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Macroeconomics
| Term | Definition |
|---|---|
| Purchasing-Power Parity (PPP) | a theory of exchange rates whereby a unit of any currency should be able to buy the same quantity of goods in all countries |
| Purchasing-Power Parity (PPP) Formula | e= (P*/P) |
| Law of One Price | the notion that a good should sell for the same price in all markets |
| Real Exchange Rate Formula | (e x P)/ P* |
| Real Exchange Rate | the rate at which the g&s of one country trade for the g&s of another |
| Depreciation | a decrease in the value of a currency as measured by the amount of foreign currency it can buy |
| Appreciation | an increase in the value of a currency as measured by the amount of foreign currency it can buy |
| Nominal Exchange Rate | the rate at which one country's currency trades for another |
| Net capital Outflow (NCO) | domestic residents' purchases of foreign assets - foreigners' purchases of domestic assets (also called net foreign investment) |
| Balanced Trade | when exports = imports |
| Trade Surplus | an excess of exports over imports |
| Trade Deficit | an excess of imports over exports |
| Net Exports (NX) | aka Trade Balance; = Value of exports - Value of imports |
| Open Economy | interacts freely with other economies around the world |
| Closed Economy | does not interact with other economies in the world |
| Rational Expectations | a theory according to which people optimally use all the info they have, including info about govt policies, when forecasting the future |
| Sacrifice Ratio | percentage points of annual output lost per 1 percentage point reduction in inflation |
| Disinflation | a reduction in the inflation rate |
| Supply Shock | an event that directly alters firms' costs and prices, shifting the AS & PC curves EX: large increase in oil prices |
| The Phillips Curve Equation formula | Unemployment Rate = Natural Rate of Unemployment - a(Actual Inflation - Expected Inflation) |
| Expected Inflation | a measure of how much people expect the price level to change |
| Natural- Rate Hypothesis | the claim that unemployment eventually returns to its normal or "natural" rate, regardless of the inflation rate |
| Phillips Curve | shows the short run trade off between inflation and unemployment |
| Automatic Stabilizers | changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession, without policy makers having to take any deliberate action EX: tax system, govt spending |
| Multiplier formula | change in Y = (1)/(1 -MPC) |
| Marginal Propensity to Consume (MPC) | the fraction of extra income that households consume rather than save |
| Multiplier Effect | the additional shifts in AD that result when fiscal policy increases income and thereby increases consumer spending |
| Contractionary Fiscal Policy | a decrease in G and/or increase in T; shifts AD left |
| Expansionary Fiscal Policy | increase in G and/or decrease in T; shifts AD right |
| Fiscal Policy | the setting of the level of govt spending and taxation by govt policy makers |
| Recessions | periods of falling real incomes and rising unemployment |
| Business Cycles | short run economic fluctuations |
| Depressions | severe recessions (very rare) |
| Stagflation | period of falling output and rising prices |
| Natural Rate of Output | the amount of output the economy produces when unemployment is at its natural rate |
| AS Curve | shows the total quantity of g&s firms produce and sell at any given price level |
| AD Curve | shows the quantity of all g&s demanded in the economy at any given price level |
| Model of AD & AS Curve | the model that most economists use to explain short run fluctuations in economic activity around its long run trend |
| Federal Open Market Committee (FOMC) | the power to increase or decrease the # of dollars in the economy |
| Efficiency Wages | above equilibrium wages paid by firms to increase worker productivity |
| Fractional Reserve Banking System | a banking system in which banks hold only a fraction of deposits as reserves |
| Reserves | deposits that banks have received but have not loaned out |
| Quantity Theory of Money | a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate |
| Fisher Effect | the one-for-one adjustment of the nominal interest rate to the inflation rate |
| Menu Costs | the costs of changing prices |
| Shoeleather Costs | the resources wasted when the inflation encourages people to reduce their money holdings |
| Inflation Tax | printing money causes inflation, which is like a tax on everyone who holds money |
| Quantity Equation formula | M x V = P x Y |
| Velocity of Money formula | V = (P x Y)/ (M) |
| Velocity of Money | the rate at which money changes hands |
| Money Neutrality | the proposition that changes in the money supply do not affect real variables |
| Classical Dichotomy | the theoretical separation of nominal and real variables |
| Relative Price | price of one good relative to (divided by) another |
| Real Variables | measured in physical units (EX: real GDP, bushels) |
| Nominal Variables | measured in monetary units (EX: nominal GDP) |
| Run On Banks | when people suspect their banks are in trouble, they may "run" to the bank to withdraw their funds, holding more currency and less deposits |
| Federal Funds Rate | interest rate on loans from banks to banks |
| Discount Rate | the interest rate on loans the Fed makes to banks |
| Open Market Operations (OMOs) | the purchase and sale of U.S. govt bonds by the Fed |
| Money Multiplier | the amount of money the banking system generates with each dollar of reserves |
| T-Account | a simplified accounting statement that shows a bank's assets and liablities |
| Reserve Ratio (R) | fraction of deposits that banks hold as reserves; total reserves as a percentage of total deposits |
| Reserve Requirements | regulations on the minimum amount of reserves that banks must hold against deposits |
| Federal Reserve (Fed) | the central bank of the U.S. |
| Monetary Policy | the setting of the money supply by policy makers in the central bank |
| Central Bank | an institution that oversees the banking system and regulates the money supply |
| Demand Deposits | balances in bank accounts that depositors can access on demand by writing a check |
| Currency | the paper bills and coins in the hands of the (non-bank) public |
| Money Supply/ Money Stock | the quantity of money available in the economy |
| Fiat Money | money without intrinsic value used as money because of govt decree (U.S. dollar) |
| Commodity Money | takes the form of commodity with intrinsic value (gold coins) |
| 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 g&s |
| Money | the set of assets that people regularly use to buy g&s from other people |
| Double Coincidence of Wants | the unlikely occurrence that two people each have good the other wants |
| Barter | the exchange of one good or service for another |
| Inward- Oriented Policies | attempt to increase productivity and living standards within the country by avoiding interaction with the rest of the world |
| Union | a worker association that bargains with employers over wages, benefits, and working conditions |
| Unemployment Insurance (UI) | a govt program that partially protects workers' incomes when they become unemployed |
| Sectoral Shifts | changes in the composition of demand across industries or regions of the country |
| Job Search | the process of matching workers with appropriate jobs |
| Structural Unemployment | occurs hen there are fewer jobs than workers |
| Frictional Unemployment | occurs when workers spend time searching for the jobs that best suit their skills and tastes |
| Natural Rate of Unemployment | the normal rate of unemployment around which the unemployment rate fluctuates |
| Cyclical Unemployment | the deviation of unemployment from its natural rate |
| Discouraged Workers | would like to work but have given up looking for jobs; classified as "not in the labor force" rather than "unemployed" |
| Labor Force Participation Rate formula | 100 x (labor force)/ (adult population) |
| Unemployment Rate (u-rate) formula | 100 x (# of unemployed)/ (labor force) |
| Crowding out | a decrease in investment that results from govt borrowing |
| Investment | purchase of new capital (not purchase of stock & bonds) |
| Budget Deficit | a shortfall of tax revenue from govt spending |
| Budget Surplus | an excess of tax revenue over govt spending |
| National Saving | the portion of national income that is not used for consumption or govt purchases (Y-C-G) |
| Public Saving | tax revenue less govt spending (T-G) |
| Private Saving | the portion of households' income that is not used for consumption or paying taxes (Y-T-C) |
| Mutual Funds | institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds |
| Financial Intermediaries | institutions through which savers can indirectly provide funds to borrowers (banks) |
| Stock | a claim to partial ownership in a firm |
| Bond | a certificate of indebtedness |
| Financial Markets | institutions through which answers can directly provide funds to borrowers |
| Financial System | the group of institutions that helps match the saving of one person with the investment of another |
| Foreign Portfolio Investment | a capital investment financed with foreign money but operated by domestic residents (EX: someone investing in a Chinese company) |
| Foreign Direct Investment | a capital investment (factory) that is owned and operate by a foreign entity (EX: GM putting a company in China |
| Catch- Up Effect | the property whereby poor countries tend to grow more rapidly than rich ones |
| Constant Returns to Scale | changing all inputs by the same % causes output to change by that % |
| Technological Knowlegde | society's understanding of the best ways to produce g&s |
| Natural Resources (N) | the inputs into production that nature provides (i.e. land, mineral deposits) |
| Human Capital (H) | the knowledge and skills workers acquire through education, training, and experience |
| Physical Capital (K) | the stock of equipment and structures used to produce g&s |
| Productivity | the average quantity of g&s produced per unit of labor (Y/L) |
| Nominal GDP | the production of goods and services valued at current prices |
| Real GDP | the production of goods and services valued at constant prices |
| Real Interest Rate formula | Nominal Interest Rate - Inflation Rate = Real Interest Rate |
| Amount in Today's Dollars formula | Amount in year "T" dollars x (Price level today)/ (Price level in yr. T) |
| CPI Calculation formula | 100 x (Cost of basket in current year) / (Cost of basket in base year) |
| Inflation Rate formula | (CPI this yr. - CPI last yr) / (CPI last yr) x 100 |
| GDP formula | Y= C + I + G + NX |
| Consumer Price Index (CPI) | measures the typical consumers cost of living |
| GDP Deflator formula | 100 x (Nominal GDP)/(Real GDP) |
| Factor Payments | are payments to the factors of production (E.g. Wages, rent) |
| Factors of Production | inputs like labor, land, capital, and natural resources |
| Gross Domestic Product (GDP) | measures total income of everyone in the economy |
| Macroeconomics | the study of the economy as a whole; the study of economy-wide phenomena, including inflation, unemployment, and economic growth |
| Microeconomics | the study of how households and firms make decisions, interact with one another in markets |
| Supply | Curve Shifters: Input Prices (wages, price of raw materials), Technology, # of sellers, Expectations Movement along the curve: Price |
| Demand | Curve Shifters: # of buyers, income, Prices of related good (substitutes, complements), Tastes, Expectations Movement along the curve: Price |
| Normal Good | positively related to income |
| Inferior Good | negatively related to income |
| Competitive Market | a market with many buyers and sellers, each has a negligible effect on price |
| Comparative Advantage | the ability to produce a good at a lower opportunity cost than another producer |
| Absolute Advantage | the ability to produce a good using fewer inputs than another producer |
| Imports | goods produced abroad and sold domestically |
| Exports | goods produced domestically and sold abroad |
| Normative Statements | describe how the world should be |
| Positive Statements | describe the world as it is |
| Production Possibilities Frontier (PPF) | a graph that shows the combinations of 2 goods the economy can possibly produce given the available resources and the available technology |
| Factors of Production | the resources the economy uses to produce goods and services, including labor, land, capital |
| Circular-Flow Diagram | a visual model of the economy shows how dollars flow through markets among households and firms |
| Inflation | an increase in the overall level of prices in the economy |
| Market Power | a single buyer or seller has substantial influence on market price (i.e monopoly) |
| Externality | when the production or consumption of a good affects bystanders (i.e pollution) |
| Market Failure | when the market fails to allocate society's resources efficiently |
| Market Economy | allocates resources through the decentralized decisions of many households and firms as they interact in markets |
| Market | a group of buyers and sellers (need not be in a single location) |
| Incentive | something that induces a person to act |
| Marginal Changes | a small incremental adjustment to a plan of action |
| Rational People | people who systematically and purposefully do the best they can to achieve their objectives |
| Opportunity Cost | what you give up to get that item |
| Efficiency | the property of society getting the most it can from its scarce resources |
| Equality | the property of distributing economic prosperity uniformly among the members of society |
| Economics | the study of how society manages its scarce resources |
| Scarcity | the limited nature of society's resources |
| Arbitrage | the process of taking advantage of price differences for the same item in different markets |
| Theory Of Liquidity Preference | Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance |
Created by:
walter2015
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