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

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