ap macro: unit three

Federal Reserve's "good" unemployment rate

between 5-3 % is best for economy - really high and really low inflation is bad (opinions vary between freshwater and saltwater economists)

liquid asset

can be quickly converted into cash

who sets the required reserve ratio?

Federal Reserve System (Fed)

private savings

equal to disposable income minus consumer spending - disposable income that is not spend on consumption

treasury department

executive agency responsible for promoting economic prosperity and ensuring financial security of the United States - hamilton was the first secretary - janet yellen

inflation

general increase in prices and fall in purchasing value of money - caused when money supply in an economy grows at a faster rate than the economy's ability to produce goods/ services - impose significant economic costs

exports

generate inflow of funds into the country from the rest of the world

water faucet analogy

government can control the amount of water for a field - field is the economy

government and economic interaction

government to state to federal plays a major role in economy - main means of redistribution of national income and GDP to meet needs necessary for economic growth

deposit insurance

guarantees that a bank's depositors will be paid even if the bank can't come up with the funds, up to a maximum amount per account

simple circular flow diagram

illustrates an economy that contains only two inhabitants: households and firms

standard value

allows all merchants and economic entities to set uniform prices for goods and services

discount window

an arrangement in which the Federal Reserve stands ready to lend money to banks in trouble

the G7

an informal bloc of industrial democracies - current members make up nearly 50% of the world economy and represent more than 60% of net global wealth

firm

an organization that produced goods/ services for sale— and that employs members of households

money

any financial asset that can be easily used to purchase goods and services

unit-of-account costs

arise from the way inflation makes money less reliable unit of measure

medium of exchange

asset that individuals acquire for the purpose of trading goods and services rather than for their own consumption

providing liquid assets

assets that can be quickly converted into cash

currency in circulation

bank accounts on which people can write checks

provide financial services

banker's bank, holds reserves, clears checks, provides cash, and transfers funds for commercial banks

real income

income divided by price level

shoe leather costs

increase costs of transactions caused by inflation

inflation rate

increase in overall level of prices per year - yearly percentage change in price index and based upon consumer price index

household

individual or group of people who share their income - engage in consumer spending and own factors of production (sell factors to firms and receive rent, wages, interest bonds, dividends on stocks) - receive government transfers from government

central bank

institution that oversees the banking system and regulates the money supply - main task to prevent another great depression and slow recessions

financial intermediary

institution that transforms the funds it gathers from many individuals into financial assets

nominal interest rate

interest rate expressed in dollar terms

the G20

international forum that brings together the world's 20 leading industrialized and emerging economies - accounts fro 85% of the world GDP and 2/3 of its population - not the largest 20 economies either in any given year either, depends on how GDP is calculated

illiquid asset

it cannot be quickly converted to cash

imports

lead to an outflow of funds to the rest of the world

bank run

many of a bank's depositors try to withdraw their funds due to fears of a bank failure - often proved contagious-> loss of faith in one bank leads to loss in faith to another bank

GDP

monetary value of all the finished goods and services produced within a country's borders in a specific time period - country can have a higher GDP by having a higher population

national accounts

national income and product accounts keep track of the flows of money between different sectors of the economy - almost all countries set this

controlling capital inflow

net inflow of funds into a country

real interest rate

nominal interest rate - inflation rate - inflation higher than expected, borrowers gain at expense of lenders - inflation lower than expected, lenders gain at expense of borrowers

total unemployment

number of workers actively seeking jobs but not employed or working

seasonal unemployment

occurs when workers lose their jobs due to change in season

government purchases of goods and services

paid for by tax receipts as well as by government borrowing

labor force participation rate

percent of population aged 16 or older that is in the labor force

job search

the process by which workers find appropriate jobs given their tastes and skills

shrinkflation

the process of items shrinking in size or quantity while their prices remain the same or increase

military industrial complex (MIC)

the relationship between a nation's military and defense industry that supplies it, seen together as a vested interest which influences public policy

monetary base

the sum of currency in circulation and bank reserves

managing national savings

the sum of private savings plus budget balance, is the total amount of savings generated within the economy

U.S. Department of Commerce

to foster, promote, and develop foreign/ domestic commerce

disposable income

total household income minus taxes - available to spend on consumption or to save

employment

total number of people currently working for pay

unemployment

total number of people who are actively looking for work but aren't currently employed - can cause social unrest and disgruntlement

aggregate output

total quantity of final goods and services the economy produces

real GDP

total value of final goods and service produced in an economy during a given year, calculated using prices of selected base year - measure of aggregate output - does not include many of the things that contribute to happiness *most important use is as a measure of the size of the economy*

money supply

total value of money available in an economy at a point of time government programs and other transfer payments (taxes)

reducing financial risk

uncertainty about future outcomes that involves financial gains and losses

frictional unemployment

unemployment due to time workers spend in job search

structural unemployment

unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at current wage

bureau of labor statistics

unit of the united states department of labor - principal fact-finding agency for the U.S. government in the broad field of labor economics and statistics and serves as a principal agency of the U.S. Federal Statistics System - formed june 27, 1884 - established in the department of interior to collect information about employment and labor

nominal GDP

value of all final goods/ services produced in the economy during a given year, calculated using the prices current in year in which output is produced

real wage

wage rate divided by price level

underemployed

workers would like to work more hours or prefer a job that better matched their skills

discouraged workers

would like to work but have given up on their job search

unemployment rate

(percent of labor force that is unemployed/ labor force) x 100%

structure of the fed

- Board of Governors (7 members), located in Washington, DC - 12 regional Fed banks, located around the U.S. - Federal Open Market Committee (FOMC), includes the Bd of Govs and presidents of some of the regional Fed banks

minimum reserve ratio for checkable bank deposits

-federal funds market allows banks that fall short of reserve requirements to borrow funds from banks with excess reserves - fed funds rate is interest rate determined in the federal funds market

three ways GDP is calculated

1. add up value added of all products 2. add up all aggregate spending on domestically-produced final goods and services 3. add up all income paid to factors of production

two changes when adding government and economic interaction with the rest of the world

1. government can save too 2. savings need not be spent on physical capital located in the same country

four main types of financial assets

1. loans 2. bonds 3. stocks 4. bank deposits

functions of federal reserve system

1. provide financial services 2. supervise and regulate banking institutions 3. maintain the stability of the financial system 4. conduct monetary policy

three tasks of the financial system

1. reducing transaction costs 2. reducing risk 3. providing liquidity

excess reserves

a bank's reserves over and above its required reserves

mutual fund

a financial intermediary that creates a stock portfolio and then resells shares of this portfolio to individual investors

bank

a financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance the illiquid investment spending needs of borrowers

commodity money

a good used as a medium of exchange that has intrinsic value in other uses

GDP per capita

a measure of an average GDP per person but is not by itself an appropriate policy goal

consumer price index (CPI)

a measure of the overall cost of the goods and services bought by a typical consumer

fiat money

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

t-account

a tool for analyzing a business's financial position by showing, in a single table, the business's assets (on the left) and liabilities (on the right)

unemployment benefits

cash transfers for those who lose their jobs and actively seek employment - given often on conditions insuring that they seek work and do not currently have job/ validated as being laid off and not fired for cause in most states

M2

contains M1 and near moneys, financial assets that aren't directly usable as a medium of exchange but can be easily exchanged

M1

contains only money in circulation, travelers check, and checkable bank deposits

two ways in managing money supply

controlling capital inflow and managing national savings

reducing transaction costs

cost of making a deal

present value

current worth of cash to be received in future with one or more payments - discounted at marker rate of interest

simon kuznets

developed a set of national income accounts - first version was presenting in congress in 1937 and in a research (national income)

cyclical unemployment

deviation in actual rate of unemployment from natural rate

measure aggregate price level

economists calculate the cost of purchasing a market basket

U.S. Department of Labor

enforces and suggests laws involving unions, the workplace, and all other issues

disinflation

process of bringing inflation rate down

price index

ratio of the current cost of that market basket to the cost in a base year multiplied by 100

menu cost

real cost of changing a listed price

capital requirements

regulators require that the owners of banks hold substantially more assets than the value of bank deposits

reserve requirements

rules set by the Federal Reserve that determine the required reserve ratio for banks

store value

something that keeps its value if it is stored rather than used

types of money

standard, commodity, fiat

labor force

sum of employment and unemployment, excluding those in the military or in prison

bank reserves

the currency banks hold in their vaults plus their deposits at the Federal Reserve

budget balance

the difference between tax revenue and government spending

budget deficit

the difference between tax revenue and government spending when government spending exceeds tax revenue

budget surplus

the difference between tax revenue and government spending when tax revenue exceeds government spending

reserve ratio

the fraction of bank deposits that a bank holds as reserves

natural rate of unemployment

the normal unemployment rate around which the actual unemployment rate fluctuates - arises from the effects of frictional and structural unemployment