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Econ Exam 3
Econ Exam 3 chapters 6 7 8
58
Economics
Undergraduate 1
04/12/2012

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Term
Aggregate Production function
Definition
Relationship that tells us how real GDP changes as the quantity of labor changes when all other influences on production remain the same.
Term
classical growth theory
Definition
View that the growth of real GDP per person is temporary and that when it rises above the subsistence level a population explosion will bring it back down to that level.
Term
economic growth rate
Definition
Real GDP growth rate = (Real GDP in current year - Real GDP in previous year) divided by Real GDP of previous year

x100
Term
labor productivity
Definition
Quantity of real GDP produced by an hour of labor.
Term
neoclassical growth theory
Definition
Proposition that real GDP per person grows because technological change produces saving and investments that make capital per hour of labor grow. Growth will end if tech. change stops. (diminishing marginal returns)
Term
new growth theory
Definition
Holds that real GDP per person grows because of choices people make in the pursuit of profit and that growth will persist indefinitely. Profit spurs tech change. opposite of malthusian theory.
Term
real GDP per person
Definition
Real GDP divided by population
Term
real wage rate
Definition
Money wage rate divided by the price level. The real wage rate is the quantity of goods and services that an hour of labor earns.
Term
rule of 70
Definition
A way to estimate the number of years it takes for a certain variable to double. The rule of 70 states that in order to estimate the number of years for a variable to double, take the number 70 and divide it by the growth rate of the variable. This rule is commonly used with an annual compound interest rate to quickly determine how long it would take to double your money.
Term
Bond
Definition
Promise to make specified payments on specified dates.
Term
Bond market
Definition
Bonds traded by firms and gov't
Term
Crowding out affect
Definition
The tendency for government budget deficit to raise the real interest rate and decrease investment. competes with businesses for scarce financial capital.
Term
demand for loanable funds
Definition
Relationship between the quantity of loanable funds demanded and the real interest rate. when all other influences on borrowing plans remain the same.
Term
financial capital
Definition
Funds that firms use to buy physical capital.
Term
financial institution
Definition
Firm that operates on both sides of the market for financial capital. A borrower in one market and a lender in another.
Term
gross investment
Definition
total amount spent on new capital
Term
loanable funds market
Definition
Aggregate of all individual financial markets
Term
mortgage
Definition
Legal contract that gives ownership of a home to a lender in case the borrower fails to make their loan payments.
Term
mortgage backed security
Definition
Entitle their owners to the income from a package of mortgages
Term
national saving
Definition
Sum of private saving, government saving, and net taxes.
Term
net investment
Definition
Change in the value of capital
Term
net taxes
Definition
Taxes paid to governments minus the cash transfers received from governments.
Term
net worth
Definition
Market value of what is lent - market value of what is borrowed.
Term
nominal interest rate
Definition
Number of dollars that a borrower pays and a lender receives in interest in a year expressed as a percentage of the number of dollars borrowed and lent
Term
real interest rate
Definition
Nominal interest rate adjusted for inflation.
Term
saving
Definition
Amount of income that is not paid in taxes or spent on consumption goods and services.
Term
stock
Definition
Certificate of ownership and claim to the firms profits
Term
stock market
Definition
Financial market where shares of corporations stocks are traded.
Term
supply of loanable funds
Definition
Relationship between a quantity of loanable funds supplied and the real interest rate when all other influences on lending plans remain the same.
Term
wealth
Definition
Value of all things people own
Term
central bank
Definition
Bank's bank and a public authority that regulates a nation's depository institution and and conducts monetary policy. Which means that it adjusts the quantity of money in circulation and influences interest rates.
Term
currency
Definition
Notes and coins held by individuals and businesses
Term
currency drain ratio
Definition
Leakage of bank reserves into currency is the currency drain. Ratio of currency to deposits.
Term
demand for money
Definition
Relationship between the quantity of real money demanded and the nominal interest rate when all other influences on the amount of money that people wish to hold remain the same.
Term
depository institution
Definition
Financial firm that takes deposits from households and firms
Term
desired reserve ratio
Definition
Ratio of reserves to deposits that the banks plan to hold
Term
excess reserves
Definition
actual reserves minus desired reserves.
Term
federal funds rate
Definition
Borrow overnight from another bank and pay interest overnight.
Term
federal open market committee
Definition
Main policy making organ of the Federal Reserve System
Term
federal reserve system
Definition
Central Bank of the US
Term
lender of last resort
Definition
The Fed. Acts as the last lender to another bank if reserves are too low. Loans at the discount rate.
Term
M1
Definition
Consists of currency and traveler's checks plus checking deposits owned by individuals and businesses.
Term
M2
Definition
Consists of M1 plus time deposits, savings deposits, and money market mutual funds and other deposits.
Term
means of payment
Definition
A method of settling a debt.
Term
monetary base
Definition
Sum of the currency and depository institution deposits at the Fed.
Term
money
Definition
Any commodity or token that is generally acceptable as a means of payment.
Term
money multiplier
Definition
Ratio of the change in the quantity of money to the change in monetary base.
Term
open market operation
Definition
Purchase or sale of securities by the Fed in the loanable funds market.
Term
quantity theory of money
Definition
Proposition that in the long run, an increase in the quantity of money brings an equal percentage increase in the price level.
Term
required reserve ratio
Definition
Minimum percentage of deposits that depository institutions are required to hold as reserves.
Term
reserves
Definition
Notes and coins in the bank's vault or in a deposit account at the Fed.
Term
velocity of circulation
Definition
Average number of times a dollar of money is used annually to buy the goods and services that make up GDP.
Term
Supply of labor
Definition
Relationship between the quantity of labor supplied and the real wage rate.
Term
Quantity of labor supplied
Definition
number of labor hours that all the households in the economy plan to work.
Term
labor market equilibrium
Definition
Price of labor is the real wage rate. Forces of supply and demand work as they do to eliminate surplus or shortage of labors. When there's neither a shortage or surplus the labor market is in equilibrium
Term
Disposable income
Definition
a household's income earned minus net taxes. increase means that consumption expenditure increases as well. But you don't spend as much as you make.
Term
Expected future income
Definition
the higher this is, other things remaining the same, the smaller its savings today.
Term
Physical capital
Definition
tools instruments and machines buildings and other items that have been produced in the past and are used today to produce goods and services.
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