ECON 2105 Exam #3

Spending Multiplier

m^s=1/(MPC)

a formula to determine the total impact on spending from an initial change of a given amount

Currency

the paper bills and coins that are used to buy goods and services

Reserves

the portion of bank deposits that are set aside and not lent out

Medicare

a mandated federal program that funds health care for citizens 65 and over

Unit of Account

the measure in which prices are quoted

Transfer Payments

payments made to groups or individuals when no good or service is received in return

Countercyclical Fiscal Policy

fiscal policy that seeks to counteract business cycle fluctuations

Aggregate Supply

the total SUPPLY of all goods and services in an economy

Moral Hazard

when a party is protected from risk behaves differently from the way it would if it were fully exposed to the risk

Mandatory Outlays

comprise of government spending that is determined by long-term obligations

Adaptive Expectations Theory

holds that people's expectations of future inflation are based on their most recent experience

Aggregate Demand

the total DEMAND for the final goods and services in an economy

Monetary Policy

involves adjusting the money supply to influence the macroeconomy

Double Coincidence of Wants

occurs when each party in an exchange transaction happens to have what the other party desires

Excess Reserves

=total reserves - required reserves

Progressive Income Tax System

one in which people with higher incomes pay a higher portion of their income taxes than people with lower incomes do

Wealth Effect

change in the quantity of AGGREGATE DEMAND that results from wealth changes due to PRICE-LEVEL changes

Medium of Exchange

what people trade for goods and services

Social Security

government administered retirement funding program

Wealth

the value of one's accumulated assets

Keynesian Economics

stress the importance of AGGREGATE DEMAND and generally believe the economy needs help in moving back to full employment equilibrium (short run)

Fractional Reserve Banking

occurs when banks hold only a fraction of deposits on reserve

Budget Deficit

occurs when government outlays exceed revenue

Fiscal Policy

comprises the use of governments' budget tools, government spending, and taxes to influence the macroeconomy

Budget Surplus

occurs when government revenue exceeds outlays

Assets

the items that a firm owns

Balance Sheets

an accounting statement that summarizes a firms key financial information

Bank Run

occurs when many depositors attempt to withdraw their funds at the same time

Required Reserve Ratio

the portion of deposits that banks are required to keep on reserve

required reserves = rr x deposits

Discount Rate

the interest rate on the discount loans made by the federal reserve

M1

the money supply measure that is essentially composed of currency and checkable deposits

Discount Loans

loans from the federal reserve to private banks

Barter

involves the trade of a good or service without a commonly accepted medium of exchange (NO MONEY)

Macroeconomic Policy

encompasses government acts to influence the macroeconomy

Checkable deposits

deposits in bank accounts from which depositors may make withdrawals by writing checks

Passive Monetary Policy

occurs when central banks purposefully choose to only stabilize money and price levels through monetary policy

Active Monetary Policy

involves the strategic use of monetary policy to counteract macroeconomics expansions and contractions

Austerity

involves strict budget regulations aimed at debt reductions

Average Tax Rate

the total tax paid divided by the amount of taxable income

tax paid/taxable income

Rational Expectations Theory

holds that people form expectations on the basis of all available information

Store of Value

a means for holding wealth

Supply Shock

a surprise event that changes a firm's production costs

Fiat Money

money that has no value except as the medium of exchange, there is no inherent or intrinsic value to the currency

Commodity-Backed Money

money that can be exchanged for a commodity at a fixed rate

Contractionary Fiscal Policy

occurs when the government DECREASES SPENDING or INCREASES TAXES to slow down economic expansion

Phillips Curve

indicates a short-run inverse relationship between inflation and unemployment rates

New Classical Critique

theory of fiscal policy asserts that, increases in government spending and decreases in taxes are largely offset by increases in savings

Crowding-Out

occurs when private spending falls in response to increases in government spending

Simple Money Multiplier

the rate at which banks multiply money when all currency is deposited into banks and they hold no excess reserves.

m^m = 1/rr

Dodd-Frank Act

the primary regulatory response to the financial turmoil that contributed to the Great Recession

Shifted LRAS to the left (institutions)

Discretionary Outlays

comprise spending that can be altered when the government is setting its annual budget (Department of Education)

Federal Funds

deposits that private banks hold on reserve at the federal reserve

Commodity Money

involves the use of an actual good in place of money

Monetary Neutrality

the idea that the money supply does not affect real economic variables

Marginal Tax Rate

the tax rate paid on an individual's next dollar of income

Debt

the sum total of accumulated budget deficits

Laffer Curve

an illustration of the relationship between the tax rates and the tax revenue

x=tax rate

y=tax revenue

International Trade Effect

occurs when a change in the price level leads to a change in the quantity of net exports demanded

Expansionary Fiscal Policy

occurs when the government INCREASES SPENDING or DECREASES TAXES to stimulate the economy toward expansion

Automatic Stabilizers

government programs that automatically implement countercyclical fiscal policy in response to economic conditions

Supply Side Fiscal Policy

involves the use of government spending and taxes to affect the production (supply) side of the economy

Contractionary Monetary Policy

occurs when a central bank acts to decrease the money supply, short-run decrease in real GDP, decrease price levels

Classical Economists

stress the importance of aggregate supply and generally believe that the economy can adjust back to full employment equilibrium on its own

Expansionary Monetary Policy

occurs when a central bank acts to increase the money supply in an effort to stimulate the economy, short-run increase in real GDP, increase price levels

Federal Funds Rate

the interest rate on loans between private banks

Stagflation

the combination of high unemployment and high inflation

Liabilities

the financial obligations a firm owes to others

Government Outlays

the part of the government budget that includes both SPENDING and TRANSFER PAYMENTS

Marginal Propensity to Consume (MPC)

the portion of additional income is spent on consumption

Quantitative Easing

the targeted use of open market operations in which the central bank buys securities specifically targeted in certain markets

Interest Rate Effect

occurs when a CHANGE IN PRICE LEVEL leads to a CHANGE IN INTEREST RATES and, therefore, in the QUANTITY OF AGGREGATE DEMAND

Open Market Operations

involves the purchase or sale of bonds by a central bank

M2

the money supply measure that includes everything in M1, plus savings deposits, money market mutual funds, and small-denomination time deposits (CDs)

Owner's Equity

the difference between a firm's assets and its liabilities

Movement along AD curve?

1. Wealth Effect

2. Interest Rate Effect

3. International Trade Effect

Shift of AD curve?

1. Real Wealth

2. Expected Income

3. Expected Price

4. Foreign Income

5. Value of Dollar

Shift of SRAS curve?

1. Supply Shock

2. Changes in Expected Future Prices

3. Errors in Past Price Expectations

Shift of LRAS curve?

1. Technology

2. Resources

3. Institutions

Responsibilities of FED

1. Monetary Policy

2. Bank Regulation

3. Central Banking

What part of the economy is fiscal policy targeted at?

Fiscal policy is targeted at the DEMAND side of the economy

Issues with "perfect" fiscal policy

1. crowding-out

2. savings shifts

3. time lag