Chapter 1: A Tour of the World | |
Output | level of production of economy as whole – and its growth rate |
Unemployment rate | proportion of workers in economy who are not employed and are looking for jobs |
Inflation rate | rate which average price of goods in economy is increasing over time |
Recession | a decrease in output |
Productivity | output per hour worked (output per hour) |
Rate of Productivity Growth | rate of growth of output per hour |
Trade Deficit | difference between imports and exports |
Chapter 2: A Tour of the Book | |
First definition of GDP | value of the final goods and services produced in the economy during a given period |
Second definition of GDP | sum of value added in the economy during a given period |
Labor Income | revenues that go to pay workers |
Capital Income (Profit Income) | the rest of the revenues that go to the firm |
Third definition of GDP | sum of incomes in the economy during a given period |
Nominal GDP | sum of the quantities of final goods produced multiplied by their current prices |
Real GDP | sum of quantities of final goods multiplied by constants (rather than current) prices |
GDP Growth | rate of growth of real GDP |
Expansion | period of positive GDP growth |
Recession | period of negative GDP growth |
Employment | number of people who have a job |
Unemployment | number of people who don’t have a job but are looking for one |
Labor Force | sum of employment and unemployment Labor Force = Employment + Unemployment L = N + U |
Unemployment Rate | ratio of number of people who are unemployed to the number people in the labor force Unemployment Rate = Unemployment/Labor Force u = U/L |
Current Population Survey (CPS) | large survey of households to compute unemployment rate classifies a person as unemployed if he or she does not have a job and has been looking for a job in the past four weeks |
Not in the labor force | those who do not have a job and are not looking for one |
Discouraged workers | unemployed people who give up looking for a job and are therefore no longer counted as unemployed |
Participation Rate | ratio of labor force to total population of working age |
Inflation | sustained rise in general level of prices |
Price level | general level of prices |
Inflation Rate | rate at which the price level increase |
Deflation | sustained decline in price level (negative inflation) |
GDP Deflator | in year t, Pt, is defined as the ratio of nominal GDP to real GDP in year t Pt = (Nominal GDPt)/(Real GDPt) = ()/(Yt) |
Index Number | the GDP deflator |
Consumer Price Index (CPI) | index measures the average price of consumption |
Cost of Living | the average price of consumption |
Chapter 3: The Short Run | |
Consumption (C) | good and services purchased by consumers different buyers for these goods |
Investment (I) | sometimes called fixed investment to distinguish from inventory investment |
Government spending (G) | purchases of goods and services by federal, state, and local governments does not include government transfers |
Imports (IM) | purchases of foreign goods and services by domestic consumers, firms, and government |
Exports (X) | purchases of domestic goods and services by foreigners |
Net exports (trade balance) | difference between exports and imports (X – IM) |
Trade surplus | exports exceed imports |
Trade deficit | exports and less than imports |
Inventory investment | difference between goods produced and goods sold in a given year difference between production and sales |
Total demand for goods (Z) | total demand for goods = consumption + investment + government spending + exports - imports Z ≡ C + I + G + X – IM |
Disposable income (YD) | income that remains after consumers have received transfers from the gov’t and paid their taxes YD ≡ Y – T Y is income T is taxes paid minus gov’t transfers received by consumers |
Consumption (C) is a positive function of disposable income (Y) | C = C(YD) (+) |
Relation between consumption and disposable income | C = c0 + c1YD |
Propensity to consume (c1) | marginal propensity to consume gives the effect an additional dollar of disposable income has on consumption slope of line is propensity to consumer |
(c0) | what people consume if their disposable income in the current year were equal to zero if YD equals zero, C = c0 |
Endogenous variable | variable depends on other variables in the model and are therefore explained within the model |
Exogenous variable | variable that isn’t explained within the model but is given |
Fiscal policy | choice of taxes and spending by the government described with taxes (T) |
Equilibrium condition | Y = Z Z = c0 + c1(Y – T) + Ῑ + G Y = c0 + c1(Y – T) + Ῑ + G |
Autonomous spending | [c0 + Ῑ + G – c1T] |
Multiplier | 1/(1-c1) multiplies autonomous spending |
Dynamics of adjustment | formally describing adjustment of output over time – that is, writing the equations |
Saving | sum of private and public savings |
Private savings (S) | savings by consumers is equal to their disposable income minus consumption S ≡ YD – C S ≡ Y – T – C S = -c0 + (1 – c1)(Y – T) |
Public saving | equal to taxes (net of transfers) minus gov’t spending T – G |
Budget surplus | if taxes exceed gov’t spending public saving is positive |
IS relation | “investment equals saving” what firms want to invest must be equal to what people and the gov’t want to save |
Equilibrium in the goods market | production = demand investment = savings |
Propensity to save | ( 1 – c1) tells us how much of an additional unit of income people save |
Chapter 4: Financial Markets | |
Money | use for transactions pays no interest two types in real world |
Currency | coins bills |
Checkable deposits | bank deposits on which you can write checks |
Bonds | pay a positive interest rate (i) cannot be used for transactions |
Money market funds (Money market mutual funds) | pool together funds of many people funds are then used to buy bonds – typically gov’t bonds |
Income | what you earn from working plus what you receive in interest and dividends |
Flow | expressed in units of time e.g. weekly income, monthly income, yearly income |
Saving | part of after-tax income that you do not spend flow |
Savings | plural synonym of wealth value of what you have accumulated over time |
Financial wealth (wealth) | value of all financial assets minus all financial liabilities in contrast to income or savings |
Investment | term economists reserve for purchase of new capital goods, from machines to plants to office buildings |
Demand for money (Md) | amount of money people want to hold Md = L(i) (-) d stands for “demand” |
Nominal income () | income not adjusted to inflation |
Demand for liquidity (L(i)) (-) | negative function increase in interest rate decreases demand for money, as people put this wealth into bonds |
Treasury bills (T-bills) | in the US, bonds issued by the gov’t promising payment in a year or less |
Price of a bond today | B B stands for “bond” price of the bond today is equal to the final payment divided by 1 plus the interest rate |
Interest rate on the bond | i = (par value - )/ |
“Bond markets went up today” | price of bonds went up and interest rates went down |
Financial intermediaries | institutions that receive funds from people and firms and use those funds to buy financial assets or make loans to other people and firms |
Reserve ratio | ratio of bank reserves to bank checkable deposits |
Bank money | liabilities of central bank are the money it has issued |
Bank runs | depositors at other banks panic and withdraw money from their banks, forcing them to close |
Federal deposit insurance | the US gov’t insures each account up to ceiling of $100,000 |
Narrow banking | would restrict banks to holding liquid and safe gov’t bonds, such as T-bills |
How much to hold in currency and how much in checkable deposits | CUd = c Md Dd = (1 – c) Md |
fixed proportion of money is currency | c |
fixed proportion of checkable deposits | (1 – c) |
demand for currency | CUd |
demand for checkable deposits | Dd |
Demand for reserves | R = θD |
Reserve Ratio | θ amount of reserves banks hold per dollar of checkable deposits |
Reserves of bank | R |
Denote dollar amount of checkable deposits | D |
Demand for reserves by banks | Rd = θ (1 – c) Md second component of demand for central bank money |
Demand for central bank money | Hd Hd = CUd + Rd Hd = cMd + θ(1 – c)Md = [c + θ (1 – c)] Md Hd = [c + θ (1 – c)] L(i) demand is equal to sum of the demand for currency and demand for reserves |
Demand for reserves | Rd |
Supply of central bank money | H H = Hd H = [c + θ (1 – c)] L(i) |
Equilibrium condition that supply and demand for bank reserves are equal | H – CUd = Rd |
Federal funds market | market for bank reserves, where interest rate moves up and down to balance supply and demand for reserves |
Federal funds rate | interest rate determined in this market |
Money multiplier | c + θ (1 – c) overall supply of money of therefore equal to central bank money multiplied by money multiplier |
High powered money | increases in H lead to more than one-for-one increases in overall money supply and therefore are high powered |
Monetary base | overall money supply depends ultimately on a “base” – amount of central bank money in economy |
Chapter 5: Goods and Financial Markets: The IS-LM Model | |
Investment function | I = I(Y, i) (+, -) investment (I) depends on production (Y) and interest rate (i) increase in output leads to an increase in investment. Increase in interest rate leads to decrease in investment |
IS curve | relation between interest rate and output is represented by downward-sloping curve equilibrium in the goods market implies that an increase in the interest rate leads to a decrease in output |
Real money supply | money stock in terms of goods, not dollars – that is equal to the real money demand (M/P) = YL(i) |
LM curve | relation between output and interest rate is represented by the upward sloping curve |
IS relation | supply of goods must equal the demand for goods how interest rate affects output Y = C(Y – T) + I(Y, i) + G |
LM relation | supply of money must equal demand for money how output affects interest rate (M/P) = Y L(i) |
Fiscal contraction (fiscal consolidation) | government decides to reduce budget deficit and does so by increasing taxes while keeping gov’t spending unchanged |
Fiscal expansion | increase in deficit, either due to an increase in gov’t spending or to a decrease in taxes |
Monetary expansion | increase in money supply |
Monetary contraction (tightening) | decrease in money supply |
Monetary-fiscal policy mix (policy mix) | combination of monetary and fiscal policies |
Confidence band | solid line in the center of the band gives the best estimate of the effect of the change in the interest rate on the variable we look at in the panel two dashed lines and the tinted space between the dashed lines represent a confidence band band within which the true value of the effect lies with 60% probability |
Appendix 1: An Introduction to National Income and Product Accounts | |
GDP | market value of the goods and services produced by labor and property located in the US |
GNP | market value of goods and services produced by labor and property supplied by US residents |
Receipts of factor income from the rest of the world | income for us capital or us residents |
Payments of factor income to the rest of the world | income received by foreign capital and foreign residents in the US |
Net National Product (NNP) | difference between GNP and NNP is depreciation of capital, call consumption of fixed capital |
National income | income that originates in the production of goods and services supplied by residents of the US |
Indirect taxes | sales taxes |
Compensation of Employees | labor income; goes to employees |
Corporate Profits and Business Transfers | profits and revenues minus costs (including interest payments) and minus deprecation |
Net Interest | interest paid by firms minus interest received by firms, plus interest received from rest of the world, minus interest paid to the rest of the world |
Proprietors’ income | income of sole proprietorships, partnerships, and tax-exempt cooperatives |
Rental income of persons | income from rental of real property, minus depreciation on this real property |
Personal consumption expenditures | sum of goods and services purchased by persons resident in the US |
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