ECON308

Exam 1, Chapters 1-3, 13-15, 20-23

security

a claim on the issuer’s future income or assets

bond

a debt security that promises to make payments periodically for a specified period of time

interest rate

the “cost of borrowing” or the price paid for the rental of funds

aggregate price level

the average price of goods and services in an economy

Financial intermediaries

institutions that borrow funds from people who have saved and in turn make loans to people who need funds

Financial innovation

the development of new financial products and services

Financial crises

major disruptions in financial markets that are characterized by sharp declines in asset prices and the failures of many financial and nonfinancial firms

Monetary policy

the management of money and interest rates

Fiscal policy

deals with government spending and taxation

Adverse selection

try to avoid selecting the risky borrower by gathering information about them

Moral Hazard

ensure borrower will not engage in activities that will prevent one to pay the loan

commodity money

goods used as money that also has value independent as their use as money

Medium of exchange

Money is acceptable to a wide variety of parties as a form of payment for goods and services

Unit of account

Money allows a way of measuring value in a standard matter

Store of value

Money allows people to defer consumption until a later date by storing value. Other assets can do this too, but money does it particularly well because it is liquid

Standard of deferred payment

Money facilitates exchanges across time when we anticipate that its value in the future will be predictable

Federal Funds Rate

the rate for a bank to borrow overnight from other banks with surplus funds

Discount Rate

the rate for borrowing from the U.S. Central Bank, normally as a last resort

Instrument independence

the Fed can use the tools it wants to use

Goal independence

the Fed can use the target it wants to use

Nonborrowed reserves

funds a financial institution holds in cash; the funds are its own, and not money on loan from a central bank

Excess reserves

refer to any reserves a bank has that exceed the Fed’s reserves requirements, whether they are borrowed or not

Dynamic open market operations

intended to directly change the level of reserves and the monetary base

Defensive open market operations

intended to maintain levels and offset other factors that affect reserve and the monetary base

Repurchase agreements

the seller agrees to purchase back the security from the Fed in a short time

Matched sale-purchase agreements

the buyer agrees to sell back the security to the Fed after a short time

Primary credit

the Standing Lending Facility which allows banks to borrow all they want from the Fed with a very short maturity (typically overnight)

Secondary credit

loans available for banks that are in financial trouble with severe liquidity problems

Seasonal credit

for banks with high seasonality (vacation destinations, agricultural areas)

Planned Expenditure

the total amount that households, businesses, the government, and foreign people spend on domestically produced goods and services

Consumption

the total demand for consumer goods and services

mpc

What percent of every dollar I get do I consume?

Autonomous Consumption

the amount of consumption expenditure that is exogenous (not affected by other variables in the model)

Investment

The purchase of new physical assets that add to aggregate demand

autonomous investment

fluctuations in investing from waves of optimism and pessimism

financial frictions

added costs to borrowing that come from asymmetric information about the creditworthiness of someone

Government purchases

spending by all governments on goods and services (not counting transfer payments)

Net Exports

the net foreign spending on domestic goods and services

Taylor Principle

to stabilize the economy, the central bank should increase the interest rate to combat inflation

Autonomous Tightening of Monetary Policy

increasing /r/ to increase the interest rate for any given inflation rate

Autonomous Easing of Monetary Policy

decreasing /r/ to decrease the interest rate for any given inflation rate

The Investment-Savings (IS) Curve

illustrates the relationship between the real interest rate and aggregate output when investment = savings in equilibrium

The Monetary Policy (MP) Curve

illustrates the relationship between interest rate set by the Fed and the inflation rate

Aggregate Supply Curve

shows the relationship between the quantity of goods supplied and the inflation rate

Long Run Aggregate Supply (LRAS)

determined by the amount of capital, technology, and labor from full employment in an economy

Short Run Aggregate Supply (SRAS)

determined by expectations of inflation, the output gap (expansion/recession), and supply shocks

Natural rate of unemployment

the level of unemployment when cyclical unemployment is zero

Output gap

percent difference between current aggregate output and potential output

short-run macroeconomic equilibrium

the point where aggregate output demanded equals aggregate output supplied

Nonactivists

believe government action is unnecessary to eliminate unemployment

Activists

see the need for the government to pursue active policy to eliminate high unemployment when it develops

Data lag

the time it takes for policy makers to obtain data indicating what is happening in the economy

Recognition lag

the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy

Legislative lag

the time it takes to pass legislation to implement a particular policy

Implementation lag

the time it takes for policy makers to change policy instruments once they have decided on the new policy

Effectiveness lag

the time it takes for the policy to actually have an impact on the economy

Cost push inflation

results either from a temporary supply shock increasing prices or a push by workers for wage hikes beyond what productivity gains can justify

Demand pull inflation

results from policy makers pursuing policies that increase aggregate demand