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ECN 203 > Final Review > Flashcards

Final Review Flashcards

1
Q

Gross Domestic Product

A

value of all new production in a nation in a period of time

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2
Q

Recession

A

actual GDP falls for two consecutive quarters or more

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3
Q

Depression

A

prolonged, deep decline in GDP

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4
Q

Potential GDP

YF

A

highest amount of production that an economy can achieve and sustain based on the amount of available resources

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5
Q

Frictional Unemployment

A

enough jobs, but haven’t found a job yet. Happens because job search takes time

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6
Q

Structural Unemployment

A

enough jobs, but a mismatch between skills and jobs. Happens because economy
grows/changes

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7
Q

Demand-Deficient Unemployment

A

not enough jobs for all actively seeking unemployment

unhealthy economy

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8
Q

Natural Rate of Unemployment

A

sum of frictional and structural rates

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9
Q

C

A

Consumption

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10
Q

I

A

Investment

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11
Q

G

A

Government Spending

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12
Q

T

A

Net Government Taxation

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13
Q

X

A

Exports

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14
Q

M

A

Imports

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15
Q

Real Value

A

a value measured in constant dollars overtimes, accounts for changes overtime

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16
Q

Nominal Value

A

a value measured in current dollars, does not account for changes overtime

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17
Q

Inflation

A

the price level rises, purchasing power of money falls

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18
Q

Price Level

A

an aggregate measure of prices in the economy

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19
Q

Consumer Price Index

A

measures price changes of goods the typical household buys (most widely used measure of inflation)

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20
Q

Deflation

A

the price level falls, purchasing power of money rises

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21
Q

Aggregate Demand (AD)

A

Represents the demand side of the economy and shows the relationship between P and Y demanded

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22
Q

Why is AD downward sloping?

A

At higher levels of the price level, the less real GDP aggregate expenditures will buy

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23
Q

AD shifts RIGHT when…

A

AE rises

C, I, G, or X increases

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24
Q

AD shifts LEFT when…

A

AE falls

T or M increases

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25
Q

Aggregate Supply (AS)

A

Represents the supply side of the economy and shows the relationship between P and Y supplied

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26
Q

Long-Run Aggregate Supply (LAS)

A

Vertical at full employment (YF) because in the long run all markets have fully adjusted and economy reaches a production level full GDP at any price level

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27
Q

Short-Run Aggregate Supply (AS)

A

relationship between amount of the actual Y supplied and P when market has not yet fully adjusted

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28
Q

Shape of AS

A

Reflects changes in costs of producing as Y increases

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29
Q

What shifts AS?

A

Changes in basic factor prices causes costs of producing to change
(Ex: change in wages or price of oil

30
Q

Consumption Spending (C)

A

Represents household purchases of goods and services

31
Q

Causes of Consumption (C)

A 
Moves Along AD: Real GDP (Y)
Y▲ = C▲
Shifts AD: Wealth (W), Consumer Confidence (CC)
W▲ = C▲
CC▲ = C▲
32
Q

G - T > 0

A

Budget Deficit

AD Shifts Right

33
Q

G - T

A

Budget Surplus

AD Shifts Left

34
Q

G - T = 0

A

Balanced Budget

35
Q

X - M > 0

A

Trade Surplus

36
Q

X - M

A

Trade Deficit

37
Q

Causes of Net Exports (NX)

A

World GDP: YW▲ = X▲ = NX▲

Domestic GDP: YD▲ = M▲ = NX▼

38
Q

If currency strengthens…

A

X decreases

M increases

39
Q

If currency weakens…

A

X increases

M decreases

40
Q

Reasons for Currency Exchange

A
  • Travel
  • Buying Imports/Selling Exports
  • International Capital Flows
41
Q

Macroeconomic shocks

A

sudden events that occur and take the economy off course

42
Q

Aggregate Demand Shocks

A

AD shifts

Ex: Housing/Subprime Mortgage Crisis

43
Q

Aggregate Supply Shocks

A

AS shifts

Ex: Sudden rise in the price of oil

44
Q

Inflationary Pressure

A

Occurs when resources are used beyond a point of sustainability. As a result, there is an excess demand in the labor market.

45
Q

Response to Inflationary Pressure

A

Adjustments in labor market occur and economy achieves a stable P

46
Q

Unemployment

A

Occurs when Y is less than YF in the Macro Model. As a result, there is an excess supply in the labor market.

47
Q

Response to Unemployment

A

Adjustments in labor market will occur and economy returns to YF

48
Q

Phillips Curve

A

Graph representing the trade-off between unemployment and inflation

49
Q

Wage-Price Spiral

A

Rising prices push workers to demand higher wages. In turn higher wages push up production costs, driving up prices (AD Shock)

50
Q

Stagflation

A

Both inflation and unemployment occur simultaneously in the economy (AS Shock)

51
Q

Federal Reserve

A

Established in 1913 to monitor names after a series of banking crises. It is independent of political control.

52
Q

Structure of the Fed

A

Board of Governors: 7 members

Federal Open Market Committee (FOMC): Board and 5 bank presidents

53
Q

Reserve Requirements

A

the portions of deposits banks must hold

54
Q

Open Market Operations

A

Buying and selling of bonds in the Open Market

55
Q

What is the main policy tool of the Fed?

A

Open Market Operations

56
Q

Federal Funds Market

A

Market for overnight loans between banks

57
Q

Federal Funds Rate (FFR)

A

Rate charged on loans in Federal Funds Market

58
Q

When the Fed buys bonds…

A

DURING RECESSION

  • Increase bank reserves
  • Lowers FFR
  • Increase S of financial capital
  • Lowers long-term interest rates
  • Increases I, AD, Y, and P
59
Q

When the Fed sells bonds…

A

DURING INFLATION

  • Decrease bank reserves
  • Raises FFR
  • Decreases S of financial capital
  • Raises long-term interest rates, - - Decreases I, AD, Y, and P
60
Q

Discount Rate (DR)

A

Rate on borrowing from Federal Reserve

61
Q

Non-interventionists

A

Government policy is unnecessary, economy will self correct

62
Q

Interventionists

A

Government should use policy tools to speed along the recovery

63
Q

Crowding Out Effect

A

Situation where interest rates rise when the government borrows funds. As a result, private-sector borrowing and investment spending fall.

64
Q

Investment (I)

A

Determined in long-term financial capital market

65
Q

Why is Supply of financial capital Upward Sloping?

A

As interest rate (r) increases, more willing to lend capital

66
Q

Shift Variables of Supply of Financial Capital

A
  • Perception of default risk for making a loan (higher the risk, higher the interest want to charge)
  • Difference between short rates and long rates (waiting premium and inflationary expectation premiums)
  • Entry and Exit of funds (international capital flows, wealth in the economy)
67
Q

Why is Demand of financial capital Downward Sloping?

A

At higher interest rate (r), willing to borrow less

68
Q

Shift Variables of Demand of Financial Capital

A
  • Business confidence: expectations about the future - Willing to demand and invest more capital if expectations are good
  • DI shifts right when confidence rises
  • DI shifts left when confidence falls
69
Q

Why does the unemployment rate underestimate the true amount of unemployment?

A

Excludes the discouraged worker and the underemployed

70
Q

I

A

Investment

ECN 203 (3 decks)

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