Key Things Flashcards
(128 cards)
1
Q
what is the difference between microeconomics and macroeconomics
A
- microeconomics is the decisions of individuals and firms
- macroeconomics studies the aggregate behaviour of the entire economy
2
Q
what are the three main variables macroeconomists use to study the economy
A
output, unemployment rate, inflation rate
3
Q
what is disposable income
A
income available for consumption and saving
4
Q
what is investment spending
A
spending on physical capital like machinery, buildings, and inventory changes
5
Q
what is the difference between exports and imports
A
- exports are domestically produced goods sold abroad
- imports are foreign goods purchased by residents
6
Q
recession
A
falling output and employment
7
Q
depression
A
severe, prolonged recession
8
Q
expansion
A
rising output and employment
9
Q
how does keynesian economics view economic slumps
A
as caused by inadequate spending and best addressed by government intervention
10
Q
what does gdp per capita measure
A
real gdp divided by the population - average income per person
11
Q
what does gdp per worker measure
A
real gdp divided by the number of workers - average productivity per worker
12
Q
what is the aggregate price level
A
measure of the overall level of prices in the economy
13
Q
what is the consumer price index
A
the most common price index used to measure inflation
14
Q
inflation
A
rise in the aggregate price level
15
Q
deflation
A
a fall in the aggregate price level
16
Q
price stability
A
when the overall price level is changing slowly
17
Q
inflation rate
A
the annual percentage change in the aggregate price level
18
Q
real wage
A
nominal income divided by the price level - shows how much you can buy
19
Q
how does inflation relate to the business cycle in the short run
A
inflation falls during downturns and rise during booms
20
Q
what determines inflation in the long run
A
changes in the money supply
21
Q
what are shoe leather costs
A
increased transaction costs from trying to avoid holding cash during inflation
22
Q
what are menu costs
A
the real cost of changing listed prices to inflation
23
Q
what are unit of account costs
A
costs from inflation making money a less reliable measure for value
24
Q
disinflation
A
the process of reducing the inflation rate
25
what is the classical view of the economy
- markets are self regulating
- prices guide behaviour
- savings drive investment
- economy tends toward full employment
26
what is focus of neoclassical economics
- supply and demand determine output and prices
- savings drive investment
- economy tends towards full employment
27
what is focus of keynesian economics
- private sector is unstable
- investment fluctuates
- government intervention is needed to stabilise employment
28
planned spending
what households/firms intend to spend or save
29
actual spending
what is actually spent or saved
30
full employment
everyone who wants a job at the current wage rate can get one
31
what is the deflationary gap
when planned expenditure exceeds full employment output
32
what is an inflationary gap
when actual expenditure exceeds full employment output
33
what is the keynesian multiplier effect
an increase in government spending leads to a larger increase in aggregate demand due to increased income
34
define money
any asset used to purchase goods/services; must be a medium of exchange, store of value, or unit of account
35
what is the difference between m1, m2, m3
m1 - most liquid
m2 - m1 + near money (savings, money market funds)
m3 - m2+ large time deposits
36
what is a t account used for
to show a banks assets and liabilities
37
what are bank reserves and the reserve ratio
reserves - vault cash + deposits at central bank
reserve ratio - % of deposits held as reserves
38
what is the money multiplier
ratio of money supply to the monetary base
39
what is the monetary base
currency in circulation + bank reserves
40
what does is and lm stand for
is - investments and saving
lm - liquidity and money
41
what links the goods and money markets in the is-lm model
the interest rate
42
what does the is curve represent
equilibrium in the goods market
43
what kind of relationship does the is curve show between interest rate and output
an inverse relationship
44
what causes the is curve to shift to the right
an increase in autonomous expenditure
45
what causes the is curve to shift to the left
a fall in autonomous expenditure
46
what affects the slope of the is curve
the sensitivity of consumption and investment to interest rate changes
47
what does the lm curve represent
equilibrium in the money market
48
what kinds of relationship does the lm curve show between income and interest rate
a positive relationship
49
what causes the lm curve to shift right
an increase in the money supply
50
what causes the lm curve to shift left
a decrease in money supply
51
what happens when government spending increases
is curve shifts right
52
what happens if taxes increase
disposable income drops - consumption falls - is curve shifts left
53
what happens when the central bank expands the money supply
lm curve shifts right - higher output and lower interest rates
54
how do central banks use the is-lm model
to monitor fiscal policy and assess potential inflationary effects
55
what is present value
the amount of money today needed produce a given future amount, using current interest rates
56
what is future value
the amount a sum of money today will grow to in the future, given prevailing interest rates
57
what is compounding
earning interest on both the initial principal and the accumulated interest
58
why is present value important for investment decisions
it allows comparison of costs and benefits at different points in time
59
when should a firm undertake an investment project
when the present value of expected income exceeds the present value of costs
60
what happens to the demand for loanable funds when interest rate rises
it declines
61
what other factors affect investment decisions beside interest rates
risk, changing interest rates, inflation
62
what does it mean to be risk averse
disliking uncertainty and preferring safer outcomes
63
how does insurance help manage risk
it transfers the risk from the individual to the insurer in exchange for a fee
64
what is adverse selection in insurance
high risk individuals are more likely to buy insurance than low risk ones
65
what is moral hazard
people take more risks after getting insurance because theyre protected from consequences
66
what is the actuarys role in insurance
to calculate risk probabilities
67
how does diversification reduce risk
by spreading investment across many stocks
68
what is idiosyncratic risk
risk unique to a specific asset or company
69
what risk cannot be eliminated through diversification
aggregate risk
70
whats the trade off between risk and return
lower risk means lower return; high return requires accepting risk
71
what does a countrys standard of living depend on
its ability to produce goods and services
72
what is productivity
the amount of goods and services produced per hour of a workers time
73
four key factors that determine productivity
- physical capital
- human capital
- natural resources
- technological knowledge
74
what are the solow production function model assumptions
- constant returns to scale
- dimishing returns to capital/labour
- closed economy
75
what is depreciation
the wearing of capital over time. reducing the capital stock
76
what happens when investment exceeds depreciation
the capital stock grows, leading to economic growth
77
what are long term drivers of economic growth
technological change and innovation
78
what is creative destruction
the process by which a new technology replaces old methods and skills
79
three causes of economic growth in the solow production model
- higher savings rate
- population growth
- technological improvement
80
why can population growth lead to poverty in some countries
if investment doesnt keep up, capital per worker falls, reducing income
81
what is foreign direct investment
capital investment owned and operated by a foreign entity
82
what is the role of the world bank
to promote investment in poor countries and support economic development
83
how does education contribute to growth
it increases human capital, raising productivity and wages
84
why are property rights and political stability important
they protect investment and ensure markets function effectively
85
how does free trade affect growth
it boosts efficiency and productivity, like a technological advance
86
how can governments support R and D
through grants, tax breaks and a strong patent system
87
unemployment
someone without a job who is willing and available to work at the going wage rate
88
what is the labour force
the total number of employed and unemployed individuals
89
two main methods of measuring unemployment
claimant count
labour force survey
90
what is frictional unemployment
unemployment from the time take to match workers with jobs
91
what is voluntary unemployment
when individuals choose not to work even though jobs are available
92
what is unvoluntary employment
when people want to work at current wages but cant find employment
93
what is structural unemployment
a mismatch between workers skill/location and available jobs
94
what is cyclical unemployment
caused by a fall in aggregate demand
95
what is the natural rate of unemployment
the level of unemployment that persists in the long run even in a healthy economy
96
how does a minimum wage above equilibrium create unemployment
it causes a surplus of labour
97
what are labour market imperfections
factors that prevent wages from adjusting to balance supply
98
what are efficiency wages
above equilibirum wages paid by firms to increase productivity
99
why might firms pay efficiency wages
to improve health, reduce turnover, boost effort, attract better workers
100
what is job search unemployment
time spent looking for a job that matches individual skills and preferences
101
what is a common cause in frictional unemployment
shifts in demand between firms or industries
102
what are some individual costs of unemployment
loss of income, low self esteem, health problems, addiction, family breakdown
103
what are economic fluctuations also known as
the business cycle - irregular and unpredictable changes in economic activity
104
what happens to unemployment when output falls
it rises
105
what macroeconomic variable is most commonly used to measure short run changes in the economy
real gdp
106
which component of gdp fluctuates most during the business cycle
investment spending
107
what are the two key variables in analysing short run economic fluctuations
real gdp and the price level
108
what model is used to explain short run economic fluctuation
the aggregate demand aggregate supply model
109
why is the aggregate demand curve downward sloping
wealth effect, interest rate effect, exchange rate effect
110
what causes the aggregate demand curve to shift
changes in consumption, investment, government spending, net exports
111
what is the shape of long run aggregate supply curve
vertical - because output depends on real factors, not price level
112
what causes the LRAS curve to shift
changes in labour, capital, natural resources, technology
113
why is the short run aggregate supply curve upward sloping
due to sticky wages, sticky prices, misperceptions
114
what is the sticky wage theory
wages are slow to adjust
115
what is the sticky price theory
prices dont adjust quickly
116
what is the misperceptions theory
firms misread overall price level changes, affecting output
117
what are the short run and long run effects of a shift in aggregate demand
short run - affects output and price level
long run - affects only price level; output returns to natural rate
118
what happens when aggregate supply shifts left
output falls, prices rise
119
stagflation
a combination of falling output and rising prices
120
how can policymakers respond to recession
- wait for self-correction
- use fiscal policy to boost aggregate demand
121
what are the three main functions of money
- medium of exchange
- unit of account
- store of value
122
fiat money
money without intrinsic value, used because of government decree
123
what is the role of a central bank
to regulate money supply and ensure financial and macroeconomic stability
124
what is the refinancing rate
the interest rate at which the central bank lends to commercial banks; raising it tightens the money supply
125
what is quantitative easing
central bank purchases of financial assets to inject money into the economy when interest rates are near zero
126
what is the money multiplier effect
when banks lend out a portion of deposits, they create new money, expanding the money supply
127
what is the quantity theory of money
the theory that the general price level is directly proportional to the money supply
128
how does inflation relate to money supply
long-run inflation is primarily caused by excessive growth in the money supply
