macroeconomic theory vocab

Question 1

exchange rate

Answer 1

the price of one currency in terms of another

Question 2

hot money

Answer 2

investment funds that flows regularly between different country’s financial markets as investors attempt to ensure they get the highest rate of return (interest rates) possible

Question 3

aggregate demand

Answer 3

total spending in an economy within a particular time period AD = C + I + G + X - M

Question 4

consumption expenditure

Answer 4

expenditure by consumers on goods and services

Question 5

investment expenditure

Answer 5

expenditure by firms on new machinery and other capital goods

Question 6

government expenditure

Answer 6

expenditure by the government on the provision of goods and services

Question 7

export expenditure

Answer 7

expenditure by foreign individuals and organisations on domestic goods and services

Question 8

import expenditure

Answer 8

expenditure by domestic individuals and organisations on foreign goods and services

Question 9

net exports (balance of trade)

Answer 9

export expenditure - import expenditure (X-M)

Question 10

price level

Answer 10

represents the average price of all goods and services produced in an economy within a time period - in UK we use weighted average called CPI

Question 11

corporation tax

Answer 11

a tax paid by limited companies as a proportion of their profit

Question 12

interest rate

Answer 12

cost of borrowing and the reward for saving expressed as a percentage

Question 13

average propensity to consumer

Answer 13

the proportion of income that is spent APC = C/Y

Question 14

marginal propensity to consume

Answer 14

the proportion of change income that is spent MPC = change in C/change in Y

Question 15

average propensity to save

Answer 15

the proportion of income that is saved APS = S/Y

Question 16

marginal propensity to save

Answer 16

the proportion of change income that is saved MPS = change in S/change in Y

Question 17

dissaving/negative saving

Answer 17

spending income that was previously saved

Question 18

floating exchange rate

Answer 18

a system whereby the price of one currency in terms of another is determined by the forces of demand and supply

Question 19

fixed exchange rate

Answer 19

a system whereby the price of one currency in terms of another is set at a specific rate and this rate is maintained by the government/central bank/monetary authority

Question 20

managed exchange rate (semi-fixed/dirty float)

Answer 20

a system whereby the exchange rate is allowed to float freely within a permitted band. intervention only occurs when the exchange rate reaches the upper or lower limits

Question 21

balance of trade

Answer 21

value of exports - value of imports (over a time period) X-M

Question 22

disposable income

Answer 22

income after tax has been subtracted and any benefits added

Question 23

discretionary income

Answer 23

disposable income minus all necessary expenditures e.g. mortgage, food, bills

Question 24

consumer confidence

Answer 24

refers to household optimism about their future circumstances (whether or not they’ll have a job)

Question 25

business confidence

Answer 25

how optimistic firms feel about the future e.g. do they expect profits to rise, do they expect increasing demand

Question 26

wealth effect

Answer 26

when consumption has a positive relationship with wealth

Question 27

indirect tax

Answer 27

tax paid by a firm on expenditure or output (UK-vat, duty tax)

Question 28

direct tax

Answer 28

tax on income and/or wealth (UK-income tax, NI, corporation tax, inheritance)

Question 29

saving

Answer 29

what isn’t spent

Question 30

dissaving/negative saving

Answer 30

spending income that was previously saved

Question 31

retained profit

Answer 31

the proportion of a firms profit that is kept by a firm and not given to shareholders

Question 32

full employment GDP

Answer 32

the value of national income when all resources (land, labour, capital, enterprise) are fully and efficiently utilised

Question 33

circular flow of income

Answer 33

an economic model that illustrates the flow of money/goods/services from households to firms in an economy

Question 34

AS curve

Answer 34

the relationship between the average price level and the total value of output domestic producers are planning to produce over a given period of time

Question 35

trade-off

Answer 35

occurs when one thing is given up in order to achieve another using AD/AS analysis we can identify a basic policy goal trade off

Question 36

macroeconomic equilibrium

Answer 36

occurs at the level of real GDP where the AD curve intersects the AS curve AD=AS

Question 37

positive output gap

Answer 37

occurs when GDP rises above full employment GDP

Question 38

negative output gap

Answer 38

occurs when GDP falls below full employment GDP

Question 39

injections

Answer 39

represent money that flows into the circular flow that can start a multiplier process - investment, gov expenditure, exports

Question 40

leakages/withdrawals

Answer 40

represent money that leaks out of the circular flow of income due to saving, taxation, imports

Question 41

multiplier

Answer 41

the amount by which an initial change in AD must be multiplied to find the eventual change in national income (GDP or Y)

Question 42

multiplier effect/process

Answer 42

the mechanism by which a change in AD eventually leads to an even greater change in national income (GDP)

Question 43

multiplier formulae

Answer 43

multiplier = final change in Y or GDP/initial change in AD multiplier = 1/proportion withdrawn

Question 44

economic cycle (business cycle)

Answer 44

fluctuations in the level of GDP/economic activity over time; following a repeated pattern of booms and slumps

Question 45

recession

Answer 45

at least two consecutive quarters of declining GDP (below trend growth)

Question 46

recovery

Answer 46

when economic growth becomes positive after a recession

Question 47

slowdown

Answer 47

when the rate of economic growth begins to fall and approach 0

Question 48

boom

Answer 48

when the rate of economic growth exceeds the rate of growth of potential GDP so that the output gap is narrowed

Question 49

the budget

Answer 49

T-G tax revenue - gov spending

Question 50

budget deficit

Answer 50

gov spending greater than tax revenue

Question 51

budget surplus

Answer 51

tax revenue greater than gov spending

Question 52

hysteresis

Answer 52

occurs when short run reductions in AD result in long run reductions in AS e.g. during long lasting recession

Question 53

demand pull inflation

Answer 53

increase in price level over time caused by increase in AD

Question 54

cost push inflation

Answer 54

increase in price level caused by an increase in firms costs e.g. cost of labour, cost of raw materials, cost of capitals that lead firms to increase prices to maintain profit