Week 1 Flashcards
paradox of thrift
- when households anticipate a recession they cut spending to prepare
- decrease in spending leads to an increase in lay-offs
- causes a recession - self-fulfilling prophesy
self-regulating economy
- popular pre-1930s
- economic problems will be solved without government intervention through the invisible hand
Keynesian economics
- popular post-1930s
- economic slumps can be mitigated through government intervention
monetary policy
uses changes in the quantity of money to change interest rates and affect overall spending
fiscal policy
uses changes in government spending and taxes to affect overall spending
recession/contraction
period of economic downturn, decreased output and employment
recovery/expansion
period of economic upturn, increased output and employment
business cycle
short run alternation between recessions and expansions
business cycle peak
point at which the economy turns from expansion to recession
business cycle trough
point at which economy turns from expansion to recession
business cycle graph
inflation
overall increase in price level
deflation
overall fall in price level
price stability
overall price level changes slowly or not at all
short run relationship between inflation and business cycle
- economy depressed: increases unemployment, decreases inflation
- economy booming: decreases unemployment, increases inflation
long run relationship between inflation and business cycle
inflation mainly determined by changes in money supply
problem with inflation
discourages people from holding onto cash because value decreases
problem with deflation
encouraes people to hold onto cash because more attractive than investment
national income and product accounts (NIPA)
- measures UK’s economic performance
- compares UK income/output to other nations
- tracks economic conditions throughout business cycle
consumer spending
household spending on goods and services
stock
share in ownership of company held by shareholder
bond
borrowing in form of IOU that pays interest
government transfer
payment by government to individuals for which no goods and services are provided in return
disposable income
- income + government transfers - taxes
- available income to spend or save
expanded circular flow diagram
private savings
disposable income - consumer spending
financial markets
- banking, stock, bond marketws
- channel private savings and foreign lending into investment, government and foreign borrowing
government borrowing
total amount of funds borrowed by federal, state and local government in financial markets
government purchase of g+s
total expenditure on g+s by federal, state, and local governments
exports
g+s sold to other countries
imports
g+s bought from other countries
inventories
stocks of goods and raw materials held to facilitate business operations
investment spending
spending on productive physical capital and on changes to inventories
GDP
market value of all final g+s produced in a country in a year
what are the 3 ways to calculate GDP?
- total value of all final g+s produced
- total spending on domestic g+s produced
- total factor income earned by households
what isn’t included in GDP?
- used goods
- financial assets/inputs
- any spending on goods not produced in nation
- intermediate g+s
value added method
value of sales - value of intermediate g+s
final g+s
g+s sold to final user
intermediate g+s
g+s sold from one firm to another that are inputs for production of final g+s
spending method
GDP = C + I + G + X - M
- C = consumer spending
- I = investment spending
- G = government spending
- X = exports
- M= imports
net exports
X - M
real GDP
- total value of final g + s produced in economy in given year using base year
- takes inflation into account
nominal GDP
- total value of final g + s produced in economy in given year
- doesn’t take inflation into account
chained dollars
method of calculating changes in GDP using average between growth rate of earlier base year and later base year
GDP per capita
average GDP per person
aggregate price level
measure of overall level of prices in economy
market basket
hypothetical set of consumer purchases of g+s
price index
cost of purchasing a given market basket in a given year
price index in a given year equation
inflation rate
yearly percentage change in price index
consumer price index (CPI)
measures the cost of market basket of a typical household
inflation rate equation
producer price index (PPI)
measures changes in price of g+s purchased by producers
GDP deflator
