Macro-Econ Midterm II

double coincidence of wants

two traders are willing to exchange their products directly

money

anything that is generally accepted in exchange for goods and services

medium of exchange

anything that facilitates trade by being generally accepted by all parties in payment for goods or services

commodity money

money that takes the form of a commodity with 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]

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 for a bank to pay money

Transactions account

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

fractional reserve banking system

only a portion of bank deposits is backed by reserves

Bank Branches

A bank's additional offices that carry out banking operations. (ex. PNC, Huntington, Chase)

Bank Holding Company

A corporation that owns banks.

Money Market Mutual Funds

A collection of short-term interest-earning assets purchased with funds collected from many shareholders.

Moral Hazard

Caused by the banks taking bigger risks by making commercial loans, credit cards etc.

Credit Score

Determined how likely a borrower was to default on their mortgage payments.

Subprime Mortgages

a type of high-risk home loan offered to borrowers with poor credit scores; were blended into other to provide a default risk for a security.

Securities-rating Agencies

Analyzed the mix of mortgages and assigned an overall credit rating.

Reserves

Funds that banks use to satisfy the cash demands of their customers and reserve requirements of the FED.

Banking Acts of 1933 & 1935

These acts brought regulation to the banking system and centralized power with the FED.

The FED's Board of Governors

Were now responsible for setting and implementing the nation's monetary policy.

Federal Open Market Committee (FOMC)

The 12 board members (1 board governor, 5 presidents of the reserve banks) responsible for raising and lowering the interest rate.

Classical Economists

A group of 19th century economists who believed that economic downturns were short run phenomena that corrected themselves through natural market forces.

Progressive Income Tax

a system where the tax rate increases as the taxable amount (income) increases; during economic expansion and recession.

Unemployment Insurance

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

Automatic Stabilizers

Built in government policies - such as income taxes and unemployment insurance - that automatically adjust to stabilize the economy without new legislation.

Discretionary Fiscal Policy

A demand management policy; the objective is to increase or decrease aggregate demand to smooth economic fluctuations.

Natural Rate of Unemployment

The unemployment rate when the economy produces its potential output.

Short Run Aggregate Supply Curve (SRAS)

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

Expansionary Fiscal Policy

An increase in government purchases and/or a decrease in net taxes aimed at increasing aggregate demand enough to return the economy to its potential output thereby reducing unemployment.

Contractionary Fiscal Policy

A decrease in government purchases and/or an increase in net taxes aimed at reducing aggregate demand enough to return the economy to potential output without worsening inflation.

Life-Cycle Model of Consumption & Saving

Young people borrow, middle-agers pay off debts & save, and older people spend 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'.

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.

Aggregate Supply

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

Nominal Wages

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 max sustainable amount of goods & services an economy can produce while fully utilizing resources.

Consumption Function

The relationship between consumption & income

Marginal Propensity To Consume (MPC)

The fraction of a change in income that is spent on consumption

Saving Function

The relationship between saving and income

Net Wealth

The value of assets minus liabilities

Marginal Propensity to Save

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

Early 1960’s

Golden Age of Keynesian