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aggregate demand
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total spending in the economy, made up of consumption, investment, government spending and net export spending
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aggregate supply
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the total amount of domestic goods and services supplied by businesses and the government, including both consumer goods and capital goods
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automatic stabilizers
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government fiscal policy (e.g. unemployment benefits and direct tax revenues) that automatically counter-balance fluctuations in economic activity. For example, government spending on unemployment benefits automatically rise and direct tax revenues automatically fall when economic activity is low
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average tax rate (HL)
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total tax paid / income x 100
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balanced budget
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when government spending equals government expenditure
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base (interest) rate
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an interest rate set by the central bank that influences all other interest rates in an economy
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budget deficit
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when government spending exceeds government revenue; government may 'run a budget deficit' in order to increase aggregate demand and national income
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budget surplus
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when government revenue exceeds government spending
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business confidence
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a measure of the expectations of businesses about the growth in the economy; can affect investment
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business cycle
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a model showing the cyclical fluctuations in economic activity; the business cycle shows a typical pattern of economic growth including recovery, boom, slowdown, and recession
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capital stock
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all goods that are made by people and are used to produce other goods and services (ex: factories)
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central bank
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the government's bank; the institution responsible for an economy's monetary policy
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circular flow of income
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a simplified economic model of a nation's economy, with households and firms and the transactions that occur between them
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classical AS model
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a model showing that the long run aggregate supply curve is vertical at the full employment level of output; it suggests that government intervention to increase aggregate demand will have no effect on national output, but will instead cause inflation
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consumer
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a person who buys goods and services for personal use
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consumer confidence
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a measure of the expectations of consumers about economic growth; can affect consumer spending in the economy
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consumer price index
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a measure of the average rate of inflation which calculates the change in the price of a representative basket of goods and services purchased by the 'average' consumer
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consumption
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spending by households in a domestic economy
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contractionary fiscal policy
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government policies on spending and taxation that aim to reduce aggregate demand and slow economic growth
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core inflation
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a measure of inflation that takes out the changes in the prices of products that tend to experience volatile price swings, such as food and energy prices; gives policy-makers a better indication of long term changes in the price level
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cost-push inflation
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a persistent increase in the average price level due to increases in the costs of production and a decrease in aggregate supply
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crowding out
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when the government spends more than it receives in revenue and needs to borrow money, forcing up interest rates and causing a reduction in investment and consumption; can cancel out the positive economic effects of government spending
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cyclical (demand-deficient) unemployment
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unemployment that exists when there is insufficient aggregate demand in the economy and wages do not fall to compensate for this. This is usually associated with a slowdown in economic growth or negative growth
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debt
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the amount of money owed by firms, households and / or government
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deflation
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a persistent fall in the average level of prices
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deflationary (recessionary) gap
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the gap that occurs when macroeconomic equilibrium occurs at a level that is less than the full employment level of output
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demand-deficient (cyclical) unemployment
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unemployment that exists when there is insufficient aggregate demand in the economy and wages do not fall to compensate for this. This is usually associated with a slowdown in economic growth or negative growth
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demand-pull inflation
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a persistent increase in the average price level due to increases in aggregate demand
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demand-side policies
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government policies to deliberately change the level of aggregate demand in the economy to achieve macroeconomic objectives
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depreciation (capital)
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when a country's capital stock loses its value over time
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deregulation
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a supply-side policy where the government reduces the number or type of regulations on firms; goal is to increase output by making it easier for firms to do business
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direct tax
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a tax imposed on people's income or wealth, and on firms' profits
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discretionary policy
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fiscal policy that deliberately tries to change aggregate demand (as opposed to automatic stabilizers)
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disequilibrium unemployment
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occurs when there are conditions that prevent the labour market from clearing (ex: real wages are too high, demand-deficient unemployment)
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disinflation
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a fall in the rate of inflation
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disposable income
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income remaining after deduction of taxes, available to be spent or saved as one wishes.
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durable goods
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goods used by consumers over a period of time (ex: car)
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economy
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the state of a country or region in terms of the production and consumption of goods and services and the supply of money
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economic contraction
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when a country's gross domestic product is decreasing
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economic expansion
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when a country's gross domestic product is increasing
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economic growth
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an increase in the actual level of output of goods and services produced by an economy; an increase in real GDP over time
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equilibrium unemployment
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occurs when the labour market is in equilibrium, where there are jobs available, but some people are unwilling or unable to take them and are unemployed (ex: frictional, seasonal, structural unemployment)
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expansionary fiscal policy
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government policies on spending and taxation that aim to increase aggregate demand and increase national income
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exports
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goods or services bought by another country's households or firms
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factors of production
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assets used to produce goods and services (land, labour, capital and enterprise)
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firms
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the people who produce the nation's output from the factors of production that households provide
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fiscal policy
answer
government policies concerning taxation and expenditure; may be used to manage the level of aggregate demand and economic growth; may be expansionary (to raise AD) or contractionary (to slow growth in AD)
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frictional unemployment
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unemployment that occurs when people are entering the workforce after leaving education, or people who have left one job and are searching for a new job.
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full employment level of output
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the level of output that is produced by the economy when there is only natural unemployment.
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GDP per capita
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total GDP divided by the population
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Gini Coefficient
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an indicator of income equality calculated by dividing the distance between the Lorenz curve and the line of absolute equality by the total area under the line of absolute equality; the higher the figure, the more unequal the income distribution
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government spending
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money spent by government on providing goods and services in an economy, such as schools and roads
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green GDP
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a measure of the total output of an economy, taking into account the environmental consequences (externalities) involved in the production of that output
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gross domestic product (GDP)
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the total value of all final goods and services produced within the borders of a country in a year; can be measured with the output method, income method, or the expenditure method
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gross national product (GNP) / gross national income (GNI)
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total income earned by a country's factors of production regardless of where those factors are located; GNP/GNI is equal to GDP plus net property income from abroad
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hidden unemployment
answer
those people who are unemployed, but not calculated as unemployed (ex: those who have given up searching for work, those who are working part-time but would like to work full-time)
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households
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the people who buy the nation's output, supply factors of production and receive payment for those factors
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income
answer
the money that people earn; a flow concept
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income inequality
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the situation where incomes are not evenly distributed in an economy
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imports
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goods or services bought by a nation's households or firms from other countries
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informal (parallel, hidden, black, shadow) markets
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economic activity that is not recorded by the government; may account for a significant portion of economic activity in developing countries
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inflation
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a persistent increase in the average level of prices
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inflationary gap
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the gap that occurs when macroeconomic equilibrium occurs at a level that is above the full employment level of output
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infrastructure
answer
large scale capital usually provided by government that is necessary for economic activity to take place (for example, roads)
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injection
answer
money that enters the simplified two-sector circular income model as investment, exports, or government spending
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interest rate
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the price of credit / borrowed money
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interventionist supply-side policies
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policies where the government takes an activist role in encouraging economic growth (ex: funding education / training or research / development)
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investment
answer
spending by firms of capital resources to expand output; an injection into the circular flow of income
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Keynesian economists
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those who believe that market forces may not bring an economy to the full employment level of output; favour government intervention to stimulate the economy in times recession
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Keynesian AS model
answer
A model showing the Keynesian interpretation of aggregate supply; in this model, there are three distinct phases of aggregate supply and macroeconomic equilibrium may occur at a level of output that is less than full employment. It suggests that the economy may remain at this level of output unless the government intervenes to increase aggregate demand.
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labour force (work force)
answer
the economically active part of the population
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labour (trade) union
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an organisation of workers whose goals include the improvement of working conditions and and wages of workers; unions work on behalf of workers through negotiations with management
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leakage
answer
money that leaves the simplified two-sector circular income model as savings, taxes, or imports
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loose monetary policy
answer
a policy of lowering interest rates with the goal of increasing the money supply and increasing aggregate demand to stimulate economic growth
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Lorenz Curve
answer
a model showing what percentage of the population earns what percentage of the total income in the economy; the further the curve is from the line of absolute equality (45 degree line), the more unequal is the distribution of income
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macroeconomic equilibrium
answer
the real output level of an economy, where aggregate demand equals aggregate supply
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macroeconomics
answer
the study of a nation's economy, how it allocates its resources; concerned with economic growth, employment, price stability, external stability, and income distribution.
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macroeconomic objectives
answer
1) steady economic growth 2) high employment 3) price stability 4) external stability 5) equitable income distribution
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marginal tax rate (HL)
answer
change in total tax paid / change in income x 100
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market-based supply-side policies
answer
policies that involve reducing government intervention in markets to provide more incentives for firms to produce, or to make it easier for them to produce (ex: reducing income taxes, reducing trade-union power, reducing minimum wages)
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monetary policy
answer
central bank policies concerning an economy's official interest rate and money supply; may be used to manage the level of aggregate demand and national income and may be expansionary (to raise AD) or contractionary (to lower AD)
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mortgage
answer
a loan to buy a house
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multiplier (HL)
answer
the amount by which an injection is multiplied in order to calculate the final addition to national income as a result of the injection; 1 / (1-MPC)
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multiplier effect (HL)
answer
a situation where an increase in injections will result in an even larger increase in national income than the value of the injection
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national income
answer
the total income earned in an economy from selling goods and services
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natural rate of unemployment
answer
the rate of unemployment that that occurs with a stable rate of inflation; the rate of unemployment that exists when the economy is at the full employment level of output
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net exports
answer
spending by foreigners on a country's exports minus domestic consumers' spending on imports
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net national income (NNI)
answer
GNI - depreciation
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net property income from abroad
answer
income earned by assets located abroad minus income paid to foreign assets operating domestically (interest, rent, dividends, profit)
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new classical economists
answer
a group of economists who believe that the economy will always move towards its long-run equilibrium at the full-employment level of output without significant government intervention
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nominal GDP
answer
the value of GDP that reflects current prices
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non-durable goods
answer
goods that are used up over a short period of time (ex: rice)
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OECD
answer
Organization for Cooperation and Development, a group of developed countries that promote policies to improve the economic and social well-being of people around the world
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output gap
answer
the difference between potential output and actual output
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Phillips Curve (short-run) (HL)
answer
a model that illustrates a short-run inverse relationship between the inflation rate and the unemployment rate
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Phillips Curve (long-run) (HL)
answer
a model showing a vertical line at the natural rate of unemployment that illustrates no trade-off between the inflation rate and the unemployment rate
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potential output
answer
the maximum output possible in an economy if all resources are used to greatest efficiency
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privatization
answer
a supply-side policy where the government sells public assets to the private sector; goal is to increase efficiency and output in the economy
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progressive taxation
answer
a system of direct taxation where tax is levied at an increasing rate as income rises; the marginal tax rate is higher than the average tax rate
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proportional taxation
answer
a system of taxation in which tax is levied at a constant rate as income rises; for example 10% regardless of amount of income earned
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purchasing power
answer
the ability of a given quantity of money to buy goods and services in an economy
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real GDP
answer
nominal GDP adjusted for inflation
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recession
answer
two or more consecutive quarters of negative economic growth
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recessionary (deflationary) gap
answer
the gap that occurs when macroeconomic equilibrium occurs at a level that is less than the full employment level of output
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redistribution policies
answer
government policies that aim to transfer money from higher income households to lower-income households
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regressive taxation
answer
a system of taxation in which tax is levied at a decreasing average rate as income rises; takes a greater proportion of tax from low-income taxpayers than from high-income taxpayers
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saving
answer
foregoing current consumption to allow for consumption in the future
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seasonal unemployment
answer
unemployment that exists when people are out of work because their usual job is out of season, e.g. a ski instructor in the summer
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stagflation
answer
The situation where an economy is facing stagnant growth, with high rates of unemployment and high rates of inflation.
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structural unemployment
answer
unemployment that exists when in the long-term the pattern of demand and production methods change and there is a permanent fall in the demand for a particular type of labour; there is a mismatch between skills and the jobs available
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supply-side economists (the Austrian school)
answer
those who believe that market forces should be left alone to determine macroeconomic equilibrium; favor little government intervention in the economy
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supply-side policies
answer
government policies designed to shift the long run aggregate supply curve to the right, increasing potential output in the economy; can be interventionist or market-based
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tax credit
answer
a supply-side policy where the government allows households or firms to reduce the amount of direct tax paid to the government
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tight monetary policy
answer
a policy of increasing interest rates to reduce or slow the growth in money supply, slowing aggregate demand and economic growth
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trade (labour) union
answer
an organisation of workers whose goals include the improvement of working conditions and and wages of workers; unions work on behalf of workers through negotiations with management
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transfer payments
answer
payments made by the government to households that do not involve an increase in production, such as unemployment benefits; not considered injections into the circular flow model
question
unemployment
answer
the state of being without work, but willing and able to work, and actively looking for a job
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unemployment rate
answer
the number of unemployed workers expressed as a percentage of the total workforce
question
underemployment
answer
when workers are carrying out jobs for which they are over-qualified or when workers are employed part-time, even though they are available for full time employment
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wealth
answer
the assets that people own (ex: house, car)
question
weighted price index
answer
an way of calculating the change in the price level by giving a weight to each item according to its importance in the consumers' budgets
question
replacement investment
answer
firms spending on new capital to maintain the productivity of existing capital
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induced investment
answer
firms spending on new capital to increase their output to respond to increased demand in the economy
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marginal propensity to consume (MPC)
answer
how much of each extra unit of income is spent on consumption (as opposed to savings and imports); ∆C / ∆Y
question
marginal propensity to save (MPS)
answer
how much of each extra unit of income is saved; ∆S / ∆Y
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marginal propensity to import (MPM)
answer
how much of each extra unit of income is spent on imports (as opposed to saved or consumed)
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marginal propensity to withdraw (mpw)
answer
how much of each extra unit of income is spent on leakages; 1 / mps + mrt + mpm
question
minimum wage
answer
the lowest wage that a firm can pay employees, according to law
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