Macroeconomics Concepts Flashcards Preview

Econ 110 > Macroeconomics Concepts > Flashcards

Flashcards in Macroeconomics Concepts Deck (56):
1

When does cost-plus pricing happen?

When firms don't know the demand curve

2

What is odd pricing?

Pricing that often ends in 5 or 9 rather than 0

3

What is convenient pricing?

Prices that simplify and expedite transactions, reducing the time costs from physically making a transaction (vending machines, parking meter, food trucks)

4

Arbitrage

Buy a good in one market at a low price and resell it in another market at a higher price

5

Transaction costs

Costs involved in carrying out an exchange of goods

6

Price Discrimination

Charging different prices to different consumers for the same product when the price differences are not due to differences in cost. (cannot happen in the case of perfect competition)

7

Requirements to engage in price discrimination

1) firm has marketpower
2) identifiable differences in willingness to pay among consumers
3) arbitrage cannot be possible

8

Perfect Price Discrimination

Each consumer pays a price equal to their willingness to pay

9

Transfer Payments

Like social security where a person isn't getting anything directly in return.

10

GDP

The market value of all final goods and services produced in a country in a period of time, typically one year.

11

Production and Income

Total Production is the same as total income.

12

Four components of GDP

1) Personal Consumption expenditures (spending on services, durable goods, nondurable goods)
2) Gross Private Domestic Investment (business fixed investment, residential investment, changes in business inventories)
3) Government Consumption & Gross Investment (spending by governments on new goods and services)
4) Net exports of goods and services (exports - imports)

13

GDP Formula (Y)

Y=C+I+G+NX

14

What production is not included in GDP?

- Household Production: responsibilities of a homemaker
- Underground economy - drug trade, illegal activities, etc

15

GNP

Value of final goods and services produced by US residents.

16

National Income

GDP minus depreciation of machinery, equipment and buildings

17

Personal Income

national income minus earnings that corporations retain rather than pay to shareholders

18

Disposable personal income

personal income minus tax payments

19

Change in prices

1) price level - measure of average price of goods and services in the economy
2) inflation - increase in prices over time
3) nominal GDP - GDP using current year prices
4) Real GDP - GDP using base year prices.

20

Inflation rate

percentage change in the price level from one year to the next.

21

Consumer price index (CPI)

A measure of the average change over time in the prices that a typical urban family of four pays for the goods and services they purchase

22

Problems w CPI (4)

1 - substitution bias
2 - increase in quality bias
3 - new product bias
4 - outlet bias

23

Producer Price Index

Average of the prices received by all producers of goods and services at all stages of the production process.

24

Interest Rate

The price of borrowing money - The cost of borrowing funds, usually expressed as a percentage of the amount borrowed.

25

Nominal Interest Rate

The stated interest rate

26

Real interest rate

nominal interest rate minus the inflation rate

27

Expansion

Total employment & total production are increasing

28

Recession

Total employment & total production are decreasing

29

GDP per capita

GDP divided by the total population

30

Potential GDP

Real GDP when all firms are producing at capacity .

31

The Financial System

A system of financial markets and dinancial intermediaries through which firms acquire funds from households.

or

Institutions through which firms acquire funds from households.

32

What is a bond

It is a loan you give to the government

33

Aggregate demand curve

the relationship between price level and quantity of real GDP demanded by household, firms and govt.

34

3 factors that change quantity demanded

1) wealth effect - rise and fall of prices moves along demand curve
2) interest effect - some savings go in bank, get interest, lower price of loanable funds, more investment spending - all from lower price.
3) international trade effect - lower relative price in US meant more US goods purchased thatn foreign goods

35

3 factors that change demand

1) expectations - optimism about future shifts demand to right. pessimism about future shifts demand to left.
2) govt policy - fed can change interest rates
3) foreign factors - economic situation in other countries can increase or decrease foreign demand for US goods.

36

Aggregate supply curve

the relationship between price level and quantity of real GDP supplied by firms

37

Factors that determine potential GDP

# workers in the economy, capital stock, technology

38

factors that change supply

#workers, capital stock, technology, expectations for future prices, errors in past expectations, supply shock (unexpected change in price of important natural resources)

39

Roles of the Federal Reserve

1) lenders of last resort
2) manages the US money supply

40

The discount rate:

the interest rate that the Fed charges to banks

41

Money

any asset that people are generally willing to accept in exchange for goods and services or for payment of debts

42

commodity money

a good that is used as money but also has value independent of its use as money

43

fiat money

money that is authorized by a government body and does not have to be exchanged for commodity money

44

Functions of money (4)

1) Medium of exchange - If you want to buy goods you use money to do so
2) unit of account - giving a single way of measuring the value of many things
3) store of value - keeps its value through time
4) standard of deferred payment - paying over time in smaller payments. Works in low inflation

45

M1 money supply

Sum of currency in circulation, checking account deposits in banks, holdings of traveler's checks.

46

M2 money supply

sum of M1 money supply, savings account deposits, small-denomination time deposits, money market mutual fund shares

47

Reserves

Deposits that banks keep on hand as cash in deposits with the federal reserve

48

Required reserve ratio (RR)

minimum fraction of deposits that a bank is required by law to keep as reserves

49

Velocity of Money

Average number of times that each dollar is used to purchase goods and services included in GDP
(MxV=PxY)

50

Nominal exchange rate

the vlaue of one country's currency in terms of another country's currency

51

Implied exchange rate

also called the "purchasing power parity" exchange rate, used in big mac example where product is the same anywhere in the world.

52

Floating currency

demand and supply determine a country's exchange rate

53

Managed Float

Floating currency with occasional government intervention

54

Fixed

countries agree to keep exchange rates fixed for long periods of time.

55

Pegged exchange rate

A policy by which a country keeps fixed the exchange rate between its currency and another country's currency

56

Why peg an exchange rate?

1) Business planning - they can't set a maximizing price if the exchange rate changes every single day
2) encourage exports -