Shift in AD (graph movement is in opposite direction)
Shift of Short-Run Phillips Curve
Shift in SRAS (shift is in opposite direction)
Factors of Production
1. Land 2. Labor 3. Capital 4. Technology
Shifters of Demand for Loanable Funds
1. Incentive to Invest 2. Contractionary Fiscal Policy (to the right)
Shifters of Supply of Loanable Funds
1. Incentive to Save 2. Monetary Policy 3. Expansionary Fiscal Policy (to the left)
Shifters of Money Supply
Monetary Policy Federal Reserve Bank
Shifters of Money Demand
1. Price Level 2. Income 3. Fiscal Policy
Shifters of Long-Run Aggregate Supply
Increase in Factors of Production
Shifters of Short-Run Aggregate Supply
1. Factors of Production (LRAS) 2. Input Costs 3. Supply Shock
Shifters of Aggregate Demand
1. GDP (or its components) 2. Monetary Policy 3. Fiscal Policy
Illustrates the production possibilities of 2 products based on amount of resources available
Demand and Supply Graph
Money Market Graph
Loanable Funds Graph
GDP = C + I + G + Xn
The expenditure approach to measuring GDP correlates well with aggregate demand (AD)
GDP = W + I + R + P
The income approach to measuring GDP correlates well with aggregate supply
Calculating Nominal GDP
The quantity of various goods produced in a nation times their current prices, added together.
Price index used to measure inflation
Inflation Rate via the CPI
(This year's CPI - Last year's CPI)/(Last year's CPI) x 100. The inflation rate is the percentage change in the CPI from one period to the next.
Real Interest Rate
the interest rate corrected for the effects of inflation;
16 or older, actively seeking employment.
1/RR where RR equals the required reserve ratio. Application: an initial injection of $1,000 of new money into a banking system with a reserve ratio of 0.1 will generate up to $1,000 x (10) = $10,000 in total money.
Quantity Theory Of Money
MV = PQ = Y. A monetarist's view that explains how changes in the money supply (M) will affect the price level (P) and/or real output assuming the velocity of money (V) is fixed in the short run.
MPC + MPS = 1
The fraction of an increase in disposable income that is spent (MPC) plus the fraction that is saved (MPS) must equal 1.
= 1/(1-MPC) or 1/MPS. This tells you how much total spending an initial interjection of spending in the economy will generate. For example, if the MPC = .8 and the government spends $100 million, then the total increase in spending in the economy = $100 x 5 = $500 million.
Tax Multiplier = MPC/MPS X Tax decrease
This tells you how much total spending will result from an initial change in the level of taxation. It is negative because when taxes decrease, spending increases, and vice versa. The tax multiplier will always be smaller than the spending multiplier.
Produces more than the other guy or when the country/individual can produce the good using fewer resources (inputs) than another country/individual.
An increase in the value of one currency relative to another, resulting from an increase in demand for or a decrease in supply of the currency on the foreign exchange market.
Balance Of Payments
Measures all the monetary exchanges between one nation and all other nations. Includes the current account and the capital account.
A certificate of debt issued by a company or government to an investor.
When a government spends more than it collects in tax revenues in a given year.
Human-made resources (machinery and equipment) used to produce goods and services;
Capital Account (AKA Financial Account)
Measures the flow of funds for investment in real assets (such as factories or office buildings) or financial assets (such as stocks and bonds) between a nation and the rest of the world.
"Other things being equal"; used as a reminder that all variables other than the ones being studied are assumed to be constant.
Circular Flow Diagram
A model of the macroeconomy that shows the interconnectedness of businesses, households, government, banks, and the foreign sectors. Money flows in a circular direction, and goods, services, and resources flow in the opposite circular direction.
Classical Economic Theory
The view that an economy will self-correct from periods of economic shock if left alone. AKA "laissez-faire"
When an individual, a firm, or a nation is able to produce a particular product at a lower opportunity cost than another individual, firm, or nation. Comparative advantage is the basis on which nations trade with one another.
Consumer Price Index (CPI)
An index that measures the price of a fixed market basket of consumer goods bought by a typical consumer. The CPI is used to calculate the inflation rate in a nation.
A component of a nation's aggregate demand; measures the total spending by domestic households of goods and services.
Contractionary Fiscal Policy
A policy whereby government increases taxes or decreases its spending in order to reduce aggregate demand. Could be used in a period of high inflation to bring down the inflation rate.
Contractionary Monetary Policy
A demand-side policy whereby the central bank 1. Increase Reserve Requirements 2. Decrease Discount Rates 3. Sell Open-Market Operations (Government Bonds/Securities)reduces the supply of money, increase interest rates and reducing aggregate demand. Could be used to bring down high inflation rates.
Inflation resulting from a decrease in AS (from higher wage rates and raw material prices, such as the price of oil) and accompanied by a decrease in real output and employment. Also reffered to as "stagflation" or "adverse aggregate supply shock".
The rise in interest rates and the resulting decrease in investment spending in the economy caused by increased government borrowing in the loanable funds market. Seen as a disadvantageous side effect of expansionary fiscal policy.
Measures the balance of trade in goods and services and the flow on income between one nation and all other nations. Equal to a country's net exports (its exports minus its imports).
Unemployment caused by a fall in aggregate demand in a nation. Not included in the natural rate of unemployment. When a nation is in a recession, there will be cyclical unemployment.
A deposit in a commercial bank against which checks may be written. Also known as a "checkable deposit".
A decrease in the value of one currency relative to another, resulting from a decrase in demand for or an increase in the supply of the currency on the foreign exchange market.
When a government intervenes in the market for its own currency to weaken it relative to another currency.
One of the three tools of monetary policy, it is the interest rate that the federal government charges on the loans it makes to commercial banks.
An increase in the potential output of goods and services in a nation over time.
Land, labor, capital, and entrepreneurial ability that are used in the production of goods and services. They are "economic" resources because they are scarce (limited in supply and desired). Also known as "factors of production".
The amount by which a bank's actual reserves exceed its required reserves. Banks can lend excess reserves; when they do, they expand the money supply. The amount of excess reserves in the banking system determines equilibrium interest rate.
The price of one currency in terms of another currency, determined in the forex market.
The spending by foreigners on domestically produced goods and services. Counts as an injection into a nation's circular flow of income.
Federal Funds Rate
The interest rate banks charge one another on overnight loans made out of their excess reserves. The FFR is the interest rate targeted by the Fed Res Bank through it's open market operations.
Changes in government spending and tax collections implemented by government with the aim of either increasing or decreasing aggregate demand to achieve the macroeconomic objectives of full employment and price-level stability.
Floating Exchange Rate System:
When a currency's exchange rate is determined by the free interaction of supply and demand in international forex markets.
Forex Markets (Foreign Exchange Market)
The market in which international buyers and sellers exchange foreign currencies for one another to buy and sell goods, services, and assets from various countries. It is where a currency's exchange rate relative to other currencies is determined.
Fractional Reserve Banking
A banking system in which banks hold only a fraction of deposits as required reserves and can lend some of the money deposited by their customers to other borrowers
When an economy is producing at a level of output at which almost all the nation's resources are employed. The unemployment rate when an economy is at full employment equals the natural rate, and includes only frictional and structural unemployment. Full-employment output is also referred to as "potential output".
GDP (Gross Domestic Product)
The total market value of all final goods and services produced during a given time period within a country's borders.
The value skills integrated into labor through education, training, knowledge, and health. An important determinant of aggregate supply and the level of economic growth in a nation.
Spending on goods and services produced in foreign nations. Counts as a leakage from a nation's circular flow of income.
A rise in the average level of prices in the economy over time (percentage change in the CPI)
The opportunity cost of money. Either the cost of borrowing money or the cost of spending money (e.g., the interest rate is what would be given up by not saving money). Conversely, this is the price a lender is paid for allowing someone else to use money for time.
A component of aggregate demand, it includes all spending on capital equipment, inventories, and technology by firms. Also includes household purchasing of newly constructed residences.
Law of Increased Opportunity Cost
As more of particular product is produced, the opportunity cost, in terms of what must be given up of other goods to produce each unit of the product, increases. Explains the convex shape of a nation's production possibilities curve.
Loanable Funds Market
The market in which the demand for private investment and the supply of household savings intersect to determine the equilibrium real interest rate.
The period of time over which the wage rate and price level of inputs in a nation are flexible. In the long run, any changes in AD are cancelled out due to flexibility of wages and prices and an economy will return to its full employment level of output. Sometimes referred to as the "flexible wage period".
Long Run Aggregate Supply (LRAS)
The level of output to which an economy will always return in the long run. The LRAS curve intersects the horizontal axis at the full employment or potential level of output.
A component of money supply including currency and checkable deposits
A more broadly defined component of money supply, equal to M1 plus savings deposits, money-market deposits, mutual funds, and small-time deposits.
The broadest component of the money supply. Equal to M2 plus large time deposits.
The study of entire nations economies and the interactions between households, firms, government, and the foreigners
The level of output at which a nation is producing at any particular period of time. May be below its full employment level (if the economy is in a recession) or beyond its full employment level (if economy is overheating).
Managed or Fixed Exchange Rate System
When a government or central bank takes action to manage or fix the value of its currency relative to another currency on the forex market
Marginal Propensity To Consume (MPC)
The fraction (percentage) of any change in income spent on domestically produced goods and services; equal to the change in consumption divided by the change in disposable income.
Marginal Propensity To Save (MPS)
The fraction of any change in income that is saved, equal to the change in savings divided by the change in disposable income.
The central bank's manipulation of the supply of money aimed at raising or lowering interest rates to stimulate or contract the level of aggregate demand to promote the macroeconomic objectives of price-level stability and full employment
Any object that can be used to facilitate the exchange of goods and services in a market.
The sum of the transaction demand and the asset demand for money. Inversely related to the nominal interest rate.
The market where the supply of money is set by the central bank; includes the downward sloping money-demand curve and a vertical money-supply curve. The "price" of money is the nominal interest rate.
The vertical curve representing the total supply of excess reserves in a nation's banking system. Determined by the monetary policy actions of the central bank.
The increase in total spending in an economy resulting from an initial interjection of new spending. The size of the multiplier effect depends upon the spending multiplier.
Natural Rate of Unemployment (NRU)
The level of unemployment that prevails in an economy that is producing at a full employment level of output. Includes structural and frictional unemployment. While countries NRUs can vary, the NRUs in the US tend to be close to 5 percent.
To balance the two accounts in the balance of payments (current and financial accounts), a country's official foreign exchange reserves measures the net effect of all the money flows from the other accounts.
The central bank's buying and selling of government bonds on the open market from commercial banks and the public.
What must be given up to have anything else. Opportunity costs are not neccesarily monetary costs, but rather include what you could do with the resources you use to undertake any activity or exchange.
Phillips Curve (long run)
A curve vertical at the NRU showing that in the long run there is no trade-off between the price level and level of unemployment in an economy.
Phillips Curve (short run)
A downward-sloping curve showing the short-run inverse relationship between the level of inflation and the level of unemployment.
Production Possibilities Curve (PPC)
A graph that shows the various combinations of output that the economy can produce given the available factors of production and the available production technology.
The output per unit of input of a resource. An important determinant of the level of aggregate supply in a nation.
The use of tariffs, quotas, or subsidies to give domestic producers a competitive advantage over foreign producers. Meant to protect domestic production and employment from foreign competition.
A contraction in total output of goods and services in a nation between two periods of time. Could be caused by a decrease in aggregate demand or in aggregate supply.
The difference between an economy's equilibrium level of output and its full employment level of output when an economy is in a recession.
The idea that an economy producing at an equilibrium level of output that is below or above its full employment will return on its own to its full employment level left to its own devices. Requires flexible wages and prices and is associated with classical economic views.
A macroeconomic situation in which both inflation and unemployment increase. Caused by a negative supply shock.
Sticky Wage and Sticky Price Model
The short run Aggregate-Supply Curve is sometimes referred to as the "sticky wage and price model", because worker's wage demands take time to adjust to changes in the overall price level, and therefore, in the short run an economy may produce well below or beyond its full employment level of output.
Unemployment caused by changes in the structure of demand for goods and in technology; workers who are unemployed because they do not match what is in demand by producers in the economy or whose skills have been left behind by economic advancement
Anything that leads to a sudden, unexpected change in aggregate supply. Can be negative (decreases AS) or positive (increases AS). May include a change in energy prices, wages, or business taxes, or may result from a natural disaster or a new discovery of important resources.
When a country's total spending on imported goods and services exceeds its total revenues from the sale of exports to the rest of the world. Synonymous with a surplus in the current account of the balance of the payments and with a negative net export component of the GDP.
When a country's sale of exports exceeds its spending on imports. Synonymous with a surplus in the current account of the balance of payments.
An important determinant of consumption. Wealth is the total value of a household's assets minus all its liabilities.
aggregate demand curve
a curve depicting the relationship between real GDP demanded (i.e., expenditures) and the price level in the economy; the aggregate demand curve slopes downward from left to right.
the difference between the maximum price a consume is (or would be) willing to pay and the price he or she actually pays.
inflation that follows from an increase in aggregate demand, which will cause equilibrium real GDP (Y) to increase and the equilibrium price level (P) to increase.
period in which a recession becomes prolonged and deep, involving high unemployment.
period in which the economy moves from a trough to a peak and a real GDP is increasing; also called a boom.
expansionary fiscal policy
enacted when the government deliberately increases its deficit to stimulate the economy; the government increases its spending (increases G), cuts taxes (decreases T), or both, and stimulates the economy by expanding aggregate demand (AD).
expansionary monetary policy
monetary policy methods by which the Fed aims to increase the money supply and lower interest rates, thereby creating an increase in output; in pursuit of expansionary policy goals, the Fed can lower the required reserve ratio, lower the discount rate, or purchase government securities on the open market.
This is caused by printing too much money too fast. a very high rate of inflation, under which prices go up very rapidly, often more than 1,000 percent in a year. This causes money to become a poor store of value.
restrictions on the quantity of a good that can be imported
a good for which there is less demand as income rises; a good the demand for which falls as income rises and rises as income falls; consumer income rises while demand decreases. (eg. Spam instead of ham)
the group of individuals who are either working or actively looking for work; the labor force includes the unemployed: labor force = number of individuals in labor force/number of individuals in the adult population, expressed as a percentage.
law of demand
states that as prices rise, people are willing and able to buy less of a good and, hence, the quantity demanded decreases; as prices fall, people are willing and able to buy more, so the quantity demanded increases and the demand curve slopes downwards.
law of supply
states that as the price of a good increases, the quantity supplied of a good increases, and as the price of a good decreases, the quantity supplied of the good decreases.
the addition to total revenue created by selling one additional unit of ouput.
occurs when supply and demand are balanced such that the market price and the quantity exchanged are under no market pressure to change.
movement along a demand curve
movement up or down a single demand curve, contrasted with movement of the demand curve itself.
the gross domestic product calculated using current-year prices (not adjusted for inflation); for example, the nominal GDP for 2001 would calculate the value of production using 2001 prices for goods and services. Nominal GDP can vary widely from year to year, due to forces such as inflation.
the highest point of a business cycle.
graphic representation of an inverse relationship between wage growth (percentage change in price level, such as inflation) and unemployment.
nominal GDP corrected for inflation; - real GDP is calculated using prices from a given base year, which may not be the same as the year being measured or the year in which the calculations are made. Real GDP allows economists to compare changes in production realistically across years, creating a stable price index so that rising prices in general do not increase real GDP. Nominal GDP/GDP Deflator x 100
required reserve ratio (RR)
a specific percentage of checking account deposits that each bank must keep in liquid, zero-interest reserves; this amount is set by the Fed.
the conflict between limited resources and unlimited human wants; the basic economic problem facing all societies.
simple money multiplier
1/RR, where RR is the required reserve ratio expressed as a decimal; if the required reserve ratio is 10% (0.1), the money multiplier is 1/0.1 = 10.
short-run aggregate supply curve
a special tax imposed on imported goods.
a civilian, non-institutionalized adult is considered to be unemployed when he or she does not have a job but is actively looking for one; unemployment figures reflect the number of individuals meeting this definition who are parts of the labor force.
the percentage of the civilian labor force that is unemployed. The number of persons unemployed divided by the number of persons in the civilian labor force (expressed as a percentage).
a person who has been unemployed and searching for a job for so long, that they have given up on finding a job and therefore forfeit unemployment.
the dollar value of all the goods and services sold to house holds.
the dollar value of goods and services sold to governments.
the transition point between economic recession and recovery; the lowest point of a business cycle
the willingness and ability of buyers to purchase a good or service.
a relationship between two factors in which the factors move in opposite directions. ex: price increases, then quantity decreases.
a relationship between two factors in which the factors move in the same direction.
a table showing quantities of a good demanded at varying prices; a table demonstrating the number of units of a good demanded at various points.
the graphical representation of the law of demand. Shows the amount of a good buyers are willing and able to buy at various prices.
a good the demand for which rises as income rises and falls as income falls; consumer income rises and demand rises. (eg. the stuff you normally buy, opposite of an inferior good)
government officials make decisions about economy. (communism)
anything that can be used to produce something else
anything from the land and/or nature. Ex: minerals, timber, petroleum, cotton.
the effort of workers.
the efforts of entrepreneurs in organizing resources for production taking risk to create new enterprises and innovating to develop new product.
the branch of economics that deals with human behavior and choices as they relate to relatively small units--the individual, the business firm, a single market.
anything that shows the economy as a whole. (usually measured by GDP)
when consumers substitute a similar, lower priced product for a product which is relatively more expensive.
diminishing marginal utility
a law stating that as an additional unit of a particular food is consumed the utility (satisfaction) gained decreases. (one hot dog is great, after the 15th hot dog, you don't want anymore, even if they're free)
change in quantity demanded
a movement along the demand curve in response to a change in price, ceteris paribus; change in price means move along the demand curve; movement = money.
an increase or decrease in consumer income will cause a shift in the Demand Curve.
demand curve shifts
will shift either to the left(decrease) in demand, or to the right(increase) in demand; shift is caused by a change in one of the non-price determinates for the good.
consumer income rise
results an increase in the demand for normal goods and a decrease in the demand for inferior goods.
goods that go together, if price ↑ the demand for both that good and complimentary good ↓. (peanut butter and jelly)
goods that compete with one another. If the price for one goes up the demand for the other will go up. (apples instead of oranges)
changes in consumer expectations
a shift in the demand curve resulting from consumer expectations regarding future income or future price of Goods and Services.
consumer taste and preferences
a shift of the demand curve resulting from a change in consumer taste and preferences.
Aggregate Supply (AS)
The relationship between the price level and the quantity of goods and services supplied in an economy. AS curve looks different in the long run and short run. In the long run, it is a vertical line, as output is dictated by the factors of production alone. In the short run, it is upward sloping.
Government program that changes automatically depending of GDP and a person's income
study of how people and societies use limited resources to satisfy unlimited wants; the management of scarcity and choice
A legal maximum on the price at which a good can be sold
A legal minimum on the price at which a good can be sold
depreciation vs. appreciation of a currency
depreciation - decrease in VALUE of currency app-The rise in value of one currency relative to another.
Excess reserves vs. Required reserves
-Reserves greater than the required amounts. -Reserves that a bank is legally required to hold, based on its checking account deposits
income approach to GDP
calculating GDP by adding up all earnings from resources used to produce output in the nation during the year
exports vs. imports
balance of trade
Money that has value because the government has ordered that it is an acceptable means to pay debts
Availability of resources to meet short-term cash requirements.
neutrality of money
changes in the money supply affect nominal but not real variables
Ability or capacity of a good or service to be useful and give satisfaction to someone.
Market in which firms purchase the factors of production from households
the market in which households purchase the goods and services that firms produce
Goods used in the production of final goods (not included in GDP)
A measurement that shows how the average price of a standard group of goods changes over time
market basket of goods
another name for weighted composite of prices of a selection of goods
nominal interest rate
the interest rate as usually reported without a correction for the effects of inflation
interest rate effect
effect that decreases price level has on investment expenditures through the effect that a chance in price level has on interest rates
net export effect
the process of how expansionary fiscal policy decreases net exports due to rising interest rates and inflation
A limit placed on the quantities of a product that can be imported
Analysis that involves comparing marginal benefits and marginal costs
an economy in which exports and imports constitute a large share of GDP.
a tax in which the ratio of tax to income rises as income rises.
an economy with some government influence over the workings of free markets. There may also be some public ownership mixed in with private property.
using all available resources to produce the maximum amount of output permitted by the current technology.
a form of economic organization in which resource allocation decisions are left to individual producers and consumers acting in their own best interests without government intervention.
a phrase coined by Adam Smith to describe how, by pursuing their own self-interests, people in a market system seem to be "led by an invisible hand" to promote societal well-being as a whole.
the number of units that consumers want to buy over a specified period of time.
Shift in a Demand Curve
occurs when any variable other than price changes. If consumers want to buy more at any and all given prices than they wanted previously, the demand curve shifts to the right (or outward). If they desire less at any given price, the demand curve shifts to the left (or inward).
the number of units that sellers want to sell over a specified period of time.
a graphical depiction of a supply schedule. It shows how the quantity supplied of some product during a specified period of time will change as the price of that product changes, holding all other determinants of quantity supplied constant.
an excess of quantity demanded over quantity supplied. When there is a shortage, buyers cannot purchase the quantities they desire.
an excess of quantity supplied over quantity demanded. When there is a surplus, sellers cannot sell the quantities they desire to supply.
Law of Supply and Demand
in a free market the forces of supply and demand generally push the price toward the level at which quantity supplied and quantity demanded are equal.
combining many individual markets into one overall market. (all of GDP)
Gross Domestic Product (GDP)
the sum of the money values of all final goods and services produced in the domestic economy and sold on organized markets during a specified period of time, usually a year.
Final Goods and Services
those that are purchased by their ultimate users. (included in GDP)
Real GDP per capita
the ratio of real GDP divided by the population. (the best way of comparing countries' GDPs
government programs designed to prevent or shorten recessions and to counteract inflation.
government policies intended to make the economy grow faster in the long run.
the amount of output a worker turns out in an hour (or a week, or a year) of labor.
the real GDP the economy could produce if the labor force and other resources were fully employed.
unemployment that is due to normal turnover in the labor market. It includes people who are temporarily between jobs because they are moving or changing occupations, or for similar reasons. (the good kind)
a government program that replaces some of the wages lost by eligible workers who lose their jobs.
the volume of goods and services that a given sum of money will buy. (purchasing power decreases as inflation increases)
Real Wage Rate
the wage rate adjusted for inflation.
the price of one good in terms of another good rather than in terms of dollars.
Real Rate of Interest
the percentage increase in purchasing power that the borrower pays to the lender for the privilege of borrowing. (r% = i% - inflation)
Nominal Rate of Interest
the percentage by which the money the borrower pays back exceeds the money that he borrowed, making no adjustment for any fall in purchasing power of this money that results from inflation.
expresses the cost of a market basket of goods relative to the cost of the same basket in a base period.
a sustained decrease in the general price level.
laws and conventions that assign owners the rights to use their property as they see fit while they own it.
Foreign direct investment
purchase or construction of real business assets—such as factories, offices, and machinery—in a foreign country.
Aggregate Demand (AD)
The total amount that all consumers, business firms, and government agencies are willing to spend on final goods and services at various price levels at a given period of time.
Consumer Expenditure (C)
the total amount spent by consumers on newly produced goods and services (excluding purchases of new homes, which are considered investment goods).
Investment Spending (I)
the sum of the expenditures of business firms on new plant and equipment and households on new homes.
Government Purchases (G)
the goods and services purchased by all levels of government.
Net Exports (X - IM)
the difference between U.S. exports and U.S. imports. It indicates the difference between what we sell to foreigners and what we buy from them.
Disposable Income (DI)
the sum of the incomes of all the individuals in the economy after all taxes have been deducted and all transfer payments have been added.
sums of money that the government gives certain individuals as outright grants rather than as payments for services rendered to employers.
the amount by which equilibrium real GDP exceeds the full-employment level of GDP.
Aggregate Supply Curve
shows for each possible price level the quantity of goods and services that all the nation's businesses are willing to produce during a specified period of time, holding all other determinants of aggregate quantity supplied constant.
there are three types of taxation: progressive, recessive, and proportional.