ECON 200 FINAL

Peak

High point of economic activity.

Contraction

Decrease in economic activity.

Trough

Low point of economic activity.

Expansion

Growth in economic activity.

Demand-Pull Inflation

Occurs when demand for goods/services is higher than supply.

too much money chasing too few goods

Cost-Push Inflation

Occurs when cost of production increases due to rise in prices of input.

Disinflation

Inflation occurs, but at a slower rate.

Deflation

When prices fall, can cause consumers to delay consumption.

Loose/Expansionary Policy

Government policy that tries to boost the economy by encouraging spending at lower prices.

Tight/Contractionary Policy

Government policy that tries to slow down the economy to reduce inflation.

Positive Output

High demand, not enough capital.

Negative Output

Too much capital, low demand.

Output Formula

((Actual Output - Potential Output) / Potential Output) x 100.

Closed Economies

Economies that do not interact with other economies around the world.

Open Economies

Economies that interact freely with other economies.

Imports

Goods produced abroad but sold domestically.

Exports

Goods produced domestically but sold abroad.

Net Exports

Value of a nation’s exports minus the value of its imports.

Positive Net Exports

Exports are greater than imports.

Negative Net Exports

Imports are greater than exports.

Shifters of Imports and Exports

Factors that affect commodities such as consumer tastes, price, exchange rates, income, transportation cost, and government policy.

Purchasing Power Parity (PPP)

The notion that a basket of goods should cost the same in different countries when adjusted for the exchange rate.

Aggregate Demand (AD)

Shows total spending in the economy.

Aggregate Demand Equation

AD = Consumption + Investment + Government Spending + (Exports - Imports).

Wealth Effect (C)

Increased asset values lead consumers to feel richer and spend more.

Interest Rate Effect (I)

Borrowing becomes costlier when interest rates increase, leading to decreased spending.

Exchange-Rate Effect (NX)

Changes in currency value affect the competitiveness of exports and imports.

Long-Run Aggregate Supply (LRAS)

Shifts with changes in labor, capital, natural resources, and technological knowledge.

Short-Run Aggregate Supply (SRAS) Shifters

Changes in production costs or input prices that affect supply.

Crowding Out Effect

Government spending increases interest rates, making borrowing more expensive.

Multiplier Effect

When one person’s spending results in increased economic activity beyond the original amount spent.

Monetary Policy

The control of money supply and interest rates by the Fed.

Fiscal Policy

Government spending and taxes determined by Congress.

Interest Rate Equilibrium

Occurs at the point where the quantity of money people want equals the quantity supplied.

Nominal Exchange Rate

Amount of foreign currency per unit of domestic currency.

Real Exchange Rate

Nominal exchange rate adjusted for price levels in the respective countries.

Four Key Determinants of Productivity

Physical capital, human capital, natural resources, and technological knowledge.

Aggregate Production Function

Describes the relationship between inputs and outputs.

International Trade Benefits

Increased variety of goods, lower costs, more competition, and enhanced job flows.

Arguments Against International Trade

Threats to jobs, national security concerns, unfair competition, and negative effects on citizens.

Net Capital Outflow (NCO)

Money going out to invest abroad minus money coming in.

Appreciation

When a currency strengthens against another.

Depreciation

When a currency weakens against another.

Understanding Economic Lags

Delays in the effects of fiscal and monetary policy.

Output Returns to Natural Level

When decreased demand leads to firms reducing wages and supply.

What is the difference between Nominal and Real Exchange Rates?

Nominal expresses price while Real expresses goods.

Aggregate Demand Shifters

Factors that cause shifts in consumption, investment, government spending, and net exports.