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.