Macroeconomics Flashcards

Essential Economics Vocabulary

Output Question

Situation where different amounts of goods are made with equal amounts of resources.

Input Question

Situation where different amounts of resources are used to make the same amount of goods.

Comparative Advantage

The ability to produce a good or service at a lower opportunity cost than another producer.

Terms of Trade

The ratio at which a country can trade its exports for imports from other countries; countries benefit from trade if they can get goods at a lower opportunity cost than producing them on their own.

Indeterminate

When both demand and supply change causing a definitive change in either equilibrium price OR quantity, the one that doesn't definitively change is indeterminate because it depends on the severity (size) of the shift.

Real GDP Definition

Measures goods and services produced. Transfer payments are not included because nothing new is purchased or produced.

Discouraged Workers

Jobless people that have given up looking for work. They are not counted as unemployed because they are not in the labor force.

Full Employment (Natural Rate of Unemployment)

The level of employment when there is no cyclical unemployment. The economy will always have some frictional and structural unemployment.

Inflation Impact on Borrowers

When inflation increases, borrowers pay back loans with dollars that have a lower purchasing power, benefiting the borrower.

Annual Inflation Rate

Shows how prices changed compared to last year.

Consumer Price Index (CPI)

Shows how prices changed compared to a base year; it is an index number, not a percentage.

Recessionary Gap

When the actual real GDP is less than the potential or full employment real GDP even if real GDP can be increasing.

Aggregate Demand Curve

A curve showing the total quantity of goods and services demanded at different price levels; it is downward sloping because higher prices cause spending to decrease due to the real wealth effect, the interest rate effect, and the exchange rate effect.

Aggregate Supply Curve

A curve showing the total quantity of goods and services supplied at different price levels; it is upward sloping because, in the short-run, businesses have an incentive to produce more output when prices increase to earn more profit before labor and resource prices increase.

Long-Run Aggregate Supply Curve

Vertical because, in the long-run, businesses have no incentive to produce more output when prices increase because resource prices and wages increase proportionately to inflation.

Negative Supply Shock

Results in a leftward shift in the SRAS causing the price level to increase and the real GDP to decrease.

Long-Run Adjustment to Negative Output Gap

Eventually, resource prices and wages will fall since there is high unemployment. The SRAS will shift rightward returning the economy to full employment real GDP, assuming wages are flexible.

Long-Run Adjustment to Positive Output Gap

Eventually, resource prices and wages will increase since there is high inflation. The SRAS will shift leftward returning the economy to full employment.

Government Spending (Short-Run Effect)

Increases real GDP and decreases unemployment. The actual increase in real GDP is significantly more than the initial increase due to the multiplier effect.

Tax Cut (Short-Run Effect)

Increases real GDP and decreases unemployment. It also decreases government tax revenue and moves the government toward a budget deficit.

Marginal Propensity to Save (MPS)

When the MPS increase, people save more. This decreases the MPC and the amount people spend which causes the spending multiplier to decrease.

Government Spending vs. Tax Cut

A tax cut has less of an impact on the economy than an increase in government spending by the same amount because people save a portion of a tax cut so not all the cut is added to the economy. The entire amount of government spending is added to the economy so it has a greater impact.

Progressive Income Taxes

Progressive taxes work countercyclically, slowing down or speeding up the economy automatically. It is an example of automatic stabilizer.

Bond Prices and Interest Rates

Inversely related. If interest rates increase, people prefer new bonds with higher rates rather than previously issued bonds with lower rates. To sell these previously issued bonds, bond owners must lower the price.

Unexpected Inflation

Causes a decrease in the real interest rate. The nominal interest rate a lender earns can be eroded if there is unexpected inflation.

Money Supply

Includes money in circulation and checkable deposits.

Monetary Base

Smaller than money supply. Includes money in circulation and bank reserves.

Money Functions

Medium of exchange (used to buy and sell goods and services), store of value (save purchasing power for a later date), and unit of account (measure the value of different goods and services).

Reserve Requirement

When the reserve requirement decreases, banks are no longer required to hold as much money in reserve. This allows them to offer more loans and increase the money supply at a faster rate.

Demand for Money

Downward sloping because when the interest rate is high, people prefer to hold less money in cash or in checking accounts and, instead, purchase assets that can earn them these higher interest rates such as bonds.

Interest Rates and Investment

Inversely related. When interest rates are high, borrowers will borrow less since the cost of the loan is higher. A low interest rate encourages more borrowing since the cost of the loan is lower.

Open Market Operations

When the central bank buys previously issued government bonds it allows banks to lend out more money which increases the money supply. The opposite happens when the central bank sells government bonds.

Cash Deposit vs. Bond Purchase (Central Bank)

A cash deposit of a certain amount creates less money than a purchase of bonds by the central bank of the same amount because banks can only lend out a portion of cash deposits so the increase in excess reserves is less than the amount deposited. A bank can lend out all of the money it gets when the central bank buys its bonds since all the funds are added to excess reserves.

Increase in Money Supply

When the money supply increases, the nominal interest rate falls. This increases investment and interest-sensitive consumer spending, increasing real GDP and decreasing unemployment.

Increase in Deficit Spending

When the government borrows, it decreases the supply of loanable funds available to the private sector. This increases the real interest rate and makes it harder for businesses to borrow.

Increase in Savings Rate

More saving increases the supply of loans available which decreases the real interest rate.

Monetary Policy to Fight Inflation

The central bank can decrease the money supply to increase interest rates and decrease investment and interest-sensitive consumer spending to prevent high inflation caused by expansionary fiscal policy.

Phillips Curve and Output Gaps

A recessionary gap is a point down and to the right on the SRPC, an inflationary gap is up and to the left on the SRPC, and full employment is in the middle where the SRPC and LRPC intersect.

Long-Run Phillips Curve

Vertical because there is no tradeoff between inflation and unemployment in the long-run. In the long-run, the economy will always be at the natural rate of unemployment (NRU).

Negative Supply Shock (Phillips Curve)

Results in a rightward shift in the SRPC showing an increase in both inflation and unemployment.

Increase in Money Supply (Quantity Theory of Money)

The quantity theory of money states that an increase in the money supply doesn't increase the amount of goods/services that can be made. Without more investment, more money only causes more inflation.

Budget Deficit

An annual measure showing how much spending outpaced tax revenue in a year.

National Debt

The cumulation of all budget deficits over time.

Crowding Out

When the government borrows, it decreases the supply of loanable funds available for private investment. This increases the real interest rate and decreases the number of loans taken by businesses.

Crowding Out (Long-Run Effects)

Causes higher interest rates which decreases investment. Less investment results in less capital stocks and less growth over time.

Economic Growth (AD/AS Model)

Shown by a rightward shift in the LRAS. This means that more output can sustainably be produced than before.

Physical Capital or Human Capital

More physical capital means that businesses can permanently produce more output than before. More human capital makes workers more productive since they are smarter and more educated.

Government Spending and Economic Growth

Government spending on infrastructure results in more growth since it increases productivity by improving transportation and production. Government spending on education can increase human capital making workers better.

Current Account

Measures the sale and purchase of goods and services between countries.

Capital and Financial Account (CFA)

Measures the sale and purchase of financial assets like currency, bonds, and stocks.

Currency Appreciation

When currency A appreciates relative to currency B, then currency B must depreciate relative to currency A.

Currency Appreciation and Net Exports

When a country's currency appreciates, it becomes more expensive for foreigners. These foreigners purchase fewer goods and services causing net exports to decrease.

Inflation and Currency

Inflation causes foreigners to demand less of the country's goods so the demand for the currency falls. Inflation also causes citizens to want relatively cheap foreign goods which increases the supply of the currency.

Interest Rates and Financial Capital Inflow

When real interest rates increase, foreigners will want more of that country's currency so they can purchase interest-bearing assets and earn a high rate of return.