Final Review Flashcards
Gross Domestic Product
value of all new production in a nation in a period of time
Recession
actual GDP falls for two consecutive quarters or more
Depression
prolonged, deep decline in GDP
Potential GDP
YF
highest amount of production that an economy can achieve and sustain based on the amount of available resources
Frictional Unemployment
enough jobs, but haven’t found a job yet. Happens because job search takes time
Structural Unemployment
enough jobs, but a mismatch between skills and jobs. Happens because economy
grows/changes
Demand-Deficient Unemployment
not enough jobs for all actively seeking unemployment
unhealthy economy
Natural Rate of Unemployment
sum of frictional and structural rates
C
Consumption
I
Investment
G
Government Spending
T
Net Government Taxation
X
Exports
M
Imports
Real Value
a value measured in constant dollars overtimes, accounts for changes overtime
Nominal Value
a value measured in current dollars, does not account for changes overtime
Inflation
the price level rises, purchasing power of money falls
Price Level
an aggregate measure of prices in the economy
Consumer Price Index
measures price changes of goods the typical household buys (most widely used measure of inflation)
Deflation
the price level falls, purchasing power of money rises
Aggregate Demand (AD)
Represents the demand side of the economy and shows the relationship between P and Y demanded
Why is AD downward sloping?
At higher levels of the price level, the less real GDP aggregate expenditures will buy
AD shifts RIGHT when…
AE rises
C, I, G, or X increases
AD shifts LEFT when…
AE falls
T or M increases
Aggregate Supply (AS)
Represents the supply side of the economy and shows the relationship between P and Y supplied
Long-Run Aggregate Supply (LAS)
Vertical at full employment (YF) because in the long run all markets have fully adjusted and economy reaches a production level full GDP at any price level
Short-Run Aggregate Supply (AS)
relationship between amount of the actual Y supplied and P when market has not yet fully adjusted
Shape of AS
Reflects changes in costs of producing as Y increases
What shifts AS?
Changes in basic factor prices causes costs of producing to change
(Ex: change in wages or price of oil
Consumption Spending (C)
Represents household purchases of goods and services
Causes of Consumption (C)
Moves Along AD: Real GDP (Y) Y▲ = C▲ Shifts AD: Wealth (W), Consumer Confidence (CC) W▲ = C▲ CC▲ = C▲
G - T > 0
Budget Deficit
AD Shifts Right
G - T
Budget Surplus
AD Shifts Left
G - T = 0
Balanced Budget
X - M > 0
Trade Surplus
X - M
Trade Deficit
Causes of Net Exports (NX)
World GDP: YW▲ = X▲ = NX▲
Domestic GDP: YD▲ = M▲ = NX▼
If currency strengthens…
X decreases
M increases
If currency weakens…
X increases
M decreases
Reasons for Currency Exchange
- Travel
- Buying Imports/Selling Exports
- International Capital Flows
Macroeconomic shocks
sudden events that occur and take the economy off course
Aggregate Demand Shocks
AD shifts
Ex: Housing/Subprime Mortgage Crisis
Aggregate Supply Shocks
AS shifts
Ex: Sudden rise in the price of oil
Inflationary Pressure
Occurs when resources are used beyond a point of sustainability. As a result, there is an excess demand in the labor market.
Response to Inflationary Pressure
Adjustments in labor market occur and economy achieves a stable P
Unemployment
Occurs when Y is less than YF in the Macro Model. As a result, there is an excess supply in the labor market.
Response to Unemployment
Adjustments in labor market will occur and economy returns to YF
Phillips Curve
Graph representing the trade-off between unemployment and inflation
Wage-Price Spiral
Rising prices push workers to demand higher wages. In turn higher wages push up production costs, driving up prices (AD Shock)
Stagflation
Both inflation and unemployment occur simultaneously in the economy (AS Shock)
Federal Reserve
Established in 1913 to monitor names after a series of banking crises. It is independent of political control.
Structure of the Fed
Board of Governors: 7 members
Federal Open Market Committee (FOMC): Board and 5 bank presidents
Reserve Requirements
the portions of deposits banks must hold
Open Market Operations
Buying and selling of bonds in the Open Market
What is the main policy tool of the Fed?
Open Market Operations
Federal Funds Market
Market for overnight loans between banks
Federal Funds Rate (FFR)
Rate charged on loans in Federal Funds Market
When the Fed buys bonds…
DURING RECESSION
- Increase bank reserves
- Lowers FFR
- Increase S of financial capital
- Lowers long-term interest rates
- Increases I, AD, Y, and P
When the Fed sells bonds…
DURING INFLATION
- Decrease bank reserves
- Raises FFR
- Decreases S of financial capital
- Raises long-term interest rates, - - Decreases I, AD, Y, and P
Discount Rate (DR)
Rate on borrowing from Federal Reserve
Non-interventionists
Government policy is unnecessary, economy will self correct
Interventionists
Government should use policy tools to speed along the recovery
Crowding Out Effect
Situation where interest rates rise when the government borrows funds. As a result, private-sector borrowing and investment spending fall.
Investment (I)
Determined in long-term financial capital market
Why is Supply of financial capital Upward Sloping?
As interest rate (r) increases, more willing to lend capital
Shift Variables of Supply of Financial Capital
- Perception of default risk for making a loan (higher the risk, higher the interest want to charge)
- Difference between short rates and long rates (waiting premium and inflationary expectation premiums)
- Entry and Exit of funds (international capital flows, wealth in the economy)
Why is Demand of financial capital Downward Sloping?
At higher interest rate (r), willing to borrow less
Shift Variables of Demand of Financial Capital
- Business confidence: expectations about the future - Willing to demand and invest more capital if expectations are good
- DI shifts right when confidence rises
- DI shifts left when confidence falls
Why does the unemployment rate underestimate the true amount of unemployment?
Excludes the discouraged worker and the underemployed
I
Investment
