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lah dee dah III
lah dee dah III
36
Economics
Kindergarten
04/30/2009

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Term
Three functions of money
Definition
1) medium of exchange (used as payment for goods and services)
2) unit of account (used for measuring the value of goods and services)
3) store of value (used to maintain purchasing power over time)
Term
Three types of money
Definition
commodity, commodity-backed, and fiat currency
Term
M1
Definition
checking
Term
M2
Definition
savings and CD's
Term
currency
Definition
actual physical dolla dolla bills
Term
2 functions of commercial banks
Definition
1) middleman in the loan market (take out loans from households, loan out to firms)
2) monetary policy channel (given power from the Fed - reserve requirements)
Term
Three major duties of the Fed
Definition
1) monetary policy
2) regulate banks
3) a bank for commercial banks
Term
required reserve ratio
Definition
portion of deposits banks are required to hold on reserve
Term
excess reserves
Definition
reserves held beyond requirements
Term
money multiplier equation
Definition
money multiplier = 1/reserve requirement
Term
Two possible monetary policy actions from the Fed
Definition
1) change reserve requirements
2) open market operations
Term
quantitative easing
Definition
the Fed being more creative with their buying to try to expand the macroeconomy (shift from short-run T-bills to long-run treasury securities and mortgage-backed securities)
Term
Explain rotunda statement #2
Definition
inflation is a monetary phenomenon because raising the money supply in SR changes P and Y in equal (though smaller) proportions, but in the LR all it does is raise the price level significantly
Term
The fisher effect
Definition
nominal interest rates change with inflation expectations (know formula)
Term
Two reasons why governments inflate
Definition
1) monetize debt
2) stimulate economy
Term
Three expectations theories (inflation)
Definition
1) No expected inflation
2) Adaptive expectations
3) Rational expectations
Term
phillips curve
Definition
shows the relationship between inflation and unemployment (that was later proven not to exist because of expectations)
Term
absolute advantage
Definition
the ability to produce using fewer resources than others
Term
comparative advantage
Definition
used to show that specialization and trade are beneficial even if a nation enjoys an absolute advantage in everything - ability to produce at lower relative cost
Term
2 LR trends of imports and exports
Definition
1) both are growing (globalization)
2) gap (trade defecit) widening
Term
4 reasons to impose trade barriers
Definition
1) infant industries
2) anti-dumping (preventing foreign firms from selling at a loss)
3) national defense (e.g. steel restrictions)
4) special interests (subsidizing domestic industries)
Term
4 results for an economy with an absolute advantage
Definition
1) more wealth
2) less physical work
3) merchandise trade defecit (imports exceed exports)
4) capital account surplus
Term
balance of payments
Definition
record of transactions between one country and all others (accounting record of all payments across borders)
Term
current account
Definition
includes goods and services, exports and imports, current income, and gifts and is settled when time=0
Term
capital account
Definition
includes ownership rights to real and financial assets and loan extensions and are ongoing obligations
Term
2 routes to a current account defecit
Definition
1) import driven economy
2) investment driven economy
(either create a defecit in the current account or a surplus in the capital account - by definitions)
Term
rule of 70
Definition
with annual growth of x percent, the level of a variable doubles every 70/x years
Term
economic growth can also be defined as...
Definition
the growth rate of per capita real GDP
Term
Solow's First Theory
Definition
focused on capital (tools) and made 2 observations: (a) developed countries have more/better tools and (b) investment and growth go hand in hand. came to the conclusion that more K yields more Y, but that there are diminishing returns to scale (Y=F(L,K))
Term
steady state
Definition
when there is no change in capital because the marginal returns from capital are zero or less than zero)
Term
3 implications of a steady state situation
Definition
1) no net investment
2) no new growth
3) convergence (...but that hasn't happened)
Term
Solow's Second Theory
Definition
technology matters too because it gives sustained and vaired growth, tech. advances are exogenous and completely random...so we should give investment goods (technology) to developing countries and aid for investment - unfortunately lead to no convergence and failures in gifted technology
Term
endogenous
Definition
caused by factors inside the organism or system, produced or systhesized within the organism or system
Term
main point behind modern growth theory
Definition
LR sustainable growth must come from within (can't be gifted or mandated) and is therefore ENDOGENOUS - institutions are the essential ingredient
Term
4 factors that diminish expected returns from investment
Definition
1) political risk
2) corruption
3) inflation risk
4) high tax rates
Term
8 institutions that foster growth
Definition
1) political stability and rule of law
2) private property rights
3) stable money and prices
4) taxes high enough for effective government
5) taxes low enough for profitable production
6) international trade
7) flow of capital across borders
8) competitive markets
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