Intro to Macroeconomics Final Exam

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Financial system
The system of financial markets and financial intermediaries through which firms acquire funds from households
financial markets
Markets where financial securities, such as stocks and bonds, are bought and sold
bond
a certificate of debt (usually interest-bearing or discounted) that is issued by a government or corporation in order to raise money
stock
the capital of a company or corporation, divided into portions or shares of uniform amount which are represented by transferable certificates
financial intermediaries
Firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers
mutual fund
fund that pools the savings of many individuals and invests this money in a variety of stocks, bonds, and other financial assets
national saving
private + public saving; portion of national income not used for consumption or government spending
=Y-C-G
private saving
portion of household’s income not used for consumption or paying taxes
=Y-T-C
public saving
tax revenue less government spending
=T-G
budget surplus
excess of tax revenue over government spending
=T-G
budget deficit
excess of government spending over tax revenue
=G-T
market for loanable funds
how financial system coordinates saving and investment, how government policies and other factors affect saving, investment, and interest rate
crowding out
occurs when a government deficit drives up the interest rate and leads to reduced investment spending
labor force
total number of workers
=employed + unemployed
unemployment
people not working but have been actively looking for a job during the past month
rate=(unemployed/laborforce)*100
labor force participation rate
% of adult population in the labor force
=100*(labor force/adult population)
natural rate of unemployment
noraml rate of unemployment around which actual u-rate fluctuates
cyclical unemployment
deviation of unemployment from its natural rate
discouraged workers
Employees who have left the labor force because they have not been able to find employment
frictional unemployment
occurs when workers spoend time searching for the jobs that best suit their skills and tastes (short term)
structural unemployment
occurs when less jobs than workers (long term)
job search
process of matching workers with appropriate jobs
unemployment insurance
a government program that partially protects workers’ incomes when they become unemployed
union
an organization of employees formed to bargain with the employer
collective bargaining
negotiation between an employer and trade union
strike
a group’s refusal to work in protest against low pay or bad work conditions
efficiency wage
firms pay voluntarily wage above minimum wage
money
medium of exchange
an item buyers give to sellers when purchasing goods and services
unit of account
the yardstick/means for comparing the values of goods and services
store of value
an item people can use to transfer purchasing power from present to future
liquidity
commodity money
takes form of a commodity with intrinsic value, backed by something tangible
ex. gold
fiat money
without intrinsic value, backed by US government
ex. US dollar
currency
paper bills and coins in hand of public (non-bank)
demand deposit
balances in bank accounts that depositors can access on demand by writing a check
federal reserve
ccentral bank of the US
Central bank
oversees banking system and regulates money supply
money supply
quantity of money available in economy
monetary policy
setting of money supply by policymakers in central bank
reserves
fractional reserve banking
banks keep a fraction of deposits as reserves and lends out the rest
reserve ratio
R; fraction of deposits bank hold as reserves; total reserves as % of total deposits
open market operations
Fed engages in buying/selling of treasury bonds
sale: MS decreases, i increases, AD decreases
purchase: MS increases, i decreases, AD increases
discount rate
rate at which banks borrow from the Fed
increase: i increases, MS decreases
decrease: i decreases, MS increases
reserve requirements
increase: i increases, MS decreases
decrease: i decreases, MS increases
federal funds rate
The interest Rate banks charge each other for overnight loans
quantity theory of money
quantity of money determines the value of money
nominal variables
measured in money terms of current prices
NOT adjusted for inflation
real variables
measured in physical units
IS adjusted for inflation
classical dichotomy
LR-changes in nominal variables DO NOT have an effect on real variables
SR-changes in nominal variables DO have an impact on real variables
monetary neutrality
canges in nominal variables don’t affect real variables, money is neutral (LR)
velocity of money
how fast money exchanges hands
quantity equation
MS x velocity of M = price level*output
therefore, when money supply increases, price level increases (inflation)
fisher effect
as nominal i increases=decreases real i + increases inflation
As i increases, inflation Increases
shoeleather costs
cost associated with continuously going to the bank during a time of inflation
menu costs
cost associated with printing new menus/magazines (b/c price changed) due to inflation
closed economy
no trade with the rest of the world
Y=C+I+G
open economy
trade with other countries
Y=C+I+G+NX
exports
domestically produced, sold internationally
imports
produced internationally, sold domestically
net exports
trade balance or exports – imports
trade surplus
exports > imports
trade deficit
exports
balanced trade
exports=imports
net capital outflow
domestic residents purchases of foreign assets less foreigners’ purchases of domestic assets
nominal exchange rate
rate at which one country’s currency trades for another
appreciation
strengthening, increase in calue of currency as measured by amount of foreign currency it can buy
depreciation
weakening, decrease in value of currency as measured by amount of foriegn currency it can buy
real exchange rate
rate at which goods and services of one country trade for anothers
=(exP)/P*
Categories: Macroeconomics