Econ 7, 8, and 10

loanable funds

all income that people have chosen to save and lend out rather than use for their own consumption; supply of loanable funds comes from saving and demand for loanable funds comes form investment

A bank loans Greg's Ice Cream $250,000 to remodel a building near campus to use as a new store. On their respective balance sheets, this loan is

an asset for the bank and a liability for Greg's Ice Cream. The loan increases the money supply

budget surplus

an excess of tax revenue over government spending; T-G=public saving

central bank

an institution that oversees the banking system and regulates the money supply

medium of exchange

an item buyers give to sellers when they want to purchase g&s

store of value

an item people can use to transfer purchasing power from the present to the future

A person who is not employed and claims to be trying hard to find a job but really is not trying hard to find a job is

counted as unemployed but should be counted as out of the labor force

populations growth may affect living standards in 3 diff ways

1. stretching natural resources; 2. diluting the capital stock (bigger population means lower productivity and living standards; 3. promoting tech progress (more people means more scientists and inventors and discoveries)

Suppose that the Bureau of Labor Statistics reports that the entire adult population of Mankiwland can be categorized as follows: 25 million people employed, 3 million people unemployed, 1 million discouraged workers, and 1 million people who are either students, homemakers, retirees, or other people not seeking employment. What is the unemployment rate?

10.7%

If $300 of new reserves generates $800 of new money in the economy, then the reserve ratio is

37.5 percent

how the fed influences the reserve ratio

=reserves/deposits; the fed sets reserve requirements; reducing reserve requirements would lower the reserve ratio and increase the money multiplier; raising the interest rate would increase the reserve ratio and lower the money multiplier

Octavia does not currently have a job, but she has applied for several jobs in the previous week. Eve is an unpaid stay-at-home mom who has not searched for work in recent years. Who does the Bureau of Labor Statistics count as "out of the labor force"?

Eve but not Octavia

physical capital per worker

K/L

Who of the following would be included in the Bureau of Labor Statistics' "unemployed" category?

Miguel, who is on temporary layoff

national income

Y=C+I+G+NX

capital requirement

a government regulation that specifies a minimum amount of capital, intended to ensure banks will be able to pay off depositors and debts

budget deficit

a shortfall of tax revenue from government spending; G-T=-(public saving); government borrowing to finance its budget deficit reduces the supply of loanable funds which creates crowding out (of private borrowers); increase in budget deficit causes fall in investment

T-account

a simplified accounting statement that shows a bank's assets and liabilities

fractional reserve banking system

banks create money when they make loans

liabilities

besides deposits, banks also obtain funds from issuing debt and equity

assets

besides reserves and loans, banks also hold securities

the federal reserve system consists of:

board of governors, 12 regional fed banks, federal open market committee (FOMC; decides monetary policy)

A bank's assets equal its liabilities under

both 100-percent-reserve banking and fractional-reserve banking

Olga owns her own business. Sven is an unpaid worker in his family's business. Who is included in the Bureau of Labor Statistics' "employed" category?

both Olga and Sven

Consider two people who are currently out of work. Tim is not looking for work because there have been many job cuts where he lives, and he doesn't think it likely that he will find work. Bev is not currently looking for work, but she would like a job, and she has looked for work in the past. The Bureau of Labor Statistics considers

both Tim and Bev to be marginally attached workers

shifts of demand for loanable funds

changes in perceived business opportunities; firms believe the economy had profit investment opportunities; demand curve shifts right

shifts of supply of loanable funds

changes in private savings: households decide to consume more and save less; supply curve shifts to left; changes in capital in flows: increase in the capital inflows, supply curve shifts right

the fed can change the money supply by

changing bank reserves, changing the money multiplier

M1

currency, demand deposits, traveler's checks, other checkable deposits

required features of money

divisible, fungible: one unit or piece must be equal to another, precisely measurable, durability, scarce/difficult to counterfeit

fiat (type of money)

does not have intrinsic value (US dollar)

investment from abroad

especially beneficial in poor countries that cannot generate enough saving to fund investment projects themselves; also helps poor countries learn state of the art technologies developed in other countries

M2

everything in M1 plus savings deposits, small time deposits, money market mutual funds

type of mutual funds

fixed income funds: like govt bonds, treasury bills, lowest return rate, lowest risk, insure relatively fixed return; equity funds: invest in stocks, highest return rate, more risk; balanced funds: invest in a mix of equities and fixed income securities, balance risk and return; index funds: track performance of a specific index

to raise K/L and hence productivity, wages, and living standards, the govt can encourage:

foreign direct investment: a capital investment (factory) that is owned and operated by a foreign entity; foreign portfolio investment: a capital investment financed with foreign money but operated by domestic residents

reserve ratio R

fraction of the deposits that banks hold as reserves, total reserves as a percentage of total deposits

catch up effect

the property whereby poor countries tend to grow more rapidly than rich ones; because of diminishing returns, the increase in K/L has a bigger effect in the poor country than in the rich country

financial markets

group of institutions through which savers can directly provide funds to borrowers (ex: the bond market and stock market); governed by the forces of supply and demand; help allocate the economy's scarce resources to their most efficient uses

The principle of monetary neutrality implies that an increase in the money supply will

increase the price level, but not real GDP

Open-market purchases by the Fed make the money supply...

increase, which makes the value of money decrease

a tax decrease...

increases the incentive for households to save at any given interest rate; supply of loanable funds curve shifts to the right; equilibrium interest rate decreases

financial intermediaries

institutions through which savers can indirectly provide funds to borrowers (ex: banks and mutual funds)

real interest rate

interest rate in the market for loanable funds

free trade

inward oriented policies (tariffs, limits on investment from abroad) aim to raise living standards by avoiding interaction with other countries; outward oriented policies (elimination of restrictions on trade or foreign investment) promote integration with the world economy; inward countries usually fail to create growth

the price of the loan

is the interest rate; the return to saving and the cost of borrowing

benefit of mutual funds

managed by a financial professional; allows investors to participate in a wide variety with only a small amount of money

four wheels of the engine of economic growth

nature resources: land, materials, fuels and environmental quality; Human resources: labor supply, education, discipline and motivation; physical capital: machines, factories, roads; technology: science, engineering, management, and entrepreneurship

According to the classical dichotomy...

nominal GDP, the price level, and nominal wages are affected by monetary factors

GDP per capita

output per person (GDP÷population)

quantity theory of money

prices rise when the government prints too much money; asserts that the quantity of money determines the value of money

national saving

private + public; Y-C-G; the proportion of national income that is not used for consumption or government purchases; in a closed economy it equals investment

living standards are determined by

productivity (policy that affects productivity: saving and investment)

govt can increase productivity by:

promoting education (investment in human capital); trade-off for investing in H is spending a year in school sacrifices a year's worth of wages now to have higher wages later

value of money

purchasing power; p= price level (price of a basket of goods, measured in money); 1/p is the value of $1 measured in goods; inflation drives up the price level and drives down the value of money

technological knowledge

society's understanding of the best ways to produce g&s; any advance in knowledge that boosts productivity (allows society to get more output form its resources)

commodity money

takes the form of a commodity with intrinsic value (ex: gold coins, cigarettes in prison)

private saving

the amount of income that households have leftover after paying their taxes and consumption (assume closed economy) Y-T-C

money multiplier

the amount of money the banking system generates with each dollar of reserves; =1/R

public saving

the amount of tax revenue that the government has left after paying for its spending; T-G

federal reserve

the central bank of the U.S.; establishes reserve requirements, regulations on the minimum amount of reserves that banks must hold against deposits

liquidity

the ease with which an asset is converted to the medium of exchange

barter system

the exchange of one good or service for another

economic growth

the expansion of country's potential GDP or national output; closely related to the growth rate of output per person which determines the rate at which the country's standard of living is rising

to ease the credit crunch in 2008

the fed and US treasury injected hundreds of billions of dollars worth of capital into the banking system; this temporarily made US taxpayers part-owners of many banks; succeeded in recapitalizing the banking system

how the fed influences reserves

the fed makes loans to banks, increasing their reserves; traditional method:adjusting the discount rate (the interest rate on loans the fed makes to banks) to influence the amount of reserves banks borrow; new method: the fed chooses the quantity of reserves it will loan, then banks bid against each other for these loans

the financial system

the group of institutions that helps match the saving of one person with the investment of another

natural resources

the inputs into production that nature provides; more N allows a country to produce more Y; countries don't need a lot of N to be rich (ex: Japan)

federal funds rate

the interest rate on loans that banks with insufficient reserves banks can borrow from banks with excess reserves; to raise fed funds rate, the fed sells govt bonds

human capital per worker

the knowledge and skills workers acquire through education, training, and experience; H/L= average worker's human capital

open market operations (OMOs) (how the fed influences reserves)

the purchase and sale of US govt bonds by the fed; when economy is slowing down, if the fed buys a govt bond from a bank, it pays by depositing new reserves in that bank's reserve account, with more reserves, the bank can make more loans, increasing the money supply; when the market is overheated, the fed sells a govt bond to a bank, it pays by reducing reserves in that bank's account, with less reserves, the bank can make less loans, decreasing the money supply

investment

the purchase of new capital

money supply

the quantity of money available in the economy; assets part of the money supply: currency (paper bills and coins not in the bank), demand deposits: balances in bank accounts that depositors can access on demand by writing a check; =money multiplier x bank reserves

production function

the relationship between the quantity of inputs and the quantity of outputs; Y= AxF(L,K,H,N) ; Y: quantity of output, L: quantity of labor, K: quantity of physical capital, H: quantity of human capital, N: quantity of nature resources; property: constant returns to scale (changing all inputs by the same percentage causes output to change by that percentage; doubling all inputs causes output to double

bank capitial

the resources a bank obtains by issuing equity to its owners (=bank assets-bank liabilities)

monetary policy

the setting of the money supply by policymakers in the central bank

leverage

the use of borrowed funds to supplement existing funds for investment purposes (leverage amplifies profits and losses)

unit of account

the yardstick people use to post prices and record debt; something that can be used to value g&s, record debts, and make calculations; measure of value

three functions of money

unit of account, store of value, medium of exchange

banks runs

when people suspect their banks are in trouble, they may run to the bank to withdraw their funds, holding more currency and less deposits; under fractional reserve banking, banks don't have enough reserves to pay off all depositors, hence banks may have to close