ECN211 Final Terminology

quantity theory of money

a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate.

nominal variable

variables measured in monetary units

real variables

variables measured in physical units

classical dichotomy

the theoretical separation of nominal variables and real variables

monetary neutrality

the proposition that changes in the money supply do not affect real variables

velocity of money

the rate at which money changes hands

quantity equation (+what it is)

the equation M x V = P x Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy’s output of goods and services

inflation tax

the revenue the government raises by creating money

fisher effect

the one-for-one adjustment of the nominal interest rate to the inflation rate

shoeleather cost

the resources wasted when inflation encourages people to reduce their money holdings

menu costs

the costs of changing prices

recession

a period of declining real incomes and rising unemployment

depression

a severe recession

model of aggregate demand and aggregate supply

the model that most economists use to explain short run fluctuations in economic activity around its long run trend.

aggregate demand curve

a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level.

aggregate supply curve

a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level

natural level of output

the production of goods and services that an economy achieves in the long run when unemployment is at its normal rate

stagflation

a period of falling output and rising prices

theory of liquidity preference

keyne’s theory that the interest rate adjusts to bring money supply and money demand into balance

fiscal policy

the setting of the levels of government spending and taxation by government policymakers

multiplier effect

the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending

crowding out effect

the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending

automatic stabilizers

changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession but that occur without policymakers having to take any deliberate action

phillips curve

a curve that shows the short run tradeoff between inflation and unemployment

natural rate hypothesis

the claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation.

supply shock

an event that directly alters firms’ costs and prices, shifting the economy’s aggregate supply curve and thus the phillips curve

sacrifice ratio

the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point

rational expectations

the theory that people optimally use all the information they have, including information about government policies, when forecasting the future

Consumer Price Index (CPI)

A measure of the overall cost of the goods and services bought by a typical consumer

Inflation Rate

The percentage change in the price index from the preceding period

Core CPI

A measure of the overall cost of consumer goods and services excluding food and energy

Producer Price Index

A measure of the cost of a basket of goods and services sold by domestic firms

Indexed

The automatic correction by law or contract of a dollar amount for the effects of inflation

Nominal Interest Rate

The interest rate as usually reported without a correction for the effects of inflation

Real Interest Rate

The interest rate corrected for the effects of inflation

Productivity

The quantity of goods and services produced from each unit of labor

Physical Capital

The stock of equipment and structures that are used to produce goods and services

Human Capital

The knowledge that workers acquire through education, training, and experience

Natural Resources

The inputs into the production of goods and services that are provided by nature, such as land, rivers, and mineral deposits

Technological Knowledge

Society’s understanding of the best ways to produce goods and services

Diminishing Returns

The property whereby the benefit from an extra unit of an input declines as the quantity of the input increases

Catch-Up Effect

The property whereby countries that start off poor tend to grown more rapidly than countries that start off rich

Labor Force

The total number of workers, including both the employed and unemployed

Unemployment Rate

The percentage of the labor force that is unemployed

Labor-Force Participation Rate

The percentage of the adult population that is in the labor force

Natural Rate of Unemployment

The normal rate of unemployment around which the unemployment rate fluctuates

Cyclical Unemployment

The deviation of unemployment from its natural rate

Discouraged Workers

Individuals who would like to work but have given up looking for a job

Friction Unemployment

Unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills

Structural Unemployment

Unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one

Job Search

The process by which workers find appropriate jobs given their tastes and skills

Unemployment Insurance

A government program that partially protects the incomes of workers who became unemployed

Interest on reserves is the Fed's primary tool for influencing the money supply. A decrease in the interest rate on reserves tends to encourage banks to hold less reserves.

Interest on reserves is the Fed's primary tool for influencing the money supply. An increase in the interest rate on reserves tends to encourage banks to hold more reserves.

A lower interest rate increases the incentive to borrow funds from the Federal Reserve, thereby increasing the quantity of reserves in the banking system, which causes the money supply to increase.

When the Federal Reserve loans more funds to banks and other financial institutions, the quantity of reserves in the banking system increases and the money supply increases.

M1

A narrower definition that includes cash and checkable deposits.

(Coins and Currency in circulation + Checkable (demand) Deposit + Traveler’s Checks + Savings deposits)

M2

A broader definition that includes savings and time deposits

(M1 + Money Market Funds + Certificates of Deposit + Other Time Deposits)

Money

The set of assets in an economy that people regularly use to buy goods and services

Medium of Exchange

An item that buyers give to sellers when they want to purchase goods and services

Unit of Account

The yardstick people use to post prices and record debts

Store of Value

An item that people can use to transfer purchasing power from the present to the future

Liquidity

The ease with which an asset can be converted into the economy’s medium of exchange

Commodity Money

Money that takes the form of a commodity with intrinsic value

Fiat Money

Money without intrinsic value that is used as money by government decree

Intrinsic Value

A measure of what an asset is worth

Currency

The paper bills and coins in the hands of the public

Demand Deposits

Balances in bank accounts that depositor can access on demand by writing a check

Federal Reserve

The central bank of the United States

Central Bank

An institution designed to oversee the banking system and regulate the quantity of money in the economy

Money Supply

The quantity of money available in the economy

Monetary Policy

The setting of the money supply by policymakers in the central bank

Reserves

Deposits that banks have received but have not loaned out

Fractional-Reserve Banking

A banking system in which banks hold only a fraction of deposits as reserves

Reserve Ratio

The fraction of deposits that hold as reserves

Money Multiplier

The amount of money that results from each dollar of reserves

Bank Capital

The resources a bank’s owners have put into the institution

Leverage

The use of borrowed money to supplement existing funds for investment purposes

Leverage Ratio

The ratio of assets to bank capital

Capital Requirement

A government regulation specifying a minimum amount of bank capital

Open-Market Operations

The purchase and sale of U.S. government bonds by the Fed

Discount Rate

The interest rate on the loans that the Fed makes to banks

Reserve Requirements

Regulations on the minimum amount of reserves that banks must hold against deposits

Interest on Reserves

The interest rate paid to banks on the reserves held in deposits at the Fed

Federal Funds Rate

The interest rate at which banks make overnight loans to one another

Labor Force Equation

Labor Force = Number of Employed + Number of Unemployed

Unemployment Rate Equation

Unemployment Rate = (Number of Unemployed/Labor Force) x 100

Labor Force Population Rate Equation

LFPR = (Labor Force/Adult Population) x 100

Money Supply Equation

Money Supply = Money Multiplier x Bank Reserves

CPI Equation

CPI = 100 x (Cost of basket in current year/Cost of basket in base year)

Inflation Rate Equation

Inflation Rate = ((CPI this year - CPI last year) / CPI last year) x 100

Real Interest Rate Equation

Real Interest Rate = Nominal Interest rate - Inflation Rate

Reserves Equation

Reserves = Demand Deposits - Loans

Required Reserves Equation

Required Reserves = Demand Deposits x Required Reserve Ratio

Leverage Ratio Equation

Leverage Ratio = Total Assets / Capital (owners’ equity)

Output Per Worker Equation

Output Per Worker = Output with _ tools per worker / Number of workers

Labor Productivity Equation

Labor Productivity = Total Output / Total Hours Worked

Physical Capital Equation

Physical Capital = Total physical capital / Total number of workers

Scarcity

The limited nature of society’s resources

Economics

The study of how society manages its scarce resources

Efficiency

The property of society getting the most it can from its scarce resources

Equality

The property of distributing economic prosperity uniformly among the members of society