ECON202

Start Studying!

Terms

undefined, object

copy deck

GDP deflator: A price index that reveals the cost during the current period of purchasing the items included in GDP relative to the cost during a base year (currently 2000). Unlike the consumer price index (CPI), the GDP deflator also measures the prices of capital goods and other goods and services purchased by businesses and governments. Because of this, it is thought to be a more accurate measure of changes in the general level of prices than the CPI.
Business cycle: Fluctuations in the general level of economic activity as measured by variables such as the rate of unemployment and changes in real GDP.
Net exports: Exports minus imports.
Discount rate: The interest rate the Federal Reserve charges banking institutions for borrowing funds.
Liquid asset: An asset that can be easily and quickly converted to purchasing power.
Employment/population ratio: The number of people sixteen years of age and over employed as civilians divided by the total civilian population sixteen years of age and over. The ratio is expressed as a percentage.
Aggregate supply curve: The curve showing the relationship between a nation's price level and the quantity of goods supplied by its producers. In the short run, it is an upward-sloping curve, but in the long run the aggregate supply curve is vertical.
Monetary policy: The deliberate control of the money supply, and, in some cases, credit conditions, for the purpose of achieving macroeconomic goals.
Quantity theory of money: A theory that hypothesizes that a change in the money supply will cause a proportional change in the price level because velocity and real output are unaffected by the quantity of money.
Frictional unemployment: Unemployment due to constant changes in the economy that prevent qualified unemployed workers from being immediately matched up with existing job openings. It results from imperfect information and search activities related to suitably matching employees with employers.
Trade deficit: The situation when a country's imports of goods and services are greater than its exports.
Real balance effect: The increase in wealth that occurs when the price level falls and the purchasing power of money increases (assuming the supply of money in the economy is stable). The wealth effect leads to an inverse relationship between price (level) and quantity demanded in the goods and services market: when the price level falls, people will demand more goods and services.
Monetarists: Economists who believe that (1) monetary instability is the major cause of fluctuations in real GDP and (2) rapid growth of the money supply is the major cause of inflation.
Phillips curve: A curve that illustrates the relationship between the rate of inflation and the rate of unemployment.
Unanticipated inflation: An increase in the general level of prices that was not expected by most decision makers.
Real values: Values that have been adjusted for the effects of inflation.
Rational-expectations hypothesis: The hypothesis that economic decision makers weigh all available evidence, including information concerning the probable effects of current and future economic policy, when they form their expectations about future economic events (such as the probable future inflation rate).
Natural rate of unemployment: The "normal" unemployment rate due to frictional and structural conditions in labor markets. It is the unemployment rate that occurs when the economy is operating at a sustainable rate of output. The current natural rate of unemployment in the United States is thought to be approximately 5 percent.
Loanable funds market: A general term used to describe the market that coordinates the borrowing and lending decisions of business firms and households. Commercial banks, savings and loan associations, the stock and bond markets, and insurance companies are important financial institutions in this market.
Balance of payments: A summary of all economic transactions between a country and all other countries for a specific time period, usually a year. The balance-of-payments account reflects all payments and liabilities to foreigners (debits) and all payments and obligations received from foreigners (credits).
Import quota: A specific limit or maximum quantity (or value) of a good permitted to be imported into a country during a given period.
Fiscal policy: The use of government taxation and expenditure policies for the purpose of achieving macroeconomic goals.
Other checkable deposits: Interest-earning deposits that are also available for checking.
Unemployment rate: The percentage of people in the labor force who are unemployed. Mathematically, it is equal to number of people unemployed divided by the number of persons in the labor force.
Inflation: A continuing rise in the general level of prices of goods and services. The purchasing power of the monetary unit, such as the dollar, declines when inflation is present.
Real GDP: GDP adjusted for changes in the price level.
Deposit expansion multiplier: The multiple by which an increase in reserves will increase the money supply. It is inversely related to the required reserve ratio.
Adaptive-expectations hypothesis: The hypothesis that economic decision makers base their future expectations on actual outcomes observed during recent periods. For example, according to this view, the rate of inflation actually experienced during the past two or three years would be the major determinant of the rate of inflation expected for the next year.
Currency: Medium of exchange made of metal or paper.
Exports: Goods and services produced domestically but sold to foreigners.
International Monetary Fund (IMF): An international banking organization, currently with more than 180 member nations, designed to oversee the operation of the international monetary system. Although it does not control the world supply of money, it does hold currency reserves for member nations and makes currency loans to national central banks.
Central bank: An institution that regulates the banking system and controls the supply of a country's money.
Inventory investment: Changes in the stock of unsold goods and raw materials held during a period.
Classical economists: Economists from Adam Smith to the time of Keynes who focused their analyses on economic efficiency and production. With regard to business instability, they thought market prices and wages would decline during a recession quickly enough to bring the economy back to full employment within a short period of time.
Productivity: The average output produced per worker during a specific time period. It is usually measured in terms of output per hour worked.
Expansionary monetary policy: A shift in monetary policy designed to stimulate aggregate demand. Bond purchases by the Fed, the creation of additional bank reserves, and an increase in the growth rate of the money supply generally indicate a shift to a more expansionary monetary policy.
Balance of merchandise trade: The difference between the value of merchandise exports and the value of merchandise imports for a nation. It is also called simply the balance of trade or net exports. The balance of merchandise trade is only one component of a nation's total balance of payments and its current account.
Discretionary fiscal policy: A change in laws or appropriation levels that alters government revenues and/or expenditures.
Marginal propensity to consume (MPC): Additional current consumption divided by additional current disposable income.
Unit of account: A unit of measurement used by people to post prices and keep track of revenues and costs.
Comparative advantage: The ability to produce a good at a lower opportunity cost than others can produce it. Relative costs determine comparative advantage.
Recession: A downturn in economic activity characterized by declining real GDP and rising unemployment. In an effort to be more precise, many economists define a recession as two consecutive quarters in which there is a decline in real GDP.
Consumer sentiment index: A measure of the optimism of consumers based on their responses to a set of five questions about their current and expected future personal economic situation. Conducted by the University of Michigan, it is based on a representative sample of U.S. households.
Activists: Economists who believe that discretionary changes in monetary and fiscal policy can reduce the degree of instability in output and employment.
Inflationary premium: A component of the money interest rate that reflects compensation to the lender for the expected decrease, due to inflation, in the purchasing power of the principal and interest during the course of the loan. It is determined by the expected rate of future inflation.
General Agreement on Tariffs and Trade (GATT): An organization formed after the Second World War to set the rules for the conduct of international trade and reduce trade barriers among nations.
Foreign exchange market: The market in which the currencies of different countries are bought and sold.
Recognition lag: The time period after a policy change is needed from a stabilization standpoint but before the need is recognized by policy makers.
Nominal GDP: GDP expressed at current prices. It is often called money GDP.
Civilian labor force: The number of people sixteen years of age and over who are either employed or unemployed. To be classified as unemployed, a person must be looking for a job.
Potential output: The level of output that can be achieved and sustained in the future, given the size of the labor force, its expected productivity, and the natural rate of unemployment consistent with the efficient operation of the labor market. Actual output can differ from the economy's potential output.
Imports: Goods and services produced by foreigners but purchased by domestic consumers, businesses, and governments.
Excess reserves: Actual reserves that exceed the legal requirement.
Pegged exchange rate system: A commitment to use monetary and fiscal policy to maintain the exchange rate value of the domestic currency at a fixed rate or within a narrow band relative to another currency (or bundle of currencies).
Impact lag: The time period after a policy change is implemented but before the change begins to exert its primary effects.
Nonactivists: Economists who believe that discretionary macroeconomic policy adjustments in response to cyclical conditions are likely to increase, rather than reduce, instability. Nonactivitsts favor steady and predictable policies regardless of business conditions.
Demand for money: A curve that indicates the relationship between the interest rate and the quantity of money people want to hold. Because higher interest rates increase the opportunity cost of holding money, the quantity of money demanded will be inversely related to the interest rate.
Depository institutions: Businesses that accept checking and savings deposits and use a portion of them to extend loans and make investments. Banks, savings and loan associations, and credit unions are examples.
Final market goods and services: Goods and services purchased by their ultimate user.
Real interest rate: The interest rate adjusted for expected inflation; it indicates the real cost of borrowing and lending money after inflation has been factored in.
Labor force participation rate: The number of people in the civilian labor force sixteen years of age or over who are either employed or actively seeking employment as a percentage of the total civilian population sixteen years of age and over.
Budget surplus: A situation in which total government spending is less than total government revenue during a time period, usually a year.
Federal Deposit Insurance Corporation (FDIC): A federally chartered corporation that insures the deposits held by commercial banks, savings and loans, and credit unions.
Money interest rate: The percentage of the amount borrowed that must be paid to the lender in addition to the repayment of the principal. The money interest rate overstates the real cost of borrowing during an inflationary period. When inflation is anticipated, an inflationary premium will be incorporated into this rate. The money interest rate is often called the nominal interest rate.
Balance on current account: The import-export balance of goods and services, plus net investment income earned abroad, plus net private and government transfers. If the value of the nation's export-type items exceeds the value of the nation's import-type items plus net unilateral transfers to foreigners, a current-account surplus is present. If the value of a nation's export-type items is less than the value of the nation's import-type items plus net unilateral transfers to foreigners, a current-account deficit is present.
Balance on goods and services: The exports of goods (merchandise) and services of a nation minus its imports of goods and services.
Less-developed countries (LDCs): Low-income countries generally characterized by rapid population growth and an agriculture-household sector that dominates the economy. Sometimes these countries are referred to as developing countries.
Technological advancement: The introduction of new techniques or methods that increase output per unit of input.
Full employment: The level of employment that results from the efficient use of the labor force taking into account the normal (natural) rate of unemployment due to information cost, dynamic changes, and the structural conditions of the economy. For the United States, full employment is thought to exist when approximately 95 percent of the labor force is employed.
Trade surplus: The situation when a country's exports of goods and services are greater than its imports.
Ricardian equivalence: The view that a tax reduction financed with government debt will exert no effect on current consumption and aggregate demand because people will fully recognize the higher future taxes implied by the additional debt.
Consumption function: The fundamental relationship between disposable income and consumption. When disposable income increases, current consumption expenditures rise, but by a smaller amount than the increase in income.
Equation of exchange: MV = PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is the output of goods and services produced in an economy.
Anticipated change: A change that is foreseen by decision makers in time for them to make adjustments.
Monetary base: The sum of currency in circulation plus bank reserves (vault cash and reserves with the Fed). It reflects the stock of U.S. securities held by the Fed.
Resource market: A highly aggregated market encompassing all resources (labor, physical capital, land, and entrepreneurship) contributing to the production of current output. The labor market is the largest component of this market.
Solow Growth Model (Depreciation): dK: decrease in capital
Credit: Funds acquired by borrowing.
Federal Open Market Committee (FOMC): A committee of the Federal Reserve system that establishes Fed policy with regard to the buying and selling of government securities—the primary mechanism used to control the money supply. It is composed of the seven members of the Board of Governors and the twelve district bank presidents of the Fed.
Bank reserves: Vault cash plus deposits of banks with Federal Reserve banks.
Restrictive fiscal policy: A reduction in government expenditures and/or an increase in tax rates such that the expected size of the budget deficit declines (or the budget surplus increases).
Solow Growth Model (Production Function): y = f(k) output per worker(income) k: capital per worker increasing in k with a decreasing rate
Fractional reserve banking: A system that permits banks to hold reserves of less than 100 percent against their deposits.
Unanticipated change: A change that decision makers could not reasonably foresee. The choices they made prior to the change did not take it into account.
Expansionary fiscal policy: An increase in government expenditures and/or a reduction in tax rates such that the expected size of the budget deficit expands.
Escalator clause: A contractual agreement that periodically and automatically adjusts money wage rates upward as the price level rises. It is sometimes referred to as a cost-of-living adjustment, or COLA.
Goods and services market: A highly aggregated market encompassing the flow of all final-user goods and services. The market counts all items that enter into GDP. Thus, real output in this market is equal to real GDP.
Depression: A prolonged and very severe recession.
Intermediate goods: Goods purchased for resale or for use in producing another good or service.
Depreciation: A reduction in the value of a currency relative to foreign currencies. A depreciation reduces the purchasing power of the currency over foreign goods.
World Trade Organization (WTO): The new name given to GATT in 1994; the WTO is currently responsible for monitoring and enforcing multilateral trade agreements among its 133 member countries.
Depreciation: The estimated amount of physical capital (for example, machines and buildings) that is worn out or used up producing goods during a period.
Restrictive monetary policy: A shift in monetary policy designed to reduce aggregate demand and put downward pressure on the general level of prices (or the rate of inflation). Bond sales by the Fed, a decline in bank reserves, and a reduction in the growth rate of the money supply generally indicate a shift to a restrictive monetary policy.
Appreciation: An increase in the value of the domestic currency relative to foreign currencies. An appreciation makes foreign goods cheaper for domestic residents.
Private investment: The flow of private-sector expenditures on durable assets (fixed investment) plus the addition to inventories (inventory investment) during a period. These expenditures enhance our ability to provide consumer benefits in the future.
Absolute advantage: A situation in which a nation, as the result of its previous experience and/or natural endowments, can produce more of a good (with the same amount of resources) than another nation.
National income: The total income earned by a country's nationals (citizens) during a period. It is the sum of employee compensation, self-employment income, rents, interest, and corporate profits.
Anticipated inflation: An increase in the general level of prices that was expected by most decision makers.
Credit unions: Financial cooperative organizations of individuals with a common affiliation (such as an employer or a labor union). They accept deposits, including checkable deposits, pay interest (or dividends) on them out of earnings, and lend funds primarily to members.
Rule of 70: If a variable grows at a rate of x percent per year, 70/x will approximate the number of years required for the variable to double.
Fiat money: Money that has neither intrinsic value nor the backing of a commodity with intrinsic value; paper currency is an example.
Equilibrium: A balance of forces permitting the simultaneous fulfillment of plans by buyers and sellers.
M2 (money supply): Equal to M1 plus (1) savings deposits, (2) time deposits (accounts of less than $100,000) held in depository institutions, and (3) money market mutual fund shares.
Underground economy: Unreported barter and cash transactions that take place outside recorded market channels. Some are otherwise legal activities undertaken to evade taxes. Others involve illegal activities, such as trafficking drugs and prostitution.
Administrative lag: The time period after the need for a policy change is recognized but before the policy is actually implemented.
Countercyclical policy: A policy that tends to move the economy in an opposite direction from the forces of the business cycle. Such a policy would stimulate demand during the contraction phase of the business cycle and restrain demand during the expansion phase.
Tariff: A tax levied on goods imported into a country.
Current account: The record of all transactions with foreign nations that involve the exchange of merchandise goods and services, current income derived from investments, and unilateral gifts.
per capita GDP: Income per person. Increases in income per person are vital for the achievement of higher living standards.
Solow Growth Model (Amount of Saving): sY: increase in capital
Net income of foreigners: The income that foreigners earn by contributing labor and capital resources to the production of goods within the borders of a country minus the income the nationals of the country earn abroad.
Store of value: An asset that will allow people to transfer purchasing power from one period to the next.
Budget deficit: A situation in which total government spending exceeds total government revenue during a specific time period, usually one year.
Federal Reserve System: The central bank of the United States; it carries out banking regulatory policies and is responsible for the conduct of monetary policy.
Gross national product (GNP): The total market value of all final goods and services produced by the citizens of a country. It is equal to GDP minus the net income of foreigners.
Official reserve account: The record of transactions between central banks.
Saving: The portion of after-tax income that is not spent on consumption. Saving is a "flow" concept.
Indirect business taxes: Taxes that increase a business firm's costs of production and, therefore, the prices charged to consumers. Examples are sales, excise, and property taxes.
Consumer price index (CPI): An indicator of the general level of prices. It attempts to compare the cost of purchasing the market basket bought by a typical consumer during a specific period to the cost of purchasing the same market basket during an earlier period.
M1 (money supply): The sum of (1) currency in circulation (including coins), (2) checkable deposits maintained in depository institutions, and (3) traveler's checks.
Depreciation: A reduction in the value of the domestic currency relative to foreign currencies. A depreciation makes foreign goods more expensive for domestic residents.
Structural unemployment: Unemployment due to the structural characteristics of the economy that make it difficult for job seekers to find employment and for employers to hire workers. Although job openings are available, they generally require skills many unemployed workers do not have.
Personal consumption: Household spending on consumer goods and services during the current period. Consumption is a flow concept.
Crowding-out effect: A reduction in private spending as a result of higher interest rates generated by budget deficits that are financed by borrowing in the private loanable funds market.
Federal funds market: A loanable funds market in which banks seeking additional reserves borrow short-term funds (generally for seven days or less) from banks with excess reserves. The interest rate in this market is called the federal funds rate.
Unemployed: The term used to describe a person not currently employed who is either (1) actively seeking employment or (2) waiting to begin or return to a job.
Cyclical unemployment: Unemployment due to recessionary business conditions and inadequate labor demand.
Foreign exchange market: The market in which the currencies of different countries are bought and sold.
Autonomous expenditures: Expenditures that do not vary with the level of income. They are determined by factors (such as business expectations and economic policy) that are outside the basic aggregate expenditure model.
Supply-side economists: Modern economists who believe that changes in marginal tax rates exert important effects on aggregate supply.
Flexible exchange rates: Exchange rates that are determined by the market forces of supply and demand. They are sometimes called floating exchange rates.
Permanent income hypothesis: The hypothesis that people's consumption depends on their long-run expected (permanent) income rather than their current income.
Currency board: An entity that (1) issues a currency with a fixed designated value relative to a widely accepted currency (for example, the U.S. dollar), (2) promises to continue to redeem the issued currency at the fixed rate, and (3) maintains bonds and other liquid assets denominated in the other currency that provide 100 percent backing for all currency issued.
Required reserves: The minimum amount of reserves that a bank is required by law to keep on hand to back up its deposits. If reserve requirements were 15 percent, banks would be required to keep $150,000 in reserves against each $1 million of deposits.
Balanced budget: A situation in which current government revenue from taxes, fees, and other sources is just equal to current government expenditures.
Dumping: Selling a good in a foreign country at a lower price than it's sold for in the domestic market.
Demand deposits: Non-interest-earning checking deposits that can be either withdrawn or made payable on demand to a third party. Like currency, these deposits are widely used as a means of payment.
Potential deposit expansion multiplier: The maximum potential increase in the money supply as a ratio of the new reserves injected into the banking system. It is equal to the inverse of the required reserve ratio.
Appreciation: An increase in the value of a currency relative to foreign currencies. An appreciation increases the purchasing power of the currency over foreign goods.
Capital account: The record of transactions with foreigners that involve either (1) the exchange of ownership rights to real or financial assets or (2) the extension of loans.
Commercial banks: Financial institutions that offer a wide range of services (for example, checking accounts, savings accounts, and loans) to their customers. Commercial banks are owned by stockholders and seek to operate at a profit.
Expenditure multiplier: The ratio of the change in equilibrium output to the independent change in investment, consumption, or government spending that brings about the change. Numerically, the multiplier is equal to 1 divided by (1 - MPC) when the price level is constant.
Fixed exchange rate: An exchange rate that is set at a determined amount by government policy.
Money supply: The supply of currency, checking account funds, and traveler's checks. These items are counted as money because they are used as the means of payment for purchases.
Gross domestic product (GDP): The market value of all final goods and services produced within a country during a specific period.
Index of leading indicators: An index of economic variables that historically has tended to turn down prior to the beginning of a recession and turn up prior to the beginning of a business expansion.
Required reserve ratio: A percentage of a specified liability category (for example, checkable deposits) that banking institutions are required to hold as reserves against that type of liability.
Open market operations: The buying and selling of U.S. government securities in the open market by the Federal Reserve.
Savings and loan associations: Financial institutions that accept deposits in exchange for shares that pay dividends. Historically, these funds were channeled into residential mortgage loans. Under banking legislation adopted in 1980, S&Ls are permitted to offer a broad range of services similar to those of commercial banks.
Money market mutual funds: Interest-earning accounts offered by brokerage firms that pool depositors' funds and invest them in highly liquid short-term securities. Since these securities can be quickly converted to cash, depositors are permitted to write checks (which reduce their share holdings) against their accounts.
North American Free Trade Agreement (NAFTA): A comprehensive trade agreement between the United States, Mexico, and Canada that went into effect in 1994. Under the agreement, tariff barriers were to continue to be phased out until 2004.
Supply shock: An unexpected event that temporarily increases or decreases aggregate supply.
New classical economists: Economists who believe that there are strong forces pushing a market economy toward full-employment equilibrium and that macroeconomic policy is an ineffective tool with which to reduce economic instability.
Nominal values: Values expressed in current dollars.
Automatic stabilizers: Built-in features that tend automatically to promote a budget deficit during a recession and a budget surplus during an inflationary boom, even without a change in policy.

Start Studying!

Deck Info

Number of cards 155