Macroeconomics Exam 3

Accelerator Principle

the proposition that a higher growth rate in real GDP results in a higher level of planned investment spending, and a lower growth rate in real GDP leads to lower planned investment spending.

Automatic Stabilizers

government spending and taxation rules that cause fiscal policy to be automatically expansionary when the economy contracts and automatically contractionary when the economy expands without requiring any deliberate actions by policy makers. example: taxes that depend on disposable income

Autonomous change in aggregate spending

an initial rise or fall in aggregate spending at a given level of real GDP.

Bank Reserves

currency held by banks in their vaults plus their deposits at the Federal Reserve.

Bank run

a phenomenon in which many of a bank’s depositors try to withdraw their funds because of fears of a bank failure.

Central Bank

an institution that oversees and regulates the banking system and controls the monetary base.

Certificate of deposit (CD)

a bank-issued asset in which customers deposit funds for a specified amount of time and earn a specified interest rate.

Checkable bank deposits

bank accounts that can be accessed by using checks, debit cards, and digital payments.

Commodity money

a medium of exchange that is a good, normally gold or silver, that has intrinsic value in other uses.

Commodity-backed money

a medium of exchange that has no intrinsic value, whose ultimate value is guaranteed by a promise that it can be converted into valuable goods on demand.

Currency in circulation

actual cash held by the public.

Discount window

a protection against bank runs in which the Federal Reserve stands ready to lend money to banks in trouble.

Flat money

a medium of exchange whose value derives entirely from its official status as a means of payment.

Inflationary Gap

the gap that exists when aggregate output is above potential output.

Inventories

stocks of goods and raw materials held to facilitate business operations.

Monetary Base

the sum of currency in circulation and bank reserves.

Monetary neutrality

the concept that changes in the money supply have no real effects on the economy in the long run and only result in a proportional change in the price level.

Money supply

the total value of financial assets in the economy that are considered money.

Multiplier

the ratio of total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change.

Near-moneys

financial assets that can’t be directly used as a medium of exchange but can be readily converted into cash or checkable bank deposits.

Nominal Wage

the dollar amount of any given wage paid.

Public Debt

government debt held by individuals and institutions outside the government.

Potential output

the level of real GDP the economy would produce if all prices, including nominal wages, were fully flexible.

Recessionary gap

the gap that exists when aggregate output is below potential output.

Reserve requirements

rules of the Federal Reserve that set the minimum reserve ratio for banks. For checkable bank deposits in the United States, the minimum reserve ratio is set at 10%.

Self-correcting

describes an economy in which shocks to aggregate demand affect aggregate output in the short run but not in the long run.

Shadow banking

bank-like activities undertaken by nondepository financial firms such as investment banks and hedge funds, but without regulatory oversight and protection.

Social insurance

government programs — like Social Security, Medicare, unemployment insurance, and food stamps — intended to protect families against economic hardship.

Stabilization policy

the use of government policy to reduce the severity of recessions and to rein in excessively strong expansions. There are two main tools: monetary policy and fiscal policy.

Stagflation

the combination of inflation and falling aggregate output.

Sticky wages

nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages.

Target federal funds rate

the Federal Reserve’s desired level for the federal funds rate. The Federal Reserve adjusts the money supply through the purchase and sale of Treasury bills until the actual rate equals the desired rate.

Medium of exchange

One of the main roles money plays on the modern economy; an asset that individuals acquire for the purpose of trading for goods and services rather then their own consumption

Store of Value

One of the main roles of money; an asset that means of holding purchasing power over time

Unit of Account

One of the main roles of money; a measure used to set prices and make economic calculations

Taylor rule for monetary policy

A rule that sets the federal funds rate according to the level of the inflation rate and either the output gap or the unemployment rate

Inflation Targeting

an approach to monetary policy that requires that the central bank try to keep the inflation rate near predetermined target rate

Accountability

An advantage of inflation targeting; central bank’s success can be judged by how close inflation rates are to target inflation rates

Transparency

An advantage of inflation targeting; The public knows the objective of an inflation-targeted central bank