MACROECONOMIC DEFINITIONS
*STARRED ITEMS WILL BE CONSIDERED ONLY FOR EXTRA CREDIT
DEFINITIONS.
01.
GROSS DOMESTIC PRODUCT (GDP): GDP is measured by the market value of all final
goods and services produced within a country in a given period of time.
02. NOMINAL GDP: The GDP
of a given year as calculated in the prices of that year.
03.
REAL GDP: Nominal GDP adjusted for the effects of inflation as measured by some
price index. Such adjustments allow comparison of GDPs of different years so
that the amount of real economic growth can be determined
04.
RECESSION PHASE: Measured by the decline in Real GDP between the peak (P) of a
business cycle and the trough (T). when real GDP
declines for at least six consecutive months (two consecutive quarters).
05.
RECESSION PHASE: measured by the increase in Real GDP between the trough of the
cycle and the level of Real GDP at the previous peak.
06.
EXPANSION PHASE: Measured by the increase in Real GDP between the level of Real
GDP at the previous peak and the level of Real GDP at the next peak of the
cycle.
07. BUSINESS CYCLE: The fluctuation in real
GDP over time which is composed of three phases: a recession phase, a recovery
phase, and an expansion phase where real GDP increases over time until it reaches
a peak again. These phases comprise a complete business cycle.
08. EMPLOYMENT: The
number of people employed in the economy. Anyone who works as little as one
hour a week for pay in the survey week is considered to be in this category.
09. UNEMPLOYMENT: The
number of people who are unemployed. People are unemployed if (1) they did no
work in the survey week, (2) they looked for work sometime in the last four
weeks, and (3) they were available for work. Alternatively, people are
unemployed if they are between jobs and will start a new job in less than 30
days.
10. NOT IN THE LABOR
FORCE: Anyone who is not employed or unemployed; anyone who is not in the labor
force. This group includes housewives, retirees, and full-time students.
11. THE NATURAL RATE OF
UNEMPLOYMENT: The normal rate of unemployment around which the actual
unemployment rate fluctuates. (NOTE: How is the normal rate of unemployment
determined?)
12. DISCOURAGED WORKER:
Anyone who has looked for work with a given reservation wage in mind for a
significant time period and has dropped out of the labor force because he
cannot find work.
13.
UNDERGROUND WORKER: Anyone who works in activities which pay cash to avoid
taxes, costly regulations, or government prohibitions.
Such persons are officially classified as unemployed or “not in labor force”
while they are more accurately categorized as being employed.
14. PHANTOM UNEMPLOYMENT:
Those who are collecting welfare benefits or unemployment insurance must
register with the Employment Service which attempts to find jobs for such
persons. A significant number of these persons so registered are considered to
be officially unemployed even though they are more accurately categorized as
“not in labor force”.
15. INFLATION: A
sustained rise in the general price level of all goods and services at a
constant or increasing rate. This rise in the price level is estimated by an
index created from the prices of a sample of items called a market basket.
16. DISINFLATION: A
sustained rise in the general price level of all goods and services at a
decreasing rate.
17. DEFLATION: A
sustained fall in the general price level of all goods and services at a
constant, increasing or decreasing rate.
18. NOMINAL INTEREST
RATE: The interest rate uncorrected for inflation.
19. EXPECTED REAL
INTEREST RATE: The nominal interest rate minus the expected rate of inflation.
20. INFLATION TAX: The
depreciation in the value of currency or demand deposits held by individuals
caused by inflation.
21. INDEXATION: The
adjustment of wages or any other monetary payment which is accomplished by
increasing the value of those payments by the inflation rate. The purchasing
power of those monetary payments should therefore remain constant.
22. GOVERNMENT DEFICITS:
Occurs when governments spend more than they receive in tax revenues. (NOTE:
These deficits are usually financed in one of three ways: an increase in future
taxes, an increase in borrowing from the bond markets, a direct increase in the
money supply produced by printing more money.)
*23. KEYNESIAN SHORT-RUN FISCAL
POLICY: Ideally, the government’s use of its budget to increase the stability
of the economy by changing tax revenues and/or government expenditures in the
following way:
(a) During a recession, the government will
attempt to reduce the duration of the recession through expansionary
fiscal policy: stimulation of private expenditures directly (by increased
government spending) or indirectly (by decreased taxes) thereby increasing the
deficit or reducing the surplus.
(b) During inflation, the government will
attempt to reduce the duration of the inflationary period through contractionary fiscal policy: reduction of private
expenditures directly (by reduced government spending) or indirectly (by
increased taxes) thereby reducing the deficit or increasing the surplus.
24. LONG-RUN FISCAL
POLICY: The ability to manage the budget so that it is sustainable in the
long-run. Sustainability requires that there be no explicit (outright
repudiation of legally promised benefits or obligations) or implicit (by means
of inflation) default on any debt accumulated by the government.
25. LAW
OF DEMAND FOR LABOR: The quantity demanded of labor varies inversely
with the wage, other things held constant (such as the productivity of labor
and the amount of government regulation).
26. DEMAND PRICE OF
LABOR: The maximum wage an employer is willing to pay to a worker. This amount
is based on the employer’s estimate of how productive the worker will be in
generating revenue for the firm.
27. LAW
OF SUPPLY OF LABOR: The quantity supplied of labor varies directly with
the wage, other things held constant (such as population size).
28. SUPPLY PRICE OF
LABOR: The lowest wage a worker is willing to accept. This wage is determined
by the opportunity cost of a worker’s next best alternative. Those workers not
receiving an offer equal to the supply price in the current market will not
accept employment there.
29. EQUILIBRIUM: Where
the quantity supplied of labor is equal to the quantity demanded of labor, at a
given wage.
30. DISEQUILIBRIUM: There
are two cases: (a) An Excess Supply occurs when the quantity supplied of
labor exceeds the quantity demanded of labor for some wage above the
equilibrium wage. The adjustment process causes wages to decrease until the
Excess Supply is equal to zero. (b) An Excess Demand occurs when the
quantity demanded of labor exceeds the quantity supplied of labor for some wage
below the equilibrium wage. The adjustment process causes wages to increase
until the Excess Demand is equal to zero.
31. MARGINAL BENEFITS OF
JOB SEARCH: The added benefits of searching for one more job. Such benefits
occur in the form of a higher wage.
32. MARGINAL COSTS OF JOB
SEARCH: The added costs of searching for one more job.
33. WAGE FLOOR: The
minimum legal wage that can be charged in a designated market. An effective wage
floor must be placed above the equilibrium wage. As a result, a wage floor
suppresses the adjustment process that would have eliminated an excess supply
in its absence.
34. PRICE CEILING: The
maximum legal price that can be charged in a designated market. An
effective price ceiling must be placed below the equilibrium price. As a
result, a price ceiling suppresses the adjustment process that would have
eliminated an excess demand in its absence.
35. REPRESSED INFLATION:
Occurs when price ceilings are legally mandated in all markets (called price
controls) in order to prevent prices from rising. When price controls are
finally repealed, prices rise rapidly to their equilibrium level.
FIRST
EXAM---------------------------------------FIRST EXAM
36.
MONEY: That part of a person’s wealth that serves as a medium of exchange, unit
of account, and a store of value.
37. MEDIUM OF EXCHANGE:
Anything that is used to pay for goods and services.
38. STORE OF VALUE: A
repository of purchasing power over time.
39. UNIT OF ACCOUNT:
Anything used to measure value in an economy.
40. FIAT MONEY: Paper
currency decreed by a government as legal tender but not convertible into
precious metal.
41. LIQUIDITY: The
relative ease and speed with which an asset can be converted into a medium of
exchange.
42. FINANCIAL
INTERMEDIARY: A firm that channels funds from savers to investors by accepting
deposits from savers and making loans to investors. Such indirect finance
lowers the transactions costs of investing in an impersonal market because the
firm can specialize in discovering the creditworthiness of borrowers.
43. FRACTIONAL RESERVE
SYSTEM: A system in which banks hold reserves that are less than the amount of
total deposits.
44. REQUIRED RESERVES:
Minimum reserve holdings legally mandated by the Federal Reserve.
45. LEGAL RESERVES: An
asset requirement mandated by the central bank. Only cash held by depository
institutions in their vaults or deposits held at the regional Federal Reserve
Bank qualify as legal reserves.
46. EXCESS RESERVES:
Reserves held over and above required reserves.
47. REQUIRED RESERVE
RATIO: The ratio of required reserves to total deposits mandated by the Federal
Reserve. Banks may keep a higher proportion of their assets as reserves so the
ratio specified by the Fed is a minimum.
48. NET
WORTH: The excess of assets over liabilities, or equity capital.
49. THE SIMPLE MONEY
MULTIPLIER: Relates changes in reserves in the banking system to changes in the
money supply when there are no conversions of reserves into currency or excess
reserves in the various rounds of the multiplier process.
50. THE COMPLEX
MULTIPLIER: Relates changes in the monetary base to changes in the money supply
when reserves can be converted into currency in the various rounds of the
multiplier process.
51. MONETARY BASE: The
sum of the reserves in the banking system plus the amount of circulating
currency.
*52. BANK RUN: A situation
where deposit holders of a bank which has pursued unwise investments will rush
to their bank and convert their deposits into currency to avoid losing their
deposits when the bank fails. The fact that bank customers can withdraw their
funds when doubts about the safety and soundness of the bank arise causes banks
to avoid unwise investments whenever possible. (NOTE: Bank runs are a form of
market discipline which minimizes the propensity for risk-taking on the part of
bank managers and contributes to the safety and soundness of a banking system.)
*53. BANKING
PANIC: A run on all banks in the banking system regardless of whether they are
nearly insolvent or highly solvent. Holders of deposits in banks will
hurry to convert those deposits to currency thereby forcing even solvent banks
to sell off significant portions of their interest earning assets, some of
which are highly illiquid. As a result, many banks will not be able to meet
their customers’ demands for currency and will become insolvent.
54. FEDERAL RESERVE
SYSTEM: The central bank in the
55. FEDERAL OPEN MARKET
COMMITTEE (FOMC): The committee which executes open market operations as part
of the Board of Governors’ monetary policy.
56. OPEN MARKET
OPERATIONS: The buying and selling of government securities by the FOMC in
order to change the level of reserves in the banking system.
57. COUNTERCYCLICAL
MONETARY POLICY: A monetary policy which is designed to stabilize the fluctuations
in GDP by (a) increasing the money supply (an expansionary monetary policy)
when a recession occurs in order to stimulate private expenditures or (b)
decreasing the money supply (a contractionary
monetary policy) in the expansion phase of the business cycle in order to
reduce private expenditures and inflation.
58. RECOGNITION LAG: A
time period which begins with the emergence of a problem and
ends when policymakers recognize it as a problem.
59. ACTION
(IMPLEMENTATION) LAG: A time period which begins with the recognition of a
problem and ends when policymakers have implemented a policy designed to
counter the problem.
60. RESPONSE LAG: A time
period which begins with the implementation of a policy designed to counter a
problem and ends when that policy has its desired impact on the economy.
61. PROCYCLICAL MONETARY
POLICY: A monetary policy which unintentionally destabilizes the economy by
following an expansionary monetary policy in the expansion phase of the
business cycle and a contractionary monetary policy
in the recession phase of the business cycle.
62. MONETARISM: The view
that changes in the supply of money are the primary cause of fluctuation in
real GDP in the short-run and the ultimate cause of inflation in the long-run.
63. FREE BANKING SYSTEM:
A banking system which is characterized by the lack of a central bank and the
ability of each bank to print its own currency.
64. ADVERSE CLEARINGS:
The process by which bank notes are returned to the bank of issue by those who
have accepted the notes in payment but who prefer to use the currency of their
own bank. (The issuing bank will lose reserves through this process whenever it
overissues its notes.)
NOTE: For example, Bank A’s notes will be
exchanged for Bank B’s notes by those who bank at Bank B. Bank B will then
return Bank A’s notes to Bank A in return for an equivalent value of Bank A’s
reserves. Bank A will lose reserves whenever it overissues
notes because the excess notes will not stay in circulation but will be
returned to Bank A either directly or indirectly
through other banks.
*65. SECONDARY NOTE MARKET:
This market arises when a bank’s notes circulate beyond the local area where
its reputation for safety is not well known. In this case, other banks which
can easily develop knowledge about the safety of Bank A will accept its notes
at face value only when Bank A is quite safe. If Bank A is in some danger of
becoming insolvent, its notes will trade at a discount. Thus the secondary note
market can be used to distinguish safe from unsafe banks by indicating whether
a particular bank’s notes are accepted at face value or not.
66. CLEARINGHOUSES: These
institutions lower the costs of returning notes to issuing banks by acting as
an intermediary between accepting bank and issuing bank.
*67. OPTION CLAUSES:
Contractual clauses which are attached to a bank’s notes stating the conditions
under which a bank will not redeem their notes. Typically, banks in this
situation offer to pay the note holders interest as a penalty for not redeeming
their notes on demand. Such clauses help banks which are under pressure from
note holders for redemption to reduce the need for liquidating relatively
illiquid assets and thereby decrease the risk of insolvency.
SECOND EXAM-------------------------------------SECOND
EXAM
68. ABSOLUTE ADVANTAGE: A
nation has such an advantage when the cost of producing a given commodity is
less than another nation’s cost of producing the same commodity.
69. COMPARATIVE
ADVANTAGE: A nation has such an advantage when the opportunity cost of
producing a given commodity is less than another nation’s opportunity cost of
producing the same commodity.
70.
71. SPECIALIZATION:
Concentrating resources in the production of those goods in which a nation has
a comparative advantage results in specialization. Such concentration increases
the productivity of those resources and raises the standard of living for that
nation.
72. PRODUCTION
POSSIBILITY FRONTIER (PPF): Assuming an economy with a given amount of
resources and a given technology, the PPF is a series of points that represent
maximum output combinations from a given set of inputs. Points on the PPF imply
that the economy is operating at full-employment. NOTE: The slope of the
PPF is determined by the opportunity costs of domestic production.
73. CONSUMPTION
POSSIBILITY FRONTIER (CPF): This curve represents the consumption possibilities
that are available to the consumers of that country when the surplus production
of one good can be traded for other goods. NOTE: The slope of the CPF is
determined by the terms of trade (TOT).
74. TARIFFS: Taxes levied
on imported goods by the importing country’s government.
*75. WELFARE LOSS OF TRADE
RESTRICTIONS: When domestic consumers reduce their consumption of an imported
good and domestic producers expand their production of a competing domestic
substitute in response to a trade restriction. Resources are thereby diverted
into lower valued uses because of the restriction. Specifically, consumers will
reduce their consumption of the imported good with a trade restriction imposed
upon it and increase their consumption of other goods which have a lower valued
use than the imported good. Producers will expand production of the competing
domestic good, thereby drawing resources away from the production of other
goods which have more value.
76. QUOTAS: Quantity
limitations on the amount of imported goods imposed by the importing country’s
government.
77. VOLUNTARY EXPORT
RESTRICTIONS (VERs): These restrictions are
agreements negotiated between the governments of the importing and exporting
countries. The importing country’s government initiates the negotiations at the
request of some domestic industry which desires protection from foreign
competition. The exporting country’s government voluntarily agrees to limit the
exports of a given good from a given industry.
78. THE CURRENT ACCOUNT
IN GOODS AND SERVICES: That portion of a country’s international accounts that
consists of imports (which imply an outflow of that country’s currency),
exports (which imply an inflow of that country’s currency), and unilateral
transfers (such as gifts and foreign aid).
79. TRADE DEFICIT: When
the balance on the current account indicates that the outflow of a country’s
currency from imports exceeds the inflow of a country’s currency from exports.
(NX = X - M < 0)
80. TRADE SURPLUS: When
the balance on the current account indicates that the inflow of a country’s
currency from exports exceeds the outflow of a country’s currency from imports.
(NX = X - M > 0)
81. THE CAPITAL ACCOUNT:
That portion of a country’s international accounts that consists of the
purchases (which imply an outflow of that country’s currency) and sales (which
imply an inflow of that country’s currency) of real and financial assets and
international lending and borrowing.
82. DEMAND CURVE FOR A
CURRENCY: The demand for currency A is equivalent to the supply of currency B
by consumers in country B who want to purchase country A’s goods but must do so
with A’s currency. Thus the demand for currency A is equivalent to the exports
from country A to country B. As the price of currency A decreases, the goods in
country A become relatively cheaper to people in country B so that there is an
increase in the quantity demanded of country A’s currency and an increase in
country A’s exports.
83. SUPPLY CURVE FOR A
CURRENCY: The supply of currency A is equivalent to the demand for currency B
by consumers in country A who want to purchase country B’s goods. Thus the
supply of currency A is equivalent to the imports into country A from country B.
As the price of currency A decreases, the goods in country B become relatively more
expensive to people in country A so that there is an decrease in the quantity supplied
of country A’s currency and a decrease in country A’s imports.
84. EXCHANGE RATE: The
price of the currency of one country expressed in a number of units of another
country’s currency. For example, the yen price of the dollar would be expressed
as e($) = 50¥/$.
85. PURCHASING POWER
PARITY (PPP): This is a method of calculating exchange rates that attempts to
value currencies at rates such that each currency will buy an equal basket of
goods.
86. FIXED EXCHANGE RATES:
When central banks choose a particular exchange and offer to buy and sell its
currency at that particular exchange rate.
87. FLOATING EXCHANGE
RATES: Exchange rates which are determined solely by the supply and demand for
particular currencies.
88. MANAGED EXCHANGE
RATES (aka DIRTY FLOAT or CRAWLING PEG): Exchange rates which are managed by
the central bank in order to prevent large fluctuations in them. Such
fluctuations introduce elements of uncertainty into international trade and may
presumably discourage some trade from occurring.
THIRD EXAM---------------------------------------THIRD EXAM