AcDec Ecocomics Vocab

Administered rates

interest rates that the Fed sets or administers to affect the policy rate (federal funds rate) and overall economic conditions, including the interest on reserve balances rate (IOR) and the discount rate

Aggregate demand curve

a graphical depiction of the relationship between the level of desired expenditures in an economy and the price level

Aggregate supply curve

a graphical depiction of the relationship between the quantity of goods and services firms wish to supply and the price level

Ample reserve policy

the use of the Fed’s administered rates to affect the policy rate and overall financial conditions, most effective when reserves are so abundant that small supply changes do not affect demand; official U.S. policy since 2008

Asset price bubble

a situation where the market price diverges from the fundamentals of supply and demand

Average labor productivity

total output divided by the quantity of labor employed in its production

Bank panic

the simultaneous failure of many banks, often following multiple bank runs

Bank run

a sudden rush of depositors seeking to withdraw funds from the banking system

Barriers to entry

conditions that prevent firms from freely entering or exiting a market

Building and loan associations

cooperative organizations where members buy shares in exchange for eligibility for a home mortgage or large loan

Business cycle

fluctuations in aggregate economic activity

Capital

one of the three factors of production, referring to money or physical assets used in production

Capital goods

long-lived goods used to produce other goods and services and not used up in production

Cartel

a group of firms that collude to restrain competition, often through output quotas

Coase Theorem

if private parties can bargain without cost over resources, they can solve externalities on their own

Comparative advantage

the ability to produce a good or service at a lower opportunity cost than others

Competitive market

a market with many buyers and sellers trading a homogeneous product where all are price takers

Complements

two goods where a rise in the price of one leads to a fall in demand for the other

Consumer Price Index (CPI)

an index comparing the cost of a fixed basket of goods over time

Consumer surplus

the difference between what a buyer is willing to pay and what they actually pay

Consumption

household spending on goods and services excluding new housing

Crowding out

a decrease in private investment caused by reduced government saving or increased borrowing

Currency

coins and bills held by the public

Cyclical unemployment

unemployment caused by deviations of output from potential output

Deadweight loss

the reduction in total surplus caused by a market distortion like a tax

Demand curve

a graph showing the quantity demanded at different prices

Demand schedule

a table showing the quantity demanded at various prices

Depression

a severe recession

Diminishing returns to scale

when additional inputs produce progressively smaller increases in output

Discount rate

the interest rate the Fed charges banks for short-term loans, acting as a ceiling for the policy rate

Economic profit

revenue minus the opportunity cost of production

Elasticity

the percentage change in quantity demanded or supplied resulting from a one percent price change

Entrepreneur

an individual who takes risks to create new products, markets, or production methods

Equilibrium

a stable situation where opposing forces are balanced

Excludable good

a good that people can be prevented from using

Excludability

the ability to prevent nonpayers from consuming a good or service

Expansion

the phase of the business cycle from trough to peak

Externality

when one person’s actions affect others without compensation

Federal funds rate

the interest rate banks charge each other for overnight reserve loans

Final goods

goods and services bought by their ultimate users

Financial markets

institutions that channel savings to borrowers for consumption or investment

Fiscal policy

government taxation and spending used to influence aggregate demand

Fixed cost

a cost that does not depend on output level

Fixed exchange rate

when a country pegs its currency to another currency

Foreclosure

seizure and sale of property when a borrower fails to make loan payments

Foreign direct investment

ownership and management of assets in another country

Frictional unemployment

unemployment caused by the time it takes to find a suitable job

Gains from trade

benefits obtained from voluntary exchange

Government purchases

spending by governments on goods and services

Gross Domestic Product (GDP)

the market value of all final goods and services produced in an economy in a given period

Gross Domestic Product (GDP) per capita

GDP divided by population, used to compare average income levels

Human capital

skills and experience gained through education and training that increase productivity

Illiquid

difficult to convert to cash quickly without losing value

Imperfect competition

a market with few sellers who have market power

Inferior good

a good whose demand falls as income rises

Inflation

a general rise in prices

Insolvent

unable to pay debts because liabilities exceed assets

Installment financing

buying something and paying for it over time in regular payments

Institutions

the rules and norms that shape economic behavior

Interest on reserve balances rate (IOR)

the interest rate paid by the Fed on bank reserves, acting as a floor for the policy rate

Intermediary

a third party that facilitates transactions between others

Intermediate good

a good used in producing other goods and services

Investment

spending on capital equipment, inventories, structures, and new housing

Keynesian model

a short-run model explaining output fluctuations through changes in aggregate demand and supply

Labor force

employed people plus those actively seeking work

Labor force participation rate

the share of the working-age population in the labor force

Law of demand

holding other factors constant, quantity demanded falls as price rises

Law of supply

holding other factors constant, quantity supplied rises as price rises

Lender of last resort

an institution that provides credit during a banking panic, typically a central bank

Leverage

using borrowed money to finance investments

Limited reserve policy

monetary policy using reserve requirements, the discount rate, and open market operations, used in the U.S. before 2008

Limited reserve system

a banking system where banks must hold required reserves or borrow to meet requirements

Liquidity

how easily an asset can be converted into money

Logrolling

trading political favors or votes

Marginal cost

the additional cost of producing one more unit

Marginal revenue

the additional revenue from selling one more unit

Market failure

when markets do not allocate resources efficiently

Market power

the ability of a firm or group to influence prices by controlling output

Monetary base

currency plus bank reserves

Monetary policy

the Fed’s control of the money supply to influence aggregate demand

Money

anything that serves as a medium of exchange, unit of account, and store of value

Money multiplier

the ratio of the money supply to the monetary base

Money supply

the total quantity of money in an economy

Monopolistic competition

a market with many firms selling differentiated products and free entry

Monopoly

a market with a single producer

Moral hazard

when protection from risk encourages riskier behavior

Mortgage-backed securities

securities backed by bundled mortgage payments

Mutual fund

an investment fund pooling money to buy diversified assets

Natural rate of unemployment

unemployment that exists when the economy is at potential output

Net capital outflow

domestic purchases of foreign assets minus foreign purchases of domestic assets

Net exports

exports minus imports

Neutrality of money

in the long run, money affects prices but not real output

Nominal GDP

GDP measured at current prices

Normal good

a good whose demand rises as income rises

Normative economics

analysis based on value judgments about what should be

Okun’s law

the relationship between output gaps and cyclical unemployment

Oligopoly

a market dominated by a few firms

Open market operations (OMOs)

central bank purchases or sales of government securities to influence the money supply

Opportunity cost

the value of the next best alternative given up

Output gap

the difference between actual and potential output