low unemployment leades tohigh reservation wages for employees (remember: they will not put in much effort unless the wage is high)best response functionthe best response of a player to every strategy of the competitorif there is a high stigma attached to unemployment then...a worker's best response function would move to the left this reduces the equilibrium wage for a given unemployment rate, resulting in a lower wage-setting curveaverage product of labor (lambda)the total output produced by a firm divided by the quantity of workersonce a firm has set a price, it has determined the division of the total rev between profits and wages1 -(W/p)there are two points on an isoprofit curve, between the higher and lower one which one has a higher output?if they are on the same isoprofit curve, a firm would be indifferent between the twothe marketing department determines the price afterHR determines the wage levellabor market equilibriumThe combination of the real wage and the level of employment determined by the intersection of the wage-setting and the price-setting curvesdecreased competition leads to...a lower price-setting curve (wage-setting curve is unaffected) therefore the equilibrium (the intersection of the two curves) shifts down and to the left, implying real wage and higher unemploymentincome effectthe change in consumption resulting from a change in real incomesubstitution effectthe change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutesmonetary policycentral bank (or government) actions aimed at influencing economic activity through changing interest rates or the prices of financial assetsfiscal policychanges in taxes or government spending in order to stabilize the economyGini Coefficienta measure of income inequality between countries using a 100-point scale, in which 1 represents complete equality and 100 represents the highest possible inequalityLorenz Curvethe curve that illustrates income distributiontrade unionan organization consisting predominantly of employees, the principal activities of which include the negotiation of rates of pay and conditions of employment for its memberswhen workers are organized into trade unions, how are wages set?the wage is determined through a process of negotiation between the union and firm the wage must always be as high as the wage indicated by the wage-setting curve but it can be bargained above that think - the bargaining curve lies above the wage-setting curveunions can...set the wage but cannot determine how many people the firm hires, because of this they will never set the wage unreasonably highsteeper isocost line meansmore effort = more profitflatter isocost line meansless effort = less profitis a bargained wage-setting curve above or below the non union wage-setting curveabove union effect = higher paid employers > harder workerswhat is a subsidya sum of money granted by the government or a public body to assist an industry or business so that the price of a commodity or service may remain low or competitive.wage subsidya government financial incentive to private employers to hire more workers, as through tax deductions for new job creationreservation wagethe lowest wage a worker would accept for a given jobstock variablea quantity measured at a point in time. Its units do not depend on timeflow variablea quantity measured per unit of time, such as annual income or hourly wagedepreciationthe loss in value of a form of wealth that occurs either through use (wear and tear) or the passage of time (obsolescence)net incomethe flow that corresponds to your stock of wealth the difference between total revenue and total expenses when total revenue is greatermaterial wealthgoods and services that we can see and touch that make our lives betterdisposable incomeIncome remaining for a person to spend or save after all taxes have been paidconsumption expenditurethe total payment for consumer goods and servicesinterest ratethe price of bringing some buying power forward in timediminishing marginal utility/diminishing marginal returns to consumptionDecreasing satisfaction or usefulness as additional units of a product are acquiredconsumption smoothingthe practice of optimizing our standard of living by ensuring a proper balance between spending and saving during the different phases of our livesa person's discount ratea measure of a person's impatience: how much she values an extra unit of consumption now over an extra unit of consumption laterslope of indifference curve is equal to themarginal rate of substitutionslope of the feasible frontier is equal tomarginal rate of transformationdiscount rate is equal tointerest ratereservation indifference curvea curve that is made of all of the points at which one would be just as well off as at their reservation positionfeasible setAll of the combinations of the things under consideration that a decision-maker could choose given the economic, physical or other constraints that he faces.assetsanything of value that is ownedliabilitiesanything of value that is owednet worthdifference between your assets and liabilitiesbase moneycash held by households, firms, and banks, and the balances held by commercial banks in their accounts at the central bank, known as reserves. Base money is the liability of the central bank (broad money - bank money)bank moneymoney in the form of bank deposits created by commercial banks when they extend credit to firms and households. Bank money is the liability of commercial banksbroad moneythe amount of broad money in the economy is measured by the stock of money in circulation. This is defined as the sum of bank money and the base money that is in the hands of the non-bank publiccentral bankthe only bank that can create base money. usually part of the government. commercial banks have accounts at this bank, holding base money.banka firm that makes profits through its lending and borrowing activitiesmaturity transformationthe practice of borrowing money short-term and lending it long-term. For example, a bank accepts deposits, which it promises to repay at short notice or no notice, and makes long-term loansliquidity riskthe risk that an asset cannot be exchanged for cash rapidly enough to prevent a financial lossdefault riskthe risk that credit given as loans will not be repaidmaturity transformation is an essential service in any economy, but it exposes the bank to...liquidity risk, along with the already existing default riskhow do banks make moneythey lend much more than they hold in legal tender because they count on despositors not to need all their funds at the same timewhat happens to a bank if all of its customers demanded their money at oncea bank run > bank is in trouble > liquidity risk leads to bank failureshort-term interest ratethe price of borrowing base moneypolicy interest ratethe interest rate set by the central bank, which applies to banks that borrow base money from each other, and from the central bankbank lending rate/market interest ratethe average interest rate charged by commercial banks to firms and households. This rate will typically be above the policy interest rate: the difference is the markup or spread on commercial lendinginsolventan entity is this if the value of its assets is less than the value of its liabilities aka bankruptleverage ratio for banks or householdstotal assets/networthleverage ratio for companies or non-bankstotal liabilities/total assetswhat is secure borrowinga bank's borrowing with collateralcredit rationingthose with less wealth borrow on unfavourable terms compared with those with more wealth, or are refused loans entirelyaverage annual growth rateSum of Growth Rates / Number of Years or slope of best fit straight line on a year, gdp per capital graphOkun's Lawthe empirical regularity that changes in the rate of growth of GDP are negatively correlated with the rate of unemploymentokun's coefficientthe change in the unemployment rate in percentage points predicted to be associated with a 1% change in the growth rate of GDP (the slope of the best fitted line)Aggregate Output (GDP)The total market value of all final goods and services produced within a yearvalue addedFor a production process this is the value of output minus the value of all inputsimports (M)Goods and services produced in other countries and purchased by domestic households, firms, and the governmentexports (X)Goods and services produced in a particular country and sold to households, firms and governments in other countriesconsumption (C)expenditure on consumer goods including both short-lived goods and services and long-lived goods, which are called consumer durablesinvestment (I)expenditure on newly produced capital goods (machinery and equipment) and buildings, including new housinggovernment spending on goods and services (G)expenditure by the government to purchase goods and services. when used as a component of aggregate demand, this does not include spending on transfers such as pensions and unemployment benefitsgovernment transfersspending by the government in the form of payments to households or individuals. Unemployment benefits and pensions are examples.net exportsexports minus imports also called the trade balancetrade deficita country's negative trade balance (it imports more than it exports)trade surplusa country's positive trade balance (it exports more than it imports)gdp (Y)aka aggregate demand the total of the components of spending in the economy, added to get GDP: Y = C + I + G + X - Mthree different measures of GDP-total spending on domestically produced goods and services -total value added in domestic production -sum of all incomes received from domestic productionself-insurancesaving by a household in order to be able to maintain its consumption when there is a temporary fall in income or need for greater expenditureco-insurancea menas of pooling savings across households in order for a household to be able to maintain consumption when it experiences a temporary fall in income or the need for greater expenditureinflationAn increase in the general price level in the economy. Usually measured over a yeardeflationa decrease in the general price level of an economyconsumer price index (CPI)a measure of the general level of prices that consumers have to pay for goods and services, including consumption taxes.gdp deflatorA measure of the level of prices for domestically produced output Nominal GDP/Real GDP x 100the multiplier processa mechanism through which the direct and indirect effect of a change in autonomous spending affects aggregate outputaggregate consumption functionan equation that shows how consumption spending in the economy as a whole depends on other variablesaggregate consumption has two partsa fixed amount and a variable amountfixed amount/autonomous consumptionhow much people will spend regardless of their incomevariable amounthow much people will spend depending on their incomecapacity utlilization rateA measure of the extent to which a firm, industry, or entire economy is producing as much as the stock of its capital goods and current knowledge would allowaggregate demand is equal toconsumption + investmentautonomous demandcomponents of aggregate demand that are independent of current incomevalue of a housemortgage debt + home equitynetworth of householdhome equity + financial weathtotal broad wealthhome equity + financial wealth + expected future earnings from employmentprofit rate on invest mentΠIf ρ (discount rate) is greater than both r (interest rate) and Π (profit rate)The owner will keep the funds and increase consumption spending.If r is greater than ρ and ΠThe decision will be to repay debt or purchase a financial asset.if Π is greater than ρ and rThe owner will invest (either at home or abroad).expropiation riskThe probability that an asset will be taken from its owner by the government or some other actoraggregate investment functionan equation that shows how investment spending in the economy as a whole depends on other variables, namely, the interest rate and profit expectationsexchange rateThe number of units of home currency that can be exchanged for one unit of foreign currencyfallacy of compositionMistaken inference that what is true of the parts (for example a household) must be true of the whole (in this case the economy as a whole)paradox of thriftThe idea that when many households simultaneously try to increase their saving, actual saving may fail to increase because the reduction in consumption and aggregate demand will reduce income and employment.budget balancegovt tax rev - govt spendingbudget in balancegovernment spending (g) = government rev less transfers (T)budget deficitG > Tbudget surplusG < Tcrowding outThe effect of an increase in government spending in reducing private spending, as would be expected for example in an economy working at full capacity utilization, or when a fiscal expansion is associated with a rise in the interest ratereverse causalitya two-way causal relationship in which A affects B and B also affects Aprimary budget deficitThe government deficit (its revenue minus its expenditure) excluding interest payments on its debtsovereign debt crisisA situation in which government bonds come to be considered so risky that the government may not be able to continue to borrow. If so, the government cannot spend more than the tax revenue they receivemultiplier modelA model of aggregate demand that includes the multiplier process

macroeconomics: part one

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