ECO - Final (CH.11,14,15: terms)

Aggregate expenditure (Y)

the level of ____ that consists of consumption, government spending, net exports, and actual investment by firms

marginal propensity to consume (MPC)

the amount that consumption increases when after-tax income increases by $1

marginal propensity to consume (MPC)

the amount that consumption increases when after-tax income increases by $1

interest rate

the “price of money,” typically expressed as a percentage per dollar per unit of time; for savers, it is the price received for letting a bank use money for a specified period of time; for borrowers, it is the price of using money for a specified period of time

planned aggregate expenditure (PAE)

the amount of spending and production that businesses, households, and others are planning to make, consisting of planned consumption, investment, government spending, and net exports

planned aggregate expenditure curve

a function of actual aggregate expenditure, holding all other factors constant

equilibrium aggregate expenditure

the level of aggregate expenditure where unplanned investment is equal to zero, or, equivalently, where planned aggregate expenditure is equal to actual aggregate expenditure

recessionary output gap

an output gap that occurs when equilibrium aggregate expenditure is below the level needed for full employment

inflationary output gap

an output gap that occurs when equilibrium aggregate expenditure is above the level needed for full employment

multiplier effect

the increase in consumer spending that occurs when spending by one person causes others to spend more too, increasing the impact on the economy of the initial spending

expenditure multiplier

the factor by which output increases in response to an initial change in aggregate expenditure

financial market

a market in which people trade future claims on funds or goods

information asymmetry

a condition in which one participant in a transaction knows more than another participant

moral hazard

the tendency for people to behave in a riskier way or to renege on contracts when they do not face the full consequences of their actions

adverse selection

a state that occurs when buyers and sellers have different information about the quality of a good or the riskiness of a situation, and this asymmetric information results in failure to complete transactions that would have been possible if both sides had the same information

market for loanable funds

a market in which savers supply funds to those who want to borrow

savings

the portion of income that is not immediately spent on consumption of goods and services

investment (I)

spending on productive inputs, such as factories, machinery, and inventories

crowding out

the reduction in private borrowing caused by an increase in government borrowing

default

the failure of a borrower to pay back a loan according to the agreed-upon terms

risk-free rate

the interest rate at which one would lend if there were no risk of default; usually approximated by interest rates on U.S. government debt

financial system

the group of institutions that bring together savers, borrowers, investors, and insurers in a set of interconnected markets where people trade financial products

liquidity

a measure of how easily a particular asset can be converted quickly to cash without much loss of value

financial intermediaries

institutions that channel funds from people who have them to people who want them

stock

a financial asset that represents partial ownership of a company

dividend

a payment made periodically, typically annually or quarterly, to all shareholders of a company

loan

an agreement in which a lender gives money to a borrower in exchange for a promise to repay the amount loaned plus an agreed-upon amount of interest

bond

a form of debt that represents a promise by the bond issuer to repay the face value of the loan, at a specified maturity date, and to pay periodic interest at a specific percentage rate

face value

the amount a bond pays out when it matures

derivative

an asset whose value is based on the value of another asset

mutual fund

a portfolio of stocks, bonds, and other assets managed by a professional who makes decisions on behalf of clients

market (systemic) risk

any risk that is broadly shared by the entire market or economy

idiosyncratic risk

any risk that is unique to a particular company or asset

standard deviation

a measurement of the amount of variation in a set of numbers

net present value (NPV)

a measure of the current value of a stream of cash flows expected in the future

efficient-market hypothesis (EMH)

the idea that market prices always incorporate all available information and therefore represent true value as correctly as is possible

arbitrage

the process of taking advantage of market inefficiencies to earn profits

private savings

the savings of individuals or corporations within a country

public savings

the difference between government tax revenue and government spending

national savings

the sum of the private savings of individuals and corporations plus the public savings of the government

closed economy

an economy that does not interact with other countries’ economies

open economy

an economy that interacts with other countries’ economies

net capital flow

the net flow of funds invested outside of a country; specifically, the difference between capital inflows (investment financed by savings from another country) and capital outflows (domestic savings invested abroad)

money

the set of all assets that are regularly used to directly purchase goods and services

store of value

a certain amount of purchasing power that money retains over time

medium of exchange

the ability to use money to purchase goods and services

barter

directly offering a good or service in exchange for some good or service you want

unit of account

a standard unit of comparison

commodity-backed money

any form of money that can be legally exchanged into a fixed amount of an underlying commodity

fiat money

money created by rule, without any commodity to back it

money supply

the amount of money available in the economy

liquidity

how easily a particular asset can be converted quickly to cash without much loss of value

monetary base

the sum of currency in circulation and reserves held by banks at the Federal Reserve

M1

definition of money that includes cash plus checking account balances

M2

definition of money that includes everything in M1 plus savings accounts and other financial instruments where money is locked away for a specified amount of time; less liquid than M1

demand deposits

funds held in bank accounts that can be withdrawn (“demanded”) by depositors at any time without advance notice

reserves

the money that a bank keeps on hand, either in cash or in deposits at the Federal Reserve

required reserves

the minimum proportion of deposits that banks were legally required (by the Federal Reserve) to keep on hand. In 2020, the Fed eliminated the reserve requirement, but banks still keep reserves to meet needs for liquidity

excess reserves

any additional amount that a bank chooses to keep in reserve beyond the minimum amount required to maintain liquidity

fractional-reserve banking

money multiplier

the ratio of money created by the lending activities of the banking system (the numerator) to the money created by the central bank (the denominator)

central bank

the institution ultimately responsible for managing the nation’s money supply and coordinating the banking system to ensure a sound economy

Federal Reserve (the Fed)

the central bank of the United States; consists of a seven-member Board of Governors and 12 regional banks

monetary policy

actions by the central bank to manage the money supply, in pursuit of certain macroeconomic goals

dual mandate

the twin responsibilities of the Federal Reserve, to use monetary policy to ensure price stability and to maintain full employment

overnight interest rate

the rate of return a lender (usually a bank) gets for lending out money over one night

federal funds rate

the interest rate at which banks choose to lend reserves held at the Fed to one another

open-market operations

the Fed’s sales or purchases of government bonds to or from banks on the open market

discount window

the lending facility run by the Fed that allows any bank to borrow reserves

discount rate

the interest rate charged by the Fed for loans of reserves through the discount window

interest on reserve balances

the overnight rate of return earned on reserve balances held at the Federal Reserve

maturity date

the point in time when a bond disburses its final payment

yield

the interest rate earned on a bond

expectations hypothesis

the proposition that long-term interest rates are determined by current and future expected overnight interest rates

risk premium

the additional yield a bond may provide due to the risk associated with it

effective lower bound

the natural lower limit on interest rates

forward guidance

communication from the Fed about the future path of overnight interest rates

quantitative easing

direct large-scale purchase of government bonds and other assets by the Fed

quantitative tightening

large-scale sale of government bonds and other assets by the Fed

liquidity-preference model

idea that the quantity of money people want to hold is a function of the interest rate

yield curve

a curve that plots the varying yields across differing maturity dates for bonds of equal credit quality