ECON1102 Macroeconomics Flashcards

Flashcards for Macroeconomics Review

Macroeconomics

The study of the performance of national and global economies, focusing on broad economic aggregates and issues.

Goods and services

Objects that people value and produce to satisfy human wants.

Factors of production

Productive resources including land, labor, capital (physical and human), and entrepreneurship used to produce goods and services.

Human capital

Knowledge and skills that people obtain from education, job training, and work experience.

Physical capital

Tools, instruments, machines, buildings, and other constructions used in production.

What Trade-offs

Arise when people choose how to spend their incomes, governments choose how to spend tax revenues, and businesses choose what to produce.

Correlation

A statistical relationship between two or more variables.

Gross Domestic Product (GDP)

The market value of final goods and services produced in an economy over a certain period.

Consumption (C)

Spending by households on goods and services.

Investment (I)

Spending on new capital goods (excluding human capital).

Government Purchases (G)

Government purchases of goods and services.

Policies/legislation

Governmental structure

Resources

Resources

Production function

The relationship between factors of production and the amount of output that can be produced.

Total Factor Productivity (TFP)

A measure of how much output is obtained from a given set of labor and capital inputs.

Returns to scale

The rate at which output increases when all factors of production increase by the same proportion.

The Solow-Swan Growth Model

Focuses on the role of capital accumulation in explaining countries’ growth experiences.

Human capital

The stock of skills that individuals accumulate to make them more productive.

Technology

Blueprint of ideas which produce new products and processes more efficiently.

Institutions

Property rights, rule of law, government systems, organizational form of firms, and contract enforcement.

Exogenous shocks

External events that can significantly impact an economy.

Innovation

The implementation of a new or significantly improved product, process, marketing method, or organizational method.

Creative destruction

The process of entrepreneurial innovation and competition that destroys old models in favor of new ones.

Capacity utilization

How much of the existing productive capacity is being used.

Potential output

The maximum level of output that an economy can produce when using its resources at sustainable rates.

Business cycle

Short-term fluctuations in the growth of real GDP.

Peak

The beginning of a contraction; the high point of economic activity prior to a downturn.

Contraction

When the economy moves from peak to trough.

Trough

The end of a contraction; the low point of economic activity prior to a recovery.

Expansion

When the economy moves from trough to peak.

Potential output (Y*)

The amount of output an economy can produce when using its resources at normal rates.

Output gap

Measures how far actual output is from its normal level at a particular time.

Cyclical unemployment

Extra unemployment that occurs during a recession.

Natural rate of unemployment

Equal to frictional plus structural unemployment.

Okun’s Law

Law that for: Each extra percentage point of cyclical unemployment is associated with approximately a 1.8 percentage point (for Australia) increase in the output gap, measured in relation to potential output.

Planned aggregate Expenditure (PAE)

Total planned spending on final goods and services.

Inventory

Goods produced by firms left unsold.

Short-run equilibrium output

The level of output that prevails during the period in which prices are predetermined.

Injections (INJP)

All sources of exogenous expenditure in the economy.

Withdrawals (WD)

That part of income not used for consumption purposes.

Disequilibrium

A situation in which planned aggregate expenditure differs from output, or equivalently when planned injections differ from withdrawals.

Paradox of thrift

Increasing the level of saving (or thriftiness) at each level of income will shift the consumption function, and therefore PAE, down.

The income–expenditure multiplier

The effect of a one-unit increases in exogenous expenditure on short-run equilibrium output; for example, a multiplier of 5 means that a 10-unit decrease in exogenous expenditure reduces short- run equilibrium output by 50 units.

Stabilisation policy

Policies used to affect planned aggregate expenditure, to eliminate output gaps.

Fiscal policy

Refers to decisions about government spending and tax collections.

Monetary policy

Refers to decisions about the level of interest rates in the economy.

Government spending

Government expenditure in a time period.

Government budget constraint

The concept that government spending has to be financed either by raising taxes or by government borrowing.

Banks are financial intermediaries

Indirect finance

Bond

A legal promise to repay a debt, usually including both the principal amount and regular interest, or coupon, payments.

Stock

A claim to partial ownership of a firm.

Risk premium

The rate of return that financial investors require to hold risky assets minus the rate of return on safe assets.

Medium of exchange

An asset used in purchasing goods and services and barter exchanges.

Unit of account

A basic measure of economic value.

Store of value

An asset that serves as a means of holding wealth.

Currency

Notes and coins on issue, less holdings of notes and coins by banks.

Bank reserves

Assets held by banks to cover withdrawals from depositors and checks written on their accounts.

100% reserve banking system

Banks hold all the money deposited in them.

Money Creation

The desired Money multiplier

Velocity

A measure of the amount of expenditure that can be financed from a given amount of money over a particular time period.

Quantity equation

An identity that states that the nominal value of expenditure in the economy must be equivalent to the stock of money multiplied by its velocity of circulation.

The Reserve Bank of Australia (RBA)

Responsible for monetary policy by influencing the level of interest rates in the economy and Oversight and regulation of financial markets

Primary goals of RBA

Responsible for macro regulation ensures stability as a whole

Open Market Operations (OMO)

The buying and selling of government bonds from the public by the Reserve Bank to change the balances in banks’ exchange settlement accounts

Exchange settlement accounts

The balances are kept by the commercial banks with the Reserve Bank and are used to manage the flow of funds between commercial banks generated by the commercial activities of their customers

Open market Purchases

The RBA paying for those assets

Open Market sales

If the Reserve Bank wants to reduce the level of reserves

Corridor/channel system

RBA will lend/ money at 25 points above the target overnight rate and pay interest at 25 below

Fiscal policy

Seignorage and the inflation tax are names for the revenue that the government obtains from printing more money

Hyperinflation

Results from excessive printing of fiat money

Ex ante inflation

Expected inflation rate

Ex post inflation

Actual inflation rate

Deflation

Level fell sharply in most countries in early 1939s

Supply curve for bills

Changes as as the price of 90-day bills changes

Achieved target cash rate

By setting the overnight cash rate to a target and allowing all the other interest rates in the economy to adjust

Demand function shift to the right

The the actual overnight actual money supply is increased

Base money

The amount of currency in circulation plus the deposits that banks have with the Reserve Bank in exchange settlement accounts

Rates (saving,investing)

Many important decisions such as saving and investing are based on the real interest rate

Nominal rates

The Reserve Bank controls nominal interest rate thought open-market operations