Econ exam 2

Business Cycle

The recurring pattern of economic expansion and contraction in capitalist economies, consisting of four phases:expansion, peak, contraction, and trough.

Recession

A significant decline in economic activity lasting for an extended period, typically measured by two consecutive quarters of negative GDP growth.

Real GDP (Gross Domestic Product)

The total monetary value of all final goods and services produced within a country's borders, adjusted for inflation or deflation.

Nominal GDP

The total monetary value of all final goods and services produced within a country's borders, measured using current market prices.

Unemployment

The condition where individuals willing and able to work cannot find employment, measured by the unemployment rate.

Inflation

The rate at which the general level of prices for goods and services rises over time.

Modern Economic Growth

Sustained increases in real GDP per capita over time, leading to rising living standards and improvements in quality of life.

Saving

The portion of income not consumed but set aside for future use.

Investment

The purchase of capital goods or financial assets with the expectation of generating future income or returns.

Financial Investment

The purchase of financial assets such as stocks, bonds, or mutual funds with the expectation of earning a return.

Economic Investment

Spending on physical capital goods to increase future production and generate income.

Expectations

Beliefs and anticipations about future economic conditions influencing economic decision-making.

Shocks

Sudden and unexpected events disrupting the normal functioning of an economy.

Demand Shocks

Sudden changes in aggregate demand for goods and services within an economy.

Supply Shocks

Sudden changes in the availability or cost of key inputs affecting the economy's production capacity.

Inventory

Stock of goods or raw materials held by businesses to meet current or future demand.

Inflexible Prices ("Sticky Prices")

Prices that do not adjust quickly or fully in response to changes in supply and demand conditions.

Flexible Prices

Prices that adjust quickly and easily in response to changes in supply and demand conditions.

National Income Accounting

System used to measure and track the overall economic activity of a nation.

Gross Domestic Product (GDP)

Total monetary value of all final goods and services produced within a country's borders within a specific time period.

Intermediate Goods

Goods used as inputs in the production of other goods or services.

Final Goods

Goods consumed by end-users or used for investment purposes.

Multiple Counting

Double-counting of the value of intermediate goods in the calculation of GDP.

Value Added

Increase in the value of a product or service at each stage of production.

Expenditures Approach

Method used to calculate GDP by summing up total expenditures on final goods and services.

Income Approach

Method used to calculate GDP by summing up total income earned by individuals and businesses.

Personal Consumption Expenditures (C)

Total expenditures by households on goods and services for consumption purposes.

Durable Goods, Nondurable Goods, Services

Categories of goods based on their lifespan and use.

Gross Private Domestic Investment (Ig)

Total investment expenditures by businesses on capital goods and residential construction.

Net Private Domestic Investment

Gross private domestic investment minus depreciation, representing the net increase in capital goods.

Government Purchases (G)

Total expenditures by the government on goods and services for public use.

Net Exports (Xn)

Difference between a country's exports and imports of goods and services.

Taxes on Production and Imports

Indirect taxes levied on the production, sale, or importation of goods and services.

National Income

Total income earned by factors of production within a country's borders.

Consumption of Fixed Capital

Wear and tear or obsolescence of capital goods deducted from gross private domestic investment.

Net Domestic Product (NDP)

Total value of all final goods and services produced within a country's borders, minus depreciation.

Personal Income (PI)

Total income received by individuals from all sources.

Disposable Income (DI)

Total income available to households after subtracting taxes from personal income.

Price Index

Measure of the average level of prices of goods and services in an economy relative to a base year.

Economic Growth

Sustained increase in the production of goods and services in an economy over time.

Modern Economic Growth

Sustained and widespread increases in real GDP per capita since the Industrial Revolution, characterized by technological innovation, increased productivity, and global interconnectedness.

Leader Countries

Nations at the forefront of economic growth and technological innovation with advanced infrastructure, well-developed institutions, and highly educated populations (e.g., United States, Japan, Germany, South Korea).

Supply Factors

Inputs/resources contributing to economic growth and production capacity, including natural resources, labor, capital, and technology.

Labor Productivity

Measure of output produced per unit of labor input, influenced by technological advancements, investments in human capital, and organizational efficiency.

Business Cycles

Recurring pattern of economic expansion and contraction consisting of four phases:expansion, peak, recession, and trough.

Unemployment Rate

Percentage of the labor force that is unemployed and actively seeking employment, a key indicator of the health of the labor market and the overall economy.

Inflation

Rate at which the general level of prices for goods and services rises over time, leading to a decrease in the purchasing power of money, measured by indices like CPI.

Potential Output

Maximum level of output an economy can sustainably produce without generating inflationary pressures, determined by available resources and structural characteristics.

Okun’s Law

Relationship describing the inverse link between changes in the unemployment rate and changes in real GDP, reflecting the cyclical nature of unemployment.

Core Inflation

Measure of inflation excluding volatile components like food and energy prices, providing a stable gauge of underlying inflationary trends.

Cost-of-living adjustments (COLAs)

Contractual or automatic adjustments made to wages, benefits, or other payments to counter changes in the cost of living due to inflation, maintaining purchasing power.

Real Interest Rate

Nominal interest rate adjusted for inflation, showing the actual return on an investment after considering changes in purchasing power.

Nominal Interest Rate

Rate of interest expressed in current terms without adjusting for inflation, representing the actual return on an investment or loan.

Hyperinflation

Extremely high and rapidly accelerating inflation rate, often exceeding 50% per month, leading to economic instability and currency devaluation.

45° (Degree) Line

Represents equilibrium in consumption and income, where the value on the horizontal axis equals the value on the vertical axis, crucial in Keynesian economics.

Consumption Schedule

Shows the relationship between disposable income and consumption levels, essential in analyzing consumer behavior in macroeconomic models.

Saving Schedule

Illustrates the relationship between disposable income and saving levels, aiding in understanding saving behavior in an economy.

Break-even Income

Level of income where consumption equals income, signifying equilibrium in consumption and income.

Average Propensity to Consume (APC)

Ratio of total consumption expenditure to total disposable income, indicating the proportion of income spent on consumption.

Average Propensity to Save (APS)

Ratio of total saving to total disposable income, showing the proportion of income saved rather than spent on consumption.

Marginal Propensity to Consume (MPC)

Measures the change in consumption resulting from a change in disposable income, crucial in understanding consumption behavior.

Marginal Propensity to Save (MPS)

Measures the change in saving resulting from a change in disposable income, providing insights into saving behavior.

Wealth Effect

Impact of changes in asset prices on consumer spending, influencing consumption decisions and aggregate demand.

Expected Rate of Return on Investment

Anticipated profit from an investment, influencing investment decisions and economic growth.

Investment Demand Curve

Represents the relationship between the expected rate of return on investment and investment spending, crucial in understanding investment decisions.

Multiplier

Illustrates how changes in autonomous spending lead to larger changes in aggregate demand and national income, showing the impact of initial spending changes.

Paradox of Thrift

Increase in saving leading to a decrease in aggregate demand and economic output, highlighting the potential negative effects of increased saving.

Planned Investment

Investment spending that firms intend to undertake based on expectations, influencing aggregate demand and economic growth.

Investment Schedule

Shows the relationship between the expected rate of return on investment and planned investment spending, essential in understanding investment decisions.

Aggregate Expenditures Schedule

Represents total planned spending at various GDP levels, aiding in analyzing the relationship between spending and output.

Equilibrium GDP

Level where aggregate demand equals aggregate supply, indicating stable prices and full resource employment.

Leakage

Diversion of income from the circular flow, including saving, taxes, and imports, reducing the multiplier effect.

Injection

Addition of income to the circular flow, including investment, government spending, and exports, stimulating economic activity.

Unplanned Changes in Inventories

Result from differences between actual and expected sales, leading to adjustments in production levels.

Net Exports

Difference between exports and imports, reflecting the impact of international trade on the economy's output.

Lump-Sum Tax

Fixed tax amount regardless of income, used for simplicity and revenue generation without distorting incentives.

Recessionary Expenditure Gap

Occurs when equilibrium GDP is below potential GDP, indicating underutilization of resources and high unemployment.

Inflationary Expenditure Gap

Occurs when equilibrium GDP exceeds potential GDP, leading to an overheated economy and upward price pressure.

Aggregate Demand–Aggregate Supply (AD-AS) Model

Framework analyzing output and price level equilibrium, considering factors influencing aggregate demand and supply.

Aggregate Demand

Total demand for goods and services at a given price level, influenced by various factors like consumer confidence and government policies.

Real-Balances Effect

Impact of price level changes on wealth and purchasing power, affecting consumer spending and aggregate demand.

Interest-Rate Effect

Impact of price level changes on interest rates and investment spending, influencing aggregate demand.

Foreign Purchases Effect

Impact of price level changes on exports and imports, affecting net exports and aggregate demand.

Determinants of Aggregate Demand

Factors influencing total spending on goods and services, including consumer confidence, interest rates, and government spending.

Aggregate Supply

Total quantity of goods and services producers are willing to supply at different price levels, influenced by resource availability and technology.

Immediate-Short-Run Aggregate Supply Curve

Represents the relationship between price level and output supplied in the very short term, assuming fixed input

Long-Run Aggregate Supply Curve

Represents the relationship between the price level and the quantity of output supplied by firms in the long term, assuming full adjustment of input prices, technology, and productivity.

Determinants of Aggregate Supply

Factors influencing the total quantity of goods and services firms are willing to supply at different price levels, including resource prices, technology, labor market conditions, government regulations, and productivity growth.

Productivity

Efficiency in utilizing inputs like labor, capital, and technology to produce goods and services, influencing output levels and potential output of the economy.

Equilibrium Price Level

Price level where aggregate demand equals aggregate supply, determining overall price levels and inflationary pressures in the economy.

Equilibrium Real Output

Level of real GDP where aggregate demand equals aggregate supply, indicating full resource utilization and potential output level.

Menu Costs

Expenses incurred by firms when adjusting prices due to market changes, like updating price lists or printing new menus.

Efficiency Wages

Wages exceeding market rates to boost productivity, reduce turnover, and enhance overall output quality.

Fiscal Policy

Use of government spending and taxation to influence economic performance, aiming to stabilize fluctuations, achieve full employment, and control inflation.

Council of Economic Advisers (CEA)

Economists advising the US President on economic policy issues and preparing economic reports.

Expansionary Fiscal Policy

Stimulating aggregate demand and economic growth by increasing government spending and/or reducing taxes during economic downturns.

Budget Deficit

Occurs when government spending exceeds revenues, financed by borrowing through government securities issuance.

Contractionary Fiscal Policy

Reducing aggregate demand and controlling inflation by decreasing government spending and/or increasing taxes.

Budget Surplus

Government revenues exceeding expenditures, used to pay down debt or fund future expenses.

Built-In Stabilizer

Automatic fiscal system features stabilizing economic fluctuations without explicit government intervention.