Economics Review: Money, Inflation, and Unemployment

Vocabulary practice flashcards covering money supply and demand, the quantity theory of money, interest rate taxation, wealth redistribution from inflation, and labor market categories from chapters 10 and 12.

Value of Money

The purchasing power of a unit of currency, represented mathematically as $\frac{1}{P}$, which decreases as the price level ($P$) increases.

Money Supply

The total amount of money circulating in the economy, which is fixed and controlled by the Federal Reserve, represented by a vertical curve on the money market graph.

Money Demand

The amount of wealth people choose to hold in liquid form, which depends on the price level ($P$), real income, interest rates, and the availability of ATMs.

Open Market Sale of Bonds

An action by the Federal Reserve that decreases the money supply, shifting the money supply curve to the left, resulting in a lower price level and a higher value of money.

Causes of a Rising Price Level

Occurs when either the money demand curve shifts to the left or the money supply curve shifts to the right.

After-Tax Nominal Interest Rate

The nominal interest rate minus taxes paid on interest earnings, calculated as $\text{Nominal Rate} - (\text{Marginal Tax Rate} \times \text{Nominal Rate})$.

After-Tax Real Interest Rate

The real return earned after adjusting for both taxes and inflation, calculated as the after-tax nominal interest rate minus the inflation rate.

Creditor

An individual or institution that lends money to another party in a credit arrangement.

Redistribution of Wealth: High Expected, Low Actual Inflation

A scenario where inflation is expected to be high but turns out low, redistributing wealth from debtors to creditors.

Redistribution of Wealth: Low Expected, High Actual Inflation

A scenario where inflation is expected to be low but turns out high, redistributing wealth from creditors to debtors.

Quantity Equation

The equation $M \times V = P \times Y$, showing the relationship between money supply ($M$), velocity of money ($V$), the price level ($P$), and real output ($Y$).

Nominal GDP

The total value of output produced at current prices, represented in the quantity equation by $P \times Y$.

Velocity of Money

The rate at which money circulates through the economy, calculated using the quantity equation as $V = \frac{P \times Y}{M}$.

Employed

A labor category comprising individuals working full-time or part-time, as well as unpaid workers who work in a family business.

Unemployed

A labor category consisting of individuals who are not working but have actively searched for a job within the last 4 weeks.

Not in the Labor Force

Individuals who do not have a job and have not actively searched for employment within the last 4 weeks.

Labor Force

The total number of available workers in an economy, calculated as the sum of all employed and unemployed individuals.

Unemployment Rate

The percentage of the labor force without a job, calculated as $\frac{\text{Number of Unemployed}}{\text{Labor Force}} \times 100$.

Labor Force Participation Rate

The percentage of the adult population (16 years or older) that is in the labor force, calculated as $\frac{\text{Labor Force}}{\text{Adult Population}} \times 100$.

Natural Rate of Unemployment

The normal amount of unemployment that an economy experiences even when operating at full track.

Frictional Unemployment

Unemployment that occurs when workers take time to search for jobs that best suit their skills and tastes, influenced by job search, retraining, and sectoral shifts.

Sectoral Shift

Changes in the composition of demand across industries, sectors, states, or regions, creating frictional unemployment as workers relocate or retrain.

Structural Unemployment

Unemployment resulting when the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one, caused by wage structures set above equilibrium.

Causes of Structural Unemployment

Factors tied to the wage structure that hold wages above equilibrium, specifically minimum wage laws, labor unions, and efficiency wages.