cie 9708 economics a2 c9

Flashcards covering key macroeconomic concepts.

Circular Flow of Income

An economic model that illustrates the flow of goods and services, factors of production, and money between households and firms in an economy.

Withdrawals (Leakages)

Income that is removed from the circular flow of income, such as savings, taxes, and imports.

Injections

Additions to the circular flow of income, such as investment, government spending, and exports.

Equilibrium in Circular Flow

A state where the rate of withdrawals (leakages) equals the rate of injections in the economy.

Marginal Propensity to Consume (MPC)

The proportion of an extra dollar of income that is spent on consumption.

Marginal Propensity to Save (MPS)

The proportion of an increase in income that is saved instead of spent on consumption.

Autonomous Consumption

The level of consumption expenditure which does not depend on income; expenditures taking place when disposable income levels are at zero.

Induced Consumption

Consumption that is influenced by the level of income; with rising income, people can spend more.

Autonomous Investment

The portion of total investment made by a government or other institution independent of economic considerations, such as government investments and funds allocated to public goods.

Induced Investment

The type of investment associated with current income, output, sales, and profit; it is influenced by the demand for goods and services.

Inflationary Gap

The difference between the current level of real GDP and the GDP that would exist if an economy was operating at full employment, where the current RGDP is higher than the potential GDP.

Deflationary Gap

The situation where a country's RGDP is lower than its GDP at full employment.

Multiplier Process

The process that occurs when any changes in the components of aggregate demand lead to an even greater change in national output.

Accelerator Effect

The effect that occurs when an increase in demand leads to an even bigger increase in investment (income-induced investment).

Crowding Out Effect

When government spending fails to increase overall aggregate demand because higher government spending causes an equivalent fall in private sector spending and investment.

Economic Growth

An increase in a country's real national output or productive capacity caused by increases in the quality or quantity of factors of production.

Economic Development

Refers to improvements in living standards, freedom, and life expectancy; a multidimensional process including changes in economic and social life.

Sustainability

A concept that suggests resources, such as the environment, should be used effectively and efficiently, so they can be maintained for future generations.

Actual Growth

The actual increase in the value of goods and services produced in the economy, measured in the short run using real GDP.

Potential Growth

The increase in the productive capacity of the economy in the long run, indicated by an increase in capital goods or skilled labor.

Output Gap

The difference between actual output and potential output; can be positive (during economic boom) or negative (during recession).

Business Cycle

The fluctuations in economic activity that an economy experiences over a period of time, including phases of boom, recession, trough, and recovery.

Labour Force

The total number of workers who are fit and able, willing to work at the market wage rate, civilians (not in the military service) and of working age population (18 to 65)—includes the unemployed

Unemployment Rate

The percentage of the labor force that is unemployed, calculated as the number of unemployed divided by the labor force, multiplied by 100.

Cyclical Unemployment

Short-term unemployment caused by recessions; due to a lack of demand for goods and services

Structural Unemployment

Long-term unemployment due to shifts in the economy, resulting in a mismatch between the skills companies need and what available workers offer; often contributed by globalization.

Frictional Unemployment

Voluntary, short-term unemployment that occurs when workers are in between jobs; includes people just entering the labor force.

Seasonal Unemployment

Unemployment caused by different industries or parts of the labour market being available during different seasons.

Classical (Real Wage) Unemployment

Unemployment that occurs when wages are set above the equilibrium level, leading to a surplus of labor; wages become sticky and do not fall enough for all workers to be hired.

Natural Rate of Unemployment

The level of unemployment that exists when the economy is considered to be at full employment; includes only voluntary (structural, frictional, seasonal) unemployment.

Phillips Curve

Shows the inverse relationship between unemployment and inflation; suggests a tradeoff between the two.

Stagflation

Occurs when an economy experiences stagnant economic growth, high unemployment, and high price inflation simultaneously, contradicting the theory behind the Phillips curve.

Money

Anything that can be used as a means of payment to facilitate trade; a stable store of value is important for its utility.

Functions of Money

Medium of exchange, store of value, unit of account, and standard of deferred payment.

Quantity Theory of Money

MV=PT, an economic theory stating that there is a direct relationship between a change in the money supply and the rate of inflation.

Monetary Transmission Mechanism

The channel by which monetary policy affects aggregate demand; connects changes in money supply to changes in income and output.

Credit Creation Process

The ability of commercial banks to create money through credit/deposits via the fractional reserve banking system.

Fractional Reserve Banking System

A banking system in which only a fraction of bank deposits are backed by actual cash on hand and available for withdrawal

Bonds

Represent the debts of issuers such as companies or government to raise money; could be thought of as an I.O.U. between the lender and borrower which includes the details of the loan and its payments.

Quantitative Easing (QE)

An unconventional monetary policy used when cutting interest rates fails to boost economic activity; the central bank creates money electronically to buy securities.

Tapering

The gradual reduction in the pace of quantitative easing (QE) by decreasing government bond purchases.

Liquidity Preference

A theory that suggests that people will desire to hold money as an asset because of transactional motive, the precautionary motive and the speculative motive

Loanable Fund Theory

The rate of interest is determined by the demand and supply of loanable funds in the money market. The loanable funds are money available for loans, which include loans, bonds and savings deposits