# Shared Flashcard Set

## Details

Macroeconomics Test
Chapter 11, 15, 13, and 14
50
Economics
06/24/2013

Term
 Demand-Pull Inflation
Definition
 increases in the price level resulting from an excess of demand over output at the existing price level; inflation is caused by an increase in aggregate demand
Term
 Types of Inflation
Definition
 Demand-Pull inflation Cost-Push inflation
Term
 Cost-Push Inflation
Definition
 increases in the price level resulting from an increase in resource costs (ex. higher wage rates and raw material prices) and hence in per unit production costs; inflation is caused by reductions in aggregate supply
Term
 Nominal Income
Definition
 the number of dollars received as wages, rent, interest or profiits
Term
 Real Income
Definition
Term
 Nominal Income formula
Definition
 Nominal income= Real income + Inflation Premium   Ex. .10= r + .06 .04= r
Term
 Real vs. Nominal returns
Definition
 your nominal return is the percentage change in the amount of money you have your real return is the percentage change in the amount of stuff you can buy
Term
 The Fisher Effect
Definition
 defines the relationship between real rates, nominal rates, and inflation   Formula: (1+R)=(1+r)(1+h) R=nominal rate r=real rate h=expected inflation rate
Term
 Groups Affected by Inflation
Definition
 Fixed Nominal-Income Receivers Savers Debitors and Creditors (unanticipated inflation benefits debtors at the expense of creditors)
Term
 Anticipated Inflation
Definition
 If people anticipate inflation or can alter their incomes to reflect expected price-level changes, then the effects of inflation become less severe
Term
 Correcting Economic Variables for the Effects of Inflation
Definition
 Price indexes are used to correct for the effects of inflation when comparing dollar figures from different times
Term
 Dollar Figures from Different Times
Definition
 Formula: Amount in today's dollars= Amount in year T's dollars [price level of today/price level in year T]   Babe Ruth Salary Example
Term
 Indexation
Definition
 when some dollar amount is automatically corrected for inflation by law or contract, the amount is said to be indexed for inflation.
Term
 The Consumer Price Index (CPI)
Definition
 The consumer price index (CPI) is a measure of the overall cost of the goods and services bought by a typical consumer The Bureau of Labor Statistics (BLS) reports the CPI each month It is used to moniter changes in the cost of living over time When CPI rises, the typical family has to spend more dollars to maintain the same standard of living
Term
 The GDP Deflator (Price Levels) vs. The consumer price Index
Definition
 The GDP Deflator [(Nominal GDP/Real GDP) * 100] reflects the prices of all goods and servcies produced domestically The consumer price index reflects the prices of all goods and services bought by consumers
Term
 How the Consumer Price Index is Calculated
Definition
 Fix the basket. Determine what prices are most important to the typical consumer. Find the prices Compute the basket's cost Choose a base year and compute the index Compute the inflation rate
Term
 Consumer Price Index Formula
Definition
 CPI= [(price of basket of goods and services/price of basket in the base year) * 100]
Term
 Inflation Rate Formula
Definition
 Inflation Rate in Year 2= [(CPI in Year 2 - CPI in Year 1/ CPI in Year 1) * 100]
Term
 Problems with Measuring the Cost of Living
Definition
 The substitution bias, introduction of new goods, and unmeasured quality changes cause the CPI to overstate the true cost of living The CPI overstates inflation by about 1 percentage point per year
Term
 The Financial System
Definition
 Consists of the group of institutions in the economy that help to match one person's saving with anoth person's investment It moves the economy's scarce resources from savers to borrowers
Term
 Financial Institutions
Definition
 The financial system is made up of financial institutions that coordinate the actions of savers and borrowers Financial Institutions can be grouped into two different categories: Financial Markets (Stock and Bond Markets) and Financial Intermediaries (Banks and Mutual Funds)
Term
 Financial Markets
Definition
 The institutions through which savers can directly provide funds to borrowers ex. Stock markets and Bond Markets
Term
 Financial Intermediaries
Definition
 Insititutions through which savers can indirectly provide funds to borrowers ex. Banks and Mutual Funds
Term
 The Bond Market
Definition
 A bond is a certificate of indebtness that specifies obligations of the borrowers to the holder of the bond
Term
 Characteristics of a Bond
Definition
 Term: the length of time until the bond matures Credit Risk: the probability that the borrower will fail to pay some of the interest or principal Tax Treatment: the way in which the tax laws treat the interest on the bond. (Municipal bonds are federal tax exempt)
Term
 The Stock Market
Definition
 Stock represents a claim to partial ownership in a firm and is therefore, a claim to the profits that the firm makes. The sale of stock to raise money is called equity financing
Term
 Mutual Funds
Definition
 A mutual fund is an institution that sells shares to the public and uses the proceeds to buy a portfolio, or various types of stocks, bonds, or both. Mutual Funds allow people with small amounts of money to easily diversify.
Term
 Other Financial Institutions
Definition
 Credit Unions Pension Funds Insurance Companies Loan Sharks
Term
 National Saving, or Saving
Definition
 Y (National Income)-C (Capital Expenditure)-G (Government Expenditures) = I (Investments) Savings (S) can be substituted for Y-C-G now written as S=I National Saving is the total income in the economy that remains after paying for consumption and government purchases
Term
 National Saving Formula
Definition
 S=(Y-T-C) + (T-G)
Term
 Private Savings
Definition
 The amount of income that households have left after paying their taxes and paying for their consumption Formula (Y-T-C)
Term
 Public Savings
Definition
 The amount of tax revenue that government has left after paying for its spending Formula (T-G)
Term
 Surplus and Deficit
Definition
 If Taxes (T) > Government Expenditures (G), the government runs a budget surplus because it receives more money than it spends (The surplus of T-G represents public savings) If Taxes (T) < Government Expenditures (G), the government runs a budget deficit because it spends more money than it receives in tax revenue
Term
 The Market for Loanable Funds
Definition
 Financial markets coordinate the economy's saving and investment in the market for loanable funds The market for loanable funds is the market in which those who want to save supply funds and those who want to borrow to invest demand funds
Term
 Government Policies Affecting Savings and Investment
Definition
 Policy 1: Taxes and Savings (Savings Incentives) Policy 2: Taxes and Investment (Investment Incentives) Policy 3: Government budget deficits and surpluses
Term
 Crowding Out Effect
Definition
 The government takes out majority of money and limits funds to private investors
Term
 Finance
Definition
 The field that studies how people make decisions regarding the allocation of resources over time and the handling of risk
Term
 Measuring the Time Value of Money: Future Value
Definition
 The amount of money in the future that an amount of money today will yield, given prevailing interest rates FV= PV (1+i)n
Term
 Measuring the Time Value of Money: Present Value
Definition
 the amount of money today that would be needed to produce, using prevailing interest rates, a given future amount of money. PV = FV/((1+i)n)
Term
 Rule of 70
Definition
 According to the rule of 70, if some variables grow at a rate of X percent per year, then the variable doubles in approximately 70/X years
Term
 Risk Aversion
Definition
 A person is said to be risk adverse if he or she exhibits a dislike of uncertainty
Term
 Individuals can reduce risk choosing any of the following:
Definition
 Buy insurance Diversify Accept a lower return on their investments
Term
 Insurance Contracts
Definition
 The general feature of insurance contracts is that a person facing a risk pays a fee to an insurance company, which in return agrees to accept all or part of the risk.
Term
 Diversification of Assets
Definition
 Diversification refers to the reduction of risk achieved by replacing a single risk with a large number of smaller unrelated risks. Firm-specific risk is risk that affects only a single company Market risk is risk that affects all companies in the stock market Diversification cannot remove market risk
Term
 The Trade Off of Risk and Return
Definition
 The higher the risk the greater the return. But potentially greater loss as well.
Term
 Utility Curves
Definition
 Utility: common term for satisfaction As a person gains more wealth, the satisfaction from said wealth lessens
Term
 Financial Analysis
Definition
 the study of a company's accounting statements and future prospects to determine its value People can employ fundamental analysis to try to determine if a stock is undervalued, overvalued, or fairly valued The goal is to buy undervalued stock
Term
 The Efficient Markets Hypothesis
Definition
 The theory that asset prices reflect all publicly available information about the value of an asset. A market is informationally efficient when it reflects all available information about the value of an asset in a rational way.
Term
 Random Walk
Definition
 refers to the path of a variable whose changes are impossible to predict.
Term
 Inflation
Definition
 A rising general level of prices in an economy It is measured by examining the general level of prices in a year relative to prices in a base year
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