Term
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Definition
| best measure of wealth, standard of living, determined by productivity of workers, key determinant of living standards--> we live better than Africans b/c we are more productive than them |
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Term
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Definition
| quantity of goods and services from each unit of labor |
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Term
| How is productivity determined? |
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Definition
| production function and other things |
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Term
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Definition
Y = A*F (L,K,H,N)
Y- quantity of output
l- labor
k-physical capital
h-human capital
natural resources
a- technology |
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Term
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Definition
| as inputs increase, their outputs increase... only up until a point, then they stop growing as much |
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Term
| graph the production fuction |
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Definition
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Term
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Definition
human effort (mental and physical) required to produce goods and services
measured in number of workrs or total number of hours worked |
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Term
| human capital per worker H |
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Definition
knowledge and skill that workers acquire through education, trianing, and experience
requires inputs like teachers, libraries, time studying
most important source of long run economic growth |
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Term
| physical capital per worker K |
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Definition
stock or equipment and structures that are available to produce goods and services
tools, more advanced tools are more effective- can also include technology infrastructure |
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Term
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Definition
provided by nature- renewable and nonrenewable
NOT necessary for economy to be highly productive, Japan has few natural resources |
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Term
| technological knowledge A |
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Definition
| society's understanding of best way to produce goods and services- when the assembly line was invented, this was spread to everyone |
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Term
| difference between technological knowledge and human capital |
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Definition
| human capital resources expended to transmit understanding of labor force, and technological knowledge is understanding about how the world works |
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Term
| how to increase output per person |
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Definition
productivity must rise
increase in population will increase total output, ALSO puts additional demands on the economy
because of diminishing returns, demands typically exceed each additional output and per capita consumption falls |
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Term
| per capita production function |
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Definition
Y/L --> output per worker, productivity
K/L--> physical capital per worker
also H/L, N/L, etc. |
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Term
| what does productivity depend on? |
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Definition
| physical and human capital per worker and technological knowledge |
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Term
| ways the government can raise productivity (6 ways) |
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Definition
1. promote savings and investment
2. promote education and training
3. encourage research and development
4. encourage international trade and investment
5. define and enforce or protect property rights
6. maintain political stability |
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Term
| savings and investment for productivity |
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Definition
invest resources into the production of new goods
requires funds finance the purchases of capital goods
domestic savings--> higher saving rate leads to a higer level of productivity and income |
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Term
| education and training for productivity |
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Definition
education is at least as important as investment in physical capital--> providing schools
positive externalities--> everyone can benefit from one person's good idea
brain drain--> highly skilled workers going to higher paying jobs |
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Term
| research and development for productivity |
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Definition
higher standards of living
research grants, tax breaks, patent system
government-usually basic science
firms- development and commercialization |
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Term
| international trade and investment for productivity |
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Definition
way for other countries to obtain technology and its benefits
technology can be embodied in goods or can be obtained as input services
trade encourages domestic dissemination of new technology
alternative source of funds
foreign direct investment, foreign portfolio investment |
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Term
| foreign direct investment |
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Definition
| capital investment owned and operated by a foreign entity |
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Term
| foreign portfolio investment |
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Definition
| investment financed with foreign money but operated by domestic residents |
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Term
| effect of investment from abroad for productivity |
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Definition
| foreign direct investment and foreign portfolio investment, BOTH cases America takes back money as a profit- raises GNP for country that is invested in |
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Term
| define and enforce property rights productivity |
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Definition
ability of people to exercise authority over the resources they own--> important for price system to work
right to contract and private property, including intellectual property
right to ownership and disposal- right to cosume, sell, transfer, exchange, and asset
communist countries- less incentive to invest in new business because property rights are less secure
right to compensation for public taking |
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Term
| maintain political stability for productivity |
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Definition
political rights will hold into the future
investors need to feel like their investments are safe
encourage entrepeneurship |
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Term
| letters of the production function and things goverments can do |
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Definition
investment from abroad- K and K/L
education- H and H/L
property rights and political stability- A, K, H, H/L, K/L
free trade- A, K, H/L, H, K/L |
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Term
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Definition
| set of assets in an economy that people regularly use to buy good and services from other people |
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Term
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Definition
medium of exchange
unit of account
store of value |
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Term
| money as a medium of exchange |
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Definition
items that buyers give to sellers to purchase stuff
barter economy, use goods to buy goods
eliminates the double coincidence of wnats |
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Term
| money as a unit of account |
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Definition
yardstick people use to post prices and record debts
"hamburger costing 5 pencils"
makes these comparisons easy |
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Term
| money as a store of value |
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Definition
item that people can use to transfer purchasing power for the present or the future
money today will buy something tomorrow
money is more liquid than stock |
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Term
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Definition
| easy with which an asset can be converted |
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Term
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Definition
commodity money
fiat money
depository money |
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Term
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Definition
money that takes the form of a commodity with intrinsic value
gold, cigarettes, etc. |
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Term
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Definition
| no value besides monetary, valuable b/c of government decree |
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Term
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Definition
| money that is created by banks in the forms of checks |
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Term
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Definition
| total available supply of money in the economy, monetary supply |
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Term
| what does money supply include? |
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Definition
paper currency
demand deposits
M1
M2
missing currency- in the hands of criminals or held abroad |
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Term
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Definition
| balances in bank accounts that can be accessed on demand |
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Term
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Definition
includes less stuff than M2
demand deposits
travelers checks
other checkable deposits
currency |
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Term
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Definition
M1
money market funds
savings deposits
small time deposits |
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Term
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Definition
| central bank for overseeing banking system and regulating quantity of money |
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Term
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Definition
regulate banks and ensure health of the system
control money supply |
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Term
| how does the fed regulate banks? |
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Definition
clears checks
bank for banks
lender of the last resort |
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Term
| how does the fed control the money supply? |
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Definition
| monetary policy through FOMC |
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Term
| FOMC (federal open market committee) |
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Definition
increase/decrease dollar through the sale of US government bonds
to increase money- creates dollars and uses them to buy bonds from public (puts dollars in the hands of the public)
decrease money supply- sells bonds from portfolio to public, less dollars in the hands of the public |
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Term
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Definition
deposits that banks have received but have not loaned
if all deposits are held than they have 100% reserve bankings |
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Term
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Definition
simplified accounting system that shows changes in a bank's assets (left side) and liabilities (right side)
reserves and deposits should be equal
if banks hold all deposits in reserve, banks do not influence the supply of money |
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Term
| fractional reserve banking |
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Definition
| banking system in which banks hold only a fraction of deposits as reserves |
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Term
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Definition
fraction of deposits that banks hold as reserves
required reserves/deposits |
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Term
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Definition
minimum that banks must hold
may hold excess reserves to ensure that they don't run out of cash
doesn't change liabilities, just breaks it up
RR%*deposits |
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Term
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Definition
| total reserves-required reserves |
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Term
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Definition
amount of money the banking system generates with each dollar of reserve
ex. $100 loaned throughout banks turns in $1000
reciprocal for the reserve rations--> if the reserve ratio is 1/10, then the muliplier is 10/1--> MM = 10, means each dollar would generate $10
higher the reserve ration, the less of each deposit banks loan out and the smaller the money multiplier |
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Term
| structure of the federal reserve |
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Definition
board of 7 governors
FOMC- 7 govs, NY Fed Prez, 4 other Prez
reserve banks (12 prez) |
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Term
| Fed tools for controlling money supply |
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Definition
setting reserve requirements
setting discount rate
open market operations |
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Term
| fed tools- open market operations |
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Definition
purchase and sale of goverment bonds (to control money supply)
sell bonds to reduce money supply- often used because it is easy |
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Term
| fed tools- reserve requirement |
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Definition
regulations on the minimum amounts of reserves that banks must hold
INCREASING reserve req means banks must hold more reserves and can loan out less of each dollar than deposits--> decreases money supply
changes used less b/c it disrupts banking |
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Term
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Definition
interest rates on loans the fed makes to banks
banks must borrow from the fed when it has too few reserves to meet requirements (too many loans)
higher rates discourage banks from borrowing reserves from red--> reduces quantity of reserves in banking system, reduces money supply
lower discount rate encourages borrowing and increases money supply |
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Term
| things the fed can't control |
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Definition
amount of money that houses choose to hold as deposits in banks---> more currency people have, less in banks
can't control amount that bankers choose to lend |
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Term
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Definition
| when fed wants to decrease money supply, needs to sell bonds to banks |
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Term
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Definition
| sole proprietership, partnership, corporation |
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Term
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Definition
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Term
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Definition
| owned jointly by two or more |
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Term
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Definition
its own legal entity, can issue stock
structure- owners are shareholders, hire a board of directors/ CEO
principle- agent pgorlem |
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Term
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Definition
cover operation expenses
expand operations |
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Term
| households in financial market |
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Definition
save money after taxes, goes into the banks
provide labor
wealth--> accumulated savings and endowments |
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Term
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Definition
| institutions through which savers can directly provide funds to borrowers |
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Term
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Definition
| certificate of indebtedness |
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Term
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Definition
maturity date
term
par value
bond price |
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Term
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Definition
| when the principle of the bond must be repaid |
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Term
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Definition
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Term
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Definition
| amount repaid at maturity |
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Term
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Definition
| what the bond is currently selling for |
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Term
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Definition
| probability that borrower will fail to pay some of the interest or principle |
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Term
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Definition
| the way that tax laws treat the interest earned on bonds |
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Term
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Definition
| bond owners not required to pay federal income tax on interest income |
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Term
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Definition
risky bonds- high interest rates
safe bonds (government) low interest rates |
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Term
| how financial markets facilitate flow of funds |
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Definition
organized trading
info sharing
risk evaluation
monitoring
risk pooling |
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Term
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Definition
| funds go directly from savers to borrowers through the fin. market |
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Term
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Definition
| go from savers through a third party, like bank or pension fund |
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Term
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Definition
| partial ownership in firm, claim to profits that firm makes |
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Term
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Definition
| sale of stocks to raise money |
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Term
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Definition
| sell of bonds to raise money |
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Term
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Definition
institutions where savers can indirectly provide funds to borrowers
banks- better for businesses, medium of exchange through checking
mutual funds- sell shares to the public and use proceeds to buy portfolio of various stocks, help people with small amounts of money to diversify,benefit of a financial expert |
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Term
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Definition
| total income and expenditure |
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Term
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Definition
consumption c
investment i
government purchases g
net exports nx (except in closed economy) |
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Term
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Definition
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Term
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Definition
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Term
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Definition
| gdp - consumption - government spending |
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Term
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Definition
tax-government spending
when t is greater than g, surprlus, vice versa is deficit |
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Term
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Definition
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Term
| how is investment related to interest rate? |
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Definition
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Term
| market for loanable funds |
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Definition
| market in which those who want to save supply funds and those who want to borrow demand funds |
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Term
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Definition
| all income people choose to be saved |
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Term
| supply and demand in market for LF |
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Definition
savings is source of supply
investment is source of demand
as interest rates rise, quantity of loans demanded decreases |
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Term
| loanable funds market graph |
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Definition
| last slide in IIIA part 2 |
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Term
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Definition
| less taxation, increase supply of LF |
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Term
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Definition
tax credits, give money to firms putting in new stuff
more investment increases demand, higher interest rates |
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Term
| government deficits/surplus and LF |
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Definition
deficit- less savings, supply decreases, increase interest rates
surplus- increases supply of LF, interest rates decrease |
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Term
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Definition
| allows government to keep tax rates smooth over time, shifts cost of war to future generations |
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Term
| present value, time value function |
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Definition
amoutn of money today that would be needed to produce given future amount of money
KNOW interest rate and times compounded |
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Term
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Definition
(1+r) * PV
r- interest rate
# of years |
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Term
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Definition
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Term
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Definition
dislike of uncertaity
concept of utility- the more wealth you have, the more you can absorb
why people buy insurance- spreading risk |
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Term
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Definition
| adverse selection, moral hazard |
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Term
| diversification of stocks |
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Definition
reduces reisk
risk measured by portfolio
standard deviations
more stocks = less risk
only eliminates firm specific risk NOT market risk |
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Term
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Definition
how likely a stock is to vary in value
higher SD = more risk |
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Term
| how to select a portfolio |
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Definition
| expected return, risk, and liquidity |
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Term
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Definition
expressed as %change in value, can be affected by taxes and inflation
ER= sum of possible returns x probability |
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Term
| philosophies of asset market determination |
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Definition
fundamental analysis
efficient market analysis
market irrationality |
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Term
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Definition
| asset value determined by economic fundamentals underlying the asset- look at a companies product, see if stock ins under/over valued then buy/sell |
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Term
| efficient market analysis |
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Definition
asset prices reflect all publically available information
random walk, changes are impossible to predict
smart people have done their jobs |
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Term
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Definition
asset price determination is psychology
no way to logically predict sotck |
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Term
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Definition
| bond that pays a set amount or "coupon payment" periodically until maturity |
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Term
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Definition
| bond makes no payment but sells for less than par value |
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Term
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Definition
| value of nations exports minus value of imports |
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Term
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Definition
value of nations exports minus value of imports
balanced trade --> exports equal imports |
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Term
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Definition
| difference between purchase of foreign assets by domestic residents and purchase of domestic assets by foreign |
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Term
| foreign direct investment |
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Definition
| US buying a company in Russia |
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Term
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Definition
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Term
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Definition
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Term
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Definition
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Term
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Definition
| domestic units worth more than foreign |
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Term
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Definition
| domestic worth fewer than foreign |
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Term
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Definition
importers give dollars
savers who want to buy foreign assets supply dollars |
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Term
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Definition
| exporters demand dollars, foreign savers buy domestic assets |
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Term
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Definition
| trading ratio for two country's currencies |
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Term
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Definition
| ratio for two counrty's goods |
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Term
| calculating real exchange rate |
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Definition
| nominal currency rate x (price domestic/price foreign) |
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Term
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Definition
current account
capital/financial account |
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Term
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Definition
net exports/imports
net factor payments- flow of earnings b/t domestic and ROW
unilateral transfers |
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Term
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Definition
financial inflows and outflows
one way transfers of assets |
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Term
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Definition
| 16, not institutionalized, able to work, NOT seeking employment |
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Term
| labor force participation rate |
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Definition
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Term
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Definition
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Term
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Definition
| employed/adult population |
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Term
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Definition
temporary, inevitable
first time job search
short, interviewing |
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Term
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Definition
changes in ecnonomy like technology
mismatch of skills and job demands
long |
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Term
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Definition
shortage of jobs, low economic activity
unemployed workers will work at whatever wage is offered |
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Term
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Definition
| cost of basket = current year/base year x 100 |
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Term
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Definition
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Term
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Definition
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Term
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Definition
| current quantity w/ base year prices |
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Term
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Definition
| current quantities x current prices |
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Term
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Definition
| this is what things are like |
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Term
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Definition
| this is what we should do about it |
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Term
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Definition
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Term
| steps of the financial crisis |
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Definition
1. government created Fannie and Freddie. private financial firms offered mortgage-backed securities, like those offered by FanFred-->collateralized debt problem. Issuers of mortgages no longer held them... principle/agent problem b/t investors and originators.
led to lower lending standards--> sub-prime mortgage
2. lots of house flipping, people taking out mortgages they couldn't afford
3. growth in financial derivatives market. lots of credit default swaps, increased leverage by financial firms.
4. houses reduced savings and increased borrowing, increased leverage by households
housing prices stopped rising and people began defaulting on their mortgages |
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