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Macroeconomics
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| Term | Definition |
|---|---|
| The principal view in microeconomics is | the assumption of perfect markets. Prices are supposed to adapt so that equilibrium is maintained between quantity demanded and quantity supplied. |
| Macroeconomics posits that | the notion of perfect markets and equilibrium do not hold for all goods and services, and certainly not for all times. |
| The central theme of Keynesian economics (as it has become known) is | the role of government in the economy. |
| Walter Heller used the term (blank) to explain the role of government in regulating unemployment and inflation. | “Fine-tuning” |
| As income increases, the demand for an inferior good will | decrease |
| The law of supply states that | the quantity supplied of a good rises when the price of the good rises, as long as all other factors that affect suppliers’ decisions are unchanged. |
| Market Supply is | the combined supply of everyone willing and able to sell a good in a market |
| An economy is said to be in stagflation when | overall price levels increase rapidly (inflation) even as the economy itself is in a recession or high levels of unemployment (stagnation). |
| In the U.S. during the 1970s, Oil prices increased dramatically. The production costs of goods spiraled leading to an increase in unemployment. What was this an example of? | stagflation |
| Macroeconomics attempts to address three major concerns: | Inflation, Growth, Unemployment |
| Refers to an increase in the overall price level, erodes the purchasing power of consumers. | inflation |
| When inflation reaches unmanageable levels it is referred to as | hyperinflation |
| represents a decrease in the overall price level | deflation |
| refers to the total quantity of final goods and services produced in an economy in a given time period, usually measured quarterly | Aggregate output |
| Macroeconomics focuses on Aggregate Output to examine | how an economy is performing |
| An economy is said to be in recession if aggregate output | falls in two consecutive quarters. |
| results if the recession persists and is prolonged | a depression |
| The avowed objective of policymakers is two-fold: | to smoothen fluctuations in the short run, and to increase the growth rate of output in the long run. |
| Three key policy frameworks used for the purpose of stimulating growth and stabilizing prices are: | Monetary Policy, Fiscal Policy, Supply-side Policy |
| Monetary Policy is | the set of tools used by a country’s central bank (the Federal Reserve in the U.S.) to regulate the availability of money in the economy |
| Fiscal Policy refers to | government policies related to taxes and how resources are allocated among competing priorities – defense, education, infrastructure, healthcare, and safety and security |
| Supply side or growth policies are those that | try to improve aggregate supply rather than addressing aggregate demand |
| As in accounting, every transaction or exchange has two elements. One element is(blank)and the other is (blank) | expenditure, receipt |
| transfer payments | provisions from the government that fall under welfare |
| The circular flow of goods in three distinct market scenarios: | The market for goods and services, The market for labor, The market for loanable funds |
| Extending the basic principle of demand and supply, we can say that aggregate demand is | the total demand for all kinds of final goods and services in any economy. |
| the central theme of (blank) is the role of government in economics | keynesian economics |
| The great depression lasted | 3 years and 7 months |
| Recessions since then have averaged | 10 months with a median of 9 months. |
| If governments print more and more paper currency, without such currency being backed up by tangible assets (such as gold) | prices tend to rise causing an inflationary spiral. |
| in the short run, societies and economies have to make choices between inflation and | unemployment |
| frictional unemployment is | the unemployment that results from time spent between jobs when a worker is searching for, or transitioning from one job to another. |
| benefit of unemployment insurance | can facilitate people to look for jobs that match their skills, and in turn this may lead to greater stability, higher productivity, and increased incomes |
| negative effect of unemployment insurance | has a tendency to make people lethargic |
| Structural Unemployment can be defined as | unemployed workers who lack required skills for the job |
| most periods of unemployment can be linked to | a relatively small number of persons who remain unemployed for long periods |
| The misery index is | the sum of the unemployment rate and the inflation rate. |
| The relationship between unemployment and inflation in the short-run is referred to as | the Phillips Curve |
| A shift in the aggregate demand curve has the tendency of pushing unemployment and inflation | in opposite directions in the short-run. |
| monetary policy can at best be effective for unemployment rates | in the short run but not in the long run. |
| The concept that unemployment ultimately tends towards its natural state, irrespective of the level of inflation, is called (blank). Empirical evidence appears to support this view. | the natural-rate hypothesis |
| Sacrifice Ratio | the number of percentage points of annual output that must be sacrificed in order to reduce inflation by one percent. |
| Theory of Rational Expectations | suggests that over time, people will process and use the information available to them and the notion of expected inflation dispels with the trade-off between unemployment and inflation. |
| Consumer Price Index (CPI) | measures the overall cost of goods and services purchased by a typical urban consumer |
| Nominal interest rates refers to | the interest rate before taking inflation into account. |
| Real interest rate is | the interest rate that has been adjusted to remove the effects of inflation to reflect the real cost of funds to the borrower and the real yield to the lender or to an investor. |
| The theory of comparative advantage implies that | even when a country has an absolute advantage in many goods and services, it would still be better off by trading with countries in goods and services where the opportunity costs are higher. |
| Gross domestic product (GDP): | Total (gross) amount of everything produced within a specific economy Used to analyze economic growth Can compare regions or nations |
| GDP defined | The market value of all final goods and services produced in a nation within a specific period of time |
| GDP includes both | goods and services. |
| Intermediate goods are | goods that firms repackage or bundle with other goods to be sold at a later stage. |
| are intermediate goods included in GDP? | no |
| would a used car that is sold be counted in GDP? | no |
| durable goods | affected by cyclical economical fluctuations |
| nondurable goods | not affected by cyclical economical fluctuations |
| true/false: transfer payments/welfare are not included in GDP | true |
| net exports (nx) | Exports minus imports If imports > exports → NX < 0 → Trade deficit If exports > imports → NX > 0 → Trade surplus |
| true/false: imports are included in GDP | false |
| Nominal GDP | GDP measured in current prices |
| Real GDP | GDP measure with prices held constant over time |
| the nominal GDP is usually (blank), which is why we use price level as a GDP (blank) to calculate Real GDP | inflated, deflator |
| Nonmarket goods are: | Goods and services produced but not sold. Uncompensated household activities |
| Underground economy: | If transactions are not directly measurable (because the income is not reported), they are not included in official measures of GDP. |
| Gross National Product (GNP) is | GDP + Residents’ investment income earned overseas – foreign residents’ investment income earned within the country. |
| Net National Product (NNP) represents | the amount of goods and services that can be consumed within a country each year without affecting the amount that can be consumed in the following years. |
| Gross National Income (GNI) is | the sum of the Gross Domestic Product (GDP) and the net income received from overseas. |
| The Consumer Price Index (CPI) reflects | changes in a basket of goods and services that consumers typically use in a given country. |
| The Wholesale Price Index (WPI) or Producer Price Index (PPI) reflects | changes in a basket of goods and services at the point of production (ignoring the costs of distribution and retailing). |
| catch-up effect | refers to the ability of the least developed countries and developing countries to grow rapidly and improve the standards of living for their people. |
| the financial system is | a device for moving scarce resources from those who can save to those who wish to borrow. |
| Financial intermediaries can broadly be classified as | banks, investment firms, and mutual funds. |
| Financing through shares or stocks is called | equity |
| Money has three main functions | medium of exchange, unit of account, can be stored in the form of savings |
| M0 is | a measure of the money supply which combines any liquid or cash assets held within a central bank and the amount of physical currency circulating in the economy. |
| M1 are known as | narrow money and denote paper currency and coins in circulation and money equivalents that can easily be converted into cash. |
| M2 = | M1 plus short term deposits in banks and specified money market funds. |
| M3 = | can be thought of as a congregation of all the other classifications of money (M0, M1 and M2) plus all of the less liquid components of the money supply. |
| Money Zero Maturity (MZM) represents | financial assets with zero maturity and that can be redeemed immediately at par. |
| Open Market Operations | Purchases of securities are an injection of money into the system thus facilitating growth while the sale of securities pulls money from the system and can stifle growth (and control inflation). |
| The Federal Discount Rate is | the interest rate on loans offered to commercial banks and financial institutions to help them tide over temporary liquidity problems. |
| The Required Reserve Ratio represents | the portion of depositors’ balances that banks must hold at all times as cash. |
| The portion of funds that banks are required to hold is called | the Cash Reserve Ratio or CRR |
| A “run on the bank” is a scenario in which | depositors rush to the bank to withdraw their deposits. |
| Federal Deposit Insurance Corporation (FDIC) was established to | protect depositors from bank failure |
| Over the long run, the overall price level has a tendency to adjust to a level where | the demand for money equals the supply. |
| Quantity Theory of Money. | Quantity of money available determines its value. Under this theory, the major cause of inflation is the increase in the quantity of money, more money equals more inflation. |
| The fact that monetary changes have no effect on real variables is referred to as | monetary neutrality. |
| If there is an increase in the supply of money in an economy, any of the variables may be affected: | Either the price level will rise. Or the quantity of output will rise. Or the velocity of money will be reduced. Of course, a combination of the three is also possible. |
| The Fisher Effect: | When the rate of inflation changes, the nominal interest rate changes accordingly. |
| Nominal Interest Rate = | Real Interest Rate + Rate of Inflation |
| The time and effort required lead to increased transaction costs and are termed as | Shoe Leather Costs. |
| The updating of prices requires resources and also requires productive activities to be sacrificed. These are called | Menu Costs. |
| We refer to an economy as a(blank) if it does not interact with other economies in the world. | closed economy |
| A country is said to have a (blank) when net exports are positive | trade surplus |
| A country is said to have a(blank) when net exports are negative. | trade deficit |
| A country is said to have a(blank) when net exports are zero – in other words, exports and imports are equal. | balanced trade |
| When the US dollar is able to buy more of a foreign currency, we would say that the dollar has (blank) with respect to the other currency. | appreciated |
| Similarly, when the US dollar is able to buy less of a foreign currency, we would say that the dollar has(blank) | depreciated. |
| According to the law of one price, | a good or service must sell for the same price irrespective of location. |
| The mechanism by which one takes advantage of the differences in prices in different markets is called | arbitrage. |
| The Wealth Effect – | when price levels fall, the value of money increases and consumers can buy more of what they need or want – this is also called the real balance effect. |
| The Exchange Rate Effect - | a fall in the relative price level of a country could render goods and services produced in other countries more expensive, leading to an increase in exports and a fall in imports – the trade balance will improve. |
| The Interest Rate Effect – | If price level is low, a reduction in interest rates is possible. The fall in interest rates means people have less incentive to save and may end up spending more. |
| is long term output of an economy dependent on price level? | no |
| The aggregate supply curve may shift to the right in the short run due to: | More people being employed and / or higher level of productivity. New investments may be made because of favorable conditions. Location of a natural resource (such as copper or tin ore, or other minerals) may spur investments in that sector. |
| According to Keynes’ Theory of Liquidity Preference, | the interest rate adjusts so as to balance the supply and demand for money. |
| crowding-out effect – | an increase in interest rate triggered by increased government spending causing some households and firms to move away from investment and thus stifling the aggregate demand. |
| Automatic Stabilizers- | policies and programs designed to mitigate the effect of economic fluctuations without the government having to intervene, include a progressive tax structure, and transfer systems such as welfare schemes and unemployment insurance. |
| an example of an intermediate good would be | pencils purchased by a restaurant to be used to take orders(w) |
| which of the following is not a main function of money? | as a backup for gold (r) |
| suppose the government reduces the corporate tax rate to encourage businesses to invest in research and development, this would be an example of | an expansionary supply side policy (r) |
| suppose in an economy, the national output increases, the economy is in a state of | expansion (w) |
| how is real GDP different from nominal GDP? | real GDP is adjusted for inflation, and nominal GDP is just measured in current prices (r) |
| macroeconomics is the study of | examines the economy as a whole (r) |
| macroeconomics attempts to address all of these concerns except | behavior of individuals in the economy (r) |
| factors of stagflation don't include | lower labor costs (r) |
| keynesian economics has been closely associated with | government intervention as an effective tool in addressing the problems of an economy (w) |
| as consumer income increases, the demand for a (blank) will increase | normal good (w) |
| which of the following statements are incorrect concerning unemployment insurance (UI)? | UI has tendency to make people energetic (r) |
| structural unemployment is closely associated with | unemployed workers who lack required skills for the job (w) |
| David Ricardo's main theory suggested that with a (blank), countries could benefit from trade | comparative advantage (w) |
| the Great Depression lasted nearly (blank) years | four (w) |
| in the long run, the Phillips curve will be vertical at the natural rate of unemployment if | the long run aggregate supply curve is vertical at potential GDP (w) |
| the aggregate demand and aggregate supply graph represents | the behavior of the economy as a whole (r) |
| reflecting on the aggregate demand -aggregate supply graph, what variable is on the vertical axis? | price level (w) |
| which of the following is not a reason for the aggregate demand curve to slope downward? | substitution effect (w) |
| suppose in an economy, the aggregate supply curve shifts to the left, but the aggregate demand curve does not shift. The Phillips curve would then show | A positive relationship between unemployment and inflation (w) |
| which of the following holds for every point on the aggregate demand curve? | Y=C + I +G+NX (w) |
| gross domestic product (GDP) also measures | a nations income (w) |
| which of the following would not be included in gdp | cole pays the neighbor kid to mow his yard |
| which of the following is not a monetary tool of the US central bank called the federal reserve | government spending |
| which one of the following does real GDP measure | a country's physical output |
| why doesn't gdp count expenditures on intermediate goods | to avoid double counting |
| the law of demand states that the quantity demanded of a good is blank related to its price, provided all other factors are unchanged | inversely |
| suppose the state of massachusetts passes a law that increases the tax on alcoholic beverages. as a result, residents in massachusetts start purchasing their alcohol in surrounding states. which of the following principles does this best illustrate? | people respond to incentives |
| blank is the combined supply of everyone willing and able to sell a good in a market | market supply |
| all of these factors are closely associated with business cycles except | individual policies of firms |
| walter heller used the term blank to explain the role of government in regulating unemployment and inflation | fine tuning |
| the natural rate of unemployment is closely associated with this percentage | 0.05 percent |
| the natural rate of unemployment can be described as | the sum of frictional unemployment and structural unemployment |
| structural unemployment is closely associated with | unemployed workers who lack required skills for the job |
| the total demand for goods and services in an economy is known as | aggregate demand |
| which of the following would represent an automatic stabilizer in the economy | changes in spending on unemployment compensation |
| why is the LRAS curve vertical | prices have nothing to do with long-term output |
| the wealth effect can help explain | the negative slope of the AD curve |
| in an economy, when interest rates are increasing | reduces the opportunity cost of future consumption |
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