Economics Unit 3

National Income Accounting

a system economists use to collect and organize macroeconomic statistics on production ,income, investments and savings

frictional unemployment

unemployment that occurs when people take time to find a job

seasonal unemployment

unemployment that occurs as a result of harvest schedules or vacations, or when industries slow or shut down for a season

structural unemployment

unemployment that occurs when workers' skills do not match the jobs that are available

cyclical unemployment

unemployment that rises during economic downturns and falls when the economy improves

census

population count

unemployment rate

the percentage of the labor force that is unemployed

full employment

the level of employment reached when there is no cyclical unemployment

underemployment

workers are overqualified for their jobs or work fewer hours than they would prefer

discouraged worker

a person who wants a job but has given up looking

inflation

a general and progressive increase in prices

purchasing power

a comparison of income versus the relative cost of a set standard of goods and services in different geographic areas

price index

an index that traces the relative changes in the price of an individual good (or a market basket of goods) over time

CPI

an index of the cost of all goods and services to a typical consume

market basket

a representative collection of goods and services

inflation rate

the rate of change of prices (as indicated by a price index) calculated on a monthly or annual basis

chronic inflation

Inflation that rises steadily from month to month over a long period.

hyperinflation

When the German economy tried to print bills to pay off their debt, inflation rates of 40% a day

quantity theory

theory that too much money in the economy causes inflation

demand pull theory

theory that inflation occurs when demand for goods and services exceeds existing supplies

cost push theory

theory that inflation occurs when producers raise prices in order to meet increased costs

wage price spiral

the process by which rising wages cause higher prices, and higher prices cause higher wages

fixed income

an income that does not increase even though prices go up

deflation

the act of letting the air out of something

poverty threshold

an income level below that which is needed to support families or households

poverty rate

percentage of people whose income falls below the poverty line

Investment

The act of redirecting resources from being consumed today so that they may create benefits in the future; the use of assets to earn income or profit.

Financial Asset

Claim on the property or income of a borrower.

Financial Itermediary

Institution that helps channel funds from savers to borrowers.

Mutual Fund

Fund that pools the savings of many individuals and invests this money in a variety of stocks, bonds, and other financial assets.

Diversification

Spreading out investments to reduce risk.

Portfolio

A collection of financial assets.

Return

The money an investor receives above and beyond the sum of money initially invested.

Coupon Rate

The interest rate that a bond issuer will pay to a bondholder.

Maturity

The time at which payment to a bondholder is due.

Par Value

The amount that an investor pays to purchase a bond and that will be repaid to the investor at maturity.

Yield

The annual rate of return on a bond if the bond were held to maturity.

Savings Bond

Low-denomination bond issued by the United States government.

Municipal Bond

A bond issued by a state or local government or municipality to finance such improvements as highways, state buildings, libraries, parks, and schools.

Corporate Bond

A bond that a corporation issues a raise money to expand its business.

Securities and Exchange Commission

An independent agency of the government that regulates financial markets and investment companies.

Junk Bond

A lower-rated, potentially higher-paying bond.

Capital Gain

The difference between a higher selling price and a lower purchase price, resulting in a financial gain for the seller.

Capital Loss

The difference between a lower selling price and a higher purchase price resulting in a financial loss to the seller.

Stock Split

The division of a single share of stock into more than one share.

Stockbroker

A person who links buyers and sellers of stock.

Fiscal policy

the use of government spending and revenue collection to influence the economy

Federal budget

a plan for the federal government's revenues and spending for the coming year

fiscal year

a twelve-month period that can begin on any date

Office of Management and Budget (OMB)

Government office that manages the federal budget

Congressional Budget Office (CBO)

Government agency that provides economic data to congress

Appropriation bill

a bill that sets money aside for specific spending

expansionary policies

fiscal policies, like higher spending and tax cuts, that encourage economic growth

contractionary policies

fiscal policies, like lower spending and higher taxes, that reduce economic growth

classical economics

the idea that free markets can regulates themselves

productive capacity

the maximum output that an economy can produce without big increases in inflation

demand-side economics

The idea that government spending and tax cuts help the economy by raising demand

Keynesian economics

a form of demand-side economics that encourages government action to increase or decrease demand and output

multiplier effect

the idea that every one dollar of government spending creates more than one dollar in economic activity

automatic stabilizer

a government program that changes automatically depending on GDP and a person's income

supply-side economics

a school of economics that believes tax cuts can help an economy by raising supply

Council of Economic Advisers (CEA)

a group of three respected economist that advise the president on economic policy

balanced budget

a budget in which revenues are equal to spending

budget surplus

a situation in which the government takes in more than it spends

budget deficit

a situation in which the government spends more than it takes in

hyperinflation

very high inflation

Treasury bill

a government bond that is repaid within three months to a year

Treasury bond

a government bond that can be issued for as long as 30 years

National debt

all the money the federal government owes to bondholders

crowding-out effect

the loss of funds for private investment due to government borrowing

expansionary policy

A fiscal policy used to encourage economic growth, often through increased spending or tax cuts

contractionary policy

a fiscal policy used to reduce economic growth, often through decreased spending or higher taxes

Monetary Policy

the actions the Federal Reserve System

Reserves

Deposits a bank keeps readily available instead of oppose as lending them out.

Reserve Requirements

amount of reserves banks are required to keep on hand

Check Clearing

the process in which banks record whose account gives up money and whose account gives receives money when a customer writes a check

Bank holding company

A company owning multiple banks

Federal Funds Rate

the interest rate banks charge each other for loans

Discount Rate

the interest rate the Fed charged commercial banks for loans

Money Creation

the process in which money enters into circulation; money printing

Required Reserve Ratio

fraction of deposits banks are required to keep in reserve

Money Multiplier formula

Initial cash deposit x1 / RRR

Excess Reserves

Reserves greater than those required by Fed

Prime Rate

rate of interest banks charge on short-term loans to their best customers

Open Market Regulations

the buying and selling of government securities in order to alter money supply

monetarism

belief money supply is most important factor in macroeconomic performance

Easy Money Policy

A monetary policy increases the money supply. ex: Lower interet rates

Tight Money Policy

Policy reducing money supply ex: Higher interest rates

Inside Lag

Time Fed takes to implement monetary policy

Outside Lag

Time it takes for monetary policy to have effect.

tax

a required payment to local, state or national government

revenue

income government receives through taxes and non-tax sources

Progressive Tax

Tax in which % of income paid is increased as income increases

Proportional Tax

Tax in which % of income paid is the same at all levels

Regressive Tax

Tax for which the % of income paid decreases as income goes up.

Tax base

income, property or good subject to a tax

Individual income tax

Tax on a person’s earnings

corporate income tax

tax on company profits

Property Tax

Tax based on real estate and other property

sales tax

Tax on good or service