6. The policy and practice of Macroeconomics Flashcards
What is the definition of “Macroeconomics”?
the study of economic activity and prices in the overall economy of a nation or a region
What do macroeconomists use to explain how the economy works?
Economic theory
Macroeconomists explain how the overall economy works by using an economic theory — a logical framework to explain a particular economic phenomenon
What are “exogenous” variables?
Exogenous variables you feed into the model
(“the variables that explain endogenous variables”)
What are “endogenous” variables?
Endogenous variables are the outputs of a model
(“the variables to be explained by the model”)
What are the 3 economic data series that macroeconomists focus on?
- real GDP
- unemployment rate
- inflation rate
What is the definition of “Real Gross Domestic Product”?
Measures the output of actual goods and
services produced in an economy over a fixed
period, usually a year
What is the definition of “business cycles”?
Business cycles are recurrent up and down movements in economic activity that differ in how regular they are
–> A recession occurs when economic activity declines and real GDP per person falls
–> A depression occurs when the decline in real GDP is severe
What is the definition of “unemployment rate”?
The unemployment rate measures the percentage of workers looking for work, but who do not have jobs, at a particular point in time
What is the definition of “inflation”?
The inflation rate tells us how rapidly the overall level of prices is rising
- Deflation occurs when the inflation rate is negative
- Hyperinflation refers to the situation of super high inflation
What is “fiscal policy”?
Fiscal policy deals with government spending and taxation
–> Government budget deficit is the excess of government spending over tax revenues for a particular year
What is “monetary policy”?
Monetary policy is the management of the money supply and interest rates
–> Conducted by central banks, e.g., the Federal Reserve of the U.S.
How can we make financial crises less likely?
A financial crisis is a large-scale disruption in financial markets characterized by sharp declines in the prices of assets (property that includes bonds, stocks, art, land) and business failures
–> eg. The United States and many other countries throughout the world experienced a major financial crisis starting in 2007
How active should stabilization policy be?
Stabilization policy is macroeconomic policy that aims at minimizing business cycle fluctuations and stabilizing economic activity
- Activists advocate the use of policies to eliminate excessive unemployment whenever it develops
- Nonactivists argue against the use of stabilization policies because the economy has a self-correcting mechanism
