ap macro Flashcards

13672026768	gross domestic product	measures total income of a nation, thought to be single best measure of a society's economic well being also measures total expenditure on economy's output of goods and services	0
13672026769	total income and total expenditure are the same	for an economy as a whole, income must equal expenditure	1
13672026770	measurement of gdp	the market value of all final goods and services produced within a country in a given period of time -total expenditure in economy -there is statistical discrepancy b/t total income and expenditure	2
13672026771	Y=C+I+G+NX	Identity Y=GDP C=consumption: spending by HH on goods and services, housing not included I=investment: purchase of goods that will be used in future to produce more goods, housing G=government purchases: salaries on govt workers, transfer payments NX=net exports: exports and imports (imp-ext)	3
13672026772	If total spending rises from one year to the next, then	1) the economy is producing a larger output of goods and services 2) goods sold at higher prices	4
13672026773	real gdp	the production of goods and services valued at constant prices, base year prices -only reflects quantity produced	5
13672026774	Nominal GDP	the production of goods and services valued at current prices -reflects both qproduced and services econ producing and prices of goods	6
13672026775	gdp deflator	-reflects only the prices of goods and services - measures the current level of prices relative to the level of prices in the abse year	7
13672026776	inflation	overall price level is rising	8
13672026777	inflation rate	the percentage change in some measure of the price level from one period to the next -gdp can take out inflation of nom gdp	9
13672026778	Is GDP a good measure of economic well-being?	-not perfect measure of well-being -leisure left out -omits value of goods and services produced at home (meal at home) -excludes quality of environment -no dist of income	10
13672026779	consumer price index	measure of overall cost of the goods and services bought by a typical consumer 1. fix the basket (4 hot dogs 2 ham) 2. find prices 3. compute basket costs 4. choose base year and compute index 5. compute infl rate	11
13672026780	inflation rate	the percentage increase in the price level from one year to the next	12
13672026781	core cpi	a measure of the overall cost of consumer goods and services excluding food and energy	13
13672026782	producer price index	a measure of the cost of a basket of goods and services bought by firms	14
13672026783	Problems in measuring the cost of living	1. substitution bias: go to better goods 2. introduction of new goods 3. unmeasured quality change: good deteriorates over years and price same, value of dollar falls bc lesser good for same dollars	15
13672026784	gdp deflator vs cpi	-gdp is services produced domestically and cpi is services bought by consumers -when price of oil rises, cpi rises more than gdp -cpi compares price of fixed basket to price of base, gdp compares price of currently produced goods to price of same goods in base year- group of goods change over time	16
13672026785	indexation	the automatic correction by law or contract of a dollar amount for the effects of inflation	17
13672026786	Cost-of-living adjustment (COLA)	raises wage when cpi raises	18
13672026787	Real and Nominal Interest Rates	real interest rate = nominal interest rate - inflation rate -nom=int rate as usually reported w/o a correction for effects of infl, how fast number of dollars in bank acc rise over time -real=int rate corrected for effects of inflation, how fast purchasing power of bank acc rises	19
13672026788	productivity	-why living standards vary sm around world -quantity of good and services produced from each unit of labor input	20
13672026789	determinants of productivity: physical capital per worker	-physical capital: the stock of equipment and structures that are used to produce goods and services -a produced factor of production	21
13672026790	det of prod: human capital per worker	-human capital: knowledge and skills that workers aquire through education, training, and experience -refers to the resources expended transmitting this understanding to the labor force	22
13672026791	DoP: natural resources per worker	-nat resources: inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits -renewable and nonrenewable	23
13672026792	DoP: technological knowledge	society's understanding of the best ways to produce goods and services, refers to society's understanding about how world works -common knowledge -proprietary knowledge: known bc company discovers it	24
13672026793	saving and investment	-can raise future productivity by investing more current resources in production of capital -but trade offs, devoting more resources to producing capital means less resources for goods for current consumption	25
13672026794	diminishing returns	as the stock of capital rises, the extra output produced from an additional unit of capital falls -inc in saving rate leads to higher growth only for a while -production function -in long run, higher saving = higher level of productivity and income but NOT high growth in variables	26
13672026795	catch up effect	-other things being equal, easier for country to grow fast if start out poor -small amts of capital investment can substantially raise workers' productivities	27
13672026796	foreign direct investment	-captial invest owned and operated by foreign entity	28
13672026797	foreign portfolio invest	-invest financed w foreign money but operated by dom residents	29
13672026798	externality	effect of ones actions on wellbeing of bystander -new ideas from individual enter society	30
13672026799	brain drain	the emigration of many of the most highly educated workers to rich countries, where these workers can enjoy a higher standard of living	31
13672026800	health and nutrition	healthier workers are more productive	32
13672026801	Property Rights and Political Stability	Policymakers should also protect property rights and promote political stability in order to achieve economic growth -prop rights: ability of ppl to exercise authority over the resources they own	33
13672026802	free trade	-inward oriented policies: attempted by poor countries, avoid interaction w rest of world to inc productivity and living standards -outward: better, integrate into world econ, trade is type of tech	34
13672026803	population growth	stretching nat resources diluting the capital stock promoting tech process	35
13672026804	natural rate of unemployment	the normal rate of unemployment around which the unemployment rate fluctuates	36
13672026805	labor force	number employed+unemployed	37
13672026806	unemployment rate	employed/labor force * 100	38
13672026807	labor force participation rate	labor force/adult population x 100	39
13672026808	cyclical unemployment	the deviation of unemployment from its natural rate	40
13672026809	discouraged workers	individuals who would like to work but have given up looking for a job -dont show up in unemployment stats	41
13672026810	How long are the unemployed without work?	- Most spells of unemployment are short - Most unemployment observed at any given time is long-term - Most people who become unemployed Will soon find jobs	42
13672026811	frictional unemployment	unemployment that occurs when people take time to find a job	43
13672026812	structural unemployment	unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one	44
13672026813	sources of fric emp	-change in demand for labor among diff firms -changing patterns of int trade	45
13672026814	unemployment insurance	a government program that partially protects workers' incomes when they become unemployed -unemployment rate is an imperfect measure of nations overall level of econ well being	46
13672026815	collective bargaining	Process by which a union representing a group of workers negotiates with management for a contract -unions earn 10-20% more	47
13672026816	efficiency wages	above-equilibrium wages paid by firms to increase worker productivity	48
13672026817	financial system	the group of institutions in the economy that help to match one person's saving with another person's investment -moves economy's scarce resources from savers to borrowers	49
13672026818	financial market	-institutions through which a person who wants to save can directly supply funds to a person who wants to borrow -bond market and stock market	50
13672026819	bond market	-certificate of indebtedness that specifies the obligations of borrower to holder of bond -IOU -date of maturity: time loan repaid -rate of interest -principal: exchange for this promise of interest and eventual repayment	51
13672026820	characteristics of bonds:	-term: length of time until bond matures -credit risk: probability that borrower will fail to pay some of int or princ (failure to pay = default) junk bonds: v high int rate -tax treatment: the way tax laws treat the int earned on the bond municipal bonds: state and local govt iss. bonds	52
13672026821	the stock market	represents ownership in a firm, claim to profits that firm makes -equity finance: sale of stock to raise money -debt finance: sale of bonds -stock index: computed as an av of group of stock prices	53
13672026822	financial intermediaries	financial institutions through which savers can indirectly provide funds to borrowers	54
13672026823	banks	-FI, take deposits to make loans, charge borrowers slightly higher interest rate on loans -facilitate purchases of goods through checks against deposits w debit cards (medium of exch) -store of value: for wealth that ppl gain in past saving	55
13672026824	mutual funds	an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds -allow ppl w small amts of money to diversify holdings -give ordinary ppl access to skills of professional money managers -index funds: buy all the stock in a given stock index	56
13672026825	national saving	the total income in the economy that remains after paying for consumption and government purchases - S=I=Y-C-G - S=(Y-T-C)+(T-G)	57
13672026826	private saving	the amount of income that households have left after paying their taxes and paying for their consumption Y-T-C	58
13672026827	public saving	the amount of tax revenue that the government has left after paying for its spending (T-G) -T>G, govt runs budget surplus bc more money than spent, pub sav is pos number -T	59
13672026828	market for loanable funds	the market in which those who want to save supply funds and those who want to borrow to invest demand funds -saving=supply -investment=demand	60
13672026829	Saving Incentives Increase the Supply of Loanable Funds	if reform of tax laws encourage greater saving, result would be lower interest rate and greater invetment	61
13672026830	Investment Incentives Increase the Demand for Loanable Funds	if a reform of the tax laws encouraged greater investment, the result would be higher interest rates and greater saving	62
13672026831	The Effect of a Government Budget Deficit	-when govt spends more than TR, lower supply -crowding out: dec in investment that results from govt borrowing -when govt reduces nat saving by running a budget deficit, int rate rises and investment falls	63
13672026832	money	the set of assets in an economy that people regularly use to buy goods and services from other people.	64
13672026833	medium of exchange	an item that buyers give to sellers when they want to purchase goods and services.	65
13672026834	unit of account	the yardstick people use to post prices and record debts.	66
13672026835	store of value	an item that people can use to transfer purchasing power from the present to the future.	67
13672026836	liquidity	the ease with which an asset can be converted into the economy's medium of exchange.	68
13672026837	commodity money	money that takes the form of a commodity with intrinsic value.	69
13672026838	fiat money	money without intrinsic value that is used as money because of government decree.	70
13672026839	currency	the paper bills and coins in the hands of the public.	71
13672026840	demand deposits	balances in bank accounts that depositors can access on demand by writing a check.	72
13672026841	Federal Reserve (Fed)	the central bank of the United States.	73
13672026842	central bank	An institution designed to oversee the banking system and regulate the quantity of money in the economy.	74
13672026843	money supply	the quantity of money available in the economy.	75
13672026844	monetary policy	the setting of the money supply by policymakers in the central bank.	76
13672026845	reserves	deposits that banks have received but have not loaned out.	77
13672026846	fractional-reserve banking	a banking system in which banks hold only a fraction of deposits as reserves.	78
13672026847	reserve ratio	the fraction of deposits that banks hold as reserves.	79
13672026848	money multiplier	the amount of money the banking system generates with each dollar of reserves.	80
13672026849	bank capital	the resources a bank's owners have put into the institution.	81
13672026850	leverage	the use of borrowed money to supplement existing funds for purposes of investment.	82
13672026851	leverage ratio	the ratio of assets to bank capital.	83
13672026852	capital requirement	a government regulation specifying a minimum amount of bank capital.	84
13672026853	open-market operations	the purchase and sale of U.S. government bonds by the Fed.	85
13672026854	discount rate	the interest rate on the loans that the Fed makes to banks.	86
13672026855	reserve requirements	regulations on the minimum amount of reserves that banks must hold against deposits.	87
13672026856	federal funds rate	the short-term interest rate that banks charge one another for loans.	88
13672026857	how does open econ work	-buy/sell g/s in world product market -buy/sell capital assets such as stocks and bonds in world financial markets	89
13672026858	net exports (also trade balance)	value of exports-value of imports -also NCO -if pos, trade surplus -if neg, trade deficit -if zero, balanced trade	90
13672026859	factors that affect trade	-taste -income -price -ex rate -cost of transpot -govt laws	91
13672026860	international flow of g/s and flow of capital related	y-c-g=i+nx s=i+nx----s=saving s=i+nco -domestic spending=c+i+g	92
13672026861	nco: net cap outflow -diff b/t purchase of foreign asset by domestic and purches of dom asset by for	- foreign assets-domestic assets -when pos- capital flowing out -when neg- cap flowing in -influenced by RIR paid on foreign and dom assets, perceived econ and pol risks of holding asset abroad, govt policies that affect foreign owndership of dom asset	93
13672026862	trade deficit	-ex	94
13672026863	balanced trade	-ex=imp -nx=0 -y=c+i+g -saving=investment	95
13672026864	trade surplus	-ex>imp -nx>0 -y>c+i+g -saving>invest	96
13672026865	nominal exchange rate	the rate at which a person can trade the currency of one country for the currency of another -1$ for 60 yen -appreciation: inc in value of dollar -depreciation: dec in value	97
13672026866	real exchange rate	the rate at which a person can trade the goods and services of one country for the goods and services of another -1 lb am cheese for .5 lb swiss cheese -eP / Px P= price index for US basket Px= price index for foreign basket	98
13672026867	depreciation	ER cause exports to rise and imports to fall, buy more US goods and raise nX	99
13672026868	appreciation	imports rise and exports fall, NX falls, buy more foreign goods (dollar worth more there)	100
13672026869	purchasing power parity -describes forces that determine ex rate in long run	-theory of ER where unit of any currency can buy same Q goods in all countries -based on principle of law of one price same price everywhere -process of taking advantage of price differences in arbitrage in the end, the dollar must buy the same amt	101
13672026870	implications of PPP	-if purch power of dollar is always same at home and abroad, then real exch rate (relative price of dom and foreign goods) cannot change -nom exch rate b/t currencies of two countries must reflect their price levels -when central bank prints large quantities of money, the money loses value both in terms of the g/s it buys and terms of other currencies it can buy	102
13672026871	limitations of PPP	-many goods cannot be easily traded -foreign, domestic goods not perfect substitutes	103
13672026872	market for loanable funds	the market in which those who want to save supply funds and those who want to borrow to invest demand funds -LF=domestically generated flow of resources available	104
13672026873	net capital outflow	-NCO pos, net outflow -NCO neg, net inflow -high IR, supply inc for LF, demand dec	105
13672026874	market for foreign currency exchange	coordinates people who want to exchange the domestic currency for the currency of other countries	106
13672026875	government budget deficits	-reduce supply LF by supply left, IR inc and crowd out investment -spending>revenue -appreciation, trade balance towards deficit	107
13672026876	trade policy	DONT AFFECT TRADE BALANCE -tariff, import quota (demand inc)	108
13672026877	pol instability & capital flight	-capital flight: large and sudden reduction in deamnd for assets located in country	109
13672026878	the business cycle	fluctuations in the economy, correspond to changes in business conditions -really irregular and hard to predict -real gdp and investment decline during recessions and unemployment inc (most macro quantities fluc together but at diff amounts)	110
13672026879	classical theory: money is a veil, nominal variables may be the first things we see when we observe an economy bc economic variables are often expressed in units of money	most economists believe that classical theory describes the world in the long run but not in the short run -beyond a period of several years, changes in money supply affect prices and other nom prices but not real gdp, unemp, or other real variables (classical theory) -in SR real and nom var related	111
13672026880	model of aggregate demand and aggregate supply	the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend	112
13672026881	aggregate demand curve	a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level	113
13672026882	aggregate supply curve	a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level	114
13672026883	why the aggregate demand curve slopes downward	1. wealth effect: dec in price level raises real value of $ and makes consumers richer so they spend more. inc in spending inc demand for g/s 2. interest rate effect: lower price level dec IR, encourages more spending on investment goods, inc demand for g/s 3. exchange rate effect: fall in US PL cause US IR to fall, value of dollar declines in foreign markets, stimulates US NX and inc demand g/s	115
13672026884	why the aggregate demand curve might shift	1) changes in consumption 2) changes in investment 3) changes in government purchases 4) changes in net exports	116
13672026885	why the aggregate supply curve is vertical in the long run	-in the LR, an economy's production of g/s (real gdp) depends on supplies of labor, capital, and natural resources and on available technology used to turn these FoP into g/s -quantity of output does not depend on level of prices	117
13672026886	why the long-run aggregate-supply curve might shift	-long run level of production is called potential output or full employment output, natural level of output the production of g/s that an economy achieves in LR when unemployment is at its normal rate 1) changes in labor 2) changes in capital 3) changes in nat resources 4) changes in technological knowledge	118
13672026887	long run growth and inflation in the model of aggregate demand and aggregate supply	economy better able to produce g/s over time, LR AS shifts right, fed inc MS and AD shift right	119
13672026888	why AS slopes upward	quantity output supplied deviates from LR, natural, level when the actual price level in the economy deviates from the price level that people expected to prevail	120
13672026889	sticky wage theory (why AS slopes up)	an unexpectedly low price level raises the real wage, which causes firms to hire fewer workers and produce a smaller quantity of goods and services -SR AS slopes up bc nom wages are slow to adjust to changing economic conditions	121
13672026890	sticky price theory (why AS slopes up)	an unexpectedly low price level leaves some firms with higher than desired prices, which depresses their sales and leads them to cut back production	122
13672026891	misperceptions theory (why AS slopes up)	an unexpectedly low price level leads some suppliers to think their relative prices have fallen, which induces a fall in production	123
13672026892	output deviates in SR from its natural level when the actual price level deviates from the price level that people had expected to prevail	quantity of output supplied = natural level of ouput + a(actual price level - expected price level) -a=number that determines how much output responds to unexpected changed in price level	124
13672026893	why SR AS might shift	-price level that people expect to prevail, so when ppl change expectations, SRAS shifts -an inc in expected price level reduces quantity g/s supplied and shifts SR AS left -dec in expected price level raises quantity g/s	125
13672026894	causes of economic fluctuations: effects of a shift in AD	-wave of pessimism affects spending plans, affects AD -HH and F now want to buy a smaller quantity g/s for any given price level, reduces AD -bc fall in AD, in SR economy moves along initial SR AS -bc fall in AD price level falls, below expected level, AS right	126
13672026895	shifts in AD	-in SR, shifts in AD cause fluctuations in output of g/s -in LR, shifts in AD affect overall price level but not ouput -bc policymakers influence AD they can potentially mitigate the severity of economic fluctuations	127
13672026896	an adverse shift in aggregate supply	A decrease in one of the determinants of aggregate supply shifts the curve to the left: Output falls below the natural rate of employment. Unemployment rises. The price level rises. -stagnation: falling output -inflation: rising prices (both mean stagnation)	128
13672026897	three reasons why AD slopes down -wealth -IR -ER	-not all of equal importance, for us, the most important reason is IR effect -theory of liquidity preference: keynes theory that the IR adjusts to bring money supply and money demand into balance	129
13672026898	the theory of liquidity preference	explain factors that determine an economy's interest rate, IR balances S and D for money -money supply: -money demand -equilibrium in the money market	130
13672026899	The Money Market and the Slope of the Aggregate-Demand Curve	inc in price level shifts money demand right, causes int rate to rise, reducing quantity g/s demanded 1) higher price level raises money demand 2) higher money demand leads to higher int rate 3) a higher IR reduces quantity g/s demanded	131
13672026900	changes in money supply	changes in monetary policy, fed buys bonds -lowers IR and g/s demanded for any price level, shift AD right when fed contracts money supply -raise IR and reduce demand g/s, shift AD left	132
13672026901	the rols of IR targets in fed policy	-monetary policy can be described as either in terms of money supply or in terms of the IR -changes in monetary policy aimed at expanding AD can be described as either inc the money supply or lowering the IR -changes in monetary policy aimed at contracting AD can be described as either dec MS or inc IR	133
13672026902	the liquidity trap	a situation in which conventional monetary policy is ineffective because nominal interest rates are up against the zero bound -forward guidance: keep IR low for period of time -quantitative easing: expansionary OMO w larger variety of financial instruments	134
13672026903	fiscal policy	the setting of the level of government spending and taxation by government policymakers	135
13672026904	changes in govt purchases	when policymakers change MS or level of taxes, they shift the AD indirectly by influencing spending decisions when govt alters purchases of g/s shifts AD directly	136
13672026905	the multiplier effect	the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending -inc in govt purchases shift AD by amt of purchase bc aggregate income stimulate additional spending by consumers	137
13672026906	a formula for the spending multiplier	mpc= marginal propensity to consume: a fraction of extra income that a household consumes rather than saves -tells us the demand for g/s that each dollar of govt purchases generates -also applies to any event that alters any component of gdp	138
13672026907	the crowding out effect	the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending -partially offsets the impact of govt purchases on AD -inc in govt purchases initially shifts to ad2 but once crowding out takes place, drops to ad3 -when govt inc purchases, AD could rise more or less by amt of purchase, depending on sizes of multiplier and crowding out effects	139
13672026908	changes in taxes	-higher income leads to higher money demand, raising IR, making borrowing more costly, reducing investments -when govt cuts taxes and stimulates consumer spending, profits rise, further inc spending -HH perception whether tax is temporary or not	140
13672026909	the employment act (case for active stab policy)	-govt should avoid being a cause of economic fluctuations -advise large and sudden changes in monetary and fiscal policy to cause change in AD -govt should respond to changes in private economy to stabilize AD	141
13672026910	The Case Against Active Stabilization Policy	monetary/fiscal policy can take a long time to put into effect, so these policies could destroy the economy because by the time they are put to work, the economy's condition could have changed.	142
13672026911	automatic stabilizers	changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action -tax system -govt spending	143
13672026912	phillips curve	a curve that shows the short-run trade-off between inflation and unemployment -pic shows neg assoc. b/t inf rate and unemp rate.	144
13672026913	AD, AS, and PC	-The Phillips curve shows the combinations of inflation and unemployment that arise in the short run as shifts in the aggregate-demand curve move the economy along the short-run aggregate-supply curve. -shifts in AD push inflation and unemployment in opposite directions in the SR	145
13672026914	how the phillips curve is related to the model of aggregate demand and aggregate supply	-bc mon pol and fis pol can shift AD, move along PC -inc in MS inc govt spending dec tax raise AD and move point on PC to high inf and low unemp -dec in MS cuts govt inc tax move on PC to lower inf and high unemp	146
13672026915	long run phillips curve	shows the relationship between unemployment and inflation after expectations of inflation have had time to adjust to experience	147
13672026916	short run phillips curve	the negative short-run relationship between the unemployment rate and the inflation rate -unemployment rate=nat rate of unemployment -a(actual inflation-expected inflation) -a=parameter that measures how much unemployment responds to unexpected inflation)	148
13672026917	How Expected Inflation Shifts the PC	• Initially, expected & actual inflation = (3%) • Unemployment = natural rate (6%). • Fed makes inflation 2% higher than expected, u-rate falls to 4%. • In the long run, expected inflation increases to 5%, PC shifts upward, unemployment returns to its natural rate.	149
13672026918	natural rate hypothesis	the claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation	150
13672026919	supply shock	an event that directly alters firms' costs and prices, shifting the economy's aggregate-supply curve and thus the Phillips curve	151
13672026920	sacrifice ratio	the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point	152
13672026921	rational expectations	the theory that people optimally use all the information they have, including information about government policies, when forecasting the future	153
13672026922	the volcker disinflation	Fed Chairman Paul Volcker Appointed in late 1979 under high inflation & unemployment Changed Fed policy to disinflation 1981-1984: Fiscal policy was expansionary, so Fed policy had to be very contractionary to reduce inflation. Success: Inflation fell from 10% to 4%, but at the cost of high unemployment...	154
13672026923	the greenspan era		155