econ final

perfectly competitive market

a market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market

demand schedule

a table that shows the relationship between the price of a product and the quantity of the product demanded

quantity demanded

the amount of a good or service that a consumer is willing and able to purchase at a given price

demand curve

a curve that shows the relationship between the price of a product and quantity of the product demanded

market demand

the demand by all the consumers of a given good or service

law of demand

the rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease

substitution effect

the change in quantity demanded of a good that results from a change in price, making the good more or less expensive relative to the other goods that are substitutes

income effect

the change in the quantity demanded of a good that results from the effect of a change in the good's price on consumer purchasing power

ceteris paribus condition

the requirement that when analyzing the relationship between two variables -- such as price and quantity demanded -- other variables must be held constant

normal good

a good for which the demand increases as income rises and decreases as income falls

inferior good

a good for which the demand increases as income falls and decreases as income rises

substitutes

goods and services that can be used for the same purpose

complements

goods and services that are used together

demographics

the characteristics of a population with respect to age, gender, and race

quantity supplied

the amount of a good or service that a firm i swilling and able to supply at a given price

supply schedule

a table that shows the relationship between the price of a product and the quantity of the product supplied

supply curve

a curve that shows the relationship between the price of a product and quantity of the product supplied

law of supply

the rule that, holding everything else constant, increases in price cause increases in quantity supplied, and decreases in price cause decreases in the quantity supplied

technological change

a positive or negative change in the ability of a firm to produce a given level of output with a give quantity of inputs

market equilibrium

a situation in which quantity demanded equals quantity supplied

competitive market equilibrium

a market equilibrium with many buyers and sellers

shortage

a situation in which the quantity demanded is greater than the quantity supplied

surplus

a situation in which the quantity supplied is greater than the quantity demanded

determinants of demand

1\. income 2. price of related goods 3. tastes 4. populations and demographics 5. expected future prices

determinants of supply

1\. price of inputs 2. technological change 3. price of substitutes in production 4. number of firms in the market 5. expected future prices

business cycle

alternating periods of economic expansion and economic recession

long run economic growth

the process by which rising productivity increases the average standard of living

labor productivity

the quantity of goods and services that can be produced by one worker or by one hour of work

capital

manufactured goods that are used to produce other goods and services

potential GDP

the level of real GDP attained when all firms are producing at capacity

financial system

the system of financial markets and financial intermediaries through which firms acquire funds from households

financial markets

markets where financial securities, such as stocks and bonds, are bought and sold

financial intermediaries

firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers

market for loanable funds

the interaction of borrowers and lenders that determines the market interest rate and the quantity of laudable funds exchanged

crowding out

a decline in private expenditures as a result of an increase in government purchases

industrial revolution

the application of mechanical power to the production of goods, beginning in England around 1750

economic growth model

a model that explains growth rates in real GDP per capita over the long run

human capital

the accumulated knowledge and skills that workers acquire from education and training of from their life experiences

per-worker production function

the relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant

new growth theory

a model of long-run economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system

patent

the exclusive right to produce a product for a period of 20 years from the date the patent is applied

catch-up

the prediction that the level of GDP per capita (or income per capita) in poor countries will grow faster than in rich countries

property rights

the rights individuals or firms have to there exclusive use of their property, including the right to buy or sell it

rule of law

the ability of a government to enforce the laws of the country, particularly with respect to protecting private property and enforcing contracts

foreign direct investment

the purchasing pr building by a corporation of a facility in a foreign country

foreign portfolio investment

the purchase by an individual or a firm of stocks or bonds issued in another country

globalization

the process of countries becoming more open to foreign trade and investment

aggregate demand and aggregate supply model

a model that explains short-run fluctuations in real GDP and the price level

aggregate demand curve

a curve that shows the relationship between the price level and quantity of real GDP demanded by households, firms and the government

short-run aggregate supply curve

a curve that shows the relationship in the short run between the price level and quantity of real GDP supplied by firms

monetary policy

the actions the Federal Reserve takes to manage the money supply and interest rates to achieve macroeconomic policy objectives

fiscal policy

changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives

long-run aggregate supply curve

a curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied

menu costs

the costs to firms of changing prices

supply shock

an unexpected event that causes the short-run aggregate supply curve to shift

money

assets that people are generally willing to accept in exchange for goods and services or for payment of debts

asset

anything of value owned by a person or a firm

commodity money

a good used as money that also has value independent of its use as money

federal reserve

the central bank of the United States

fiat money

money, such as paper currency, that is authorized by a central bank or government body that does not have to be exchanged by the central bank for gold or some other commodity money

m1

the narrow definition of the money supply: the sum of currency in circulation, checking account deposits in banks, and holdings of traveler's checks

m2

a broader definition of the money supply: it includes m1 plus savings account deposits, small-denomination time deposits, balances in money market deposit accounts in banks, and non institutional money market fund shares

reserves

deposits that a bank keeps as cash in its value or on deposit with the Federal Reserve

required reserves

reserves that a bank is legally required to hold, based on its checking account deposits

required reserve ratio

the minimum fraction of deposits banks are required by law to keep as reserves

excess reserves

reserves that banks hold over the legal requirement

simple deposit multiplier

the ration of the amount of deposits created by banks to the amount of new reserves

fractional reserve banking system

a banking system in which banks keep less than 100 percent of deposits as reserves

bank run

a situation in which many depositors simultaneously decide to withdraw money from a bank

bank panic

a situation in which many banks experience runs at the same time

discount loans

loans the Federal Reserve makes to banks

discount rate

the interest rate the Federal Reserve charges on discount loans

federal open market committee (FOMC)

the Federal Reserve committee responsible for open market operations and managing the money supply in the United States

open market operations

the buying and selling of Treasury securities by the Federal Reserve in order to control the money supply

security

a financial asset -- such as a stock or a bond -- that can be bought and sold in a financial market

securitization

the process of transforming loans or other financial assets into securities

velocity of money

the average number of times each dollar int he money supply is used to purchase goods and services included in GDP

quantity theory of money

a theory about the connection between money and prices that assumes that the velocity of money is constant

federal funds rate

the interest rate banks charge each other for overnight loans

expansionary monetary policy

the Federal Reserve's policy of decreasing interest rates to increase real GDP

contractionary monetary policy

the Federal Reserve's policy of increasing interest rates to reduce inflation

taylor rule

a rule developed by John Taylor that links the Fed's target for the federal funds rate to economic variables

inflation targeting

a framework for conducting monetary policy that involves the central bank announcing its target level of inflation

automatic stabilizers

government spending and taxes that automatically increase or decrease along with the business cycle

multiplier effect

the series of induced increase in consumption spending that results from an initial increase in autonomous expenditures

budget deficit

the situation in which the government's expenditures are greater than its tax revenue

budget surplus

the situation in which the government's expenditures are less than its tax revenue

cyclically adjusted budget deficit or surplus

the deficit or surplus in the federal government's budget if the economy were at potential GDP

tax wedge

the difference between the pretax and postal return to an economic activity

determinants of long run economic growth

1\. increases in labor productivity 2. increases in capital per hour worked 3. technological change

rule of 70

Calculates the number of years it would for an economy to double,

formula for rule of 70

number of years to double = 70/growth rate

determinants of loanable funds market

1\. increase in government budget deficit → supply shift to the left

2\. increase in the desire of households to consume today → supply to the left

3\. increase in tax benefits for saving → supply to the right

4\. increase in expected future profits → demand to the right

5\. increase in corporate taxes → demand to the left

effects of recession

price level decreases and real GDP decreases

effects of expansion

price level increases and real GDP increases

great moderation

the period of time, around 1950, where the economy stopped having severe recessions