macroeconomic theory vocab Flashcards
exchange rate
the price of one currency in terms of another
hot money
investment funds that flows regularly between different country’s financial markets as investors attempt to ensure they get the highest rate of return (interest rates) possible
aggregate demand
total spending in an economy within a particular time period AD = C + I + G + X - M
consumption expenditure
expenditure by consumers on goods and services
investment expenditure
expenditure by firms on new machinery and other capital goods
government expenditure
expenditure by the government on the provision of goods and services
export expenditure
expenditure by foreign individuals and organisations on domestic goods and services
import expenditure
expenditure by domestic individuals and organisations on foreign goods and services
net exports (balance of trade)
export expenditure - import expenditure (X-M)
price level
represents the average price of all goods and services produced in an economy within a time period - in UK we use weighted average called CPI
corporation tax
a tax paid by limited companies as a proportion of their profit
interest rate
cost of borrowing and the reward for saving expressed as a percentage
average propensity to consumer
the proportion of income that is spent APC = C/Y
marginal propensity to consume
the proportion of change income that is spent MPC = change in C/change in Y
average propensity to save
the proportion of income that is saved APS = S/Y
marginal propensity to save
the proportion of change income that is saved MPS = change in S/change in Y
dissaving/negative saving
spending income that was previously saved
floating exchange rate
a system whereby the price of one currency in terms of another is determined by the forces of demand and supply
fixed exchange rate
a system whereby the price of one currency in terms of another is set at a specific rate and this rate is maintained by the government/central bank/monetary authority
managed exchange rate (semi-fixed/dirty float)
a system whereby the exchange rate is allowed to float freely within a permitted band. intervention only occurs when the exchange rate reaches the upper or lower limits
balance of trade
value of exports - value of imports (over a time period) X-M
disposable income
income after tax has been subtracted and any benefits added
discretionary income
disposable income minus all necessary expenditures e.g. mortgage, food, bills
consumer confidence
refers to household optimism about their future circumstances (whether or not they’ll have a job)
business confidence
how optimistic firms feel about the future e.g. do they expect profits to rise, do they expect increasing demand
wealth effect
when consumption has a positive relationship with wealth
indirect tax
tax paid by a firm on expenditure or output (UK-vat, duty tax)
direct tax
tax on income and/or wealth (UK-income tax, NI, corporation tax, inheritance)
saving
what isn’t spent
dissaving/negative saving
spending income that was previously saved
retained profit
the proportion of a firms profit that is kept by a firm and not given to shareholders
full employment GDP
the value of national income when all resources (land, labour, capital, enterprise) are fully and efficiently utilised
circular flow of income
an economic model that illustrates the flow of money/goods/services from households to firms in an economy
AS curve
the relationship between the average price level and the total value of output domestic producers are planning to produce over a given period of time
trade-off
occurs when one thing is given up in order to achieve another using AD/AS analysis we can identify a basic policy goal trade off
macroeconomic equilibrium
occurs at the level of real GDP where the AD curve intersects the AS curve AD=AS
positive output gap
occurs when GDP rises above full employment GDP
negative output gap
occurs when GDP falls below full employment GDP
injections
represent money that flows into the circular flow that can start a multiplier process - investment, gov expenditure, exports
leakages/withdrawals
represent money that leaks out of the circular flow of income due to saving, taxation, imports
multiplier
the amount by which an initial change in AD must be multiplied to find the eventual change in national income (GDP or Y)
multiplier effect/process
the mechanism by which a change in AD eventually leads to an even greater change in national income (GDP)
multiplier formulae
multiplier = final change in Y or GDP/initial change in AD
multiplier = 1/proportion withdrawn
economic cycle (business cycle)
fluctuations in the level of GDP/economic activity over time; following a repeated pattern of booms and slumps
recession
at least two consecutive quarters of declining GDP (below trend growth)
recovery
when economic growth becomes positive after a recession
slowdown
when the rate of economic growth begins to fall and approach 0
boom
when the rate of economic growth exceeds the rate of growth of potential GDP so that the output gap is narrowed
the budget
T-G
tax revenue - gov spending
budget deficit
gov spending greater than tax revenue
budget surplus
tax revenue greater than gov spending
hysteresis
occurs when short run reductions in AD result in long run reductions in AS e.g. during long lasting recession
demand pull inflation
increase in price level over time caused by increase in AD
cost push inflation
increase in price level caused by an increase in firms costs e.g. cost of labour, cost of raw materials, cost of capitals that lead firms to increase prices to maintain profit
