduction in total surples that results from the inefficiency of a market not in equilibrium

Reserve Requirement

The required ration of funds that commercial banks and other depository institutions must hold in reserve against deposits

Short-run aggregate supply (SRAS) curve

The short-run aggregate supply curve is positively sloped because many input costs are slow to change in the short run

Inflationary gap

The spending reduction necessary (when expanded by the multiplier) to bring an overheated economy back to full employment

Total Surplus

The sum of consumer surplus and producer surplus, and a measure of the overall net benefit gained from a market

Decision lag

The time it takes Congress and the administration to decide on a policy once a problem is recognized

Recognition Lag

The time it takes for policymakers to confirm that the economy is in a recession or a recovery. Short-term variations in key economic indicators are typical and sometimes represent nothing more than randomness in the data

Information lag

The time policymakers musta wait for economic data to be collected, processed, and reported. Most macroeconomic data are not available until at least one quarter after the fact

Implementation Lag

The time required to turn fiscal policy into law and eventually have an impact on the economy

Public Debt

The total accumulation of past deficits less surpluses; it includes Treasury bills, notes, and bonds, and U.S. Savings Bonds

Labor Force

The total number of those employed and unemployed. The unemployment rate is the number of unemployed divided by the labor force, expressed as a %

Real GDP

The total value of final goods and services produced in a country in a year measured using prices in a base year Real GDP is determined by multiplying the nominal GDP by the base year index divided by the current year index

Which of the following is NOT a public choice theory issue?

The underground economy

Marginally attached workers

These are workers who have actively looked for work in the past year but not the past four weeks.

Discouraged Workers

To continue to be counted as unemployed, those without work must actively seek work. Discouraged workers are those who have given up actively looking for work and, as a result, are not counted as unemployed

Structural Unemployment

Unemployment caused by changes in the structure of consumer demands or technology. It means that demand for some products declines and the skills of this industry's workers often become obsolete as well. This results in an extended bout of unemployment while new skills are developed

Frictional Unemployment

Unemployment for any economy that includes workers who voluntarily quit their jobs to search for better positions, or are moving to new jobs but may still take several days or weeks before they can report to their new employers

Cyclical Unemployment

Unemployment that results from changes in the business cycle, and where public policymakers can have their greatest impact by keeping the economy on a steady, low-inflationary, solid growth path. Its the difference between current employment and full employment

Economic Growth

Usually measured by the annual percentage change in real GDP, reflecting an improvement in the standard of living

Liquidity trap

When interest rates are so low that people believe rates an only rise, they hold on to money rather than investing in bonds and suffering the expected capital loss

Paradox of thrift

When investment is positively related to income and households intend to save more, they reduce consumption, income, and output, reducing investment so that the result is that consumers actually end up saving less

market failure

When markets fail to provide the socially optimal level of output, and will provide output at too high or low a price

What Shape is the aggregate demand curve

a downward-sloping line

price ceiling

a government set maximum price that can be charge for a product or service. When the price ceiling is set below equilibrium, it leads to shortages

laissezfaire

a market that is allowed to function without any government intervention

The inflationary gap is the reduction in

aggregate spending

Aggregate expenditures

consist of consumer spending, business investment spending, government spending, and net foreign spending (exports minus imports): GDP = C +I +G + (X - M)

The spending multiplier is determined by

dividing 1 by the marginal propensity to save.

The long-run aggregate supply curve is vertical at full______

employment

Since March 2008, the discount rate has been:

less than the prime rate

misallocation of resources

occurs when a good or service is not consumed by the person who values it the most, and typically results when a price ceiling creates an artificial shortage in the market

Average propensity to save

the percentage of income that is saved