Unit 2 Definitions Flashcards
• Accelerator
a change in the level of investment in new capital goods induced by a change in national income or output. The size of the accelerator depends on the economy’s capital-output ratio.
• Aggregate demand
the total planned spending on real output produced within the economy.
• Aggregate supply
the level of real national output that producers are prepared to supply at different average price levels.
• Balance of trade in goods
the part of the current account measuring payments for exports and imports of goods. It is sometimes called the “balance of visible trade.”
• Balance of trade in services
the part of the current account measuring payments for exports and imports of services. It is sometimes called the “balance of invisible trade,” though the two terms are not strictly identical.
• Balanced budget
this is achieved when government spending equals government revenue (G = T.)
• Bank Rate
the rate of interest the Bank of England charges when lending money to commercial banks to increase their liquidity.
• Budget deficit
occurs when government spending exceeds government revenue (G > T.)
• Budget surplus
occurs when government spending is less than government revenue (G < T.)
• Capital-output ratio
the ratio between the output that firms are currently producing and their existing stock of fixed capital assets.
• Central bank
the central bank implements monetary policy on behalf of the government.
• Ceteris paribus
holding all other factors in the economy constant when examining one part of the economy. It is an important assumption in microeconomics, but not generally in macroeconomics.
• Claimant count
the method of measuring unemployment according to those people who are claiming unemployment-related benefits.
• Closed economy
an economy with no international trade.
• Commercial bank
a commercial bank, such as Barclays, aims to make a profit from commercial banking business.
• Consumption
total planned spending by households on real output produced within the economy.
• Contractionary fiscal policy
uses fiscal policy to decrease aggregate demand and to shift the AD curve to the left.
• Cost-push theory of inflation
a rising price level is caused by an increase in the costs of production, shown by a shift of the SRAS curve to the left.
• Crowding out
a situation in which an increase in government or public sector spending displaces private sector spending, with little or no increase in aggregate demand.
• Current account (1)
the part of the balance of payments measuring payments for exports and imports, investment income and transfers.
• Current account (2)
a bank account that allows its owner to withdraw cash immediately by using a cheque or a plastic debit card.
• Current account deficit
occurs when currency outflows in the current account exceed currency inflows. It is often shortened to “exports exceeding imports (X < M).”
• Current account surplus
occurs when currency inflows in the current account exceed currency outflows. It is often shortened to “exports exceeding imports (X > M).”
• Cyclical unemployment
also known as Keynesian and demand-deficient unemployment. As this name suggests, it is unemployment caused by a lack of aggregate demand in the economy.
• Deficit financing
deliberately running a budget deficit and borrowing to finance the deficit.
• Deflation
a persistent or continuing fall in the average price level.
• Demand-pull inflation
a rising price level caused by an increase in aggregate demand, shown by a shift of the AD curve to the right.
• Demand-side fiscal policy
changes in the budget deficit are used to increase or decrease the level of aggregate demand (and to shift the AD curve to the right or the left.)
• Depression
this term has no generally agreed definition. It is best to think of it as a long and deep recession. In the UK, a recession is defined as a period of negative economic growth lasting at least 6 months.
• Deregulation
involves removing previously imposed regulations.
• Discretionary fiscal policy
involves making discrete changes to G, T and the budget deficit to manage and “fine-tune” the level of aggregate demand.
• Economic cycle
the fluctuation of real output above and below the trend output line.
• Economic growth
an increase in the economy’s potential level of real output, and an outward movement of the economy’s production possibility frontier.
• Equilibrium national income
the level of income at which withdrawals from the circular flow of income equal injections into the flow. In a two-sector model of the economy, national income is in equilibrium when S = I.
• Expansionary fiscal policy
uses fiscal policy to increase aggregate demand and to shift the AD curve to the right.
• Export
a domestically produced good or service sold to residents of other countries.
• Free-market economists
these are also known as neoclassical economists.
• Frictional unemployment
voluntary unemployment, occurring when a worker switches between jobs.
• Full employment (Beveridge’s definition):
3% or less of the labour force unemployed.
• Full employment (free-market definition)
the level of employment occurring at the market-clearing real wage rate, where the number of workers whom employers wish to hire equals the number of workers wanting to work.
• Government spending multiplier
the relationship between a change in government spending and the resulting change in national income.
• Import
a good or service produced in another country and sold to residents of this country.
• Inflation
a persistent or continuing rise in the average price level.
• Interest rate
the reward for lending savings to somebody else (e.g. a bank) and the cost of borrowing.
• Investment
total planned spending by firms on real output produced within the economy.
• Investment income
profit and interest income flowing into a country that is generated from assets that residents of the country own abroad.
• Investment multiplier
the relationship between a change in investment and the resulting change in national income.
• Keynesian economists
followers of the economist John Maynard Keynes.
• Labour Force Survey
a quarterly sample survey of households in the UK. Its purpose is to provide information on the UK labour market. The survey seeks information on respondents’ personal circumstances and their labour market status during a period of 1-4 weeks.
• Lender of last resort function
the Bank of England’s willingness to lend cash to commercial banks to increase their liquidity and to maintain confidence in the banking system.
• Liquidity
measures the ease with which assets can be turned into cash quickly and at a pre-known rate or price. Cash is the most liquid of all assets.
• Macroeconomic equilibrium
the level of real national output at which AD = AS or at which planned injections into the circular flow of income equal planned withdrawals from the flow.
• Macroeconomics
involves the study of the whole economy at the aggregate level.
• Marketisation
involves shifting provision of goods or services from the non-market sector to the market sector.
• Monetarism
the belief that, as inflation is assumed to be caused by excessive growth of the money supply, monetary policy should be used to control its growth.
• Monetary policy
involves the use of interest rates to achieve the government’s policy objectives.
• Money supply / stock of money
takes the form of cash and bank deposits.
• Mortgage
a long-term loan to a house owner that is secured by the property.
• National debt
the stock of all past government borrowing that has not been paid back.
• National income / national output
the flow of new output produced by the economy in a particular period (e.g. a year.)
• National income multiplier
the relationship between a change in aggregate demand and the resulting change in national income.
• Open economy
an economy with exports and imports.
• Output gap
the difference between actual output and the trend output line.
• Policy conflict
occurs when two policy objectives cannot be achieved at the same time: the better the performance in achieving one objective, the worse the performance in achieving the other.
• Policy indicator
provides information about what is happening in the economy.
• Policy instrument
a tool or set of tools used to try to achieve a policy objective.
• Policy objective
a target or goal that policy-makers aim to “hit.”
• Privatisation
involves shifting the ownership of state-owned assets to the private sector.
• Progressive tax
a tax where the proportion of income paid in tax rises as income increases.
• Recession
a fall in real output for 6 months or more
• Reflation
an increase in the level of real output following an increase in aggregate demand.
• Saving
income which is not spent.
• Seasonal unemployment
unemployment caused by factors such as the weather and the end of the Christmas shopping period.
• Structural unemployment
unemployment caused by structural change in the economy: for example, when industries decline without being replaced by new industries.
• Supply-side economics
a branch of free-market economics arguing that government policy should be used to improve the competitiveness and efficiency of markets.
• Supply-side fiscal policy
used to increase the economy’s ability to produce and supply goods, through creating incentives to work, save, invest and to be entrepreneurial
• Supply-side policies
interpreted narrowly, supply-side policies focus on the role of tax cuts in increasing personal incentives. Interpreted broadly, they aim to improve the economy’s ability to produce and supply more output.
• Tax multiplier
the relationship between a change in taxation and the resulting change in national income.
• Technical progress
improvements in methods of production resulting from invention, innovation and research and development. It often leads to the production of new types of goods and better-quality goods.
• Trade-off between policy objectives
governments often do this because it may be impossible to achieve two or more objectives simultaneously. They aim for a satisfactory combination.
• Transfers (1)
the part of government spending in which tax revenues are paid to people such as pensioners, without any output being produced in return.
• Transfers (2)
payments flowing between countries in forms such as foreign aid, grants and gifts.
• Trickle-down effect
income paid by rich people to the poorer people they employ.
• Wealth
the stock of assets, or things that have value, which people own.
