Quiz 2 Flashcards
GDP= C + I + G +Xn
The expenditure approach to measuring GDP correlates well with aggregate demand (AD).
GDP Deflator
A price index used to adjust nominal GDP to arrive at real GDP. Called the “deflator” because nominal GDP will usually overstate the value of a nation’s output if there has been inflation. The Consumer Price Index (CPI) is another commonly used price index.
Classical Economic Theory
The view that an economy will self-correct from periods of economic shock if left alone. Also known as “laissez-faire.”
Deflation
A decrease in the average price level of a nation’s output over time.
Depreciation
A decrease in the value of one currency relative to another, resulting from a decrease in demand for or an increase in the supply of the currency on the foreign exchange market.
Exports
The spending by foreigners on domestically produced goods and services. Counts as an injection into a nation’s circular flow of income.
Frictional Unemployment
Unemployment of workers who have employable skills, such as those who are voluntarily moving between jobs or recent graduates who are looking for their first job.
Full Employment
When an economy is producing at a level of output at which almost all the nation’s resources are employed. The unemployment rate when an economy is at full employment equals the natural rate, and includes only frictional and structural unemployment. Full-employment output is also referred to as “potential output.”
Imports
Spending on goods and services produced in foreign nations. Counts as a leakage from a nations circular flow of income.
Inflation
A rise in the average level of prices in the economy over time (percentage change in the CPI)
Investment
A component if aggregate demand, it includes all spending on capital equipment, inventories, and technology by firms. This does not include financial investment, which is the purchase of financial assets (stocks and bonds). Also includes household purchasing of newly constructed residences.
Marginal Analysis
Decision-making which involves a comparison of marginal (extra) benefits and marginal costs.
Marginal Propensity to Consume (MPC)
The fraction of any change in income spent on domestically produced goods and services; equal to the change in consumption divided by the change in disposable income.
Marginal Propensity to Save (MPS)
The fraction of any change in income that is saved; equal to the change in savings divided by the change in disposable income.
Market Economic System
A system of resource allocation in which buyers and sellers meet in markets to determine the price and quantity of goods, services, and productive resources.
