Macroeconomics Mid-Term 2

Consumption Function

The relationship between consumption and income

Marginal Propensity to Consumer (MPC)

The fraction of a change in income that is spent on consumption; the change in consumption divided by the change in income that caused it.  

Marginal Propensity to Save (MPS)

The fraction of a change in income that is saved; the change in income that caused it. 

Saving Function

The relationship between saving and income

Net Wealth

The value of assets minus liabilities

Life-Cycle Model of Consumption and Saving

Young people borrow, middle-agers pay off debts and save, and older people draw down their savings; on average net savings over a lifetime are small.  

Investment Function

The relationship between the amount businesses plan to invest and the economy's income

Autonomous

A term that means “independent”; for example, autonomous investment is independent of income

Government Purchase Function

The relationship between government purchases and the economy's income

Net Exports

The relationship between net exports and the economy's income

Simple Spending Multiplier

A ratio of change in real GDP demanded to the initial change in spending that brought it about. (Assuming only consumption varies with income). 1/(1-MPC) = 1/MPS

Aggregate Supply

The relationship between the economy's price level and the amount of the output firms are willing and able to supply 

Nominal Wage

The wage measured in dollars of the year in question: the dollar amount on a paycheck

Real Wage

The wage measured in dollars of constant purchasing power; the wage measured in terms of the quantity of goods and services it buys

Potential Output

The economy's maximum sustainable output, given the supply of resources, technology and know-how, and rules of the game; the output level when there are no surprises about the price level

Natural Rate of Unemployment

The unemployment rate when the economy produces its potential output

Short Run

In macroeconomics, a period during which some resources prices, especially those for labor, remain fixed by explicit or implicit agreements

Short-Run Aggregate Supply (SRAS) Curve

A curve that shows a direct relationship between the actual price level and real GDP supplied in the short run, o.t.c., including the expected price level

Short-Run Equilibrium

The price level and real GDP that result when the aggregate demand curve intersects the short-run aggregate supply curve

Expansionary Gap

The amount by which actual output in the short run exceeds the economy's potential output

Long Run

In macroeconomics, a period during which wage contract a resource price agreement can be renegotiated; there are no surprises about the economy's actual price level

Long-Run Equilibrium

The price level and real GDP that occur when  

1. The actual price level equals the expected price level 

2. Real GDP supplied equals potential output 

3. Real GDP supplied equals real GDP demanded

Recessionary (Contractionary) Gap

The amount by which actual output in the short run falls short of the economy's potential output

Long-Run Aggregate Supply (LRAS) Curve

A vertical line at the economy's potential output; aggregate supply when there are no surprises about the price level and all resources contracts can be negotiated

Supply Shocks

Unexpected events that affect aggregate supply, sometimes only temporarily

Beneficial Supply Shocks

Unexpected events that increase aggregate supply, sometimes only temporarily

Adverse Supply Shocks

Unexpected events that reduce aggregate supply, sometimes only temporarily

Hysteresis

The theory that the natural rate of unemployment depends in part on the recent history of unemployment; a long period of high unemployment can increase that natural rate of unemployment

Fiscal Policies Automatic Stabilizers

Structural features of government spending and taxation that reduce fluctuations in disposable income and thus consumption, over the business cycle

Discretionary Fiscal Policy

The deliberate manipulation of government purchases, taxation, and transfer payments to promote macroeconomic goals, such as full employment, price stability, and economic growth

Simple Tax Multiplier

The ratio of a change in real GDP demanded to the initial change in autonomous net taxes that brought it about; the numerical value of the simple tax multiplier is 1–MPC/(1-MPC)

Expansionary Fiscal Policy

An increase in government purchases, decrease in net taxes, or some combination of the two aimed at increasing aggregate demand enough to return the economy to its potential output thereby reducing unemployment; policy used to close a contractionary gap

Contractionary Fiscal Policy

A decrease in government purchases, increase in net taxes, or some combination of the two aimed at reducing aggregate demand enough to return the economy to potential output without worsening inflation; policy used to close an expansionary gap

Classical Economists

A group of 18^th and 19^th century economists who believed the economic downturns were short run phenomena that corrected themselves through natural market forces; thus, they believed the economy were self-correcting and needed no government intervention

The Great Depression

At its height, 25% of the working population was unemployed

Automatic Stabilizers

Smooth out fluctuations in disposable income over the business cycle, thereby stimulating aggregate demand during recessions and dampening aggregate demand during expansions

The Revenue Acy of 1945

Reduced the individual income tax rate by 3 percentage points

Progressive Income Tax

During economic expansion and recession

Unemployment Insurance

During economic expansion, the system automatically increases the flow of unemployment insurance taxes from the income stream into the unemployment insurance fund, moderating aggregate demand

Double Coincidence of Wants

Two traders are willing to exchange their products directly. Barter

Money

Anything that is generally accepted in exchange for goods and services. (Money fulfills three important functions: a medium of exchange, a unit of account, and a store of value)

Medium of Exchange

Anything that facilitates trade by being generally accepted by all parties in payment for goods and services

Commodity Money

Anything that serves both as money and as a commodity; money that has intrinsic value

Unit of Account

A common unit for measuring the value of each good or service

Store of Value

Anything that retains its purchasing power over time

Gresham’s Law

People tend to trade away inferior money and hoard the best. [Bad money drives out good debasing the coinage]

Seigniorage

The difference between the face value of money and the cost of supplying it: the “profit” from issuing money

Token Money

Money whose face value exceeds its cost of production 

Check

A written order instructing the bank to pay someone for an amount deposited

Transaction Account

A bank account that permits direct payment to a third party-for example- with a check or a debit card

Fractional Reserve Banking System

Only a portion of bank deposits are backed by reserves

Bank Notes

Originally, papers promising a specific amount of gold and silver to anyone who presented them to issuing banks for redemption; today, Federal Reserve notes are mere paper money

Representative Money

Bank notes that exchange for a specific commodity, such as gold or silver

Fiat Money

Money not redeemable for any commodity; its status as money is conferred initially by the government, but eventually by common experience

Legal Tender

U.S. currency that constitutes a valid and legal offer of payment for debt

Financial Intermediaries

Institutions that serve as go-betweens, accepting funds from savers and lending them to borrowers

Depositionary Institutions

Commercial banks and thrift institutions; financial institutions that accept deposits from the public

Commercial Banks

Depository institutions that historically make short-term loans, primarily to business

Thrift Institutions (Thrifts)

Savings banks and credit unions; depository institutions that historically lent money to households

The National Banking Act of 1863

Later amendments created a new system of federally chartered banks called National Banks.

Reserves

Funds that banks use to satisfy the cash demands of their customer and reserve requirements of the FED; reserves consist of cash held by banks plus deposits at the FED

Bank Breaches

A bank’s additional offices that carry out banking operations

Bank Holding Company

A corporation that owns banks

Money Market Mutual Fund

A collection of short-terms interest earning assets purchased with funds collected from many shareholder

Subprime Mortgage

Mortgages given out to people who can’t afford them. Were blended into other mortgage packages to provide a default risk of security

Securities-Rating Agencies

Analyzed the mix of mortgages and assigned an overall credit rating

Troubled Asset Relief Program (TARP)

A government program that invested in financial institutions and automakers to help stabilize markets

Too Big to Fail

Financial institutions have become so large and interconnected that failure would have been a disaster for the greater economy. (collapse had to be prevented, thus bailout)

TARP Money

Bought stakes in banks, and government stakes in General Motors and Chrysler 

Dodd-Warner Act

• Regulations aimed at preventing another financial crisis 

• Provided for tighter rules and regulation reform 

• Credit rating agencies had new regulations to follow 

• Orderly Liquidation Authority 

• Federal Insurance Office – identified and monitored insurance companies 

• Passed a code where all banks and investment companies set aside money to cover losses such as going bankrupt or in distress.  

• Comsumer Financial Protection Bureau: Prevented predatory mortgage lending and helped consumers to understand terms of mortgages before agreeing to accept it. (Also deterred mortgage brokers from earning higher commissions for closing loans with higher fees/higher interest rates

Volcker Rules

Restricted how banks could invest, limited speculative trading, and eliminated proprietary trading (invest for direct market gain rather than earning commission dollars by trading on behalf of clients)

Securities and Exchange Commission (SEC)

Established the SEC Office of Credit ratings to ensure that credit agencies provide meaningful and reliable credit ratings of businesses, municipalities and other entities they evaluate

Whistleblower Program

Established a mandatory bounty program under which whistleblowers can receive 10%-30% of the proceeds from a litigation settlement. Extended time to 180 days for a whistleblower to bring forth a claim against their employer

Money Aggregate

Measure of the economy's money supply

M1

The narrow measure of the money supply, consisting of currency and coins held by the nonbanking public, checkable deposits and traveler's checks

Checkable Deposits

Bank deposits that allow the account owner to write checks to third parties; debt cards can also access these deposits and transmit them electronically

Currency (=Fiat Money)

Federal Reserve notes and coins

Savings Deposits

Bank deposits that earn interest but have no specific maturity date

Time Deposits

Bank deposits that earn a fixed interest rate if held for the specified period, which can range from several months to several years; also called certificates of deposit (CD’s)

M2

A money aggregate consisting of M1 plus savings deposits, small denomination time deposits, money market mutual funds, and other near monies

Debit Card

Card that taps directly into a depositor's bank account to buy something and often to get cash back; also called a check card

Bitcoin

Digital currency, initially purchased with traditional currencies. It can fund some transactions; it fluctuates in value. It’s more like a speculative investment

Federal Reserve Notes

Issued by the US Bureau of Engraving and Printing. (an agency within the US Treasury) (Produced under the Federal Reserve Act of 1913 and Issued to the Federal Reserve Banks)

Coins

Manufactured by the US Mint. (A bureau of the US Treasury)

Asymmetric Information

A situation in which one side of the markets has more reliable information than the other side

Balance Sheet

A financial statement at a given point in time showing assets on one side and liabilities plus net worth on the other side; because assets must equal liabilities plus net worth, the two sides of the statement must balance.

Net Worth

Assets minus liabilities; also called owners' equity

Assets

Anything of value that is owned

Liabilities

Anything owed to other people or institutions

Required Reserves

The dollar amount of reserves a bank is obligated by regulation to hold as cash in the bank's vault or on account at the FED

Required Reserve Ratio

The ratio of reserves to deposits that banks are obligated by regulation to hold

Excess Reserves

Bank reserves exceeding required reserves. Can be sued to make loans or to purchase interest bearing assets

Liquidity

A measure of the ease which an asset can be converted into money without a significant loss of value

Federal Funds Market

A market for overnight lending and borrowing of reserves among banks. The interbank market for reserves on account at the FED

Federal Funds Rate

The interest rate charged in the federal funds market; the interest rate banks charge one another for overnight borrowing; the FED’s target interest rate

Money Multiplier

The multiple by which the money supply changes as a result of a change in fresh reserves in the banking system

Simple Money Multiplier

The reciprocal of the required reserve ratio, or 1/r; the maximum multiple of fresh reserves by which the money supply can increase

Discount Rate

The interest rate the FED charges banks that borrow money

Cash for Clunkers

June 2009 approved $1 billion to pay from $3,500-$4,500 to each car buyer who traded in a “clunker” -or a car with gas milage of 18 miles per gallon or less