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cyclical unemployment
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unemployment caused by a business cycle recession
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frictional unemployment
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unemployment that occurs when people take time to find a job
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structural unemployment
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unemployment that occurs when workers' skills do not match the jobs that are available
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natural rate of unemployment
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the unemployment rate that arises from the effects of frictional plus structural unemployment
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Income and Consumption
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As income increases, consumption increase
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income and savings
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As income increases, savings increase
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APC (average propensity to consume)
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The amount of income that is consumed (C/I)
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APS (average propensity to save)
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Amount of income saved (S/I)
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MPC (marginal propensity to consume)
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"Extra change in income" (change in consumption / change in income)
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MPS (marginal propensity to save)
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Change in savings / Change in income
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Spending Multiplier
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The measure of how government spending changes GDP ( 1 / 1- MPC)
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fractional reserve banking
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a banking system that keeps only a fraction of funds
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Discount rate
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The interest rate on the loans that the Fed makes to banks
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Federal Reserve System
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the central bank of the United States
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Phillips Curve (short run)
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indicates a short-run inverse relationship between inflation and unemployment rates
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Stagflation
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a period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)
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Disinflation
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a reduction in the rate of inflation
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cyclical asymmetry
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the idea that monetary policy may be more successful in slowing expansions/controlling inflation than in extracting the economy from severe recession
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4 tools of monetary policy
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open market operations,
reserve ratio
discount rate
interest on reserves
reserve ratio
discount rate
interest on reserves
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money multiplier
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the amount of money the banking system generates with each dollar of reserves
(1/reserve ratio)
(1/reserve ratio)
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Tools of fiscal policy
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taxes and government spending
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crowding out
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a decrease in investment that results from government borrowing
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Short Run Aggregate Supply
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wages and resource prices will not increase as price levels increase
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Long Run Aggregate Supply
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wages and resource prices will increase as price levels increase
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Short run aggregate demand
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an increase in aggregate demand increases the price level and actual GDP beyond potential GDP
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Long run aggregate demand
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an automatic mechanism brings the economy back to potential GDP but the price level remains higher
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Federal Funds Rate (FFR)
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the interest rate that banks charge one another to borrow money
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Phillips Curve (long run)
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no trade-off between the inflation rate and the unemployment rate (vertical line)
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Laffer Curve
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a supposed relationship between economic activity and the rate of taxation that suggests the existence of an optimum tax rate that maximizes tax revenue.
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supply-side economics
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believes tax cuts can help an economy by raising supply
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Classical Economic Theory
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The market as a self-adjusting mechanism
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Keynesian economics
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a form of demand-side economics that encourages government action to increase or decrease demand and output
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Monetarist Theory
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The idea that the amount of money in circulation (the money supply) is the primary influence on economic activity and inflation.
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Equation of Exchange
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MV=PQ
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Phases of the business cycle
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peak, recession, trough, expansion
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GDP formula (expenditure approach)
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C + I + G + (X-M)
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GDP formula (income approach)
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Total National Income + Sales Taxes + Depreciation + Net Foreign Factor Income
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currency appreciation
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A rise in value of one currency in terms of another currency
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absolute advantage
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the ability to produce a good using fewer inputs than another producer
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comparative advantage
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the ability to produce a good at a lower opportunity cost than another producer
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NAFTA (North American Free Trade Agreement)
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Allows open trade between the US, Mexico, and Canada.
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WTO (World Trade Organization)
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the only international body dealing with the rules of trade between nations
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Quotas
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Limit on products they can enter
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Tariffs
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Taxes on imported goods
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invisible hand
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self-directed gain into social and economic benefits for all
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normal goods (superior goods)
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a good that consumers demand more of when their incomes increase
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inferior good
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a good that consumers demand less of when their incomes increase
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