Fiscal policyIn economics and political science, fiscal policy is the use of government revenue collection (taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variables developed in reaction to the Great Depression of the 1930s, when the previous laissez-faire approach to economic management became unworkable.
Risk aversionIn economics and finance, risk aversion is the tendency of people to prefer outcomes with low uncertainty to those outcomes with high uncertainty, even if the average outcome of the latter is equal to or higher in monetary value than the more certain outcome. Risk aversion explains the inclination to agree to a situation with a more predictable, but possibly lower payoff, rather than another situation with a highly unpredictable, but possibly higher payoff.
Macroeconomic modelA macroeconomic model is an analytical tool designed to describe the operation of the problems of economy of a country or a region. These models are usually designed to examine the comparative statics and dynamics of aggregate quantities such as the total amount of goods and services produced, total income earned, the level of employment of productive resources, and the level of prices. Macroeconomic models may be logical, mathematical, and/or computational; the different types of macroeconomic models serve different purposes and have different advantages and disadvantages.
MacroeconomicsMacroeconomics is a branch of economics that deals with the performance, structure, behavior, and decision-making of an economy as a whole—for example, using interest rates, taxes, and government spending to regulate an economy's growth and stability. This includes regional, national, and global economies. Macroeconomists study topics such as GDP (Gross Domestic Product), unemployment (including unemployment rates), national income, price indices, output, consumption, inflation, saving, investment, energy, international trade, and international finance.
MicrofoundationsMicrofoundations are an effort to understand macroeconomic phenomena in terms of economic agents' behaviors and their interactions. Research in microfoundations explores the link between macroeconomic and microeconomic principles in order to explore the aggregate relationships in macroeconomic models. During recent decades, macroeconomists have attempted to combine microeconomic models of individual behaviour to derive the relationships between macroeconomic variables.
Economic modelIn economics, a model is a theoretical construct representing economic processes by a set of variables and a set of logical and/or quantitative relationships between them. The economic model is a simplified, often mathematical, framework designed to illustrate complex processes. Frequently, economic models posit structural parameters. A model may have various exogenous variables, and those variables may change to create various responses by economic variables.
New classical macroeconomicsNew classical macroeconomics, sometimes simply called new classical economics, is a school of thought in macroeconomics that builds its analysis entirely on a neoclassical framework. Specifically, it emphasizes the importance of rigorous foundations based on microeconomics, especially rational expectations. New classical macroeconomics strives to provide neoclassical microeconomic foundations for macroeconomic analysis.
Consumption (economics)Consumption is the act of using resources to satisfy current needs and wants. It is seen in contrast to investing, which is spending for acquisition of future income. Consumption is a major concept in economics and is also studied in many other social sciences. Different schools of economists define consumption differently. According to mainstream economists, only the final purchase of newly produced goods and services by individuals for immediate use constitutes consumption, while other types of expenditure — in particular, fixed investment, intermediate consumption, and government spending — are placed in separate categories (see consumer choice).
Monetary policyMonetary policy is the policy adopted by the monetary authority of a nation to affect monetary and other financial conditions to accomplish broader objectives like high employment and price stability (normally interpreted as a low and stable rate of inflation). Further purposes of a monetary policy may be to contribute to economic stability or to maintain predictable exchange rates with other currencies.
Consumption functionIn economics, the consumption function describes a relationship between consumption and disposable income. The concept is believed to have been introduced into macroeconomics by John Maynard Keynes in 1936, who used it to develop the notion of a government spending multiplier. Its simplest form is the linear consumption function used frequently in simple Keynesian models: where is the autonomous consumption that is independent of disposable income; in other words, consumption when disposable income is zero.
Equity premium puzzleThe equity premium puzzle refers to the inability of an important class of economic models to explain the average equity risk premium (ERP) provided by a diversified portfolio of U.S. equities over that of U.S. Treasury Bills, which has been observed for more than 100 years. There is a significant disparity between returns produced by stocks compared to returns produced by government treasury bills. The equity premium puzzle addresses the difficulty in understanding and explaining this disparity.
Fiscal conservatismFiscal conservatism or economic conservatism is a political and economic philosophy regarding fiscal policy and fiscal responsibility with an ideological basis in capitalism, individualism, limited government, and laissez-faire economics. Fiscal conservatives advocate tax cuts, reduced government spending, free markets, deregulation, privatization, free trade, and minimal government debt. Fiscal conservatism follows the same philosophical outlook of classical liberalism. This concept is derived from economic liberalism.
Interest rateAn interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, the compounding frequency, and the length of time over which it is lent, deposited, or borrowed. The annual interest rate is the rate over a period of one year. Other interest rates apply over different periods, such as a month or a day, but they are usually annualized.
Economic puzzleA puzzle in economics is a situation where the implication of theory is inconsistent with observed economic data. An example is the equity premium puzzle, which relates to the fact that over the last two hundred years, the risk premium of stocks over bonds has been around 5.5%, much larger than expected from theory. The equity premium puzzle was first documented by Mehra and Prescot (1985). See also ; Financial economics #Challenges and criticism. Equity premium puzzle Home bias in trade puzzle Equity home
Loss aversionLoss aversion is a psychological and economic concept which refers to how outcomes are interpreted as gains and losses where losses are subject to more sensitivity in people's responses compared to equivalent gains acquired. Kahneman and Tversky (1992) have suggested that losses can be twice as powerful, psychologically, as gains. When defined in terms of the utility function shape as in the Cumulative Prospect Theory (CPT), losses have a steeper utility than gains, thus being more "painful" than the satisfaction from a comparable gain as shown in Figure 1.
Hyperbolic absolute risk aversionIn finance, economics, and decision theory, hyperbolic absolute risk aversion (HARA) refers to a type of risk aversion that is particularly convenient to model mathematically and to obtain empirical predictions from. It refers specifically to a property of von Neumann–Morgenstern utility functions, which are typically functions of final wealth (or some related variable), and which describe a decision-maker's degree of satisfaction with the outcome for wealth. The final outcome for wealth is affected both by random variables and by decisions.
Isoelastic utilityIn economics, the isoelastic function for utility, also known as the isoelastic utility function, or power utility function, is used to express utility in terms of consumption or some other economic variable that a decision-maker is concerned with. The isoelastic utility function is a special case of hyperbolic absolute risk aversion and at the same time is the only class of utility functions with constant relative risk aversion, which is why it is also called the CRRA utility function.
PolicyPolicy is a deliberate system of guidelines to guide decisions and achieve rational outcomes. A policy is a statement of intent and is implemented as a procedure or protocol. Policies are generally adopted by a governance body within an organization. Policies can assist in both subjective and objective decision making. Policies used in subjective decision-making usually assist senior management with decisions that must be based on the relative merits of a number of factors, and as a result, are often hard to test objectively, e.
WeekA week is a unit of time equal to seven days. It is the standard time period used for short cycles of days in most parts of the world. The days are often used to indicate common work days and rest days, as well as days of worship. Weeks are often mapped against yearly calendars, but are typically not the basis for them, as weeks are not based on astronomy. The modern seven-day week can be traced back to the Babylonians, who used it within their calendar.
Monetary economicsMonetary economics is the branch of economics that studies the different theories of money: it provides a framework for analyzing money and considers its functions (such as medium of exchange, store of value, and unit of account), and it considers how money can gain acceptance purely because of its convenience as a public good. The discipline has historically prefigured, and remains integrally linked to, macroeconomics. This branch also examines the effects of monetary systems, including regulation of money and associated financial institutions and international aspects.
