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ECO 100 - Test 3
Definitions
| Question | Answer |
|---|---|
| Aggregate Expenditures | Consist of consumer expenditures, government spending, business investment spending, and net foreign spending (exports minus imports), or GDP = C + I + G + (X - M) |
| Aggregate Demand | The output of goods and services (real GDP) demanded at different price levels. |
| Wealth Effect | Families 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 money wealth declines, reducing output demanded. |
| Aggregate Supply | The real GDP that firms will produce at varying price levels. |
| Short-Run Aggregate Supply (AS) Curve | This is positively sloped becuase many input costs are slow to change in the short run. |
| Long-Run Aggregate Supply (LRAS) Curve | This is vertical at full employment because the economy has reached its capacity to produce. |
| Macroeconomic Equilibrium | Occurs at the intersection of the aggregate supply and aggregate demand curves. At this output level, there is no net pressures for the economy to expand or contract. |
| Multiplier | Spending changes alter equilibrium income by the spending change times this. 1 person's spending becomes another's income, and that person spends some (MPC), which becomes income for another person, and so on, until income has changed by 1/(1-MPC)=1/MPS |
| 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. |
| Demand-Pull Inflation | Results when aggregate demand expands so much that equilibrium output exceeds full employment output and the price level rises. |
| Cost-Push Inflation | Results when a supply shock hits the economy, reducing aggregate supply, and thus reducing output and increasing the price level. |
| Discretionary Spending | The part of the budget that includes such programs as national defense, transportation, science, and income security. |
| Mandatory Spending | Authorized by permanent laws. Includes such programs as Social Security, Medicare, and interest on the national debt. |
| Discretionary Fiscal Policy | Involves adjusting government spending on tax policies with the 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 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 economy. |
| Supply-Side Fiscal Policy | Focus on shifting the LRAS curve to the right, expanding the economy without increasing inflationary pressures. Unlike policies to increase aggregate demand, these take longer to have an impact on the economy. |
| Laffer Curve | Plots hypothetical tax revenues at various income tax rates. If tax rates are zero, tax revenues will be zero; if rates are 100%, revenues will also be zero. As tax rates rise from zero, revenues will rise, reach a maximum, and then decline. |
| Automatic Stabilizers | Transfer payments and tax revenues automatically expand or contract in ways that reduce the intensity of business fluctuations without any overt action by Congress or other policymakers. |
| Data Lag | The time policymakers must wait for economic data to be collected, processed, and reported. |
| Recognition Lag | The time it takes for policymakers to confirm that the economy is trending in or out of a recession. |
| Implementation Lag | The time required to turn fiscal policy into law and eventually have an impact on the economy. |
| Crowding-Out Effect | Arises from deficit spending requiring the government to borrow, which drives up interest rates, which in turn reduces consumer spending and business investment. |
| Money | Anything that is accepted in exchange for other goods and services for the payment of debt. |
| Barter | The direct exchange of goods and services for other goods and services. |
| Medium of Exchange | Money functions as this because goods and services are sold for money, then the money is used to purchase other goods and services. |
| Unit of Account | Money provides a yardstick for measuring and comparing the values of many goods and services. |
| Store of Value | The function that enables people to save the money they earn today and use it to buy the goods and services they want tomorrow. |
| Liquidity | How quickly and easily an asset can be converted into cash. |
| M1 | The narrowest definition of money; includes currency, checks, and other accounts that have check-writing or debit capabilities, such as stock market and money market accounts. |
| M2 | A broader definition of money that includes near monies that are not as liquid as cash, including deposits in savings accounts, money market accounts, and money market mutual fund accounts. |
| Transactions Demand for Money | That part of individual wealth held in money to perform commercial transactions. |
| Precautionary Demand for Money | Tha tpart of individual wealth held in money to handle unexpected events and expenses. |
| Speculative Demand for Money | When inflation isn't a problem, holding money for a short period of time is virtually risk free, whereas holding other assets is more risky. ___ varies inversely with interest rates since they are the opportunity costs of holding money in a portfolio. |
| Fractional Reserve Banking System | To prevent bank runs, a percent of bank deposits must be held in reserve. |
| Money Multiplier | Measures the potential or maximum amount the money supply can increase or decrease when new deposits enter or exit the system. Defined as 1/reserve requirement. |
| Federal Reserve System | The central bank of the United States |
| Federal Open Market Committee | Composed of members of the Board of Governors of the Fed and selected presidents of the regional Federal Reserve Banks; it oversees open market operations (the buying and selling of government securities), the main tool of monetary policy. |
| Reserve Requirements | The required ratio of funds that commercial banks and other depository institutions are required to hold in reserve against deposits. |
| Discount Rate | The interest rate the Federal Reserve charges commercial banks and other depository institutions to borrow reserves from a regional Federal Reserve Bank. |
| Open Market Operations | The buying and selling of U.S. government securities to adjust reserves in the banking system. |
Created by:
howellme