MacroEcon 1.09 Flashcards
GDP Income approach
sums all income earned in the production of final goods
GDP expenditure approach
sums all expenditures to purchase final product
3 common measures of price inflation
Consumer price index (CPI)
Producer price index (PPI)
GDP deflator
Demand pull inflation
Demand curve is shifted up
lower interest rates
increase unemployment benefits
Consumers have more money to spend
Cost-push inflation
supply curve shifted inward
production costs go up
prices go up
supply goes down
Increase in output (equilibrium GDP)
Marginal propensity to save MPS
Real interest rates
adjusted for inflation
Risk free interest rates
Rates that would be charged if lenders had 100% chance of being repaid.
US Treasury securities are indicators of risk free interest rates
Federal Funds rate (Discount rate)
rate the federal reserve charge for loan to bank
Prime rate
the rate banks charge their most creditworthy businesses on short term loans. Typically set at 3% over federal funds rate
Nominal interest rates
rate quoted by financial institutions. Includes premiums to protect from default, inflation
fiscal policy
governments actions to effect economy. tax rates, government spending
Monetary policy
Involves efforts by the central bank or Fed to manage credit conditions, interest rates, and money supply
Fed has several tools to carry out expansion monetary policy and contraction monetary policy
Reserve Requirments (ratio)
Discount rate
Open market operations
Reserve requirements ratio
how much money the fed makes available to loan out. how much they need to hold in reserve.
Not adjusted often
Discount rate
adjustment of interest rate the fed charges banks for short term emergency loans
Open market operations
Used most frequently
Either buying or selling short term treasury bills to effect the amount of money the banks have to lend.
Frictional unemployment
normal turnover. worker between jobs
Structural unemployment
affects workers who lose jobs do to changes in demand for goods. VHS, horses and buggies
Cyclical unemployment
results in job losses due to fluctuations in the business cycle. recessions and expansions
regulatory policy
immigration laws, minimum wage laws, energy policy
Classical economic theory
argues that in the absence of government intervention economies can be self stabalilizing
keynesian theory
fiscal policy, lower taxes more government spending. argues that prices and wages do not adjust quickly enough on their own. must use fiscal policy
monetarist theory
monetary policy-open market
supply side theory
reduce taxes. money lost from tax reduction will be balanced out by taxes from increased spending
laffer curve
if tax rates are high enough increases tax rates will not increase tax revenue. people don’t want to work if being taxed 80%
new keynesian theory
combination of fiscal and monetary policy
austrian theory
if interest rates drop too low company will over buy and outpace demand.
Absolute trade advantage
a country being able to produce a good at a lower cost than another
Stagflation
persistent high inflation combined with high unemployment and stagnant demand in a country’s economy.
NAIRU
Non accelerating inflation rate of unemployment
is the specific level of unemployment that is evident in an economy that does not cause inflation to rise up.
Phillips Curve
The theory states that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment. However, the original concept has been somewhat disproven empirically due to the occurrence of stagflation in the 1970s, when there were high levels of both inflation and unemployment.
GDP
GDP = Consumption by households + Investment + Government spending + Net exports
