CoreMicroEconomics_CH_9-12 Flashcards
Aggregate demand
The output of goods and services (read GDP) demanded at different price levels. PG. 199
Macroeconomic equilibrium
Occurs at the intersection of the short-run aggregate supply and aggregate demand curves. At this output level, there are no net pressures for the economy to expand or contract. Pg 207
Aggregate supply
The real GDP that firms will produce at varying price levels. In the short run, aggregate supply is positively sloped because many inputs costs are slow to change, but in the long run, the aggregate supply curve is vertical at full employment since the economy has reached its capacity to produce. Pg. 203
Cost-push inflation
Results when a supply shock hits the economy, reducing short-run aggregate supply, and thus reducing output and increasing the price level. Pg. 210
Demand-pull inflation
Results when aggregate demand expands so much that equilibrium output exceeds full employment output and the price level rises. Pg. 209
Long-run aggregate supply (LRAS) curve
The long-run aggregate supply curve is vertical at full employment because the economy has reached its capacity to produce. Pg. 204
Aggregate expenditures
Consist of consumer spending, business investment spending, government spending, and net foreign spending (exports minus imports): GDP = C + I + G + (X - M). Pg. 199
Marginal propensity to consume
The change in consumption associated with a given change in income (DC/DY) Pg. 208
Marginal propensity to save
The change in saving associated with a given change in income (DS/DY) Pg. 208.
Multiplier
Spending changes alter equilibrium income by the spending change times the multiplier. One person’s spending becomes another’s income, and that second person spends some (the MPC), which becomes income for another person, and so on, until income has changed by 1/(1-MPC) = 1/MPS. The multiplier operates in both directions. Pg. 207
Short-run aggregate supply (SRAS) curve
The short-run aggregate supply curve is positively sloped because many input cost are slow to change in the short run. Pg. 203
Wealth Effect
Families usually hold some of their wealth in financial assets such as saving accounts, bonds, and cash, and a rising aggregate price level means that the purchasing power of this money wealth declines, reducing output demand.
Automatic stabilizers
Tax revenues and transfer payments automatically expand or contract in ways that reduce the intensity of business fluctuations without any overt action by Congress or other policymakers. Pg. 233
Expansionary fiscal policy
Involves increasing government spending, increasing transfer payments, or decreasing taxes to increase aggregate demand to expand output and the economy. Pg. 226
Crowding-out effect
Arises from deficit spending requiring the government to borrow, thus driving up interest rates and reducing consumer spending and business investment. Pg. 234
Implementation lag
The time required to turn fiscal policy into law and eventually have an impact on the economy. Pg. 234
Discretionary fiscal policy
Involves adjusting government spending and tax policies with the express short_run goal of moving the economy toward full employment, expanding economic growth, or controlling inflation. Pg. 223
Discretionary spending
The part of the budget that works its way through the appropriations process of Congress each year and includes such programs as national defense, transportation, science, environment, and income security. Pg 223
Contractionary fiscal policy
Involves increasing withdrawals from the economy by reducing government spending, transfer payments, or raising taxes to decrease aggregate demand to contract output and the economy. Pg. 228
Decision lag
The time it takes Congress and the administration to decide on a policy once a problem is recognized. Pg. 234
Information lag
The time policymakers must wait for economic data to be collected, processed, and reported. Most macroeconomic data are not available until at least one quarter (three months) after the fact. p. 234Laffer curve
Plots hypothetical tax revenues at various income tax rates. If tax rates are zero, tax revenues will be zero; if rates are 100%, revenues will also be zero. As tax rates rise from zero, revenues rise, reach a maximum, and then decline. (p. 231)
Mandatory spending
Spending authorized by permanent laws that does not go through the same appropriation process as discretionary spending. Mandatory spending includes such programs as Social Security, Medicare, and interest on the national debt. (p. 223)
Recognition lag
Policies that focus on shifting the long-run aggregate supply curve to the right, expanding the economy without increasing inflationary pressures. Unlike policies to increase aggregate demand, supply-side policies take longer to have an impact on the economy. (p. 229)
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The time it takes for policymakers to confirm that the economy is trending in or out of a recession. Short-term variations in key economic indicators are typical and sometimes represent nothing more than randomness in the data. (p. 234)
Supply_side fiscal policies
Annually balanced budget
Federal expenditures and taxes would have to be equal each year. Annually balanced budgets tend to be procyclical. Pg. 245
Fiscal sustainability
A fiscal imbalance equal to zero. Pg 254
Crowding-out effect
Arises from deficit spending requiring the government to borrow, thus driving up interest rates and reducing consumer spending and business investment. Pg. 251
Functional finance
Essentially ignores the impact of the budget on the business cycle and focuses on fostering economic growth and stable prices, while keeping the economy as close as possible to full employment. Pg. 246
Deficit
The amount by which annual government spending exceeds tax revenues. Pg 242
Generational imbalance
An estimate of how much of any fiscal imbalance is being shifted to future generations. Pg 253
Fiscal imbalance
The difference between the present value of future obligations and expected revenues, less government assets, assuming current policies remain unchanged. Pg. 253
Budget and trade deficits
These are related by the following equation: G _ T = (S _ I) + (M _ X). So, budget deficits must be covered by net domestic saving (private plus corporate) or by net foreign saving (imports minus exports). Pg. 248
Cyclically balanced budget
Balancing the budget over the course of the business cycle by restricting spending or raising taxes when the economy is booming and using these surpluses to offset the deficits that occur during recessions. Pg. 245
Externally held debt
Public debt held by foreigners, roughly equal to half of the outstanding U.S. debt held by the public. Pg. 249
Government budget constraint
The government budget is limited by the fact that G_ T = DM + DB + DA. Pg. 503
Internally held debt
Public debt owned by U.S. banks, corporations, mutual funds, pension plans, and individuals. Pg. 249
Public choice theory
The economic analysis of public and political decision making, looking at issues such as voting, the impact of election incentives on politicians, the influence of special interest groups, and rent_seeking behaviors. Pg. 243
Public debt
The total accumulation of past deficits and surpluses; it includes Treasury bills, notes, and bonds, and U.S. savings bonds. Pg. 242
Surplus
Occurs when the price is above market equilibrium, and quantity supplied exceeds quantity demanded. Pg. 242
Barter
The direct exchange of goods and services for other goods and services. Pg. 260
M1
The narrowest definition of money; includes currency (coins and paper money), demand deposits (checks), and other accounts that have check_writing or debit capabilities, such as stock market and money market accounts. The most liquid instruments that might serve as money. Pg. 261
Federal funds rate
The interest rate financial institutions charge each other for overnight loans used as reserves. Pg. 275
M2
A broader definition of money that includes “near monies” that are not as liquid as cash, including deposits in savings accounts, money market accounts, and money market mutual fund accounts. Pg. 262
Federal Reserve System
The central bank of the United States. Pg. 271
Medium of exchange
Money is a medium of exchange because goods and services are sold for money, then the money is used to purchase other goods and services. Pg. 260
Financial intermediaries
Financial firms (banks, mutual funds, insurance companies, etc.) that acquire funds from savers and then lend these funds to borrowers (consumers, firms, and government). Pg. 266
Money
Anything that is accepted in exchange for other goods and services or for the payment of debt. Pg. 259
Liquidity
How quickly, easily, and reliably an asset can be converted into cash. Pg. 261
Discount rate
The interest rate the Federal Reserve charges commercial banks and other depository institutions to borrow reserves from a regional Federal Reserve Bank. Pg. 275
Federal Open Market Committee (FOMC)
This twelve_member committee is composed of members of the Board of Governors of the Fed and selected presidents of the regional Federal Reserve Banks; it oversees open market operations (the buying and selling of government securities), the main tool of monetary policy. Pg. 274
Fiat money
Money without intrinsic value but nonetheless accepted as money because the government has decreed it to be money. Pg. 260
Fractional reserve banking system
To prevent bank runs (all depositors demanding their deposits in cash at the same time), a portion of bank deposits must be held as vault cash, or else in an account with the regional Federal Reserve Bank. Pg. 269
Money multiplier
Measures the potential or maximum amount the money supply can increase (or decrease) when new deposits enter (exit) the system and is defined as 1 divided by the reserve requirement. The actual money multiplier will be less, since some banks hold excess reserves.
Open market operations
The buying and selling of U.S. government securities, usually Treasury bonds, to adjust reserves in the banking system. Pg. 275
Reserve requirements
The required ratio of funds that commercial banks and other depository institutions must hold in reserve against deposits. Pg. 274
Store of value
The function that enables people to save the money they earn today and use it to buy the goods and services they want tomorrow. Pg. 261
Unit of account
Money provides a yardstick for measuring and comparing the values of a wide variety of goods and services. It eliminates the problem of double coincidence of wants associated with barter. Pg. 260
