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macroeconomics - frank 2E



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change in quantity demanded
a movement along the demand curve that occurs in response to a change in price
net exports
exports minus imports
anticipated inflation
when the rate of inflation turns out to be roughly what most people expected
the debts one owes
store of value
an asset that serves as a means of holding wealth
gross national product (GNP)
the market value of goods and services produced by factors of production owned by the residents of a country
nominal interest rate
the type of interest rate you usually encounter in everyday life - the price paid per dollar borrowed per year
any firm, the market value of its product or service minus the cost of inputs purchased from other firms
inferior good
a good whose demand curve shifts leftward when the incomes of buyers increase
unemployment rate
the number of unemployed people divided by the labour force
menu costs
the costs of changing prices
zero inflation
when the price level stays roughly constant from one year to the next
diminishing returns to capital
if the amount of labour and other inputs employed is held constant, then the greater the amount of capital already in use, the less an additional unit of capital will tend to add to production
risk premium
the rate of return that financial investors require to hold risky assets minus the rate of return on safe assets
real quantity
quantity that is measured i constand dollar terms
units of output per hour divided by units of input per hour
expansionary policies
gov't policy actions intended to increase planned spending and output
excess demand (shortage)
when the price od good lies below the equilibrium price; buyers are dissatisfied when there is excess demand
moderate inflation
typically means inflation between 3 and 6 percent per year
trad deficit
when imports exceed exports -- the difference between the value of a country's imports and the value of its exports in a given period
constant (parameter)
a quantity that is fixed in value
excess supply (surplus)
when the prices of a good exceeds the equilibrium price
unit of account
a basic measure of economic value
a measure that is defined at a point in time
capital outflows
purchases of foreign assets by domestic households and firms
reserve-deposit raito
bank reserves divided by deposits
nominal quantity
a quantity that is measured in terms of its current dollar value
deflating (a nominal quantity)
the process of dividing a nominal quantity by a price index 9such as the CPI) to express the quantity in real terms
final goods and services
goods or services consumed by the ultimate user
a mathematical expression that describes the relationship between 2 or more variables
a term that refers to both gov't transger payments and interest payments on the public debt
expansionary gap
a negative output gap, which occurs when actual output is higher than potential output
fractional-reserve baning system
a banking system in which bank reserves are less than depostis so that the reserve-deposit ratio is less than 100 percent
relative price
the price of specific good or service in comparions to the prices of other good and services
life-cycle saving
saving to meet long-term objectives, such as retirement, unitveristy attendance, or the purchase of a home
The Scarcity Problem
Although we have boundless needs and wants, the resources available to us are limited. Scarcity means that we have to make choices - having more of one good thing usually means having less of another
macroeconomic policies
government actions designed to affect the performance of the economy as a whole
foreign exchange rate
the price of one unit of a country's currency in terms of another country's currency. Foreign exchange rates are determined in foreign exchange markets
discretionary fiscal policy
changes in gov't spending and taxation deliberately made to stabilize planned aggregate expenditure
vertical intercept
in a straight line, the value taken by the dependent variable when the independent variable equals zero
rational person
someone with well-defined goals who tries to fulfill those goals as best as he or she can
gross investment
the sum of private-sector and gov't investments
the direct trade of goods or services for other goods or services
change in supply
a shift of the entire supply curve
independent variable
a variable in an equation whose value determines the value taken by another variable in the equation
real GDP
a measure of GDP in which the quantities produced are valued at the prices in a base year rather than at current prices
monetary policy
central bank management of interest rates to acieve macroeconomic objectives
efficient quantity
the quantity that results in the maximum possible economic surplus from producing and consuming the good
trade balance (or net exports)
the alue of a country's exports less the value of its imports in a particulat period (quarter or year)
anything of value that one owns
The Efficiency Principle
Economic efficiency occurs when total economic surplus is maximized. Efficiency is an important social goal, because when the economic pie grows larger, everyone can potentially have a larger slice
open economy loanable funds model
a theory of real interest rate determination for an economy open to international capital flows
present value (PV)
the value of a sum of money today -- that is the value in the current or initial period
current account
the record of payments and receipts arising from trde in goods and services, frominternational investment income, and from international investment income, and from international transfers
fiscal policy
decisions that determine the gov'ts budget, including the amount and composition of gov't expenditures and gov't revenues
any asset that can be used as means of payment for purchases andn to settle debts
commodity money
an asset with intrinsic value, such as a gold or silver coin, that is generally accepted as a means of payment for purchases and settling debts
The Equilibrium Principle
A market in equilibrium leaves no unexploited opportunities for individuals but may bot exploit all gains achievable through collective action
downward nominal wage rigidity hypothesis
the claim that low levels of inflation will reduce efficiency b/c real wage cuts will then typically require nominal wage cuts, which will be resisted
natural rate of unemployment (*u)
the part of the total unemployment rate that is attributable to fristional, structural, and seasonal unemployment; equivalently, the unemployment rate that prevails when cyclical unemployment is zero, so the economy has neither a recessionary nor an expansioanry output gap
closed economy
an economy that neither trades with nor engages in borrowing and lending with the rest of the world
low inflation
typically means infaltion between one and three percent per year
prinicipal amount
the amount originally lent
income-expenditure multiplier
the effect of a one-unit increase in autonomous aggregate demand on short-run equilibrium output
capital inflows
purchases of domestic assets by foreign households and firms
average benefit
total benefit of undertaking n units of an activity divided by n
a situation in which the prices of most goods and services are falling over time so that inflation is negative
international capital flows
purchases or sales of real and financial assets across international borders
capital good
a long-lived good, which is itself produced and used to produce other goods and services
private-sector investment
spending by firms on final goods and services, primarily capital goods and housing
the practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index
coupon rate
the interest rate promised when a bond is issued
economic surplus
the benefit of taking any action minus its cost
sum of currency outstanding and balances held in chequing accounts
consumer price index (CPI)
measures the cost in that period of a standard basket of goods and services relative to the cost of the same basket of goods and services in a fixed year, called the base year
national wealth
the total value of the real assets in a country
positive economics
economic analysis that offers cause-and-effect explanations of economic relationships;
100 percent reserve banking
a situation in which banks' reserve equal 100 percent of their deposits
Okun's law
states that each extra percentage point of cyclical unemployment is associated with about 2-percentage-point increase in the output gap, measured in relation to potential output
bank reserves
cash or similar assets held by commercial banks for the purpose of meeting depositor withdrawals and payments
a measure that is defined per unit of time
the market for any good consists of all potential buyers and sellers of that good
rate of inflation
the annual percentage rate of change in the price level as measured, for example, by the CPI
attainable point
any combination of goods that can be produced using currently available resources
stable inflation
when the inflation rate stays roughly constant from one year to the next
participation rate
the labour force divided by the working-age population
net capital inflows
capital inflows minus capital outflows
intermediate goods and services
goods or services used up in the production of final good and services and therefore not counted as part of GDP
current income minus spending on current needs - a flow
spending by households on goods and services, such as food, clothing, and entertainment
labour force
the total number of employed people in the economy
efficient point
any combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the other combination of goods for which currently available resources do not allow an increase in the production of one good without a reduction in the production of the other
net international liabilities
the value of financial claims of non-residents on Canadian wealth net of the value of financial claims of Canadian residents agaisnt foreign wealth
0 bound on nominal interest rates hypothesis
the cliam that because interest rates cannot go below 0, a central bank may be unable to stimulate the economy with rate cuts if the official interest rate is low to begin with
flat money
an asset with no intrinsic value, such as paper currency, that is generally accepted as a means of payment for purchases and the settling of debts
gross domestic product (GDP)
the market value of the final goods and services produced in a country during a given period
saving rate
saving dived by income
a quantity that is free to take a range of different values
autonomous expenditure
the portion of planned aggregate expenditure that is independent of output
trade surplus
when exports exceed imports -- the difference between the value of a ocuntry's exports and the value of its imports in a given period
wealth effect
the tendency of changes in asset prices to affect households' wealth and thus their spending on consumption goods and services
unattainable point
any combination of goods that cannot be produces using currently available resources
nominal GDP
a measure of GDP in which the quantities produced are valued at current-year prices; nominal GDP measures the current dolalt calue of production
unanticipated inflation
when the rate of inflation turns out to be substantially different from what most people had expected
a period in which the economy is growing at a rate signicantly above normal
short-run equilibrium output
the level of output at which output Y equals planned aggreagate expenditure; the level of output that prevails during the period in which prices are predetermined
the end of a recession, the low point of economic activity prior to a recovery
a legal promise to repay a debt, usually including both the principal amount and regular interest payments
precautionary saving
saving her protection against unexpected setbacks, such as the loss of a job
absolute advantage
one person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person
seasonal unemployment
unemployment associated with the seasons and/or weather
open economy
an economy that trades with and engages in borrowing and lending with other countries
potential output (or potential GDP or full-employment output)
the amount of output (real GDP) that an economy can produce when using its resources, such as capital and labour, at normal rates
marginal cost
the increase in total cost that results from carrying out one additional unit of an activity
change in the quantity supplied
a movement along the supply curve that occurs in the response to a change in price
capital gains
increases in the value of existing assets
the adding up of individual economic variables to obtain economywide totals
recessionary gap
a positive output gap, which occurs when potential output exceeds actual output
behaviour that results in new products, sevices, technological processes or organizational innovations that are productivity-enhancing
compound interest
the payment of interest not only on the original deposit by on all previously accumulated interest
economic efficiency
condition that occurs when all goods and services are produced and consumed at their respective socially optimal levels
a regular payment received by stockholders for each share that they own
time value of money
the fact that a given dollar amount today is equivalent to a larger dollar amount in the future, because the money can be invested in an interest-bearing account in the meantime
equilibrium price and equilibrium quantity
the price and quantity of a good at the intersection of the supply and demand curves for the good
normative economics
economics statements that refelct subjective value judgements and are based on ethical positions
capital losses
decreases in the values of existing assets
accelerating inflation
when the inflation rate rises from ne year to the next
recession (or contraction)
a period in which the economy is growing at a rate significantly below normal
marginal propensity to consume (MPC)
the amount by which consumption rises when disposable income rises by $1; we assum that 0 < MPC < 1
net capital outflows
capital outflows minus capital inflows
reserve requirements
set by some central banks, the minimum balues of the ratio bank reserves to bank deposits that commercial banks are allowed to maintain; the Bank of Canada does not set reserve requirements
marginal benefit
the increase in total benefit that results from carrying out one more unit of an activity
the value of assets minus liabilities
GDP deflator
a measure of the price level of goods and services included in GDP
the study of individual choice under scarcity and its implications for the behaviour of prices and quantities in individual markets
contractionary policies
gov't policy actions designed to reduce planned spending and output
structural umemployment
unemployment that occurs when workers are unable to fill available jobs because they lack the skills, or do not live where jobs are available
gross saving
the sum of household, corporate, gov't, and non-resident saving
banking panic
a rush of withdrawals from the banking system made by depositors responding to news or rumours of impending bankruptcy of one or more banks
price signal distortion hypothesis
the claim that any substantial amount of change in the price level will make it difficult for market participants to interpret the extent to which price changes involve relative price changes
fallacy of composition
the mistake of falsely assuming that what is true at the level of a particulat individual, household, firm, or industry is necessarily true at a higher aggregate level
Fisher effect
the tendency for nominal interest rates to be high when inflation is high and low wehen inflation is low
average propensity to consume (APC)
consumption divided by disposable income
two goods are substitutes in consumption if an increase in the price of one causes a rightward shift in the demand curve for the other
key policy rate
the interest rate employed by the central bank as its major policy tool; th ekey policy rate for the Bank of Canada, which is also called the official interest rate, is the target for the overnight rate
national net worth
the total value of the real assets of a country adjusted for its net foreign liabilities
planned aggregate expenditure (PAE)
total planned spending on final goods and services
a particularly severe or protracted recession
the study of how people make choices under conditions of scarcity and of the results of those choices for society
real wage
the wage paid to workers measured in terms of real purchasing power
open-market operations
open-market purchases and open-market sales
consumption function
the relationship between conumption spending and its determinants, such as disposable (after-tax) income
rule of 72
a rule stating that to find the number of years it takes a magnitude to double when it is growing at a constant rate, divide 72 by the growth rate
autonomic stabilizer
provisions in the law that imply automatic increases in gov't spending or decreases in taxes when real output declines
future value (FV)
the value a sum of money grows to at some date in the future, when it compounds at a given interest rate
non-resident saving
the balance between saving provided to the Canadian economy by non-residents and saving provided to foreign economis by residents of Canada
capital consumption allowances
accounting allowances for the using up of fixed capital in the production process
closed economy loanable funds model
a theory of real interest rate determination for an economy cut off from international capital markets
a stable, balanced, or unchanging situation in which all forces at work within a system are cancelled by others
a particularly strong and protracted phase of an expansion
coupon payments
regular interest payments made to the bondholder
production possibilities curve
a graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good
open-market sale
the sale by the central bank of gov't bonds for the purpose of reducing bank reserves
average labour productivity
output per employed worker
when the inflation rate falls from one year to the next
bequest saving
saving done for the purpose of leaving an inheritance
dependant variable
a variable in an equation whose value is determined by the value taken by another cariable in the equation
price index
a measure of the average price of a given class of goods or services relative to the price of the same goods and services in a base year
in a straight line, the ratio of the vertical distance the straight line travels between any 2 points (rise) to the corresponding horizontal distance (run)
Bank of Canada
Canada's central bank
price level
the overall level of prices at a point in time as mesured by a price index such as the CPI
supply curve
a curve or schedule showing the toal quantity of a good that sellers want to sell at each price
gov't deposit shifting
the transfer of gov't deposits by the central bank between the gov'ts account at the central bank and the gov'ts accounts at commercial banks
variable cost
a cost that varies with the level of activity
normal good
a good whose demand curve shifts rightward when the incomes of buyers increase
stabilization policies
gov't policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps
inefficient point
any combination of goods for which currently available resources enable an increase in production of one good without a reduction in the production of the other
high inflation
typically means inflation grater than 500 percent per year
sunk cost
a cost that is beyong recovery at the moment a decison must be made
discouraged workers
people who say they would like to have a job but have not made an effort to find one in the past four weeks
national saving
the sum of gross saving by the household sector, the corporate sector, and the gov't sector
The Cost-Benefit Principles
An individual (or a firm or a society) will be better off taking an action if, and only if, the extra benefits from taking the action are greater than the extra costs
average cost
total cost of undertaking n units of an activity divided by n
fixed cost
a cost that does not vary with the level of an activity
cyclical unemployment
the extra unemployment brought about by period of recession
financial intermediates
firms that extend credit to borrowers using funds raised from investors
comparative advantage
one person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other person's opportunity cost
output gap (or Y*-Y)
the difference between the economy's potential output and its actual output at a point in time
all the assets in M1 plus some additional assets that are usable in making payments but at greater cost or inconvenience than currency or chequing accounts
opportunity cost
the value of the next best alternative that must be foregone in order to undertake the activity
the beginning of a recession, the high point of economic activity prior to a recovery
medium of exchange
an asset used in purchasing goods and services
stock (or equity)
a claim to partial ownership of a firm
frictional unemployment
the short-term unemployment associated with the process of matching workers with jobs
change in demand
a shift of the entire demand curve
the study of the performace of national economies and the policies that governments use to try to improve that performance
power of compound gowth
the fact that small differences in growth rates, maintained over long periods, will produce large differences in magnitude
Federal Reserve System
the central bank of the US; aka the Fed
European Central Bank
the central bank of the euro zone countries; aka ECB
open-market purchase
the purchase of gov't bonds from the public by the central bank for the purpose of increasing the supply of bank reserves
real interest rate
the nominal interest rate minus the inflation rate
the preactice of spreading of one's wealth over a variety of different financial investments to reduce overall risk
induced expenditure
the portion of planned aggregate expenditure that depends on output Y
market equilibrium
occurs when all buyers and sellers are satisfied with their respective quantities at the market price

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