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Final Exam - Terms
Chapters 16, 17, 21, & 22
46
Economics
Undergraduate 2
12/03/2014

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Term
Money
Definition
The set of assets in an economy that people regularly use to buy goods and services from other people
Term
Medium of exchange
Definition
An item that buyers give to sellers when they want to purchase goods and services
Term
Unit of account
Definition
The yardstick people use to post prices and record debts
Term
Store of value
Definition
An item that people can use to transfer purchasing power from the present to the future
Term
Liquidity
Definition
The ease with which an asset can be converted into the economy's medium of exchange
Term
Commodity money
Definition
Money that takes the form of a commodity with intrinsic value.
Term
Fiat money
Definition
Money without intrinsic value that is used as money because of government decree
Term
Currency
Definition
The paper bills and coins in the hands of the public
Term
Demand deposits
Definition
Balances in bank accounts that depositors can access on demand by writing a check
Term
Federal Reserve (FED)
Definition
The central bank of the United States
Term
Central bank
Definition
An institution designed to oversee the banking system and regulate the quantity of money in the economy
Term
Money supply
Definition
The quantity of money available in the economy
Term
Monetary policy
Definition
The setting of the money supply by policy makers in the central bank
Term
Reserves
Definition
Deposits that banks have received but have not loaned out.
Term
Fractional-reserve banking
Definition
A banking system in which banks hold only a fraction of deposits as reserves
Term
Reserve ratio
Definition
The fraction of deposits that banks hold as reserves
Term
Money multiplier
Definition
The amount if money the banking system generates with each dollar of reserve
Term
Bank capital
Definition
The resources a bank's owners have put into the institution
Term
Leverage
Definition
The use of borrowed money to supplement existing funds for purposes of investment
Term
Leverage ratio
Definition
The ratio of assets to bank capital
Term
Capital requirements
Definition
A government regulation specifying a minimum amount of bank capital
Term
Open-market operations
Definition
The purchase and sale of U.S. Government bonds by the FED
Term
Discount rate
Definition
The interest rate on the loans that the FED makes to banks
Term
Reserve requirements
Definition
Regulations on the minimum amount of reserves that banks must hold against deposits
Term
Federal funds rate
Definition
The interest rate at which banks make overnight loans to one another.
Term
Quantity theory of money
Definition
A theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate.
Term
Nominal variables
Definition
Variables measures in monetary units
Term
Real variables
Definition
Variables measured in physical units
Term
Classical dichotomy
Definition
The theoretical separation of nominal and real variables
Term
Monetary neutrality
Definition
The proposition that changes in the money supply do not affect real variables
Term
Velocity of money
Definition
The rate at which money changes hands
Term
Quantity equation
Definition
The equation M x V = P x Y, which relates the quantity of money, the velocity of money, and the dollar value of the Economy's output of goods and services.
Term
Inflation tax
Definition
The revenue the government raises by creating money
Term
Fisher effect
Definition
The one-for-one adjustment of the nominal interest rate to the inflation rate
Term
Shoeleather cost
Definition
The resources wasted when inflation encourages people to reduce their money holdings.
Term
Menu costs
Definition
The costs of changing prices
Term
Theory of liquidity preference
Definition
Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance.
Term
Fiscal policy
Definition
The setting of the level of government spending and taxation by government policymakers
Term
Multiplier effect
Definition
The additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending.
Term
Crowding-out effect
Definition
The offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending.
Term
Automatic stabilizers
Definition
Changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policy makers having to take any deliberate action
Term
Phillips curve
Definition
A curve that shows the shirt-run trade-off between inflation and unemployment
Term
Natural-rate hypothesis
Definition
The claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate if inflation
Term
Supply shock
Definition
An event that directly alters firms costs and prices, shifting the economy's aggregate-supply curve and thus the Phillips curve
Term
Sacrifice ratio
Definition
The number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point.
Term
Rational expectations
Definition
The theory that people optimally use all the information they have, including information about government policies, when forecasting the future
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