Macroeconomics - Klein CU Boulder

principles of macroeconomics

cyclical unemployment

unemployment that occurs due to the natural business cycle (ex: a country is in recessions and workers get laid off due to it)

Structural Unemployment

There are consistently fewer jobs avilable than workers seeking them. (demand is below equilibrium)

frictional unemployment

A person is waiting to find a job that more accurately represents or utilizes their skills and education

The multiplier effect

Initial government spending becomes income for others, who therefore will spend that money. inital spending ripples into additional spending

Menu costs

the financial and practical costs a firm incurs when it changes its prices 

shoeleather costs

the costs associated with reducing money holdings, such as time and effort spent managing transactions.

inflation fallacy

the belief that inflation destroys purchasing power without recognizing that oftentimes wages rise with it.

demand-pull inflation

there is excess demand for output- businesses will have to raise prices b/c they cannot sustainably produce more goods and it will pull the inflation rate up above what people initially expected

cost-push inflation

when the cost to produce goods increases businesses have to raise prices of said goods, and in-turn, pushes the inflation rate higher can happen regardless of the output gap, just depends on cost-shocks (PC)

intermediate good

a good that is used as an imput in the production of a final good (not complete)

Final good

a good or service sold to its final user

effecient market hypothesis

at any given point in time, asset prices reflect all publicly available information

crowding out effect

the decline in private investment that follows an increase in government spending- when government increases spending and runs a budget deficit and has to borrow money, increasing the real interest rate. borrowing money becomes more expensive and saving money becomes more attractive.

who are the suppliers and demanders in the loanable funds market

savers are the suppliers, investors are the demanders

what happens when the loanable funds market reaches equilibrium

total quantity of funds is equal to the the amount of investment

current budget deficit

the flow of new borrowing over the course of a year. When the government experiences a shortfall of revenues compared to its spending

how is the current budget deficit measured

looking at the current spending versus its revenue from taxes

current acounts deficit

the difference between the income that americans recieve from abroad and the income that american people pay to foreigners

when is there an accounts budget deficit

when americans pay more to fireigners tthan they recieve in payments from foreigners ( purchasing imports, paying investment income, investing abroad)

consumption curve shifters

any other changes other than income

consumption curve movement causers

changes in income

production function shifters

changes in human capital or technology

production function movement causers

changes in physical capital or labor

IS curve shifters

Spending shocks (C) investment (I) government spending (G) or Net exports (NX)

IS curve momevent causes

a change in the real interest rate

MP curve shifters

financial shocks:changes in the risk-free rate, or the risk premium

MP curve movement causes

None, its a rate set by the fed so there wouldnt be movements along it

Phillips curve shifters

Supply shocks: changes in production costs or expected inflation

Phillips curve movement causes

A change in the output gap

Federal funds rate

the nominal interest rate that banks pay to borrow money from eachother overnight. Contolled by the federal reserve

Federal funds rate floor

set by the fed showing the least amount a money a bank can make for keeping its money by paying banks interest for keeping money in reserves.

Federal funds rate ceiling

the fed lends money directly to banks through what is called the discount rate. It sets a maximum price because banks will not borrow money from eachother if they can get a cheaper rate from the fed.

Quantitative easing

A monetary policy strategy where the federal reserve purchases large quantities of longer term government bonds in order to put downward pressure on long term interest rates

A dual mandate

The two primary goals that guide the federal reserves monetary policy. To promote maximum stable employment and keep inflation low and stable.

deflation

a percentage decrease in prices

disinflation

a slowdown of price inflation

forward guidance

works to reduce uncertainty about future monetary policy.

automatic stabilizers

types of fiscal policy that naturalluy adjust as the economy expands and retracts without ant action or legislation required from policymakers. They leave consumers with more money to spend and works to automatically correct recessions

automatic stabilizer examples

unemployment insurance benefits, social security payments, progressive income taxes, food assistance programs, welfare programs

Index fund

a mututal fund that buys all the stock in a given index

index fund pros

greater diversification and lower expenses

mandatory spending

spending on programs that is not determined annually but set in law. Consists of payments for government benefit programs where the eligibility rules and benefit formulas are established by law

diminshing returns to capital

the principle that as more capital is added to a production process, the following output generated by each additional unit of capital will eventurally decrease, assuming all other factors stay constant

How would the consumption function change as a result of consumers becoming more oessimistic about the state of the economy

shifts down

for consumption smoothers, the marginal propensity to consume of a change in income that was expected is:

close to one

what factors make the interest rates on bonds higher?

high credit risk and a long term