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Module 2 - Review


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Consumer Price Index
CPI - The Consumer Price Index is an index number measuring the average price of consumer goods and services purchased by households. It is one of several price indices calculated by national statistical agencies. The percent change in the CPI is a measure of inflation. The CPI can be used to index (i.e., adjust for the effects of inflation) wages, salaries, pensions, or regulated or contracted prices. The CPI is, along with the population census and the National Income and Product Accounts, one of the most closely watched national economic statistics.
Static Economy
If Net Investment (In) is zero, the economy is static or not changing. The economy is adding new capital at a rate just fast enough to replace what is being worn out or used up. This situation occurred during World War II in the United States.
Civilian Labor Force
All persons, age 16 and older, not in the military and who are employed or actively seeking employment.
Goods produced in one country and sold to another country. Goods leaving the country of domestic origin.
Phillips Curve
A graph showing the relationship between inflation and unemployment . The theory states that unemployment can be reduced in the short run by increasing price level (inflation) at a faster rate. Conversely, inflation can be lowered at the cost of possibly increased unemployment and slower economic growth
Crowding Out
A situation in which increases in government spending leads to reductions in private spending. Large increases in government spending, whether financed by taxing, borrowing, or printing new money, are likely to reduce business investment spending.
Fiscal Year
Any twelve consecutive months. The fiscal year for the federal government runs October 1 - September 30.
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.
Structural Unemployment
The long-term and chronic unemployment that exsists even when the economy is producing at a normal rate. These are workers who have lost their jobs because of changing market (demand) conditions and whose skills do not match the requirement of available jobs. Unemployment that arises when the skills of available workers do not match the requirements of a available jobs.
Personal Consumption Expenditures
C = Personal Consumption Expenditures - spending by households on goods and services.
Rational Expectations
Theory that emphasizes the fact that government cannot reduce an economy's unemployment - even in the shortrun. The arguement is that because people anticipate the consequences of announced government policies and change their behavior accordingly, they end up undermining the policy.
Business Cycle
Recurring ups and downs in the level of economic activity.
Indirect Business Tax
Taxes businesses pay to government for which government has done nothing to earn. Example: Sales taxes
GDP Deflator
A measure of the level of prices of all final goods and services (consumer goods, investment goods, and government) produced by the economy in a base year.
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.
Expansionary Fiscal Policy
Fiscal policy used to increase aggregate demand or supply. Deliberate measures to increase government expenditures, decrease taxes, or both Appropriate during periods of unemployment.
The phase in the business cycle characterized by high production (real GDP), full unemployment, and inflation.
The highest point in an economic expansion.
Stabilization Policy
Policy efforts undertaken to reduce the severity of recessions or to rein in excessively strong expansions.
Circular Flow
A model that shows the process of exchange among consumers (also called households), businesses and government.
Gross Domestic Product
GDP - Gross Domestic Product is the total dollar value of all goods and services produced, in final form, within the domestic borders of the United States, regardless of the national origin of the producing firm.
Calendar Year
The fiscal year that runs January 1 - December 31.
Supply-Side Economics
Theory based on the premise that is possible to achieve full employment without inflation. Through tax cuts, spending cuts, and deregulation, government creates the proper incentives for the private sector to increase aggregate supply. "Reaganmics" of the 1980's.
Transfer Payments
Income received, but not earned, including (but not limited to) unemployment insurance, veterans benefits, Temporary Assistance to Needy Families, and subsidies to farmers.
Contractionary Fiscal Policy
Fiscal policy used to decrease aggregate demand or supply. Deliberate measures to decrease government expenditures, increase taxes, or both. Appropriate during periods of inflation.
Underemployed Workers
Those people who are employed but not in jobs that utilize their skills and talents to the greatest extent.
Durable Goods
Goods expected to last a year or longer.
The level of real GDP and the price level at which aggregate quantity demanded equals aggregate quantity supplied.
D = deprecation - to decline in value. The allowance for worn out or used up capital. It is a charge against total business receipts for the year.
Disposal Income
DI = Disposable Income. DI is personal income minus personal income taxes. DI = PI - PITS
Fiscal Policy
Changes in government spending and/or taxes to achieve particular economic goals - low unemployment, stable prices, and economic growth.
Aggregate Supply
The total quantity of output supplied over varying prices by all sectors in the economy together in a given time period.
Autonomous Consumption
The part of consumption that is independent of the level of disposable income.
Compensation of Employees
Income earned from providing labor to businesses. Compensation of Employees = Wages and salaries + wage and salary supplement.
Net Private Domestic Investment
In = Net Private Domestic Investment - total business investment (Ig) minus depreciation (D). Ig - D = In
Consumption Function
The relationship between consumption and income. C = f(Y), where C = Consumption and Y = Income
Income Approach
The total or sum of all income earned in the production of GDP. One of two ways to calculate GDP.
Cost-Push Inflation
Inflation caused primarily by decreases in aggregate supply. Economy wide reduction in supply of an item drives up or "pushes" price up.
Gross Private Domestic Investment
Ig = Gross Private Domestic Investment - total investment by businesses on plant, equipment, and inventory goods before depreciation.
Full Employment
The employment level at which actual employment rate equals the natural rate of unemployment.
Balanced Budget
The budget that occurs when spending equals receipts. Appropriate during periods of full employment.
Personal Income
PI = Personal Income. PI is income received, but not necessarily earned, by households before paying personal taxes.
Transitory Income
The unexpected gain or loss of income during a year.
Monies not spent.
Tax Avoidance
The driving force behind the underground economy.
Relative Income Hypothesis
As national income increases, consumption spending increases as well, always by the same amount. As national income increases, the MPC remains constant.
Keynesian Economics
Theory based on the principles of John Maynard Keynes, stating that government spending should increase during economic slumps and be decrease during good times for the economy.
Proprietors' Income
Proprietors' income is money earned by sole proprietors or partners in unincorporated businesses.
Real GDP
GDP that has been adjusted for price changes; GDP measured in base-year, or constant, prices. Real GDP has been adjusted for changes in the price level (adjusted for inflation.)
Severe, deep, and long lasting recession.
An increase in the overall level of most prices in an economy.
Personal Income Taxes
PITS = Personal Income Taxes. PITS are taxes paid to a government agency for wages and salaries earned.
Cyclical Unemployment
Unemployment due to recessionary business conditions and inadequate labor demand, caused by downturns in the business cycle.
Federal Budget
A statement of the federal governments' planned expenditures and anticipated receipts for the upcoming fiscal year.
Aggregate Demand
The total demand for goods and services over varying prices within the economy, including componenting such as household consumption, business investment, government spending & net exports.
Underground Economy
The unreported or illegal production of goods and services in an economy. The underground economy is not included in the calculation of GDP.
The phase in the business cycle characterized by a period of decline in the level of output, employment, and income lasting six or more months. Prices may fall.
Net Domestic Product
NDP = Net Domestic Product. NDP is GDP adjusted for depreciation. GDP as a measure of total output gives an exaggerated sense of output. NDP = GDP - D
Neo-Keynesian Economics
Theory based on the idea that by managing aggregate demand, government can achieve the most acceptable combination of unemployment and inflation.
Permanent Income
Income that individuals expect to receive annually.
Inventory Investment
The value of the stocks of inventories that businesses keep in reserve to facilitate production and sales.
Value Added
The difference between the value of the products produced by a firm minus the value of the products (materials) purchased and used by the firm to produce the product
Expanding Economy
If Net Investment (In) is positive, the economy is growing or expanding.
Inflationary Gap
The amount by which aggregate spending at full employment exceeds full-employment output.
The phase in the business cycle characterized by declining levels of real GDP, moderating rates of inflation, and emerging levels of unemployment.
C + Ig + G + Xn
Formula used to calculate the expenditures approach.
Government Spending
G = Government Spending (or purchases) - all goods and services bought by government.
The phase in the business cycle characterized by a period of increasing real GDP and decreasing rates of unemployement. Follows a recession.
Price Level
A measure of prices in one year expressed in realtions to prices in the base year.
Intermediate Goods
Goods used in the production of other goods. Using intermediate goods in calculation of GDP would cause double counting, overstating the value of GDP.
Budget Surplus
The budget that occurs when spending is less than receipts. Appropriate during periods of inflation.
Nondurable Goods
Goods expected to last less than a year.
Demand Pull Inflation
Inflation caused primarily by excess aggregate demand. Consumer driven inflation - consumers are trying to spend more economy can produce.
Net Exports
Xn = Net Exports - the difference between a country's exports minus its imports.
Budget Deficit
The budget that occurs when spending is greater than receipts. Appropriate during periods of unemployment.
Nominal GDP
A measure of GDP in which the quantities produced are valued at current-year prices; measure current dollar value of production. Nominal GDP has not been adjusted for inflation.
Profit includes: Proprietors' Income and Corporate Income
Autonomous Investment
The part of investment that is independent of the level of disposable income.
Classical Economics
Based on Say's Law, Classical economists believed that if left alone, an economy would always tend back toward full employment. They were strong proponents of the Laissez Faire approach to economic management - "Hands off."
Trend Line
The upward-sloping shape of the trend line shows economic growth from peak to peak. If an economy is not growing, the trend line would be horizontal.
Permanent Income Hypothesis
The hypothesis that people's consumption depends on their long-run expected (permanent) income rather than their current income.
Absolute Income Hypothesis
As national income increases, consumption spending increases, but by diminishing amounts. As national income increases, the marginal propensity to consume (MPC) decreases.
Income earned from renting property to others, including land, housing, and office space.
Built-In Stabilizers
Automatic changes in the economy that reduce the magnitude of fluctuations in total spending, helping to prevent wide swings in the levels of output and employment. These include federal income taxes and transfer payments - unemployment insurance and Temporary Assistance to Families in Need.
Base Year
The year serving as a point of comparison for other years in a price index.
Final Goods
Goods to be sold to the consumer for final use, these goods are not for resale.
Goods produced in another country and bought by another country. Goods coming into a country which were produced elsewhere.
Recessionary Gap
The amount by which aggregate spending at full employment falls short of full employment output.
Corporate Income
Corporate income includes: Corporate income taxes to government + Dividends paid to stockholders + Undistributed corporate profits or retained earnings.
The physically intangible actions performed to satisfy economic wants, including but not limited to medical care, dental care, haircuts, education, police protection, fire protection, and national defense
A period of slow economic growth and high unemployment (stagnation) while prices rise (inflation). Prevelent during the 1970's and 1980's.
Declining Economy
If Net Investment (In) is negative, the economy is declining. Net investment in this economy is negative. The economy is producing less than what is being used up during the year. This occurred in the United States during the Great Depression.
Intended Investment
Investment spending that business producers plan to make.
Life-Cycle Hypothesis
A person's MPC is relatively high during young adulthood, decreases during the middle years, and increases when the person is at or near retirement.
Income earned on gains from financial investments.
The lowest point in an economic contraction. Real GDP stops falling at this point.
National Income
NI = National Income - all income earned by American-owned resources, whether located here or abroad. NI = Compenstation of Employees + Rent + Interest + Profit
Marginal Propensity to Save
MPS = Marginal Propensity to Save - the change in one's savings caused by the change in one's income. MPS = change in savings (S)/change in income (Y)
Discouraged Workers
Those people not included in the official measures of unemployment because they have stopped actively searching for work. They are no longer part of the civilian labor force.
Marginal Propensity to Consume
MPC = Marginal Propensity to Consume - the ratio of the change in consumption spending to a given change in income. MPC = change in C/change in Y
Gross National Product
GNP = Gross National Product - the total dollar value of all goods and services produced, in final form, by United States firms, no matter where these firms are located worldwide.

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