Terms : Hide Images
| 5255129833 | output | the level of production of a country as a whole | 0 | |
| 5255129834 | output growth | the rate of change of output | 1 | |
| 5255129835 | unemployment rate | the ratio of the number of people who are unemployed to the number of people in the labor force | 2 | |
| 5255129836 | inflation rate | the rate at which the average price of goods in the economy is increasing over time | 3 | |
| 5255129837 | Gross Domestic Product | the value of final goods and services produced in the economy in a given geographic space in a given time period; it depends on (1) the quantity of inputs or factors of production and (2) the ability of those inputs to product output, or the production function | 4 | |
| 5255129838 | intermediate good | a good used in the production of another good | 5 | |
| 5255129840 | Gross Domestic Product | the sum of incomes in the economy during a given period of time, since the sum of the expenditure of buyers is equal to income of sellers | 6 | |
| 5255129841 | value added | the value of production minus the value of the intermediate goods used in its production | 7 | |
| 5255129842 | nominal GDP | the sum of the quantities of final goods produced times their current price | 8 | |
| 5255129843 | real GDP | the sum of the quantities of final goods produced times constant prices; what would happen to GDP if only prices had not changed. | 9 | |
| 5255129844 | employment | the number of people who have a job | 10 | |
| 5255129845 | unemployment | the number of people who don't have a job and are looking for one | 11 | |
| 5255129846 | labor force | the sum of employment and unemployment: L = N + U | 12 | |
| 5255129847 | discouraged workers | people in the labor force who give up looking for a job due to high unemployment | 13 | |
| 5255129848 | participation rate | the ratio of the labor force to the total population of adults | 14 | |
| 5255129849 | inflation | a sustained rise in the price level | 15 | |
| 5255129850 | inflation rate | the rate at which the price level increases | 16 | |
| 5255129851 | GDP deflator | in year t, Pt is defined as the ratio of nominal GDP to real GDP in year t: Pt = (nominal GDPt)/(real GDPt) = ($Yt)/(Yt) | 17 | |
| 5255129852 | consumer price index | the average price of consumption (cost of living); represents the consumption basket of a typical urban consumer; measures changes in price levels relative to a base year, so it measures inflation; it is a type of deflator with a constant basket, or a Laapreys index; overstates inflation because of substitution effect and new goods which actually help, quality changes | 18 | |
| 5255129858 | consumption | C = c0 + c1Y: goods and services purchased by consumers; | 19 | |
| 5255129859 | investment | I - the sum of nonresidential investment and residential investment (purchase of new plants or machines by firms + purchase of new houses or apartments) | 20 | |
| 5255129860 | government spending | G - the purchase of goods and services by federal, state, and local governments | 21 | |
| 5255129861 | net exports | X - M: also called trade balance; sum of the value of exports - sum of the value of imports | 22 | |
| 5255129862 | trade surplus / deficit | exports >/< imports | 23 | |
| 5255129863 | inventory investment | difference between goods produced and sold in a given year | 24 | |
| 5255129864 | aggregate demand for goods | Z = C + I + G + X-IM | 25 | |
| 5255129867 | disposable income | YD = Y - T after-tax income | 26 | |
| 5255129868 | income | Y | 27 | |
| 5255129869 | taxes - government transfers | T | 28 | |
| 5255129870 | fiscal policy | the choice of taxes and spending by the government | 29 | |
| 5255129874 | private saving | by consumers, equal to disposable Y-C[Y-T] | 30 | |
| 5255129875 | public saving | equal to T-G (can be negative if gvt is in deficit) | 31 | |
| 5255129876 | investment = saving | I=Sn in a closed economy | 32 | |
| 5255129877 | money | unit of account, store of value; medium of exchange. | 33 | |
| 5255129879 | demand for money and how can expected inflation influence price levels and cause real inflation; what is fixed? | the amount of real balances of money (purchasing power) people want to hold: (M/P)d = L(i,Y) = L(r+Epi,Y) | 34 | |
| 5255129881 | open market operations | the purchase or sale of gov bonds by the central bank to increase or decrease the money supply; expansionary = buying bonds; contractionary = selling bonds | 35 | |
| 5255129882 | reserves | held by banks, not lent out; so depositors can withdraw from their checking accounts and so depositors can write checks | 36 | |
| 5255129883 | reserve ratio | ratio of bank reserves to checkable deposits | 37 | |
| 5255129885 | investment relation | I = I(Y(+), i(-) ): investment I depends positively on production Y and negatively on interest rate i; tells how interest rate affects output | 38 | |
| 5255129886 | crowding out | when investment falls as the deficit rises, since government purchases crowd out investment | 39 | |
| 5255129890 | labor demand curve | W = MPL*P | 40 | |
| 5255129891 | expected inflation | the inflation rate "Epi" that people expect and use to influence their decisions | 41 | |
| 5255129892 | real wage/rental rate profit maximization | W/P = MPL | 42 | |
| 5255266666 | Cobb-Douglas production function | where Y=A(K^a)(L^1-a) the coefficients are the share of labor of each factor; the marginal products of each factor are proportional to their average products |  | 43 |
| 5255298634 | Walra's law | the fact that the real interest rate "r" equilibrates both the loanable funds market and the goods market; states that in a general equilibrium model, if there are "n" markets and "n-1" are in equilibrium, the last one must be too. LF eq. Y-C-G = I Goods eq. +(C+G) so Y = C+I+G | 44 | |
| 5255307000 | effect of fiscal policy on C/S | desired savings corresponds to desired consumption; increase G leads to lower public saving and lower Sn; decreased taxes leads to higher Y-T and higher C and higher private savings but lower public savings. So Sn depends on maybe corresponding increase/decrease in G. | 45 | |
| 5255353405 | Euler's theorem | with CRTS in the long run, competitive factor payments exhaust output so there is zero economic profit | 46 | |
| 5255358978 | Fisher effect | According to the Fisher equation, a 1 percent increase in the rate of infla- tion in turn causes a 1 percent increase in the nominal interest rate. 1:1:1 changes in money supple lead to change in inflation (see money demand function above in equilibrium) lead to change in nominal interest rate. | 47 | |
| 5255421632 | equity capital or bank capital or owner's equity | assets - liabilities (extra money a bank has on hand) | 48 | |
| 5255421596 | leverage ratio | total assets / equity capital | 49 | |
| 5255867161 | models | used by economists to simplify reality and see how exogenous variables influence endogenous variables | 50 | |
| 5255881707 | market-clearing | essential assumption that in the long run, price of a good/service moves quickly to balance its quantity supplied and demanded; assume that wages and prices are flexible, not sticky | 51 | |
| 5255936172 | imputed value | value of goods/services not sold in the marketplace that is included in GDP ("rent" that homeowners "pay" to themselves" | 52 | |
| 5255966453 | chain-weighted measures of GDP | base year changes over time | 53 | |
| 5255976547 | GNP | gross national product, income earned by nationals, not within borders; GNP = GDP + NFP | 54 | |
| 5255985562 | gross | measurement including depreciation | 55 | |
| 5255987754 | NNP | net national product = GNP - depreciation | 56 | |
| 5255991043 | NI | national income = NNP - statistical discrepancy | 57 | |
| 5255999096 | seasonal adjustment | removal of seasonal fluctuations (ex. Christmas) | 58 | |
| 5256037239 | PCE | personal consumption expenditure deflator (like GDP deflator) but only for "C" component | 59 | |
| 5256069769 | household vs establishment surveys | measure employed (includes part-time at time of survey), unemployed, out of labor force (includes discouraged workers); differ due to self-employment, etc; establishment survey is employees on firms' present payroll | 60 | |
| 5256166774 | factors of production | inputs used to product goods/services; take capital and labor as fixed in the classical model, assume both are fully utilized; each unit is paid the factor price | 61 | |
| 5256205590 | production function | relationship between how much output from given capital and labor amounts | 62 | |
| 5256208960 | CRTS | constant returns to scale; equal increase in all factors causes equal increase in output; zY=F(zK, zL) | 63 | |
| 5256239303 | competitive firm | small relative to the markets in which it trades, so it has little influence on market prices | 64 | |
| 5256259284 | MPL | marginal product of labor is the extra amount of output the firm gets from one extra unit of labor, holding the amount of capital fixed; diminishing marginal product if capital is held fixed | 65 | |
| 5256327903 | national income accounts identity | Y=C+I+G determines demand for g/s; equal to the supply of output in equilibrium (market-clearing assumption); also shows S=I when rearranged | 66 | |
| 5256334794 | comsumption function | relationship between C and Y-T; MPC | 67 | |
| 5256338650 | interest rate | cost of funds used to finance investment, as the price of loanable funds, while savings is the supply of loanable funds and investment is the demand (as a downward-sloping curve) for loanable funds; real vs nominal | 68 | |
| 5256384285 | fiat money | established by decree so no intrinsic value | 69 | |
| 5256415325 | commodity money | has an intrinsic value and is used as money; like gold or paper redeemable for gold with the gold standard | 70 | |
| 5256431416 | money supply | quantity of money available in the economy; M=C+D | 71 | |
| 5256431417 | monetary policy | government's control over M | 72 | |
| 5256434197 | central band | FR in the US; an independent institution that controls monetary policy | 73 | |
| 5256441753 | OMO | When the Fed wants to increase the money supply, it uses some of the dollars it has to buy government bonds from the public. Because these dollars leave the Fed and enter into the hands of the public, the purchase increases the quantity of money in circulation. | 74 | |
| 5256444638 | currency | sum of outstanding paper and coins | 75 | |
| 5256448162 | demand deposits | funds people have in their checking accounts; | 76 | |
| 5256470859 | balance sheet | accounting statement of assets and liabilities |  | 77 |
| 5256508498 | financial intermediation | transferring funds from savers to borrowers | 78 | |
| 5256736625 | leverage | use of borrowed money to supplement existing funds for purposes of investment. The leverage ratio is the ratio of the bank's total assets (the left side of the balance sheet) to bank capital (the one item on the right side of the balance sheet that represents the owners' equity). | 79 | |
| 5256749963 | monetary base | B=C+R; total dollars held by public | 80 | |
| 5256752359 | rr | reserve-deposit ratio rr is the fraction of deposits that banks hold in reserve. It is determined by the business policies of banks and the laws regulating banks. | 81 | |
| 5256755197 | cr | currency-deposit ratio cr is the amount of currency C people hold as a fraction of their holdings of demand deposits D. It reflects the preferences of households about the form of money they wish to hold. | 82 | |
| 5256812414 | reserve requirement | Fed imposes minimum rr; reserves above are excess | 83 | |
| 5256816327 | interest on reserves | Fed pays this to banks | 84 | |
| 5257114670 | quantity equation | MoneyxVelocity=PricexTransactions MxV=Px(T or proxy Y) | 85 | |
| 5257135674 | income velocity of money | V in equation MxV=PxY | 86 | |
| 5257137982 | real money balances | M/P; the quantity of money in terms of the quantity of goods and services it can buy | 87 | |
| 5257146508 | money demand function | equation that shows the determinants of the quantity of real money balances people wish to hold; (M/P)d = kY as portion of income; at equilibrium; money supply equals money demand, so M/P = kY and V=1/k M/P = L([i=r+Epi], Y) negative correlation with "i", positive correlation with Y | 88 | |
| 5257156833 | quantity theory of money | assuming that in equation MV=PY, velocity of money, income is constant, money supply is set by CB, P is ratio of nominal output PY to output Y; % Change in M+% Change in V =% Change in P+% Change in Y. Thus, the quantity theory of money states that the central bank, which controls the money supply, has ultimate control over the rate of inflation. If the central bank keeps the money supply stable, the price level will be stable. If the central bank increases the money supply rapidly, the price level will rise rapidly. According to the quantity theory, an increase in the rate of money growth of 1 percent causes a 1 percent increase in the rate of inflation. | 89 | |
| 5257179881 | seigniorage | revenue raised by the printing of money | 90 | |
| 5257183665 | inflation tax | cost of printing money to raise revenue | 91 | |
| 5257201752 | nominal interest rate | interest rate that the bank pays; i=r+pi | 92 | |
| 5257203879 | real interest rate | the increase in your purchasing power | 93 | |
| 5257210202 | Fisher equation | i=r+Epi (for expected inflation which influences present decisions) | 94 | |
| 5257212886 | ex ante real interest rate | real interest rate that the borrower and lender expect when the loan is made due to Epi or expected inflation | 95 | |
| 5257225952 | ex post real interest rate | the real interest rate that is actually realized | 96 | |
| 5257242907 | shoeleather cost | The inconvenience of reducing money holding is metaphorically called the shoeleather cost of inflation, because walking to the bank more often causes one's shoes to wear out more quickly. | 97 | |
| 5257246376 | menu costs | Changing prices is sometimes costly; for example, it may require printing and distributing a new catalog; causes higher variability in relative prices and price distortion as prices are not constantly being updated | 98 | |
| 5257255715 | unexpected inflation | transfers money from lenders to borrowers since borrowers pay back a loan with money that is worth less | 99 | |
| 5257264720 | benefit of inflation | wage cuts are rare since nominal wages are sticky downward; inflation cuts real wages then | 100 | |
| 5257289661 | real vs nominal | expressed in output units or fixed price levels vs. in terms of money | 101 | |
| 5257293736 | monetary neutrality | irrelevance of money in the determination of real variables | 102 | |
| 5257343094 | Slow growth model | an exogenous growth model, an economic model of long-run economic growth set within the framework of neoclassical economics. It attempts to explain long-run economic growth by looking at capital accumulation, labor or population growth, and increases in productivity, commonly referred to as technological progress. At its core it is a neoclassical aggregate production function, usually of a Cobb-Douglas type | 103 | |
| 5257357067 | steady-state | when k=k*, or investment in capital equals capital depreciation so capital levels are not changing | 104 | |
| 5257363804 | depreciation rate | delta; rate at which capital stock depreciates per year | 105 | |
| 5257409232 | savings rate in solow | If the saving rate is high, the economy will have a large capital stock and a high level of output in the steady state. If the saving rate is low, the economy will have a small capital stock and a low level of output in the steady state. | 106 | |
| 5257415286 | growth effect vs level effect | Policies that alter the steady-state growth rate of income per person are said to have a growth effect (like policies that alter rate of technological progress g(u)); we will see examples of such policies in the next chapter. By contrast, a higher saving rate is said to have a level effect, because only the level of income per person—not its growth rate—is influenced by the saving rate in the steady state. | 107 | |
| 5257461641 | Golden Rule level of capital | The steady-state value of k that maximizes consumption is called the Golden Rule level of capital and is denoted k*gold; c*=f(k*) - i (break-even investment/depreciation); maximized when MPK = depreciation/break-even rates. The net marginal product of capital is equal to the steady-state growth of total income (MPK-delta=n+g) If the economy is operating with less capital than in the Golden Rule steady state, then diminishing marginal product tells us that MPK n g. In this case, increasing the rate of saving will increase capital accumulation and economic growth and, eventually, lead to a steady state with higher consumption (although consumption will be lower for part of the transition to the new steady state). On the other hand, if the economy has more capital than in the Golden Rule steady state, then MPK n g. In this case, capital accumulation is excessive: reducing the rate of saving will lead to higher consumption both immediately and in the long run. When the economy begins above the Golden Rule, reaching the Golden Rule produces higher consumption at all points in time. When the economy begins below the Golden Rule, reaching the Golden Rule requires initially reducing consumption to increase consumption in the future. Reaching the Golden Rule achieves the high- est steady-state level of consumption and thus benefits future generations. But when the economy is initially below the Golden Rule, reaching the Golden Rule requires raising investment and thus lowering the consumption of current generations. | 108 | |
| 5257623627 | population growth | Because the number of workers is growing at rate n, however, total capital and total out- put must also be growing at rate n. Hence, although population growth cannot explain sustained growth in the standard of living (because output per worker is constant in the steady state), it can help explain sustained growth in total output. .According to the Solow model, the higher the rate of population growth, the lower the steady-state levels of capital per worker and output per worker. | 109 | |
| 5257634080 | Malthus and his model | "food is necessary to the existence of man" and that "the passion between the sexes is necessary and will remain nearly in its present state." He concluded that "the power of population is infinitely greater than the power in the earth to produce subsistence for man." prediction that mankind would remain in poverty forever has proven very wrong. | 110 | |
| 5257640261 | Kremer and his model | Kremer has suggested that world population growth is a key driver of advancing economic prosperity. If there are more people, Kremer argues, then there are more scientists, inventors, and engineers to contribute to innovation and technological progress. | 111 | |
| 5257657401 | efficiency of labor | where E is a new (and somewhat abstract) variable called the efficiency of labor. The efficiency of labor is meant to reflect society's knowledge about production methods: as the available technology improves, the efficiency of labor rises, and each hour of work contributes more to the production of goods and services. technology is parametrized by labor and effective workers | 112 | |
| 5257673204 | abor-augmenting technological progress | This form of technological progress is called labor augmenting, and g is called the rate of labor-augmenting technological progress. Because the labor force L is growing at rate n, and the efficiency of each unit of labor E is growing at rate g, the effective number of workers L E is growing at rate n g. | 113 | |
| 5257678821 | balanced growth | According to the Solow model, technological progress causes the values of many variables to rise together in the steady state. | 114 | |
| 5257705229 | covergence | poor countries catch up with the rich; According to Solow model, conditional convergence: countries appear to be converging to their own steady states, which in turn are determined by such variables as saving, population growth, and human capital. | 115 | |
| 5257816854 | Capital income | MPK*K; share of capital income out of total income is MPK*K/Y | 116 | |
| 5257832054 | return to capital relative to economy's growth rate? | MPK-delta <=> n+g | 117 | |
| 5257924698 | creative destruction | When the entrepreneur's firm enters the market, it has some degree of monopoly power over its innovation; indeed, it is the prospect of monopoly profits that motivates the entrepreneur.The entry of the new firm is good for consumers, who now have an expanded range of choices, but it is often bad for incumbent producers, who may find it hard tocompete with the entrant. If the new product is sufficiently better than old ones, the incumbents may even be driven out of business. Over time, the process keeps renewing itself. The entrepreneur's firm becomes an incumbent, enjoying high profitability until its product is displaced by another entrepreneur with the next generation of innovation. | 118 |
