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Macroeconomics final
chapters 11, 12, 13.1, 13.2, 18, 19
84
Economics
Undergraduate 1
05/15/2010

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Term
gross domestic product
Definition
1) market value of the final goods and services produced in an economy during a given time period
2) GDP
3) measure value of an economy's production
Term
potential GDP
Definition
1) also known as "natural gross domestic product"
2) refers to the highest level of real GDP output than can be sustained over the long term
3) there is a limit because of natural and institutional constraints
Term
nominal values
Definition
refer to current prices and current quantities
Term
real values
Definition
refers to constant prices and current quantities
Term
which GDP is comparable over time
Definition
Real GDP
Term
GDP equation (expenditures)
Definition
GDP=C+G+I+(X-M)
Term
cyclical unemployment
Definition
caused by recession
Term
frictional unemployment
Definition
when the worker leaves job by choice
Term
structural unemployment
Definition
caused by a change in technology
Term
GDP deflator
Definition
a price index for final goods purchased by the entire economy
Term
consumer price index
Definition
1) price index provides information on the cost of living for an entire economy
2) represents the average cost of goods purchased
3) measures the average price of final goods purchased by households
Term
CPI-U
Definition
measures urban households cost of living (85%)
Term
CPI-W
Definition
cost of living for wage and clerical workers (35%)
Term
how to calculate CPI
Definition
1) determine base period prices P(0) and quantities Q(0)
2) calculate the cost of the basket during the base period P(0)*Q(0)
3) determine current prices P(t)
4) calculate the current cost of the basket P(t)*Q(0)
5) calculate the CPI
Term
aggregate demand
Definition
total amount that all consumers, business firms, govt agencies, and foreigners spend on US final goods and services
Term
investment spending
Definition
amount that firms spend on factories, machinery, software and the like, plus the amount families spend on new houses
Term
Aggregate supply
Definition
the total supply of goods and services that firms in a national economy plan on selling during a specific time period
Term
macroeconomic equilibrium
Definition
for an economy in the short run is established when aggregate demand intersects with short run aggregate supply
Term
impact of inflation on multiplier
Definition
inflation reduces impact of multiplier
Term
productivity
Definition
a measure of output from a production process, per unit of input
Term
increases in productivity
Definition
increase the standard of living
Term
trough
Definition
the lower turning point of a business cycle
Term
peak
Definition
top of business cycle
Term
expansion
Definition
steady increase in economic growth
Term
recession
Definition
occurs with decline of economic growth
Term
economic growth
Definition
1) is sustainable increase in productive capacity
2) long run growth is regular continuous increases in potential GDP
Term
legal reserves
Definition
LR=r*D
Term
r
Definition
required reserve ratio given by law
Term
R
Definition
reserves (cash + deposits at fed)
Term
D
Definition
checkable deposits
Term
ER
Definition
excess reserves (R-LR)
Term
banks continue to lend until
Definition
1) eligible customers do not desire loans
2) borrowers withdraw cash from their deposits
Term
simple money multiplier
Definition
1/r
Term
potential deposit creation
Definition
ER*(1/r)
Term
what happens to AD with an expansionary fiscal policy
Definition
increases
Term
what happens to AD with a contactionary fiscal card
Definition
decreases
Term
is government spending easily observed
Definition
yes, as firm revenues or as payments and taxes are observed in take home pay
Term
are fiscal policy operations have an immediate impact
Definition
yes
Term
government spending multiplier
Definition
1/(1-MPC)
Term
tax multiplier
Definition
-MPC/(1-MPC)
Term
balanced budget multiplier
Definition
1
Term
the economy has a recessionary gap
Definition
Y
Term
expansionary fiscal policy
Definition
1) increases output and lowers unemployment
2) increase govt spending, and lower taxes
3) associated with recessionary gap
Term
contractionary fiscal policy
Definition
1) increase T, lower G
2) Y>potential GDP
Term
monetary policy goals
Definition
1) full employment
2) stable prices
3) moderate business cycle fluctuations
4) promote long run economic growth
Term
monetary policy tools
Definition
1) required reserve ratio (r)
2) discount rate
3) open market operations
Term
increasing r
Definition
ER decreases and money decreases
Term
discount rate
Definition
interest rate charged by the fed for banks to borrow funds overnight
1) increase D.R. banks borrow less, ER and money decreases
Term
open market operations
Definition
federal open market committee directs NY fed to buy and sell bonds
1) buying bonds: bonds in banks decrease and reserves increase, ER increases and so does money
Term
interest rates represent
Definition
the cost to borrow $1 for 1 year
Term
federal funds rate
Definition
annualized rate bankers pay to borrow $1 overnight from another bank
Term
if AD increases
Definition
so will GDP and employment
Term
to find change in investment
Definition
(gap)/(expenditure multiplier)
Term
if excess reserves increase...
Definition
banks lend more to firms to buy capital goods (I increases)
Term
if interest rates decrease...
Definition
firms borrow more funds to fund purchases of capital goods (I increases)
Term
to close a recessionary gap
Definition
1) decrease the required reserve ratio
2) decrease the discount rate
3) buy us bonds from banks
Term
to close the inflationary gap, the fed can...
Definition
1)increase the required reserve ratio
2) increase the federal funds rate
3) sell US bonds
Term
balance of payments
Definition
records an economies trading, borrowing and lending: in the US, the BOP records the transactions in the goods sector and the financial sector
Term
3 BOP accounts
Definition
1) current account
2) capital account
3) official settlements account
Term
current account
Definition
(net exports)+(net interest income)+(net transfers)=CA
Term
capital account
Definition
(foreign US investment)-(US investment abroad)=capital accounts
Term
official settlements account
Definition
(change in US foreign exchange holdings)
Term
the capital account records
Definition
the difference between foreign purchases of US assets and the US purchases of foreign assets
Term
official settlements account represents
Definition
US investment abroad in foreign money less the holdings in the US $ by foreigners
Term
exchange rates
Definition
is the price of one currency in terms of another currency
Term
appreciation
Definition
occurs when there is an increase in purchasing power relative to another currency
Term
depreciation
Definition
increases AD, causing AE to raise, and US price levels to rise along with GDP increasing and unemployment falling
Term
demand for foreign currencies increase if:
Definition
1) us interest rates are lower relative to the rest of the world
2) us GDP growth is higher
3) US inflation is higher
Term
supply of foreign currencies increase if:
Definition
1) US interest rates increase relative to the rest of the world
Term
aggregate expenditures
Definition
spending on final goods in an economy
1) AE=C+I+G+(X-M)
Term
AE equilibrium
Definition
when GDP=AE
Term
aggregate supply
Definition
value of domestic product produced by firms at each given price level
Term
factors of AS
Definition
1) price level movement along curve
2) input prices increase, profit rates fall, AS shifts to left
3) nominal wages increase, profits lower, AS shifts to the left
4) better technology-increase labor productivity, increase profit rates, increase AS
5) additional resources, AS increases
Term
macroeconomic equilibrium
Definition
where AS and AD meet
Term
potential GDP
Definition
1) GDP at full employment
2) represented by straight line up and down
3) independent of input prices-no movement
4) nominal wages-no impact/movement
5) technology-shift to right
6) better resources-shift to right
Term
output gaps (inflationary gap)
Definition
1) Real GDP>Potential GDP
2) nominal wages increase
3) aggregate supply decreases-increase in unemployment
4) aggregate expenditure decreases
Term
output gaps (recessionary gap)
Definition
1) real GDP
Term
impact of inflation on the multiplier
Definition
1) inflation reduces impact of multiplier
2) some spending power is lost as prices increase
Term
money is...
Definition
1) convenient
2) eliminates barter and need for a double coincidence of wants
3) reduces transaction costs
4) increases division of labor and labor specialization
Term
does money have a store value
Definition
yes
Term
required reserves ratio
Definition
state bank regulation that sets the minimum reserves each bank must hold to customer deposits and notes
Term
the fed
Definition
1) US central banking system
2) national banks are required to join the system
3) fed is owned by its member banks
Term
the fed does..
Definition
1) provide the money supply
2) regulate interest rates
3) set required reserve ratio
Term
federal open market committee
Definition
1) controls the federal funds rate-interest rate which banks borrow from and lend to each other
2) directs the NY fed to buy and sell bonds
3) buy bonds: bonds in banks decrease and reserves increase, so ER increases and so does money
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