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Inflation
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An increase in the overall price levels in an economy
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Consumer Price Index (CPI)
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A measure of the overall cost of the goods and services bought by a typical consumer
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nominal income
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The amount of money income received in a given time period, measured in current dollars; not adjusted for inflation and not used to determine purchasing power.
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real income
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The amount of goods and services that can be purchased with nominal income during some period of time; nominal income adjusted for inflation.
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purchasing power
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The ability to purchase goods and services.
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deflation
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A decrease in the overall price level
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labor force
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The total number of workers, including the employed and unemployed.
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full employment
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Employment level when there is no cyclical unemployment; however, structural and frictional unemployment will naturally exist
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unemployment rate
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the percentage of the labor force that is unemployed.
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frictional unemployment
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Brief periods of unemployment experienced by people moving between jobs or into the labor market
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structural unemployment
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unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
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cyclical unemployment
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Deviations from the natural rate of unemployment based on normal fluctuations in the business cycle.
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natural unemployment
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the normal rate of unemployment, consisting of frictional unemployment and structural unemployment
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stagflation
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A period of falling output and rising prices
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recession
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A period of declining real incomes and rising unemployment.
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expansion
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A period of economic growth as measured by a rise in real GDP and drop in price levels.
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classical theory
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An approach to the study of formal organizations that views workers as being motivated almost entirely by economic rewards
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laissez-faire
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Idea that government should play as small a role as possible in economic affairs.
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Say's Law
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Supply creates its own demand; production creates demand sufficient to purchase all goods and services produced.
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Keynesian Theory
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The theory that a government policy of increasing spending and cutting taxes could stimulate the economy in a recession.
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expenditure model
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used to add up what is spent when measuring GDP; GDP=C+I+G+(X-M)
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personal consumption expenditure
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Total spending by consumers for durable goods, nondurable goods, and services during a specified period of time.
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private domestic investment
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spendings on final goods and services by businesses
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national income
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The total income earned by citizens and businesses within a country during one year. Measures how much everyone in the economy has earned. Equals the GNP.
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personal income
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Refers to salaries and wages as well as investment income and government payments to individuals.
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disposable personal income
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Income remaining for people to spend or save after all taxes have been paid
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marginal propensity to consume (MPC)
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The change in consumption divided by the change in income; the fraction of disposable income that a household consumes rather than saves.
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marginal propensity to save (MPS)
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Change in savings divided by the change in income; the fraction of disposable income that is saved rather than spent.
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multiplier effect
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The additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending.
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the wealth effect, interest rate effect, and the exchange rate effect
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Why does the AD curve shift downward?
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CIGNX
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What are the determinants of AD (think about its relation to GDP)?
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In the long run, an economy's labor, capital, resources, and technology determine the total quantity of goods and services supplied, and this quantity supplied is the same regardless of the price level.
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Why is AS vertical in the long run?
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Changes in labor, capital, natural resources, and technological knowledge
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What causes the LRAS curve to shift?
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sticky wage theory, sticky price theory, and misperceptions theory
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Why does the SRAS curve shift upward?
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Changes in labor, capital, natural resources, and technological knowledge
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What causes the SRAS curve to shift?
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natural rate of output
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the production of goods and services that an economy achieves in the long run when unemployment is at its normal rate
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expansionary gap
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a positive output gap, which occurs when actual output is higher than potential output (Y>Y*) and price levels decrease
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contractionary gap
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the amount by which actual output in the short run falls short of the economy's potential output and price levels decrease
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fiscal policy
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the setting of the level of gov't spending and taxation by gov't policymakers
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expansionary
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An increase in government spending or a reduction in taxes to increase AD is what kind of fiscal policy?
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contractionary
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A decrease in government spending or an increase in taxes to reduce AD is what kind of fiscal policy?
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automatic stabilizers
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Changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action
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Wealth effect
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The tendency for people to increase their consumption spending when their purchasing power of money rises and to decrease their consumption spending when purchasing power falls.
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Interest Rate Effect
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Effect in which a lower price level reduces the interest rate, encourages greater spending, and therefore increases AD (and vice versa).
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Exchange-rate effect
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fall in U.S. price level causes U.S. interest rates to fall, real value of dollar declines in foreign exchange markets. depreciation stimulates/increases U.S. net exports and increases quantity of goods and services demanded (and vice versa).
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Sticky-Wage Theory
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Nominal wages are slow to adjust to changing economic conditions due to contracts and unions.
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Sticky-price Theory
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Because of menu costs, prices of some goods and services adjust slowly to changing economic conditions.
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Misperceptions Theory
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an unexpectedly low price level leads some suppliers to think their relative prices have fallen which induces a fall in production, but they don't realize that other firms in the industry are going through the same thing.
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RGDP: Increase
PL: Decrease
PL: Decrease
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An increase in labor productivity would most likely cause RGDP and PL to change in what day?
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Increases
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When business become more optimistic about future business conditions, what happens to the investment demand?
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The real balance effect
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As average PL decreases, the purchasing power of people's cash balances increases. This results in an increase in spending. What effect is this?
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SRAS: decrease
LRAS: decrease
PPF: shift inward
LRAS: decrease
PPF: shift inward
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A sustained increase in oil prices would most likely cause SRAS, LRAS, and PPF to change how?
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SRAS: increase
LRAS: increase
PPF: shift outward
LRAS: increase
PPF: shift outward
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A rapid increase in successful research and development projects for the nation most likely results in what change in SRAS, LRAS, and PPF?
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MPS decreases
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The value for the spending multiplier increases if the value of the _____ increases/decreases.
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