Download Unit 3 Vocabulary list

Unit 3 Vocabulary list
Keynesian Economics
macroeconomic generalization, which led to the conclusion that a capitalistic economy
is characterized by macroeconomic instability and that fiscal and monetary policy can
be used to promote full employment, price level stability and economic growth.
Consumption schedule
A schedule showing the amounts households will spend at different levels of
disposable income
A schedule showing the amounts a household plans to save (or NOT to spend on
consumer goods) at different levels of disposable income.
Saving schedule
Marginal propensity to
consume (MPC)
The fraction of any change in disposable income spent for consumer goods; equal to
the change in consumption divided by the change in disposable income.
Marginal propensity to
save (MPS)
The fraction of any change in disposable income not spent for consumer goods (in
other words; saved); equal to the change in savings divided by the changes in
disposable income
Investment demand curve
(loanable funds market)
A curve that shows the amount of investment (loanable funds) demanded by an
economy at a series of real interest rates
Equilibrium GDP
The point at which aggregate supply equals aggregate demand
Planned investment
The amount that a firm plans or intends to invest; impacted by interest rates
Actual investment
The amount that a firm does invest; equal to planned investment plus unplanned
investment.
Multiplier
the number by which a change in any component of aggregate demand must be
multiplied to find the resulting change in the equilibrium GDP. Calculated as 1/MPS or
1/(1-MPC).
Net exports
Exports minus imports
Aggregate demand
A schedule or curve, which shows the total quantity of goods and services demanded
(purchased) at different price levels
Wealth effect (real
balances effect)
The tendency for increases in the price level to lower the real value or purchasing
power of consumer assets, effecting a reduction in consumer spending; a fall in the
aggregate price level increases the purchasing power, so consumption increases.
Discretionary fiscal policy
Deliberate changes in taxes (tax rates) and government spending by congress to
promote full employment, price stability, and economic growth
Expansionary fiscal
policy
A decrease in government expenditures for goods and services, an increase in net taxes,
or some combination of the two for the purpose of reducing inflation
Contractionary fiscal
policy
An increase in government expenditures for goods and services, a decrease in net taxes,
or some combination of the two for the purpose of increasing aggregate demand and
expanding real output to stabilize economy
Budget deficit
Amount by which the government’s expenditures exceed its revenues (mostly taxes)
each fiscal year
Cyclical deficit
Budget deficit that is caused by recession conditions bringing in lower tax revenues
Budget surplus
Amount by which a governments revenues (mostly taxes) exceed its expenditures each
fiscal year
Built-in stabilizer
(Automatic stabilizer)
A mechanism that increases the deficit (or reduces the surplus) in a recession, or that
reduces the deficit (or increases the surplus) without action from fiscal policymakers.
(Example- tax system: the more money we make as a society, the more the
government’s revenues increase)
Progressive tax system
System of taxation where the average tax rate of an individual raises as their income
increases
Proportional tax system
System of taxation where the average tax rate of an individual remains constant as their
income rises or falls.
Regressive tax system
System of taxation where the average tax rate of an individual falls as their income
rises or vice versa
Net export effect
The idea that the impact of the change in fiscal or monetary policy will be strengthened
or weakened by the subsequent change in net exports
Supply-side fiscal policy
Fiscal policy emphasizing control of the aggregate supply curve through changes in
production costs
Interest rate effect
The tendency for increases in the price to increase the demand for money, raise interest
rates and, as a result, reduce total spending in the economy. The opposite is true for
decreases in price level.
Foreign purchases effect
The inverse relationship between the net exports of an economy and its price level
price level relative to foreign price levels. AD increases if our Price level goes down.
Determinants of aggregate
demand
Factors such as consumption spending, investment, government spending, and net
exports which, if they change, shift the aggregate demand curve
Aggregate supply
A schedule or curve showing the total quantity of goods and services supplied
(produced) at different price levels
Determinants of the
aggregate supply
Factors such as input prices, productivity, and the legal-institutional environment, and
nominal wages which, if they change, shift the aggregate, the supply curve.
Productivity
A measure of average output, or of real output per unit of input. For example, the
productivity of labor may be found by dividing the real output by the hours of work.
Equilibrium price level
The price level at which the aggregate demand curve intersects the aggregate supply
curve.
Equilibrium real domestic
output (GDP)
The gross domestic product at which the total quantity of final goods and services
purchased (aggregate expenditures) is equal to the total quantity of final goods and
services produced (the real domestic output); the real domestic output at which the
aggregate demand curve intersects the aggregate supply curve.
Sticky Wages
Refers to a situation in which employers are slow to change wage rates in the face of a
surplus or a shortage of workers
Capital inflow
The net inflow of funds into a country
Rate of return
The profit earned on a project expressed as a percentage of its cost.
Nominal wage
The dollar amount of the wage paid (not adjusted for inflation)
Potential output
(Full-employment output)
The level of Real GDP the economy would produce if all prices, including nominal
wages, are fully flexible; shown by LRAS, PPC, and the situation where there is only
structural and frictional unemployment present.
AS-AD model
A model in which the aggregate supply curve and the aggregate demand curve are used
together to analyze economic fluctuations.
Supply shock
An event that shifts the short-run aggregate supply curve; examples _______________
Demand shock
An event that shifts the aggregate demand curve: examples ____________________
Stagflation
The combination of inflation and falling aggregate output; caused by SRAS decrease
Long-run macroeconomic
equilibrium
When the point of short-run macroeconomic equilibrium is on the long-run aggregate
supply curve.
Recessionary gap
When aggregate output is below potential output; point inside LRAS or PPC
Inflationary gap
When aggregate output is above potential output; point outside LRAS
Classical economics
Belief that supply creates its own demand (Say’s Law), wages and prices are fully
flexible, and that an economy will always be at or move towards full-employment
output (on LRAS or PPC)
Short-Run Phillips Curve
Graph that shows negative relationship between the unemployment rate and the
inflation rate
Long-Run Phillips Curve
Graph that shows that there is no relationship between the unemployment rate and
inflation rate; vertical line is equal to structural plus frictional unemployment (NRU)