ECO 101-2
Terms
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- Employed
-
Any person 16 years or older
1) works for pay, either for someone else or in his or her own business for 1 or more hours per week.
2) Who works without pay for 15 or more per week in a family enterprise
3) who has a job but has been temporarily absent with/w.o pay - Unemployed
- A person 16 years or older who is not working, is availible for work and has made specific efforts to find work during the prev 4 weeks.
- Not in the labor force
- A person who is not looking for work because he or she does not want a job or has given up looking
- Labor force
- # of people employed plus the number of employed
- Labor force Equation
-
labor force = employed + unemployed
dont include perosn who is not looking for work b/c they dont want a job/ given up looking - Population
- Labor force + not in labor force
- Unemployment rate
-
Ratio of # of people un employed to the total # of people in the labor force
Unemployed/ employed+ unemployed - Labor force participation rate
-
the ratio of the labor force to the total population 16 years or older
Labor force rate = Labor force/ population - Discouraged-worker effect
- decline the measured unemployment rate that results when people who want to work but cannot find jobs grow discouraged and stop looking, thus dropping out of the ranks of the unemployed and the labor force.
- Frictional unemployment
- portion of unemployment that is due to the normal turnover in the labor market; used to denote short run job/skill matching problems
- Structural unemployment
- Portion of unemployment that is due to changes in the structure of the economy that result in a significant loss of jobs in certain industries
- Cyclical unemployment
- unemployment that is above frictional plus structural unemployment
- Natural rate of unemployment
- unemployment rate that occurs as a normal part of the functioning of the economy. Sometimes taken as the sum of frictional unemployment rate and structural unemployment rate.
- Consumer price index
-
CPI
price index computed each month by bureau of labor statistics using a bundle that is meant to represent the "market basket" purchased monthly by the typical urban consumer
CPI NEW - CPI OLD
/
CPI OLD
*100
= inflation - Producer prices indexes
- PPI measures of prices that producers receive for products at all stages in the production process.
- Real interest rate
- the difference between interest rate on a loan and the inflation rate
- Output growth
- the growth rate of the output of the entire economy
- Per capita output growth
- growth rate of output per person in the economy
- Productivity growth
- Growth rate of output per worker
- Aggregate output
-
Total quantity of goods and services produced(supplied) in an economy in a given period
AKA aggregate income
AKA Y - Aggregate incomes
-
total income received by all factors of production in a given period.
aka aggregate output
aka Y - Y
-
Aggregate output(income)
combined term used to remind you of the exact equality between aggregate output and income. - Consumption function
- relationship between consumption and income
- Aggregate consumption function
-
level of aggregate consumption at each level of aggregate income.
Upward slope indicates that higher levels of income lead to higher consumption - Marginal propensity to consume
-
(MPC) fraction of a change in income that is consumed, or spent
= slope of consumption function
Change in (C) consumption
/
Change in (Y) income - Aggregate saving (S)
-
part of aggregate income that is not consumed
S= Y-C - Identity
- something that is always true
- Marginal propensity to save
-
(MPS) fraction of a change in income that is saved.
MPC+MPS=1 - Planned investment
-
(I)
those additions to capital stock and inventory that are planned by firms - Actual investment
- the actual amount of investment that takes place; it includes items such as unplanned changes in inventories.
- Equilibrium
- Occurs when there is no tendency for change. In macroeconomic goods market, equilibrium occurs when planned aggregate expenditure is equal to aggregate output
- Planned aggregate expenditure
-
AE
total amount the economy plans to spend in a given period
Equal to consumption plus planned investment
AE = C+I+G
AE = Y ONLY AT EQUILBRIUM - Y > C+I+G
-
aggregate output > planned aggregate expenditure
increase in inventories
firm produced more, but then less - Y < C+I+G
-
Aggregate output < AE
decrease in inventory, firms didnt make enough, increase production - Multiplier
- Ratio of change in the equilibrium level of output to a change in some exogenous variable
- Exogenous variable
- variable that is assumed not to depend on the state of the economy, that is it does not change when economy changes
- Fiscal policy
- Govt's spending and taxing policies
- Monetary policy
- behavior of the federal reserve concerning the nation's money supply
- Discretionary fiscal policy
- Changes in taxes or spending that are the result of deliberate changes in govt policy
- Net taxes
- (T) taxes paid by firms and households to the govt minus transfer payments made to households by the govt
- Disposable incomes
-
after tax income
Total income minus net taxes
Y-T=Yd - Budget Deficit
-
Difference between what a govt spends and what it collects in taxes in a given period
G-T = Budget Deficit - Taxes + consumption function
-
C = A + bYd
C = A + b(Y-T) - Govt spending multiplier
-
ratio of change in the equilibrium level of output to a change in govt spending
1/MPS - Tax multiplier
-
ratio of change in the equilibrium level of output to change in taxes.
tax cut will cause increase in Y and C
tax increase will decrease in Y and C - Balanced - budget multiplier
-
ratio of change in the equilibrium level of output to a change in govt spending where the change in govt spending is balanced by a change in taxes so as not to create any deficit.
The balance budget multiplier is = 1
The change in Y resulting from change in G and the equal change in T are exactly the same size as the initial change in G or T
IF both , G and T are =
then change in the equilibrium point is = to either G or T, either because they are = - Federal budget
- budget of the federal govt
- Federal surplus or Deficit
-
Total federal receipts minus total expenditures
+ = surplus
- = deficit - Federal debt
- total amount owed by the federal government
- Privately held federal debt
- privately held (non-government owned) debt of the US govt
- Automatic Stabilizers
- revenue and expenditure items in the federal budget that automatically change with the state of the economy in such a way as to stabilize GDP
- Automatic Destabilizer
- revenue and expenditure items in the federal budget that automatically change with the state of the economy in such a way as to destabilize GDP
- Fiscal drag
- negative effect on the economy that occurs when average tax rates increase because tax payers have moved into higher income brackets during an expansion
- Full-employment budget
- What the federal budget would be if the economy were producing at the full-employment level of output
- Structural deficit
- Deficit that remains at full employment
- Cyclical deficit
- deficit that occurs because of a downturn in the business cycle
- What is money?
-
1) means of payment
2) store of value
3) unit of account - Barter
- direct exchange of goods and services for other goods and services
- Medium of exchange
-
what sellers generally accept and buyers generally use to pay for goods/services
aka means of payment - Store of value
- an asset that can be used to transport purchasing power from one time period to another
- Liquidity property of money
-
property of money that makes it a good medium of exchange as well as a store of value.
it is portable and readily accepted and thus easily exchanged for goods - Unit of account
- standard unit that provides a consistent way of quoting prices
- Commodity money
- Items used as money that also have intrinsic value in some other use
- Fiat/Token money
- items designated as money that are intrinsically worthless
- Legal tender
- Money that a govt has required to be accepted in settlement of debts
- Currency Debasement
- decrease in the value of money that occurs when its supply is increased rapidly
- M1
-
Transaction money
money that can be used directly for transactions
= currency held outside banks + demand deposits + travelers checks + other check able deposits - M2
-
Broad money
includes money markets and savings
= M1 + saving accounts + money market + other near monies - Near monies
- close substitutes for transactions money, such as savings account and money market accounts
- Financial intermediaries
- Banks and other institutions that act as a link between those who have money to lend and those who want to borrow money
- Run on a bank
- Occurs when many of those who have claims on a bank (deposits) present them at the same time
- Federal reserve bank
- Central bank of the US
- Reserves
- deposits that a bank has at the federal reserve bank plus its cash on hand
- Required reserve ratio
- % of its total deposits that a bank must keep as reserves at the federal reserve
- Excess reserves
-
difference between a bank's actual reserves and its required reserves
Excess reserves = actual reserves - required reserves - Money multiplier
-
multiple by which deposits can increase for every dollar increase in reserves; equal to 1 divided by required reserve ratio
= 1/ required reserve ratio - Federal Open Market Committee
- (FOMC) group composed of seven members of the Fed's board of governors, the president of the NY federal reserve bank, and four of the other 11 district bank presidents on a rotating basis; it sets goals concerning the money supply and interest rates and directs the operation of the Open Market Desk in NY
- Open Market Desk
- Office in the NY federal reserve bank from which govt securities are bought and sold by the Fed
- Lendor of last resort
- One of the functions of the FED: it provides funds to troubled banks that cannot find any other sources of funds.
- Tools of Federal reserve
-
1) changing required reserve ratio
2) changing the discount rate
3) Engaging in open market operations - Discount rate
- interest rate that banks pay to the FED to borrow from it
- Moral Suasion
- Pressure that in the past the FED exerted on member banks to discourage them from borrowing heavily from the FED
- Open market operations
- purchase and sale by fed FED of govt securities in the open market; a tool used to expand or contract the amount of reserves in the system and thus the money supply
- Interest
-
Fee that borrowers pay to lenders for the use of their funds
when interest rates rise
price of existing bonds fall - Non synchronization of income and spending
- the mismatch between the timing of money inflow to the household and timing of money outflow for household expenses
- Speculative motive
- One reason for holding bonds instead of money: Because the market price of interest-bearing bonds is inversely related to the interest rate, investors may want to hold bonds when interest rates are high with the hope of selling them when interest rates fall
- Tight monetary policy
- Fed policies that contract the money supply and thus raise interest rates in an effort to restrain the economy
- Easy monetary policy
- Fed policies that expand the money supply thus lower interest rates in an effort to stimulate the economy