ECONS101 Test Two Macroeconomics

Frage	Antworten
What are the four sub groups that the working age population is divided into?	- Labour force - Those of the labour force employed - Those of the labour force unemployed - Those of the labour force inactive (not seeking employment.
What are the three commonly reported ratios derived from the working age population sub groups?	- Participation rate, labour force/working age population - Unemployment rate, Unemployed/labour force - Employment rate, employed/labour force
What is Employment Rent?	The value of having a job compared to the value of not having one, determined by the formula Wage/reservation wage-disutility of work. Determined by wages, benefits of the jobs like company cars or disutility of work like transportation costs.
What is a Labour Union?	A collection of people representing an industry who gather together to negotiate wages and working conditions for workers, i.e TSA, TEU or E Tu.
What are the four functions of money?	-Medium of exchange - Unit of account (agreed measure of the value of goods and services) - Standard of deferred payment (contracts to be written for future receipts and payments) - Store of value that can be exchanged later for goods and services
What is Base Money?	Case held by the households, firms and banks, and the balances held by commercial banks in their accounts in the central bank, known as the reserves. A liability to the central bank.
What is Bank Money?	Money in the form of bank deposits, created by the commercial banks when extending credit to firms and households.
Broad Money	The amount of Broad money in the economy is measured by the stock of money in circulation. The sum of bank money plus Base money that is in the hands of the non bank public.
What is a balance sheet?	What the household or firm owns or owes to others, its' assets and liabilities.
What is Net worth?	The difference between ones' assets and liabilities, what it owns, what it owes to others an what is owed to them.
What is the Policy Rate?	The interest rate set by the central bank, which applies to commercial banks that borrow base money from each other and the central bank.
What is the Bank Lending Rate?	The average interest rate commercial banks charge to households and firms. Typically above the policy rate to allow banks to make decent profit margins.
Government Bond	Financial instruments issued by the government to raise funds, paying flows of money at specific intervals
What is a Yield?	the implied interest rate of return that they buyer gets on their money when buying a bond at it's market price
Present Value	The today value of a stream of future income or other benefits
What is a Reserve balance?	A1-The cash a bank holds plus its balance in it's account with the central bank-Base money.
What is a Banks own Financial assets?	(A2)- Instruments banks use as collateral while borrowing in the money market. Borrowing the replenish balances (if running deficit)
Bank Deposits	(L1)- The bank owes these to households and firms.
Secured borrowing	This is what banks have borrowed from households and firms and other banks in the money market
Leverage Ratio	The value of assets divided by the equity stake in those assets.
How to calculate the Marginal rate of transformation	MRT is the tradeoff between current and future consumption (1=r)
Diminishing marginal returns to consumption	The value to the individual of an additional unit of consumption declines the more consumption the individual has
Discount rate	A measure of a persons pure impatience, how much a person values an additional unit of consumption now over an additional unit of consumption later (slope of the indifference curve) MRS.
Pure impatience	Characteristic of a person who values an additional unit of consumption now over later because of myopia or weakness of will.
Collateral	An asset that a borrower pledges to a lender as a security for a loan
Recession	A period when output is declining. Or when the level of output is lower than it should be
Okun's Law	The growth the GDP is negatively correlated with the rate of unemployment
Aggregate output	The total output across the entire economy, across sectors, firms and households
Value added	The value of output minus all the value of inputs
GDPP	Total domestic production, measured as value added
GDPE	Total expenditure on domestic products (goods and services)
Government Transfers	Spending by the government in the form of payments to households or individuals
Self insurance	Saving by a household in order to smooth consumption, maintaining a consistent level of consumption after a temporary shock to income.
Co-insurance	A means of pooling savings across households in order for a household to maintain consistent level of consumption after a temporary shock to income.
Capacity utilisation rate	A measure of the extent to which a firm, household or entire economy is producing as much as the stock of capital goods and current knowledge would allow
Investment coordination game	Game in which there are two Nash equilibria, of which one may be Pareto efficient (better than the other). i.e a two firms will invest, or not invest in the coordination game as this is a better outcome over one investing over the other and vice versa.
Inflation	An increase in the general price level of the economy
Consumer price index (CPI)	A measurement of the general level of prices that consumers have to pay for a bundle of goods and services, including consumption taxes
GDP Deflator	A measure of the level of prices for domestically produced output.
What is autonomous consumption, and what is autonomous demand?	- Consumption that is independent of current income - Components of AD that are independent of current income
Multiplier process	Mechanisms through which the direct and indirect effect of a change in autonomous spending on aggregate output
Marginal Propensity to Consume	The change in consumption when income changes by one unit
Marginal Propensity to import	The change in imports when income changes by one unit
consumption Function	Shows how consumption spending in the economy as a whole depends on other variables
Investment Function	Equation showing how investment spending in the economy as a whole depends on other variables
Goods market equilibrium	Point at which output meets aggregate demand in the home economy
Target wealth	The level of wealth a household aims to hold, based on its economic goals
Financial Accelerator	Mechanism through which firms and households ability to borrow increases when the value of the collateral they pledged to the lender increases
Automatic Stabilisers	Characteristics of the tax and transfer system that have the effect of offsetting and expansions or contractions, i.e unemployment benefits
Fiscal stimulus	Combinations of tax cuts or decreases as well as increased transfers or other spending as a means of increasing aggregate demand
Paradox of Thrift	What holds true for an individual household does not always hold true for the entire economy. If a household saves and smooths consumption due to a temporary shock they are better off, if all households do this as a result of an economy wide shock output and aggregate demand will eventually decrease.
Government Budget balance Government budget deficit Government budget surplus	- The difference between tax revenue and spending - when the government budget balance is negative - when the government budget balance is positive
Primary deficit	The government deficit, its revenue minus expenditure (excluding interest repayments)
Sovereign debt crisis	Situation in which government bonds come to be considered too risky that the government is rendered unable to borrow
Positive Feedback Negative feedback	Process whereby some initial change sets in motion a change that amplifies the initial change process where some initial change sets in motion a change that dampens the initial change
Aggregate economy side components of supply and demand	How labour and capital are used to produce goods and services (labour market model) also wage and price setting model How spending decisions generate demand for goods and services (multiplier model)
Long run, medium run and short run models	Long run cost curve, refers to costs when the firm can fully adjust all its inputs In medium run, this refers to everything exogenous, capital stock, technology and institutions In short run what is exogenous is prices, wages, capital stock, technology.
Disinflation	A decrease in the rate of inflation
Real interest rate	The interest rate corrected for inflation (nominal interest rate-rate of inflation)
Protectionist policies	Government policies to limit trade to reduce the amount of imports into the economy.
Bargaining gap	The difference in between real wages that firms wish to offer in order to provide incentives to work and the real wage that allows firms the markup that maximises profits given the level of competition
Market Interest rate or Bank lending rate	Market Interest rate that banks set, that is above the policy interest rate that firms and households pay when taking out a loan
Asset prices	Financial assets in the economy like government bonds and shares issued by companies
Profit expectations and confidence	Influences the confidence and investment decisions of firms. Central banks try to build confidence through consistent policymaking and good communication to keep investment consistent.
AD=	C0+C1(1-t)Y+1(r)+G+X-mY
What component of AD equation represents consumption spending?	C0
What component of AD equation represents the interest rate?	r or (r)
What component of AD equation represents Investment	I or I(r)
What are the two Important Limitations to the usefulness of monetary policy in stabalisation?	- The short term nominal interest rate cannot go below 0 - A country without its own currency cannot use monetary policy
Zero lower bound	The interest rate cannot go below negative
Quantitative easing	Central banks purchases of financial assets aimed at reducing interest rates on those assets when conventional monetary is not possible.
Supply shock	An unexpected change on the supply side of the economy
Demand shock	An unexpected change in the demand side of the economy, could be due to changes in autonomous consumption, investment or imports
Capacity constrained	When a firm has more orders for its output than it can fill
Creative destruction	Old technologies and the firms that are unable to adapt are swept away by the new because they cannot compete
Marginal product of capital	The additional amount of output that is produced if a particular input was increased by one unit, keeping all other inputs constant
Diminishing marginal product of capital	Each additional unit of capital or inputs results in a smaller increment in total output than did the previous unit
Beveridge curve	The inverse relationship between the unemployment rate and the job vacancy rate
Labour market matching	The ways in which employers seeking employees to fill vacancies meet employees
Diffusion Gap	The lag between the first introduction of an innovation and its general use
Adjustment Gap	The lag between some outside change in labour market conditions and the movement of the economy to its new equilibrium.

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ECONS101 Test Two Macroeconomics

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