Macroeconomics: Fiscal Policy, Monetary Theory, and Economic Indicators

This set of flashcards covers key concepts from the lecture including fiscal policy effects, monetary equations, and capital accumulation metrics.

Crowding out effect

The phenomenon where increased public spending ($G \uparrow$) leads to a budget deficit and an increased demand for loanable funds ($D_{LF} \uparrow$), which raises real interest rates ($R_{ir} \uparrow$) and decreases private spending in investment and consumption ($I \& C \downarrow$).

Balanced budget

A budget condition where government spending equals tax revenue ($G = T$).

Budget surplus

A budget condition where tax revenue exceeds government spending ($G < T$).

Budget deficit

A budget condition where government spending exceeds tax revenue ($G > T$), often resulting in capital inflow.

Discretionary fiscal policy

Fiscal policy actions that require the creation of a new law.

Non-discretionary fiscal policy

Economic stabilizers that occur automatically without new legislation, known as Automatic Stabilizers.

Problems with fiscal policy

Issues including the crowding out effect, time lags, national debt increases due to deficits, and rational expectations.

Multiplier effect

The concept that changes in spending have a magnified impact on AD, where the tax multiplier is less than the spending multiplier.

Nominal Interest Rate ($N_i$) Equation

$N_i = R_i + \text{expected inflation}$, where in the long run ($LR$) the rate is flexible and in the short run ($SR$) it is fixed.

Equation of exchange

The monetary relationship expressed as $MS \times V = P \times Y$.

Quantity theory of money (Long Run)

The theory stating that in the long run, an increase in the money supply ($MS \uparrow$) leads to inflation only.

Money multiplier

The factor by which the money supply increases, calculated as $\frac{1}{rr}$ (where $rr$ is the required reserve ratio).

Money Base ($M_0$)

The total amount of currency in circulation plus bank reserves.

Net Investment

The total amount of investment minus depreciation ($\text{Investment} - \text{depreciation}$).

Capital accumulation

The growth of capital stock that occurs when investment is greater than depreciation ($\text{investment} > \text{depreciation}$).

Marginal Propensity to Consume (MPC)

The fraction of additional income that a household consumes rather than saves, calculated as $MPC = \frac{\Delta C}{\Delta Y}$.

Aggregate Demand Equation

The equation representing the total demand for goods and services in an economy, expressed as $AD = C + I + G + (X - M)$, where $C$ is consumption, $I$ is investment, $G$ is government spending, $X$ is exports, and $M$ is imports.

Phillips Curve

An economic concept displaying the inverse relationship between inflation and unemployment, suggesting that as inflation rises, unemployment tends to fall.

Okun's Law

The empirical relationship between unemployment and economic output, typically expressed as a 1% increase in unemployment leading to a 2% decrease in GDP.

Real GDP Growth Rate

The percentage change in real GDP from one period to another, calculated as $\text{Real GDP Growth Rate} = \frac{(GDP<em>{current} - GDP</em>{previous})}{GDP_{previous}} \times 100$.

Consumer Price Index (CPI)

A measure that examines weighted average prices of a basket of consumer goods and services, calculated as $CPI = \frac{Cost\ of\ Basket\ in\ Current\ Year}{Cost\ of\ Basket\ in\ Base\ Year} \times 100$.

Gross Domestic Product (GDP)

The total monetary value of all final goods and services produced in a country within a specific time period, commonly assessed annually.