# Shared Flashcard Set

## Details

Econ Exam 2
Econ 202 Exam 2
71
Economics
11/08/2007

Term
 Classical relationship between savings and investment
Definition
 Savings and investment are functions of interest
Term
 Savings is a positive function of: (keynes)
Definition
 income
Term
 unspent income creates
Definition
 unsold output
Term
 Three regions of aggregate supply graph
Definition
 1)Keynesian region2)Intermediate region3)Classical region
Term
 First fundamental classical assumption
Definition
 competition exists in all markets creating flexible prices and wages (including the labor market)
Term
 Second classical fundamental assumption
Definition
 Savings and investment are functions of interest
Term
 Income (y) =
Definition
 Savings (s) + Consumption (c)
Term
 Average propensity to consume (APC)--definition
Definition
 the part of the income spent on consumption at each level of income
Term
 APC (formula)
Definition
 C/Y=APC
Term
 Marginal Propensity to Consume (MPC)--definition
Definition
 The proportion of change in income that is translated into change in consumption
Term
 MPC (formula)
Definition
 ∆C/∆Y=MPC
Term
 The relationship between income and savings is
Definition
 Positive
Term
 Average Propensity to Save (APS)--definition
Definition
 The proportion of income that is saved
Term
 APS (formula)
Definition
 S/Y=APS
Term
 Marginal Propensity to Save (MPS)--definition
Definition
 proportion of a change in income that is devoted to a change in savings
Term
 MPS (formula)
Definition
 ∆S/∆Y=MPS
Term
 The slope of the savings function equals:
Definition
 MPS
Term
 APC+APS=
Definition
 1
Term
 MPC+MPS=
Definition
 1
Term
 when the consumption function shifts upwards the savings function shifts
Definition
 downwards
Term
 Equillibrium in a savings function occurs when
Definition
 when planned savings equals planned investments
Term
 GDP Gap
Definition
 the difference between full employment output and equillibrium output
Term
 Multiplier (K)--definition
Definition
 the ratio between the permanent change in income and the change in investment
Term
 Multiplier (K) formula
Definition
 1 / MPS = K
Term
 Recessionary Gap (formula)
Definition
 (Yfe-Ye) / K
Term
 Inflationary Gap (Definition)
Definition
 when FE output exceeds equillibrium
Term
 Inflationary Gap (formula)
Definition
 (Ye-Yfe) / K
Term
 Budgetary deficit
Definition
 When gov't expenditures (G) exceeds tax revenues (T)
Term
 Budgetary Surplus
Definition
 when tax revenue (T) exceeds gov't expenditures (G)
Term
 tax function
Definition
 the positive relationship between income (independent variable) and tax revenue (dependent variable)
Term
 progressive tax
Definition
 when proportion of taxes paid rises with income
Term
 regressive tax
Definition
 when proportion taxes paid declines as income increases
Term
 proportional tax
Definition
 when proportion of taxes paid remains constant as income rises
Term
 taxes are a tool of
Definition
 fiscal policy
Term
 recognition lag
Definition
 time elapsed between the emergence of a problem and the recognition of the problem by policy makers
Term
 action lag
Definition
 time elapsed between recognition and action
Term
 policy lag
Definition
 the time elapsed between action and its effect on the economy (6-9 months)
Term
Definition
 certain variables that predict the course of the economy
Term
 Crowding-out effect
Definition
 when gov't finances deficits by borrowing (selling bonds) interest rates rise, reducing private spending (consumers and investors are crowded out of the market)
Term
 functional finance
Definition
 a political philosophy which says the main function of the federal budget is to stabilize the economy regardless of the size of the imbalance
Term
Definition
 conservatives who advocate balancing the budget every year regardless of the cost of doing so
Term
 balancing the budget over the cycle (definition)
Definition
 deficits in recessions years should roughly equal surpluses in boom years
Term
 flat money
Definition
 money which has value by gov't decree
Term
 legal tender
Definition
 the value of money is determined by the amount of goods and services it can buy
Term
 fractional reserve system
Definition
 when banks keep on reserve only a fraction of the deposits they owe
Term
 reserve requirement
Definition
 the percentage of deposits a bank is required to keep at all times
Term
 Federal Deposit Insurance Corporation (FDIC)
Definition
 a gov't agency that insures each checking account up to \$100,000
Term
 Balance Sheet
Definition
 a T-account which shows what the bank owns (assets) and owes (liabilities)
Term
 Reserve ratio (definition)
Definition
 the ratio bewteen legal reserves and demand deposits liabilities
Term
 reserve ratio (formula)
Definition
 (Deposit with FRB) / (demand deposit liabilities) = RR
Term
 required reserves
Definition
 the amount of reserves the bank is required to hold
Term
 excess reserves
Definition
 reserves held over and above the amount required to satisfy the legal-minimum reserve requirement
Term
 Deposit multiplier (definition)
Definition
 the number by which excess reserves are multiplied to obtain total demand deposits that can be created
Term
 deposit multiplier (formula)
Definition
 1 / (required reserve ratio)
Term
 M1
Definition
 currency + checking accounts + negotiated orders of withrdawal
Term
 M2
Definition
 M1 + savings deposits + small certificates of deposit
Term
 M3
Definition
 M2 + large denomination time deposits
Term
 liquidity
Definition
 the ease and speed at which an asset can be converted into cash without a loss
Term
 capital loss
Definition
 a loss on the sale of assets as their prices changed since date of purchase
Term
 objective of monetary policy
Definition
 stabilize the economy by changing the rate of growth in money supply
Term
 Discount Rate
Definition
 interest rate the fed charges to commercial banks
Term
 federal funds rate
Definition
 the rate commercial banks charge other banks for overnight loans
Term
 prime rate
Definition
 the rate charged by large banks to large corporations
Term
 interest rate structure (three things)
Definition
 interest rates vary according to: 1) degree of risk2) time length of loan3) tax exempt status of earnings
Term
 Quantitative Control (Definition)
Definition
 change the quantity of money or its growth rate
Term
 quantitative controls (examples)
Definition
 1) change in reserve requirements2) change in discount rate3) open market operations (sales and purchase of gov't bond by the fed)
Term
 qualitative control (definition)
Definition
 when a government imposes restrictions on certain segments of the market
Term
 qualitative control (examples)
Definition
 1) impose minimum down payments2) limitations on credit card use
Term
 equation of exchange
Definition
 PQ=MV   (=GDP)
Term
 effects of deflation
Definition
 increases debt burden on debtors and reduces real interest and real wages
Term
 Say's Law
Definition
 supply creates its own demand
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