Studied by 2 people
let me be a lesson to you all that procrastination does not pay
potential output
the economy’s maximum stable output in the long run
natural rate of unemployment
the unemployment rate when the economy is producing its potential level of output
classical economists
a group of laissez-faire economists who believed that economic downturns corrected themselves in the long run through natural market forces
annually balanced budget
matching annual spending with annual revenue, except during war years; the approach to federal budgeting prior to the Great Depression
multiplier effect
a theory that claims any change in fiscal policy affects aggregate demand by more than the original change in spending or taxing
discretionary fiscal policy
legislative changes in government spending or taxing to promote macroeconomic goals
automatic stabilizers
government spending and taxing programs that year after year automatically reduce fluctuations in disposable income, and thus in consumption, over the business cycle
recognition lag
the time needed to identify a macroeconomic problem
decision-making lag
the time needed to decide what to do once the problem has been identified
implementation lag
the time needed to execute a change in policy
effectiveness lag
the time needed for changes in policy to affect the economy
Recovery Act of 2009
at $787 billion, the largest stimulus measure in US history; enacted in February 2009 and projected to last two years
crowding out
private investment falls when larger government deficits drive up interest rates
crowding in
government spending stimulates private investment in an otherwise stagnant economy
debt ceiling
a limit on the total amount of money that the federal government can legally borrow
medium of exchange
anything generally accepted by all parties in payment for goods and services; the most important function of money
commodity money
anything that serves both as money and as a commodity, such as gold
check
a written order instructing the bank to pay someone from money on deposit
frictional reserve banking system
only a portion of bank deposits is backed by reserves
representative money
bank notes that exchange for a specific commodity, such as gold
fiat money
money of no value in itself and not convertible into gold, silver, or anything else of value; declared money by government decree
Federal Reserve System (the Fed)
established in 1913 as the central bank and monetary authority of the United States
discount rate
interest rate that the Fed charges banks that borrow reserves
Federal Open Market Committee (FOMC)
twelve-member group that makes decisions about open-market operations
open-market operations
buying or selling US government securities as a way of regulating the money supply
M1
the narrow definition of the money supply; consists of currency (including coins) held by the nonbanking public, checkable deposits, and traveler’s checks
checkable deposits
deposits in financial institutions against which checks can be written and ATM, bank, or debit, cards can be applied
M2
a broader definition of the money supply, consisting of M1 plus savings deposits, small denomination time deposits, and money market mutual fund accounts owned by households
net worth
assets minus liabilities; also called owners’ equity
asset
any physical property or financial claim that is owned
liability
an amount owed
balance sheet
a financial statement showing assets, liabilities, and net worth at a point in time; assets must equal liabilities plus net worth, so the statement is in balance
required reserve ratio
a Fed regulation that dictates the minimum fraction of deposits each bank must keep in reserve
required reserves
the dollar amount that must be held in reserve; checkable deposits multiplied by the required reserve ratio
excess reserves
bank reserves in excess of required reserves
money multiplier
the multiple by which the money supply can increase as a result of an increase in excess reserves in the banking system
money demanded
the relationship between how much money people want to hold and the market interest rate
money supply
the stock of money available in the economy at a particular time; determined by the Fed
federal funds market
a market for overnight lending and borrowing of reserves held by the Fed for banks
federal funds rate
the interest rate banks charge one another to borrow reserves overnight; the Fed’s target interest rate
euro
the European common currency
too big to fail
a financial institution becomes so large and so interconnected with other financial institutions that its failure would be a disaster for the wider economy
stress test
bank regulators assessed the soundness of large banks to determine which ones needed more financial capital to weather a bad economy
Note
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