Midterm II Prep

National Income Accounting Identity

Y = C + I + G + NX, where Y is RGDP, C is Consumption, I is Investment, G is Government Spending, and NX is Net Exports.

National Saving

The total of Private Saving and Public Saving.

Private Saving (Sₚ)

Quantity of Output - Taxes - Consumption. (Y-T-C)

Public Saving (Sᵖ)

Calculated as Taxes - Government Spending. (T-G)

Budget Surplus

Occurs when government revenue is greater than government spending.

Budget Deficit

Occurs when government revenue is less than government spending.

Marginal Propensity to Consume (MPC)

Affects investment; higher MPC leads to less saving and less investment.

Loanable Funds Market

A model that shows how saving and investment are determined by supply (from savings) and demand (from investment).

Unemployment Rate

(Number of Unemployed / Labor Force) * 100.

Natural Rate of Unemployment

The normal level of unemployment consisting of frictional and structural unemployment.

Cyclical Unemployment

Unemployment caused by economic downturns or recessions.

Frictional Unemployment

Short-term unemployment occurring while individuals are transitioning between jobs.

Structural Unemployment

Long-term unemployment resulting from shifts in the economy, like technological changes.

Minimum Wage Laws

A reason for above-equilibrium wages; establishes a wage floor.

Union Bargaining

Negotiations by labor unions that may raise wage levels above eqilibrium.

Efficiency Wages

Wages that are set higher than equilibrium to increase employee productivity.

M1 Money Supply

Includes currency, demand deposits, and traveler's checks.

M2 Money Supply

Includes M1 plus savings deposits, money market mutual funds, and small time deposits.

Money Multiplier

Calculated as 1 / Reserve Ratio, indicating how much money banks can create through lending.

Quantity Equation of Money

Expressed by the equation M*V = P*Y, connecting money supply with price level and output.

Fisher Effect

In the long run, an increase in money supply leads to a proportional increase in the price level. (Nominal Interest rate)

Costs of Inflation

Includes price distortion, Reduced purchasing power, and potential uncertainty.

Benefits of Inflation

Includes reducing the real value of debt and making it easier for employers and workers to adjust wages