Economics MT3

Excludable

When someone can be easily excluded from using something

Rivalrous

When your use of a good subtracts from another's

Externality

side effects of an activity that affects bystanders whose interests aren't taken into account

Marginal private cost (MPC)

extra cost paid by the seller from one extra unit

Marginal external cost (MEC)

extra external cost imposed on bystanders from one extra unit

Marginal social cost (MSC)

MPC + MEC (all marginal costs)

Marginal private benefit (MPB)

the extra benefit enjoyed by the buyer from one extra unit

Marginal external benefit (MEB)

extra external benefit accruing to by standers from one extra unit

Marginal social benefit (MSB)

MPB +MEB

Market outcome

outcome that society achieves when no externalities are not accounted for

Socially optimal outcome

outcome that is most efficient for society as a whole, including interests of buyers, sellers, and bystanders

Gross Domestic Product (GDP)

market value of all final goods and services produced within a country in a year

Nominal GDP

GDP measured in today's prices

Real GDP

GDP measured in constant prices

A simple math trick to calculate %Dnominal GDP (for short periods of time)

%∆ real GDP + %∆P

Working-age population (POP)

those 16+ who are not in the military or institutionalized

Employed (E)

POP who are working, self-employed, or temp. absent from their job

Unemployed (U)

POP without jobs who are actively searching for a job and able to accept a job if offered

Labor force (LF)

E + U

Not in the labor force (NILF)

working age people who are neither E or U

Labor force participation rate (LFPR)

LF/POP * 100

Unemployment rate (UE rate)

U/LF*100

Employment-population ratio (E/POP)

E/POP * 100

Marginally attached

someone who wants a job and has looked for one within a year but isn't counted as unemployed

Underemployed

someone who has some work but wants more hours, or job isn't adequately using their skills

Involuntarily part time

someone who wants a full-time work but hasn't found a job yet

Discouraged worker

someone who is available to work but hasn't looked because they don't think there are jobs out there

Long-term unemployed

Unemployed for 6 consecutive months +

Efficiency wage

higher wages paid to encourage greater productivity

Inflation

generalized rise in overall level of prices

Deflation

generalized decrease in overall level of prices

Inflation rate

annual % increase in average price level of a fixed basket of goods and services

Consumer price index (CPI)

index that tracks the average price consumers pay over time for a representative basket of goods

Core inflation

inflation that excludes food and energy

Personal consumption expenditure (PCE) deflator

measure of inflation that also includes items consumed but not paid for directly

Producer price index (PPI)

price index that tracks the prices of inputs for production process

GDP deflator

price index that tracks the price of all goods and services produced domestically

Aggregate expenditure

total amount of G+S that people want to buy across whole economy

Federal funds rate (FFR)

interest rate that the Fed uses as its policy tool, which is the nominal rate banks pay to borrow overnight from the FFM

Federal funds market

market of domestic unsecured borrowings

Effective FFR

actual interest rate

Monetary policy

process of setting interest rates in an effort to influence economy, affects money supply

Reserves

cash banks need to keep on hand

Required reserves (RR)

minimum amount of reserves a bank must hold

Required reserve ratio (r)

minimum fraction of deposits banks are required to keep

Excess reserves (ER)

additional reserves

T-account

stripped down version of a BS that shows how transactions change a BS

Demand deposit (DD)

money that can be immediately withdrawn

Deposit multiplier (DM)

ratio of the amount of deposits created by banks to the amount of new reserves

Open market trading desk

trading desk at NY fed reserve

Bond

an IOU, promise to pay back a loan with interest

Overnight reverse repurchase agreement

the desk sells a govt bond to a bank and agrees to buy it back at a higher price the next day

Discount window

mechanism by which the Fed can lend $ directly to banks

Discount rate (DR)

interest rate on loans the fed offers throught the DW

Floor framework

lower bound of the FFR

Open Market Operations (OMO)

Fed's buying and selling of govt bonds to influence the interest rate

Expansionary monetary policy

Fed cuts interest rates to aid low inflation / weak GDP

Contractionary monetary policy

Fed increases interest rates to address high inflation / high GDP

(The Fed's) Inflation-induced response

Fed cuts REAL interest rates cuz inflation too low

(The Fed's) Output-induced response

Fed cuts interest rate more than is needed to offset the decline in inflation

Fiscal policy

Govt use of spending and tax policies to attempt to stabilize the economy

Discretionary fiscal policy

policy that temporarily changes govt spending or taxes to boost or slow the economy

Government mandatory spending

spending on programs that are set in law

Government discretionary spending

spending that Congress appropriates annually

Income taxes

taxes on all income

Earned income

wages from employer

Payroll taxes

taxes on earned income

Progressive tax

sliding scale tax

Taxable income

amount of your income that you pay taxes on

Marginal tax rate (MTR)

tax you pay if you earn another dollar

Sales tax

tax on purchases

Excise tax

tax on specific product

Balanced budget

Govt spending = tax revenue

Budget deficit

GS > tax revenue

Budget surplus

GS < tax revenue

Gross government debt

total amount the govt owes

The multiplier

measure of how much GDP changes from direct and indirect effects

Crowding out

decline in private spending (mostly Investments)

Automatic stabilizers

spending and taxes that adjust with economy, without action from politicians

Absolute advantage (AA)

ability of one person to do a task using fewer inputs than someone else

Comparative advantage (CA)

the abillity to do a task at a lower opportunity cost

Gains from trade

benefits that come from reallocating resources

Free trade

trade between countries without govt restrictions

Import quota

limit on the quantity of a good that can be imported

Tariff

tax on imported products

Floating exchange rate

exchange rate determined purely by supply and demand

Fixed exchange rate

govt sets the price of a currency

Why AD is downward sloping

Wealth effect (as p-level drops, people feel wealthier and Q increases), FED channel (as p-level and interest rates drop, spending increases, Q increases), International effect (as p-level drops, US exports increase so domestic goods become relatively cheaper -> Q increases

Why AS is upward sloping

Higher output leads to higher p-level and vice versa

Why LRAS is vertical

Factors in the LR (land, labor, physical/human capital, technology, govt institutions) are unaffected by p-level

Why Very SRAS is horizontal

In immediate aftermath of economic shock managers cannot set prices (time frame = several weeks)

Private goods

Owned exclusively by one person (cars, food, clothes)

Public goods

Services provided to us (national defense, R+D)

Club goods

Pay to use (cable TV, toll roads)

Common resources

Available to everyone (mall parking lots, free wifi)

Free rider problem

Someone enjoys benfits without bearing costs (group projects, welfare)

Tragedy of the commons

Tendency to overconsume a common resource (common living areas)

Internalize the externality

make public goods private (fines, community service)

Negative externality

Costs (2nd hand smoke, drunk drivers)

Positive externality

Benefits (R+D, education, sports)