Macroeconomics Definitions

Question 1

Macroeconomics

Answer 1

The branch of economics which studies the working of the economy as a whole. It involves aggregates that concern economic growth, unemployment, inflation, distribution of wealth and income and external stability.

Question 2

Circular Flow of income

Answer 2

The flow of income between households (consumers) and firms. Expenditures on goods and services flow from households to firms, and income flows from firms to households. Leakages may flow out of the economy, but flow back in by injections.

Question 3

National Income Accounting

Answer 3

Measuring an economy’s national income or the value of its output.

Question 4

National Income Accounting: GDP

Answer 4

The (1) total market value of all (2) final goods and services produced in a country over a (3) given period of time, usually one year, before depreciation.

Question 5

National Income Accounting: Net Domestic Product (NDP)

Answer 5

GDP adjusted for depreciation.

Question 6

National Income Accounting: Gross National Income (GNI)

Answer 6

The sum total of all final goods and services produced by a country in a given period of time, usually one year, plus the value of net factor (property) income from abroad. (formerly known as Gross National Product (GNP))

Question 7

National Income Accounting: Net National Income (NNI)

Answer 7

GNI adjusted for depreciation.

Question 8

Methods of Calculating Gross Domestic Product (1): National Expenditure Approach

Answer 8

the total of all spending in an economy over one year by the four components of aggregate demand: C+I+G+X-M

Question 9

Methods of Calculating Gross Domestic Product (2): National Output Approach

Answer 9

the sum total of all final goods and services added together over a time period of usually one year, calculated by summing up the value-added at each stage of production
• This avoids “double-counting intermediate goods”.
- It is important not to count intermediate goods and services, example steel that produces cars

Question 10

Methods of Calculating Gross Domestic Product (3): National Income Approach:

Answer 10

The income accrued by a country’s residents for supplying productive resources, and is the sum of all forms of wages, rent, interest and profits over a given period of time

Question 11

Depreciation (of fixed capital)

Answer 11

The wearing out of capital goods, also called capital consumption.

Question 12

Factor Prices

Answer 12

the cost of all factors of production used in the production process, before the adjustment for taxes and subsidies.

Question 13

GDP per capita

Answer 13

GDP divided by the population.

Question 14

Green GDP

Answer 14

GDP/GNI that has been adjusted to take into account environmental destruction (loss of resources) and/or health consequences of environmental problems.

Question 15

Purchasing Power Parity (PPP)

Answer 15

is a theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries.
• When you make two currencies equal to the value of one US dollar and compare prices and GDP.

Question 16

The Business Cycle

Answer 16

The periodic fluctuations of national output around its long term trend. Often occurs at a generally upward growth path (productive potential).
• Economies tend to move through stages including “boom”
and “bust.

Question 17

Marginal Propensity to Consume (MPC)

Answer 17

the percentage change in consumption brought about by an increase in additional income.

Question 18

Marginal Propensity to Save (MPS)

Answer 18

the percentage change in savings brought about by an increase in additional income.

Question 19

Multiplier effect

Answer 19

An initial change in aggregate demand can have a much greater final impact on equilibrium national income, OR It is the number of times a rise in national income exceeds the rise in injections of demand that caused it.

Question 20

Aggregate Demand

Answer 20

the relationship between the aggregate quantity of goods and services demanded - or Real GDP - and the price level. (C+ I+G+X-M)

Question 21

Investment

Answer 21

the business purchase of goods and services or ADDITIONS TO CAPITAL STOCK (new buildings, new plant, new vehicles, new machinery), and additions to inventory.

Question 22

Price Level

Answer 22

the average of all prices, measured using an index. We use price levels to give us the ‘real’ total output or expenditure.

Question 23

Aggregate Supply

Answer 23

The total supply of goods and services produced within an economy at a given overall price level in a given time period.
• describes the relationship between price levels and the quantity of output that firms are willing to provide.

Question 24

Short-run

Answer 24

when prices of final goods and services change ( ∆ average price level), but factor prices do not – there is a time lag.

Question 25

Long-run

Answer 25

when factor prices do adjust to final price changes ( ∆ average price level).

Question 26

Business cycle

Answer 26

the fluctuations in economic activity over time. There are four stages of the business cycle: (1) recession, when economic activity slows down; (2) trough, when the recession is at its deepest; (3) recovery, when the economy begins to grow; and (4) peak/boom, when economic activity is high.

Question 27

Natural rate of employment

Answer 27

Unemployment resulting from a situation where there is no cyclical unemployment, only structural, frictional and seasonal. It is seen as the rate of full employment where demand for labor equals the supply of labor. • Full employment and the natural rate of unemployment are really the same thing. • Increase in demand at this level will cause inflation.

Question 28

Full Employment (Level of National Income)

Answer 28

This is the level at National Income at which everyone who wants to work is able to. It is the level of employment rates where there is no cyclical or deficient-demand unemployment. • This is NOT 0% unemployment as there will exist frictional and some structural unemployment.

Question 29

Long--Run Aggregate Supply

Answer 29

is the relationship between real output and the price level at full employment. It is defined as that period in time when all markets are in equilibrium, including the labor market. (The natural rate of unemployment).

Question 30

Macroeconomic Equilibrium

Answer 30

Occurs at the price level where aggregate demand equals aggregate supply.

Question 31

Keynesian Model (John Maynard Keynes)

Answer 31

Economic viewpoint: Economy is INHERENTLY UNSTABLE and can remain in a recessionary or inflationary period INDEFINITELY. The government NEEDS TO INTERVENE to correct this imbalance. How: • During a recession/deflationary period the government needs to induce spending or “prime the pump” (aggregate demand). During an inflationary period the government needs to use measures to decrease spending (aggregate demand). • Note: The aggregate supply curve goes from horizontal to vertical!!!!

Question 32

Neo-Classical Model (New Classical Model)

Answer 32

Economic Viewpoint: The economy is inherently stable, and although there may be periods where the economy slows down, it will self-correct. The government should intervene as little as possible. • Markets operate more efficiently when the government stays out of the economy. • Note: According to this model the SRAS curve is upsloping!! • Flexible prices, wages, and interest rates

Question 33

Recessionary Gap (or Deflationary Gap)

Answer 33

Where an economy is operating below its full employment equilibrium. There are unemployed resources! • Under this condition, the level of real GDP is currently lower than its full employment, which puts downward pressure on prices in the long-run.

Question 34

Recession

Answer 34

a business cycle contraction, a general slowdown in economic activity; by definition, two or more quarters of negative growth in Gross Domestic Product.

Question 35

Growth Recession

Answer 35

slow growth, lower than the long-term average growth trend and not enough to accommodate full-employment.

Question 36

Inflationary Gap

Answer 36

A macroeconomic condition that describes the distance between the current level of real GDP and the full employment (long run equilibrium) real GDP. Real GDP is higher than full-employment GDP and there is upward pressure on prices.

Question 37

Spare capacity

Answer 37

a situation when some factors of production are unemployed

Question 38

Labor Force

Answer 38

people who are 16 years or older (may be different in some countries), and are working or who are actively seeking work

Question 39

Unemployment

Answer 39

occurs when there are people actively looking for work at the equilibrium wage rate but are not able to find work

Question 40

Unemployment benefits

Answer 40

regular payment made by the government to those who are unemployed. (most developed countries automatically give benefits to those that are laid-off, but NOT to those who are fired)

Question 41

Unemployment Rate

Answer 41

The number of unemployed expressed as a percentage of the labor force

Question 42

Demand deficient or cyclical unemployment

Answer 42

Unemployment caused by the business cycle where the slowdown in economic activity with falling aggregate demand is the cause of unemployment.

Question 43

Frictional unemployment

Answer 43

unemployment as a result of people who are between jobs, or are entering, or reentering the job market ( labor force). • It often takes time for workers to find jobs, even though there are jobs. It is often seen as a healthy for an economy to have workers move into areas of need.

Question 44

Structural unemployment

Answer 44

unemployment caused by a change in the demand for skills as the nature or structure of the economy changes (dynamic economy). • So there is a mismatch between qualifications, skill-sets and characteristics of the unemployed and available jobs. Example: Car workers, steel workers in the US.

Question 45

Seasonal unemployment

Answer 45

unemployment associated with industries or regions where the demand for labor is lower at certain times of the year.

Question 46

Real-wage unemployment

Answer 46

disequilibrium unemployment being driven up above the market clearing rate. It is caused my non-market forces entering the labor market such, as Government imposed minimum wage, or labor unions pushing up wages.

Question 47

Discouraged worker

Answer 47

is someone who has left the labor force because they cannot find work. In other words, discouraged workers are unemployed people that were looking for work but have given up and therefore are NOT in the labor force. • Discouraged worker may distort unemployment statistics

Question 48

Underemployment

Answer 48

A situation where a country there are highly skilled workers but working in low-paying jobs, and/or workers who are working part time but would prefer full-time work. • example: people in part-time work who would like to work more. This is seen as a problem in China, the Philippines, Mexico, etc. Someone working under their education level, or selling fruit on the streets would be considered underemployed

Question 49

Hidden unemployment

Answer 49

the number of people who do not have work but who are not counted in government reports, for example, people who have stopped looking for a job (discouraged workers) and people who work less than they want to (part time) • Usually mean “real unemployment rates” may be much higher than government claims.

Question 50

Inflation

Answer 50

Inflation is the sustained (persistent) upward movement in the average level of prices.

Question 51

Rate of Inflation

Answer 51

The percentage increase in the price of goods and services, usually annually. Most commonly associated with the Consumer Price Index

Question 52

Consumer Price Index

Answer 52

Measures the change in purchasing a fixed basket of goods and services from one time period to another. A price index measuring average prices over time!

Question 53

Price Stability

Answer 53

When the average level of prices is moving neither up or down.

Question 54

Money illusion

Answer 54

the idea that people consider the nominal value of money rather than its real value thus ignoring the purchasing power of their income. People therefore have an unrealistic picture of their income and wealth.

Question 55

Demand Pull Inflation

Answer 55

Inflation induced by a persistence of an excess of aggregate demand in the economy over aggregate supply. Can be looked at as too much money chasing too few goods and services.

Question 56

The Quantity of Money Theory (excess monetary growth)

Answer 56

claims that in the long-run an increase in the quantity of money causes an equal increase in the price level

Question 57

Cost Push Inflation

Answer 57

the situation in an economy where there is sustained prices rises because of production costs increasing, example wages, imported materials, interest rates and rents.

Question 58

Supply-side shocks

Answer 58

occurs when there is an unexpected change in the supply of a f actor of production resulting in a sudden change in its price

Question 59

Deflation

Answer 59

A sustained (or persistent) decrease in the general price level (Japan, Hong Kong) where the rate falls below zero.

Question 60

The Phillips Curve

Answer 60

strong inverse relationship between inflation and unemployment.

Question 61

Long-Run Phillips Curve

Answer 61

In the long run this trade-off between inflation and unemployment does not tend to occur. Unemployment will gravitate toward the natural rate of unemployment.

Question 62

Stagflation

Answer 62

occurs when an economy experiences a period of increasing inflation, negative or zero economic growth and rising unemployment.

Question 63

Progressive Tax

Answer 63

system of tax where the percentage paid in tax increases as income increases. -Used by most MDC’s as a form of income tax (direct) collection. (also an automatic fiscal stabilizer)

Question 64

Regressive Tax

Answer 64

tax regime where the percentage of tax paid is lower the higher the income, so proportionally less tax is being taken from higher income earners. Sales tax is an example of a regressive tax

Question 65

Proportional Tax

Answer 65

A tax which is levied at the same rate for all, regardless of income. Often called a flat tax. -For example everyone might pay 15% of their income in tax.

Question 66

Direct Tax

Answer 66

a tax leveled on factor incomes. | -Examples: tax paid by individuals on income, tax paid by companies on profit.

Question 67

Indirect tax

Answer 67

taxes on the production, sale purchase or use of a good | – usually producer taxed so it passes (indirectly) onto the consumer -example sales tax on new cars.

Question 68

Disposable Income

Answer 68

total income households receive from wages, salaries and transfers from governments less taxation

Question 69

Discretionary Income

Answer 69

part of disposable income that is used to undertake new consumption expenditure

Question 70

Transfer Payments

Answer 70

payments received by persons from the government in the form of social payments i.e. social security payments, income support, subsidies) payments are being transferred from financial resources collected by one group in society and given to another group

Question 71

Gini coefficient

Answer 71

a statistic used to measure the extent of equality in distribution, usually income and wealth. It is measured between 0 and 1 with 0 being perfect equality and 1 being perfect inequality

Question 72

Demand-side policies

Answer 72

Government policy that attempts to alter the level of AD to complement government policy and stabilize the economy. Consist of Fiscal and Monetary policies.

Question 73

Fiscal Policy (Budgetary policy)

Answer 73

Policy regarding the size and composition of government spending and revenue used to influence both the level and pattern of economic activity in a country. It can be either expansionary or contractionary to either increase or decrease economic activity and influence aggregate demand.

Question 74

Expansionary Fiscal Policy

Answer 74

will involve increasing government expenditure or decreasing taxes (an injection in the circular flow) –will lead to increased AD and multiplied rise in AD.

Question 75

Contractionary Fiscal Policy

Answer 75

cutting government spending and/or raising taxes (a leakage from the circular flow) –will lead to decreased AD and multiplied decrease in AD

Question 76

Business confidence

Answer 76

is related to the expectations of businesses about the future of economic conditions, (which may be optimistic or pessimistic) and affects the level of investment.

Question 77

Austerity Measures

Answer 77

Increasing taxes and cutting government spending in order to reduce a budget deficit. Has the effect of contracting the economy (even though tis may lead to an even worse economic situation). i.e. Greece, Spain, Portugal, Italy 2012-2014.

Question 78

Budget Surplus

Answer 78

The excess of central government tax receipts (revenue) over its spending for one year.

Question 79

Budget Deficit

Answer 79

The excess of central government spending over its receipts (revenue) for one year.

Question 80

Automatic fiscal stabilizers

Answer 80

Fiscal policy that works without using a discretionary government policy. The economy automatically contracts (slows down) during an inflationary period, and expands during a recessionary period. - Progressive tax system will automatically increase the rate of taxation as income rises and thus slow down the potential rise in AD and decrease the rate of taxation as income rises increasing AD. - Unemployment benefits, and other recessionary spending also act as automatic stabilizers.

Question 81

Discretionary Fiscal Policy

Answer 81

deliberate changes in tax rates and government spending to influence level of AD

Question 82

Crowding Out

Answer 82

A situation where government spending displaces (or crowds out) Private Investment. (The government is competing for the same money businesses and consumers want…it drives up the interest rate) Note: Be able to show this graphically using a Loanable Funds Market Supply and Demand diagram!!!!

Question 83

Monetary Policy

Answer 83

The central bank policy with respect to the quantity of money in the economy to affect the rate of interest and aggregate demand. Now broadly accepted as the primary determinant/weapon to influence of AD

Question 84

Expansionary Monetary Policy (Easy Money)

Answer 84

An increase in the money supply in order to lower interest rates and increase Consumption and Investment. Used to counter or correct a recession. More recently known as QUANTITATIVE EASING (QE). i.e. QE1 and QE2 were recently used in 2009 & 2011& 2013 in the United States by the Federal Reserve bank (the FED) in order to stimulate growth in the sluggish economy.

Question 85

Contractionary Monetary Policy (Tight Money)

Answer 85

A decrease in the money supply in order to increase interest rates and decrease Consumption and Investment. Used to counter or correct inflation or inflationary pressure. i.e. Used in China in 2010-2011 to try and contain inflationary pressure in the economy

Question 86

Supply Side Policies

Answer 86

Are mainly microeconomic policies designed to improve (incease) the supply-side potential of an economy, make markets and industry operate more efficiently, and therefore contribute to a faster rate of growth of real national output. Note: May be Market-based supply side policies (no government intervention) or Interventionist supply side policies.

Question 87

Capital Gains

Answer 87

income earned though the selling of an asset. | i.e. Selling stocks at a higher price than bought, or selling a house at a higher price.

Question 88

Laffer Curve

Answer 88

A diagram the shows the relationship between government revenue and the % tax rate. At 0% tax rate and a 100% tax rate the government would be zero. At some percentage rate government revenue would be maximized. It is used to show that increasing marginal tax rates too much may discourage investment and work and will cause a decrease in government revenue.