honors econ unit 4 etikerentse textbook chapters 17,18,19
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43 Terms
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potential output
the economy’s maximum stable output in the long run
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natural rate of unemployment
the unemployment rate when the economy is producing its potential level of output
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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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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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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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discretionary fiscal policy
legislative changes in government spending or taxing to promote macroeconomic goals
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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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recognition lag
the time needed to identify a macroeconomic problem
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decision-making lag
the time needed to decide what to do once the problem has been identified
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implementation lag
the time needed to execute a change in policy
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effectiveness lag
the time needed for changes in policy to affect the economy
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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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crowding out
private investment falls when larger government deficits drive up interest rates
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crowding in
government spending stimulates private investment in an otherwise stagnant economy
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debt ceiling
a limit on the total amount of money that the federal government can legally borrow
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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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commodity money
anything that serves both as money and as a commodity, such as gold
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check
a written order instructing the bank to pay someone from money on deposit
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frictional reserve banking system
only a portion of bank deposits is backed by reserves
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representative money
bank notes that exchange for a specific commodity, such as gold
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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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Federal Reserve System (the Fed)
established in 1913 as the central bank and monetary authority of the United States
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discount rate
interest rate that the Fed charges banks that borrow reserves
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Federal Open Market Committee (FOMC)
twelve-member group that makes decisions about open-market operations
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open-market operations
buying or selling US government securities as a way of regulating the money supply
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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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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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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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net worth
assets minus liabilities; also called owners’ equity
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asset
any physical property or financial claim that is owned
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liability
an amount owed
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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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required reserve ratio
a Fed regulation that dictates the minimum fraction of deposits each bank must keep in reserve
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required reserves
the dollar amount that must be held in reserve; checkable deposits multiplied by the required reserve ratio
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excess reserves
bank reserves in excess of required reserves
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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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money demanded
the relationship between how much money people want to hold and the market interest rate
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money supply
the stock of money available in the economy at a particular time; determined by the Fed
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federal funds market
a market for overnight lending and borrowing of reserves held by the Fed for banks
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federal funds rate
the interest rate banks charge one another to borrow reserves overnight; the Fed’s target interest rate
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euro
the European common currency
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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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stress test
bank regulators assessed the soundness of large banks to determine which ones needed more financial capital to weather a bad economy