Term
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Definition
The amount the sum will be worth at a given future date, when allowed to earn interest at the prevailing rate.
FV=PV(1+r)^n |
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Term
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Definition
The amount that would be needed today to yield that future sum at prevailing interest rates.
PV=FV/(1+r)^n |
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Term
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Definition
| If a variable grows at a rate of x percent per year, that variable will double in about 70/x years. |
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Term
| Diminishing Marginal Utility |
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Definition
| The more wealth a person has, the less extra utility he would get from an extra dollar, which is why people are risk averse. |
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Term
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Definition
| A high risk person benefits more from insurance, so is more likely to purchase it. |
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Term
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Definition
| People with insurance have less incentive to avoid risky behavior. |
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Term
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Definition
| The method of reducing risk with a large number of smaller, unrelated risk. It reduces firm specific risk, but does not reduce market risk. |
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Term
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Definition
| Standard deviation goes down from 50 to 20, when you have 40 stocks in portfolio. |
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Term
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Definition
| Present value of any dividends the stock will pay + Present value of the price you get when you sell the share. |
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Term
| Efficient Market Hypothesis |
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Definition
| Each asset price reflects all publicly available information about the value of the asset. |
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Term
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Definition
| Each stock price reflects all available information about the value of the company. |
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Term
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Definition
| The path of a variable whose changes are impossible to predict |
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Term
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Definition
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Term
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Definition
| People not working who have looked for work during previous 4 weeks. |
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Term
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Definition
| (# of unemployed/labour force) x 100 |
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Term
Labour Force Participation Rate
(% of adult population that is in the labour force) |
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Definition
| (labour force/adult population) x 100 |
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Term
| Why is the unemployment rate not a perfect indicatior of joblessness? |
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Definition
1.) it excludes discouraged workers
2.) it does not distinguish between full time and part time work.
3.) Doesn't account for underemployment. |
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Term
| Natural Rate of Unemployment |
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Definition
| The normal rate of unemployment around which the actual unemployment rate fluctuates. |
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Term
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Definition
| The deviation of unemployment from its natural rate, which is associated with business cycles. |
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Term
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Definition
| Occurs when the worker spends time searching for the jobs that best suit their skills and tastes. |
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Term
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Definition
| Occurs when there are fewer jobs than workers. It occurs when there is a mismatch between the worker's skills and the job. |
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Term
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Definition
| Process of matching workers with appropriate jobs. |
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Term
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Definition
| Changes in the composition of demand across industries or regions of the country. |
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Term
| Government employment agencies |
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Definition
| Give out information about job vacancies to speed up the matching of workers with jobs. |
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Term
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Definition
| Aim to equip workers displaced from declining industries with the skills needed in growing industries. |
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Term
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Definition
| A government program that partially protects workers' incomes when they become unemployed. This increases frictional unemployment because UI benefits end when a worker takes a job, so the workers have less incentive to find a job. |
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Term
| Reasons for Structural Unemployment (imbalance between supply and demand)? |
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Definition
1.) Minimum wage laws.
2.) Unions
3.) Efficiency Wages (firms voluntarily pay above equilibrium wages to boost productivity) |
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Term
| Reasons for Efficiency Wages |
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Definition
1.) Worker health
2.) Worker turnover
3.) Worker quality
4.) Worker effort |
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Term
| Double Coincidence of wants |
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Definition
| The unlikely occurrence that two people each have a good the other wants. |
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Term
| The Three Functions of Money |
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Definition
1.) Medium of Exchange
2.) Unit of Account
3.) Store of value |
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Term
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Definition
| An item buyers give to sellers when they want to purchase goods and services. |
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Term
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Definition
| The yardstick people use to post prices and record debts |
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Term
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Definition
| An item people can use to transfer purchasing power from the present to the future. |
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Term
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Definition
| Takes the form of a commodity with intrinsic value |
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Term
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Definition
| Money without intrinsic value, used as money because of government decree. |
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Term
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Definition
| Currency, demand deposits, traveler's checks, and other checkable deposits. |
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Term
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Definition
| Everything in M1 plus savings deposits, small time deposits, money market mutual funds, and a few minor categories. |
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Term
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Definition
| An institution that oversees the banking system and regulates the money supply |
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Term
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Definition
| The setting of the money supply by policymakers in the central bank. |
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Term
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Definition
| The central bank of the US |
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Term
| Money Market Mutual Funds |
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Definition
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Term
| Fractional Reserve Banking System |
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Definition
| Where banks keep a fraction of deposits as reserves, and use the rest to make loans. |
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Term
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Definition
| Regulations on the minimum amount of reserves that the banks must hold against deposits |
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Term
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Definition
| The amount of money the banking system generates with each dollar of reserves. Money multiplier=1/R |
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Term
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Definition
| The purchase and sale of U.S. government bonds by the Fed. To increase the money supply, the Fed buys govt bonds, paying with currency. |
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Term
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Definition
| To Increase money supply, the Fed reduces RR. Banks make more loans from each dollar of reserves. |
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Term
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Definition
| Interest Rate on loans the Fed makes to banks. When banks are running low on reserves, they may borrow reserves from the Feds. To increase money supply, Fed can lower discount rate to encourage more borrowing. |
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Term
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Definition
| Banks can borrow from other banks. |
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Term
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Definition
| Asserts that the quantity of money determines the value of money |
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Term
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Definition
| Measured in monetary units |
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Term
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Definition
| Measured in physical Units. |
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Term
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Definition
| The Theoretical Separation of nominal and real variables. Hume suggests that monetary developments affect nominal variables, but not real variables |
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Term
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Definition
| Changes in the money supply does not affect real variables. |
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Term
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Definition
The rate at which money changes hands.
V x M= P x Y, where V is the velocity, M is the money supply, P is the price level, and Y is the real GDP. |
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Term
| Quantity Theory of Money in 5 Steps |
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Definition
1.) V is stable
2.) a change in M causes a change in P x Y
3.) a change in M does not affect Y because money is neutral.
4.) a change in M causes a change in P.
5.) Rapid money supply growth causes rapid inflation |
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Term
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Definition
| Inflation exceeding 50% per month. |
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Term
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Definition
| Printing money causes inflation, which is like a tax on everyone who holds money. |
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Term
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Definition
| Due to the neutrality of money, and since nominal interest rate= inflation rate + real interest rate, nominal interest rate adjusts one for one with the changes in the inflation rate. |
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Term
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Definition
| The resources wasted when inflation encourages people to reduce their money holdings. |
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Term
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Definition
| The costs of changing prices i.e. printing new menus. |
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Term
| Misallocation of resources from relative price variability |
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Definition
| Firms don't all raise prices at the same time, so relative prices can vary, which distorts the allocation of resources. |
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Term
| Confusion and inconvenience |
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Definition
| Inflation changes the yardstick we use to measure transactions. Complicates long range planning and the comparison of dollar amounts over time. |
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Term
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Definition
| Inflation makes nominal income grow faster than real income. Taxes are based on nominal income, and some are not adjusted for inflation. |
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Term
| Arbitrary Redistributions of Wealth |
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Definition
| Higher than expected inflation transfers purchasing power from creditors to debtors. Debtors get to repay their debt with dollars that aren't worth as much. |
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Term
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Definition
| Does not interact with other economies in the world. |
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Term
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Definition
| Interacts freely with other economies around the world. |
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Term
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Definition
| Domestic residents' purchases of foreign assets minus foreigners' purchases of domestic assets. |
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Term
| Foreign Direct Investment |
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Definition
| Domestic residents actively manage the foreign investment (i.e. McDonald's opens a fast food outlet in Thailand) |
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Term
| Foreign Portfolio Investment |
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Definition
| Domestic residents purchase foreign stocks or bonds. |
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Term
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Definition
| Domestic Purchases of foreign assets exceed foreign purchases of domestic assets. |
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Term
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Definition
| Foreign purchases of domestic assets exceed domestic purchases of foreign assets |
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Term
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Definition
| the rate at which one country's currency trades for another. |
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Term
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Definition
| An increase in the value of a currency as measured by the amount of foreign currency it could by |
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Term
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Definition
| A decrease in the value of a currency as measured by the amount of foreign currency it can buy. |
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Term
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Definition
| The rate at which the g&s of one country trade for the g&s of another. |
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Term
| Real exchange rate formula |
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Definition
Real exchange rate= (e x P)/P2
where P is the domestic price, P2 is the foreign price in foreign currency, and e is the nominal exchange rate. |
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Term
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Definition
| the notion that a good should sell for the same price in all markets. |
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Term
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Definition
| A theory of exchange rates whereby a unit of any currency should be able to buy the same quantity of goods in all countries. |
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Term
| Limitations of PPP theory |
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Definition
1.) Many goods cannot be easily traded
2.) Foreign, domestic goods are not always perfect substitutes. |
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