Econ Test Draft 1

Social insurance programs

 government programs intended to protect families against financial hardship

medicare

covers healthcare for ppl over 65

medicaid

healthcare for low income individuals

how do changes in governemt policy affect consumer spending?

if taxes increase, disposable income will increase giving consumers more money to buy things and increasing demand

fiscal policy

government changes in order to shift aggregate demand and supply

expansionary fiscal policy

government policy that increases aggregate demand (shifting it to the right) to close reccessionary gap

modes of expansionary fiscal policy

increase in government spending and services, a decrease in taxes, an increase of government transfers

contractionary fiscal policy

government policy that decreases aggregate demand (shifting it to the left) to close inflationary gap

modes of contractionary fiscal policy

decrease in government purchases of goods and services, an increase in taxes ,a reduction in government transfers.

money,investment,government multiplier

1/rr or 1/(1-mpc)

tax multiplier

-mpc/(1-mpc)

lump sum taxes

taxes that dont depend on the taxpayers income

automatic stabilizers

government spending and taxation policies that automatically adjust to economic conditions, helping to stabilize the economy without direct intervention.

PNC (shifters of aggregate supply)

productivity,nominal wages, commodity prices

SEWFM (shifters of aggregate demand)

supply of physical capital,expectation,wealth,fiscal policy,moentary policy

marginal propensity to consume

change in consumer spending/change in disposible income

discretionary fiscal polcity

fiscla policy that is a direct result of deliberate governemtn action rather then a automatic adjustment

Budget balance

saving by government= tax revenue-good and services-government transfers

budget surplus

a posititve budget balance

budget deficit

a negative budget balance

Expansionary fiscal policy effect on budget

makes budget surplus bigger or budget deficit smaller

Cyclically adjusted budget balance

estimate of what the budget balance would be if real gdp was exactly equal to potential output

fiscal year

runs from october 1 to september 30 and is labeled according to the calendar year in which it ends

Implicit liability

spending promises made by government that are effectively a debt despite the fact that they aren't included in debt statistics

money

any asset that can easily be used to purchase goods and services

liquid asset

can easily be converted into money

illiquid asset

cannot be easily converted into money

currency in circulation

actual cash in the hands of the public

Checkable bank deposits

bank accounts on which people can write check

Money supply

the total value of financial assets in the economy that are considered money

Double coincidence of wants

 in a barter system, 2 parties can only trade if they have a item the other wants not universally like with money

Money is a medium of exchange

an asset that individuals use to trade for goods and services rather then for consumption

Money is a Store of value

a means  of holding purchasing power over time

money is a unit of account

 the commonly accepted measure individuals use to to set prices and male economic calculations

Commodity money

the medium of account that was a good ex.gold

commodity backed money

a medium of exchange with no intrinstic value whose ultimate value is determined by a promise that it could always be converted into valuable goods on demand

fiat money

medium of exchange whose value is derived entirely from its official status as a means of payment

Monetary aggregates

overall measurements of the money supply

M1

only currency in circulation (cash, travelers checks, checkable bank deposits)

M2

 m1+ near moneys which are financial assets that aren't directly usable as a medium of exchange but can be readily converted into cash like a savings account or a cd

m1 is the most ______ of money

liquid

Financial intermediary

uses liquid assets in the form of bank deposits to finance illiquid investments of borrowers

Bank reserves

the currency banks hold in their vaults plus their deposits at the federal reserv

T-account

summarizes a business financial position with liabilities and asset

reserve ratio

smallest fraction of bank deposits that a bank must hold

Bank run

 a phenomenon where many of banks depositors pull their money out at once because of bank failure suspicions

Discount insurance

 FDIC provides deposit insurance a guarantee that depositor will be paid even if banks does not have the funds with a maximum of 250000 per depositor per bank (eliminates main reason for bank runs)

Capital requirement

banks must have more assets than liabilities so that regardless of if pans go bad they have something to pay it back with

Banks capital

 the excess of a bank's assets over its bank deposits and other liabilities

Reserve requirements

minimum amount banks must have in reserves(10% in usa)

Discount window

borrowing from the federal government to pay depositors as a final resort

Banks create money by…

 borrowing out your deposit and using it to make further purchases (all the money made - your deposit because it isn't created but is initial)

Excess reserves

 banks reserves over and above its required reserves

Monetary base

sum of currency in circulation and reserves held in banks

Money multiplier

 ratio of the money supply to the monetary base

Federal reserve system

the board of governors and the 12 regional federal reserve banks

Central banks

an institution that oversees and regulates the banking system and controls the monetary base

The federal bank of new york

 carries out open market operations (main tool of monetary policy)

Glass-stragall acts

seperated banks into commercial banks(depository banks that accept deposits and were covered by deposit insurance ) and investment banks (engage in creating and trading financial assets  such as stocks and corporate bonds but were not covered by deposit insurance due to being more risky

Saving and loans (thrifts)

 institutions designed  to accept saving and turn them into long term mortgages for homebuyers

Leverage

finances it investments with borrowed funds

Balance sheet effect

 the reduction in a firm's net worth from falling asset prices

Vicious cycle of deleveraging

asset sales to cover losses produce negative balance sheet effects on other firms and force creditors to call in their loans forcing sale of more asses and causing further decline in asset prices

Subprime lending

lending to home buyers who don't meet the usual criteria for being able to afford their payment 

Securitization

 a pool of loans is assembled and shares of that pool are sold to investors 

The federal reserve provides financial services

”bankers bank” holds reserves, clears checks provides cash and transfers funds to commercial banks

The fed Supervise and regulate banking institutions-

 ensures the safety of the nations banking and financial systems

The fed maintains the stability of the financial system

provides liquidity to financial institutions to ensure their safety

Federal funds market

where failing banks can borrow from other banks that have excess reserves instead of going straight to the government

The federal funds rate

the interest rate that funds are bought and sold in the federal funds market 

Discount rate

 the interest rate the federal reserve charges on loans to banks (1% higher than the federal funds rate to encourage banks to borrow from each other rather than the fed gov)

Open market operation

 a purchase or sale of treasury bills by the fed

government monetary policy

open market operations, discount rate, reserve ratio

future value

peresent value x(1+r)^n

present value

(x/1+intrest rate)^n

 Short term interest rate

 rates on financial assets that come to maturity within less than a year

Long term interest rates

rates of interest on financial assets that mature a number of years in the future

What affects money demand

short term interest rates rather than long term interest rates

Money Demand Curve

 relationship between interest rate and quantity of money demanded (downward sloping because as the interest rate rises the opp cost of holding money rises as well and ppl hold less cash putting it in accounts to incur interest)

Changes in aggregate price level

 shifts demand curve because if costs are higher the demand for money will go up and vice versa 

The demand for money is…

proportional to the price level

Changes in real gdp

shifter of money demand curve because household purchase more goods and services when real gdp goes up shifting demand to the right and vice versa

Changes in credit markets and banking technology

shifts money demand curve allows people to hold less cash therefore shifting demand to the left

Changes in institution

shifter of demand  when banking regulations change allowing banks to pay interest on checking account funds the demand for money rose and shifted the demand curve to the right 

Liquidity preference model of the interest rate

 the interest rate is determined by the supply and demand for money in the market for money

Money supply curve

 shows how the quantity of money supplied varies based on the interest rate

How does the fed increase and decrease money supply

open market operations (buying or selling t bills)

Target federal funds rate

 a desired level for the federal funds rates (hit through open market operation to manipulate the money supply)

expansionary monetary policy

increases the demand for goods and services by buying t bills and giving banks money to increase monetary supply in return

Contractionary monetary policy

decreases the demand for goods and services by selling t -bills and reducing the monetary supply in return giving banks less money to lend out

Taylor rule for monetary policy

a rule for setting interest rates that take into account the interest rate and the output gap as well as the unemployment rate in some cases (2.07+1.28x inflation rate- 1.95 x unemployment gap)

Inflation targeting

central banks se an explicit target for the inflation rate and set monetary policy in order to hit that target

Zero lower bound for interest rates

sets limits to the power of monetary policy because interest rate cannot go below 0

Neutrality of money

 the apl will drop as the interest rate drops and the economy will stabilize regardless of what the apl is (changes in money supply have no effect in the long run)

Classical model of the price level

the real quantity of money is always at its long run equilibrium level (nominal money supply/aggregate price level)

Inflation tax

 a reduction in the value of money held by the public caused by inflation

Output gap

percentage difference between the actual level of real gdp and potential output 

relationship between unemployment rate and the output gap

when aggregate output is - to potential output , the actual unemployment rate is equal to the natural rate of unemployment, and when the output gap is positive (inflationary gap) thew unemployment is below the natural rate and vice versa for a negative output gap  (fluctuations of the unemployment rate revolve around the natural rate of unemployment)

Short run phillips curve

the negative short run relationship between the unemployment rate and the inflation rate (when inflation is high, unemployment is low and vice versa)