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ECON 1100
Eveline Adomait

ECON MIDTERM Chapters 4-10, 13.2 with exchange rates CHAPTER 4 Macro is the study of the performance of the national economies and policies gov- ernments use to try to improve that performance. Key Terms:  Aggregation -The adding up of individual economic variables to obtain economy-wide totals  Average Labour Productivity -Output per employed worker  Fiscal Policy -Decisions that determine the government’s budget, including the amount and composition of government revenues and expenditures  Government Budget Balance -The difference between government revenues and expenditures  Government Budget Deficit -When revenues fall short of expenditures  Government Budget Surplus -When revenues exceed expenditures  Government Debt -The sum of past government deficits and surpluses; a stock measure that is cal- culated at a point in time  Macroeconomic Policies -Government actions designed to affect the performance of the economy as a whole  Monetary Policy -Refers in normal times to central bank management of interest rates to achieve macroeconomic objectives  Structural Policy -Government policies aimed at changing the underlying structure, or institutions of the nations economy  Unconventional Monetary Policy -Refers to measures such as loaning money to troubled financial institutions and buying long-term government debt, that central banks utilize in abnormal times to supplement conventional monetary policy CHAPTER 5  Consumption -Spending by households on goods and services, such as food, clothing, and en- tertainment  Discouraged Workers -People who say they would like to have a job but have not made an effort to find one in the past 4 weeks  Employment Rate -The percentage of the working age population that is employed  Final Goods or Services -Consumed by the ultimate user because they are the end products of the pro- duction process, counted towards GDP  GDP Deflator -A measure of the price level of goods and services included in the GDP  Government Purchases - All government expenditure on currently produced goods and services, exclu- sive of government transfer payments  Gross Domestic Product -The market value of the final goods and services produced in a country during a given period  Gross National Product -The market value of goods and services produced by factors of production owned by the residents of a country; equivalent in magnitude to gross national income  Intermediate Goods or Services -Used up in the production of final goods and services an therefore not counted towards gdp  Labour force -The total number of employed and unemployed people in the economy  Net Exports -Exports minus imports  Net Investments -Investment that adds to the total capital stock of the economy  Nominal GDP -A measure of GDP in which the quantities produced are valued at current=year prices; measures the current dollar value of production  Participation rate -the percentage of the working-age population in the labour force  Private sector investment -Spending by firms on final goods and services, primarily capital goods and housing  Real GDP -a measure of GDP in which the quantities produced are valued at the prices in a base year rather than at current prices  Unemployment rate -the number of unemployed people divided by the labour force  Value added -for any firm, the market value of its product or service minus the cost of inputs purchased from other firms CHAPTER 6  Accelerating Inflation -when the inflation rate rises from one year to the next  Anticipated Inflation -when the rate of inflation turns out to roughly be what people had expected  CPI -for any period, measures the cost in that period of a standard basket of goods and services relative to the cost of the same basket of goods and services in a fixed year, called the base year  Deflating (a normal quantity) -the process of dividing a nominal quantity by a price index (such as the CPI) to express the quantity in real terms  Deflation -a situation in which the prices of most goods and services are falling over time so that inflation is negative  Disinflation -when the inflation rate falls from one year to the next  Downward Nominal Wage Rigidity Hypothesis -the claim that low levels of inflation will reduce efficiency because real wage cuts will then then typically require nominal wage cuts which will be resisted  Fisher Effect -the tendency for nominal interest rates to be high when inflation is high and low when inflation is low  High Inflation -greater than 6%  Hyperinflation -more than 500%  Indexing -the practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index; prevents the purchasing pow- er of the nominal quantity from being eroded by inflation  Low Inflation -0-3%  Moderate Inflation -Between 3-6%  Nominal Interest rate -The type of interest rate you usually encounter in everyday life-the price paid per dollar borrowed per year  Normal Quantity -A quantity that is measured in terms of its current dollar value  Price Index -A measure of the average price of a given class of goods or services relative to the price of the same goods and services in a base year  Price Level -The overall level of prices at a point in time as measured by a price index such as the CPI  Price Signal Distortion Hypothesis -The claim that nay substantial amount of change in the price level will make it difficult for market participants to interpret the extent to which price changes involve relative price changes  Rate of Inflation -The annual percentage rate of a change in the price level as measured for exam- ple, by the CPI  Real Interest Rate -The nominal interest rate minus the inflation rate r=i-π  Real Quantity -A quantity that is measured in constant dollar terms  Real Wage -The wage paid to the workers measured in terms of real purchasing power  Relative price -The price of a specific good or service in comparison to the prices of other goods and services  Stable inflation -When the inflation rate stays roughly constant from one year to the next  Unanticipated inflation -When the rate of inflation turns out to be substantially different from what peo- ple had expected  Zero bound on nominal interest rates hypothesis -The claim that because interest rates cannot go below zero, a central bank may be unable to stimulate the economy with rate cuts if the official interest rate is low to begin with  Zero Inflation -When the price level stays roughly constant from one year to the next CHAPTER 7  Boom - a particularly strong and protracted phase of expansion  Cyclical Unemployment -the extra unemployment brought about by periods of recession  Depression -a particularly severe or protracted recession  Expansion -a period in which the economy is growing at a rate significantly above normal  Expansionary Gap -a positive output gap, which occurs when actual output is higher than potential output  Frictional Unemployment -the short-term unemployment associated with the process of matching workers with jobs  Natural Rate of Unemployment -the part of the total unemployment rate that is attributable to frictional, struc- tural and seasonal unemployment; equivalently, the unemployment rate that prevails when cyclical unemployment is zero, so the economy has neither a re- cessionary nor an expansionary gap  Okun’s Law -states that each extra percentage point of cyclical unemployment is associated with about a 2% point decrease in the output gap, measured in relation to poten- tial output  Output gap -the difference between the economy’s actual output and its potential output at a point in time  Peak -the beginning of a recession, the high point of economic activity prior to a downturn  Potential output -the amount of output (real GDP) that an economy can produce when using its resources, such as capital and labour, at normal rates  Recession/Contraction -a period in which the economy is growing at a rate significantly below normal  Recessionary Gap -a negative output gap, which occurs when potential output exceeds actual out- put  Seasonal Unemployment -unemployment associated with the seasons and/or weather  Structural Unemployment -unemployment that occurs when workers are unable to fill available jobs be- cause they lack the skills, or do not live where jobs are accessible.  Trough -the end of a recession, the low point of economic activity prior to a recovery  Unemployment Duration -the length of a period during which an individual is continuously unemployed CHAPTER 8  Asset price bubble -occurs when the price of a financial or real asset or asset category rises much more rapidly than prices in general and by much more than can be explained by fundamental factors  Average propensity to consume -consumption divided by disposable income  Automatic stabilizers -provisions in the law that imply automatic increases in government spending or decreases in taxes when real output declines  Autonomous expenditure -the portion of planned aggregate expenditure that is dependent of output  Consumption function -the relationship between consumption spending and it determinates, such as disposable (after tax and transfer) income  Contractionary policies -government policy actions designed to reduce planned spending and output  Discretionary fiscal policy -changes in government spending ad taxation deliberately made to stabilize planned aggregate expenditure  Disposable income -refers to income that includes the addition of transfers and the deduction of taxes  Economy-wide marginal tax rate -the amount by which taxes rise when income rises by $1  Expansionary policies -government polic
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