ECON 0110: EXAM 2
52 Cards in this Set
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consumption function
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the relationship in the economy between consumption and income, other things constant: Y=C+S+T
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marginal propensity to consume
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the fraction of a change in income that is spent on consumption; the change in consumption divided by the change income that caused it
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marginal propensity to save
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the fraction of a change in income that is saved; the change in saving divided by the change in income that caused it
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saving function
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the relationship between saving and income, other things constant
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net wealth
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the value of all assets, minus liabilities
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investment function
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the relationship between the amount businesses plan to invest and the economy's income, other things constant
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autonomous
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a term that means independent, for example, investment is independent of income
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government purchase function
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the relationship between government purchases and the economy's income, other things constant
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net export function
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the relationship between net exports and the economy's income, other things constant
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aggregate expenditure line
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a relationship tracing, for a given price level, spending at each level of income, or real GDP; the total of C+I+G+(X-M) at each level of income, or real GDP
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income-expenditure model
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a relationship that shows how much people plan to spend at each income level; this model identifies, for a given price level, where the amount people plan to spend equals the amount produced in the economy
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simple spending multiplier
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the ratio of a change in real GDP demanded to the initial change in spending that is brought about; the numerical value of it is 1/(1-MPC), called because only consumption varies with income
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automatic stabilizers
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structural features of government spending and taxation that reduce fluctuations in disposable income, and thus consumption, over the business cycle
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discreationary fiscal policy
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the deliberate manipulation of government purchases, taxation, and transfer payments to promote macroeconomic goals, such as full employment, price stability, and economic growth
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simple tax multiplier
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the ratio of a change in real GDP demanded to the initial change in autonomous net taxes that brought it about; the numerical value is: -mpc/(1-mpc)
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expansionary fiscal policy
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an increase in government purchases, decrease in net taxes, or some combination of the two aimed at increasing aggregate demand enough to reduce unemployment and return the economy to its potential output; fiscal policy used to close a recessionary gap
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contractionary fiscal policy
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a decrease in government purchases, increase in net taxes, or some combination of the two aimed at reducing aggregate demand enough to return the economy to potential output without worsening inflation; fiscal policy used to close an expansionary gap
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classical economists
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a group of 18-19th cen. economists who believed that economic downturns corrected themselves through natural market forces; thus, they believed the economy was self-correcting and needed no government intervention
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Employment Act of 1946
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law that assigned to the federal government the responsibility for promoting full employment and price stability
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permanent income
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income that individuals expect to receive on average over the long term
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American Recovery and Reinvestment Act
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at an estimated cost of $862 billion, the largest stimulus measure in history, enacted in Feb 2009 and projected to last two years
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federal budget
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a plan for federal government outlays and revenues for a specified period, usually a year
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budget resolution
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a congressional agreement about total outlays, spending by major category, and expected revenues; it guides spending and revenue decisions by the many congressional committees and subcommittees
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continuing resolution
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budget agreements that allow agencies, in the absence of an approved budget, to spend at the rate of the previous year's budget
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entitlement programs
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guaranteed benefits for those who qualify for government transfer programs such as social security and medicare
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annually balanced budget
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budget philosophy prior to the Great Depression; aimed at matching annual revenues with outlays, except during the times of war
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cyclically balanced budget
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a budget philosophy calling for budget deficits during recessions to be financed by budget surpluses during expansions
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functional finance
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a budget philosophy using fiscal policy to achieve the economy's potential GDP, rather than balancing budgets either annually or over the business cycle
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crowding out
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the displacement of interest-sensitive private investment that occurs when higher government deficits drive up market rates
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crowding in
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the potential government spending to stimulate private investment in an otherwise dead economy
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national debt
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the net accumulation of federal budget deficits
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inflation
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a sustained increase in the average level of prices
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Consumer price index
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based on prices of things consumers buy, includes used goods and imports, but not raw materials
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GDP deflator
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includes price of all new goods and services produced in the US
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deflation
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a decrease in the average level of prices
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disinflation
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a decrease in the inflation rate
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stagflation
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simultaneous existence of high inflation and high unemployment
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hyperinflation
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very high inflation
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indexing
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increasing contracted payments automatically to take into account inflation
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Cost of living adjustments
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pay increases which are indexed
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substitution
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the actual market basket should change as prices change
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Phillips Curve
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graph showing the inverse (negative) relationship between the unemployment rate and the inflation rate
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autonomous consumption
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spending that does not depend on the level of income or GDP
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autonomous spending
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any spending that does not depend on the level of income or GDP
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induced consumption
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the increase in consumption spending caused (or induced) by an increase in income
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autonomous investment
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investment spending that does not depend on the level of GDP
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induced investment
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investment spending that increases or decreases as GDP increases or decreases
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desired investment spending
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the amount businesses wish to spend on new plant and equipment = the amount contractors wish to spend on new residential construction + the amount that businesses wish to spend to add to their stock inventory
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induced investment spending
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investment spending that is induced by increases in the level of GDP
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planned investment
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the plant and equipment spending, residential construction spending, and inventory spending that firms desire to undertake
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equilibrium level of output
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the level of output in which planned or desired purchases by consumers, businesses, government and foreigners equal aggregate output
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autonomous spending multiplier
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the change in equilibrium output divided by the change in autonomous spending that caused it
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