Macroeconomics Chapters 6-9

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Adjustable-rate mortgage (ARM)
A mortgage (home loan) that adjusts the nominal interest rate to changing rates of inflation.
Aggregate demand
The total quantity of output (real GDP) demanded at alternative price levels in a given time period, ceteris paribus.
Aggregate supply
The total quantity of output (real GDP) producers are willing and able to supply at alternative price levels in a given time period, ceteris paribus.
Autonomous consumption
Consumer spending not dependent on current income.
Average propensity to consume (APC)
Total consumption in a given period divided by total disposable income.
Base year
The year used for comparative analysis; the basis for indexing price changes.
Bracket creep
The movement of taxpayers into higher tax brackets (rates) as nominal incomes grow.
Business cycle
Alternating periods of economic growth and contraction.
Consumer Price Index (CPI)
A measure (index) of changes in the average price of consumer goods and services.
Consumption
Expenditure by consumers on final goods and services.
Consumption function
A mathematical relationship indicating the rate of desired consumer spending at various income levels.
Core inflation rate
Changes in the CPI, excluding food and energy prices.
Cost-of-living adjustment (COLA)
Automatic adjustments of nominal income to the rate of inflation.
Cyclical unemployment
Unemployment attributable to a lack of job vacancies—that is, to an inadequate level of aggregate demand.
Deflation
A decrease in the average level of prices of goods and services.
Demand-pull inflation
An increase in the price level initiated by excessive aggregate demand.
Discouraged worker
An individual who isn’t actively seeking employment but would look for or accept a job if one were available.
Disposable income
After-tax income of households; personal income less personal taxes.
Dissaving
Consumption expenditure in excess of disposable income; a negative saving flow.
Equilibrium (macro)
The combination of price level and real output that is compatible with both aggregate demand and aggregate supply.
Equilibrium GDP
The value of total output (real GDP) produced at macro equilibrium (AS = AD).
Fiscal policy
The use of government taxes and spending to alter macroeconomic outcomes.
Frictional unemployment
Brief periods of unemployment experienced by people moving between jobs or into the labor market.
Full employment
The lowest rate of unemployment compatible with price stability, variously estimated at between 4 percent and 6 percent unemployment.
Full-employment GDP
The value of total market output (real GDP) produced at full employment.
GDP deflator
A price index that refers to all goods and services included in GDP.
Growth recession
A period during which real GDP grows but at a rate below the long-term trend of 3 percent.
Hyperinflation
Inflation rate in excess of 200 percent, lasting at least one year.
Inflation
An increase in the average level of prices of goods and services.
Inflation rate
The annual percentage rate of increase in the average price level.
Inflationary flashpoint
The rate of output at which inflationary pressures intensify; the point on the AS curve where slope increases sharply.
Inflationary GDP gap
The amount by which equilibrium GDP exceeds full-employment GDP.
Investment
Expenditures on (production of) new plants, equipment, and structures (capital) in a given time period, plus changes in business inventories.
Item weight
The percentage of total expenditure spent on a specific product; used to compute inflation indexes.
Labor force
All persons over age 16 who are either working for pay or actively seeking paid employment.
Labor force participation rate
The percentage of the working-age population working or seeking employment.
Laissez faire
The doctrine of “leave it alone,” of nonintervention by government in the market mechanism.
Law of demand
The quantity of a good demanded in a given time period increases as its price falls, ceteris paribus.
Macroeconomics
The study of aggregate economic behavior, of the economy as a whole.
Marginal propensity to consume (MPC)
The fraction of each additional (marginal) dollar of disposable income spent on consumption; the change in consumption divided by the change in disposable income.
Marginal propensity to save (MPS)
The fraction of each additional (marginal) dollar of disposable income not spent on consumption; 1 − MPC.
Monetary policy
The use of money and credit controls to influence macroeconomic outcomes.
Money illusion
The use of nominal dollars rather than real dollars to gauge changes in one’s income or wealth.
Natural rate of unemployment
The long-term rate of unemployment determined by structural forces in labor and product markets.
Nominal GDP
The value of final output produced in a given period, measured in the prices of that period (current prices).
Nominal income
The amount of money income received in a given time period, measured in current dollars.
Okun’s Law
One percent more unemployment is estimated to equal 2 percent less output.
Outsourcing
The relocation of production to foreign countries.
Price stability
The absence of significant changes in the average price level; officially defined as a rate of inflation of less than 3 percent.
Production possibilities
The alternative combinations of final goods and services that could be produced in a given period with all available resources and technology.
Real GDP
The value of final output produced in a given period, adjusted for changing prices.
Real income
Income in constant dollars; nominal income adjusted for inflation.
Real interest rate
The nominal interest rate minus the anticipated inflation rate.
Recession
A decline in total output (real GDP) for two or more consecutive quarters.
Recessionary GDP gap
The amount by which aggregate spending at full employment falls short of full-employment output.
Relative price
The price of one good in comparison with the price of other goods.
Saving
That part of disposable income not spent on current consumption; disposable income less consumption.
Say’s Law
Supply creates its own demand.
Seasonal unemployment
Unemployment due to seasonal changes in employment or labor supply.
Structural unemployment
Unemployment caused by a mismatch between the skills (or location) of job seekers and the requirements (or location) of available jobs.
Supply-side policy
The use of tax incentives, (de) regulation, and other mechanisms to increase the ability and willingness to produce goods and services.
Underemployment
People seeking full-time paid employment that work only part-time or are employed at jobs below their capability.
Unemployment
The inability of labor force participants to find jobs.
Unemployment rate
The proportion of the labor force that is unemployed.
Wealth effect
A change in consumer spending caused by a change in the value of owned assets.
Categories: Macroeconomics