Untitled Flashcard Set

Macroeconomics Final Flashcards (Knowt Format)

Supply and Demand

Quantity Demanded :: The amount of a good consumers are willing and able to buy at a specific price.

Law of Demand :: As price decreases, quantity demanded increases.

Quantity Supplied :: The amount of a good producers are willing and able to sell at a specific price.

Law of Supply :: As price increases, quantity supplied increases.

Market Equilibrium :: The point where supply equals demand.

Shortage :: A situation where demand is greater than supply.

Surplus :: A situation where supply is greater than demand.

Demand Shifters :: Income, prices of related goods, tastes, expectations, number of buyers.

Supply Shifters :: Input prices, technology, expectations of future prices, number of producers.

Competitive Market :: A market with many buyers and sellers.

GDP and Measuring the Economy

GDP :: The market value of all final goods and services produced within a country in a given period of time.

GDP Formula :: GDP = C + I + G + NX

Consumption (C) :: Spending by households on goods and services.

Investment (I) :: Spending on capital goods used to produce future goods and services.

Government Purchases (G) :: Spending by local, state, and federal governments on goods and services.

Net Exports (NX) :: Exports minus imports.

Nominal GDP :: GDP measured using current prices.

Real GDP :: GDP measured using constant base-year prices.

Real GDP measures what? :: Actual output of goods and services.

GDP Deflator Formula :: GDP Deflator = Nominal GDP / Real GDP

Inflation Formula :: Inflation = ((New - Old) / Old) × 100

Consumer Price Index (CPI) :: Measure of the cost of living for consumers.

CPI uses what? :: Fixed quantities with changing prices.

Fisher Equation :: Real Interest Rate = Nominal Interest Rate - Inflation Rate

Growth and Production

Factors of Production :: Labor, capital, natural resources, human capital, technological knowledge.

Labor :: Workers and people in the economy.

Capital :: Tools, machines, and structures used to produce goods.

Human Capital :: Skills and knowledge gained through education and experience.

Technological Knowledge :: Society’s understanding of how to produce goods efficiently.

Diminishing Returns :: Adding more of one input eventually leads to smaller increases in output.

Constant Returns to Scale :: Doubling all inputs doubles output.

Unemployment

Labor Force Formula :: Labor Force = Employed + Unemployed

Unemployment Rate Formula :: Unemployment Rate = Unemployed / Labor Force

Natural Rate of Unemployment :: The normal unemployment rate the economy fluctuates around.

Cyclical Unemployment :: Unemployment caused by recessions.

Frictional Unemployment :: Unemployment from workers changing jobs.

Structural Unemployment :: Unemployment caused by mismatches between workers’ skills and jobs.

Not in Labor Force :: Adults not working and not seeking work.

Financial System

Savings :: Income not spent.

Investment in macroeconomics :: Purchase of capital goods.

Loanable Funds Market :: Market where savers supply funds and borrowers demand funds.

Price of a loan :: The real interest rate.

National Savings Formula :: S = (Y - C - T) + (T - G)

Budget Surplus :: When taxes are greater than government spending.

Budget Deficit :: When government spending is greater than taxes.

Future Value Formula :: FV = (1 + r)^N × PV

Risk Aversion :: Preference for less risky investments.

Diversification :: Reducing risk by spreading investments.

Efficient Markets Hypothesis :: Asset prices reflect all publicly available information.

Speculative Bubble :: Asset prices rise above fundamental value.

Money and Banking

Functions of Money :: Medium of exchange, unit of account, store of value.

Commodity Money :: Money with intrinsic value.

Fiat Money :: Money without intrinsic value.

Liquidity :: Ease of converting an asset into cash.

Fractional Reserve Banking :: Banks keep part of deposits in reserves and loan out the rest.

Money Multiplier Formula :: Money Multiplier = 1 / Reserve Ratio

Federal Reserve :: Central bank of the United States.

Federal Reserve tools :: Open-market operations, reserve requirements, discount rate.

Expansionary Monetary Policy :: Policies that increase the money supply.

What does buying bonds do? :: Increases the money supply.

What does lowering reserve requirements do? :: Increases the money supply.

What does lowering the discount rate do? :: Increases the money supply.

Quantity Theory of Money Formula :: Price Level = (Money Supply × Velocity) / Real GDP

Increasing money supply causes what? :: Inflation.

Business Cycles and Aggregate Demand

Business Cycle :: Short-run fluctuations in economic activity.

Expansion :: Period when GDP is increasing.

Recession :: Period when GDP is decreasing.

Aggregate Demand Formula :: AD = C + I + G + NX

Why does AD slope downward? :: Wealth effect, interest-rate effect, exchange-rate effect.

Wealth Effect :: Lower prices increase consumers’ purchasing power.

Interest-Rate Effect :: Lower prices lower interest rates and increase investment.

Exchange-Rate Effect :: Lower prices increase net exports.

What increases Aggregate Demand? :: Tax cuts, government spending increases, optimism.

What decreases Aggregate Demand? :: Tax increases, government spending cuts, pessimism.

Aggregate Supply and Equilibrium

Long-Run Aggregate Supply (LRAS) :: Determined by factors of production.

Why does SRAS slope upward? :: Sticky wages, sticky prices, misperceptions.

What shifts LRAS? :: Changes in factors of production.

Increase in expected prices does what to SRAS? :: Shifts SRAS left.

Decrease in expected prices does what to SRAS? :: Shifts SRAS right.

Long-run equilibrium :: SRAS = LRAS = AD

Short-run equilibrium :: SRAS = AD

Demand Boom :: Increase in AD causing inflation and expansion.

Demand Recession :: Decrease in AD causing recession and deflation.

Negative Supply Shock :: Decrease in SRAS causing inflation and recession.

Examples of negative supply shocks :: Oil crisis, bad weather.

Liquidity Preference and Monetary Policy

Liquidity Preference Theory :: Interest rates are determined by supply and demand for money.

Money Demand Curve :: Downward sloping because higher interest rates reduce demand for money.

Increasing money supply does what to interest rates? :: Decreases interest rates.

Increasing money supply does what to AD? :: Increases aggregate demand.

Liquidity Trap :: Situation where interest rates are near zero and monetary policy becomes ineffective.

Fiscal Policy

Fiscal Policy :: Government decisions about taxes and spending.

Increasing government spending does what? :: Increases aggregate demand.

Multiplier Effect :: Initial spending causes additional increases in spending.

Multiplier Formula :: Multiplier = 1 / (1 - MPC)

Marginal Propensity to Consume (MPC) :: Fraction of extra income that is spent.

Crowding-Out Effect :: Government spending raises interest rates and reduces investment.

Phillips Curve

Long-Run Phillips Curve (LRPC) :: Vertical curve showing unemployment returns to natural rate.

Short-Run Phillips Curve (SRPC) :: Shows inverse relationship between inflation and unemployment.

Milton Friedman’s argument :: Monetary policy cannot affect unemployment in the long run.

Unexpected inflation does what? :: Creates short-run changes in unemployment.

Increase in expected inflation does what? :: Shifts SRPC upward.

Inflation Target Curve :: Government’s target inflation rate.

Expansionary policy on Phillips Curve :: Moves economy along SRPC.

Natural Rate of Unemployment (NRU) :: Long-run unemployment rate economy returns to.