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Flashcards by ellisderooij, updated more than 1 year ago
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Created by ellisderooij
over 9 years ago
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| Question | Answer |
| Economic Interaction | How my choices affect your choices, and vice versa |
| Opportunity Cost | What you must give up in order to get it; true cost |
| Trade-offs at the margin | Comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less |
| Resource | Anything that can be used to produce something else |
| Individual choice | The decision by an individual of what to do, which necessarily involves a decision of what not to do |
| 4 principles | 1. Choices are necessary because resources are scarce 2. The true cost of something is its Opportunity Cost 3. "How much" is a decision at the Margin 4. People usually respond to incentives, exploiting opportunities to make themselves better off |
| Incentive | Anything that offers a reward to people who change their behaviour |
| 5-9 principles | 5. There are gains from trade 6. Markets move towards equilibrium 7. Resources should be used efficiently to achieve society's goals 8. Markets usually lead to efficiency 9. when markets don't achieve efficiency government intervention can improve society's welfare |
| Equilibrium | An economic situation is in equilibrium when no individual would be better of doing something else. |
| Efficiency | An economy is efficient if it takes all opportunities to make some people better off withouth making other people worse off. |
| Equity | Means that everyone gets his or her fair share. Since people can disgree about what's fair, equity isn't as well defined a concept as efficiency. |
| Principles 10-12 | 10. One Person's Spending is Another Persons Income 11. Overall spending sometimes gets out of line with the economy's productive capacity 12. Government policies can change spending |
| Inflation | A too high overall spending, causes a rise in prices throughout the economy |
| Model | Simplified representation of a real situation that is used to better understand real-life situations. |
| Other things equal assumption | All other relevant factors remain unchanged |
| Production Possibility Frontier | The PPF illustrates the trade-offs facing an economy that produces only two goods. It shows the maximum quantity of one good that can be produced for any given quantity produced of the other. |
| Efficient in Production | If the economy as a whole could not produce more of any one good without producing less of something else |
| Factors of Production | Reference to a resource that is not used up in production (for example the workers and their machines, but the metal they use to make something cannot be used again) |
| Comparative Advantage | A country has a comparative advantage in producing a good or service if its opportunity cost of producing the good or service is lower than other countries. |
| Absolute Advantage | A country has an absolute advantage in producing a good or service if the country can produce more output per worker than other countries. |
| Barter trade | Trade takes the form of barter when people directly exchange goods or services that they have for goods or servives that they want |
| Circular-flow diagram | Represents the transactions in an economy by flows around a circle |
| Markets for goods and services; Factor Markets | Markets on which companies sell their goods and services to housholds; Factor markets are the ones on which firms buy the resources they need to produce those goods and services |
| Income distribution | An economy's income distribution is the way in which total income is divided among the owners of the various factors of production (less and high skilled workers and owners of capital and land) |
| Positive economics versus Normative economics | Positive economics tend to be descriptive (forecasting etc.) whereas Normative economics are prescriptive (how the world should work) |
| Causal relationship; dependent and independent variable | A causal relationship exists between two variables when the value taken by one variable directly influences or determines the other value. The determining variable is the independent one and the determined variable is the dependent one |
| Curve; and linear relationships | A curve is the line on the graph that depicts two variables. If the curve is a straight line it has a linear relationship, but is it curved it is a nonlinear relationship |
| Tangent line | straight line that just touches, or is tangent to, a nonlinear curve at a particular point. The slope of that curve is at that point equal to that of the nonlinear curve |
| Omitted Variable | An unobserved variable that through its influence on other variables, creates the erroneous appearance of a direct causal relationship among those variables |
| Reverse causality | The error of rc is committed when the true direction of causality between two variables is reversed |
| Competitive Market | A market in which there are many buyers and many sellers of the same good or service, none can influence the price of the good or service (model of supply and demand) |
| Shift of the demand curve | A change in the quantity demanded at any given price, represented by the change of the original demand curve to a new position, denoted by a new demand curve |
| Movement along the demand curve | A change in the quantity demanded of a good arising from a change in the good's price |
| Substitute Complement | 1. Two goods are substitutes when a rise in the price of one of the goods leads to an increase in the demand of the other good 2. Two goods are complements if a rise in the price of one good leads to a decrease in the demand for both goods |
| Normal Goods Inferior Goods | 1. When a rise in income increases the demand for a good (the normal case) 2. When a rise in income decreases the demand for a good |
| Individual Demand Curve | Illustrates the relationship between quantity demanded and price for an individual consumer |
| Market-Clearing Price | Same as Equilibrium Price |
| Shortage (excess demand) | When the price is lower than equilibrium, more buyers will want to buy that good, but there are not enough sellers |
| Property Rights | The rights of owners of valuable items, whether resources or goods, to dispose of those items as they choose |
| Economic Signal | Any piece of information that helps people make better economic decisions |
| Market Failure | When markets fail to be efficient |
| Price Controls; Price Ceiling; Price Floor | Legal restrictions on how high or low a market price may go; Maximum price sellers are allowed to charge for a good or service; Minimum price buyers are required to pay for a good or service |
| Deadweight Loss | Loss in total surplus that occurs whenever an action or policy reduces the quantity transacted below the efficient market equilibrium quantity |
| Ricardian model of International Trade | Analyzes international trade under the assumption that opportunity costs are constant |
| Factor intensity | The factor intensity of production of a good is a measure in relatively greater quantities than other factors in production |
| Heckscher Ohlin Model | According to this model, a country has a comparative advantage in a good whose production is intensive in the factors that are abundantly available in that country |
| Domestic Demand Curve | Shows how the quantity of a good demanded by domestic consumers depends on the price of that good |
| Offshore Outsourcing | Takes place when businesses hire people in another country to perform various tasks |
| Self-Regulating Economy | In a self-regulating economy problems such as unemployment are resolved withouth government intervention, through the working of the invisible hand |
| Keynesian Economics | Economic slumps are caused by inadequate spending, and they can be mitigated by government intervention |
| Monetary Policy | Uses changes in the quantity of money to alter interest rates and affect overall spending |
| Fiscal Policy | Uses changes in government spending and taxes to affect overall spending |
| Recessions and Expansion | Contractions are periods of economic downturn when output and employment are falling Recoveries are periods of economic upturn when output and employment are rising |
| Business Cycle | The short-run alternation between recessions and expansions |
| Inflation and Deflation | Overall rising or fallin of prices |
| Trade Deficit or Surplus | A country runs a trade deficit when it buys more goods from foreign countries than it sells them and with surplus that is the other way around |
| National Accounts | Keep track of the flows of money between different sectors of the economy |
| Stock | Share in the ownership of a company held by a shareholder |
| Inventories | Stocks of goods and raw materials held to facilitate business operations |
| Net Exports | The difference between the value of exports and the value of imports |
| Price Index | Measures the cost of purchasing a given market basket in a given year, where that cost is normalized so that it is equal to 100 in the selected base year |
| Rule of 70 | Time it takes a variable to double: 70/annual growth rate of variable |
| Convergence Hypothesis | International differences in real GDP per capita tend to narrow over time |
| Loanable Funds Market | Hypothetical market that illustrates the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders |
| Crowding Out | Occurs when a government budget deficit drives up the interest rate and leads to reduced investment spending |
| Fisher Effect | According to the Fisher effect, an increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged |
| Marginal Propensity to Consume (MPC) | The increase in consumer spending when disposable income rises by 1$ |
| Marginal Propensity to Save (MPS) | The increase in household savings when disposable income rises by 1$ |
| Autonomous Change in Aggregate Spending | Initial change in the desired level of spending by firms or else at a given level of the real GDP |
| Multiplier | The ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change |
| Consumption Function | An equation showing how an individual household's consumer spending varies with the household's current disposable income |
| Aggregate Consumption Function | The relationship for the economy as a whole between aggregate current disposable income and aggregate consumer spending |
| Accelerator Principle | Higher growth of GDP leads to higher planned investment spending, but a lower growth rate of real GDP leads to lower planned investment spending |
| Inventory Investment | The value of the change in total inventories held in the economy during a given year (Inventories are stocks of goods held to satisfy future sales) |
| Income Expenditure Equilibrium | When aggregate output, measured by real GDP, is equal to planned aggregate spending |
| Income-Expenditure Equilibrium GDP | The level of real GDP at which real GDP equals planned aggregate spending |
| Keynesian Cross | Diagram that identifies income-expenditure equilibrium as the point where the planned aggregate spending line crosses the 45-degree line |
| The Paradox of Thrift | Many individual actions together can have a different and worse outcome than intended; when all households save for tough times, while this actually creates an even tougher time |
| Rise in Interest Rate | Causes a decrease in investment spending because it makes the cost of borrowing higher |
| Sticky Wages | Nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages |
| Potential Output | The level of real GDP the economu would produce if all prices, including nominal wages were fully flexible |
| Stagflation | Stagnation plus inflation; Combination of inflation and falling aggregate output |
| Recessionary Gap | When aggregate output is below potential output |
| Inflationary Gap | When aggregate output is above potential output |
| Stabilization Policy | The use of government policy to reduce the severity of recessions and rein in excessively strong expansions |
| Maturity Transformation | The conversion of short-term liabilities into long-term assets |
| Maturity Transformation | The conversion of short-term liabilities (deposits) into long-term assets (loans) |
| Banking Crisis | Occurs when a large part of the depository banking sector or the shadow banking sector fails or threatens to fail |
| Asset Bubble | The price of an asset is pushed unreasonably high, due to expectations of further price gains |
| Financial Contagion | Vicious downward spiral among depository banks or shadow banks; each bank's failure worsens fears and increases the likelihood that another bank will fail too |
| Credit Crunch | When potential borrowers either can't get credit at all, or must pay very high interest rates; causing them to cut back on spending, pushing the economy into a recession |
| Debt Overhang | Occurs when a vicious circle of deleveraging (process of reducing the level of one's debt by rapidly selling one's assets) leaves a borrower with high debt but diminished assets ( think of the housing crisis, people bought expensive house, now worth a lot less but still have to pay interest of the mortgage ) |
| Keynesian Economics | Everyone uses it without knowing; Rests on two main tenets: Changes in aggregate demand affect aggregate output, employment and prices; and changes in business confidence cause the business cycle |
| Macroeconomic Policy Activism | The use of monetary and fiscal policy to smooth out the business cycle |
| Monetarism | Asserts that GDP will grow steadily if the money supply grows steadily |
| Discretionary Monetary Policy | The use of changes in the interest rate or the money supply to stabilize the economy |
| Monetary Policy Rule | A formula that determines the central bank's actions |
| Velocity of Money | The ratio of nominal GDP to the money supply; M * V = P * Y M= Money Supply, V= Velocity, P= aggregate price level, Y= real GDP |
| Natural Rate Hypothesis | Because inflation is eventually embedded into expectations, to avoid accelerating inflation over time the unemployment rate must be high enough that the actual inflation rate equals the expected inflation rate |
| Political Business Cycle | Results when politicians use macroeconomic policy to serve political ends |
| New Classical Macroeconomics | Is an approach to the business cycle that returns to the classical view that shifts in the aggregate demand curve affect only the aggregate price level, not aggregate output |
| Rational Expectations | View that individuals and firms make decisions optimally using all available information |
| New Keynesian Economics | Market imperfections can lead to price stickiness for the economy as a whole |
| Real Business Cycle Theory | Claims that fluctuations in the rate of growth of total factor productivity cause the business cycle |
| Great Moderation Consensus | Combines a belief in monetary policy as the main tool of stabilization, with skepticism toward the use of fiscal policy, and an acknowledgement of the policy constraints imposed by the natural rate of unemployment and the political business cycle |
| Current Account | Or Balance of Payments on Current Account; Balance of payments on goods and services plus net international transfer payments and factor income |
| Balance of Payments on Goods and Services | Difference between a country's exports and imports during a given period |
| Trade Balance (Merch Trade Balance) | Difference between a country's imports and exports of goods |
| Financial Account (Balance of Payments on Financial Accounts / Capital Account) | The difference between a country's sales of assets to foreigners and its purchases of assets from foreigners during a given period |
| Equilibrium Exchange Rate | The rate at which the quantity of a currency demanded in the foreign exchange market is equal to the quantity supplied |
| Real Exchange Rates | Rates adjusted for international differences in aggregate price levels |
| Purchasing Power Parity | The PPP between two countries' currencies is the nominal exchange rate at which a given basket of goods and services would cost the same amount in each country |
| Exchange Rate Regime; Fixed and Floating Exchange Rate | A rule governing policy toward the exchange rate; It is fixed when a government keeps the exchange rate against some other currency at or near a target; It is floating when the government lets the market forces determine the exchange rate |
| Exchange Market Intervention | Government purchases or sales of currency in the foreign exchange market |
| Foreign Exchange Reserves | Stocks of foreign currency that governments maintain to buy their own currency on the foreign exchange market |
| Foreign Exchange Controls | Licensing Systems that limit the right of individuals to buy foreign currency |
| Social Insurance | Government programs intended to protect families against economic hardship |
| Expansionary Fiscal Policy | Increases aggregate demand; - Increase in government purchases of goods and services - Cut in taxes - Increase in government transfers |
| Lump-Sum Taxes | Taxes that don't depend on the taxpayer's income |
| Automatic Stabilizers | Government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands |
| Discretionary Fiscal Policy | Fiscal policy that is the result of deliberate actions by policy makers rather than rule |
| Cyclically Adjusted Budget Balance | An estimate of what the budget balance would be if real GDP were exactly equal to potential output |
| Fiscal Year | Runs from October 11 to Semptember 30 and is labeled according to the calendar year in which it ends |
| Public Dept | Government debt held by individuals and istitutions outside the government |
| Debt-GDP Ratio | The government's debt as a percentage of GDP |
| Implicit Liabilities | Spending promises made by governments that are effectively a dept despite the fact that they are not included in the usual debt statistics |
| Currency in Circulation | Cash held by the public |
| Checkable Bank Deposits | Bank accounts on which people can write checks |
| Money Supply | The total value of financial assets in the economy that are considered money |
| Money is: | A medium of exchange, and a store of value (holding purchasing power over time) |
| Unit of Account | A measure used to set prices and make economic calculations |
| Commodity (Backed) Money | A good used as a medium of exchange that has intrinsic value in other uses; Medium with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods |
| Fiat Money | Medium of exchange whose value derives entirely from its official status as a means of payment (US dollar) |
| Monetary Aggregate | An overall measure of the money supply |
| Near-Moneys | Financial assets that can't be directly used as a medium of exchange but can be readily converted into cash or checkable bank deposits |
| Bank Reserves | The currency banks hold in their vaults plus their deposits at the Federal Reserve |
| T-Account | Tool for Analyzing a business's financial position by showing, in a single table, the business's assests and liabilities |
| Reserve Ratio | The fraction of bank deposits that a bank holds as reserves |
| Bank Run | Phenomenon in which many of a bank's depositors try to withdraw their funds due to fears of a bank failure |
| Deposit Insurance | Guarantees that a bank's depositors will be paid even if the bank can't come up with the funds, up to a maximum amount per account |
| Reserve Requirements | Rules set by the Federal Reserve that determine the minimum reserve ratio for banks |
| Discount Window | An arrangement in which the Federal Reserve stands ready to lend money to banks in trouble |
| Excess Reserves | A bank's reserves over and above its required reserves |
| Monetary Base | The sum of currency in circulation and bank reserves |
| Money Multiplier | The ratio of the money supply to the monetary base |
| Central Bank | Institution that oversees and regulates the banking system and controls the monetary base |
| Federal Funds Market | Allows banks that fall short of the reserve requirements to borrow funds from banks with excess reserves |
| Federal Funds Rate | The interest rate determined in the federal funds market |
| Discount Rate | Rate of interest the Fed charges on loans to banks |
| Open Market Operation | A purchase or sale of government debt by the Fed |
| Leverage | A financial institution engages in leverage when it finances its investments with borrowed funds |
| Balance Sheet Effect | The reduction in a firm's net worth due to falling asset prices |
| Vicious Cycle of Deleveraging | Takes place when asset sales to cover losses produce negative balance sheet affects on other firms and force creditors to call in their loans, forcing sales of more assets and causing further declines in asset prices |
| Subprime Lending | Lending to home-buyers who don't meet the usual criteria for being able to afford their payments |
| Securitization | A pool of loans is assembled and shares of that pool are sold to investors |
| Money Demand Curve | Shows the relationship between the interest rate and the quantity of money demanded |
| Liquidity Preference Model of the Interest Rate | The interest rate is determined by the supply and demand for money |
| Money Supply Curve | Shows how the quantity of money supplied varies with the interest rate |
| Taylor Rule for Monetary Policy | A rule that sets the federal funds rate according to the level of the inflation rate and either the output gap of the unemployment rate |
| Inflation Targetting | Occurs when the centrabl bank sets an explicit target for the inflation rate and sets monetary policy in order to hit that target |
| Monetary Neutrality | Changes in the money supply should not have real effects on the economy |
| Classical Model of the Price Level | The real quantity of money is always at its long-run equilibrium level |
| Inflation Tax | The reduction in the value of money held by the public caused by inflation |
| Okun's Law | The negative relationship between the output gap and cyclical unemployment |
| Short-Run Phillips Curve | The negative short-run relationship between the unemployment rate and the inflation rate |
| NAIRU Non Accelerating Inflation Rate of Unemployment | The unemployment rate at which inflation does not change over time |
| Long-Run Phillips Curve | Shows the relationship between unemployment and inflation after expectations of inflation have had time to adjust to experience |
| Disinflation | The process of bringing down inflation that is embedded in expectations |
| Debt deflation | The reduction in aggregate demand arising from the increase in the real burden of outstanding debt caused by deflation |
| Zero Bound | There is a zero bound on the nominal interest rate; it cannot go below zero |
| Liquidity Trap | The economy is in a trap when conventional monetary policy is ineffective because nominal interest rates are up against the zero bound |
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