Term
| Main Purpose of the Economic System |
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Definition
| Move scarce resources from savers to borrowers. |
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Term
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Definition
| Supply money to the financial system with the expectation that they will get it back with interest. |
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Definition
| Take money from financial system with knowledge that they'll have to pay interest. |
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Term
| Financial Market Definition |
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Definition
Financial markets are the institutions throuch which a person can directly supply funds to a person who wants to borrow. |
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Term
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Definition
A bond is a certificate of indebtedness that specifies the obligations the borrower has to the holder of the bond.
An IOU |
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| Buyer of a bond's options |
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Definition
| Hold until maturity or sell at an earlier date. |
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Term
| 3 Characteristics of Bonds |
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Definition
1. Term
The length of time until a bond matures.
2. Credit Risk
The probability that the borrower will fail to pay some of the interest or the principal. (defaulting on bond)
3. Tax treatment
The way tax laws treat the interest earned by the bond.
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Term
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Definition
| Long term bonds ==> More risky because holders of them have to wait longer to get their money back. If the person needs their money back they often have to sell the bond at a smaller price. Long term bonds usually pay more interest but can be junk. |
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Term
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Definition
| Sometimes borrowers default on the bond by declaring bankruptcy. US government is a safe credit risk so the interest is low. Financially shaky corporations issue junk bonds which pay high interest rates but are risky. |
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Term
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Definition
| Municipal bonds are not taxed. All others are. Local governments pay lower interest rates since they aren't taxed. |
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Term
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Definition
| Partial ownership of company. |
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Term
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Definition
| The sale of stock to raise money. |
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Term
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Definition
| The sale of bonds to raise money. |
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Term
| Difference between Stocks and Bonds |
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Definition
Stocks = ownership
Bonds = Owing shit |
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Term
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Definition
Determined by supply and demand.
Demand is people's perception of future profitability. |
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Term
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Definition
Financial institutions through which savers can indirectly provide funds to borrowers.
Banks and Mutual Funds |
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Term
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Definition
An item that people can easily use to engage in transactions.
Checks are an example because you write it "against" the banks assets and its easy and immediate versus stocks and bonds. |
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Term
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Definition
Stocks, Bonds, Bank Deposits, Mutual Fund Deposits
Bank deposits are easiest to transfer through the writing of a check. |
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Term
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Definition
| An institution that sells shares to the public and uses its proceeds to buy a selection or portfolio of various types of stocks, bonds or both. |
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Term
| Advantage of Mutual Funds |
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Definition
Allows people with shallow pockets to diversify.
Gives ordinary people access to the skills of professional money managers. |
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Term
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Definition
| A type of mutual fund that buys all the stocks in a certain index because they don't think you can "game" the market. Statistically they do better than mutual funds and they keep costs down by selling rarely and not paying high salaries. |
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Term
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Definition
| The total income that remains in society after paying for consumption and government purchases. |
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Term
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Definition
| The income that households ahve left after paying for taxes and consumption |
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Term
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Definition
| The tax revenue that the government has left after paying for its spending. |
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Term
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Definition
| An excess/shortfall of tax revenue over/under government spending. |
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Term
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Definition
The equation that states Saving = Investment.
Doesn't apply on a personal basis but on the economy as a whole since investment is the purchase of new capital. |
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Term
| Market for Loanable Funds |
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Definition
| The market in which those who want to save supply funds and those who want to borrow to invest demand funds. |
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Term
| Saving and Loanable Funds |
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Definition
| Saving is the source of the supply of loanable funds. |
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Term
| Investment and Loanable Funds |
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Definition
| Investment is the source of DEMAND for loanable funds. |
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Term
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Definition
Saving increases so supply curve shifts right.
Demand isn't affected so it stays the same.
Equilibrium point moves to the right and down.
Quantity of Loanable Funds increases.
Interest rate decreases.
More investment.
Economy gets better!
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Term
| Effects of Investment Tax Credit |
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Definition
Demand Shifts Up
Supply Stays the same
Equilibrium moves up and to the right
Interest Rate Increases
Total loanable funds rises
Thus, if a reform of the tax laws encouraged greater investment, the result would be higher interest rates and greater saving. |
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Term
| Government Budget Deficits Effect on Supply and Demand |
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Definition
Supply Shifts Left.
Demand stays the same.
Equilibrium moves up and to the left.
Loanable Funds decreases and interest rate increases.
When the government reduces national saving by running a budget deficit, the interest rate rises, and investment falls.
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Term
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Definition
| Flow of resources available to fund private investment. |
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Term
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Definition
Opposite of deficit.
Thus, a budget surplus increases the supply of loanable funds, reduces the interest rate, and stimulates investment and grows an economy faster. |
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Term
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Definition
| This category includes those who worked as paid employees, worked in their own business, or worked as unpaid workers in a family member's business. Both full-time and part-time workers are counted. This category also includes those who were not working but who had jobs from which they were temporarily absent because of, for example, vacation, illness, or bad weather. |
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Term
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Definition
| This category includes those who were not employed, were available for work, and had tried to find employment during the previous 4 weeks. It also includes those waiting to be recalled to a job from which they had been laid off. |
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Term
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Definition
| The total number of workers including both the unemployed and the employed. |
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Term
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Definition
| (Number of Unemployed/Labor Force) X 100 |
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Term
| Labor Force Participation Rate |
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Definition
| (Labor Force / Adult Population) X 100 |
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Term
| Natural Rate of Unemployment |
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Definition
| The normal rate of unemployment around which the unemployment rate fluctuates. |
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Term
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Definition
| Deviation from the natural rate of unemployment. |
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Term
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Definition
| Workers who would like to work but have given up looking for a job. |
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Term
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Definition
| Unemployment that results because it takes time for workers to search for workers to search for jobs that best suit their tastes and skills. |
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Term
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Definition
| Unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one. When supply is less than demand. |
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Term
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Definition
The process by which workers find appropriate jobs given their tastes and skills.
Since this takes some time it results in frictional unemployment. |
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Term
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Definition
| A government program that partially protects workers' incomes when they become unemployed. |
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Term
| Effects of Unemployment Insurance |
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Definition
| Since people respond to incentives they don't try that hard to get a job since they're being rewarded for being unemployed. |
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Term
| Minimum Wage and Unemployment |
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Definition
| Minimum wage puts a bind on the market and creates a deficit of jobs. |
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Term
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Definition
| A worker association that bargains with employers over wages, benefits and working conditions. |
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Term
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Definition
| The process by which unions and firms agree on the terms of employment. |
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Term
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Definition
| The organized withdrawal of labor from a firm by a union. |
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Term
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Definition
Prevents "company towns"
Prevents companies from having market power. |
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Term
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Definition
Drives wages above equilibrium
Causes unemployment |
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Term
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Definition
| Above-equilibrium wages paid by firms to increase worker productivity. |
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Term
| Reasons for Efficiency Wages |
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Definition
Worker Health
Higher wages ==> healthier workers ==> More efficient Workers
Worker Turnover
Higher wages ==> More incentive to stay ==> Less turnover ==> less costs associated with training new workers
Worker Quality
Higher Wages ==> More Talented Workers ==> More Efficiency
Worker Effort
Higher Wages ==> Try Harder so that they can keep their jobs ==> Efficiency
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Term
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Definition
| The set of assets in an economy that people regularly use to buy goods and services from other people. |
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Term
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Definition
| An item that buyers give to sellers when they want to purchase goods and services. |
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Term
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Definition
| The yardstick people use to post prices and record debts. |
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Term
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Definition
| An item that people can use to transfer purchasing power from the present to the future. |
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Term
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Definition
| The ease with which an asset can be converted into the economy's medium of exchange. |
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Term
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Definition
Money that takes the form of a commodity with intrinsic value. (Value even if it wasn't money)
Gold, cigarettes in prison |
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Term
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Definition
| Money without intrinsic value that is used as money because of government decree. |
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Term
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Definition
| The paper bills and coins in the hands of the public. |
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Term
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Definition
| Balances in bank accounts that depositors can access on demand by writing a check. |
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Term
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Definition
An institution designed to oversee the banking system and regulate the quantity of money in the economy.
The Federal Reserve is the central bank of the US |
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Term
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Definition
1. Regulate banks and ensure health of the banking system.
2. Control the supply of money that is available in the economy. |
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Term
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Definition
| The quantity of money available in the economy. |
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Term
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Definition
| The setting of the money supply by policymakers in central banks. |
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Term
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Definition
| Deposits that banks have received but not loaned out. |
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Term
| If banks hold all money in reserves |
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Definition
| Banks do not influence the supply of money. |
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Term
| Fractional-Reserve Banking |
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Definition
| A banking system in which banks hold only a fraction of deposits as reserves. |
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Term
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Definition
| The fraction of deposits that banks hold as reserves. |
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Term
| Because Money Supply equals Currency Plus Demand Deposits |
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Definition
| Thus,when banks hold only a fraction of deposits in reserve, banks create money. |
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Term
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Definition
The amount of money the banking system generates with each dollar of reserves.
The reciprocal of the reserve ratio. |
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Term
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Definition
The purchase and sale of US government bonds by the Fed.
To increase money supply they buy bonds. To decrease money supply they sell bonds. |
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Term
| Feds Tools for Regulating Money Supply |
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Definition
| Open Market Operations, Reserve Requirements, Discount Rate |
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Term
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Definition
Regulations on the minimum amount of reserves that banks must hold against deposits.
Causes the reserve ratio to rise ==> lowers multiplier ==> lowers money supply |
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Term
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Definition
The interest rate on the loans that the Fed makes to banks.
Essentially manipulating the rate at which it lends to banks so that they have more or less in their reserves and thus more or less money in the money supply. |
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Term
| Problems Controlling the Money Supply |
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Definition
The Fed can't control the amount of money households choose to deposit in banks. (if people lose faith the fed can't stop them from pulling money out and ruining reserves)
The Fed can't control the amount bankers choose to lend. (If bankers become more cautious about lending money supply falls and the Fed can't stop it) |
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Term
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Definition
| The interest rate at which banks make overnight loans to one another. |
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