Unit 1 Macroeconomics Exam

Study Guide

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Chapter 1 - Introduction to Economics

Scarcity - The condition in which human wants are forever greater than the available supply of time, goods, and resources.
Resources - The basic categories of inputs used to produce goods & services. Resources are also called factors of production. Economists divide resources into three categories: land, labor, and capital.
Land - Any natural resource provided by nature that is used to produce a good or service.
Labor - That mental and physical capacity of workers to produce goods and services.
Entrepreneurship - The creative ability of individuals to seek profits by taking risks and combining resources to produce innovative products.
Capital - A human-made good used to produce other goods and services.
Economics - The study of how society chooses to allocate its scarce resources to the production of goods and services to satisfy unlimited wants.
Macroeconomics - The branch of economics that studies decision making for the economy as a whole.
Microeconomics - The branch of economics that studies decision making by a single individual, household, firm, industry, or level of government.
Model - A simplified description of reality used to understand and predict the relationship between variables.
Ceteris Paribus - A Latin phrase that means while certain variables change, all other things remain unchanged.
Positive Economics - An analysis limited to statements that are verifiable.
Normative Economics - An analytics based on subjective value judgements.

Chapter 2 - Production Possibilities, Opportunity Cost, and Economic Growth

Opportunity Cost - The best alternative sacrificed for a chosen alternative.
Marginal Analysis - An examination of the effects of additions to or subtractions from a current situation.
Production Possibilities Curve - A curve that shows that maximum combinations of two outputs an economy can produce in a given period of time with its available resources and technology.
Technology - The body of knowledge applied to how goods are produced.
Law of Increasing Opportunity Costs - The principle that the opportunity cost increases as production of one output expands.
Economic Growth - The ability of an economy to produce greater level of output, represented by an outward shift of its production possibilities curve. An expansion in national output measured by the annual percentage increase in a nation’s real GDP.
Investment - The accumulation of capital, such as factories, machines, and inventories, used to produce goods and services.

Chapter 5 - Gross Domestic Product

Gross Domestic Product (GDP) - The market value of all final goods and services produced in a nation during a period of time, usually a year.
Transfer Payment - A government payment to individuals not in exchange for goods or services currently produced.
Final Goods - Finished goods and services produced for the ultimate user.
Intermediate goods - Goods and services used as inputs for the production of final goods.
Circular Flow Model - A diagram showing the exchange of money, products, and resources between households and businesses.
Flow - A rate of change in a quantity during a given time period, such as dollars per year. For example, income and consumption are flows that occur per week, per month, or per year.
Stock - A quantity measured at one point in time. For example, an inventory of goods or the amount of money in a checking account.
Expenditure Approach - The national income accounting method that measures GDP by adding all the spending for final goods during a period of time.
Income Approach - The national income accounting method that measures GDP by adding all incomes during a period of time, including compensation of employees, rents, net interest, and profits.
Indirect Business Taxes - Taxes levied as a percentage of the prices of goods sold and therefore collected as part of the firms revenue. Firms treat such taxes as production costs. Examples include general sales taxes, excise taxes, and customs duties.
National Income (NI) - The total income earned by resource owners, including wages, rents interest, and profits. NI is calculated as gross domestic product minus deprecation of the capital worn out in a producing output.
Personal Income (PI) - The total income received by households that is available for consumption, saving, and payment of personal taxes.
Disposable Personal Income (DI) - The amount of income that households actually have to spend or save after payment of personal taxes.
Nominal GDP - The value of all final goods based on the prices existing during the time period of production.
Real GDP - The value of all final goods produced during a given time period based on the prices existing in a selected base year.
GDP Chain Price Index - A measure that compares changes in the prices of all final goods during a given time period relative to the prices of those goods in a base year. This index is also called GDP price index or simply GDP deflator.

Chapter 6 - Business Cycles & Unemployment

Business Cycle - Alternating periods of economic growth and contraction, which can be measured by changes in real GDP.
Peak - The phrase of the business cycle in which real GDP reaches its maximum after rising during a recovery.
Recession - A downturn in the business cycle during which real GDP declines, and the unemployment rate rises. Also called a contraction.
Trough - The phase of the business cycle in which real GDP reaches its minimum after falling during a recession.
Expansion - An upturn in the business cycle during which real GDP rises. Also called a recovery.
Economic Growth - The ability of an economy to produce greater levels of output, represented by an outward shift of its production possibilities curve. An expansion in national output measured by the annual percentage increase in a nation’s real GDP.
Leading Indicators - Variables that change before real GDP changes.
Coincident Indicator - Variables that change at the same time real GDP changes.
Lagging Indicators - Variables that change after real GDP changes.
Unemployment Rate - The percentage of people in the civilian labor force who are without jobs and are actively seeking jobs.
Civilian Labor Force - The number of people 16 years of age and older who are employed or who are actively seeking a job, excluding armed forces, homemakers, discouraged workers, and other persons not in the labor force.
Discouraged Worker - A person who wants to work, but who has given up searching for work because he or she believes there will be no job offers.
Frictional Unemployment - Temporary unemployment caused by the time required of workers to move from one job to another.
Structural Unemployment - Unemployment caused by a mismatch of the skills of workers out of work and the skills required for existing job opportunities.
Outsourcing - The practice of a company having its work done by another company in another country.
Offshoring - The practice of work for a company performed by the company’s employees located in another country.
Cyclical Unemployment - Unemployment caused by the lack of jobs during a recession.
Full Employment - The situation in which an economy operates at an unemployment rate equal to the sum of the frictional and structural unemployment rates. Also called the natural rate of unemployment.
GDP Gap - The difference between actual real GDP and potential or full-employment real GDP.

Chapter 10 & Appendix - Aggregate Demand/Supply

Aggregate Demand Curve (AD) - The curve that shows the level of real GDP purchased by households, businesses, government, and foreigners (net exports) at different possible price levels during a time period, ceteris paribus.
Real Balances Effect - The impact on total spending (and therefore real GDP) caused by the inverse relationship between the price level and the real value of financial assets with fixed nominal value.
Interest-rate Effect - The impact on total spending (and therefore real GDP) caused by the direct relationship between the price level and the interest rate.
Net Exports Effect - The impact on total spending (and therefore real GDP) caused by the inverse relationship between the price level and the net exports of an economy.
Aggregate Supply Curve (AS) - The curve that shows the level of real GDP produced at different possible price levels during a time period, ceteris paribus.
Keynesian Range - The HORIZONTAL SEGMENT of the aggregate supply curve, which represents an economy in a severe recession.
Intermediate Range - The RISING SEGMENT of the aggregate supply curve, which represents an economy as it approaches full employment output.
Classical Range - The VERTICAL SEGMENT of the aggregate supply curve, which represents an economy at full-employment output.
Stagflation - The condition that occurs when an economy experiences the twin maladies of high unemployment and rapid inflation simultaneously.
Cost-push Inflation - An increase in the general price level resulting from an increase in the cost of production, and illustrated by a leftward shift of the aggregate supply curve.
Demand-pull Inflation - A rise in the general price level resulting from an excess of total spending (demand); illustrated by a rightward shift of the aggregate demand curve.
Short-run Aggregate Supply Curve (SRAS) - The curve that shows the level of real GDP produced at different possible price levels during a time period in which nominal incomes do not change in response to changes in the price level.
Long-run Aggregate Supply Curve (LRAS) - The curve that shows the level of real GDP produced at different possible price levels during a time period in which nominal income change by the same percentage as the price level changes.

Chapter 11 - Fiscal Policy

Fiscal Policy - The use of government spending and taxes to influence the nation’s output, employment, and price level.
Discretionary Fiscal Policy - The deliberate use of changes in government spending or taxes to alter aggregate demand and stabilize the economy.
Spending Multiplier (SM) - The change in aggregate demand (total spending) resulting from an initial change in any component of aggregate expenditures, including consumption, investment, government spending, and net exports. As a formula, spending multiplier equals 1/(1-MPC) or 1/MPS.
Marginal Propensity to Consume (MPC) - The change in consumption resulting from a given change in the real disposable income.
Marginal Propensity to Save (MPS) - The change in saving from a given change in real disposable income.
Tax Multiplier (TM) - The change in aggregate demand (total spending) resulting from an initial change in taxes.
Balanced Budget Multiplier - An equal change in government spending and taxes, which changes aggregate demand by the amount of the change in government spending.
Automatic Stabilizers - Federal expenditures and tax revenues that automatically change levels in order to stabilize an economic expansion or contraction; sometimes referred to as nondiscretionary fiscal policy.
Budget Surplus - A budget in which government revenues exceed government expenditures in a given time period.
Budget Deficit - A budget in which government expenditures exceed government revenues in a given time period.
Supply-side Fiscal Policy - A fiscal policy that emphasizes government policies that increase aggregate supply in order to achieve long-run growth in real output, full employment, and a lower price level.
Laffer Curve - A graph depicting the relationship between tax rates and total tax revenues.

Chapter 12 - The Public Sector

Government Expenditures - Federal, state, and local government outlays for goods and services, including transfer payment.
Benefits-received Principle - The concept that those who benefit from government expenditures should pay the taxes that finance their benefits.
Ability-to-pay Principle - The concept that those who have higher incomes can afford to pay a greater proportion of their income in taxes, regardless of benefits received.
Progressive Tax - A tax that charges a higher percentage of income as income rises.
Average Tax Rate - The tax divided by the income.
Marginal Tax Rate - The fraction of additional income paid in taxes.
Regressive Tax - A tax charges lower percentage of income as income rises.
Proportional or Flat Tax - A tax that charges the same percentage of income, regardless of the size of income. Also called a flat rate or simply a flat tax.
Public Choice Theory - The analysis of the government’s decision-making process for allocating resources.
Benefit-cost Analysis - The comparison of the additional rewards and costs of an economic alternative.
Rational Ignorance - The voter’s choice to remain uniformed because the marginal cost of obtaining information is higher than the marginal benefit from knowing it.

Chapter 13 - Federal Deficits, Surpluses, & the National Debt

National Debt - The amount owed by the federal government to owners of government securities.
Net Public Debt - National debt minus all government interagency borrowing.
Debt Ceiling - A legislated legal limit on the national debt.
Internal National Debt - The portion of the national debt owed to a nation’s own citizens.
External National Debt - The portion of the national debt owed to foreign citizens.
Crowding-out Effect - A reduction in the private-sector spending as a result of federal budget deficits financed by U.S. Treasury borrowing. When federal government borrowing increases interest rates, the result is lower consumption spending by households and lower investment spending by businesses.
Crowding-in Effect - An increase in private-sector spending as a result of federal budget deficits financed by U.S. Treasury borrowing. At less than full employment, consumers hold more Treasury securities, and this additional wealth causes them to spend more. Business investment spending increases because of optimistic profit expectations.