Macroeconomics & Microeconomics

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ceteris paribus
used by economists to discuss laws in economics (Latin)
“all other things being equal”
command economy
an economy in which the governments makes all economic decisions about how the factors of production are used
Mnemonic device: associate command with communism
market economy
the forces of supply and demand determine how economic questions will be answered
traditional economy
an economy in which economic decisions are made based on tradition
factors of production
land, labor, capital, entrepreneurial ability (resources)
land, labor, capital, entrepreneurship
land, labor, capital, entrepreneurial ability (factors of production)
the study of how we allocate our scarce resources among competing forces
productive resources that come from nature
Ex: water, trees, minerals
human resources
Ex: physical effort of people, knowledge and skills of people
person produced tools of the trade
Ex: buildings, equipment, tools, and machines
The intelligence, imagination, and ability to take the risks that are needed to start up and maintain a business
Ex: Oprah Winfrey, Ted Turner, Bill Gates
when there are not enough resources to supply everyone’s unlimited wants or needs
opportunity cost
the value of the next best alternative
production possibilities curve/frontier (PPC/PPF)
a graphic representation of the production relationship between the two goods
capital versus consumer goods
goods used in the production process
goods used by people in their day to day lives
law of increasing opportunity
as you increase production of one good, you must give up increasing units of the other good
absolute advantage
the ability of an individual, a firm, or a country to produce more of a good or service than competitors, using the same amount of resources or fewer number of resources

when some individual, group, or country has the ability to produce a product more efficiently than another individual, group, or country.

comparative advantage
the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than other producers.
property rights
the ability of an individual to own and exercise control over scarce resources
role of incentives
The possibility of personal gain; what motivates people to be involved in the market system and is a major contributor of efficiency in a market economy
law of diminishing marginal returns
As more of a variable resource is added to a given amount of a fixed resource, marginal product eventually declines and could become negative
an exchange that occurs as a compromise
economic growth
steady growth in the productive capacity of the economy (and so a growth of national income)
unskillfulness resulting from a lack of efficiency
mixed economy
an economic system that combines private and state enterprises
has elements of both a command and market economy
an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, esp. as contrasted to cooperatively or state-owned means of wealth.
A theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole.
conformity with rules or standards; fairness; impartiality
the ratio of the output to the input of any system
the amount of goods and services people are willing to buy
quantity demanded
the amount of a good or service that a consumer is willing and able to purchase at a given price
law of demand
consumers buy more of a good when its price decreases and less when its price increases
income effect
a change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product’s price.
substitution effect
when consumers react to an increase in a good’s price by consuming less of that good and more of other goods
the five different factors that can cause a shift in demand
T: Tastes and preferences
R: Related goods and services
I: Income
B: Buyers, number of
E: Expectations of price
complement goods
Goods used together so that as price of the first good rises (falls), demand for the second or complement good will fall (rise.) Examples include razors and razor blades, coffee and cream or sugar, etc.
substitute goods
Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.
normal good
A good for which the demand increases as income rises and decreases as income falls
inferior good
A good for which the demand increases as income falls and decreases as income rises
direct cost
A cost that can be easily and conveniently traced to a specified cost object.
the pleasure or satisfaction derived from some activity or decision
marginal benefit
the additional benefit to a consumer from consuming one more unit of a good or service
marginal cost
the additional cost to a firm of producing one more unit of a good or service
explicit cost
known out of pocket, obvious costs
implicit cost
non obvious or opportunity costs
eminent domain
the right of government to take private property for public use
per capita income
the total national income divided by the number of people in the nation
gains from trade
people can get more of what they want through trade than they could if they tried to be self-sufficient
the concentration of the productive efforts of individuals and firms on a limited number of activities
how much of a good or service producers are willing and able to supply at every price
quantity supplied
the amount a supplier is willing and able to supply at one price level
law of supply
there is a direct relationship between price and quantity supplied
Determinants of supply
Resource: cost and availability
Opportunity: cost of alternative production
Taxes, subsidies and government regulation
Technology (productivity)
Expectations of the producer
Number of firms in the industry
a situation in which the market price has reached the level at which quantity supplied equals quantity demanded
a situation in which quantity demanded is greater than quantity supplied
a situation in which quantity supplied is greater than quantity demanded
price ceiling
a maximum price that can be legally charged for a good or service
price floor
a legal minimum on the price at which a good can be sold
circular flow
A model that shows the process of exchange among consumers (also called households), businesses and government
factor market
market in which firms purchase the factors of production from households
resource market
a market in which households sell and firms buy resources or the services of resources
financial market
the banking, stock and bond markets through which private savings and foreign lending flow to become investment, government, and foreign borrowing
gross domestic product
the total dollar value of all final goods produced in a nation during one year
Aggregate Spending (GDP) = C + I + G + (X-M)
OR Aggregate Spending (GDP) = (W + P + I + R + depreciation + indirect business taxes (non-profit based taxes paid by corporations) ─ subsidies + net income of foreigners)
gross national product
The total value of goods and services, including income received from abroad, produced by the residents of a country within a specific time period, usually one year.
transfer payments
government spending where no good or service is exchanged; does not count towards GDP
Ex: student aid; unemployment benefits; etc….
national income
National income includes all money payments (wages, profit interest, rent) earned by households as a result of their interaction in the resource market. When added together, these factor payments should be equivalent to GDP (with the addition of a few things like depreciation and indirect business taxes). Transfer payments from the government are not counted in measures of national income.
net domestic product (NDP)
calculated by subtracting consumption of fixed capital (depreciation) from GDP. If you didn’t account for depreciation, the value of an economy’s output would be significantly overstated. Especially in regard to macroeconomics, accounting for slight changes can have dramatic effects. Remember, we are dealing with billions and trillions of dollars, so 1 or 2 % of depreciation can mean hundreds of millions of dollars—equal to some undeveloped nations’ entire GDP.
personal income (PI)
While national income includes income from productive resources, personal income includes income directly and indirectly earned by households. Because personal income is spendable income, payments for Social Security taxes or undistributed corporate taxes or profits are not counted in measures of personal income, but transfer payments such as unemployment and welfare are counted.
disposable income (DI)
DI is what households actually have to spend. If you subtract personal income tax from PI, you are left with disposable income. You can think of it as your take-home pay. Disposable income equals and individual’s spending plus savings because people can either spend their money or save it.
real GDP
gross domestic product (GDP) adjusted to account for changes in currency values and price changes as well as inflation
real = nominal – inflation
nominal GDP
the GDP measured in terms of the price level at the time of measurement (unadjusted for inflation)
Things that do not count towards GDP
purely financial transactions
intermediate goods:used in the production process and counted when the final good is sold (e.g. the flour used in baking bread)
secondhand sales (used goods)
non-market and other household production activities
leisure activities
the underground economy
the costs of pollution
business cycle
portrays the highs and lows of the economy as people buy and sell goods and services
people in the labor force who are actively looking for jobs
natural rate of unemployment
structural and frictional unemployment that is always in an economy
willingness to pay
a consumer’s desire to buy a good or service
consumer surplus
the difference between your willingness to pay and the price you actually pay. It is the area below the demand curve and above the price.
producer surplus
the difference between the price received and the marginal cost of producing the good. It is the area above the supply curve and under the price.
excise tax
a tax that is measured by the amount of business done (not on property or income from real estate)
total welfare
the sum of consumer surplus and producer surplus. The free market equilibrium provides maximum combined gain to society.
a measure of the relative satisfaction from, or desirability of, consumption of goods and services
the fictional measuring unit of utility
marginal utility
(economics) the amount that utility increases with an increase of one unit of an economic good or service
law of diminishing marginal returns
a law that states that if additional units of one resource are added to another resource in fixed supply, eventually the additional output will decrease
production quota
an artificial limit on how much of a good or service can be produced
excise tax
a tax on sales of a good or service
law of unintended consequences
The law that states that for any law or policy implemented to achieve one or more set of objectives, there will be unintended, or unexpected costs from that law or policy.
negative externality
a negative impact that affects people not involved in an activity
sin tax
a relatively high tax designed to raise revenue and reduce consumption of a socially undesirable product such as liquor or tobacco
pigovian tax
a penalty tax set to restrict an activity
tax incidence
burden of taxation; the percentage of any tax actually paid by consumers and producers
classical economics
a school of thought based on the idea that free markets regulate themselves; proposed by Adam Smith
Say’s Law
theory that supply creates its own demand; advanced by John Baptiste Say in early 1800s
short-run aggregate supply
the total amount of goods and services that all firms are willing and able to produce within the economy
long-run aggregate supply
A time period when all production factors have time to adjust to full employment; this curve is vertical at the natural rate of employment
determinants of aggregate supply
Resource prices
Actions by the government
Political or environmental phenomena
aggregate demand
the amount of goods and services in the economy that will be purchased at all possible price levels
net export effect
as interest rates in the U.S. fall, investors tend to put more money into foreign investments. This drives foreign prices up and lowers U.S. prices, which then leads to a better exchange rate. When American-made goods are cheaper compared to foreign goods, more goods are exported than imported, leading to a better net export rate
interest rate effect
as price levels fall, consumers’ demand for money increases. This causes interest rates (which are the price of money) to rise. Higher interest rates cause investment and other interest-sensitive components of aggregate demand to decrease
wealth effect
When prices rise in an economy, the real value of household income declines, and so consumer spending drops. This drop results in a decrease in real GDP. If price levels drop, the value of money and other financial assets is higher, and consumers will spend more
demand pull inflation
results when there is too much consumer spending; when prices go up due to an increase in consumer demand for goods
cost push inflation
when prices rise because the cost of making the product increases.
wage push inflation
when prices increase due to the fact that workers receive more wages for the same amount of work.
profit push inflation
when the owners of business raise prices simply because they wish to make more profit.
Determinants of Aggregate Demand
Consumer spending
Investment spending
Government spending
Net Exports (Exports – Imports)
Difference between AD and GDP
AD includes transfer payments because they can influence consumer’s income but GDP does not include transfer payments anywhere in its calculation.
price level
the average price of all goods and services in the economy
marginal propensity to consume (MPC)
how much of every extra dollar would be consumed
MPC= Change in Spending/Change in Income
marginal propensity to save (MPS)
how much of every extra dollar would be saved
MPS= Change in Savings/Change in Disposable Income
expenditure multiplier
aids in calculating the change in GDP when expenditures change
Spending Multiplier = 1/1-MPC; 1/MPS; Change in GDP/Change in Spending
tax multiplier
aids in calculating the change in GDP when taxes change
Tax Multiplier= MPC/MPS; Change in GDP/Change in Taxes
accounting profit
A calculation of total earnings that includes the explicit costs of doing business, such as depreciation, interest and taxes, but does not include implicit costs such as opportunity costs.
average fixed cost
the fixed cost per unit of output
average revenue
total revenue divided by quantity sold
average variable cost
the variable cost per unit of output
economic profit
total revenue minus economic plus accounting costs
explicit cost
known, out of pocket, obvious costs
fixed costs
costs that do not change in the short run, like rent on a building
implicit cost
non-obvious or opportunity costs
long run
a period of time long enough to change the amount of any input used in production
marginal cost
the additional, or incremental cost incurred from any activity, or action
marginal revenue
additional revenue a firm earns from selling an additional unit of some good or service
short run
a period of time too short to change some inputs in the production process
total cost
fixed costs + variable costs
total revenue
price times quantity sold
variable cost
the cost of inputs such as labor, that can change in value
average fixed cost
Fixed cost divided by the quantity of output
the point in a curve where the rate of change in the slope begins to change
diseconomies of scale
increases in costs stemming from a company becoming too large
economies of scale
cost savings associated with large scale production
perfect competition
a market structure where thousands of competing firms sell a homogenous good or service
perfectly elastic demand
a good where any change in price causes quantity demanded to change in an infinite manner (a horizontal demand curve)
excess economic profits
economic profits far exceeding what is normal in some industry
minimum losses
the lowest price that can be charged for a good or service before losses begin to occur
normal profits
total revenue equal to the explicit and implicit costs of production
shut down point
the point where the price of a good or service is equal to the minimum point on the average variable cost curve
allocative efficiency
is reached in production when marginal cost equals the price, which equals marginal revenue
productive efficiency
is reached in production when price is set where the minimum average total cost (ATC) is equal to the price, which also equals marginal revenue and demand
economic growth
an increase in gross domestic product illustrated by an outward shift of the long run aggregate supply curve or the production possibilities curve
fiscal policy
the government’s use of tax and spending policies to battle problems in the economy
Examples include: government expenditures and personal income taxes
average total cost pricing
pricing a good or service at a level that creates enough revenue to pay the total cost of production
average variable cost pricing
pricing a good or service at a level that creates enough revenue to pay only the variable costs of production
fair-return price
where P = ATC, monopolist will only earn normal profits (break-even profits that will cover all his/her costs)
marginal cost pricing
pricing a good or service at a level just sufficient to pay for the marginal cost of production
natural monopoly
a monopoly that is created from economies of scale- like an electric utility
price discriminating monopolist
occurs when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs
public utility
a company that sells a good or service that is vital to the public interest (electric power) and thus faces regulations on prices and output
socially optimal price
where P = MC, it is the best option for consumers since it is the highest quantity of the lowest price
entry barrier
a way of blocking new entrants into a market if profits are being earned (e.g. patents, trademarks and violence)
Federal Communications Committee
The commission that regulates communications to ensure that the media does not post libel and that the government does not abuse their power of prior restraint; established in 1934
Herfindahl-Hirschman index
a measure of how concentrated (how much, or little competition exists) an industry is
a market structure characterized by a single seller of a unique product with no close substitutes
monopoly pricing
a price that is set equal to a monopolist’s demand curve, rather than at a level that is just equal to cost of production
the single buyer of some good or service, typically the single buyer of labor in some market
problems with utility regulation
1. gold plating: One of the major criticisms of public utility regulation is that if utilities are allowed to submit expenses to a body of elected regulators, the utility will have every incentive to inflate expenses in order to be allowed a higher rate charged to its customers.
2. the lack of research and development
3. the nuclear scare
when goods and services are brought into a nation
when goods and services are sold to other nations
terms of trade
an agreement regarding how much of each product in terms of the other product being traded
brand loyalty
a situation where buyers do not change their behavior much in response to price changes because they are loyal to a company’s brand
excess capacity
the difference between how much of a good or service is produced and how much could be produced
implicit contract
an unwritten agreement between two parties- often a source of brand name loyalty
monopolistic competition
a market structure where a few firms enjoy some brand name loyalty
product differentiation
a way of helping consumers see differences in goods or services (advertising)
a consortium of independent organizations formed to limit competition by controlling the production and distribution of a product or service
conglomerate merger
a merger among firms in unrelated industries
dominant strategy
A strategy where no matter what your rival does you are no better off or worse off from the strategy you have picked.
failing firm
A firm that is incurring economic losses and is facing bankruptcy.
game theory
A theory that seeks to explain how the behavior of one person, or firm, is impacted by the behavior of another person or firm.
horizontal merger
A merger among competing firms.
The joining of two firms.
nash equilibrium
A situation where rival individuals or rival firms cannot gain by changing their behavior.
A market structure where only a few firms dominant the sales for a good or service.
The phenomena that occurs when two agents acting together produce more than the expected outcome.
vertical integration
Coordination of the production process from beginning to end.
vertical merger
A merger among firms in the production process (a car maker buying a tire company).
balance of payments
a system by which a nation tracks all transactions between nations; this is made up of two accounts: current and capital. The sum of these two accounts must always be zero.
current account
record of all goods and services exchanged between two nations
financial account
record of trade involving financial assets including stocks, bonds, and real estate; sometimes called the capital account
trade deficit
When a nation spends more on imports than it earns from exports
trade surplus
When a nation earns more from its exports than it spends on imports
outflow of financial capital
When Americans purchase assets abroad
inflow of financial capital
When foreigners purchase U.S. assets
exchange rate
the price of one nation’s currency in terms of another nation’s currency
factors that affect the foreign exchange of currency

Consumer tastes and preferences – If consumers like foreign goods better than domestic goods, the demand for foreign dollars will increase and the domestic dollar will depreciate.

Inflation – Inflation may negatively impact a nation’s currency as demand for the nation’s goods decreases with higher price levels.

Economic growth and higher incomes- a nation that is healthy with a growing economy generally has a strong currency with high foreign purchasing power. The nation’s citizens normally have higher incomes, which they spend on both foreign and domestic goods.

Interest rates – higher interest rates cause an increase in financial investment as financial investors seek the highest return on their money. Lower interest rates cause an outflow of financial capital. NOTE: This is not the same as capital investment where businesses borrow money to build factories and acquire other capital. Remember, high interest rates decrease investment spending.

when the price of a nation’s dollar increases in relation to another nation’s dollar
when the price of a nation’s dollar decreases in relation to another nation’s dollar
exchange rate
the value of one currency expressed in terms of another currency
product market
the market for final goods and services
a good used to produce another good
factor market
the market for the factors of production like land, labor and capital
circular flow
a model showing how goods, services, resources, and money each flow through the economy
the single buyer of some good or service, typically the buyer of labor in some market
derived demand
how the demand for one good stems from, or is derived from the demand for another good. The demand for labor is a derived demand. It comes from the demand for what labor produces.
labor supply
the relationship between wages and salaries and the quantity of labor hours supplied
land, labor, capital
marginal physical product
the additional output gained from employing one more unit of some input
marginal revenue product
the marginal product of labor or capital multiplied by the price that can be charged for what labor or capital produced
perfectly competitive labor market
a situation where there are many suppliers and many demanders of some type of labor
the single buyer of some good or service, typically the single buyer of labor in some market
input demand
the demand for labor, capital and natural resources
a good that consumers can opt to buy if some other good increases in price and vice versa (sausage and bacon)
pairs of good for which a fall in price of one good results in a greater demand for the other good
the knowledge of how to produce some good
industry demand for labor
the total demand for any type of labor. The sum of all individual demand curves for some type of labor.
market demand for an input
the total demand for any input in the production process
market supply of an input
the total supply of any input in the production process
market equilibrium
where the price of a good or service has settled at a point where quantity demanded equals quantity supplied
economic rent
the value a producer or supplier receives over and above what would normally be received for a good or service
minimum wage
a legal floor on the wage rate
marginal input cost
additional cost of adding one more unit of some input
average input cost
total input cost divided by the total quantity of inputs used
a collection of workers who negotiate the terms of employment together, rather than individuals
collective bargaining
the process whereby leaders of a labor union negotiate the terms of a labor contract with the management of a company
craft union
a union representing such workers such as carpentry and plumbing
industrial union
a union that represents people in automobile, trucking, and other industries
the single buyer of some good or service, typically the single buyer of labor in some market
bilateral monopoly
a situation where there is a single seller of some labor resource and a single buyer of that resource
value of all assets; including money, equipment, buildings, tools, inventory
money put at risk with the expectation that income, or profit from that risk will be greater than the initial investment
interest rate
the percentage of the borrowed money charged for one year
marginal product of capital
the additional output gained from employing one more unit of some capital good
marginal product of labour
the additional output gained from employing one more unit of labour
marginal rate of technical substitution
the rate at which capital and labour can be substituted for one another in any given production process
physical capital
consists of tools, machinery, raw materials, vehicles, structures, and inventories in various stages of production.
human capital
consists of the knowledge, education, training, and skill that humans bring to the process of production.
marginal return on investment
the percentage rate of return on investment of additional sums of money, to acquire more capital.
a tax on imported goods
a restriction on the number of goods that can be exported by a nation to another nation
voluntary export restriction
when a nation agrees to restrict the number of goods it exports to avoid tariffs and quotas
horizontal summation
The process of creating a market demand curve by summing the quantities demanded by each individual at every price.
M1, M2, and M3
different categories that help measure the money supply
fiat money
money that has value because it is backed by the word of the federal government and not by gold or other valuable resources
The smallest, most liquid form of money; M1 includes checkable or demand deposits, travelers’ checks, coins, and currency; it is not in circulation; when we talk about money supply, this is what we are usually describing; Vault cash is not counted in the money supply because it has already been counted when it is deposited in the bank.
This definition includes M1 plus savings and small (less than $100,000) time deposits. Time deposits must remain in the bank for a fixed length of time before they can be withdrawn. Other accounts less than $100,000 like money market deposit accounts and money market mutual funds are also counted in M2 and usually earn a higher interest rate than regular deposits. M2 is larger than M1 but less liquid.
This definition includes M2 plus large ($100,000 or more) time deposits. M3 is even less liquid than M2 because the money must stay in the bank longer. An example of M3 would be a 5-year certificate of deposit or a savings bond (which are usually held for 7 years before maturity). M3 is no longer reported by the Federal Reserve but is included here to give M2 context. It will not be tested on the AP exam.
a promise to pay the holder an amount equal to the cost of the bond along with a specified amount of interest earned.
a more short-term loan than a bond.
represent partial ownership in a corporation; much more volatile than bonds or securities
currency in circulation
the total amount of paper currency, coins, and demand deposits that is held by consumers and businesses rather than by financial institutions, central banks, and the U.S. Treasury
common pool resource good
a good that is owned by all members of society like the air or the ocean
common property
property that is owned by all members of society
exclusion/rival goods
goods where one person’s use of the good excludes others from using it
free riders
people who derive benefits from the work, or purchases of others without doing any work, or making any purchase
nonexclusion goods
goods where one person’s consumption does not exclude others from consuming as well (a sunset)
private good
a good where one person can exclusively enjoy the consumption
public good
a good that is not produced effectively by the private sector (national defense) and thus is provided by the government
shared consumption
a good or service where more than one person can simultaneously enjoy it
toll good
a good where a price can be charged and exclusion can take place
tragedy of the commons
a term used to refer to the near starving of the Pilgrims as a result of practicing farming based on common property
shared consumption
it means that when one person uses the good, it does not diminish the service to others
Coase theorem
a theory that states even in the presence of externalities an economy can reach an efficient solution as long as transaction costs are sufficiently low
external benefit
benefits conferred on party C from the transactions involving party A and B
external cost
known, out of pocket, obvious costs
negative externality
a negative impact that affects people not involved in an activity
positive externality
the external benefits conferred on third parties who did not participate in the original transaction directly
demand deposits
the amount of required reserves and excess reserves that a bank has not loaned out or otherwise invested
excess reserve
the portion of every dollar that is deposited that a bank can loan out or otherwise invest
money multiplier
shows how much a new deposit in the bank can impact the money supply (1/reserve requirement)
required reserve
the portion of every dollar that is deposited that a bank cannot loan out or otherwise invest; the amount of currency they keep in the vault
required reserve ratio
the amount of money each bank must keep by law from every dollar deposited in the bank
output method
resources are fixed but output is variable
input method
resources are variable but output is fixed
external benefit
benefits conferred on party C from the transaction involving parties A and B
external cost
costs imposed on party C from the transaction involving parties A and B (pollution)
marginal social benefit of pollution
the incremental benefits (economic growth, jobs, etc.) that are derived from each additional unit of pollution
marginal social cost of pollution
the incremental costs (poor health, poor productivity, etc.) that are created from each additional unit of pollution
socially optimal quantity of pollution
the level of pollution where the marginal social benefits of pollution equal the marginal social costs of pollution
crowding out
when government spending increases real interest rates causing private investment to decrease
loanable funds graph
a graphic representation of the relationship between real interest rates and loanable funds
nominal interest rates
interest rate stated in current prices
real interest rates
interest rates adjusted for inflation
ability to pay principle
the principle that suggests that people with greater income should have a greater share of the tax burden than people with lower levels of income
benefits received principle
the principle of taxation that suggests that those people who derive the greatest benefits from the use of taxpayer dollars, should pay a greater share of the tax burden
effective tax rate
the actual burden (over and above the stated tax burden) of taxation
nominal tax rate
the stated tax rate
progressive tax
a tax where as income increases, the percentage of income paid in taxes increases
proportional tax
a flat, set percentage tax on income
regressive tax
a tax that charges a higher percentage of one’s income the less income one has
tax incidence
the burden of taxation- the percentage of any tax actually paid by consumers and producers
geographic mobility
the willingness and ability of a person to move to a geographic location where economic opportunities are greater
Gini ratio
a measure of statistical dispersion commonly used as a measure of inequality of income or wealth
income distribution
how concentrated income is in the hands of rich, middle class and poor people
Lorenz curve
a curve that seeks to depict the distribution of income
resource endowment
the resources a person is born with
equation of exchange
velocity of money
number of times a single dollar is spent during a year
monetarist theory
belief that any problem in the economy can be solved by increasing the money supply 3-5%
supply side theory
belief that any problem in the economy can be solved by taking action to shift AS to the right
rational expectations policy
belief that people behave rationally so problems in the economy must be solved by actions that surprise the populace
automatic stabilizers
changes to an economy that require no action by Congress or the President
discretionary policy
actions by policymakers that impact the economy. Examples would include changing taxes or spending.
the cumulative amount of deficit that was not paid off in the year that the deficit was incurred
the amount by which spending is greater than revenue in a given time period
The Federal Reserve System
system of 12 district banks charged with monitoring the money supply with the goal of establishing price stability, full employment, and sustainable economic growth
monetary policy
actions taken by the Federal Reserve to control inflation and recession in the economy
discount rate
the interest rate the Federal Reserve charges banks when they borrow money from the Fed
open market operations
buying and selling securities to control inflation and recession by varying the money supply
federal funds rate
the interest rate at which one bank lends to another bank
Phillips curve
graphical representation of the relationship between inflation and unemployment
high unemployment and high inflation
Categories: Macroeconomics