Term
| Aggregate demand (curve) – |
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Definition
| shows the relationship between aggregate price level and quantity of aggregate output demanded by households, business, government and rest of the world |
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Term
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Definition
Short run: relationship between the general level of prices and the quantity of aggregate output produced in the short- run where many production costs are fixed.
Long run: relationship between the general level of prices and the quantity of aggregate output where all prices including nominal wages are fully flexible. |
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Term
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Definition
Wealth effect of a change in the aggregate price level: a higher aggregate price level reduced the purchasing power of households wealth and reduces consumer spending.
Interest rate effect of a change in aggregate the price level: a higher aggregate price level reduces the purchasing power of households money holdings, leading to a rise in interest rates and a fall in investment spending and consumer spending. |
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Term
| What causes the AD curve to slope downward, Explain the wealth effect and the interest rate effect. |
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Definition
Wealth effect of a change in aggregate price level – higher aggregate price level reduces the purchasing power of households’ wealth and reduces consumer spending.
Interest rate effect of a change in aggregate price level – a higher price level reduces the purchasing power of households’ money holdings, leading to a rise in interest rates and a fall in investment spending and consumer spending. |
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Term
| Explain the wealth effect and the interest rate effect. |
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Definition
Changes in consumption, investment, gov’t spending or net exports
Changes in expectations
Wealth
The stock of physical capital
Government policy:
Fiscal policy
Monetary policy |
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Term
| Why does the SRAS curve slope upward? Why is the LRAS curve vertical? |
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Definition
SRAS curve slopes upward because nominal wages are sticky in the short run:
A higher aggregate price level leads to high profits and increased aggregate output in the short run
LRAS curve vertical – it is vertical because in the long run an increase in the aggregate price level has no effect on the quantity of aggregate output supplied. |
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Term
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Definition
| The dollar amount of the wage paid. |
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Term
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Definition
| the purchasing power of your paycheck. |
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Term
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Definition
| the nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages. |
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Term
| What events cause the SRAS curve to shift? What events cause the LRAS curve to shift? |
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Definition
| Changes in: Commodity price, Nominal wages, and Productivity |
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Term
| Explain the difference between actual output and potential output. |
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Definition
Actual Output – the output that is actually produced.
Potential Output – Can be above, below, or the same as actual output. |
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Term
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Definition
| The combination of inflation and falling aggregate output |
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Term
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Definition
| lower aggregate output and a higher aggregate price level |
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Term
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Definition
| when aggregate output is below potential output |
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Term
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Definition
| when aggregate output is above potential output |
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Term
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Definition
| the percentage difference between actual aggregate output and potential output |
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Term
| Discretionary fiscal policy |
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Definition
| the deliberate manipulation of taxes and government spending by Congress through passage of laws |
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Term
| Non-discretionary fiscal policy |
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Definition
| also known as Automatic Stabilizers are taxing and spending laws that are already on the books |
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Term
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Definition
| takes a larger share of the income of high-income taxpayers than of low-income taxpayers |
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Term
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Definition
| takes a smaller share of the income of high-income taxpayers than of low-income taxpayers |
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Term
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Definition
| One tax rate on all income earned |
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Term
| How do taxes and transfer payments affect the multiplier? How does government spending affect the multiplier? |
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Definition
Fiscal policy has a multiplier effect on economy
Expansionary fiscal policy leads to an increase in real GDP larger than the initial rise in aggregate spending caused by policy
Contractionary fiscal policy leads to a fall in real GDP larger than initial reduction in aggregate spending caused by policy
How does gov’t spending affect Multiplier?
1/(1-MPC), is larger than the multiplier on changes in taxes or transfers, MPC/(1-MPC), because part of any change in taxes or transfers is absorbed by savings.
Changes in gov’t purchase have a more powerful effect on economy than equal sized changes in taxes or transfers. |
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Term
| Expansionary fiscal policy – |
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Definition
increased government purchases of goods and services, higher government transfers, or lower taxes – reduce the budget balance for that year.
Make a budget surplus smaller or a budget deficit bigger. |
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Term
| Contractionary fiscal policies |
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Definition
smaller government purchases of goods and services, smaller government transfers, or higher taxes – increase the budget balance for that year.
Making a budget surplus bigger or budget deficit smaller. |
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Term
| When does a countercyclical (or procyclical) policy usually occur? |
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Definition
Caused by the multiplier effect, it leads to a fall in real GDP larger than the initial reduction in aggregate spending caused by the policy.
Procyclical: To keep a balanced budget, not entering into any recession.
Cyclical unemployment: occurs during a recession due to the lack of spending, defined when GDP is down over 2 consecutive quarters. |
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Term
| Recognize the conditions for recommending an expansionary or contractionary fiscal policy. |
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Definition
Used to lessen effects of recession or unemployment
Expand economic activity
Policy tools
Increase gov’t spending – increase size of bureaucracy
Decrease net taxes – reduce size of gov’t bureaucracy
Combination of increase in Government spending and Decrease in net taxes – results from compromise required to get bill passed in Congress. |
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Term
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Definition
| Persistent budget deficits have long-run consequences because they lead to an increase in |
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Term
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Definition
| Public debt may crowd out investment spending which reduces long-run economic growth. |
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Term
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Definition
| Rising debt may lead to a government default, resulting in economic and financial turmoil (Greece) |
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Term
| Who owns the federal debt? |
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Definition
the sum of the indebtedness of the federal government in the form of interest- earning bonds. It reflects loans to the U.S. Treasury or what the government owes to bond holders. It represents the cumulative effect of all the prior budget deficits and surpluses.
The government, foreign nations, and the American people own the Federal debt in the form of: bills, notes, bonds, and government account series. |
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Term
| What is the debt-GDP ratio? |
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Definition
Debt- GDP ratio – a widely used measure of fiscal health.
This number can remain stable or fall even in the face of moderate budget deficits if GDP rises over time. |
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Term
| What is social insurance? What are implicit liabilities? |
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Definition
Social insurance programs – government programs intended to protect families against economic hardship.
Implicit liabilities - spending promises made by governments that are effectively a debt despite the fact that they are not included in the usual debt statistics. |
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Term
| Explain the three functions of money. |
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Definition
A medium of exchange – an asset that individuals acquire for the purpose of trading rather than for their own consumption
A store of value – means of holding purchasing power over time. An asset that allows people to transfer purchasing power from one period to another
A unit of account – a measure used to set prices and make economic calculations |
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Term
| What does the term liquidity mean? |
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Definition
| the ability or ease with which assets can be converted into cash. |
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Term
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Definition
| a physical good used as a medium of exchange that has other uses. |
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Term
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Definition
| a medium of exchange whose value derives entirely from its official status as a means of payment. |
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Term
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Definition
| financial assets that cannot be directly used as a medium of exchange but can be readily converted into one. |
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Term
| M1 (medium of exchange) – |
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Definition
| Can be readily spent in exchange for goods and services, currency in the hands of the public, checking account balances, travelers’ checks. |
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Term
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Definition
| Financial assets that cannot be directly used as a medium of exchange but can be readily converted into one. |
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Term
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Definition
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Term
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Definition
| is the sum of currency in circulation and bank reserves. |
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Term
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Definition
| Credit cards are not money, they are a convenient way to arrange a loan. |
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Term
| Why are currency and checkable deposits considered money and why do they have value? |
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Definition
| Currency in circulation is cash held by the publicCheckable bank deposits – bank accounts on which people can write checks |
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Term
| How did fractional reserves begin with goldsmiths? |
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Definition
| Probably began in Middle Ages with gold merchants. During the Middle Ages, gold was the primary medium of exchange. This was commodity money. Began in Florence, Italy. Gold merchant has vaults, because gold is so heavy and difficult to move, many individuals went to the gold merchant and deposited their gold. Merchant issued a receipt and the receipt would state that the person deposited X amount of gold in the vault. Soon become FIAT money. – used in trade. Gold merchant realized that people would deposit their gold but would not come back and take deposits out. Gold merchants began lending, loaning out against those deposits in the vault. |
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Term
| What is the required reserve ratio? |
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Definition
| the fraction of bank deposits that the bank holds as reserves. The Federal Reserve sets this requirement. Amount of deposits that must be held by the bank. |
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Term
| What is the money multiplier? Compute the money multiplier. Explain how it is used in the economy. |
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Definition
| Money multiplier – the ratio of money supply to the monetary base(1/r), where r is the reserve ratio of the bank. For example, if the reserve ratio is 10% and $100 is deposited in a bank, then the bank can loan $90 which will eventually be deposited by someone else into the bank, so the bank can loan $81 more dollars, and so on. The total amount of demand deposits created (1/0.1) x $100 = $1,000 |
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Term
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Definition
| the effect on consumer spending and investment spending caused by the effect of a change in the aggregate price level on the purchasing power of consumers and firms money holdings. |
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Term
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Definition
| the effect on consumer spending caused by the effect of a change in the aggregate price level on the purchasing power of consumers assets. |
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Term
| what is on the horizontal and vertical lines of the Income- expenditure model. |
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Definition
| Real gdp is on the horizontal and real planned aggregate spending is on the vertical |
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