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Macro - Ch. 7, 8, 9 & 10

Business Cycle
Alternating periods of economic expansion and economic recession
Low point of the business cycle
High point of the business cycle
The period of a business cycle during which total production and total employment are increasing
The period of a business cycle during which total production and total employment are decreasing
Potential GDP
The average GDP over a long period of time - level of real GDP attained when all firms are producing at capacity
The market value of all final goods and services produced in a country during a period of time - measures the well-being economy
Transfer Payment
A payment by the government where they get no good or service in return (ex. unemployment check - not counted towards GDP)
Components of GDP
Consumption, Investment, Government Purchases, and Net Exports
Spending by households on goods and services but not including spending on new homes
Autonomous Consumption
Consumption that takes place no matter what your income is ( ex. food)
Marginal Propensity to Consume (MPC)
The percentage of additional disposable income you consume (between 0 and 1)
Disposable Income
Income - taxes
Spending by firms on new factories, office buildings, machinery, and additions to inventory. Also included is spending by households on new houses
Exogenous Variable
A variable determined "outside of the model"
Interest Rate
The cost of money
Government Purchases
Spending by federal, state, and local governments on goods and services
Net Exports
Exports - Imports
Closed Economy
An economy without trade
GDP Equation
Y = C + I + G + NX
Nominal GDP
The value of all final goods and services when evaluated using the current year prices
Real GDP
The value of all final goods and services when evaluated using base year (one year) prices
GDP Deflator
(Nominal GDP / Real GDP) X 100
Working-Age Population
The portion of the population that is 16 years of age or older
Labor Force
The sum of the employed and unemployed workers in the economy
Labor Force Participation Rate
(Labor Force / Working-Age Population) X 100
The # of people who are willing and able to work but are not working
Unemployment Rate
(Number of Unemployed / Labor Force) X 100
Discouraged Workers
People who are available for work but have not looked for a job during the previous 4 weeks because they believe no jobs are available for them
Frictional Unemployment
Short-term unemployment that arises from the process of matching workers with jobs (in between jobs)
Structural Unemployment
Unemployment arising from a persistent mismatch between the skills and attributes of workers and the requirements of the job (have to learn new skills)
Cyclical Unemployment
Unemployment caused by a business cycle recession
Natural Rate of Unemployment
When unemployment consists of only frictional and structural unemployment
Why We Have Unemployment
Unemployment Insurance, minimum wage laws, and efficiency wages
Efficiency Wages
When individuals get paid a wage above what they are "worth"
Price Level
A measure of the average prices in an economy
Inflation Rate
The percentage increases in price level
Consumer Price Index (CPI)
Average of the prices of the goods and services purchased by the typical urban family of four
CPI Equation
(Expenditures in Current Year / Expenditures in the Base Year) X 100
4 Biases of CPI
Substitution Bias, Increase in quality bias, new product bias, and outlet bias
Value in X Dollars
(Value in Y Dollars) X (CPI in X) / (CPI in Y)
Long-Run Economic Growth
The process by which rising productivity increases the average standard of living
Labor Productivity
The quantity of goods and services that can be produced by one worker (or by one hour of work)
Ways to Increase Labor Productivity
Increase in capital per hour worker and/or technological change
Financial Markets
Markets where financial securities (stock, bonds) are bought and sold
Key Services Financial Markets Provide
Risk, Liquidity, and Information
Y + TR - C - T
T - TR - G
Finding G
I = Sprivate + Spublic
Market for Loanable Funds
Interactions of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged
Supply of Loanable Funds Depends On
Households willingness to save and the extent of government savings
Demand of Loanable Funds Depends On
Willingness of firms to borrow to finance projects
Reasons for Separation of Rich and Poor
Environment, Type of Government, Wars and Revolutions, Low Rates of Saving
Promoting Growth
Enhance Property Rights, Improve health and education, Promote Technological Change, Promote Savings and Investment
Technological Change
Change in the quantity of output without a change in inputs (# of machines)
Human Capital
Accumulated knowledge and skills that workers acquire from education, training, and experience