Macroeconomics Test 2 Flashcards

Three Main Economic Indicators

Gross Domestic Product (GDP) : Measures economic growth. Unemployment Rate: Measures the labor market. Inflation Rate: Measures price levels.

Gross Domestic Product (GDP)

The total market value of all the final goods and services produced within an economy in a given period.

Total Market Value

Refers to the quantity of goods multiplied by their respective prices.

Gross National Product (GNP)

The total market value of all the final goods and services produced worldwide by U.S. firms and residents.

Final Goods

Goods and services that are purchased for final use by the consumer.

Intermediate Goods

Goods that is used in the production process. It is not considered a final good or service.

Value Added

The market value of a firm’s output less the value of the inputs the firm has bought from others.

Not Included in GDP

Non

Components of GDP

Consumption expenditures: purchases by consumers. Private investment expenditures: purchases by firms. Government purchases: purchases by federal, state, and local governments. Net exports: net purchases by the foreign sector (domestic exports minus domestic imports).

Consumption Expenditures

Purchases of currently produced goods and services, either domestic or foreign.

Private Investment Expenditures

Spending on new plants and equipment. Newly produced housing. Additions to inventories during the current year.

Gross Investment

New investment expenditures are called gross investment.

Depreciation

During the year, some of the existing plant, equipment, and housing will deteriorate. This wear and tear is called depreciation.

Net Investment

The true addition to the stock of capital of the economy is net investment. Net investment equals gross investment minus depreciation.

Government Purchases

Purchases of newly produced goods and services by all levels of government.

Transfer Payments

Funds paid to individuals but not associated with the production of goods and services.

Imports

Goods we buy from other countries.

Exports

Goods made here and sold to other countries.

Net Exports

Total exports minus total imports.

Trade Deficit

When we buy more goods from abroad than we sell, we have a trade deficit.

Trade Surplus

A trade surplus occurs when our exports exceed our imports.

Income Approach

Count income derived from production. Wages, rental income, interest income, profit.

Expenditure Approach

Count sum of money spent buying the final goods.

Real GDP

A measure of GDP that takes into account price changes. This measure of total output does not increase just because prices increase.

Nominal GDP

When we use current prices to measure GDP, that is what we call nominal GDP, which can increase as a result of higher production or higher prices.

Economic Growth

Sustained increases in the real production of an economy over a long time.

Economic Fluctuations

Economic fluctuations, also called business cycles, are movements of GDP away from potential output.

Recession

An economy is considered to be in a recession when it fails to grow for at least six consecutive months, or two consecutive quarters of negative GDP.

Depression

A severe and prolonged recession. Usually classified as a depression if duration is at least three years.

Business Cycle

Alternating rises and declines in the level of economic activity.

Peak

A peak is the date at which the recession starts—that is, when output starts to decline.

Trough

A trough is the date at which the recession begins to end—that is, when output starts to increase again.

Recovery/Expansion

After a trough, the economy enters a recovery period or period of expansion.

Unemployment Rate

The percentage of labor force unemployed and looking for work.

Labor Force

The employed and unemployed.

Labor Force Participation Rate

The fraction of the population that is over 16 years of age that is in the labor force.

U

3 Unemployment Rate

Cyclical Unemployment

The unemployment that accompanies fluctuations in real GDP.

Seasonal Unemployment

Unemployment due to recurring calendar effect is called seasonal unemployment.

Frictional Unemployment

The unemployment that occurs naturally during the normal workings of an economy. It occurs because it simply takes time for people to find the right jobs and for employers to find the right people to hire.

Structural Unemployment

Occurs when the economy evolves. It occurs when different sectors give way to other sectors or certain jobs are eliminated while new types of jobs are created.

Discouraged Workers

Individuals who want to work, have searched for work in the prior year, but are not currently looking for work because they believe they won’t be able to find a job.

Marginally Attached Workers

Individuals who would like to work, have searched for work in the recent past, but have stopped looking for work for a variety of reasons.

Individuals Working Part Time for Economic Reasons

Workers who would like to be employed full

U

6 Unemployment Rate

Natural Rate of Unemployment / Full Employment

The level of unemployment at which there is no cyclical unemployment is called the natural rate of unemployment or full employment.

Natural Rate of Unemployment

The economist’s notion of what the rate of unemployment should be when there is full employment. There will always be some amount of frictional and structural unemployment, so the unemployment rate will never be zero.

Labor

People’s physical and mental talents and efforts that are used to help produce goods and services. (Workers of all varieties, including owners of small businesses)

Wages

Price that employers pay for labor.

Earnings

The amount of income (money) received by a worker; equal to the wage (rate) multiplied by the amount of time worked.

Nominal Wage

The amount of money received per hour, day, or year. (face amount)

Real Wage

The quantity of goods and services a worker can obtain with nominal wages; real wages reveal the “purchasing power” of nominal wages.

Productivity

A measure of average output or real output per unit of input.

Reasons Labor Can Be Highly Productive

Plentiful capital (machinery and buildings). Access to abundant natural resources. Advanced technology. Labor quality (education, training, etc.). Other factors: Efficiency/flexibility of management, market economy, specialization.

Inflation

An increase in the money supply in relation to products and services available, which causes a rise in the general level of prices.

Demand

Pull Inflation

Cost

Push Inflation

Built

In Inflation

Hyperinflation

An extremely high rate of inflation. (50% monthly rate, which is approximately 13,000% or higher annually)

Consumer Price Index (CPI)

The CPI measures changes in prices facing consumers. (Inflation / Deflation rate).

CPI

U

CPI

W

Consumer Price Index Fixed Basket

The CPI measures changes in a fixed basket of goods; a collection of items chosen to represent the purchasing pattern of a typical consumer.

Cost

of

Producer Price Index (PPI)

The Producer Price Index is a family of indexes that measures the average change over time in the selling prices received by domestic producers of goods and services.

Money Illusion

A confusion of real and nominal magnitudes.

Deflation

A sustained decrease in the average level of prices and wages in the economy.

Finance

Study of how money is managed by individuals, companies, and governments.

Money

Anything that is regularly used in economic transactions or exchanges.

Money

Any item that is generally acceptable to sellers in exchange for goods and services.

Barter

The exchange of one good or service for another good or service.

Fiat Money

Paper money not backed or readily convertible to precious metal such as gold.

Medium of Exchange

The property of money that exchange is made through the use of money. Before fiat money, we used bartering.

Unit of Account

The property of money that prices are quoted in terms of money. Serves as common standard or yardstick of value.

Store of Value

The property of money that it preserves value until it is used in an exchange. Way to accumulate wealth (buying power) until it is needed.

Characteristics of Money

Acceptability. Divisibility. Portability. Stability. Durability. Difficult to counterfeit.

Credit Cards

Promise to pay at a later date by using preapproved lines of credit granted by bank or financial institution. Credit cards are not money, they are debt.

Liquidity

The ease with which an asset can be converted quickly into cash with little or no loss of purchasing power.

M1

The most narrowly defined money supply, equal to currency in the hands of the public and the checkable deposits of banks and credit unions.

M2

A broader definition of money, known as M2, includes M1 and assets that can be readily turned into M1, such as deposits in money market mutual funds and savings accounts.

Legal Tender

The Government has designated currency as legal tender.

Acceptability

Accepted as a medium of exchange.

Relative Scarcity

Depends on supply and demand and derives its value from its scarcity relative to is utility (its want

Commercial Banks

State and national banks that provide checking and savings accounts and make loans.

Credit Unions

Owned and controlled by depositors. Offer wide range of financial services.

Federal Deposit Insurance Corporation (FDIC)

Insures personal accounts up to a maximum of $250,000 at member institutions.

National Credit Union Administration (NCUA)

Regulates and charters credit unions and insures their deposits up to $250,000.

Balance Sheet

A financial statement that shows an organization’s assets, liabilities and owners’ equity on a given date. The balance sheet of a commercial bank shows how a bank raises and uses money.

Assets

Assets generate income for the bank. Loans are assets for the bank because a borrower must pay interest to the bank.

Liabilities

Liabilities are the sources of funds for the bank. The bank is “liable” for returning funds to depositors.

Owners’ Equity

The funds that owners must place into the bank so it has some startup funds.

Fractional Reserve Banking

A system in which only a fraction of bank deposits are required to be available for withdrawal and the remaining amount can be used to create loans from the money that is deposited.

Reserve Ratio

The ratio of reserves to deposits.

Money Creation

Banks and Credit Unions create checkable deposits by issuing loans. Checkable deposits are a vital component of the nation’s money supply.

Money Multiplier

The money multiplier shows the total increase in checking account deposits for any initial cash deposit.

Money Multiplier Process

The initial cash deposit triggers additional rounds of deposits and lending by banks, which leads to a multiple expansion of deposits.

Velocity of Money

The number of times that the average dollar in the money supply is spent for final goods and services.

Federal Reserve System

On December 23, 1913, the Federal Reserve System, which serves as the nation’s central bank, was created by an act of Congress. The System consists of a seven

Chairperson of the Fed

Spokesperson for the FED.

Board of Governors

Supervises the 12 Federal Reserve Banks and sets monetary policy.