Mcaroeconics Exam2

Consumption Function

The relationship between consumption and income.

Marginal Propensity to Consume

The fraction of change in income that is spent on consumption; the change in consumption divided by the change in income that caused it.

Marginal Propensity to Save

The fraction of a change in income that is saved; the change in income that caused it.

Saving Function

The relationship between saving and income.

Net Wealth

The value of assets minus liabilities.

Life-Cycle Model of Consumption and Saving

Young people borrow, middle agers pay off debts and save, and older people draw down their savings; on average net savings over a lifetime are small.

Investment Function

The relationship between the amount businesses plan to invest and the economy's income.

Autonomous

A term that means 'independent'.

Government Purchase Function

The relationship between government purchases and the economy's income.

Net Exports

The relationship between net exports and the economy's income.

Simple Spending Multiplier

A ratio of change in real GDP demanded to the initial change in spending that brought it about. (Assuming consumption varies with income) = 1/(1-MPC) = 1/MPS.

Aggregate Supply

The relationship between the economy's price level and the amount of output firms are willing and able to supply.

Labor

The most important resource, accounting for about 70% of production costs.

Nominal Wages

The wage measured in dollars of the year in question: the dollar amount on a paycheck.

Real Wages

The wage measured in dollars of constant purchasing power; the wage measured in terms of the quantity of goods and services it buys.

Potential Output

The economy's maximum sustainable output, given the supply of resources, technology and know-how, and rules of the game; the output level when there are no surprises about the price level.

Natural Rate of Unemployment

The unemployment rate when the economy produces its potential output.

Short Run

In macroeconomics, a period during which some resource prices, especially those for labor, remain fixed by explicit or implicit agreements.

Short-Run Aggregate Supply (SRAS) curve

A curve that shows a direct relationship between actual price level and real GDP supplied in the short run, including expected price level.

Short-Run Equilibrium

The price level and real GDP that result when the aggregate demand curve intersects the short-run aggregate supply curve.

Expansionary Gap

The amount by which actual output in the short run exceeds the economy's potential output.

Long Run

In macroeconomics, a period during which wage contracts and resource price agreements can be renegotiated; there are no surprises about the economy's actual price level.

Long-Run Equilibrium

The price level and real GDP that occur when 1) The actual price level equals the expected price level, 2) Real GDP supplied equals potential output and 3) Real GDP supplied equals real GDP demanded.

Recessionary (Contractionary) Gap

The amount by which actual output in the short run falls short of the economy's potential output.

Long-Run Aggregate Supply (LRAS) curve

A vertical line at the economy's potential output; aggregate supply when there are no surprises about the price level and all resource contracts can be negotiated.

Supply Shocks

Unexpected events that affect aggregate supply, sometimes only temporarily.

Beneficial Supply Shocks

Unexpected events that increase aggregate supply, sometimes only temporarily.

Adverse Supply Shocks

Unexpected events that reduce aggregate supply, sometimes only temporarily.

Hysteresis

The theory that the natural rate of unemployment depends in part on the recent history of unemployment; a long period of high unemployment can increase the natural rate of unemployment.

Automatic Stabilizers

Structural features of government spending and taxation that reduce fluctuations in disposable income and thus consumption, over the business cycle.

Discretionary Fiscal Policy

The deliberate manipulation of government purchases, taxation, and transfer payments to promote macroeconomic goals, such as full employment, price stability, and economic growth.

Simple Tax Multiplier

The ratio of a change in real GDP demanded to the initial change in autonomous net taxes that brought it about; the numerical value of the simple tax multiplier is MPC/(1-MPC).

Expansionary Fiscal Policy

An increase in government purchases, decrease in net taxes, or some combination of the two aimed at increasing aggregate demand enough to return the economy to its potential output thereby reducing unemployment; policy used to close a contractionary gap.

Contractionary Fiscal Policy

A decrease in government purchases, increase in net taxes, or some combination of the two aimed at reducing aggregate demand enough to return the economy to potential output without worsening inflation; policy used to close an expansionary gap.

Classical Economists

A group of the 18th and 19th century economists who believe that economic downturns were short run phenomena that corrected themselves through natural market forces; thus, they believed the economy was self-correcting and needed no government intervention.

FDIC

Created in 1933 to back and ensure savings, and to separate commercial banking from investment banking.

The Great Depression

At its height, 25% of the working population was unemployed.

John Maynard Keynes

Published 'The general theory of employment, interest, and money' in 1936, highlighting inflexible prices and wages in a downward direction.

Employment Act of 1946

Gave the federal government responsibility for promoting full employment and price stability.

Revenue Act of 1945

Reduced the individual income tax rate by 3 percentage points.

Progressive Income Tax

A tax system that adjusts rates during economic expansion and recession.

Unemployment Insurance

During economic expansion, the system automatically increases the flow of unemployment insurance taxes from the income stream into the unemployment insurance fund, moderating aggregate demand.

GDP Fluctuations

Because of automatic stabilizers, GDP fluctuates less than it otherwise would, and disposable income varies proportionally less than does GDP.

Golden Age of Keynesian Economics

Refers to the 1960s when Keynesian economics was widely accepted and practiced.

Federal Budget Deficit

Proposed by President Kennedy during the Golden Age of Keynesian Economics.

Tax Cuts

Implemented by President Johnson as part of fiscal policy during the 1960s.

Discretionary Fiscal Policy

A demand management policy aimed at increasing or decreasing aggregate demand to smooth economic fluctuations.

Stagflation

A situation characterized by high unemployment and high inflation resulting from a decrease in aggregate supply.

Supply Side Experiment

Economic policies in the 1980s that included a 23% tax cut and a reduction in government spending from 7.1% to 6.3%.

Longest Peacetime Expansion

The economic expansion during the 1980s that was sustained by the stimulus from the tax cut.

1993 Tax Increase

President Clinton's substantial increase in taxes for high-income households.

Republican Congress 1994

A Congress that imposed more discipline on Federal Spending.

Jobless Recovery

An economic recovery that occurs without a corresponding decrease in unemployment.

Economic Recession 2001

A period of economic decline that began by early 2001, compounded by the September 11 attacks.

2008 Economic Stimulus Check

A check issued to all tax-paying Americans aimed at stimulating the economy, averaging $600 per taxpayer.

Sub-prime Loans Crisis

A financial crisis in late summer 2008 linked to the failures of Freddie Mac, Fannie Mae, AIG, and numerous banks.

2008 Bailout Plan

A $700 billion plan by the government to bail out failing financial institutions.

Great Recession

The economic downturn that began in December 2007, marked by declining home prices and rising foreclosure rates.

Lehman Brothers Bankruptcy

The largest bankruptcy in U.S. history, filed in September 2008, with assets over $600 billion.

AIG Bailout

The bailout of the insurance giant AIG, which had assets of $1.2 trillion.

TARP

Troubled Asset Relief Program initiated in October 2008 to provide bailouts and calm credit markets.

4th Quarter 2008 GDP Drop

A decline of 8.9% in real GDP, the largest drop in decades.

Unemployment Rate End of 2008

The unemployment rate reached between 5% and 7.4% by the end of 2008.

Recovery and Reinvestment Act

A program initiated on February 17, 2009, with $787 billion aimed at stimulating aggregate demand.

Stress Test for Banks

A test administered by the Treasury to assess the financial stability of banks.

FDIC

Federal Deposit Insurance Corporation, which closed 465 banks from 2008-2012.

Deposit Insurance

$250,000 insurance provided by the FDIC for bank deposits.

Wachovia Acquisition

The acquisition of Wachovia by Wells Fargo was completed on December 31, 2008, after a government-forced sale.

Wachovia Brand Absorption

The Wachovia Brand was absorbed into the Wells Fargo brand in a process that lasted 3 years, with the last branches converted on October 15, 2011.

Obama's Tax Cut

Issued another tax cut in January 2009.

Industrial Leaders Resignation

President Obama asked some industrial leaders/CEOs to resign in order for their companies to get federal aid.

Dodge and Chrysler Bankruptcy

Dodge and Chrysler declared bankruptcy during the economic crisis.

Housing Market

The housing market/new starts flatlined from 2012-2014, leading to foreclosures.

Stimulus Package

The stimulus package was all deficit spending and remains controversial and unpopular.

GDP Decline

Government purchases grew, but GDP fell 0.7%.

Employment Decline

Between 2007-09, employment saw a decline of 6.1%.

Federal Deficit

Ran from $161 billion in 2007, to 359 billion in 2008, to 1.4 trillion in 2009.

Deficit Borrowing

At that time, 41 cents of each dollar spent by the government was borrowed.

Cash for Clunkers

Approved $1 billion in June 2009 to pay from $3,500-$4,500 to each car buyer who traded in a 'clunker'.

Clunker Definition

A car with gas mileage of 18 miles per gallon or less.

Program Extension

Congress put $2 billion more into the Cash for Clunkers program and limited the extension to a month.

Government Spending

The money spent on the Cash for Clunkers program was money the government didn't have, sharply increasing the deficit.

Interest Payments

The government spends an extra $90 million a year just to pay the interest for the program.

Japanese Manufacturers

Accounted for 41% of the Cash for Clunkers program sales.

BIG Three Automakers

Accounted for 39% of the Cash for Clunkers program sales.

Car Destruction

680,000 cars had to be destroyed, removing the same number from the used-car market.

Unemployment Rate

Until late 2012, unemployment remained above 8.0%.

Trump Tax Cut

Produced a significant tax cut for businesses and taxpayers, reducing rates from 35% to 21%.

Economic Recovery

The economy recovered with low unemployment, more jobs being filled, and pay outpacing the cost of living.

Covid Economic Impact

In 2020, the economy unraveled due to lockdowns and supply and demand disruptions.

Double Coincidence of Wants

Two traders are willing to exchange their products directly.

Money

Anything that is generally accepted in exchange for goods and services.

Medium Exchange

Anything that facilitates trade by being generally accepted by all parties in payment for goods or services.

Commodity Money

Anything that serves both as money and as commodity; money that has intrinsic value.

Unit of Account

A common unit for measuring the value of each good or service.

Store of Value

Anything that retains its purchasing power over time.

Gresham's Law

People tend to trade away inferior money and hoard the best; bad money drives out good.

Seigniorage

The difference between the face value of money and the cost of supplying it; the 'profit' from issuing money.

U.S. Coin Production

A quarter (25 cents) costs 3 cents to produce.

Token Money

Money whose face value exceeds its costs of production.