Exam 2 Flashcards
(121 cards)
1
Q
Financial system
A
The group of institutions that helps match the saving of one person with investments of others
2
Q
Bond
A
Certificate of indebtedness
3
Q
Bond maturity
A
Finite time period at the end of which the bond will end and the principle is repaid with interest
4
Q
Bond principle
A
Face value of the bond
5
Q
Bond risk
A
That interest rates will change
6
Q
Financial intermediaries
A
Institutions through which savers can indirectly provide funds to borrows
7
Q
Example of financial intermediaries
A
Banks and mutual funds
8
Q
Mutal funds
A
Sell shares to the public and use the proceeds to buy portfolios of stocks and bonds
9
Q
Crowding out effect
A
The government borrows to finance its deficits leaving less funds avalible for investment
10
Q
Natural rate of unemployment
A
Normal rate around which actual fluctuates
11
Q
Cyclical unemployment
A
The deviation of unemployment from its natural rate
(Natural-average)xamount of years
12
Q
Frictional unemployment
A
When workers spend time searching for the jobs that best suit there skills and taste
13
Q
Structural unemployment
A
When there are fewer jobs than there are workers
14
Q
Unemployment insurance
A
A government program that partially protects workers incomes when they become unemployed
15
Q
Efficency wages
A
Firms voluntary pay above equil wages to boost productivity. Worker health, worker turnover, worker quality, work effort
16
Q
Unions
A
Higher wages but higher unemploy, outsiders worse off
17
Q
Min-wage law
A
May exceed equil wage causing structural unemployment
18
Q
Barter
A
The exchange of one good and service for another
19
Q
Double coincidence of wants
A
Two people have what the other wants. Need for barter
20
Q
Commodity money
A
Takes form of commodity with intrinstic value
21
Q
Fiat money
A
Money without intrinsic value. Value because of gov decree
22
Q
Demand deposits
A
Balances in bank accounts that depositors can access on demand by writing a check
23
Q
Fractional reserve banking system
A
Banks keep a fraction of deposits as reserves and use the rest to make loans
24
Q
Money multiplier
A
The amount of money the banking system generates with each dollar of revenue (1/R)
25
Leverage
The use of borrowed funds to supplement exisiting funds for investment purposes
26
Open market operations
Purchase and sell of us gov bonds
27
Discount rate
Interst rate on loans the fed makes to banks
28
Federal funds rate
Interest rates on loans from other banks
29
Value of money
1/P
30
Relative price
The price of one good relative to another. Relative price of CD=price CD/price of pizza=1.5 pizza/CD
31
Classical dichotomy
Separation of real and nominal variables. Nominal variables change but real dont
32
Monetary neutality
Changes in money supply do not effect real variables
33
Volicity of money
(PxY)/M
34
Hyperinflation
Inflation exceeding 50% each month
35
Inflation tax
The revenue from printing money
36
Fisher effect
Nominal interest rate adjust one for one with changes in the inflation rate
37
Trade deficit
Imports>exports
38
Trade surplus
Exports> imports
39
Net capital outflow
Domestic residents purchases of foreign minus foreign purchasr of domestic
40
Nominal exchange rate
The rate at which one countries currecy trades for anothers
41
Appreciation
Increase value of a currency as measured by the amount of foreign it cam buy
42
Depreciation
Decrease in the amount of foreign it can buy
43
Real exchange rate
(Nominalx domestic price)/ foreign price
44
Natural rate of output
Amount of output when unemp is at its natural rate
45
Full employment output
The sames as natural rate of output
46
Short run aggregate supply
Upward sloping, total quanity firms sell at given price level
47
Long run aggregate supply
Vertical
48
Stagflation
Period of falling output and rising prices
49
Liqudity trap
When interest rate is zero
50
Expansionary
Increase G and decrease T to shift AD left
51
Contrationary
Decrease G and increase T to shift AD left
52
Multiplier effect
Additional shifts in AF that results when fiscal policy increases consumer spending
53
Monetary policy
Changing MS
54
Fiscal ploicy
Changing G and Taxes
55
Marginal propensity to consume
The fraction of extra incomr that households consume rather than save (c/rise income)
56
Automatic stablizers
Taxes auto go down increase AD, gov spends more on assistances increase AD
57
Phillps curve
Shows trade off between inflation and unemployment
58
Disinflation
A reduction in inflation rate
59
Sacrifice ratio
Percentage points of annual output lost per 1 percentage point reduction in inflatiob
60
Short run phillps curve
Downward sloping
61
Long run phillips curve
Vertical line
62
Private savings
Household income not used for consumption or paying taxes
| Y-T-C
63
Public saving
Taxes-Government spending
64
National saving
Private plus public saving
| Y-C-G
65
Investment
The purchase of new capital
66
Saving incentives
Tax incentives for saving increase supply of loanable funds which reduces the equil interest rate and increases equal quanity
67
Investment incentives
Investment tax credit increases the demand for LF which raises interst rate and increases quanity
68
What happens when a budget deficit crowds out investment
Reduces the growth and productivity and GDP
69
Unemployment rate
100x (#of unemployed/labor force)
70
Labor force participation rate
100x (labor force/adult population)
71
U-rate not perfect
Excludes discouraged worker, no distingishtion between full and part time, misreporting
72
Medium of exchange
Function of money that is an item buyers give to sellers when they want to purchase goods and service
73
Unit of account
Function of money that is the yardstick people use to post prices and record debts
74
Store of value
A function of money that is an item people can use to transfer purchasing power from the present to the future
75
M1
Currency, demand deposits, travelers check, and other checkable deposits
76
M2
Everything in M1 plus savings deposits, small time deposits, mutual funds, and a few minor categories
77
Reserve ratio (R)
Reserves/deposits
78
Money supply with reserves
Money multiplier x bank reserves
79
Leverage ratio equation
Assets/capital
80
What happens when fed increases money supply
Value of money falls and P rises
81
Real wage
The price of labor relative to the price of output. W/P
82
The quanity equation
MV=PY
83
Shoeleather cost
Cost of inflation that are the resources wasted when inflation encourages people to reduce their money holding
84
Menu cost
Cost of inflation that is the cost of changing prices
85
Misallocation of resources from relative price variability
Firms dont all raise prices at same time, relative prices can vary, which distorts the allocation of resources
86
Confusion and inconveniences
Complicates long range plannkng and the comparison of dollar amounts over time
87
Tax distortions
Cost of inflation that causes people to pay more taxes even when their real incomes dont increase
88
After tax real interest rate
Nominal (1-tax rate x interest rate) minues inflation rate
89
Real interest rate
Nominal-inflation rate
90
Foreign direct investment
Domestic residents activly manage the foreign investment
91
Foreign portfolio investment
Domestic residents purchase foreign stocks or bonds supplying Lf to a foreign firm
92
NCO is greater than zero
Domestic purchases of foreign assets exceed foreign purchases of domestic
93
NCO is less than zero
Foreign purchases of domestic assets exceeds domestic purchases of foreign assets
94
Law of one price
The notion that a good should sell for the same price in all markets
95
Purchasing power parity
A theory of exchange rates whereby a unit of any currency should be able to buy the same quantity of goods in all countries
96
Limitations of PPP
Many goods cannot be easily traded: prices cannot be arbitraged. Foreign and domestic goods not perfect subs, price differences reflect different taste
97
How do we measure economic fluctuations?
With aggregate demand and supply
98
AD curve shifts because of C
Stock market, preferences, and taxes
99
AD shifts because of I
Firms buy new equiptment, expectations, interest rate, monetary policy, tax incentives
100
AD shifts because of G
Federal spending and state and local spending
101
AD shifts because of NX
Booms/recessions in countries that buy exports, appreciation/depreciation in foreign exchange market
102
Long run supply curve is
The natural rate of output
103
LRAS shift because of changes in labor
Immigration, baby boomers, gov policy reduce urate
104
LRAS shift because of capital
Invest in factories and equiptment, more college degrees, weather damage
105
LRAS shift because of natural resources
New mineral deposit, reduced oil supply, changing weather
106
LRAS shift because of technology
Increase improvement in technology
107
Sticky wage theory
Nominal wages are sluggish to adjust because firms set wages in advance based on Pe
Revenue is higher but labor isnt so increase output
108
The sticky price theory
Firms set sticky prices in advance based on Pe. Menu prices make prices low and demand high so increase output
109
Misperceptions theory
Firms believe realitive price is rising and may increase output
110
AS equation
Output=natural output rate+a(P-Pe)
111
Long run equil
Pe=p and Y=Yn and unemp is at its natural rate
112
What causes stagflation
Shift left of SRAS
113
Interest rate effect
A fall in P reduces money demand which lowers r which increasss I and the quanity of g and s demanded moving down AD curve
114
A fall in P
Reduces money demand
115
Money demand is determined by
How much wealth people want to hold in liquid form. Output, rate, and price influence
116
Fed uses what to reduce AD
Reduce MS which raises R which then reduces quanity of g and s demanded
117
Does monetary policy work in liquity trap
No because interest rates cannot be reduced farther than zero
118
Fiscal policy crowding put effect
The size of AD shift may be smaller than inital fiscal expansion
G increase and AD increase by same but then higher Y increases MD and R which reduces AD
119
Phillips curve equations
Urate= natural urate- a(actual inflation-expected)
120
Supply shock
An event that directly alters firms cost and prices shifting AS and phillips curve
121
Supply shock shifts phillips curve
SRAS shifts left, prices rise and output and emp fall. Inflation and urste increse as phillps shifts upward
