Econ Exam 2 DONT FAIL DONT FAIL

business cycle

the economy's relatively short-term movement in and out of recession

depreciation

the process by which capital ages over time and therefore loses its value

depression

an especially lengthy and deep decline in output

double counting

a potential mistake to avoid in measuring GDP, in which output is counted more than once as it travels through the stages of production

durable good

long-lasting good like a car or a refrigerator

exchange rate

the price of one currency in terms of another currency

final good and service

output used directly for consumption, investment, government, and trade purposes; contrast with “intermediate good”

GDP per capita

GDP divided by the population

gross domestic product (GDP)

the value of the output of all final goods and services produced within a country in a year

gross national product (GNP)

includes what is produced domestically and what is produced by domestic labor and business abroad in a year

intermediate good

output provided to other businesses at an intermediate stage of production, not for final users; contrast with “final good and service”

inventory

good that has been produced, but not yet been sold

national income

includes all income earned: wages, profits, rent, and profit income

net national product (NNP)

GNP minus depreciation

nominal value

the economic statistic actually announced at that time, not adjusted for inflation; contrast with real value

nondurable good

short-lived good like food and clothing

peak

during the business cycle, the highest point of output before a recession begins

real value

an economic statistic after it has been adjusted for inflation; contrast with nominal value

recession

a significant decline in national output

service

product which is intangible (in contrast to goods) such as entertainment, healthcare, or education

standard of living

all elements that affect people’s happiness, whether people buy or sell these elements in the market or not

structure

building used as residence, factory, office building, retail store, or for other purposes

trade balance

gap between exports and imports

trade deficit

exists when a nation's imports exceed its exports and it calculates them as imports –exports

trade surplus

exists when a nation's exports exceed its imports and it calculates them as exports – imports

trough

during the business cycle, the lowest point of output in a recession, before a recovery begins

adverse selection of wage cuts argument

if employers reduce wages for all workers, the best will leave

cyclical unemployment

unemployment closely tied to the business cycle, like higher unemployment during a recession

discouraged workers

those who have stopped looking for employment due to the lack of suitable positions available

efficiency wage theory

the theory that the productivity of workers, either individually or as a group, will increase if the employer pays them more

frictional unemployment

unemployment that occurs as workers move between jobs

implicit contract

an unwritten agreement in the labor market that the employer will try to keep wages from falling when the economy is weak or the business is having trouble, and the employee will not expect huge salary increases when the economy or the business is strong

insider-outsider model

those already working for the firm are “insiders” who know the procedures; the other workers are “outsiders” who are recent or prospective hires

labor force participation rate

this is the percentage of adults in an economy who are either employed or who are unemployed and looking for a job

natural rate of unemployment

the unemployment rate that would exist in a growing and healthy economy from the combination of economic, social, and political factors that exist at a given time

out of the labor force

those who are not working and not looking for work—whether they want employment or not; also termed “not in the labor force”

relative wage coordination argument

across-the-board wage cuts are hard for an economy to implement, and workers fight against them

structural unemployment

unemployment that occurs because individuals lack skills valued by employers

underemployed

individuals who are employed in a job that is below their skills

unemployment rate

the percentage of adults who are in the labor force and thus seeking jobs, but who do not have jobs

adjustable-rate mortgage (ARM)

a loan a borrower uses to purchase a home in which the interest rate varies with market interest rates

base year

arbitrary year whose value as an index number economists define as 100; inflation from the base year to other years can easily be seen by comparing the index number in the other year to the index number in the base year—for example, 100; so, if the index number for a year is 105, then there has been exactly 5% inflation between that year and the base year

basket of goods and services

a hypothetical group of different items, with specified quantities of each one meant to represent a “typical” set of consumer purchases, used as a basis for calculating how the price level changes over time

Consumer Price Index (CPI)

a measure of inflation that U.S. government statisticians calculate based on the price level from a fixed basket of goods and services that represents the average consumer's purchases

core inflation index

a measure of inflation typically calculated by taking the CPI and excluding volatile economic variables such as food and energy prices to better measure the underlying and persistent trend in long-term prices

cost-of-living adjustments (COLAs)

a contractual provision that wage increases will keep up with inflation

deflation

negative inflation; most prices in the economy are falling

Employment Cost Index

a measure of inflation based on wages paid in the labor market

GDP deflator

a measure of inflation based on the prices of all the GDP components

hyperinflation

an outburst of high inflation that often occurs (although not exclusively) when economies shift from a controlled economy to a market-oriented economy

index number

a unit-free number derived from the price level over a number of years, which makes computing inflation rates easier, since the index number has values around 100

indexed

a price, wage, or interest rate is adjusted automatically for inflation

inflation

a general and ongoing rise in price levels in an economy

International Price Index

a measure of inflation based on the prices of merchandise that is exported or imported

Producer Price Index (PPI)

a measure of inflation based on prices paid for supplies and inputs by producers of goods and services

quality/new goods bias

inflation calculated using a fixed basket of goods over time tends to overstate the true rise in cost of living, because it does not account for improvements in the quality of existing goods or the invention of new goods

substitution bias

an inflation rate calculated using a fixed basket of goods over time tends to overstate the true rise in the cost of living, because it does not take into account that the person can substitute away from goods whose prices rise considerably

bank run

when depositors race to the bank to withdraw their deposits for fear that otherwise they would be lost

basic quantity equation of money

money supply × velocity = nominal GDP

central bank

institution which conducts a nation’s monetary policy and regulates its banking system

contractionary monetary policy

a monetary policy that reduces the supply of money and loans

countercyclical

moving in the opposite direction of the business cycle of economic downturns and upswings

deposit insurance

an insurance system that makes sure depositors in a bank do not lose their money, even if the bank goes bankrupt

discount rate

the interest rate charged by the central bank on the loans that it gives to other commercial banks

excess reserves

reserves banks hold that exceed the legally mandated limit

expansionary monetary policy

a monetary policy that increases the supply of money and the quantity of loans

federal funds rate

the interest rate at which one bank lends funds to another bank overnight

inflation targeting

a rule that the central bank is required to focus only on keeping inflation low

interest rate on reserve balances (IORB)

the interest the Federal Reserve pays banks on their reserves held at their Federal Reserve bank

lender of last resort

an institution that provides short-term emergency loans in conditions of financial crisis

loose monetary policy

a monetary policy that increases the supply of money and the quantity of loans

open market operations

the central bank selling or buying Treasury bonds to influence the quantity of money and the level of interest rates

quantitative easing (QE)

the purchase of long term government and private mortgage-backed securities by central banks to make credit available in hopes of stimulating aggregate demand

reserve requirement

the percentage amount of its total deposits that a bank is legally obligated to either hold as cash in their vault or deposit with the central bank

tight monetary policy

a monetary policy that reduces the supply of money and loans

velocity

the speed with which money circulates through the economy; calculated as the nominal GDP divided by the money supply

automatic stabilizers

tax and spending rules that have the effect of slowing down the rate of decrease in aggregate demand when the economy slows down and restraining aggregate demand when the economy speeds up, without any additional change in legislation

balanced budget

when government spending and taxes are equal

budget deficit

when the federal government spends more money than it receives in taxes in a given year

budget surplus

when the government receives more money in taxes than it spends in a year

contractionary fiscal policy

fiscal policy that decreases the level of aggregate demand, either through cuts in government spending or increases in taxes

corporate income tax

a tax imposed on corporate profits

crowding out

federal spending and borrowing causes interest rates to rise and business investment to fall

discretionary fiscal policy

the government passes a new law that explicitly changes overall tax or spending levels with the intent of influencing the level of overall economic activity

estate and gift tax

a tax on people who pass assets to the next generation—either after death or during life in the form of gifts

excise tax

a tax on a specific good—on gasoline, tobacco, and alcohol

expansionary fiscal policy

fiscal policy that increases the level of aggregate demand, either through increases in government spending or cuts in taxes

implementation lag

the time it takes for the funds relating to fiscal policy to be dispersed to the appropriate agencies to implement the programs

individual income tax

a tax based on the income, of all forms, received by individuals

legislative lag

the time it takes to get a fiscal policy bill passed

marginal tax rates

or the tax that must be paid on all yearly income

national debt

the total accumulated amount the government has borrowed, over time, and not yet paid back

payroll tax

a tax based on the pay received from employers; the taxes provide funds for Social Security and Medicare

progressive tax

a tax that collects a greater share of income from those with high incomes than from those with lower incomes

proportional tax

a tax that is a flat percentage of income earned, regardless of level of income

recognition lag

the time it takes to determine that a recession has occurred

regressive tax

a tax in which people with higher incomes pay a smaller share of their income in tax

standardized employment budget

the budget deficit or surplus in any given year adjusted for what it would have been if the economy were producing at potential GDP

absolute advantage

when one country has more resources, more productive resources, or a natural endowment to produce a good compared to another country; when a country can produce more of a good compared to another country

gain from trade

a country that can consume more than it can produce as a result of specialization and trade