Macroeconomics concepts overview ( Solutions)

Aggregate Demand

• This is the total amount of goods and services consumers are willing to buy.
• Example: all the products and services that people, businesses, and the government will buy

Aggregate Supply

• The total supply of all the goods and services available in an economy
• Example: all the products and services which are made available by suppliers

Business Cycle

• This refers to the changes in economic activity of a company over the long term.
• Example: It may consist of growth, stagnation and decline.

Central Bank

• This is a financial institution responsible for the monetary policy of a country.
• Example: European Central Bank in Europe, Federal Reserve System in the USA

Consumer Price Index (CPI)

• This is an economic measure of inflation in the domestic economy, and is determined by tracking the prices of a specific set of goods and services purchased by the public.
• Example: This is used to determine the rate of inflation, current prices are compared to a base year.

Cyclical Unemployment

• Unemployment that is caused by a downturn in the business cycle
• Example: Corporate layoffs in a recession cause this type of unemployment

Deflation

• This is a general decrease in the level of prices.
• Example: It results in an increase in the real value of money.

Depression

• This an economic term that refers to prolonged period of economic decline with large numbers of unemployed, shrinking incomes, and general economic hardship.
• Example: The United States had a “Great” one in 1929.

Discount Rate

• This is the interest rate charged by the Federal Reserve for loans to member banks.
• Example: one of the ways the Federal Reserve controls the money supply, it might be around 5% right now.

Disposable Income
This is the economic term that refers to one’s total income that is left following the payment of all required taxes.

Economic Growth
This is the increase in the value of the goods and services produced by an economy.

Excise Tax

• This is a tax on production, transportation, sale or consumption of a certain good or service.
• Example: gas tax, cigarette tax

FDIC
This was a federally sponsored corporation which insures deposits in national banks and certain other qualifying financial institutions up to a stated amount.

Federal Reserve System

• This is the central bank of the United States.
• Example: supervises commercial banks by monitoring accounts and controlling interest rates

Final Goods

• This economics term refers to any tangible item that is produced and eventually consumed by the buyer; they are used when calculating GDP.
• Example: Cars, televisions, and clothing, NOT iron, wood, and cotton.

Fiscal Policy

• The government program of spending and taxation to promote desired economic goals for the nation
• Example: this is how the government tries to keep the economy stable

Frictional Unemployment

• Unemployment caused by people changing jobs.
• Example: this is not caused by changes in the business cycle but by people leaving one job to find another

GDP per Capita

• This one of the measures of national income and output for a given country’s economy and is defined as the total market value of all final goods and services produced within the country in a calendar year.
• Example: Gross Domestic Product

Government Deficit

• This occurs when a government spends more money than it takes in.
• Example: For the US, it is currently $8,944,609,455,758.69. Whoops, now it’s higher.

Gross Domestic Product

• The total value of all the goods and services produced within a country in a given year
• Example: one way to measure the economic growth or decline of a nation

Income Tax
This is a tax levied on net personal or business income.

Inflation

• A rise in the general level of prices.
• Example: reduces the value of a dollar, usually measured by the Consumer Price Index

Interest Rate

• The percentage of a financial loan which is paid as a fee over a period of time.
• Example: APR

Macroeconomics

• This is the study of an economy as a whole.
• Example: economics is divided into two fields – microeconomics and this

Monetary

• The term _ Policy refers to a plan of the government to regulate the money supply in the nation.
• Example: in the United States the Federal Reserve System controls this by adjusting interest rates

National Debt

• This is the total amount of money a nation owes its creditors.
• Example: for the United States, this is in the trillions of dollars

Open Market
This is a freely competitive market operating without government-imposed restrictions.

Open Market Transaction
This phrase refers to most stock market transactions where an investor purchases stock shares. In this situation, the purchase indicates that the investor believes that the stock will gain value.

Payroll Taxes

• These are withholdings from employees’ wages paid to the federal, state, or local governments.
• Example: Income, Social Security, Medicare, and Unemployment are examples.

Producer Price Index
This is an economic indicator that is computed by the Bureau of Labor statistics and is meant to measure the average change in prices received by US producers for their goods over a period of time.

Progressive Tax

• A tax where the percentage paid in tax increases as the level of income rises
• Example: federal income tax is an example of this type of tax

Proportional Tax
This is a type of taxation that takes the same percentage of one’s income regardless of how much or how little one makes.

Recession

• This is a decline in a country’s GDP for two or more successive quarters. It is usually characterized by a significant decline in economic activity.
• Example: 1979-1980 and the Energy Crisis
  2001-2003 and the dot com bust

Regressive Tax

• This is a type of taxation that takes a higher percentage of one’s salary as one’s income decreases.
• Example: Sales taxes are an example of this kind of tax.

Regulation

• These are the legal restrictions set forth by a government to produce desired outcomes.
• Example: anti-monopoly laws are put in place to eliminate the risk of high prices and total control

Reserve Requirement

• This is the percentage of their deposits that member banks must keep available in a Federal Reserve Bank.
• Example: Right now around 10-15%

Revenue

• This is the total amount of money that is brought into a company or government by its business activities or taxation policies.
• Example: In the case of the federal government, this is money gained through taxes, fines, fees, etc.

Sales Tax

• This is a tax on goods and services, a percentage of the retail price.
• Example: Some states have it, some states do not.

SPLOST

• This tax can be levied by any county for the purpose of funding the building and maintenance of parks, schools, roads, and other public facilities.
• Example: The Special Purpose Local Option Sales Tax adds an additional 2% onto the existing state sales tax of 4%

Stagflation
This is a period of large price inflation combined with no output growth, increasing unemployment, and a recession.

Structural Unemployment

• Unemployment that is caused by changes in technology or reduced demand for certain products.
• Example: an example of this would be typewriter repairmen who are out of work because of the popularity of computers

Subsidy

• This is financial assistance from the government to encourage the production of or the purchase of a good.
• Example: a federal grant, a tax break, or a trade barrier

Tariff
This is a tax on imported goods and is usually designed to protect domestic production of similar goods.

Transfer Payment

• A payment made by the government to someone who does not produce a good or service in return
• Example: examples would be a Social Security Disability check or an unemployment check

Unemployment

• This is the lack of jobs for willing workers.
• Example: joblessness

Unemployment Rate

• This term refers to the percentage of the civilian workforce who are available for a job but do not have one.
• Example: This is one of the ways the health of an economy is measured.

Sample question 1

Why do higher interest rates usually lead to currency values increasing?

Interest rates refer to the “percentage of principal that is charged by the lender to use its money”.

When interest rates are high, foreign and domestic investors will need to purchase the currency and invest in the country in order to earn high revenue.

Sample question 2

In September 2015, the interest rate in Canada was 0.1 percent with an overnight loan rate of 0.5 percent. 2 years later in 2017, the Bank of Canada increased overnight loans rate to 1.0 percent.

What will cause the Bank of Canada to change the loan rate or let the rate remain as it is in 2018?

The overnight loan rate is the rate depository institutions charge other depository institutions to borrow money in the overnight market. Assume a depository institution has $20 million in its vault (excess reserves), If more borrowers needed more than this amount within a short period of time, the bank has to borrow from other depository institutions.

When the overnight loan rate increases, more interests are paid on loans making it more expensive. This reduces the demand for loans, which causes less investment. The Bank of Canada might have done this to reduce the increasing inflation rate.

The bank will continue to charge this loan rate as long as the currency does not depreciate. If the Canadian Dollar depreciates, the Bank of Canada will have to lower overnight loan rates to stimulate economic growth and encourage more investment. People are encouraged to save when interest rates are higher. And though saving is good for the individual, it is usually not good for the general economy. The economy does well when money is spent on consumption and investment. 

Sample question 3

During the great recession, what reduced the severity of the recession

During the great recession, the general prices of goods increased due to inflation, banks’ liquidity decreased, people were unwilling to save their money in banks. 

Those who had savings in bank accounts were making large withdrawals, which left the banks with less to stimulate the economy.

The American Recovery and Redemption Act of 2009. This was a fiscal stimulus by the government which focused on:

• Preserving and creating more jobs to replace those which had been lost in 2008.
• Infrastructure investment to encourage demand and businesses
• Energy efficiency and science
• Assistance to the unemployed
• State, and local fiscal stabilization

Sample question 4

What is direct foreign investment

Direct foreign investment is when a company invests or owns a business in another country other than where it is based. Example: American-based firm opens and operates a factory in Greece.

• Foreign indirect investment – When corporations, financial institutions, and investors purchase stakes in foreign companies especially those that are engaged in foreign stock exchange trade
• Foreign portfolio investment – When an investor holds stock, mutual funds, bonds, and other traded funds from a country outside their own.

Sample question 5

What is allocative inefficiency in a market

Allocative efficiency – A situation in which the production of goods and services in the economy represents consumer preferences, where the price charged for a good is equal to the marginal cost of production.

Allocative inefficiency is when goods and services produced do not fit consumers’ preferences, which occurs when there is equilibrium in the market. A disequilibrium causes allocative inefficiency.