CLEP Principles of Macroeconomics

Scarcity

Fundamental reality, humans must engage in production choices, in short supply of wants and needs

Needs and Wants

Not limited, some go unsatisfied

Origin of Economics

Adam Smith, founding father, "The Wealth of Nations" (1776)

Economic Choice

Which of our needs go unsatisfied? Forces people to make choices and trade-offs result

Trade-offs

forgone alternative use of a resource in the production of goods and services

PPF Curve

Production Possibilities Frontier Curve, is a curve depicting all maximum output possibilities for two goods, given a set of inputs consisting of resources and other factors.

Law of diminishing marginal returns

as one input variable is increased, there is a point at which the marginal increase in output begins to decrease, holding all other inputs constant. At the point where the law sets in, the effectiveness of each additional unit of input decreases

Law of increasing opportunity cost

the principle that as the production of a good increases, the opportunitiy cost of producing an additional unit rises

Law of supply

the principle that, other things being equal, an increase in the price of a product will increase the quantity of that product supplied, and conversely for a price decrease

Law of demand

the principle that, other things being equal, an increase in the price of a product will reduce the quantity of that product demanded, and conversely for a decrease in price.

Determinants of supply

factors other than price that alter (shift) the quantities supplied of a good or service.

Law of diminishing marginal utility

the principle that as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of a g/s decreases

Determinants of demand

factors other than price that alter (shift) the quantities demanded of a good or service

Change in supply

change in the quantity supplied of a good or service at the prices; a shift of the supply curve to the left (decrease) or right (increase)

Change in demand

change in the quantity demanded of a good or service at all prices; a shift of the demand curve to the left (decrease) or right (increase)

Markets

a mechanism, a place where buyers and sellers of goods and services meet to satisfy their self-interest

Equilibrium price

price at which the quantity demanded and the quantity supplied are equal (intersect), shelves clear, and price stability occurs

Shortage

difference between the quantity demanded of a g/s and the quantity supplied at a below-equilibrium price

Surplus

difference between the quantity demanded of a g/s and the quantity supplied at a above-equilibrium price

Productive efficiency

the economy could not produce any more of one good without sacrificing production of another good

Allocative efficiency

distribution of resources among firms and industries to obtain production quantities of the products most wanted by society (consumers); where marginal cost equals marginal benefit

Market equilibrium

the actual price you see in the world is a balancing act between supply and demand

Consumer surplus

the portion of the demand curve that lies above the equilibrium price level and denotes those consumers that would be willing to buy the g/s at higher price levels

Producer surplus

that portion of the supply curve that lies below equilibrium price and denotes producers that would bring the g/s to market at even lower prices

GDP

gross domestic product - total market value of all final goods and serivces produced annually within the boundaries of the United States, whether by the U.S. or foreign-supplied resources

Aggregate expenditure

all spending for final goods and services in an economy

AE model

Inflation expectations

a key determinant that impacts the loanable funds market for both borrowers and lenders

Stagflation

when an increase in resource costs shift the aggregate supple curve inward, resulting in an increase in the price level and unemployment; also termed cost-push inflation

CPI

consumer price index - index that measures the prices of a set "basket" of some 300 g/s bought by a "typical" consumer; used by government as a main indicator of the rate of inflation

PCE

Real GDP

an economic measurement (such as GDP or income) that has been adjusted for inflation

Nominal GDP

an economic measurement that is unadjusted for inflation

GDP deflator

price index found by dividing nominal GDP by real GDP; used to adjust nominal GDP to real GDP

Cost-push inflation

when an increase in resource costs shift the aggregate supple curve inward, resulting in an increase in the price level and unemployment; also termed staglation

Demand-pull inflation

Price levels rise rapidly because of total spending excess of total productivity. Excess demand quickly bids up price of available goods.

Keynesian theory

macroeconomics generalizations leading to the conclusion that a capitalistic economy is characterized by macroeconomic instability and that fiscal policy and monetary policy can be used to promote full employment, price level stability, and economic growth

Say's law

A controversial generalization that the production of goods and services creates an equal demand for those g/s. Associated with economic policies under President Reagan

Supply side

macroeconomic perspective that emphasizes fiscal policy aimed at altering the state of the economy through Ig (short run) and the aggregate suppply (long run)

Demand side

Direct opposition to "laissez faire" view, Keynes believed that government should play the key role in revitalizing a stagnant economy by stimulating demand. Government regulation of the business cycle.

Laffer curve

Curve relating government tax rates and tax revenues and on which a particular tax rate (between 0 and 100 percent) maximizes tax revenues

Short-run Phillips curve

the negative short-run relationship between the unemployment rate and the inflation rate

Long-run Phillips curve

the Phillips Curve after all nominal wages have adjusted to changes in the rate of inflation; a line emanating straight upward at the economy's natural rate of unemployment

Marginal propensity to consume

change in consumption spending relative to a change in income

Marginal propensity to save

chance in saving relative to a change in income

Equilibrium GDP

output level at which the total amount of goods produced, GDP, is just equal to the total amount of goods purchased

GDP multiplier

Determine exact ratio of change relationship between changes in AE and GDP

Investment demand

Shift in demand for money would cause firms to borrow more money as long as the increase in real rates doesn't exceed the increase in net profits

AD/AS model

Variable price levels relative to changes in output, employment and income as aggregate demand and aggregate supply equilibrium​ occurs

Monetary policy

Policy basis on which the Federal Reserve influences interest rates through manipulation of the money supply to promote price stability, full employment, and productivity growth

Fiscal policy

Cyclical deficits

federal budget deficit caused by a recession and the resultant decline in tax revenues

National debt

the accumulated cyclical deficits of the Federal government over time

Crowding out

caused by the federal government's increased borrowing in the money market that results in a rise in interest rates. The rise in interest rates results in a decrease in gross business domestic investment, which reduces the effectiveness of expansionary fiscal policy

Money supply

defined, measured, and reported as M1, M2, M3

Stocks

an ownership share in a company held by an investor

Bonds

financial instrument through which a borrower (corporate or government) is contracted to pay the principal at a specified interest rate at a specific date (maturity) in the future; promissory note

Federal Reserve System

Banks

Loanable funds

Real interest rates

the interest rate adjusted for inflation

Nominal interest rates

the interest rate unadjusted for inflation

Money multiplier

Balance sheet

statement of the assets and liabilities that determines a firm's net (solvency)

FOMC

Federal Open Market Committee, the 12 member group that determines the purchase and sale policy of the Federal Reserve Banks in the market for U.S. government securities; affects federal funds rate

Expansionary policy

combination of government increases in spending and net decrease in taxes, for the purpose of increasing aggregate demand, increasing output and disposable income, and lowering unemployment.

Contractionary policy

combination of government reduction in spending and a net increase in taxes, for the purpose of decreasing aggregate demand, lowering price levels, and thus controlling inflation

Policy mix

recognition that fiscal and monetary policies are not independent and that in some circumstances are a necessary complement to each other

NAFTA

North America Free Trade Agreement, 1993 trade agreement between Canada, the United States, and Mexico, designed to reduce trade barriers over a 15-year period

GATT

General Agreement on Tariffs and Trade, international agreement, reached in 1947, in which 23 nations agreed to reduce tariff rates and eliminate import quotas. The Uruguay Round of the GATT talks led to the World Trade Organization

WTO

World Trade Organization, group established by the Uruguay Round of the GATT to assist in the promotion of trade and resolution of trade disputes

Global economy

Comparative advantage

determines specialization and exchange rate for trade between nations; based on the nation with lower relative or comparative cost of production

Absolute advantage

Balance of payments

the summary of a nation's current account and its financial account

Current account

section in the nation's international balance of payments that records its exports and imports of goods and services, its net investment income, and its net transfers. A component of the balance of payments accounts

Capital account

section of a nation's international balance-of-payments balance sheet that records foreign purchases of U.S. assets (money in) and U.S. purchases of foreign assets (money out)

Capital inflows

reflects the net difference between foreign funds invested in the home country minus the domestic funds invested in the foreign country. A component of the balance of payments account