Untitled Flashcards Set

money – an asset that is socially and legally accepted as a medium of exchange.

There are three functions of money.

medium of exchange – an asset used as payment when purchasing goods/services

store of value – an asset that serves as a means of holding wealth

unit of measure – a basic measure of economic activity

Buyers Reservation Price – the Maximum Amount of Money that a Buyer is willing to give up for an Item

Sellers Reservation Price – The Minimum Amount of Money that a Buyer is willing to accept for an Item

demand – the relationship between the price of a good and the quantity that consumers are willing and able to purchase, all other factors fixed

supply – the relationship between the price of a good and the quantity that firms are willing and able to sell, all other factors fixed

Law of Demand – all other factors fixed, a greater quantity of a good will be demanded at lower prices (demand curves are downward sloping).

Law of Supply – all other factors fixed, a greater quantity of a good will be supplied at higher prices (supply curves are upward sloping

Horizontal Interpretation of Demand Curve – start by focusing on a particular price, and then go over to the demand curve horizontally to determine the corresponding quantity demanded at this particular price.

excess supply – a situation in which quantity supplied is greater than quantity demanded (resulting in “downward pressure” on price).

excess demand – a situation in which quantity demanded is greater than quantity supplied (resulting in “upward pressure” on price).

Role of Profits in a free market economy – profits serve as a vital “signaling device” in free market economies, directing resources to their most valuable use.

entrepreneur – someone who organizes and manages a business, typically with considerable initiative and exposure to risk.

Role of the Entrepreneur – profits can only serve as effective signals insofar as someone is able to recognize, appreciate, and respond according to different levels of profit.

Gross Domestic Product – the total market value of all FINAL goods and services produced within a society.

Nominal GDP – The Value of GDP in current period prices

Real GDP – the Value of GDP computed using prices from an arbitrary base year as the starting point.

Price Index – A Mathematical Representation of the price level or the average price for goods and services in a country in a particular year, with the price level in the base year set equal to 100.

economic growth – sustained increases over time in a society’s value of Real GDP

 graphically illustrated by an outward shift of the PPF

 measured quantitatively as the percentage increase in Real GDP

GDP growth rate – annual percentage change in the value of real GDP

Rule of 72 – the observations that a variable that grows at a constant rate of “X% per period” will double in value in approximately “(72/X) periods”

GDP Per Capita – is computed as the value of GDP of a country divided by the population of that country. (Better for comparison between Countries than just comparing GDP.)

Industrially Advanced Countries – high income countries with primarily market based economies, large stocks of technologically advanced industrial capital and highly skilled workforce.

Less Developed Countries – lower income countries which are held back by some combination of poor economic institutions, undeveloped industrial capital, and/or an uneducated and unskilled workforce.

Economic Growth – sustained increases over time of Real GDP

Catch‐up Effect – conjecture that (all other factors fixed) the growth rates of less developed countries will exceed the growth rates of developed countries, allowing the less developed countries to “catch up” over time

Vicious‐cycle‐of‐poverty hypothesis – conjecture that poor countries will remain poor since they do not have sufficient resources available to make the investments in capital which are necessary for economic growth

Capital flight – tendency for wealthy people in poor countries to invest their financial capital abroad instead of at home

brain drain – tendency for the most highly talented people from developing countries to become educated and then move to an already wealthy country

Rule‐of‐Law – environment in which property rights and contracts are respected and administered fairly and transparently, without favorites, NOTE: countries lacking rule‐of‐law have difficulty achieving growth

Crony Capitalism – environment in which well‐connected unscrupulous business people use corrupt political systems to their advantage in order to obtain preferential treatment from government (e.g., government contracts, subsidies, bailouts, tax loopholes)

 in such an environment, the efficient use of resources is distorted to the detriment of economic growth

physical capital – machines, building, factories, and other equipment used in the production process.

human capital – the knowledge, education, skills, experience, work ethic, inter‐personal skills, and other attributes of workers which determine productivity.

Inflation – Overall Increase in the level of prices prevalent in an economy over time.

Deflation – Overall Decrease in the level of prices prevalent in an economy over time.

 Consumer Price Index – a measure of the average change over time in the prices paid by urban consumers for a market based basket of consumer goods

Dual Coincidence of Wants – for a barter trade to take place, one side of the transaction has to want what the other side has, and vice versa.

Relative Price – of a good is an expression of the price of a unit of the good in terms of a number of units of some other good.

Money Supply – the amount of money in circulation in a society

Equation of Exchange – ties together the amount of money created by a government and the prices charged by business people in general

The Velocity of Money – the number of times that a typical dollar is used in a transaction in a given year

Nominal Wealth – The hard dollar amount of wealth you hold at any one time expressed in today’s dollars reflects nominal purchasing power

Real Wealth – Real purchasing power as expressed in the amount of goods that you can purchase.

Central Bank – the entity which has the ability to alter the money supply of an economy.

Hyperinflation – refers to a very high rate of inflation generally greater than 100% per year.

Contractionary Monetary Policy – a decrease in the money supply which dampens overall economic activity resulting in lower levels of output, employment and incomes in the short term (but greater stability in the long term)

Expansionary Monetary Policy – an increase in the money supply which provides a short term stimulus to the macro economy, resulting in higher levels of output, employment and incomes.

Price Control – a legal restriction on the price at which trade can take place

 Price Ceiling – legally established maximum price at which a trade can take place.

 Price Floor – a legally established minimum price at which a trade can take place.

Federal Reserve System (also known as the ‘Fed’) – the central bank of the United States

How does Central Bank control the money supply: Open Market Operations & Reserve Requirements

A) Open Market Operations – the buying and selling of U.S. Treasury Debt Securities by the Fed in open markets with the intent of increasing or decreasing the money supply.

a. Market Maker – A firm that provides liquidity to a market for a security by maintaining an active Buy and Sell price at some level at all times.

b. Primary Dealer in US Government Securities – a firm that buys government securities directly from the government as required, with the intent of reselling them to others, thus acting as a market maker in Government Securities.

B) Reserve Requirements – minimum amount of money that a bank must keep on hand (and not loan out) at any given point in time in either the form of cash in its vault or deposits with the central bank (the Fed).

a. Fractional Reserve Banking System – Refers the point that at any given time a commercial bank is only required to retain a portion of the money it has accepted in deposits.

C) Discount Rate – the interest rate that the Fed charges banks to borrow money on a short term basis.