honors econ unit 4 etikerentse textbook chapters 17,18,19

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potential output

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let me be a lesson to you all that procrastination does not pay

43 Terms

1

potential output

the economy’s maximum stable output in the long run

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2

natural rate of unemployment

the unemployment rate when the economy is producing its potential level of output

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3

classical economists

a group of laissez-faire economists who believed that economic downturns corrected themselves in the long run through natural market forces

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4

annually balanced budget

matching annual spending with annual revenue, except during war years; the approach to federal budgeting prior to the Great Depression

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5

multiplier effect

a theory that claims any change in fiscal policy affects aggregate demand by more than the original change in spending or taxing

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6

discretionary fiscal policy

legislative changes in government spending or taxing to promote macroeconomic goals

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7

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

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8

recognition lag

the time needed to identify a macroeconomic problem

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9

decision-making lag

the time needed to decide what to do once the problem has been identified

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10

implementation lag

the time needed to execute a change in policy

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11

effectiveness lag

the time needed for changes in policy to affect the economy

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12

Recovery Act of 2009

at $787 billion, the largest stimulus measure in US history; enacted in February 2009 and projected to last two years

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13

crowding out

private investment falls when larger government deficits drive up interest rates

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14

crowding in

government spending stimulates private investment in an otherwise stagnant economy

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15

debt ceiling

a limit on the total amount of money that the federal government can legally borrow

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16

medium of exchange

anything generally accepted by all parties in payment for goods and services; the most important function of money

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17

commodity money

anything that serves both as money and as a commodity, such as gold

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18

check

a written order instructing the bank to pay someone from money on deposit

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19

frictional reserve banking system

only a portion of bank deposits is backed by reserves

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20

representative money

bank notes that exchange for a specific commodity, such as gold

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21

fiat money

money of no value in itself and not convertible into gold, silver, or anything else of value; declared money by government decree

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22

Federal Reserve System (the Fed)

established in 1913 as the central bank and monetary authority of the United States

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23

discount rate

interest rate that the Fed charges banks that borrow reserves

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24

Federal Open Market Committee (FOMC)

twelve-member group that makes decisions about open-market operations

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25

open-market operations

buying or selling US government securities as a way of regulating the money supply

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26

M1

the narrow definition of the money supply; consists of currency (including coins) held by the nonbanking public, checkable deposits, and traveler’s checks

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27

checkable deposits

deposits in financial institutions against which checks can be written and ATM, bank, or debit, cards can be applied

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28

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

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29

net worth

assets minus liabilities; also called owners’ equity

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30

asset

any physical property or financial claim that is owned

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31

liability

an amount owed

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32

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

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33

required reserve ratio

a Fed regulation that dictates the minimum fraction of deposits each bank must keep in reserve

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34

required reserves

the dollar amount that must be held in reserve; checkable deposits multiplied by the required reserve ratio

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35

excess reserves

bank reserves in excess of required reserves

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36

money multiplier

the multiple by which the money supply can increase as a result of an increase in excess reserves in the banking system

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37

money demanded

the relationship between how much money people want to hold and the market interest rate

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38

money supply

the stock of money available in the economy at a particular time; determined by the Fed

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39

federal funds market

a market for overnight lending and borrowing of reserves held by the Fed for banks

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40

federal funds rate

the interest rate banks charge one another to borrow reserves overnight; the Fed’s target interest rate

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41

euro

the European common currency

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42

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

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43

stress test

bank regulators assessed the soundness of large banks to determine which ones needed more financial capital to weather a bad economy

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