macro ch 5-11

Question 1

Consumption function

Answer 1

the Keynesian relationship between income and consumption

Question 2

marginal propensity to consume (MPC)

Answer 2

the increase in consumption per unit increase in disposable income

Question 3

marginal propensity to save (MPS)

Answer 3

the increase in saving per unit increase in disposable income

Question 4

autonomous expenditure multiplier

Answer 4

gives the change in equilibrium output per unit change in autonomous expenditures (i.e. govt spending)

Question 5

autonomous expenditures

Answer 5

expenditures that are largely determined by factors other than current income

Question 6

balanced budget multiplier

Answer 6

gives the change in equilibrium output that results from a 1 unit increase of decrease in BOTH taxes and government spending

Question 7

liquidity preference

Answer 7

Keyne’s term for the demand for money relative to bonds

Question 8

liquidity trap

Answer 8

a situation at a very low interest rate where the speculative demand for money schedule becomes nearly horizontal

Question 9

natural rates of unemployment and output

Answer 9

are determined by REAL supply-side factors: the capital stock, the size of the labor force, and the level of technology

Question 10

phillips curve

Answer 10

is the schedule showing the relationship between the unemployment and inflation rates

Question 11

hysteresis

Answer 11

is the property that, when a variable is shocked away from an initial value, it shows no tendency to return, even when the shock is over. Persistently high unemployment rates in many european countries have led economists to argue that unemployment exhibits this.

Question 12

new classical policy ineffectiveness proposition

Answer 12

asserts that systematic monetary and fiscal policy actions that change aggregate demand will not affect output and employment even in the short run

Question 13

rational expectations

Answer 13

expectations formed on the basis of all available relevant information concerning the variable being predicted. Moreover, economic agents are assumed to use available information intelligently; that is, they understand the relationships between the variables they observe and the variables they are trying to predict.

Question 13

Zero Coupon Bonds

Answer 13

A single future payment at a single date ( T bill)

Question 14

Coupon bonds

Answer 14

Preset payments of interest and the principal paid at maturity (govt and corporate bonds)

Question 15

Commercial paper

Answer 15

Maturity<1 year

Short term private firm debt

Question 16

Bonds

Answer 16

Held for their claim on wealth at some future period

Expectations over future conditions including risk and liquidity play role in our demand for bonds

Question 17

Supply of bonds

Answer 17

Stock of all bonds outstanding or issued

Price increase qty supplied increases bc lower rate of interest to be paid