Principles of Macroeconomics Chapter 5 – 8

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Business cycle
the cycle of short-term ups and downs in the economy
aggregate output
the total quantity of goods and services produced in an economy in a given period
a period in which aggregate output declines for two consecutive quarters
a prolonged and deep recession
a period during which output and employment grow
an increase in the overall price level
purchasing power of money
The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy.
a period of very rapid increases in the overall price level
a decrease in the overall price level
circular flow diagram
a diagram showing the income received and payments made by each sector of the economy
fiscal policy
government policies concerning taxes and spending
expansionary fiscal policy
fiscal policy that intends to increase output (GS↑ TAX↓)
contractionary fiscal policy
fiscal policy that intends to decrease output (GS↓ TAX↑)
monetary policy
the tools used by the Federal Reserve to control the quantity of money, which in tern affect interest rates
Great Depression
the period of severe economic contraction and high unemployment that began in 1929 and continued throughout the 1930’s
a situation of both high inflation and high unemployment
final goods and services
goods and services produced for final use
intermediate goods
goods that are produced by one firm for use in further processing by another firm
value added
the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage
the total value of all final goods and services produced within a country
the total value of all final goods and services produced by its nationals (= GDP + NFIA)
expenditure approach
a method of calculating GDP that measures the total amount of spent on all final goods and services during a given period (GDP = C + I + G (EX – IM))
income approach
a method of computing GDP that measures the income received by all factors of production in producing final goods and services
value added approach
a method of computing GDP that avoids intermediate goods and transfer payments
the goods that firms produce now but intend to sell later
the amount by which an asset’s value falls in a given period
final sales + changes in business inventries
net investment
gross investment – depreciation
net exports
exports – imports
national income
the total income earned by the factors of production owned by a country’s citizen (= NNP – Statistical discrepancy)
compensation of employees
wages, salaries, and various supplements
net national product (NNP)
gross national product minus depreciation; a nation’s total product minus what is required to maintain the value of its capital stock
statistical discrepancy
data measurement error
personal income
the total income of households
disposable personal income
personal income – personal income taxes
personal savings
the amount of disposable income that is left after total personal spending in a given period
nominal GDP
GDP measured in a current national currency
real GDP
GDP measured in the price of the base year
base year
the year chosen for the weights in a fixed-weight procedure
GDP deflator
nominal GDP / real GDP × 100
Limitations of the GDP concept
GDP and social welfare, the underground economy, illegal activity, per capita
labor force
employed + unemployed
labor force + not in labor force
unemployment rate
the ration of the number of people unemployed to the total number of people in the labor force
frictional unemployment
the portion of unemployment that is due to the normal turnover in the labor market; used to denote short-run job/skill matching problems
structural unemployment
the portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries
cyclical unemployment
unemployment that is above frictional plus structural unemployment (recession → decrease in aggregate output → ?)
natural rate of unemployment
the rate of unemployment when the labor market is in eqilibrium
anticipated inflation
when individuals know inflation is coming, and how to deal with it
unanticipated inflation
when individuals do not know inflation is coming
demand pull inflation
inflation caused by consumers’ demand
cost push inflation
inflation caused by costs of productions
inflation rate
(CPI present – CPI past) / CPI past
consumer price index (CPI)
a price index computed each month by the Bureau of Labor Statistics using a bundle that is meant to represent the “market basket” purchased monthly by the typical urban consumer
producer price index (PPI)
measures of prices that producers receive for products at all stages in the production process
aggregate income = aggregate output = real GDP
marginal propensity to consume (MPC)
the fraction of a change in income that is consumed, or spent. (= slope of consumption function = △C / △Y)
aggregate savings
the part of aggregate income that is not consumed (= Y – C)
something that is always true
marginal propensity to save(MPS)
the fraction of a change in income that is not consumed (△S / Y△)
average propensity to consume (APC)
the proportion of Yd that is consumed (C/Yd)
planned investment (I)
those additions to capital stock or inventory that are planned by firms
planned aggregate expenditure (AE)
the total amount the economy plans to spend in a given period. (C + I)
when Y = AE (Y = C + I)
Permanent Income Hypothesis
Milton Friedman’s contribution that consumption is a function of permanent income and NOT current income
Life Cycle Hypothesis
the contribution of Ando and Modigliani that consumption is related to income over the entire lifetime of an individual
Three approaches to equilibrium
graphical approach, algebraic approach, and saving-investment approach(leakage/injection approach)
the ration of the change in the equilibrium level of output to a change in some exogenous variable (1/1-MPC)
exogenous variable
a variable that is assumed not to depend on the state of the economy- that is, it does not change when the economy changes
Categories: Macroeconomics