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Macro-economics
the study of problems that affect the economy as a whole (lack of growth, recessions, unemployment, and inflation) and what to do about them
Classical Economists
economists who believe that business cycles (ups and down of the economy) are temporary glitches, and who generally favor laissez-faire, or non-activist, policies
Keynesian Economists
economists who believe that business cycles reflect underlying problems that can be addressed with activist government policies - said the government can help
Supply-side economics
the long-run growth framework focuses on incentives for supply
Demand-side economics
the short-run business cycle framework focuses on demand
Potential Output
the highest amount of output an economy can sustainably produce and sell using existing production process and resources
Per Capita Output
output divided by the total population
Business Cycle
a short-run, temporary upward or downward movement of economic activity, or real GDP, that occurs around the growth trend - Economy goes through ups and downs (peaks and troughs) - economic growth (long term going up) - business cycles -short run
Peak
top of a cycle
Boom
a very high peak, representing a big jump in output
Recession
a decline in real output that persists for more than two consecutive quarters of a year - creates unemployment and lower profits, etc.)
Expansion
an upturn that lasts at least two consecutive quarters of a year
Depression
a deep prolonged recession
Unemployment rate
the percentage of people in the economy who are both able to and looking for work but who cannot find jobs
Cyclical Unemployment
unemployment resulting from fluctuations in economic activity - caused by recessions
Structural unemployment
unemployment caused by the institutional structure of an economy or by economic restructuring making some skills obsolete - few jobs available with many people wanting them
Frictional unemployment
unemployment caused by people entering the job market and people quitting a job just long enough to look for and find another one - occurs because it takes time to find a new job (always exists)
Target rate of unemployment
the lowest sustainable rate of unemployment that policy makers believe is achievable given existing demographics and the economy's institutional structure
Structural Stognation
cyclical downturn that is not expected to end any time soon without major changes to the structure of the economy
Gross Domestic Product (GDP)
the total market value of all final goods and services produced in an economy in a one-year period -final goods and services -in an economy -during a time period - Flow variable (income not wealth, what's happening now)
Aggregate Accounting System
a set of rules and definitions for measuring economic activity in the economy as a whole
Consumption
spending by households on good and services
Investment
spending for the purpose of additional product -"saving", spend money in order to improve a businesses productivity
Government Spending
goods and services that government buy
Transfer Payments
payments to individuals that do not involve production by those individuals
Net Exports
spending on goods and services produced in the US that foreigners (export) minus goods and services produces abroad that US citizens buy (imports)
Final Output
goods and services purchased for their final use
Intermediate Products
products used as input in the production of some other product
Value Added
the increase in value that a firm contributes to a product or services
Depreciation
the decrease in an assets's value
Net Investment
gross investment minus depreciation
Gross National Product (GNP)
the aggregate final output of citizen and businesses of an economy in a one-year period - GNP = GDP + Net foreign Factor Income - includes foreign factors (making something abroad)
Net foreign factor income
the income from foreign domestic factor sources minus foreign factor income earned domestically
Nominal GDP
the amount of goods and services produced measured at current prices
Inflation
a continual rise in the price level over time
Real GDP
the total amount of goods and services produced adjusted for price-level changes
GDP deflator
the average price of all components of total output expressed relative to comparison year prices set at 100
Price Index
a measure of the composite price of a specified group of goods
Nominal Interest Rate
rate you pay or receive to borrow or lend money
Real Interest Rate
the nominal interest rate adjusted for inflation (nominal interest rate - inflation)
Real Wealth
the value of the productive capacity of the assets of an economy measured by the goods and services it can produce now and in the future
Nominal Wealth
the value of those assets measured at their current market prices
Asset Price Inflation
a rise in the price of assets unrelated to increases in their productive capacity
Purchasing Power Parity
a method of comparing income that takes into account that different relative prices among countries
Potential Output
the highest amount of output an economy can sustainably produce using existing production processes and resources
Monetary Policy
a policy of influencing the economy through changes in the money supply and interest rates - government influences money -Using interest rate or the money supply to change aggregate demand
Equilibrium Output
the level of output toward which the economy gravitates in the short tun because of the cumulative cycles of declining or increasing production
Deflation
an overall decline the price level in the economy
Paradox of Thrift
an increase in saving can lead to a decrease in expenditures, whit can lead to decreasing supply, decreasing output, causing a recession, and lowering total saving - we think something's going to happen so it does
Aggregate Demand Curve
a curve that shows how a change in the price level will change aggregate expenditures on all goods and services in an economy -slopes down -government only controls government spending, the people decided the rest
Interest Rate Effect
the effect that a lower price level has an investment expenditure through the effect that a change in the price level has on interest rates - higher price levels cause people to want more money. Thus, can borrow more and lend less, driving up the interest rate. Leads to reduce investment…
International Effect
as the price level falls, net exports will rise
Money Wealth Effect
a fall in the price level will make the holders of money richer, so they buy more - changes in price affect the purchasing power of your wealth, which shifts the consumption function
Multiplier Effect
the amplification of initial changes in expenditures - multiplier= 1/(1-Marginal Parpincy to Consume) - Marginal Parpincy to Consume- a measurement comparing how much we spend to how much we save (Poor people have a higher MPC)
Fiscal Policy
associated with government spending and taxes -using government spending or tax policy to change aggregate demand
Short-run aggregate supply curve
a curve that specifies how a shift in the aggregate demand curve affects the price level and real output in the short-run, other things constant
Quantity-Adjusting markets
markets in which firms respond to changes in demand primarily by changing production instead of changing their prices
Aggregate Supply curve
a curve that shows the long-run relationship between output and the price level -in the short-run, some things are sticky (changes don't move very fast) -long-run- when everything has time to adjust, changes in prices will have zero effect on Real GDP (Vertical at potential output)
Inflationary Gap
aggregate expenditures above potential output that exist at the current price level
Counter-cyclical Fiscal Policy
fiscal policy in which the government offsets any change in aggregate expenditures that would create a business cycle
Fine-tuning
fiscal policy designed to keep the economy always at its target or potential level of income
Recessionary Gap
the amount by which equilibrium output is less than potential output
GDP=
=Potential GDP - Actual GDP = C+I+G+NX
Productivity
Output per unit of input
Say's Law
supply creates its own demand
The Rule of 72
the number of years it takes for a certain amount to double in value is equal to 72 divided by its annual rate of increase
Specialization
the concentration of individuals on certain aspects of production
Division of Labor
the splitting up of a task to allow for specialization of production
Per Capita Growth
producing more goods and services per person (% change in real GDP - % change in population)
Human Capital
the skills that are embodied in workers through experience, education, and on-the-job training, or, people's knowledge
Social Capital
the habitual way of doing things that guides people in how they approach production
Technology
the way we make goods and supply services
Classical Growth Model
a theory of growth that emphasizes the role of capital in the growth process -focuses on diminishing marginal productivity of labor
Law of Diminishing Marginal Productivity
as more and more of a variable input in added to an existing fixed input, eventually the additional output produced with that additional input falls
New Growth Theory
a theory of growth that emphasizes the role of technology in the growth process
Positive Externalities
positive effects on others not taken into account by the decision maker
Patent
positive effects on others not taken into account by the decision maker
Learn by Doing
improve the methods of production through experience
Network Externality
the use of a good by one individual makes the technology more valuable to other people
Disinflation
a fall in the inflation rate
Price Stablility
a majority goal of the economy (keeping inflation in check because a lot of inflation is bad)
Trade Deficits
import more than we export
Trade Surplus
trading more than we bring in
National Account
Keep track of consumer spending, sales of producers, businesses, etc.
Shifters of the Aggregate Demand Curve
-Changes in Foreign Income -Exchange rates (how much our currency is worth in other countries) -Distribution of Income -Changes in Expectations (Paradox of Thrift) -Multipler Effect
Macroeconomic Policy
-we want price stability and low unemployment
Capital
factor of production, the things that help run a business -those with more capital grow slower
Entrepreneurship
most important source of economic growth
Money
a highly liquid financial asset that;s generally accepted in exchange for other goods, is used as a reference in valuing other goods and can be stored as wealth
Reserve Ratio
the ratio of reserves to total deposits 1/reserve ratio=amount of demand deposit
Money Multiplier
the measure of the amount of money ultimately created per dollar deposited in the banking system, when people hold no currency
Transaction Motive
the need to hold money for spending
Precautionary motive
holding money for unexpected expenses and impulse buying
Speculative Motive
holding cash to avoid holding financial assets whose prices are falling
M1
currency in the hands of the public, checking account balance, and traveler's checks
M2
M1 plus savings and money market accounts, small-denomination time deposits and retail money funds
Double Coincidence of Wants
in order to trade something that you want, you must have something they want
Types of Money
-Commodity Money- trading an actual good as money (gold) -Commodity-backed Money- not trading gold, trading the paper that says you own gold -Fiat Money- money backed by nothing
Bank Reserves
actual amount of money in the vault
T-accounts
assets on one side, liabilities on the other -assets=loans -liabilities=Deposits
Bank Run
everyone shows up at once asking for their money and banks may not have enough money (Mary Poppins)
Monetary Base
bank reserves and currency in circulation all physical currency in the economy

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