midterm two ch 6,8,9

Long run, economic growth

The process by which rising productivity increases the average standard of living

Expansion

Real GDP is rising

Recession

Real GDP is falling

Real GDP per capita

Real GDP divided by population

Labour productivity

Real GDP divided by number of workers or hours worked

Capital

Durable manufactured goods used to produce other goods and services. Example, machines, computers, tools, buildings vehicles.

Human capital

Accumulated knowledge and skills of workers. example education training experience

Technological change

Improvements in methods of combining inputs into outputs

Potential GDP

Level of real GDP attained when all firms are producing at capacity

Output gap

Difference between actual GDP and potential GDP

Positive output gap

Actual GDP is above potential GDP

Negative output gap

Actual GDP is below potential GDP

Financial markets

Markets where financial securities are bought and sold. example stock markets, bond markets

Financial security

Document stating terms under which funds pass from buyer to seller

Stock

Financial security representing partial ownership of a firm

Bond

Financial security promising to repay a fixed amount of funds

Financial intermediaries

Firms that borrow funds from savers and lend them to borrowers. eg. banks

Liquidity

The ease with which a financial asset can be converted into cash

Information

Prices of financial securities reflect the expectation of many investors about future returns

National income identity

Y= C+I+G+NX

Private saving

Households receive income from factors of production and transfers. They pay taxes and consume.

Public saving

The government receives tax revenue and spends on purchases and transfers

Total saving

Private saving plus public saving

In a closed economy

Saving equals investment

Government has a balanced budget

Public savings equal zero

Government runs a budget deficit

Public savings are less than zero

Government runs a budget surplus

Public savings, greater than zero

Borrowers

Firms that want to invest in capital

Lenders

Households that save and lend funds and sometimes for an investors

Real interest rate

The price that equates saving an investment

Inflation rate

Percentage increase in the price level from one year to the next

Aggregate expenditure

Total plan spending in the economy

Actual investment

Planned investment plus unplanned inventory changes

Macroeconomic equilibrium

Planned aggregate expenditure = real GDP

Consumer confidence

Expectations about income, employment, and overall economic conditions

Consumption function

Describes how consumption depends on disposable income

Marginal propensity to consume

How much consumption changes when disposable income changes by one dollar

Saving

Any part of disposable income not spent

45° line shows

Where AE = Y

Multiplier effect

Small change in autonomous expenditure causes a larger change in equilibrium real GDP

Autonomous expenditure

Parts of spending that do NOT depend on the level of real GDP

Induced expenditure

Spending that DOES depend on real GDP

Wealth effect

Higher price level reduces, real wealth, decreasing consumption

International trade effect

If domestic prices rise faster than foreign prices, exports fall, and imports rise, reducing net exports

Interest rate effect

Higher price level increases money demand

Aggregate demand curve

Relationship between the price level and the quantity of real GDP demanded

Components of real GDP

Consumption, investment, government purchases, and net exports

Aggregate demand and aggregate supply model

Short run fluctuations in real GDP and the price level

Short run aggregate supply

Relationship in the short run between the price level and quantity of real GDP supplied by firms

Monetary policy

Actions the central bank takes to manage the money supply and interest rates to pursue macro economic objectives

Fiscal policy

Changes in federal taxes and purchases intended to achieve macroeconomic objectives

Aggregate supply

Quantity of goods and services that firms are willing and able to supply

Long run aggregate supply curve

Relationship in the long run between price level and the quantity of real GDP supplied

Menu costs

Cost of changing prices

Supply shock

Unexpected event that causes short run aggregate supply to shift

Stagflation

Combination of inflation and recession