Flashcards in Macroeconomics Deck (53):
Identify the five major sectors (or elements) of a macroeconomic free-market flow model.
In a macroeconomic free-market flow model, what are "leakages?"
Leakages are the purposes for which individual income is used other than for domestic consumption expenditures. These leakages include amounts of income that go for taxes, savings and payments for imports.
In a macroeconomic free-market flow model, what are "injections?"
Injections are the sources of amounts added to domestic production that are do not result from domestic consumption expenditures. These injections include amounts that come from government spending and subsidies, investment spending and amounts received for exports.
Define "personal disposable income".
Amount of income that individuals have available for spending, defined as total personal income after taxes are deducted.
Define "potential gross domestic product (potential GDP)".
The maximum final output that can occur in the domestic economy at a point in time, without creating upward pressure on the general level of prices in the economy.
Identify important gross measures used in macroeconomics.
Measures of total activity or output in an economy including: 1.Nominal Gross Domestic Product (GDP);
2.Real Gross Domestic Product;
3.Potential Gross Domestic Product;
4.Gross National Product (GNP);
5.Net National Product;
7.Personal Disposable Income.
Define "nominal gross domestic product (nominal GDP)".
Total output of final goods and services produced for exchange in the domestic market during a period (usually a year), without adjustment for changing price levels.
Define "real gross domestic product (real GDP)".
Total output of final goods and services produced for exchange in the domestic market during a period (usually a year), measured at constant prices.
Define "gross national product (GNP)".
Total output of all goods and services produced world-wide using economic resources of U.S. entities.
Define "net national product (NNP)".
Total output of all goods and services produced worldwide using economic resources of U.S. entities, but only including the cost of investment in new capital (excludes depreciation).
Define "national income (NI)".
The total payments for economic resources included in all production (but not including taxes as a payment).
Identify characteristics that exclude individuals from the labor (or work) force.
The following are not included in the labor force: 1.Those less than 16 years old;
3.Those not actively seeking work;
4.Those who are institutionalized;
5.Military members on active duty.
Define "frictional unemployment".
Unemployment in which members of the labor force are not employed because they are in transition between jobs or have imperfect information about job opportunities.
Define "structural unemployment".
Unemployment in which members of the labor force are not employed because their prior types of jobs have been greatly reduced or eliminated, and/or because they lack the skills needed for available jobs.
Define "cyclical unemployment".
Unemployment in which members of the labor force are not employed because a downturn in the business cycle has reduced the current need for workers.
Define "official full employment".
Officially, full employment exists where there is no cyclical unemployment. When there is official full employment, there could still be frictional, structural and/or seasonal unemployment.
Define "marginal propensity to consume" and "marginal propensity to save".
1.MPC = Change in consumption as a result of a change in disposable income (or percent of an additional dollar of disposable income that will be spent).
2.MPS = Change in savings as a result of a change in disposable income (or percent of an additional dollar of disposable income that will be saved).
3.MPC + MPS = 1 (i.e., the change in disposable income).
Define "average propensity to consume" and "average propensity to save".
1.APC = Percent of disposable income spent on consumption goods;
2.APS = Percent of disposable income saved;
3.APC + APS = 1 (i.e., Disposable Income).
Define the "consumption function".
The relationship between consumption spending and disposable income.
What are the factors that influence investment spending?
4.Consumer income and wealth;
5.Current vacancy rates;
6.Level of capacity utilization;
8.Current and expected sales levels.
Give at least three examples of investment spending.
3.Business durable equipment;
What is the effect of interest rate on investment spending?
1.Higher interest rates = lower levels of investment;
2.Lower interest rates = higher levels of investment
Define "aggregate demand".
Total spending of individuals, businesses, governmental entities, and net foreign spending on goods and services at different prices at the macroeconomic (economy) level.
What are the factors that determine the level of imports?
1.Relative levels of income and wealth;
2.Relative values of currencies;
3.Relative price levels;
4.Import and export restrictions and tariffs;
5.Relative inflationary rates.
List the significant factors that cause a negatively-sloped demand curve.
1.Interest rate factor;
3.Foreign purchasing power factor.
Define "discretionary fiscal policy".
Intentional changes by the government in its tax receipts and/or spending to increase or decrease aggregate demand. (e.g., to close a recessionary gap - increase demand;-to close an inflationary gap - reduce demand.)
What factors will cause a change in the level of a supply curve?
4.But NOT the Price of the item supplied, which causes a movement along a given Supply Curve.
What is the slope of a Conventional aggregate supply curve?
It is a continuously positive slope, with steeper slope beginning at the level of full employment; supply increases with price, but requires proportionately higher prices at full employment.
What is the slope of a Keynesian aggregate supply curve?
It is horizontal up to the level of output at full employment, then slopes upward to the right; supply increases with no change in price until the economy is at full employment.
What is the slope of a Classical aggregate supply curve?
It is completely vertical; supply remains unchanged at various price levels.
Define "aggregate supply".
Total output of goods and services at different price levels at the macroeconomic (economy) level.
What determines aggregate equilibrium for an economy?
The level of output and price at which aggregate demand and aggregate supply are equal.
What factors determine the effect of a change in aggregate supply (alone) on aggregate equilibrium?
1.Which Aggregate Supply Curve is assumed;
2.Direction of change in the Aggregate Supply Curve
What is the effect on aggregate equilibrium of an increase in aggregate demand (only) when a Classical supply curve is assumed?
Since the Classical supply curve is completely vertical, an increase in Aggregate Demand (alone) will increase price with no change in the quantity supplied.
What is the effect on aggregate equilibrium of an increase in aggregate demand (only) when a Keynesian supply curve is assumed?
Since the Keynesian supply curve is horizontal up to the point of full employment, as Aggregate Demand increases, there will be an increase in supply (quantity) with no change in price until the level of full employment is reached, at which point both quantity and price increase.
What is the effect on aggregate equilibrium of a decrease in aggregate demand (only) when a Conventional supply curve is assumed?
Since the Conventional supply curve has a continuous positive slope, as Aggregate Demand decreases, both supply (quantity) and price will decrease.
Give examples of lagging indicators (of the business cycle).
1.Changes in labor cost;
2.Ratio of inventory to sales;
3.Duration of unemployment;
4.Commercial loans outstanding;
5.Ratio of consumer installment credit to personal income.
Give examples of leading indicators (of the business cycle).
2.Initial claims for unemployment;
3.Weekly manufacturing hours;
6.New orders for consumer goods;
7.Real money supply.
Define "business cycles".
Cumulative fluctuations in aggregate real GDP which last at least two years
Identify and describe the elements of business cycles.
1. Peak: Point that marks the end of rising aggregate output and the beginning of a decline in output;
2.Trough: Point that marks the end of a decline in aggregate output and the beginning of an increase in output;
3.Economic Expansion or Expansionary Period: Periods during which aggregate output is increasing;
4.Economic Contraction or Recessionary Period: Periods during which aggregate output is decreasing.
Define "leading indicators of business cycles".
Measures of economic activity that occurs before a change in the business cycle.
Define "lagging indicators of business cycles".
Measures of economic activity associated with changes that occur after changes in the business cycle.
Identify three common price indices.
1.Consumer Price Index (CPI);
2.Wholesale Price Index (WPI);
3.Gross Domestic Product (GDP) Deflator
What causes demand-induced (or demand-pull) inflation?
Results when aggregate spending for goods and services exceeds the productive capacity of the economy at full employment.
What causes supply-induced (or cost-push or supply-push) inflation?
Results from increases in the cost of inputs to the production process which are passed on to the final buyer in the form of higher prices.
What are the consequences of inflation?
1.Lower current wealth and lower future real income;
2.Higher interest rates;
3.Uncertainty of economic measures.
Define "price indexes (or indices)".
Factor that converts prices of each period to what those prices would be in terms of prices of a specific prior (or subsequent) reference period.
Define "inflation" and "deflation".
1.Inflation = the rate of increase in the price level.
2.Deflation = the rate of decrease in the price level.
In the U.S., most commonly measured by the CPI-U.
Identify and define the various measures of money used by the Federal Reserve.
1.M1: Paper and coin currency held outside banks and check-writing deposits.
2.M2: Includes M1 items plus savings deposits, money-market deposit accounts, certificates of deposit (less than $100,000), individual-owned money-market mutual funds, and certain other deposits.
3.M3: Includes M2 items plus certificates of deposit ($100,000 and greater), institutional-owned money-market mutual funds, and certain other deposits
What are the methods used by the Federal Reserve to regulate the money supply?
1.Reserve-requirement changes (percent of loan amounts that must be held by bank);
2.Open-Market Operations (buying and selling U.S. Treasury debt obligations);
3.Discount Rate (rate of interest banks pay when borrowing from Federal Reserve Banks).
Identify the major components of the United States banking system.
A central banking system, the Federal Reserve System, consisting of:1.Board of Governors: Policy-making body;
2.Federal Open Market Committee: Implements monetary policy through open-market operations to affect the money supply (M1);
3.Federal Reserve Banks: Twelve district banks, each responsible for a specific geographical area of the U.S.
What functions does money serve?
1.A medium of exchange;
2.A measure of value;
3.A store of value.