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Macroeconomics Def 2

Aplia Macro Chapters 7-13 Definitions

QuestionAnswer
Aggregate Demand Quantity demanded of all goods and services (Real GDP) at different price levels, ceteris paribus
Aggregate Demand Curve A urve that shows the quantity demanded of all goods and services (Real GDP) at different price levels, ceteris paribus
Real Balance Effect The change in the purchasing power of dollar-denominated assets that results from a change in price level
Monetary Wealth The value of a person's monetary assets. Wealth, as distinguished from monetary wealth, refers to the value of all assets owned, both monetary and nonmonetary. In short, a person's wealth equals his or her monetary wealth plus nonmonetary wealth (ex Ca
Purchasing Power The quantity of goods and services that can be purchased with a unit of money. Purchasing power and the price level are inversely related. As the price level goes up, purchasing power goes down.
Interest Rate Effect The changes in household and business buying as the interest rate changed (which, in turn, is a reflection of a change in the demand for or supply of credit brought on by price level changes)
International Trade Effect The change in foreign sector spending as the price level changes
Wealth The value of all assets owned, both monetary and nonmonetary
Exchange Rate The price of one currency in terms of another currency
Appreciation An increase in the value of one currency relative to other currencies.
Depreciation A decrease in the value of one currency relative to other currencies
Aggregate Supply The quantity supplied of all goods and services (Real GDP) at different price levels, ceteris paribus
Short-Run Aggregate Supply (SRAS) Curve A curve that shows the qunatity supplied of all goods and service (Real GDP) at different price levels, ceteris paribus
Short-Run Equilibrium The condition that exists when the quantity demanded of Real GDP equals the (short-run)quantity supplied of real GDP. This condition is met where the aggregate demand curve intersects the short-run aggregate supply curve
Natural Real GD{ The Reald GDP that is produced at the natural unemployment rate. The Real GDP that is produced when the economy is in the long-run equilibrium.
Long-Run Aggregate Supply (LRAS) Curve The LRAS curve is a vertical line at the level of Natural Real GDP. It represents the output the economy produces when wages and prices have adjusted to their (final)equilibrium levels and neither producers nor workers have any relevant misperceptions
Long-Run Equilibrium The condition that exists in the economy when wages and prices have adjusted to their (final) equilibrium levels and workers do not have any relevant misperceptions. Graphically, long-run equilibrium occurs at the intersection of the AD and LRAS curves.
Say's Law Supply creates its own demand. Production creates demand sufficient to purchase all the goods and services produced
Recessionary Gap The condition in which Real GDP that the economy is producing is less than the Natural Real GDP and the unemployment rate is greater than the natural unemployment rate.
Inflationary Gap The condition in which the Real GDP that the economy is producing is greater than the Natural Real GDP and the unemployment rate is less than the natural unemployment rate.
Laissez-faire A public policy of not interfering with market activities in the economy.
Efficiency Wage Models These models hold that it is sometimes in the best interest of business firms to pay their employees higher-than-equilibrium wage rates
Consumption Function The relationship between consumption and disposable income.
Marginal Propensity to Consume (MPC) The ratio of the change in disposable income
Autonomous Consumption The part of consumption that is independent of disposable income.
Marginal Propensity to Save (MPS) he ration of the change in saving to the change in disposable income
Multiplier The number that is multiplied by the change in autonomous spending to obatain the overall change in total spending, The Multiplier (m) is equal to 1/(1-MPC).
Progressive Income Tax An income tax system in which one's tax rate rises as one's taxable income rises
Proportional Incom Tax An income tax system in which a person's tax rate is the same no matter what his or her taxabe income is.
Regressive Income Tax An income tax system in which a person's tax rate declines as his or her taxable income rises.
Budget Deficit Government expenditures greater than tax revenue
Budget Surplus Tax revenues greater than government expenditures
Balanced Budget Government expenditures equal tax revenues.
Cyclical Deficit The part of the budget deficit that is a result of a downturn in economic activity
Structural Deficit The part of the budget deficit that would exist even if the economy were operating at full employment.
Public Debt The total amount that the federal government owes its creditors.
Fiscal Policy Changes in government expenditures and/or taxes to achieve economic goals, such as low unemployment, stable prices, and economic growth.
Expansionary Fiscal Policy Increase in government spending and/or decreases in taxes to achieve particular economic goals.
Contractionary Fiscal Policy Decreases in government expenditures and or increases in taxes to achieve economic goals
Discretionary Fiscal Policy Deliberate changes of government expenditures and/or taxes to achieve economic goals
Automatic Fiscal Policy Changes in government expenditures and/or taxes that occur automatically without (additional) congressional action.
Crowding Out The decrease in private expenditures that occurs as a consequence of increased government spending or the financing needs of a budget deficit
Complete Crowding Out A decrease in one or more components of private spending that only partially offsets the increase in government spending.
Data Lag Policy makers are not aware of economic changes as soon as they happen.
Wait-and-See Lag After policy makers are aware of a downturn in the economy they wait and see to be sure that events are not just a short term phenomenon
Legislative Lag The time it takes for Congress (or the President) to propose a measure, build support for it, and get it passed
Transmission Lag The time it takes for a fiscal measure to go into effect after it passes legislation
Effectiveness Lag The time it takes for a fiscal measure to affect the economy
Marginal Income Tax Rate The change in a person's payment divided by the change in his or her taxable income
Laffer Curve The curve, named after Arthur Laffer, that shows the relationship between tax rates and tax revenues. According to the Laffer curve, as tax rates rise from zero, tax revenues rise, reach a maximum at some point, and then fall with further increases
Tax Base In terms of income taxes, the total amount of taxable income. Tax revenue=Tax Base x (average) Tax Rate
Money Any good that is widely accepted for purposes of exchange and in the repayment of debt
Barter Exchanging goods and services for other goods and services without the use of money
Medium of Exchange A function of money, anything that is generally acceptable in exchange for goods and services
Unit of Account A function of money, a common measure in which relative values are expressed.
Store of Value A function of money, the ability of an item to hold value over time.
Double Coincidence of Wants In a barter economy, a requirement that must be met before a trade can be made. It specifies that a trader must find another trader who is willing to trade what the first trader wants and at the same time wants what the first trader has.
M! Currency held outside banks plus checkable deposits plus traveler's checks.
Currency Coins and paper money
Federal Reserve Notes Paper money issued by the Fed.
Checkable Deposits Deposits on which checks can be written
M2 M1 plus savings deposits (including money market deposit accounts) plus small-denomination time deposits plus (retail) money market mutual funds
Savings Deposit An interest-earning account at a commercial bank or thrift institution. Normally checks cannot be written on savings deposits, and the funds in a savings deposit can be withdrawn (at any time) without penalty
Money Market Deposit Account An interest-earning account at a bank or thrift institution. Usually, a minimum balance is required for an MMDA, and most offer limited check-writing privileges.
Time Deposit An interest-earning deposit with a specified maturity date. Time deposits are subject to penalties for early withdrawal. Small denomination deposits are deposits less than 100,000.
Money Market Mutual Fund an interest-earning account at a mutual fund company. Usually, a minimum balance is required for an MMMF account. Most MMMF accounts offer limited check-writing privileges. Only retail MMMFs are part of M2.
Fractional Reserve Banking A banking arrangement that allows banks to hold reserves equal only a fraction of their deposit liabilities.
Federal Reserve System (The Fed) The central bank of the United States
Reserves The sum of bank deposits at the Fed and vault cash
Required Reserve Ratio (r) A percentage of each dollar deposited that must be held on reserve (at the Fed or in the bank's vault)
Required Reserves The minimum amount of reserves a bank must hold against its checkable deposits as mandated by the Fed
Excess Reserves Any reserves held beyond the required amount. The difference between (total) reserves and required reserves.
T-Account A simplified balance sheet that shows the changes in a bank's assets and liabilities.
Simple Deposit Multiplier The reciprocal of the required reserve ratio, 1/r
Cash Leakage Occurs when funds are held as currency instead of deposited into a checking account.
Board of Governors The governing body of the Federal Reserve System.
Federal Open Market Committee (FOMC) The 12-member policy-making group within the Fed. The committee has the authority to conduct open market operations.
Open Market Operations The buying and selling of governemtn securities by the Fed.
Monetary Policy Changes in the money supply, or in the rate of change of the money supply, to achieve particular macroeconomic goals.
U.S. Treasury Securities Bonds and bond-like securities issued by the U.S. Treasury when it borrows.
Open Market Purchase The buying of government securities by the Fed.
Open Market Sale The selling of government securities by the Fed.
Reserve Requirement The rule that specifies the amount of reserves a bank must hold to back up deposits.
Federal Funds Market A market where banks lend reserves to one another, usually for short periods.
Federal Funds Rate The interest rate in the federal funds market; the interest rate banks charge one another to borrow reserves.
Discount Rate The interest rate the Fed charges depository institutions that borrow reserves from it.
Term Action Facility (TAF) Program Under the Term Auction Facility Program, the Federal Reserve auctions funds to depository institutions. Each TAF auction is for a fixed amount, with the TAF rate determined by the auction process (subject to a minimum bid rate).
Equation of Exchange An identity stating that the money supply times velocity must be equal to the price level times Real GDP.
Velocity The average number of times a dollar is spent to buy final goods and services in a year.
Simple Quantity Theory of Money The theory assuming that velocity (V) and Real GDP (Q) are constant and predicting that changes in the money supply (M) lead to strictly proportional changes in the price level (P)
One-Shot Inflation A one-time increase in the price level. An increase in the price level that does not continue.
Continued Inflation A continued increase in the price level.
Liquidity Effect The change in the interest rate due to a change in the supply of loanable funds.
Income Effect The change in the interest rate due to a change in Real GDP.
Price-Level Effect The change in the interest rate due to a change in the price level.
Expectations Effect The change in the interest rate due to a change in the expected inflation rate
Nominal Interest Rate The interest rate actually charged (or paid) in the market; the market interest rate. Nominal interest rate=Real interest rate+Expected inflation rate.
Real Interest Rate The nominal interest rate minus the expected inflation rate. When the expected inflation rate is zero, the real interest rate equals the nominal interest rate.
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