Help
Options
Didn't know it?
click below
click below
Knew it?
click below
click below
Don't Know
Remaining cards (0)
Know
retry
shuffle
restart
0:00
Embed Code - If you would like this activity on your web page, copy the script below and paste it into your web page.
Normal Size Small Size show me how
Normal Size Small Size show me how
MacroEcon
| Question | Answer |
|---|---|
| Scarcity | the limited nature of society's resources |
| Economics | the study of how society manages its scarce resources |
| Principles of decision making (4) | *people face tradeoffs *the cost of something is what you give up to get it *rational people think at the margin *people respond to incentives |
| Principles of interactions among people (3) | *trade can make everyone better off *markets are usually a good way to organize economic activity *governments can sometimes improve market outcomes |
| Principles of the economy as a whole (3) | *a country's standard of living depends on its ability to produce goods and services *prices rise when the government prints too much money *society faces a short-run tradeoff between inflation and unemployment |
| Two roles of economists | *Scientists (try to explain the world) *Policy advisers (try to improve it) |
| Model | a highly simplified representation of a more complicated reality. |
| Circular-flow diagram | a visual model of the economy; shows how dollars flow through markets among households and firms |
| Factors of production | "the resources the economy uses to produce goods and services, including labor, land, and capital" |
| Households (in circular-flow diagram) | "*own factors of production, rent/sell them to firms for income *buy and consume goods and services" |
| Firms (in circular-flow diagram) | "*buy/hire factors of production, use them to produce goods and services *sell goods and services" |
| Production Possibilities Frontier (PPF) | a graph that shows the combinations of two goods the economy can possibly produce given the available resources and available technology |
| Points on PPF graph | *On the PPF - possible and efficient (all resources fully utilized) *Under the PPF - possible but not efficient *Points above the PPF - not possible |
| Opportunity cost | What must be given up to obtain an item |
| Slope of PPF | opportunity cost of one good in terms of the other |
| Microeconomics | the study of how households and firms make decisions and how they interact in markets |
| Macroeconomics | "the study of economy-wide phenomena, including inflation, unemployment, and economic growth" |
| Positive statements | *as scientists *attempt to describe the world as it is *can be confirmed or refuted |
| Normative statements | *as policy advisers *attempt to prescribe how the world should be *cannot be confirmed or refuted |
| Exports | goods produces domestically and sold abroad |
| Imports | goods produced abroad and sold domestically |
| Absolute advantage | ability to produce a good using fewer inputs than another producer |
| Comparative advantage | the ability to produce a good at a lower opportunity cost than another producer |
| Benefit of trade | "When people/countries specialize in the goods in which they have a comparitive advantage, the total goods produced is larger." |
| Market | all actual or potential buyers or sellers of a good or service |
| Competitive market | a market with many buyers and sellers; has a negligible effect on price |
| Perfectly competitive market | a market in which all goods are exactly the same; has so many buyers and sellers that no one can affect market price |
| Quantity demanded | the amount of a good that buyers are willing and able to purchase at a particular price |
| Law of demand | "the claim that the quantity demanded of a good falls when the price of the good rises, other things equal" |
| Deman schedule | a table that shows the relationship between the price of a good and the quantity demanded |
| Demand curve slope and reason | "*Downward *as the good becomes more expensive, people switch to substitutes *as the good becomes more expensive, people can't afford to buy as much of it" |
| Buyer's reservation price | largest dollat amount the buyer would be willing to pay for a good |
| Market demand vs. Individual demand | Market demand = sum of quantities demanded by all buyers at each price |
| Demand curve shifters | *number of buyers *income *price of related goods *tastes *expectations |
| Quantity supplied | the amount of a good that sellers are willing and able to sell |
| Law of supply | "the claim that the quantity supplied of a good rises when the price of the good rises, other things equal" |
| Supply schedule | a table that shows the relationship between the price of a good and the quantity supplied |
| Supply curve shifters | *input prices *technology *number of sellers *expectations |
| Surplus | when quantity supplied is greater than quantity demanded; causes price to fall |
| Shortage | when quantity demanded is greater than quantity supplied; causes price to rise |
| Gross Domestic Product (GDP) | the market value of all final goods and services produced within a country in a given period of time |
| Missing from circular-flow diagram | "*government (collects taxes, buys g&s) *financial system (matches savers' supply of funds with borrowers' demand for loans) *foreign sector (trades g&s, financial assets, and currencies with the country's residents)" |
| Final goods | intended for the end user |
| Intermediate goods | used as components or ingredients in the production of other goods |
| Components of GDP | *consumption (C) *investment (I) *government purchases (G) *net exports (NX) *Y = C + I + G + NX |
| Consumption | total spending by households on goods and services |
| Investment | "total spending on goods that will be used in the future to produce more goods (includes capital equipment, structures, inventories)" |
| Government purchases | "all spending on the goods and services purchased by government at the federal, state, and local levels *excludes transfer payments" |
| Net exports | exports less imports |
| Nominal GDP | "values output using current prices, not corrected for inflation" |
| Real GDP | "values output using the prices of a base year, corrected for inflation" |
| GDP Deflator | a measure of the overall level of prices * (nominal GDP/real GDP) |
| Inflation rate (GDP) | percentage increase in GDP deflator from one year to the next |
| GDP does not value (4) | "*quality of the environment *leisure time *non-market activity (e.g., childcare provided by a child's parent) *an equitable distribution of income" |
| Consumer Price Index (CPI) | measures the typical consumer's cost of living (cost of basket in current year/cost of basker in base year) |
| How to calculate CPI | 1. Fix the basket 2. Find prices 3. Compute cost |
| Inflation rate (CPI) | percentage increase in CPI from one year to the next |
| Problems with CPI | *substitution bias *introduction of new goods *unmeasured quality change |
| Substitution bias | consumers substitute relatively cheaper goods as prices rise at different rates. CPI misses this because it uses a fixed basket |
| Introduction of new goods | "creates variety, consumers can choose goods that more closely meet their needs. CPI misses this because it uses a fixed basket" |
| Unmeasured quality change | "improvements in quality of goods in the basket increase the value of each dollar, quality is difficult to measure" |
| Indexation | "automatic correction for inflation by law or in a contract, often uses CPI to measure inflation" |
| Nominal interest rate | "rate of growth in the dollar value of a deposit or debt, not corrected for inflation" |
| Real interest rate | "rate of growth in the purchasing power of a deposit or debt, corrected for inflation (nominal interest rate - inflation rate)" |
| Productivity | the average quantity of goods and services produced per unit of labor input *Y/L (output per worker) |
| Physical capital | the stock of equipment and structures used to produce goods and services |
| Human capital | "the knowledge and skills workers acquire through education, training, and experience" |
| Natural resources | "the inputs into production that nature provides (e.g., land, mineral deposits)" |
| Technological knowledge | society's understanding of the best ways to produce goods and services |
| Production Function | "Y = A*F(L, K, H, N) *A=level of technology *L=quantity of labor *K=physical capital *H=human capital *N=natural resources" |
| Diminishing returns to capital | "As factors of production (A, L, K, H, or N) rise, the extra output from an additional unit of the factor falls" |
| The catch-up effect | the property whereby poor countries tend to grow more rapidly than rich ones |
| Foreign direct investment | capital investment that is owned and operated by a foreign entity |
| Foreign portfolio investment | capital investment financed with foreign money but operated by domestic residents |
| Property rights | ability of people to exercise authority over the resources they own |
| Inward-oriented policies | aim to raise living standards by avoiding interaction with other countries |
| Outward-oriented policies | promote integration with the world economy |
| Financial system | the group of institutions that helps match the saving of one person with the investment of another |
| Financial markets | "institutions through which savers can directly provide funds to borrowers (e.g., the bond market, the stock market)" |
| Bond | a certificate of indebtedness |
| Stock | a claim to partial ownership of a firm |
| Financial intermediaries | "institutions through which savers can indirectly provide funds to borrowers (e.g., banks, mutual funds)" |
| Mutual funds | institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds |
| Private saving | the portion of households' income that is not used for consumption or paying taxes (Y-T-C) |
| Public saving | tax revenue less government spending (T-G) |
| National saving | the portion of national income that is not used for consumption or government purchases; private saving + public saving (Y-C-G) |
| Budget surplus | an excess of tax revenue over government spending (T-G) (=public saving) |
| Budget deficit | a shortfall of tax revenue from government spending (G-T) (= -public saving) |
| Market for Loanable Funds | A supply-demand model of the financial system *supply=saving *demand=investment |
| Crowding out | "process by which an increase in budget deficit causes a fall in investment (government borrows to finance debt, leaving less funds for investment)" |
| Employed | "paid employees, self-employed, and unpaid workers in a family business" |
| Unemployed | people not working who have looked for work during the previous four weeks |
| Not in the labor force | everyone who is not classified as employed or unemployed |
| Labor force | "total number of workers, including employed and unemployed" |
| Unemployment rate (U-rate) | percent of the labor force that is unemployed ( |
| Labor force participation rate | percent of the adult population that is in the labor force (labor force/adult population) |
| Problems with U-rate | *excludes discouraged workers *does not distinguish between full- and part-time work or people working part time because full-time jobs are unavailable *some people misreport their work status in BLS survey |
| Natural rate of unemployment | normal rate of unemployment around which the actual unemployment rate fluctuates |
| Cyclical unemployment | deviation of unemployment from its natural rate (associated with business cycles) |
| Frictional unemployment | occurs when workers spend time searching for jbos that best suit theit skills and tastes (generally short-term) |
| Structural unemployment | occurs when there are fewer jobs than workers (usually long-term) |
| Job search | process of matching workers with appropriate jobs |
| Sectoral shifts | changes in the composition of demand across industries or regions of the country |
| Efficiency wages | above-equilibrium wages voluntarily paid by firms to boost worker productivity |
| Recessions | periods of falling real incomes and rising unemployment |
| Depressions | severe recessions (very rare) |
| Business cycles | short-run economic fluctuations |
| Classical dichotomy | separation of variables into two groups *real *nominal |
| Neutrality of money | changes in the money supply affect nominal but not real variables |
| Arbitrary redistribution of wealth | If inflation rate > interest rate, debtors repay creditors with dollars that aren't worth as much and vice versa |
| Central bank | institution that oversees the banking system and regulates money supply |
| Monetary policy | setting of money supply by policymakers in the central bank |
| Federal reserve (Fed) | central bank of the U.S. |
| Store of value | an item people can use to transfer purchasing power from the present to the future |
| Unit of account | the yardstick people use to post prices and record debts |
| Medium of exchange | an item buyers give to sellers when they want to purchase goods and services |
| 3 Functions of money | 1. medium of exchange 2. unit of account 3. store of value |
| Fed's 3 Tools of Monetary Control (and define) | *Open-Market Operations (OMOs) (the purchase and sale of U.S. government bonds by the Fed) *Reserve requirements (affects how much money banks can create by making loans) *Discount rate (interest rate on Fed's loans to banks) |
| Problems controlling money supply (2) | *households can hold more money ass currency - banks have fewer reserves - MS down *banks can hold more reserves that required - fewer loans - MS down |
| Real exchange rate | rate at which goods and services of one country trade for goods and services of another (eP/P*) (e=nominal exchange rate - foreign currency per unit of domestic currency, P=domestic price, P*=foreign price) |
| Nominal exchange rate | rate at which one country's currency trades for another, expressed as foreign currency per unit of domestic currency |
| Net Capital Outflow (NCO) | a.k.a. Net Foreign Investment - domestic purchases of foreign assets, less foreign purchases of domestic assets |
| Variables that influence NX (6) | *consumer preference for foreign and domestic goods *prices of goods at home and abroad *income of consumers at home and abroad *exchange rates of currency *transportation costs *government policies |
| Fisher effect | nominal interest rate adjusts one-for-one with changes in the inflation rate (increase in inflation causes equal increase in nominal interest rate, so real interest rate is unchanged) |
| Hyperinflation | Inflation greater that 50% per month, cause by the government printing too much money |
| Velocity of money | rate at which money changes hands (V=PY/M) (P=price level, Y=real GDP, PY=nominal GDP, M=money supply) |
| Money demand | amount of wealth people want to hold in liquid form *depends on price level (P) - increase in P=decrease in valur of money=more money required to buy goods and services |
| Federal funds rate | interest rate on loans between banks (banks with insufficient reserves borrow from banks with excess reserves) |
| Money supply/Money stock and two included assets | the quantity of money available in the economy, includes *currency (money in the hands of the public) *demand deposits (balances in bank accounts) |
| Two kinds of money | *commodity money (a commodity with intrinsic value) *fiat money (money without intrinsic value, used as money because of government decree) |
| Money neutrality | proposition that changes in MS do not affect real variables |
| Reserve ratio (R) | fraction of deposits that banks hold as reserves/total reserves as a percentage of total deposits |
| Purchasing Power Parity (PPP) | theory that a unit of any currency should be able to buy the same quantity of goods in all countries, based on the law of one price |
| Limitations of PPP (2) | *many goods cannot be easily traded (i.e., services) - these price differences cannot be arbitraged away *foreign and domestic goods are not perfect substitutes - price differences reflect taste differences |
| Law of one price | notion that a good should sell for the same price in all markets |
| Arbitrage | quick profit by buying goods where they cost less and selling them where they cost more (price increases where good was purchased, decreases where it was sold until the two are equal) |
| Appreciation | increase in value of currency in terms of foreign currency |
| Depreciation | decrease in value of currency in terms of foreign currency |
| 3 Ways to increase money supply | *purchase bonds *decrease reserve requirement *decrease discount rate |
| Model of aggregate demand and aggregate supply | model used by most economists to study fluctuations (differs from classical economic theories used to explain the long run) |
| The wealth effect | As price rises, the dollars people hold buy fewer goods and services so real wealth is lower and people feel poorer. Consumption falls. |
| The interest-rate effect | As price rises, buying goods and services requires more dollars. People sell bonds or other assets to get these dollars. This drives up interest rates and investment falls (investment depends negatively on interest rates) |
| The exchange-rate effect | As P, US interest rates rise. Foreign investors desire more U.S. bonds, so there is a higher demand for money in the foreign exchange market. US exports are more expensive to people abroad & imports are cheaper to US residents. NX falls. |
| Reason for slope of aggregate demand (AD) curve | An increase in price (P) reduces the quantity of goods and services demanded because *the wealth effect (C falls) *the interest-rate effect (I falls) *the exchange-rate effect (NX falls) |
| AD curve shifters | Any event that changes C, I, G, or NX (except change in P) will shift AD curve |
| Aggregate supply (AS) curves | *Upward-sloping in short run *Vertical in long run |
| Natural rate of output | the amount of output the economy produces when unemployment is at its natural rate *also potential output or full-employment output |
| LRAS curve shifters | *change in quantity of labor or natural rate of unemployment *change in physical or human capital *change in natural resources *change in technology |
| Why the slope of SRAS matters | If AS is vertical (long-run), fluctuations in AD do not cause fluctuations in output or employment. If AS slopes up (short-run), shifts in AD do affect output and unemployment. |
| Sticky-wage theory | nominal wages are sticky in the short run - adjust slowly. Firms and workers set the nominal wage according to expected price level. If the actual price level > expected, revenue is higher but labor cost is not. Production is more profitable. |
| Sticky-price theory | many prices are sticky in the short run due to menu costs. Firms set prices in advance according to expected price level. If MS increases unexpectedly, firms with menu costs have relatively low prices, increasing demand for their products. |
| Misperceptions theory | firms may confuse changes in price with changes in the relative price of their products. If price level rises above expected, a firm sees its price rising before realizing all prices are rising. The firm may believe its relative price is rising. |
| Long-run equilibrium | *Expected price level (PE) = Actual price level (P) *Output (Y) = Natural rate of output (YN) *Unemployment is at its natural rate |
| Four steps to analyze economic fluctuations | 1. Determine whether the event shifts AD or AS. 2. Determine whether curve shifts left or right. 3. Use AD-AS diagram to see how the shift changes Y and P in the short run. 4. Use AD-AS diagram to see how economy moves from new SR equilibrium to new LR eq |
| Stagflation | a condition of falling output and rising prices, caused by a fall in aggregate supply |
| Theory of liquidity preference | a simple theory of the interest rate (r), which adjusts to balance supply and demand for money |
| How the interest-rate effect works | A fall in price level (P) reduced money demand, which lowers interest rate (r). A fall in r increases investment (I) and the quantity of goods and services demanded. |
| Effect of reducing money supply | Reducing MS raises interest rate (r). An increase in r reduces the quantity of goods and services demanded. |
| Fiscal policy | the setting of the level of government spending and taxation by government policymakers |
| Expansionary fiscal policy | *an increase in G and/or decrease in T *shifts AD right |
| Contractionary fiscal policy | *a decrease in G and/or increase in T *shifts AD left |
| The multiplier effect | the additional shifts in AD that result when fiscal policy increases income and thereby increases consumer spending |
| Marginal propensity to consume (MPC) | the fraction of extra income that households consume rather than save |
| The crowding-out effect | the reduction in net increase of AD from the initial fiscal expansion that results from a reduction in investment caused by an increase in r |
| How the crowding-out effect works | Higher Y increases MD and r, which reduce AD, causing the rightward shift of AD to be less than the increase in G |
| Automatic stabilizers | changes in fiscal policy that stimulate aggregate demand when the economy goes into recession, without policymakers having to take any deliberate action (e.g., the tax system and government spending) |
| Result of three theories of SRAS | output deviates from its natural rate when actual price level deviates from expected price level *firms increase output (and employment), hence SRAS curve slopes upward |
Created by:
mmmcla01
Popular Business sets