Term
| What is the financial system consisted of? |
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Definition
| The group of institutions in the economy that help match one person's saving with another person's investment. |
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Term
| What is the purpose of the financial system? |
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Definition
| To move the economy's scarce resources from savers to borrowers. |
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Term
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Definition
| The institutions through which savers/lenders can directly provide funds to borrowers. |
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Term
| What are the 2 major financial markets we talked about? |
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Definition
| The bond market and the stock market. |
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Term
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Definition
| A certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond. |
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Term
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Definition
| The length of time until it matures. |
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Term
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Definition
| The way in which the tax laws treat the interest on the bond. |
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Term
| Which type of bond are federal tax exempt? |
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Definition
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Term
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Definition
| Represents a claim to partial ownership in a firm and is therefore a claim to the profits that the firm makes. |
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Term
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Definition
| The sale of stock to raise money. |
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Term
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Definition
| Stocks may ofter higher risks, but also potentially higher returns. |
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Term
| What are the most important U.S. stock exchanges? |
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Definition
| New York Stock Exchange, American Stock Exchange, NASDAQ |
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Term
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Definition
| Financial institutions through which savers can directly provide funds to borrowers. |
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Term
| What are the two main financial intermediaries we talked about? |
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Definition
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Term
| What do banks do for spenders and savers? |
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Definition
| Pay depositors interest and charge borrowers slightly higher interest (to profit). |
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Term
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Definition
| An institution that sells shares to the public and uses the proceeds to buy a portfolio of various types of stocks, bonds, or both. |
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Term
| What are the 3 key services provided by the financial system? |
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Definition
1) Risk sharing
2) Liquidity
3) Collecting and analyzing info |
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Term
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Definition
| The ease with which a financial security can be exchanged for money. |
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Term
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Definition
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Term
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Definition
| The total income in the economy that remains after paying for consumption and government purchases. |
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Term
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Definition
| The amount of income that households have left after paying their taxes and paying for their consumption. |
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Term
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Definition
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Term
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Definition
| The amount of tax revenue that the government has left after paying for its spending. |
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Term
| Public saving formula (and what each result means) |
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Definition
T-G
IF: T>G = surplus
G>T = deficit |
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Term
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Definition
| Refers to all income that people have chosen to save and lend out, rather than use for their own consumption. |
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Term
| Where does supply come from? |
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Definition
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Term
| Where does demand come from? |
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Definition
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Term
| What does the interest rate stand for? |
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Definition
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Term
| The interest rate in the market for loanable funds = ______? |
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Definition
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Term
| How is the real interest rate determined? |
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Definition
| The equilibrium of the supply and demand for loanable funds. |
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Term
| How does tax on interest income affect demand? |
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Definition
| It reduces the future payoff from current saving, reducing the incentive to save. |
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Term
| How does tax decrease affect demand? |
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Definition
| It increases the incentive for households to save at any given interest rate. |
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Term
| If a change in tax law encourages greater saving, the result will be _____________ interest rates and _____________ investment. |
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Definition
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Term
| What does an investment tax credit do to demand? |
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Definition
| Increases the incentive to borrow, making the demand curve shift right. |
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Term
| If a change in tax laws encourages greater investment, the result will be ______________ interest rates and ____________ saving. |
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Definition
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Term
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Definition
| When the government spends more than it receives in tax revenues (the difference). |
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Term
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Definition
| The accumulation of past budget deficits. |
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Term
| What does government borrowing to finance the budget deficit do to the supply of loanable funds? |
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Definition
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Term
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Definition
| The fall in investment due to government borrowing. |
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Term
| What does crowding out do to the supply curve? |
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Definition
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Term
| When the government reduces national saving by running a deficit. the interest rate ____________ and investment ___________. |
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Definition
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Term
| A budget surplus _________ the supply of loanable funds, ________ the interest rate, and ___________ investment. |
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Definition
| Increases, reduces, increases. |
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Term
| In a closed economy, national saving must = __________? |
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Definition
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Term
| How is the interest rate determined? |
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Definition
| By the supply and demand for loanable funds. |
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Term
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Definition
| Number of years to double = (70/ growth rate) |
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Term
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Definition
| Refers to the amount of goods and services produced for each hour of a worker's time. |
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Term
| How is a nation's standard of living determined? |
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Definition
| By the productivity of its workers. |
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Term
| How are living standards measured? |
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Definition
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Term
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Definition
| Refers to the accumulation of a growth rate over a period of time. |
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Term
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Definition
| The inputs used to produce goods and services. |
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Term
| What are the 4 broad categories of factors of production? |
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Definition
| Physical capital, human capital, natural resources, technological knowledge. |
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Term
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Definition
| The stock of equipment and structures that are used to produce goods and services. |
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Term
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Definition
| The knowledge and skills that workers acquire through education, training, and experience. |
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Term
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Definition
| Inputs used in production that are provided by nature. |
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Term
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Definition
| Society's understanding of the best ways to produce goods and services. |
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Term
| The Solow Model (Production Function) |
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Definition
| A mathematical function that describes the relationship between the quantity of inputs used in production and the quantity of output from production. |
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Term
| Solow Model implicit formula says? |
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Definition
Y= A*F (L, K, H, N)
The output (Y) depends on the amount of physical capital (K), human capital (H), natural resources (N), the number of workers (L), as well as the state of technology (A). |
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Term
| What does it mean that a production function has constant returns to scale? |
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Definition
| A doubling of all inputs causes the amount of output to double as well. |
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Term
| Explict form of the Solow Model |
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Definition
| Y/L = A*(K/L)^.3 where A=1 and L=2 |
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Term
| According to the Solow model, as capital per worker increases, what does output do? |
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Definition
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Term
| What does the theory of diminishing marginal productivity of capital per worker say? |
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Definition
| As capital increases, so does output, but at a decreasing rate. |
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Term
| According to the Solow Model, what does technological change do to the quantity of output? |
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Definition
| Increases it with the same amount of physical capital. |
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Term
| Diminishing returns says what? |
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Definition
| An increase in the savings rate leads to higher growth only for a while. |
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Term
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Definition
| The property whereby countries that start off poor tend to grow more rapidly than countries that start off rich. |
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Term
| What are the 5 government policies that raise productivity and living standards? |
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Definition
1) Encourage saving and investment
2) Encourage investment from abroad
3) Encourage education and training
4) Establish secure property rights
5) Promote research |
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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
| Investments financed with foreign money but operated by domestic residences. |
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Term
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Definition
| Refer to the ability of people to exercise authority over the resources they own. (Ensures investments are secure). |
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Term
| What happens to economic activity during a recession? |
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Definition
| Normal growth in the production of goods and services doesn't occur. |
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Term
| Classical growth model (Solow) |
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Definition
| Explains how the economy works in the long run. |
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Term
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Definition
| Explains short run fluctuations when the economy is away from long run equilibrium for short periods of time. |
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Term
| How is the economy's output of goods and services measured? |
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Definition
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Term
| What does the aggregate supply curve show? |
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Definition
| The quantity of goods and services that firms choose to produce and sell at each price level. |
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Term
| What are the 3 reasons the aggregate demand curve is downward sloping? |
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Definition
1) The wealth effect
2) The interest rate effect
3) The exchange-rate effect |
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Term
| How does a lower price level affect spending? |
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Definition
| The interest rate is lower, so investment is higher. |
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Term
| What happens if prices in the U.S. fall, but exchange rate remains the same? |
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Definition
| U.S. exports will rise and the U.S. will import less. |
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Term
| What does a decreased price do to the AD model? |
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Definition
| Curves downward because the quantity demanded (U.S. exports) will be higher than quantity imported. |
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Term
| In the long run, the aggregate supply curve is ___________. |
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Definition
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Term
| In the short run, the aggregate supply curve is ____________. |
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Definition
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Term
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Definition
| Occurs when the aggregate supply curve is vertical, at its natural rate of output. |
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Term
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Definition
| The amount of labor force employed when the actual rate of unemployment equals the sum of frictional and structural unemployment. |
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Term
| What are the 3 reasons the aggregate supply curve slopes upward in the short run? |
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Definition
1) Sticky-wage theory
2) Sticky-price theory
3) Misperceptions theory |
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Term
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Definition
| Nominal wages are slow to adjust, or are "sticky" in the short run, making production at a lower price level less profitable. |
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Term
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Definition
| The prices of some goods and services adjust sluggishly in response to changing economic conditions. |
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Term
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Definition
| Changes in the overall price level temporarily mislead suppliers about what is happening in the markets in which they sell their output. |
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Term
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Definition
| A period of recession and inflation. |
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Term
| What happens during a period of stagflation? |
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Definition
| Output falls and prices rise. |
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