Chapter 7, 8, 9 Econ
federal reserve system
"watchdog" of economy; central bank of the U.S.; holds power to implement monetary policy
rule of 72
# of years for an economy to double in size ≈ 72/annual percentage growth rate
unemployment rate
(# of unemployed divided by labor force) times 100
labor force participation rate
(labor force divided by relevant population) times 100
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
hyperinflation
An extremely high rate of inflation, generally above 100% per year.
relevant population
Any civilian over the age of sixteen who is non-institutionalized
federal funds interest
Borrowing and lending between banks establishes a ______ _______ ______
decrease in discount rate
Fed is signaling economy needs to be stimulated; expansionary policy is being implemented; money supply needs to be increased
increase in discount rate
Fed is signaling inflation is an issue; economy is slowing down; contractionary policy is being implemented; money supply needs to be reduced
monetary policy
Government policies which determine a nation's Money Supply
reduces
Increasing the amount of required bank reserves _________the money supply
discount rate
Interest rate the FED charges banks for overnight loans
increases
Lowering the amount of required bank reserves ___________ the money supply.
sources of inflation
Printing money, Negative Supply shocks: drastic change in supply of a good essential to the economy (gas prices when pipeline ruptured), Positive Demand shocks: i.e., tax cut
investment
Purchases of newly produced goods and services by FIRMS
consumption
Purchases of newly produced goods and services by HOUSEHOLDS
labor force
The _____ _____ is the total number of those employed and unemployed
macroeconomics
The branch of economics which studies the functioning and performance of a society's "economy as a whole"
equation of exchange
Ties together the amount of money created by a government and the prices charged for goods and services ( money supply x velocity of money = GDP = price level x quantity)
expansions
_______ are marked by positive economic growth and a reduction in unemployment.
recessions
________ (contractionary phases) are marked by negative economic growth and a rise in unemployment
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)
aggregate level of output
a measure of the real quantity of goods/services produced (denoted Q )
fractional reserve banking system
a system in which at any point in time a commercial bank is only required to retain a portion of the money it has accepted as deposits
underground economy
aka black market. Sale not reported to authorities. Barter trade, cash under the table
total population
all people living in a country
goods and services
all tangible items and intangible items
inflation
an overall increase in the level of prices prevalent in an economy over time
stabilization function
attempts by government to minimize fluctuations in overall macroeconomic activity
structural unemployment
caused by changes in consumer demand or technology
cyclical unemployment
caused by fluctuations in the business cycle (e.g., recessions)
components of GDP
consumers, investments, government, foreign exports; Y = C + I + G + NX (expenditure approach)
non market production
creation of goods and services not sold through a market (mowing your own lawn, painting a friend's house, moving yourself)
central bank
entity which has the ability to alter the money supply of an economy Primary task is to control the nation's money supply. U.S.
net exports
exports minus imports (X - M)
natural rate of unemployment
frictional + structural
intermediate goods
goods sold to other firms to be used in other production process
deflation
if a society experiences declining prices over time; decrease in money supply
within a society
includes all economic activity which takes place within a geographic border
intensive growth
increased worker productivity, technology, improved physical capital, improved human capital
difficulties measuring GDP
intermediate goods, used goods, non market production, underground economy
price control
legal restriction on the price at which trade can take place
nominal GDP
measured based on market values prevailing at the time; value of GDP computed using current year prices, accounts for inflation
GDP
measures a society's output; total markey value of all final goods and services produced within a society over a certain period of time
rate of unemployment
measures the prevalence of unemployment in the economy
money
medium of exchange; store of value; unit of measure
setting of reserve requirements
minimum restrictions on the amount of money that a bank must keep on hand at any point in time, in the form of either cash in its vault or deposits with the central bank. Lowering this increases the money supply; raising this decreases the money supply
brain drain
most highly talented human resources become educated (often overseas) and then move to an already wealthy nation
extensive growth
new land cultivated, new manufacturing facilities, may/may not increase standard of living, not usually sustainable over long periods of time
real GDP formula
nominal gdp/gdp deflator) x 100
seasonal unemployment
occurs regularly and is tied to specific seasons/weather (e.g., lifeguards, Christmas shopping spree)
contractionary phase
period from peak to trough
expansionary phase
period from trough to peak on business cycle
crony capitalism
preferential treatment through rigged contracts and subsidies
gdp deflator
price index that measures inflation or deflation in an economy with respect to a specific base year
consumer price index
provides a measure of how prices change over time; Price changes are weighted by the importance of the goods based on spending habits of the population
inflation rate
rate at which the overall price level increases on an annual basis.
economic growth
represented by an outward shift of PPF
used goods
resale items
frictional unemployment
results from workers who voluntarily quit to search for a better position
contractionary policy
results in a decrease in the money supply in order to slow down inflation
expansionary policy
results in an increase in the money supply
setting of discount rate
setting the interest rate that the Fed charges banks on short-term loans. Lowering this increases the money supply; raising this decreases the money supply
reserve requirements
setting the minimum amount of required bank reserves
misery index
simultaneous high inflation and unemployment • Term coined by Arthur Okun (unemployment rate + inflation rate)
overall price level
the "average" of all the prices of goods/services traded (denoted P )
real GDP
the adjusted value of GDP (adjusting for changes in prices). Shows actual increase in production
open market operations
the buying and selling of U.S. Treasury debt securities
loanable funds market
the collection of all markets in which lenders and borrowers interact (e.g., mortgage markets, auto loan markets, consumer credit markets, business loan markets)
velocity level
the number of times that a typical dollar is used in market transactions in a single year (denoted V )
discouraged workers
the portion of marginally attached workers who have given up actively looking for work (not included in unemployment rate)
total market value
the value of different items are weighted according to the market price and summed
marginally attached workers
those who actively looked for work in the past year, but not the past four weeks (not included in unemployment rate)
underemployed workers
those working part time or seeking a better job (not included in unemployment rate)
of all final
to avoid "double counting", intermediate goods are not included in GDP
bureau of labor statistics
tracks the inflation rate by calculating the value of the Consumer Price Index (CPI)
real gdp per capita
value of real gdp divided by total population; excellent indicator of the average economic standard of living
capital flight
wealthy people in poor countries invest their capital elsewhere (seeking higher return on investment)
GDP equation
when you add together the value of every final good produced multiplied by the quantity of the good produced: (P1 x Q1) + (P2 x Q2) + (P3 x Q3) + ... + (PN x QN)
unemployed
● Not working ● Willing/able to work ● Actively seeking a job in the past four weeks
employed
● They work full-time or part-time. ● Work a temporary job. ● Have a job but are on vacation, sick leave, maternity leave, on strike, etc. ● Is an unpaid family worker working at least 15 hours per week.