Erhardt Macroeconomics Exam 2 Study Guide

Consumption Function

The relationship between consumption and income (o.t.c.)

Decrease in net wealth, increase in price level, or increase in interest rate

A downward shift in consumption function can be caused by...

An increase in net wealth, decrease in price level, favorable change in expectations, or decrease in interest rate

An upward shift in consumption function can be caused by...

Marginal Propensity to Consume (MPC)

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

Saving Function

The relationship between saving and income (o.t.c.)

Marginal Propensity to Save (MPS)

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

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, (o.t.c.)

Autonomous

A term that means "independent"; for example, autonomous investment is independent of income

Government Purchase Function

The relationship between government purchases and the economy's income, (o.t.c)

Net Exports

The relationship between net exports and the economy's income, (o.t.c.)

Aggregate Supply

The relationship between the economy's price level and the amount of output firms are willing and able to supply o.t.c.

70%

Labor accounts for how much 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 the actual price level and real GDP supplied in the short run, o.t.c., including the 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

3. Real GDP supplied equals real GDP demanded

Wage-Price Spiral

The process by which rising wages cause higher prices, and higher prices cause higher wages

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 contract can be negotiated

Supply Shocks

Unexpected events that affect aggregate supply

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

Truman

Which President introduced automatic stabilizers during his presidency?

Discretionary Fiscal Policay

The deliberate manipulation of government purchases, taxation, and transfer payments to prompt macroeconomic pals, 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 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 18th and 19th century economists who believed 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

1929

What year did the stock market crash?

1933

What year was The Great Depression at its height?

25%

How much of the working population was unemployed in 1933?

1933 Banking Act

The formation of the FDIC (Federal Deposit Insurance Corporation) was part of what act?

1935 Banking Act

The FED gains more independence as part of what act?

Keynes

Who published The General Theory of Employment Interest and Money in 1936?

Fiscal and Monetary Policies

Keynes key focuses...

The three developments that bolstered the use of discretionary fiscal policy in the US

1. With the economy operating below its potential, the government needed to increase aggregate demand to boost output and employment

2. WWII lifted US out of the depression

3. Employment Act of 1946 gave the federal government responsibility for promoting full employment and price stability

Overall Impact of Fiscal Policy

Don't worry about a balanced budget, promote full

1960s

When was the Golden Age of Keynesian Economics?

Supply-Side Economics

Ronald Reagan shifted to what kind of economics?

The Jobless Recovery

What was the economic recovery between 2004-2007 called?

Lehman Brothers and Bear Stearns failed; JPMorgan Chase acquired Bear Stearns at a low price.

Which two major investment banks failed in 2008?

Triggers of the late summer 2008 financial crisis

Subprime mortgage loans tied to Freddie Mac, Fannie Mae, AIG, and many banks began failing, causing global financial consequences.

JPMorgan Chase, Goldman Sachs, Bank of America, and Morgan Stanley.

Which banks were considered "too big to fail" during the 2008 crisis?

$700 billion, gave the government ownership of many financial institutions

What was the 2008 bailout plan created by Congress and the President?

Ford Motor Company

Which automakers suffered major trouble during the recession?

The economy entered recession by November 2008, officially confirmed in 2009.

When was the recession officially recognized?

Falling home prices, rising foreclosures, and mortgage defaults.

What caused the Great Recession after December 2007?

The Lehman Brothers' bankruptcy

The largest bankruptcy in U.S. history, involving over $600 billion in assets and 25,000 employees.

AIG, a $1.2 trillion insurance giant, was bailed out by the government.

What happened to AIG during the crisis?

Troubled Asset Relief Program

What does TARP stand for?

TARP's main effects

Stabilized credit markets, though the economy and stock market continued falling.

GDP decline in 2008

Real GDP fell 8.9% in Q4 2008, the largest drop in decades.

5% to 7.4%

What was the change in unemployment by the end of 2008?

Recovery and Reinvestment Act of 2009

A $787 billion stimulus package signed on February 17, 2009 to increase aggregate demand.

Deficit Spending

How was the 2009 stimulus funded?

Tax Cuts

According to analysis, what affects the economy more: tax cuts or spending increases?

GDP fell, employment dropped, and unemployment remained high

Why was the stimulus package controversial?

Above 8%

Unemployment in late 2012

1.2 trillion

Federal deficit rose by how much from 2007-2009?

41 cents per dollar spent

What percentage of federal spending was borrowed in 2009?

Cash for Clunkers

A 2009 program paying $3,500-$4,500 to trade in low-mileage vehicles.

$3 billion

How much money did Congress allocate to Cash for Clunkers?

Administrative problems with Cash for Clunkers

Complex rules, crashing websites, reimbursement delays, and dealer dropouts.

680,000

How many vehicles were sold through Cash for Clunkers?

Japanese manufacturers and Big Three

Which automakers benefited most from Cash for Clunkers sales?

Tax change under Trump

Corporate tax rate fell from 35% to 21%.

Economic recovery under Trump

Low unemployment, more jobs, wage growth, and rising investment.

Remained weak under Trump

Restaurants, retail, immigration policy, and healthcare issues.

The American Rescue Plan

A $1.9 trillion stimulus package passed in 2021.

Infrastructure Investment and Jobs Act

$1.2 trillion for roads, bridges, and broadband.

Inflation Reduction Act

A law focused on clean energy, healthcare costs, insulin caps, and corporate taxes

CHIPS and Science Act

$280 billion to boost U.S. semiconductor production.

Employment record under Biden

Over 16 million jobs added with unemployment below 4% for the longest stretch since the 1950s.

Inflation peak under Biden

9.1% in June 2022.

Numerous Record Highs

What happened in the stock market during Biden's term?

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 of Exchange

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

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

Commodity Money

Anything that services both as money and as a commodity; money that has intrinsic value

Gresham's Law

People tend to trade away inferior money and hoard the best (Bad money drives out good - debasing the coinage); Money should maintain a relatively stable value

Seigniorage

The difference between the face value of money and the cost of supplying it: the "profit" from issuing money

Token Money

Money whose face value exceeds its cost of production

Check

A written order instructing the bank to pay someone from an amount deposited

Transactions Account

A bank account that permits direct payment to a third party - for example - with a check or a debit card

Fractional Reserve Banking System

Only a portion of bank deposits are backed by reserves

Bank Notes

Originally, papers promising a specific amount of gold and silver to anyone who presented them to issuing banks for redemption; today, Federal Reserve notes are mere paper money

Representative Money

Bank notes that exchange for a specific commodity, such as gold or silver

Fiat Money

Money not redeemable for any commodity; its status as money is conferred initially by the government, but eventually by common experience