Term
|
Definition
There are two methods of measuring GDP, each handling its own side of the economy
Aggregate Expenditures Approach = C + I + G + NetEx
Aggregate Income = Wages + Profits + Rent + Interest |
|
|
Term
|
Definition
Real GDP = Measuring this year’s GDP using a previous year’s (base year’s) prices in order to accurately observe quantity of production
Nominal GDP = The quantity of all goods and services produced times the prices for which they were sold |
|
|
Term
|
Definition
A measure of overall economic output
“The total dollar value of all final goods and services produced within the borders of the United States in one year’s time”
Generally, most modernized nations see their GDPs rise annually, although their economies fluctuate in the short-run business cycle (B4)
Expansion = GDP rises
Recession = GDP falls |
|
|
Term
| Final vs. Intermediate (Goods) |
|
Definition
Final Goods = Goods that are sold as-is
Intermediate Goods = Goods that are utilized in the production of other goods |
|
|
Term
|
Definition
When the government increases the production of money, thus increasing the price level of goods
Even though there are millions of different prices for different goods that cannot possibly move in the same direction simultaneously, economists can observe the average tend in prices
The Consumer Price Index, or CPI, is the measurement of inflation
When graphed, it appears relatively similar to a supply-and-demand graph, although the factors that alter the curves are different (B5) |
|
|
Term
|
Definition
| The total expenditure on a market basket in the current year divided by the total expenditure on the same market basket in the base year, times 100 |
|
|
Term
|
Definition
The average of current prices across the entire spectrum of goods and services produced in the economy
CPI is the most common measurement of price level |
|
|
Term
|
Definition
| The collection of money and how much money one has affects economic investment and the future price at which one could purchase capital |
|
|
Term
| Disinflation vs. Deflation |
|
Definition
Disinflation = A decrease in the rate of inflation
Deflation = The opposite of inflation, wherein the value of the dollar appreciates as price level lowers |
|
|
Term
|
Definition
Frictional = The unemployment that results when workers are between two different vocations
o Can also include workers searching for their first job
Cyclical = The unemployment that results when the economy enters a recession
o The only kind of unemployment that economists consider bad
Structural = The unemployment that results when a specific vocation is no longer relevant, and thus those who previously occupied that vocation become unemployed
o While it may feel bad to its victims, structural unemployment is not considered a bad thing in an economically-progressive country
Unemployment Rate equals the number of people “unemployed,” divided by the number of people in the overall “labor force” (all occupied workers as well as all unemployed workers searching for work)
o Does not include children, retired persons, and other people who are not actively searching for work |
|
|
Term
|
Definition
| The aggregate demand curve represents C, I, G, and NetEx |
|
|
Term
|
Definition
As price level rises (factoring out inflation), the value of savings decreases
o If the value of one’s savings falls, one will spend less
o Thus, price level will increase while aggregate demand will decrease |
|
|
Term
| International Trade Effect |
|
Definition
The aggregate demand (AD) curve is sloped downwards because, as our price level rises while those of other countries do not, it becomes more profitable to purchase foreign-made goods
Reduces the power of the spending multiplier because some American spending is spent on foreign-made goods, thus beginning the spending multiplier process for that foreign country but not for the US |
|
|
Term
| Short-Run Aggregate Supply |
|
Definition
| The willingness to offer goods and services for sale at different prices in the short run, when one or more variables are constant (sloped in three segments) |
|
|
Term
|
Definition
| The tendency for wages to remain consistent in the short run despite any changes in the value of labor |
|
|
Term
| Long-Run Aggregate Supply |
|
Definition
| The willingness to offer goods and services for sale at different prices in the long run, when multiple variables can be altered (a vertical line) |
|
|
Term
|
Definition
An economy's GDP is attributable to the availability of scare resources of that economy
The allocation of scarce resources such as land, labor, capital, etc., determines the health of the economy |
|
|
Term
|
Definition
Wages + Profits + Interest + Rent
Adding together aggregate income is one of the two means of calculating GDP |
|
|
Term
|
Definition
| The income earned but not necessarily received by American factors of production |
|
|
Term
|
Definition
| One’s personal income minus one’s personal taxes |
|
|
Term
|
Definition
| One of the four components (C) of aggregate demand (AD), representing spending by the private sector on goods, services, capital, and labor |
|
|
Term
|
Definition
One of the four components (C) of aggregate demand (AD), representing domestic investment by institutions and banks and private investors
Consists of businesses' purchase of capital, individuals' purchases of new homes, and changes in business inventories |
|
|
Term
| Depreciation (Capital Consumption) |
|
Definition
| Synonym for depreciated capital, normally a dollar value thereof |
|
|
Term
|
Definition
Gross means total, whereas net means something has been subtracted out of the total
NDP disregards I, specifically the purchase of capital by businesses
• Instead, NDP focuses on the dollar value of all new capital purchased, disregarding all depreciated capital included under the I component of GDP
The dollar value of all worn-out (or depreciated) capital subtracted from the GDP equals the NDP |
|
|
Term
|
Definition
| One of the four components (C) of aggregate demand (AD), representing government purchasing of goods, services, capital, and labor |
|
|
Term
|
Definition
| Payments made by the government, an institution, or a person, directly to another institution or person (thus excluded from GDP) |
|
|
Term
|
Definition
| The dollar value of total imports subtracted from total exports |
|
|
Term
|
Definition
Marginal Propensity to Consume
• Abbreviated as MPC
• For every additional dollar of income, what percentage of it gets spent
• Graphically, the MPC is equal to the slope of the consumption function (B8)
Marginal Propensity to Spend
• Abbreviated as MPS
• For every additional dollar of income, what percentage of it gets saved |
|
|
Term
|
Definition
The minimum level of consumption that would still exist even if the consumer had no income
Does not change with/is not dependent upon, the level of income in our society |
|
|
Term
|
Definition
Also known as the “consumption function”
When disposable income increases, so does consumption spending, and vice-versa
Its slope is equal to the MPC
Never starts at zero because people would still consume some amount of goods and services regardless of having no income (via savings, loans, etc.) |
|
|
Term
|
Definition
A tool used to calculate the overall effect that a change in spending has on RGDP
Equal to 1/1-MPC |
|
|
Term
|
Definition
A tool used in determining fiscal policy, but not as strong as others, such as the spending multiplier
Equal to MPC/MPS |
|
|
Term
| Discretionary Fiscal Policy |
|
Definition
Done by Congress and the President
Created by changes in government spending and taxes, but can sometimes be ineffective due to the 6-month lag in observing the economy |
|
|
Term
|
Definition
| Unemployment Compensation = Unemployed workers can receive benefits from both the state and local levels for varying periods of time This gives people something of a disposable income, allowing them to still spend at least small amounts of money |
|
|
Term
| Government Deficit vs. Debt |
|
Definition
Government Debt = The total amount of money owed by the government to creditors who hold US debt instruments (like treasury bills and bonds), including all federal debt held by states, corporations, individuals
Government Deficit = If the government drew up a spreadsheet and subtracted all the expenses from all the income, there would be a shortfall; the dollar value of this shortfall is the government (or national) deficit |
|
|
Term
|
Definition
If government spending increases (in an attempt to increase aggregate demand), so will the government deficit, meaning the government will need to borrow more
• In borrowing more, real interest rates will increase, thus lowering investment and consumer spending
• If investment and consumer spending decrease, so does aggregate demand, unintentionally creating a reverse effect |
|
|
Term
|
Definition
The more income one earns, the higher percentage of said income one pays in taxes
Thus, progressive income taxes constitute countercyclical policy |
|
|
Term
|
Definition
| The tax rate on the next additional tax bracket (i.e. the $150,000-$200,000 bracket, you pay 25%, etc.) |
|
|
Term
|
Definition
Anything that is commonly accepted as a medium of exchange, or as payment for a good or service
Medium of exchange = Transferred as payment for goods or services
Unit of account = The unit of measurement used to measure value
Storage = Used as a medium with which to store value (value can be stored for long periods of time) |
|
|
Term
|
Definition
| Money that is purely used as a token, such as the dollar |
|
|
Term
|
Definition
| Something that can be used as money but also be used for something else, such as salt or gold |
|
|
Term
|
Definition
| The extent to which assets can be converted into cash |
|
|
Term
|
Definition
M1
o Cash and coins that aren’t invested in banks
o Checking account balances (also known as checkable deposits)
o M1 is known as ‘totally liquid’ = It’s entirely in money-form
M2
o Everything in M1
o Savings account balances |
|
|
Term
|
Definition
Twelve regional banks that compose the central bank of the United States and provide services to private banks
Board of Governors is appointed by the President and approved by Congress (members are normally bankers and serve non-congruent terms to the President) |
|
|
Term
|
Definition
If the Federal Reserve injects a substantial amount of money into a specific market in exchange for products, the producers in this market would place the money they make into their checking accounts, thus beginning the money-multiplier process and changing the money supply
• The Federal Reserve only does this in the United States government bond market by purchasing bonds
• The Federal Open Market Committee is in charge of purchasing bonds, setting monetary policy, etc.
By performing open market operations, the Federal Reserve can alter the money supply |
|
|
Term
|
Definition
The interest rate that the Federal Reserve charges when banks borrow its funds
If the Federal Reserve lowers the discount rate, banks will borrow more, increasing the money supply, and vice-versa
By adjusting the discount rate, the Federal Reserve can alter the money supply |
|
|
Term
|
Definition
| The interest rate at which banks actively trade balances and deposits held at the Federal Reserve for overnight (one-day) loans |
|
|
Term
| Fractional Reserve Banking |
|
Definition
By law, banks only have to keep a certain fraction of their customers’ deposits in the bank at any given time
This corresponds with the Federal Reserve’s ability to set reserve requirements, meaning it gets to determine said fraction |
|
|
Term
|
Definition
| The fraction (expressed as a percentage) of a bank's total deposits that must be held inside the bank as reserves at any given time, as set by the Federal Reserve |
|
|
Term
|
Definition
| Money (deposits) and other assets stored inside a bank's vault at any given time in order to conduct daily functions |
|
|
Term
|
Definition
Represented by the formula 1/rr, where ‘rr’ stands for the reserve ratio
Two possibilities
o The Federal Reserve adds $1,000 to bank reserves
• Multiplied by the money multiplier, we learn that the money supply (M1) could theoretically increase by up to $5,000
• Thus, the answer is SM up by $5,000
o Susie deposits a $1,000 check in her checking account
• Multiplied by the money multiplier, we learn that the money supply (M1) could theoretically increase by up to $5,000
• However, the $1,000 must be subtracted from this, for it was already in the money supply; thus, the increase is $4,000 |
|
|
Term
|
Definition
| The more people choose to convert their assets into cash (as opposed to keeping them in checking accounts), the weaker the money multiplier will be |
|
|
Term
|
Definition
| Downwards-sloping, but not because people want less money as interest rates rise, they just need less |
|
|
Term
| Transaction (Cash) Demand |
|
Definition
| People have a demand for cash in order to perform daily transactions; this demand reduces the power of the money multiplier, for it lowers the amount of reserves a bank will have on-hand |
|
|
Term
|
Definition
| Policy performed by the Federal Reserve (usually via the Federal Open Market Committee) that affects the money supply in order ensure economic growth and stability |
|
|
Term
| Nominal vs. Real (Interest Rates) |
|
Definition
Nominal Interest Rate = Whatever the current interest rate is, in this year's prices
Real Interest Rates = Whatever the current interest rate is, measured in another year's prices in order to factor out inflation |
|
|
Term
|
Definition
Fiscal policy addressing the supply side
o In a recession, increase SRAS in order to stimulate the economy
o In an expansion, decrease SRAS in order to normalize the economy
Tax policies
o Reduce the sales tax, making it cheaper for businesses to produce
o Reduce marginal tax rates, thereby lowering the amount of taxes that people must pay in each income bracket and creating greater incentives for said people to work hard enough to join an even higher tax bracket |
|
|
Term
|
Definition
| Simultaneous (substantial) inflation and high unemployment |
|
|
Term
|
Definition
An alternative to Keynesian economic theory
o Stated that Y = C + I + G + NetEx was incorrect
Proposed that M1 x V = PL x RGDP (or M x V = P x Q)
o V stands for the velocity of the dollar, or the number of times the typical dollar is spent in a given year, which we assume to be constant
o Q stands for RGDP and is affected by factors not represented in the formula
• Thus, only M and P are active variables
Instability Providers
o Government (and more specifically, the Federal Reserve)
o Federal Reserve monetary policy (i.e. timing lags)
Stability Providers
o Competitive markets |
|
|
Term
|
Definition
Examines the relationship between inflation and unemployment (C4)
o In the short-run Phillips Curve, there is a correlation (inversely)
When aggregate demand increases (as a result of expansionary monetary policy, lower interest rates, and therefore more I spending), price level goes up, and unemployment goes down
o In the long-run Phillips Curve, there is no correlation
Eventually, demand for higher wages will increase, leading to a decrease in short-run aggregate supply and therefore a simultaneous increase in both price level and unemployment |
|
|
Term
|
Definition
Every bond contains two promises
o That the principle (or full value of the loan) will be paid back at some specific time in the future (known as the bond’s maturity date)
o That the government will pay annually a certain percentage of the bond’s principle as interest (known as the bond’s coupon rate)
If interest rates have fallen since the bond was issued, the bond will now command a higher price in the bond market (selling at a premium)
If interest rates have risen since the bond was issued, the bond will now command a lower price in the bond market (selling at a discount) |
|
|
Term
|
Definition
| Imports (-) exceed exports (+) |
|
|
Term
|
Definition
| Exports (+) exceed imports (-) |
|
|
