Term 1

Definition 1

Term 2

Increase in the Price of a Substitute in Production

 

Definition 2

  • shifts the S curve to the left
  • more of the substitute is produced and less of the good is produced

Term 3

Price Floor and Price Ceiling

Graph

Definition 3

Price Floor is the top Green line,

Price ceiling in the bottom green line
-

Term 4

Aggregate Expenditure Model

Definition 4

focuses on the short run relationship between total spending and real GDP, assuming that the price level is held constant

Term 5

If Aggregate Expenditure is equal to GDP...

Definition 5

then inventories are unchanged

and the economy is in macroeconomic equilibrium

Term 6

If Aggregate Expenditure is Less than GDP...

Definition 6

then inventories rise

and GDp and employment decrease
-

Term 7

If Aggregate Expenditure is Greater that GDP...

Definition 7

then inventories fall

and GDP and employment will increase

Term 8

Macroeconomic Equilibrium

Definition 8

AE=GDP

Term 9

Five Most Important Variabled that Determine the Level of Consumption:

Definition 9

  1. current disposable income
  2. household wealth
  3. expected future income
  4. the price level
  5. the interest rate
-

Term 10

Consumption Function

Definition 10

the relationship between consumption spending and disposable income

Term 11

 Marginal Propensity to Consume

Definition 11

the slope of the consumption function:

                              change in consumption  =  Δ C

                      change in disposable income    Δ YD

Term 12

Change in Consumption Formula

Definition 12

change in disposable income-net taxes
-

Term 13

Disposable Income Function

Definition 13

national income-net taxes

Term 14

National Income Function

Definition 14

=GDP=Disposable Income-Net taxes

= Consumption+Savings+Taxes

Term 15

Marginal Propensity to Save

Definition 15

the change in saving/ change in disposable income

1=MPS+MPC
-

Term 16

Four Most Important variables that Determine the Level of Investments:

Definition 16

  1. Expectations of future profitability
  2. interest rate
  3. taxes
  4. cash flow

Term 17

Government Purchases

Definition 17

all spending by th federal, local and state gov. for goods and services

Term 18

Three Most Important Variables that determine the Level of Net Exports

Definition 18

  1. the price level in the us relative to the price levels in other countries
  2. the growth rate of GDP in the US relative to other countires
  3. the exchange rate between the dollar and other currencies
-

Term 19

Definition 19

  • planned aggrigate expenditure is greater than GDP for points above the 45 degree line

  • planned aggrigate expenditure is less than GDP for points below the 45 degree line

  • all points on the macroeconomic equilibrium must line on the line

Term 20

Autonomous Expenditure

Definition 20

an expenditure that does not depend on the level of GDP

Term 21

Multiplier

Definition 21

              change in equilibrium real GDP               = ΔY

            change in autonomous spending                    Δ I

     1     

1-MPC
-

Term 22

The Multiplier Effect

Definition 22

an increase in autonomous expenditure leads to a larger increase in real GDP

Term 23

Definition 23

Term 24

Aggrigate Demand and Aggrigate Supply Model

 

Definition 24

explains the shorts run fluctuations in real GDP and the price levels

 
-

Term 25

Aggregate Demand Curve

Definition 25

shows the relationship between the price level and the quantity of real GDP demaned by households, firms and the government

Term 26

Definition 26

Term 27

Short-Run Aggregate Supply Curve

Definition 27

shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms
-

Term 28

Why is the Aggregate Demand Curve Downward Sloping?

Definition 28

  1. wealth effect: how a change in the price level affects consumption
  2. the interest-rate effect: how a chnage in the price level effects the investment
  3. The international- trade effect: how a change in the price level effect the net exports

Term 29

Three Variable that Shift the Aggregate Demand Curve:

Definition 29

  1. changes in gov policies
  2. changes in the expectations of households and firms
  3. changes in foreign variable

Term 30

Monetary Policy

Definition 30

the actions the fed reserve thakes to manage the money supply and interest rates to pursue macroeconomic policy objectives
-

Term 31

Fiscal Policy

Definition 31

changes in the fed taxes and purchases that ar eintended to achieve macroeconomic policy objectives

Term 32

Long Run Aggregate Supply Curve

Definition 32

a curve that shows the relationship between the prce level and the quantity of real GDP supplied

Term 33

If an Increase in Interest Rates

Definition 33

AD shifts left

higher interest rates raise the cost to firms and housholds or borrowing, reducing consumption and investmentspending
-

Term 34

Increase in Gov Purchases

Definition 34

AD shifts rigtht

gov purch are a component of AD

Term 35

Definition 35

Term 36

Increase in Personal Income Taxes or Business Taxes

Definition 36

AD shifts left

consumption spending falls when personnal taxes rise, and investment falls when business taxes rise
-

Term 37

Increase in Households' Expectations of their Future Income

Definition 37

AD shifts right

consumption spending increase

Term 38

Increase Firms' Expectations of the Future Profitability of Investment Spending

Definition 38

AD shifts right

investment spending increases

Term 39

Increase in the Growth Rate of Domestic GDP Relative to the Growth Rate of Foreign GDP

Definition 39

AD shifts left

imports will increase faster than exports, reducing net exports
-

Term 40

Increase in the Exchange Rate (value of the the dollar) Relative to Foreign Currencies

Definition 40

AD shifts left

imports will rise and exports will fall, reducing net exports

Term 41

The Long-Run Aggregate Supply Curve

Definition 41

chnages in the price level do not affect the level of Aggregate supply in the long run.

Vertical Line

Term 42

Short-Run Aggregate Supply Curve

Three Most Common Explantions:

Definition 42

  1. contracts make some wages and prices "sticky"
  2. firms are often slow to adjust wages
  3. menu costs make some prices sticky
-

Term 43

Five Variables that Shift the Short-Run Aggregate Supply Curve

Definition 43

  1. increases in the labor force and in the capital stock
  2. tech. change
  3. expected changes in the future price levels
  4. adjustments of workers and firms to errors in past expectations about the price levels
  5. unexpected changes in the price of an important natural resources

Term 44

Supply Shock

Definition 44

an unexpected event that causes Aggregate supply curve shifts

Term 45

Increase in the Labor Force or the Capital Stock

Definition 45

AS shifts to the right

more output can be produced at every price level
-

Term 46

Increases Productivity

Definition 46

AS shifts right

costs of producting output fall

Term 47

Increases in the Expected Future  Price Level

Definition 47

AS shifts right

costs of producing output fall

Term 48

Increases in Workers and Firms Adjusting to having Previously Underestimated the Price Level

Definition 48

AS shifts left

workers and firms increase wages and prices
-

Term 49

Increase in the Expected Price of Important Natural Resources

Definition 49

AS shifts to the left

cost of producing output rise

Term 50

Definition 50

a decline in investment shifts AD to the left causing a recession→as firms and workers adjust to the price level being lower than they had expected, costs will fall and cause SRAS to shift to the right→ euquilibirum moves down with a lower price level 

Term 51

 SR and LR effects od an Increase in AD

Definition 51

  • an increase in investment shifts AD to the right, causing an inflationary expansion
  • as firms and workers adjust to the price level being higher than they had expected, costs will rise and cause SRAS to shift to the left
  • equilibrium moves up with a higher price level
-

Term 52

Monetary Policy

Definition 52

the actions the fed reserve takes to manage the money supply interest rates to purseue macroeconomic policy objectives

Term 53

The Quantity Theory of Money

Definition 53

a theory about the connection between money and prices that assumes that the velocity of money is constant

Term 54

Quantity Equation

Definition 54

M x V = P x Y

money supply x velocity of money = price level x real output
-

Term 55

Money

Definition 55

assets that poeple are generally willing to accept in exchange for goods and services or for payment of debts

Term 56

Commodity Money

Definition 56

a good used as money that also has value independent of its use as money

Term 57

Four Functions of Money

Definition 57

  1. medium of exchange
  2. unit of account
  3. store of value
  4. standard of deferred payment
-

Term 58

M1

Definition 58

the narrowest definition of the money supply: the sum of currency in circulation, checking account deposits in banks and holdings of traveler's check

Term 59

M1 Includes Three Things:

Definition 59

  1. Currency, which is all the paper money and coins that are in circulation, means not held by banks or gov
  2. the value of all checking account deposits at banks
  3. the value of travelers checks

Term 60

M2

Definition 60

a broader definition of the money supply: it include M1 plaus savings account balances, balanes in money market deposite accounts in banks and noninstitutional money market fund shares
-

Term 61

In M2 There are Two Key Points about ht eMoney Supply to Keep in Mind

Definition 61

  1. the money supply consists of both currency and checking account deposits
  2. b.c balances in checking account deposits are included in money supply, banks pay an important role in the way th emoney supply increases and decreases.

Term 62

Four Goals of Monetary Policy

Definition 62

  1. price stability
  2. high employment
  3. stability of financial markets and institutions
  4. economic growth