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Macroeconomics
Harvard Ec10 Macro
127
Economics
Undergraduate 1
05/09/2010

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Term
microeconomics
Definition
the study of how households and firms make decisions and how they interact in markets
Term
macroeconomics
Definition
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
Term
GDP
Definition
gross domestic product- the market value of all final goods and services produced within a country in a given time period
Term
consumption
Definition
spending by households on goods and services, with the exception of purchasing of new housing
Term
investment
Definition
spending on capital equipment, inventories, and structures, including household purchasing of new housing
Term
government purchases
Definition
spending on goods and services by local, state, and federal governments
Term
net exports
Definition
spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)
Term
nominal GDP
Definition
the production of goods and services valued at current prices
Term
real GDP
Definition
the production of goods and services valued at constant prices
Term
GDP deflator
Definition
a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100
Term
CPI
Definition
consumer price index- a measure of the overall cost of the goods and services bought by a typical consumer
Term
inflation rate
Definition
the percentage change in the price index from the preceding period
Term
producer price index
Definition
a measure of the cost of a basket of goods and services bought by firms
Term
indexation
Definition
the automatic correction by law or contract of a dollar amount for the effects of inflation
Term
nominal interest rate
Definition
the interest rate as usually reported without a correction for the effects of inflation
Term
real interest rate
Definition
the interest rate corrected for the effects of inflation
Term
productivity
Definition
the quantity of goods and services produced from each unit of labor input
Term
physical capital
Definition
the stock of equipment and structure that are used to produce goods and services
Term
human capital
Definition
the knowledge and sills that workers acquire through education, training, and experience
Term
natural resources
Definition
the inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits
Term
technological knowledge
Definition
society's understanding of the best ways to produce goods and services
Term
diminishing returns
Definition
the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases
Term
catch-up effect
Definition
the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
Term
financial system
Definition
the group of institutions in the economy that help to match one person's saving with another person's investment
Term
financial markets
Definition
financial institutions though which savers can directly provide funds for borrowers
Term
bond
Definition
a certificate of indebtedness
Term
stock
Definition
a claim to partial ownership in a firm
Term
financial intermediaries
Definition
financial institutions through which savers can indirectly provide funds to borrowers
Term
mutual fund
Definition
an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds
Term
national saving
Definition
the total income in the economy that remains after paying for consumption and government purchases
Term
private saving
Definition
the income that households have left after paying for taxes and consumption
Term
public saving
Definition
the tax revenue that the government has left after paying for its spending
Term
budget surplus
Definition
an excess of tax revenue over government spending
Term
budget deficit
Definition
a shortfall of tax revenue from government spending
Term
market for loanable funds
Definition
the market in which those who want to save supply funds and those who want to borrow to invest demand funds
Term
crowding out
Definition
a decrease in investment that results from government borrowing
Term
finance
Definition
the field of studies that shows how people make decisions regarding the allocation of resources over time and the handling of risk
Term
present value
Definition
the amount of money today that would be needed, using prevailing interest rates, to produce a given future amount of money
Term
future value
Definition
the amount of money in the future than an amount of money today will yield, given prevailing interest rates
Term
compounding
Definition
the accumulation of a sum of money in, say, a bank account, where the interest earned remains in the account to earn additional interest in the future
Term
risk aversion
Definition
a dislike of uncertainty
Term
diversification
Definition
the reduction of risk achieved by replacing a single risk with a number of smaller, unrelated risks
Term
firm-specific risk
Definition
risk that affects only a single company
Term
market risk
Definition
risk that affects all companies in the stock market
Term
fundamental analysis
Definition
the study of a company's accounting statements and future prospects to determine its value
Term
efficient markets hypothesis
Definition
the theory that asset prices reflect all publicly available information about the value of an asset
Term
informational efficiency
Definition
the description of asset prices that rationally reflect all available information
Term
random walk
Definition
the path of a variable whose changes are impossible to predict
Term
labor force
Definition
the total number of workers, including both the employed and unemployed
Term
unemployment rate
Definition
the percentage of the labor force that is unemployed
Term
labor-force participation rate
Definition
the percentage of the adult population that is in the labor force
Term
natural rate of unemployment
Definition
the normal rate of unemployment around which the unemployment rate fluctuates
Term
cyclical unemployment
Definition
the deviation of unemployment from its natural rate
Term
discouraged workers
Definition
individuals who would like to work but have given up looking for a job
Term
frictional unemployment
Definition
unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills
Term
structural unemployment
Definition
unemployment that results because the number of jobs available is insufficient to provide a job for everyone who wants one
Term
job search
Definition
the process by which workers find appropriate jobs given their tastes and skills
Term
unemployment insurance
Definition
a government program that partially protects workers' incomes when they become unemployed
Term
union
Definition
a worker association that bargains with employers over wages, benefits, and working conditions
Term
collective bargaining
Definition
the process by which unions and firms agree on the terms of employment
Term
strike
Definition
the organized withdrawal of labor from a firm by a union
Term
efficiency wages
Definition
above-equilibrium wages paid by firms to increase worker productivity
Term
money
Definition
the set of assets in an economy that people regularly use to buy goods and services from other people
Term
medium of exchange
Definition
an item that buyers give to sellers when they want to purchase goods and services
Term
unit of account
Definition
the yardstick people use to post prices and record debts
Term
store of value
Definition
an item that people can use to transfer purchasing power from the present to the future
Term
liquidity
Definition
the ease with which an asset can be converted into the economy's medium of exchange
Term
commodity money
Definition
money that takes the form of a commodity with intrinsic value (eg. gold)
Term
fiat money
Definition
money without intrinsic value that is used as money because of government decree
Term
currency
Definition
the paper bills and coins in the hands of the public
Term
demand deposits
Definition
balances in bank accounts that depositors can access on demand by writing a check
Term
Federal Reserve (the Fed)
Definition
the central bank of the US
Term
central bank
Definition
an institution designed to oversee the banking system and regulate the quantity of money in the economy
Term
money supply
Definition
the quantity of money available in the economy
Term
monetary policy
Definition
the setting of the money supply by policymakers in the central bank
Term
reserves
Definition
deposits that banks have received but have not loaned out
Term
fractional-reserve banking
Definition
a banking system in which banks hold only a fraction of deposits as reserves
Term
reserve ratio
Definition
the fraction of deposits that banks hold as reserves
Term
money multiplier
Definition
the amount of money the banking system generates with each dollar of reserves
Term
open-market operations
Definition
the purchase and sale of US government bonds by the Fed
Term
reserve requirements
Definition
regulations on the minimum amount of reserves that banks must hold against deposits
Term
discount rate
Definition
the interest rate on the loans that the Fed makes to banks
Term
federal funds rate
Definition
the interest rate at which banks make overnight loans to one another
Term
quantity theory of money
Definition
a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
Term
nominal variables
Definition
variables measured in monetary units
Term
real variables
Definition
variables measured in physical units
Term
classical dichotomy
Definition
the theoretical separation of nominal and real variables
Term
monetary neutrality
Definition
the proposition that changes in the money supply do not affect real variables
Term
velocity of money
Definition
the rate at which money changes hands
Term
quantity equation
Definition
the equation M*V=P*Y relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services
Term
inflation tax
Definition
the revenue the government raises by creating money
Term
Fisher effect
Definition
the one-for-one adjustment of the nominal interest rate to the inflation rate
Term
shoeleather costs
Definition
the resources wasted when inflation encourages people to reduce their money holdings
Term
menu costs
Definition
the costs of changing prices
Term
closed economy
Definition
an economy that does not interact with other economies in the world
Term
open economy
Definition
an economy that interacts freely with other economies around the world
Term
exports
Definition
goods and services that are produced domestically and sold abroad
Term
imports
Definition
goods and services that are produced abroad and sold domestically
Term
net exports
Definition
the value of a nation's exports minus the value of its imports; also called the trade balance
Term
trade balance
Definition
the value of a nation's exports minus the value of its imports; also called net exports
Term
trade surplus
Definition
an excess of exports over imports
Term
trade deficit
Definition
an excess of imports over exports
Term
balanced trade
Definition
a situation in which exports equal imports
Term
net capital outflow
Definition
the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners
Term
nominal exchange rate
Definition
the rate at which a person can trade the currency of one country for the currency of another
Term
appreciation
Definition
an increase in the value of a currency as measured by the amount of foreign currency it can buy
Term
depreciation
Definition
a decrease in the value of a currency as measured by the amount of foreign currency it can buy
Term
real exchange rate
Definition
the rate at which a person can trade the goods and services of one country for the goods and services of another
Term
purchasing-power parity
Definition
a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries
Term
trade policy
Definition
a government policy that directly influences the quantity of goods and services that a country imports or exports
Term
capital flight
Definition
a large and sudden reduction in the demand for assets located in a country
Term
recession
Definition
a period of declining real incomes and rising unemployment
Term
depression
Definition
a severe recession
Term
model of aggregate demand and aggregate supply
Definition
the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend
Term
aggregate demand curve
Definition
a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level
Term
aggregate supply curve
Definition
a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level
Term
stagflation
Definition
a period of falling output and rising prices
Term
theory of liquidity preference
Definition
Keynes's theory that the inerest rate adjusts to bring money supply and money demand into balance
Term
fiscal policy
Definition
the setting of the level of government spending and taxation by government policymakers
Term
multiplier effect
Definition
the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending
Term
crowding-out effect
Definition
the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending
Term
automatic stabilizers
Definition
changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action
Term
Phillips curve
Definition
a curve that shows the short-run trade-off between inflation and unemployment
Term
natural-rate hypothesis
Definition
the claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation
Term
supply shock
Definition
an event that directly alters firms' costs and prices, shifting the economy's aggregate supply curve and thus the Phillips curve
Term
sacrifice ratio
Definition
the number of percentage points of annual output lost in the process of reducing inflation by one percent
Term
rational expectations
Definition
the theory that people optimally use all the information they have, including information about government policies, when forecasting the future
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