Chapter 30 Flashcards

Vocabulary flashcards based on Chapter 30 lecture notes, covering key economic terms and concepts.

Aggregate Expenditure

The sum of everyone’s spending plans in an economy.

Planned Investment

The purchasing of new capital by businesses, excluding unplanned changes in inventories.

Macroeconomic Equilibrium

Occurs when the total production of output equals aggregate expenditure.

Potential Output

The economy’s maximum sustainable rate of output.

Output Gap

The difference between actual output and potential output, as a percentage of potential output.

IS Curve

Illustrates how lower real interest rates lead to a more positive output gap; represents macroeconomic demand curve.

MP Curve

Illustrates the current real interest rate, shaped by monetary policy and the risk premium; typically represented as a horizontal line.

Risk-Free Interest Rate

The interest rate on a loan that involves almost no risk; effectively set by the Federal Reserve.

Risk Premium

The extra interest that lenders charge to account for risk.

Monetary Policy

The process of setting interest rates to influence economic conditions, typically by the Federal Reserve.

Fiscal Policy

Adjustments to government spending and tax policies to influence the economy.

Multiplier

Measures how much extra GDP is generated by each extra dollar of spending.

Spending Shocks

Events that change the level of aggregate expenditure associated with a given real interest rate and level of income, causing shifts in the IS curve.

Financial Shocks

Changes in borrowing conditions, such as adjustments to the risk-free real interest rate or shifts in financial markets that change the risk premium, causing shifts in the MP curve.

Interest Rate Spread

The difference between the interest rate at which you can borrow and the risk-free interest rate; an estimate of the risk premium.