MacroEcon McConnell Flashcards
change in demand
A movement of an entire demand curve or schedule such that the quantity demanded changes at every particular price; caused by a change in one or more of the determinants of demand.
growth accounting
The bookkeeping of the supply-side elements such as productivity and labor inputs that contribute to changes in real GDP over some specific time period.
dumping
The sale of a product in a foreign country at prices either below cost or below the prices commonly charged at home. The objective is to increase market share in a foreign market by driving out competition and thereby create a monopoly situation where the exporter will be able to unilaterally dictate price and quality of the product.
break-even income
The level of disposable income at which households plan to consume (spend) all their income and to save none of it.
economizing problem
The choices necessitated because society’s economic wants for goods and services are unlimited but the resources available to satisfy these wants are limited (scarce).
budget line
A line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products’ prices.
gold standard
A historical system of fixed exchange rates in which nations defined their currencies in terms of gold, maintained fixed relationships between their stocks of gold and their money supplies, and allowed gold to be freely exported and imported.
personal income (PI)
The earned and unearned income available to resource suppliers and others before the payment of personal taxes.
International Monetary Fund (IMF)
The international association of nations that was formed after the Second World War to make loans of foreign monies to nations with temporary balance of payments deficits and, until the early 1970s, manage the international system of pegged exchange rates agreed upon at the Bretton Woods conference. It now mainly makes loans to nations facing possible defaults on private and government loans.
General Agreement on Tariffs and Trade (GATT)
The international agreement reached in 1947 in which 23 nations agreed to eliminate import quotas, negotiate reductions in tariff rates, and give each other equal and nondiscriminatory treatment. It now includes most nations and has become the World Trade Organization.
national income
Total income earned by resource suppliers for their contributions to gross domestic product plus taxes on production and imports; the sum of wages and salaries, rent, interest, profit, proprietors’ income, and such taxes.
protective tariff
A tariff designed to shield domestic producers of a good or service from the competition of foreign producers.
voluntary export restrictions (VER)
Voluntary limitations by countries or firms of their exports to a particular foreign nation; undertaken to avoid the enactment of formal trade barriers by the foreign nation.
savings account
A deposit in a commercial bank or thrift institution on which interest payments are received; generally used for saving rather than daily transactions; a component of the M2 money supply.
comparative advantage
A situation in which a person or country can produce a specific product at a lower opportunity cost than some other person or country; the basis for specialization and trade.
real-business-cycle theory
A theory that business cycles result from changes in technology and resource availability, which affect productivity and thus increase or decrease long-run aggregate supply.
insider-outsider theory
The hypothesis that nominal wages are inflexible downward because firms are aware that workers (“insiders”) who retain employment during recession may refuse to work cooperatively with previously unemployed workers (“outsiders”) who offer to work for less than the current wage.
index funds
Mutual funds whose portfolios exactly match a stock or bond index (a collection of stocks or bonds meant to capture the overall behavior of a particular category of investments) such as the Standard & Poor’s 500 Index or the Russell 3000 Index.
collateral
The pledge of specific assets by a borrower to a lender with the understanding that the lender will get to keep the assets if the borrower fails to repay the loan with cash.
short-run aggregate supply curve
An aggregate supply curve relevant to a time period in which input prices (particularly nominal wages) do not change in response to changes in the price level.
equilibrium price
The price in a competitive market at which the quantity demanded and the quantity supplied are equal, there is neither a shortage nor a surplus, and there is no tendency for price to rise or fall.
allocative efficiency
The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal, and at which the sum of consumer surplus and producer surplus is maximized.
budget deficit
The amount by which expenditures exceed revenues in any year.
time preference
The human tendency for people, because of impatience, to prefer to spend and consume in the present rather than save and wait to spend and consume in the future; this inclination varies in strength among individuals.
liquidity
The degree to which an asset can be converted quickly into cash with little or no loss of purchasing power. Money is said to be perfectly liquid, whereas other assets have lesser degrees of liquidity.
mortgage-backed securities
Bonds that represent claims to all or part of the monthly mortgage payments from the pools of mortgage loans made by leaders to borrowers to help them purchase residential property.
multiple counting
Wrongly including the value of intermediate goods in the gross domestic product; counting the same good or service more than once.
price ceiling
A legally established maximum price for a good, or service. Normally set at a price below the equilibrium price.
market failure
The inability of a market to bring about the allocation of resources that best satisfies the wants of society; in particular, the overallocation or underallocation of resources to the production of a particular good or service because of externalities or informational problems or because markets do not provide desired public goods.
vault cash
The currency a bank has on hand in its vault and cash drawers.
Security Market Line (SML)
A line that shows the average expected rate of return of all financial investments at each level of nondiversifiable risk, the latter measured by beta.
efficiency factor (in growth)
The capacity of an economy to achieve allocative efficiency and productive efficiency and thereby fulfill the potential for growth that the supply factors (of growth) make possible; the capacity of an economy to achieve economic efficiency and thereby reach the optimal point on its production possibilities curve.
subprime mortgage loans
High-interest-rate loans to home buyers with above-average credit risk.
income approach
The method that adds all the income generated by the production of final goods and final services to measure the gross domestic product.
fiscal policy
Changes in government spending and tax collections designed to achieve full employment, price stability, and economic growth; also called discretionary fiscal policy.
frictional unemployment
A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.
securitization
The process of aggregating many individual financial debts, such as mortgages or student loans, into a pool and then issuing new securities (typically bonds) backed by the pool. The holders of the new securities are entitled to receive the debt payments made on the individual financial debts in the pool.
monetary multiplier
The multiple of its excess reserves by which the banking system can expand checkable deposits and thus the money supply by making new loans (or buying securities); equal to 1 divided by the reserve requirement.
network effects
Increases in the value of a product to each user, including existing users, as the total number of users rises.
economic resources
The land, labor, capital, and entrepreneurial ability that are used to produce goods and services; the factors of production.
cyclical deficit
Federal budget deficit that is caused by a recession and the consequent decline in tax revenues.
immediate short-run aggregate supply curve
An aggregate supply curve for which real output, but not the price level, changes when the aggregate demand curve shifts; a horizontal aggregate supply curve that implies an inflexible price level.
reverse repo
A short-term money loan that the borrower obtains by pledging bonds as collateral. The name reverse repo refers to how the borrower would view the transaction. The same transaction when viewed by the lender would be called a repo.
cyclical unemployment
A type of unemployment caused by insufficient total spending (insufficient aggregate demand) and which typically begins in the recession phase of the business cycle.
monetary policy
A central bank’s changing of the money supply to influence interest rates and assist the economy in achieving price-level stability, full employment, and economic growth.
supply curve
A curve that illustrates the supply for a product by showing how each possible price (on the vertical axis) is associated with a specific quantity supplied (on the horizontal axis).
proportional tax
At the individual level, a tax whose average tax rate remains constant as the taxpayer’s income increases or decreases. At the national level, a tax for which the average tax rate (= tax revenue/GDP) remains constant as GDP rises or falls.
price index
An index number that shows how the weighted-average price of a “market basket” of goods changes over time relative to its price in a specific base year.
labor-force participation rate
The percentage of the working-age population that is actually in the labor force.
Okun’s law
The generalization that any 1-percentage-point rise in the unemployment rate above the full-employment rate of unemployment is associated with a rise in the negative GDP gap by 2 percent of potential output (potential GDP).
other-things-equal assumption
The assumption that factors other than those being considered are held constant; ceteris paribus assumption.
asset demand for money
The amount of money people want to hold as a store of value; this amount varies inversely with the interest rate.
trade surplus
The amount by which a nation’s exports of goods (or goods and services) exceed its imports of goods (or goods and services).
equation of exchange
MV = PQ, in which M is the supply of money, V is the velocity of money, P is the price level, and Q is the physical volume of final goods and final services produced.
nondurable good
A consumer good with an expected life (use) of less than three years.
nominal gross domestic product (GDP)
GDP measured in terms of the price level at the time of measurement; GDP not adjusted for inflation.
investment
In economics, spending for the production and accumulation of capital and additions to inventories. (For contrast, see financial investment.)
structural unemployment
Unemployment of workers whose skills are not demanded by employers, who lack sufficient skill to obtain employment, or who cannot easily move to locations where jobs are available.
Bretton Woods system
The international monetary system developed after the Second World War in which adjustable pegs were employed, the International Monetary Fund help stabilize foreign exchange rates, and gold and the dollar were used as international monetary reserves.
European Union (EU)
An association of 28 European nations (as of mid-2013) that has eliminated tariffs and quotas among them, established common tariffs for imported goods from outside the member nations, eliminated barriers to the free movement of capital, and created other common economic policies.
liquidity trap
A situation in a severe recession in which the central bank’s injection of additional reserves into the banking system has little or no additional positive impact on lending, borrowing, investment, or aggregate demand.
economic growth
(1) An outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology; (2) an increase of real output (gross domestic product) or real output per capita.
wealth effect
The tendency for people to increase their consumption spending when the value of their financial and real assets rises and to decrease their consumption spending when the value of those assets falls.
import demand curve
A downsloping curve showing the amount of a product that an economy will import at each world price below the domestic price.
law of demand
The principle that, other things equal, an increase in a product’s price will reduce the quantity of it demanded, and conversely for a decrease in price.
supply schedule
A table of numbers showing the amounts of a good or service producers are willing and able to make available for sale at each of a series of possible prices during a specified period of time.
positive economics
The analysis of facts or data to establish scientific generalizations about economic behavior.
new classical economics
The theory that, although unanticipated price-level changes may create macroeconomic instability in the short run, the economy will return to and stabilize at the full-employment level of domestic output in the long run because prices and wages adjust automatically to correct movements away from the full-employment output level.
supply factors (in growth)
The four determinants of an economy’s physical ability to achieve economic growth by increasing potential output and shifting out the production possibilities curve. The four determinants are improvements in technology plus increases in the quantity and quality of natural resources, human resources, and the stock of capital goods.
nonexcludability
The inability to keep nonpayers (free riders) from obtaining benefits from a certain good; a characteristic of a public good.
human capital
The knowledge and skills that make a person productive.
Council of Economic Advisers (CEA)
A group of three persons that advises and assists the president of the United States on economic matters (including the preparation of the annual Economic Report of the President).
balance-of-payments surplus
Misleading term used in the financial press to describe a net increase in a country’s foreign exchange reserves as it buys and sells foreign exchange in order to maintain a fixed exchange rate. The term is misleading because a nation’s balance of payments statement must always balance (be zero) and can never be in surplus (greater than zero).
free-rider problem
The inability of potential providers of an economically desirable good or service to obtain payment from those who benefit, because of nonexcludability.
per-unit production cost
The average production cost of a particular level of output; total input cost divided by units of output.
nontariff barriers (NTBs)
All barriers other than protective tariffs that nations erect to impede international trade, including import quotas, licensing requirements, unreasonable product-quality standards, unnecessary bureaucratic detail in customs procedures, and so on.
token money
Bills or coins for which the amount printed on the currency bears no relationship to the value of the paper or metal embodied within it; for currency still circulating, money for which the face value exceeds the commodity value.
Trade Adjustment Assistance Act
A U.S. law passed in 2002 that provides cash assistance, education and training benefits, health care subsidies, and wage subsidies (for persons age 50 or older) to workers displaced by imports or relocations of U.S. plants to other countries.
inflationary expenditure gap
In the aggregate-expenditures model, the amount by which the aggregate expenditures schedule must shift downward to decrease the nominal GDP to its full-employment noninflationary level.
marginal analysis
The comparison of marginal (“extra” or “additional”) benefits and marginal costs, usually for decision making.
division of labor
The separation of the work required to produce a product into a number of different tasks that are performed by different workers; specialization of workers.
economic system
A particular set of institutional arrangements and a coordinating mechanism for solving the economizing problem; a method of organizing an economy, of which the market system and the command system are the two general types.
external public debt
The portion of the public debt owed to foreign citizens, firms, and institutions.
earmarks
Narrow, specially designated spending authorizations placed in broad legislation by senators and representatives for the purpose of providing benefits to firms and organizations within their constituencies. Earmarked projects are exempt from competitive bidding and normal evaluation procedures.
inferior good
A good or service whose consumption declines as income rises, prices held constant.
business cycle
Recurring increases and decreases in the level of economic activity over periods of years; consists of peak, recession, trough, and expansion phases.
unit of account
A standard unit in which prices can be stated and the value of goods and services can be compared; one of the three functions of money.
aggregate demand
A schedule or curve that shows the total quantity of goods and services that would be demanded (purchased) at various price levels.
risk premium
The interest rate above the risk-free interest rate that must be paid and received to compensate a lender or investor for risk.
direct relationship
The relationship between two variables that change in the same direction, for example, product price and quantity supplied; a positive relationship.
quasi-public good
A good or service to which excludability could apply but that has such a large positive externality that government sponsors its production to prevent an underallocation of resources.
checkable deposit
Any deposit in a commercial bank or thrift institution against which a check may be written.
aggregate supply shocks
Sudden, large changes in resource costs that shift an economy’s aggregate supply curve.
flexible exchange rate
A rate of exchange that is determined by the international demand for and supply of a nation’s money and that is consequently free to rise or fall because it is not subject to currency interventions. Also referred to as a “floating exchange rate.”
balance on capital and financial account
The sum of the capital account balance and the financial account balance.
natural rate of unemployment (NRU)
The full-employment rate of unemployment; the unemployment rate occurring when there is no cyclical unemployment and the economy is achieving its potential output; the unemployment rate at which actual inflation equals expected inflation.
thrift institution
A savings and loan association, mutual savings bank, or credit union.
follower countries
As it relates to economic growth, countries that adopt advanced technologies that previously were developed and used by leader countries.
risk-free interest rate
The interest rate earned on short-term U.S. government bonds.
monetarism
The macroeconomic view that the main cause of changes in aggregate output and the price level is fluctuations in the money supply; espoused by advocates of a monetary rule.
nondiversifiable risk
Investment risk that investors are unable to reduce via diversification; also called systemic risk.
aggregate demand–aggregate supply (AD-AS) model
The macroeconomic model that uses aggregate demand and aggregate supply to determine and explain the price level and the real domestic output (real gross domestic product).
demand factor (in growth)
The requirement that aggregate demand increase as fast as potential output if economic growth is to proceed as quickly as possible.
zero lower bound problem
The constraint placed on the ability of a central bank to stimulate the economy through lower interest rates by the fact that nominal interest rates cannot be driven lower than zero without causing depositors to withdraw funds from the banking system and thus reduce the ability of banks to stimulate the economy via lending.
supply shocks
Sudden, unexpected changes in aggregate supply.
Board of Governors
The seven-member group that supervises and controls the money and banking system of the United States; the Board of Governors of the Federal Reserve System; the Federal Reserve Board.
fractional reserve banking system
A system in which commercial banks and thrift institutions hold less than 100 percent of their checkable-deposit liabilities as reserves of currency held in bank vaults or as deposits at the central bank.
disposable income (DI)
Personal income less personal taxes; income available for personal consumption expenditures and personal saving.
regressive tax
At the individual level, a tax whose average tax rate decreases as the taxpayer’s income increases. At the national
command system
A method of organizing an economy in which property resources are publicly owned and government uses central economic planning to direct and coordinate economic activities; socialism; communism. Compare with market system.
restrictive monetary policy
Federal Reserve System actions to reduce the money supply, increase interest rates, and reduce inflation; a tight money policy.
beta
A relative measure of nondiversifiable risk that measures how the nondiversifiable risk of a given asset or portfolio compares with that of the market portfolio (the portfolio that contains every asset available in the financial markets).
limited liability rule
A law that limits the potential losses that an investor in a corporation may suffer to the amount that she paid for her shares in the corporation. Encourages financial investment by limiting risk.
velocity
The number of times per year that the average dollar in the money supply is spent for final goods and final services; nominal gross domestic product (GDP) divided by the money supply.
currency intervention
A government’s buying and selling of its own currency or foreign currencies to alter international exchange rates.
export supply curve
An upward-sloping curve that shows the amount of a product that domestic firms will export at each world price that is above the domestic price.
durable good
A consumer good with an expected life (use) of three or more years.
saving schedule
A table of numbers that shows the amounts households plan to save (plan not to spend for consumer goods), at different levels of disposable income.
Troubled Asset Relief Program (TARP)
A 2008 federal government program that authorized the U.S. Treasury to loan up to $700 billion to critical financial institutions and other U.S. firms that were in extreme financial trouble and therefore at high risk of failure.
loan guarantees
A type of investment subsidy in which the government agrees to guarantee (pay off) the money borrowed by a private company to fund investment projects if the private company itself fails to repay the loan.
productivity
A measure of average output or real output per unit of input. For example, the productivity of labor is determined by dividing real output by hours of work.
open-market operations
The purchases and sales of U.S. government securities that the Federal Reserve System undertakes in order to influence interest rates and the money supply; one method by which the Federal Reserve implements monetary policy.
excess reserves
The amount by which a commercial bank’s or thrift institution’s actual reserves exceed its required reserves; actual reserves minus required reserves.
demand-pull inflation
Increases in the price level (inflation) resulting from increases in aggregate demand.
real gross domestic product (GDP)
Gross domestic product adjusted for inflation; gross domestic product in a year divided by the GDP price index for that year, the index expressed as a decimal.
repo
A short-term money loan made by a lender to a borrower that is collateralized with bonds pledged by the borrower. The name repo refers to how the lender would view the transaction. The same transaction when viewed from the perspective of the borrower would be called a reverse repo.
demand shocks
Sudden, unexpected changes in demand.
expansion
The phase of the business cycle in which real GDP, income, and employment rise.
rivalry
(1) The characteristic of a private good, the consumption of which by one party excludes other parties from obtaining the benefit; (2) the attempt by one firm to gain strategic advantage over another firm to enhance market share or profit.
contractionary fiscal policy
A decrease in government purchases of goods and services, an increase in net taxes, or some combination of the two, for the purpose of decreasing aggregate demand and thus controlling inflation.
creative destruction
The hypothesis that the creation of new products and production methods destroys the market power of existing monopolies.
target rate of inflation
The publicly announced annual inflation rate that a central bank attempts to achieve through monetary policy actions if it is following an inflation targeting monetary policy.
coordination failure
A situation in which people do not reach a mutually beneficial outcome because they lack some way to jointly coordinate their actions; a possible cause of macroeconomic instability.
near-money
Financial assets that are not themselves a medium of exchange but that have extremely high liquidity and thus can be readily converted into money. Includes noncheckable savings accounts, time deposits, and short-term U.S. government securities plus savings bonds.
gross domestic product (GDP)
The total market value of all final goods and final services produced annually within the boundaries of a nation.
world price
The international market price of a good or service, determined by world demand and supply.
shocks
Sudden, unexpected changes in demand (or aggregate demand ) or supply (or aggregate supply).
efficiency loss
Reductions in combined consumer and producer surplus caused by an underallocation or overallocation of resources to the production of a good or service. Also called deadweight loss.
personal consumption expenditures (C)
The expenditures of households for both durable and nondurable consumer goods.
U.S. government securities
U.S. Treasury bills, notes, and bonds used to finance budget deficits; the components of the public debt.
determinants of supply
Factors other than price that determine the quantities supplied of a good or service. Also referred to as “supply shifters” because changes in the determinants of supply will cause the supply curve to shift either right or left.
modern economic growth
The historically recent phenomenon in which nations for the first time have experienced sustained increases in real GDP per capita.
devaluation
A decrease in the governmentally defined value of a currency.
long run
(1) In microeconomics, a period of time long enough to enable producers of a product to change the quantities of all the resources they employ, so that all resources and costs are variable and no resources or costs are fixed. (2) In macroeconomics, a period sufficiently long for nominal wages and other input prices to change in response to a change in a nation’s price level.
macroeconomics
The part of economics concerned with the performance and behavior of the economy as a whole. Focuses on economic growth, the business cycle, interest rates, inflation, and the behavior of major economic aggregates such as the household, business, and government sectors.
balance on goods and services
The exports of goods and services of a nation less its imports of goods and services in a year.
