LSU Econ 2010 Exam 3

business cycles

short term fluctuations in GDP and other variable

reccesion

a period in which the economy is growing at a rate significantly below normal

depression

a particularly severe or protracted recession

peak

the beginning of a recession; the high point of economic activity prior to a downturn

trough

the end of a recession; the low point of economic activity prior to a recovery

expansion

a period in which the economy is growing at a rate significantly above normal

boom

a particularly strong and protracted expansion

potential output, y*

the maximum sustainable amount of output ( real GDP) that an economy can produce

output gap

the difference between the economy's actual output and its potential output, relative to potential output, at a point in time

recessionary gap

a negative output gap which occurs when potential output exceeds actual output (Y

expansionary gap

a positive output gap, which occurs when actual output is higher than potential output (Y>Y*)

natural rate of unemployment, u*

the part of the total unemployment rate that is attributable to frictional and structural unemployment; equivalently, the unemployment rate that prevails when cyclical unemployment is zero, so that the economy has neither a recessionary nor an expansionary output gap

Okun's law

each extra percentage point of cyclical unemployment is associated with about a 2 percentage point increase in the output gpa, measured in relation to potential output

menu cost

the costs of changing prices

planned aggregate expenditure (PAE)

total planned spending on final goods and services

consumption function

the relationship between consumption spending and its determinants, in particular, disposable income

autonomous consumption

consumption spending that is not related to the level of disposable income

wealth effect

the tendency of changes in asset prices to affect households' wealth and thus their consumption spending

marginal propensity to consume (MPC)

the amount by which consumption rises when disposable income rises by $1; we assume that 0

autonomous expenditure

the portion of planned aggregate expenditure that is independent of output

induced expenditure

the portion of planned aggregate expenditure that depends on output Y

expenditure line

a line showing the relationship between planned aggregate expenditure and output

short run equilibrium output

the level of output at which output Y equals planned aggregate expenditure PAE; the level of output that prevails during the period in which prices are predetermined

income expenditure multiplier

the effect of a one unit increase in autonomous expenditure on short run equilibrium output

stabilization polices

government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps

expansionary policies

government policy actions intended to increase planned spending and output

contractionary policies

government policy actions designed to reduce planned spending and output

fiscal policy

decisions about how much the government spends and how much tax revenue it collects

automatic stabilizers

provisions in the law that imply automatic increases in government spending or decreases in taxes when real output declines

board of governors

the leadership of the Fed, consisting of seven governors appointed by the president to staggered 14 year terms

federal open market commitee (FOMC)

the committee that makes decisions concerning monetary policy

banking panic

a situation in which news or rumors of the imminent bankruptcy of one or more banks leads bank depositors to rush to withdraw their funds

deposit insurance

a system under which the government guarantees that depositors will not lose any money even in their bank goes bankrupt

federal funds rate

the interest rate that commercial banks charge each other for very short term (usually overnight) loans; because the Fed frequently sets its policy in terms of the federal funds rate, this rate is closely watched in financial markets

portfolio allocation decision

the decision about the forms in which to hold one's wealth

demand for money

the amount of wealth an individual or firm choses to hold in the form of money

money demand curve

a curve that shows the relationship between the aggregate quantity of money demand M and the nominal interest rate i; because an increase int he nominal interest rate increase the opportunity cost of holding money, which reduces the quantity of money demanded, the money demand curve slopes

discount window lending

the lending of reserves by the federal reverse to commercial banks

discount rate (or primary credit rate)

the interest rate the the Fed charges commercial banks to borrow reserves

reserve requirements

set by the Fed, the minimum values of the ratio of bank reserves to bank deposits that commercial banks are allowed to maintain