macroeconomics Lecture Notes

Flashcards for macroeconomics exam review.

Aggregate Demand (AD)

The total demand for goods and services in an economy at a given price level and in a given time period. AD = C + I + G + X - Im.

Autonomous Consumption (c0)

The portion of consumption that does not depend on current disposable income; the intercept of the consumption function.

Autonomous Expenditures

Expenditures that do not vary with the level of GDP; planned investment and government spending in the Keynesian model.

Bond

A financial instrument representing a loan made by an investor to a borrower, paying a positive interest rate and having a maturity date.

Budget Deficit

Occurs when government expenditures exceed government revenues in a fiscal year.

Budget Surplus

Occurs when government revenues exceed government expenditures in a fiscal year.

Consumption (C)

The goods and services purchased by consumers.

Consumption Function

The relationship between consumption spending by households and their disposable income. C = c0 + c1(YD).

Crowding-Out Effect

Increased government spending or reduced taxes lead to higher interest rates, which in turn reduce private investment.

Current Income Hypothesis

Consumption in any one period depends on income received during that same period.

Disposable Income (YD)

The income that remains once consumers have paid taxes and received transfers from the government (YD = Y - T).

Equilibrium in the Goods Market (IS Relation)

Total planned expenditures (aggregate demand) are equal to the total output (GDP/Y).

Equilibrium in the Money Market (LM Relation)

The quantity of money demanded is equal to the quantity of money supplied.

Fiscal Contraction (Fiscal Consolidation)

Fiscal policy that reduces the budget deficit, typically through increased taxes and/or decreased government purchases.

Fiscal Expansion

Fiscal policy that increases the budget deficit, typically through decreased taxes and/or increased government purchases.

Fiscal Policy

The government’s choices regarding the overall level of government purchases and/or taxes, aimed at influencing aggregate demand.

Government-Purchases Multiplier

The ratio of the change in equilibrium income/output (ΔY) to an initial change in government purchases (ΔG), indicating a magnified effect on income.

Government Spending (G)

Purchases of goods and services by federal, state, and local governments, excluding government transfers and interest payments on government debt.

Induced (Endogenous) Expenditures

Expenditures that vary with GDP.

Interest Rate (i)

The cost of borrowing money or the return on lending money.

Investment (I) (Fixed Investment)

The purchase of capital goods, including non-residential investment (by firms) and residential investment (by households for new houses/apartments).

Inventory Investment

The difference between production and sales.

IS Curve

A downward-sloping curve in the IS-LM model that represents all combinations of income (Y) and the interest rate (i) for which the goods market is in equilibrium.

Keynesian Cross

A graphical tool used to determine equilibrium output in the goods market, where aggregate demand equals output.

Liquidity Trap

An extreme case where almost everyone prefers holding cash rather than bonds, making monetary policy ineffective.

LM Curve

An upward-sloping curve in the IS-LM model that represents all combinations of income (Y) and the interest rate (i) for which the money market is in equilibrium.

Marginal Propensity to Consume (c1)

The effect of an additional dollar of disposable income on consumption; it is the slope of the consumption function (ΔC/ΔYD).

Monetary Contraction (Monetary Tightening)

A decrease in the money supply, typically implemented by the central bank.

Monetary Expansion

An increase in the money supply, typically implemented by the central bank.

Monetary Policy

Actions undertaken by a central bank to influence the availability and cost of money and credit.

Money Multiplier (m)

The amount of money the banking system generates with each unit of deposits, calculated as 1/r, where r is the reserve ratio.

Money Supply (Ms)

The total quantity of money available in an economy at a specific time.

Net Exports (X - IM)

The difference between exports (X) and imports (IM), also known as the trade balance.

Permanent Income Hypothesis

Consumption in any period depends on permanent (average annual) income.

Personal Saving (S)

Disposable personal income not spent on consumption during a particular period (S = YD - C).

Planned Investment (IP)

The level of investment that firms intend to make in a given period.

Price Setting Relation

The price level (P) is determined by the nominal wage (W) and the markup (μ) (P = (1 + μ)W).

Private Saving

Saving by consumers (S = Y - T - C).

Public Debt

The sum of all past government deficits; how much a country owes to all its lenders.

Public Saving

Taxes minus government spending (T - G). Positive when T > G, negative when T < G.

Quantitative Easing (QE)

A central bank purchases government bonds or other financial assets from commercial banks to inject money into the economy.

Reserve Ratio (r)

The fraction of deposits that banks are required to hold as reserves.

Reserves

Deposits that banks have received but have not loaned out.

Speculative Demand for Money (L2)

The demand for money held in response to changes in interest rates on bonds. It has a negative relationship with interest rates.

Stabilization Policy

Actions taken by policymakers to mitigate the effects of economic shocks and stabilize output and prices.

Transactions Demand for Money (L1)

Money people hold to pay for goods and services they anticipate buying. It increases with income.

Unplanned Investment (IU)

Investment during a period that firms did not intend to make, often resulting from unexpected changes in inventories.

Wage Setting Relation

The relationship in the labor market determining the nominal wage based on expected prices, unemployment, and other factors.