ECON EXAM 3

real gross domestic product (RGDP)

the total value of all final goods and services produced in a given period, such as a year or a quarter, adjusted for inflation

What are the 3 major macroeconomic goals?

1. maintaining employment of human resources at relatively high levels
2. maintaining prices at a relatively stable level
3. achieving a high rate of economic growth, meaning a growth in output per person over time

unemployment rate

number of unemployed/civilian labor force
-the percentage of the population age 16 and older who are willing and able to work but are unable to obtain a job

labor force

the number of people age 16 and over who are available for employment

discouraged workers

an individual who has left the labor force because he or she could not find a job

job loser

an individual who has been temporarily laid off or fired

job leaver

a person who quits his or her job

reentrant

an individual who worked before and is now reentering the labor force

new entrant

an individual who has not held a job before but is now seeking employment

underemployment

a situation in which a workers skill level is higher than necessary for a job

labor force participation rate

the percentage of the working-age population in the labor force

frictional unemployment

the unemployment that results from workers searching for suitable jobs and firms looking for suitable workers

structural unemployment

the unemployment that results from the persistent mismatch of the skills of workers and the requirements of jobs

cyclical unemployment

unemployment due to short-term cyclical fluctuations in the economy

natural rate of unemployment

the median, or "typical" unemployment rate, equal to the sum of frictional and structural unemployment when they are at a maximum

potiental output

the amount of real output the economy would produce if its labor and other resources were fully employed, that is, at the natural rate of unemployment

minimum-wage rate

an hourly wage floor set above the equilibrium wage

efficency wage model

theory stating that higher wages lead to greater productivity

price level

the average level of prices in the economy

inflation rate

the percentage change in the price level from one year to the next

deflation

a decrease in the overall price level, which increases the purchasing power of money

relative price

the price of a specific good compared to the price of other goods

price index

a measure of the trend in prices paid for a certain bundle of goods and services over a given period

Consumer price index (CPI)

a measure of the cost of a market basket that represents the consumption of a typical household

GDP deflator

a price index that helps measure the average price level of all final consumer goods and services produced

producer price index

a measure of the cost of goods and services bought by firms

hyperinflation

extremely high rates of inflation for sustained periods of time

menu costs

the costs imposed on a firm from changing listed prices

shoe-leather cost

the time and inconvenience cost incurred when individuals reduce their money holdings because of inflation

nominal interest rate

the reported interest rate that is not adjusted for inflation

real interest rate

the nominal interest rate minus the inflation rate; also called the inflation-adjusted interest rate

business cycles

short-term fluctuations in the economy relative to the long-term trend in the output

expansion

when output (real GDP) is rising significantly--the period between the trough of a recession and the next peak

peak

the point in time when expansion comes to an end, that is, when output is at the highest point in the cycle

contraction

when the economy is slowing down-measured from the peak to the trough

trough

the point in time when output stops declining, that is, when business activity is at its lowest point in the cycle

recession

a period of significant decline in output and exmployment

depression

a severe recession or contraction in output

boom

a period of prolonged economic expansion

leading economic indicators

factors that economists at the Department of Commerce have found typically change before changes in economic activity

national income accounting

a uniform means of measuring economic performance

gross domestic product (GDP)

the measure of economic performance based on the value of all final goods and services produced within a country during a given period

double counting

adding the value of a good or service more than once by mistakenly counting the intermediate goods and services in GDP

expenditure approach

the calculation of GDP by adding the expenditures of market participants on final goods and services over a given period
GDP=C+I+G+(X-M)

consumption

purchases of final goods and services

nondurable goods

tangible items consumed in a short period of time, such as good

durable goods

longer-lived consumer goods, such as automobiles

investment

the creation of capital goods to augment future production

fixed investment

all new spending on capital goods by producers

producer goods

capital goods that increase future production capabilities

inventory investment

purchases that add to the stocks of goods kept by the firm to meet consumer demand

factor payments

wages (salaries), rent, interest payments, and profits paid to the owners of productive resources

gross national product (GNP)

the difference between net income of foreigners and GDP

depreciation

annual allowance set aside to replace worn-out capital
ex: technology, vehicles, buildings

net national product (NNP)

GNP minus depreciation

indirect business taxes

taxes, such as sales tax, levied on goods and services sold

national income (NI)

a measure of income earned by owners of the factors of production

personal income (PI)

the amount of income received by households before personal taxes

disposable personal income

the personal income available after personal taxes

Real GDP formula

(nominal GDP/price index)*100

real gross domestic product per capita

real output of goods and services per person

research and development (R&D)

activities undertaken to create new products and processes that will lead to technological progress

aggregate demand (AD)

the total demand for all the final goods and services in the economy

open economy

a type of model that includes international trade effects

aggregate demand curve

graph that shows the inverse relationship between the price level and RGDP demanded

aggregate supply curve (AS)

the total quantity of final goods and services suppliers are willing and able to supply at a given price level

recessionary gap

the output gap that occurs when the actual output is less than the potential output

inflationary gap

the output gap that occurs when the actual output is greater than the potential output

demand-pull inflation

a price-level increase due to an increase in aggregate demand

stagflation

a situation in which lower growth and higher prices occur together

cost-push inflation

a price-level increase due to a negative supply shock

wage and price inflexibility

the tendency for prices and wages to only adjust slowly downward to changes in the economy

fiscal policy

the discretionary, or deliberate, use of government purchases and taxes to alter equilibrium output and prices to stabilize the economy

multiplier effect

a chain reaction of additional income and purchases that results in total purchases that are greater than the initial increase in purchases

automatic stabilizers

changes in government transfer payments or tax collections that automatically help counter business cycle fluctuations

money

anything generally accepted in exchange for goods or services

medium of exchange

the primary function of money, which is to facilitate transactions and lower transaction costs

barter

direct exchange of goods and services without the use of money

means of deferred payment

the attribute of money that makes it easier to borrow and to repay loans

currency

coins and/ or paper created to facilitate the trade of goods and services and the payment of debts

legal tender

coins and paper officially declared to be acceptable for the settlement of financial debts

fiat money

a means of exchange established by government declaration not backed by a physical commodity, such as gold or silver, but rather by the government that issued it

demand deposits

balances in bank accounts that depositors can access on demand

transaction deposits

deposits that can be easily converted to currency or used to buy goods and services directly

travelers check

transaction instruments easily convertible into currency

nontransaction deposits

funds that cannot be used for payment directly but must be converted into currency for general use

near money

non-transaction deposits that are not money but can be quickly converted into money

money market mutual funds

interest-earning accounts provided by brokers that pool funds into such investments as Treasury bills

liquidity

the ease with which one asset can be converted into another asset or into goods and services

M1

the narrowest definition of money; includes coins, currency, demand deposits, other checkable deposits, and travelers checks

M2

a broader definition of money that includes M1 plus savings deposits, time deposits, and noninstitutional money market mutual fund shares

gold standard

defining the dollar as equivalent to a set value of a quantity of gold, allowing direct convertibility from currency to gold

Greshman's law

the principle that "cheap money drives out dear money"; given an alternative, people prefer to spend less valuable money

commercial banks

financial institutions organized to handle everyday financial transactions of businesses and households through demand deposit accounts and savings accounts and by making short-term commercial and consumer loans

savings and loan associations

financial institutions organized as cooperative assocaitions that hold demand deposits and savings of members in the form of dividend bearing shares and make loans, especially home mortgage loans

credit unions

financial cooperatives made up of depositors with a common affiliation

reserve requirements

holdings of assets at the bank or at the Federal Reserve Bank as mandated by the Fed

fractional reserve system

a system that requires banks to hold reserves equal to some fraction of their checkable deposits

secondary reserves

highly liquid, interest-paying assets held by the bank

balance sheet

a financial record that indicates the balance between a bank's assets and its liabilities plus capital