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microeconomics
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how individual households and firms make decisions, interact with one another in markets
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macroeconomics
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the study of the economy as a whole
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Gross Domestic Product (GDP)
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the market value of all final goods & services produced within a country in a given period of time
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Gross National Product (GNP)
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the total income earned by a nation's permanent residents; differs from GDP bc includes income citizens earn abroad & excludes income foreigners earn here
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Real GDP per capita
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the main indicator of the average person's standard of living
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Consumer Price Index
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a measure of the overall cost of the goods & services bought by a typical customer
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Producer Price Index (PPI)
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similar to the CPI, but measures the cost of a basket of goods & services bought by firms instead of by customers; sometimes used as a predictor for changes in the CPI
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Nominal Interest Rate
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not corrected for inflation, rate of growth in the dollar value
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Real Interest Rate
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corrected for inflation, rate of growth in the purchasing power
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Productivity
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the quality of goods & services produced from each unit of labor input
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Principle of Economics
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a country's standard of living depends on its ability to produce goods & services
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Physical Capital
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the stock of equipment & structures that are used to produce goods & services
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Human Capital
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the knowledge & skills that workers acquire thru education, training & experience
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Natural Resources
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the inputs into the production of goods & services that are provided by nature, such as land, rivers, & mineral deposits
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Technological Knowledge
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society's understanding of the best ways to produce goods & services
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Savings & Investment
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by giving up current consumption in favor of saving & putting that money toward increasing the physical & human capital stock, an economy can increase its future production capability
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Diminishing Returns
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the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases
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Catch-Up Effect
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the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich. In other words, poorer countries will have a faster rate of growth, but their growth rate will slow as they approach the level of richer countries
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Foreign direct investment
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capital investment that is owned & operated by a foreign entity
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Foreign portfolio investment
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investment financed with foreign money but operated by domestic fesidents
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Education
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investment in human capital *positive externality
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Health & Nutrition
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another form of human capital, as healthier workers are more productive
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Property Rights & Political Stability
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people & firms are more likely to invest & work hard if they know the product of their work will not be stolen or confiscated by the government
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Free Trade
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most economists believe poor countries are better off pursuing outward-oriented policies & increasing their interaction w/ the rest of the world
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Research & Development
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improvements in technological knowledge; can be encouraged by patent laws
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Population Growth
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a large labor force can help growth but may not cause higher standards of living for individual citizens
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Financial System
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the group of institutions in the economy that help to match one person's saving w/ another person's investment; match savings & investment
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Financial Markets
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financial institutions through which savers can directly provide funds to borrowers
-bond
-stock
-bond
-stock
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Financial Intermediaries
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financial institutions through which savers can indirectly provide funds to borrowers
-bank
-mutual fund
-bank
-mutual fund
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National Saving
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the total income in the economy that remains after paying for consumption & government purchases
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Private Saving
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the income that households have left after paying taxes & consumption
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Public Saving
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the tax revenue that the government has left after paying for its spending
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Market for Loanable Funds
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the market in which those who want to save supply funds & those who want to borrow to invest demand funds
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Employed
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paid employees, self-employed, & unpaid workers in a family business
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Unemployed
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people not working who have looked for work during the previous 4 weeks
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Labor Force
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total number of workers, including the employed & unemployed
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Labor Force Participation Rate
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the percent of the adult population that is in the labor force
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Discouraged Workers
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would like to work but have given up looking for jobs; classified as "not in the labor force" rather than "unemployed"
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Natural Rate of Unemployment
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the normal rate of unemployment around which the actual unemployment rate fluctuates; the unemployment rate is never zero
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Cyclical Unemployment
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the deviation of unemployment from its natural rate; associated with business cycles
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Frictional Unemployment
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workers spend time searching for a job that best suits their skills & tastes; short term
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Sectoral Shifts
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changes in the composition of demand across industries or regions of the country
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Unemployment Insurance
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government program that partially protects workers' incomes when they become unemployed; increases frictional unemployment, but can result in better job matches & thus higher productivity
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Structural Unemployment
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when there are fewer jobs than workers; long term; when wage is above equilibrium
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Liquidity
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the ease with which an asset can be converted into the economy's medium of exchange
-how fast you can turn it into cash
-how fast you can turn it into cash
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Commodity Money
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has an intrinsic value; gold, cigarettes
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Fiat Money
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has no intrinsic value; used as money because of government decree; US dollar
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Currency
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paper bills & coins held by the public (accounts for about 30%)
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Demand Deposits
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balances in bank accounts that depositors can access on demand by writing a check or swiping a debit card (accounts for about 70%); tiger card, checks
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Credit Cards
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NOT MONEY; simply a way to defer payment
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100% Reserve Banking
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all deposits are held as reserves; banks have no effect on the money supply
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Fractional-Reserve Banking
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banks hold only a fraction of deposits as reserves; banks increase the money supply
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Reserve Requirement
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a minimum reserve ratio set by the Fed
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Excess Reserves
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reserves held by a bank that exceed the reserve requirement
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Bank Capital
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the resources a bank's owners have put into the institutions (also called owners' equity) in reality, banks' assets are not just the deposits from customers but also include capital from owners
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Capital Requiremernt
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a government regulation specifying a minimum amount of a bank capital
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Leverage
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the use of borrowed money to supplement existing funds for the purposed of investment leverage amplifies profits & amplifies losses
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Insolvement
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when a bank's assets fall below its liabilities; bank is unable to fully pay off its debit holders & depositors during the 2008/2009 crisis... blah blah
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Central Bank
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institution designed to oversee the banking system & regulate
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Monetary Policy
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set by the Federal Reserve; sets the supply of money, reserve ratio, interest rates
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Fiscal Policy
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set by Congress & the President; sets amounts of taxes & government spending
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Open Market Operations
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conducted by the Federal Open Market Committee, & are the Fed's main tool for changing the money supply
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Discount Rate
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the rate at which it loans funds to banks, to influence the amount of reserves banks borrow
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Bank Run
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if depositors worry that their bank is in trouble, they will rush to withdraw their deposits, but w/ fractional-reserve banking there isn't enough cash to pay everyone
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Federal Funds Rate
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banks can borrow from each other thru their accounts at the Fed, & they pay the federal funds rate on those loans; usually temporary, overnight loans
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Principle of Economics
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prices rise when the government prints too much money
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Quantity of Theory of Money
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the quantity of money determines the value of money
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Nominal Variables
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measured in monetary units
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Real Variables
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measured in physical units
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Relative Price
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the price of one good relative to (divided by) another; measured in physical units; real variable
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Classical Dichotomy
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the theoretical separation of nominal & real variables
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Monetary Neutrality
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the proposition that changes in the money supply do not affect real variables
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Velocity of Money
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the rate at which money changes hands
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Hyperinflation
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inflation exceeding 50% per month, usually caused by excessive growth in money supply
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Inflation Tax
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revenue the gov. gets from printing money; results in an effective tax on everyone holding money
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Fisher Effect
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money supply growth determines the inflation rate, which determines the nominal interest rate, but has no effect on the real interest rate
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Nominal Exchange Rate
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the rate at which one country's currency trades for another
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Appreciation ("strengthening")
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an increase in the value of a currency as measured by the amount of foreign currency it can buy
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Depreciation ("weakening")
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a decrease in the value of a currency as measured by the amount of foreign currency it can buy
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Real Exchange Rate
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the rate at which the goods & services of one country trade for the goods & services of another
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Law of One Price
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the notion that a good should sell for the same price in all markets
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Arbitrage
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simultaneous purchase & sale of an asset to profit from a difference in price
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Purchasing Power Parity (PPP)
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a theory of exchange rates whereby a unit of any currency should be able to buy the same quantity of goods in all customers; based on law of one price
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Business Cycles
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short-run economic fluctuations
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Model of Aggregate Demand & Aggregate Supply
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this model differs from the theories we just covered (classical dichotomy & monetary neutrality) in that they describe short-term fluctuations, not long run
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Aggregate Demand (AD) Curve
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shows the quantity of g&s demanded in the economy at any given price level
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Wealth Effect
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if the price level rises, people feel poorer & buy less, thus Consumption falls
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Interest Rate Effect
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if the price level rises, people need more dollars to buy their g&s, so they sell financial assets, driving up interest rates & causing investment to fall
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Exchange-Rate Effect
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if the US price level rises, US interest rate rise (bc of the previous interest rate effect), increasing demand for US capital assets, decreasing NCO & causing the US dollar to appreciate, which then causes NX to fall by making US exports relatively more expensive
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Aggregate Supply (AS) Curves
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shows the total quantity of g&s firms produce & sell at any given price level
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LRAS Curve
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represents the natural rate of output aka potential output aka full-employment output
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SRAS Curve
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shows how changes in the price level can, in the short run, change the level of real output
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Stage Wage Theory
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nominal wages are slow to adjust to changing economic conditions due to long-term labor contracts; if the price level falls & firm is unable to respond by reducing wages, output becomes less profitable & the firm will hire fewer workers & reduce output
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Sticky Price Theory
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some prices are slower to change, due to firms' different menu costs; firms who don't shift their prices quickly when prices fall will see declining sales & respond by reducing output
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Misconceptions Theory
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changes in overall price level can temporarily mislead suppliers about what is happening in the market; sellers may misinterpret a price fall as a reduction in the reward for supplying their product, instead of an economy-wide price shift, & reduce the quantity of g&s they supply
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Long-Run Equilibrium
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where the AD curve intersects w/ the LRAS curve
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Automatic Stabilizers
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changes in fiscal policy that stimulate agg demand when economy goes into recession, without policymakers having to take any deliberate option
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Multiplier Effect
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the additional shifts in AD that result when fiscal policy increases income & thereby increases consumer spending
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Marginal Propensity to Consume (MPC)
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the fraction of extra income that households consume rather than save
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Crowding-out Effect
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fiscal expansion raises real interest rate r, which reduces investment, which reduces the net increase in aggregate demand
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