ECON 202 FINAL Flashcards
Practicing final
What is macroeconomics?
The study of the performance of the national economy.
What is the business cycle referring to?
The fluctuations in real GDP and the two phases of expansion and recession.
Recessions
Phases of persistent decline in production.
Business Cycle Peak
turning point between expansion and recession
Expansions
phases of persistent increase in production
Business Cycle Trough
turning point between recession and expansion
Business Cycle Sequence
Expansion - Peak - Recession - Trough
Inflation
Increases in the overall level of prices
Deflation
Decreases in the overall level of prices
Nominal GDP
The market value of all the final goods and services produced within a country in a given time period.
Market Value
The price for which a good of service is sold in a market.
Final Goods and Services
A good or service that is purchased by its final user.
Intermediate Goods and Services
Items that are produced by one firm, brought by another firm, and used as a component of a final good or service.
Expenditure Approach (to measure GDP)
Measure total expenditures on final goods and services produced within a country in a given time period.
Income Approach (to measure GDP)
Measure total income received by factors of production operating within a country in a given time period.
Personal Consumption Expenditures (C)
Spending by domestic households on consumer goods and services.
Gross Private Domestic Investment (I)
Spending by domestic firms on new capital goods and additions to inventories. (also expenditure on new homes by households).
Capital Goods
Goods that are used to produce other goods and services, but are not completely used up in the production of these other goods and services.
Additions to inventories
Goods that are produced but are not sold to their final user inside of the period we are measuring GDP.
Government Expenditure on Goods and Services (G)
Purchases of goods and services by the domestic federal, sate and local governments.
Transfer Payments
Cash transfers from governments to households and firms such as social security benefits, unemployment compensation, and subsidies.
Imports (M)
Purchases of goods and services by the domestic economy from the rest of the world.
Net Exports of Goods and Services (X-M)
The value of exports minus the value of imports
Exports (X)
Sales of goods and services by the domestic economy to the rest of the world.
Net Exports
Exports - Imports = X - M
X - M is negative
trade deficit
X - M is positive
trade surplus
GDP
=C + I + G + X -M
Stock of Capital Goods (Or Capital Stock)
The total amount of capital goods currently operating in the economy
Deprecation
The decrease in the existing stock of capital goods that results from wear and tear and obsolescence
Net Private Domestic Investment
Gross Private Domestic Investment minus Deprecation (note - capital stock will increase if Net Private Domestic Investment is positive)
Net Domestic Product
GDP - Deprecation
How are goods and services produced?
Using factors of production (labor, capital equipment, land, entrepreneurship)
Compensation of Employees
Payment for labor services
Corporate profits
Profits earned by corporations
Proprietor’s income
Income of the non-incorporated self-employed
Rental Income
Payment for the use of land and other rented resources
Real Gross Domestic Product (real GDP)
measure the market value of production in all years using a fixed set of market values from some common year, called the base year.
Household Production
Goods and services that are produced for personal use.
Underground Economy
Market transactions for goods and services where the market value isn’t observed
Standard of living
A comprehensive state of economic well being, including things such as income levels, quality of housing and food, medical care, educational opportunities, transportation, communications, and other measures.
Real GDP per person
real GDP divided by the population of the nation
CPI for year T
= (Total cost of CPI basket in the prices of the year T / Total cost of CPI basket in the prices of base year) x 100
GDP Deflator for year T
= (Nominal GDP for year T / Real GDP for year T) x 100
Inflation Rate for year T
= [(Price level for year T - Price Level for year (T-1))/(Price Level for year (T-1))] x 100
Real Wage Rate for year T
= (Nominal wage for year T / Price Level for year T) x 100
Unemployment Rate
The unemployment rate is the number of people who can’t find a job, expressed as a percentage of all those who either have a job or are actively looking for one.
Current Population Survey
A monthly survey of 60,000 households conducted by the US Census Bureau
Working-Age Population
The total number of people aged 16 years and over who are not institutionalized
Employed
To be considered employed, you must either have a full or part-time job
Unemployed
To be considered unemployed you must fall under one of the three categories:
1) You have made specific efforts to find a job within the previous four weeks.
2) You are waiting to be called back to a job from which you have been laid off.
3) You are waiting to start a job within 30 days.
Not in the Labor Force
Those who are in the working-age population but are not employed or unemployed.
Labor Force
The sum of the number of employed and unemployed persons.
Unemployment Rate:
(Number of Unemployed / Labor Force) x 100
Marginally Attached Workers
A person who currently is not working and has not looked for work in the previous four weeks, but has indicated they want and are available for work and have looked for work sometime in the recent past.
Discouraged Worker
A marginally attached worker who has stopped looking for a job because of repeated failures to find one
Economic Part-Time Workers
Workers who hold part-time jobs but wish to have full-time jobs.
Structural Unemployment
Unemployment that exists when changes in the economy change the skills needed to perform jobs or change the location of jobs.
Frictional Unemployment
Unemployment that arises from “normal labor market turnover” (includes: people re-entering the labor force, because of the ongoing creation and destruction of jobs, and from people voluntarily leaving jobs to search for other ones)
Cyclical Unemployment
Fluctuations in unemployment caused by the business cycle.
Natural Unemployment Rate
The unemployment rate that exists when all unemployment is either frictional unemployment or structural unemployment.
Full Employment
The aggregate number of hours of work done by workers in an economy when the unemployment rate equals the natural unemployment rate.
Demand for Labor
The relationship between the aggregate quantity of labor demanded by firms and the real wage rate. Firms will hire more hours of labor if the real wage rate declines.
Supply for Labor
The relationship between the aggregate quantity of labor supplied by workers. Workers will supply more hours of labor if the real wage rate increases.
Labor Market Equilibrium
Occurs when the amount of labor demanded is equal to the amount of labor supplied.
Potential Real GDP
The quantity of Real GDP produced at full employment
What does the output gap show?
The distance between real GDP and potential real GDP.
Output Gap
= Real GDP - Potential Real GDP
Labor Productivity
The quantity of the real GDP produced by an hour of labor
The Stock of Capital Goods
How many and what type of capital goods are in the economy
Human Capital
The knowledge and skill that people obtain from education, on-the-job training, and work experience.
Where does Growth in Labor Productivity come from?
Growth in the Stock of Capital Goods, Growth in Human Capital, Technological Advances (both human capital and capital goods are influenced by technological advances)
Growth Rate of Real GDP
The annual percentage growth rate of Real GDP
Economic Growth
The growth of potential real GDP
Growth Rate of Real GDP Per Person in year Z
= (Real GDP per person in year Z - Real GDP per person in previous year / Real GDP per person in previous year) x 100
Rule of 70
Tells us that the number of years it takes any variable to double is approximately 70 divided by the annual percentage growth rate of that variable.
Money
Any commodity or token that is a Medium of Exchange, meaning it is generally acceptable as a means of payment.
Means of Payment
A method of settling a debt.
Barter
An economic system in which goods and services must be exchanged directly for other goods and services.
Double Coincidence of Wants
For an exchange of goods or services to occur in a barter system, both sides must want the other good or service that the other is offering
Unit of Account
The agreed upon measure for stating the prices of goods and services
Store of Value
Something that can be held and exchanged later for goods and services.
M2
The primary monetary aggregate in use today
Monetary Aggregates
Official measures of the amount of money in the US
Liquid Assets
Assets that are easily convertible into a means of payment without a loss in value
What does M2 consist of?
Currency owned by individuals and businesses, Checking Deposits, Other Liquid Deposits, Time Deposits, and Deposits with Money Market Mutual Funds
Depository Institution
A financial firm that takes deposits from households and firms and makes loans to other households and firms. There are different types of depository institutions, including; Commercial Banks, Savings and Loan Associations, Savings Bank, Credit Unions, and Money Market Mutual Funds.
Federal Reserve System
The central bank of the US
What types of Assets do Depository Institutions own?
1) Reserves: Currency in the bank’s vaults and deposits held with the Federal Reserve.
2) Other Cash Assets: Primarily loans to other banks. These earn interest at an interest rate known as the Federal Funds Rate.
3) Securities: This includes very low risk investments in the US government Treasury bills and corporate bills, as well as higher risk investments in the US government treasury and corporate bonds and mortgage-backed securities.
4)Loans: Loans made to businesses and individuals.
What are the 3 primary goals the central bank of an economy has?
1) Serves as a bank for depository institutions.
2)Regulates depository institutions.
3)Conducts monetary policy: adjusting the amount of money in the economy and influencing interest rates.
What are the primary goals in conducting the monetary policy of the Federal Reserve?
Keep inflation low and maintain full employment.
What are the three components of the Federal Reserve System?
Board of Governors, Regional Federal Reserve Banks, Federal Open Market Committee or “FOMC”
What comprises the Board of Governor’s?
There are 7 members, and each member is appointed by the president and confirmed by the senate for a 14 year term. One of the board members serves as their Chair of the Board of Governors.
Jerome Powell
The current chair of the Board of Governors.
Federal Open Market Committee (FOMC)
The component of the Federal Reserve System that is in charge of conducting monetary policy. There are 12 voting members of the FOMC, including the 7 members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four presidents of the other 11 regional Federal Reserve banks on a rotating basis.
Open Market Operation
The purchase or sale of financial assets (usually US government Treasury Bills and Bonds) in the open market
Regional Federal Reserve Banks
There are 12 regional Federal Reserve Banks that provide services to local depository institutions.
Open Market Purchase
Increases deposits in depository institutions and thus the quantity of money in the economy.
Increase the level of bank reserves.
Open Market Sale
Decreases deposits in depository institutions and thus the quantity of money in the economy.
Decrease the level of bank reserves.
When do we say a bank has Unplanned Reserves?
If bank reserve has above its Desired Reserves
Monetary Base
The sum of currency and bank’s deposits of reserves with the Federal Reserve
Real Money Supply
the money supply divided by the price level
Money Multiplier
= (change in quantity of money / change in monetary base)
Unplanned Reserves
Can be used by banks to make additional loans
Money Multiplier
Gives the multiple for the change in the quantity of money that results from a change in the monetary base
Money Supply
The amount of money in the economy at a particular point in time also known as Nominal Money Supply
Real Money Demand
the amount of real money that people choose to hold as part of their real wealth
Real Wealth
Wealth divided by the price level
Wealth
the sum of values of the assets that people own
Nominal Interest Rate
The annual interest received by the provider of financial capital, expressed as a percentage of the amount of funds provided
Real Interest Rate
The annual real interest received by the provider of financial capital, expressed as a percentage of the of the real amount of funds provided
When the nominal interest rate rises:
people wish to hold less real money and more bonds
Real Interest Rate equation
nominal interest rate - inflation rate
When the nominal interest rate falls:
people wish to hold more real money and less bonds
Equation of Exchange
(Nominal Money supply * Velocity) = (Price Level * Real GDP)
Bond
A promise by an organization (such as a firm or the government) to make specified payments on specified dates. There is an implicit interest rate associated with a bond. Higher bond prices mean lower nominal interest rates for the bond.
Lower bond prices mean higher nominal interest rates for the bond.
equilibrium real wage rate
the real wage rate that ensures that the quantity of labor supplied equals the quantity of labor demanded
Velocity
The average number of times a dollar of money is used annually to buy the goods and services that make up nominal GDP
After-tax disposable income
income minus taxes plus transfer payments
Aggregate Supply / Aggregate Demand (AS/AD) model
a graphical model of how real GDP and the price level are determined in an economy over the shorter run and the transition into the longer run
Quantity of Real GDP Demanded definition:
= Real Personal Consumption Expenditures + Planned Real Gross Private Domestic Investment + Real Government Expenditure on Goods and Services + Real Net Exports on Goods and Services
Quantity of Real GDP Demanded
The total amount of final goods and services produced inside the US that people, businesses, and the government and foreigners plan to buy
When do firms accumulate unwanted inventories?
When Real GDP > Quantity of Real GDP Demanded
Aggregate Demand Curve
shows the relationship between the aggregate price level in the economy and the quantity of real GDP demanded
Quantity of real GDP supplied
the total quantity of final goods and services that firms pan to produce. the quantity of real GDP supplied is always equal to real GDP.
Real wage rate
Money wage rate divided by the price level
Nominal wage rate
number of dollars that an hour of labor earns
Fiscal Policy
The governments attempt to influence the economy by setting and changing taxes, making transfer payments, and purchasing goods and services
Potential real GDP
the level of real GDP produced when the economy is operating at full employment
macroeconomic “long run”
a period of time long enough for the labor market to adjust to the equilibrium and for real GDP to to equal potential GDP
macroeconomic “short run”
a period of time shorter than the long run for which real GDP can differ from potential GDP
Long-Run Aggregate Supply Curve
shows the relationship between the aggregate price level in the economy and the quantity of real GDP supplied in the long run (when real GDP is equal to potential GDP)
Short-Run Aggregate Supply Curve
shows the relationship between the quantity of real GDP supplied and the aggregate price level in the short-run when the money wage rate and potential real GDP remain constant
short-run macroeconomic equilibrium
occurs at the intersection of the SAS and AD curves
This intersection determines a short-run equilibrium price level and a short-run equilibrium level of real GDP
long-run macroeconomic equilibrium
occurs at the intersection of the SAS, LAS, and AD curves
This intersection determines a long-run equilibrium price level
The long-run equilibrium level of real GDP is potential real GDP
Below full-employment equilibrium
A short-run macroeconomic equilibrium in which potential GDP exceeds real GDP
Above full-employment equilibrium
A short-run macroeconomic equilibrium in which real GDP exceeds potential real GDP
Stagflation
the simultaneous occurrence of a recession and increased inflation
Demand Pull Inflation
inflation that occurs when aggregate demand increases, which shifts the AD curve to the right
Cost Push Inflation
inflation that occurs when the cost of production increases, which pushes producers to raise their prices
Federal Budget
An annual statement of the outlays and receipts of the US government, together with the laws and regulations that approve and support them.
Receipts
How much revenue the federal government collects
Outlays
How much the government spent
fiscal policy
the use of tax policy and spending decisions to achieve desired macroeconomic objectives
Employment Act of 1946
requires congress to use fiscal policy to “promote maximum employment, production, and purchasing power”.
When do we say that the government has a budget deficit?
When the receipts are less than the outlays
fiscal stimulus
a fiscal policy activity that attempts to push real GDP back toward potential real GDP
automatic fiscal policy
fiscal stimulus that happens automatically in a recession
discretionary fiscal policy
fiscal stimulus that requires an act of Congress
(ex: American Recovery and Reinvestment Act of 2009, the CARES Act of 2020, and the ARPA Act of 2021)
Recognition Lags
We don’t observe exactly what is going on in the economy in real time. One of the factors that causes a delay when using fiscal stimulus.
Law Making Lags
Even after we know a recession has started, it takes time for Congress to debate and pass discretionary fiscal policy legislation. One of the factors that causes a delay when using fiscal stimulus.
Impact Lags
Even after fiscal stimulus is implemented, it can take time before its effects on the economy are felt. One of that factors that causes a delay when using fiscal stimulus.
