macro eco - review 1

8/14/2019 Macro Eco - Review 1

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MACROECONOMICS REVIEW 2

1. Central to the study of macroeconomics is the notion of national income.

2. GNP Capital Consumption = NNP

3. Liquidity refers to the speed and the certainty with which an asset can be converted back into

money, whenever the asset-holders desire. Money itself is thus the most liquids asset of all.

4. Market prices Indirect taxes + Subsidies = Factor Cost.

5. The income approach excludes transfer payment such as pensions, sickness benefit and child

benefit.

6. The output approach is the one that calculates national income by adding together the money

value of the output from the various sectors of the economy, namely agriculture

manufacturing, construction, transport and so on.

7. The Expenditure Approach is the one that calculates national income by totaling the

expenditure of the various agents in the economy on final output.

8. (C) + (G) + (I) = Totaldomestic expenditureat market prices.

9. (C) + (G) + (I) + (X) (M) =GDP at market price.

10.GDP at market prices indirect Taxes + Subsidies = GDP at factor cost.

(C) Customers expenditure

(G) Government expenditure

(I) Investment

(X) Exports

(M) Imports

11.Transfer payments are simply a redistribution of income from the taxpayer to the recipient.

12.There are 2 flows taking place between consumers and firms: real flowand monetary flow.

13.Inflation is a rise in the general level of prices caused by an excess of demand over supply and

related to an increase in the supply of money, both as bank notes and in the form of bank

credit.

14.The annual inflation rate is the percentage increase per annum in the average price of goods

and services.

15.Unemployment rate is the percentage of the labor force that is unemployed.


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16.Economic growth is the rate at which the national income of a country increases.

17.Circular flow of income is the flow of payments and receipts between domestic firms and

domestic household.

18.Gross Domestic Product is the value of output of the factors of production located in the

domestic economy regardless of who owns these factors.

19.Gross National Product measures total income earned by domestic citizens regardless of thecountry in which their factor services were supplied.

20.Value added is the increase in the value of goods as a result of the production process.

21.Final goods are goods purchased by the ultimate user.

22.Intermediate goods are partly finished goods, which from inputs to another firms production

process and are used up in that process.

23.Savings, taxation, and imports are called leakages from the circular flow of income.

24.Direct taxes are taxes on income: Individuals pay income tax on earnings from labor, rents,

dividends and interest.

25.Indirect taxes are taxes on expenditure. They are taxes levied on expenditure on goods and

services.

26.GNP deflator is the ratio of nominal GNP to real GDP expressed as an index.

27.Per capita real GNP is real GNP divided by the total population.

28.The relationship between consumption and income is referred to as the consumption

function.

29.Aggregate demand is the amount that firms and households plan to spend on goods and

services at each level of income.

30.Consumption function shows the level of aggregate consumption desired at each level of

personal disposable income.

31.Marginal Propensity to Consume is the change in consumption as a result of an additional unit

of income.

32.Marginal Propensity to Save is the change on savings as a result of an additional unit of

income.

33.In an economy, which is not fully employed, the more thrifty and frugal households are, the

lower will be the level of output and employment. This is called Paradox of thrift.

34.Investment, government expenditure and exports are called injections into the circular flow of

income.


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35.Inflation is a persistent tendency for the general level of prices to increase. Inflation represents

a change in the purchasing power of money.

36.The most commonly quoted measure of inflation is the Retail Price Index.

37.The main costs of perfectly anticipated inflation are shoe-leather costs and menu costs.

38.The effects from unexpected inflation are redistributional effects, the effect on business, and

the effect on the balance of payments.

39.The relationship between unemployment and inflation can be analyzed by reference to the

Phillips curve.

40.The Natural Rate of Unemployment relates to the unemployment, which exists when the

economy is at full employment.

41.The aggregate supply curve indicates the level of output firms are willing to supply in the

economy at particular price levels.

42.Demand-pull inflation occurs when Aggregate Demand exceeds Aggregate Supply at currentprices, leading to an increase in the price level.

43.Cost-push inflation occurs when there is an increase in the cost of production not associated

with excess demand.

44.Three common methods of dealing with inflation are: fiscal policy, monetary policy, prices and

income policy.

45.There are 3 national income accounting methods: income approach, output approach, and

expenditure approach.

46.4 functions of money are: a medium of exchange, a unit of account, a store of value, and a

standard of deferred payment.

47.Short-term capital flows refer to liquid funds held in bank accounts or short-term government

securities such as Treasury bills.

48.The foreign exchange market (FEM) is the market where international currencies are traded.

49.The floating exchange rate system is where the exchange rate is determined by market forces

with no government intervention.

50.A floating exchange rate regime can lead to uncertainty in international trade both for the

trader and the investor, since they are unsure about the future exchange rate.

51.With a fixed exchange rate, governments agree to maintain their particular exchange rate at a

predetermined level.

52.The government has a number of instruments at its disposal as a means of achieving its

objectives. These instruments are: Fiscal policy; Monetary policy; Prices and incomes policy;

Exchange rate policy; Import control.


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53.Deregulation involves the removal of government regulations that are seen to restric

competition.

54.Limitations of the theory of comparative advantage can be seen as: Reciprocal demand

Transport costs; Factor mobility; Returns to scale; Full employment; Free trade.

55.A tariff is a tax placed on imported commodities with the aim of raising their price and

therefore, discouraging their purchase.

56.Any discrepancies can be overcome by including the statistical discrepancy.

57.A quota is a physical limit placed on the amount of a commodity that can be imported over a

certain period of time.

58.Physical capital is the machinery, equipment, and buildings used in production.

59.Inventories are goods held in stock by the firm for future sales.

60.Depreciation is the loss in value resulting from the use of machinery during the period.


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INFLATION, UNEMPLOYMENT, DEFICITS. AND DEBT

Important Terms

Cost-push inflation: inflation caused by increases in the cost of producing output rather than by

increases in aggregate demand.

Cyclical deficit: the federal deficit that arises when output is below its full-employment level.

Demand-pull inflation: Inflation that occurs because of increases in aggregate demand.

Phillips curve: a curve depicting an inverse relationship between the rate of inflation and the rate of

unemployment.

Public debt: The amount owned by the federal government; that is, the sum of interest-bearing deb

obligations issued by the federal government.

Stagflation: A situation in which there is increasing inflation and unemployment simultaneously.

Structural deficit: The federal deficit that exists when output is at its full-employment level.

ECONOMIC GROWTH AND PRODUCTIVITY

Important Terms

Capital deepening: An accumulation of capital that result in an increase in the ratio of capital to

labor.

Capital-output ratio: The ratio of the economys stock of capital to total output.

Capital widening: an increase in capital that is necessary because of increases in the labor supply;

i.e., capital additions are necessary to keep the ratio of capital to labor constant.

Economic growth: the increase in an economys ability to produce, as measured by the absolute or

relative increase in GDP or in per capita output over time.

Labor productivity: Labors output per hour measured by dividing real GDP by the number of hours

worked by labor.

Law of diminishing returns: the tendency of incremental output to fall as additional inputs of a

variable resource are used with a fixed quantity of other economic sources.

Malthusian theory of population: the economys ability to grow food increases at a slower rate than

the increase in population, resulting in a decreasing standard of living.

Neoclassical model of economic growth: A model of growth which emphasizes the importance o

capital deepening and technology change.


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INTERNATIONAL TRADE AND FINANCE

Important Terms

Constant opportunity costs: The constant amounts of a commodity that must be given up in order

to release just enough resources to produce each additional unit of a second commodity.

Credit (+): A transaction that results from a payment from foreigners. This includes exports of goods

and services, and capital inflows (i.e., investments and loans received from abroad).

Current account: a balance-of-payment section that includes the flow of goods, services, and

government grants between the nation and the rest of the world.

Debit (-): a transaction that results in a payment to foreigners. This includes imports of goods and

services, government grants to foreigners, and capital outflows (i.e., investments and loans made

abroad).

Deficit in balance of payments: the excess of debit (-) over credit (+) in the nations current and

capital accounts.

Depreciation of the domestic currency: an increase in the domestic currency price of 1 unit of the

foreign currency. (This is the same as appreciation of the foreign currency)

Fixed-exchange-rate system: the system in which the rates of exchange between the domestic and

foreign currencies are fixed.

Flexible-exchange-rate system: a system in which the rate of exchange floats freely to find its

equilibrium level at the intersection of the market demand and supply curves of the foreign currency.

Gains from trade: the increase in the consumption of both commodities that result from

specialization in production and trade.

Import quota: a restriction on the quantity of a good that is allowed to be imported into a nation

during a year.

Import tariff: a tax on imports.

Increasing opportunity costs: the increasing amounts of commodity that must be given up in orde

to release just enough resources to produce each additional unit of a second commodity.

Instant-Industry argument for protection: the claim that a newly established industry requires

protection until it can grow in size and efficiency and be able to face foreign competition.

Official reserve account: the balance-of-payments section that shows the change in the nations

official (i.e., government) reserves and liabilities required to balance its current and capital accounts.

Open economy: an economy which is connected with the rest of the world through trade and

financial relationships.


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Production-possibilities or transformation curve: the graphic representation of the various

alternative combinations of two commodities that a society can produce by fully utilizing all of its

resources and the best available technology.

Rate of exchange or exchange rate: the domestic currency price of 1 unit if the foreign currency.

Surplus in the balance of payments: the excess of credit (+) over debits (-) in the nations current

and capital accounts.

Terms of trade: the trade exchange ratio or the rate at which 1 commodity is exchanged for another.

macro eco - review 1

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