Econ 201 Midterm 2
Ch. 9 thru Ch. 12
Terms
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- Equilibrium
- situation in which neither consumers nor firms have any incentive to change their behavior. They are content to conintue with things as they are.
- expenditure schedule
- shows relationship between national income (GDP) and total spending
- induced investment
- part of investment spending that rises when GDP rises and falls when GDP falls
- income-expenditure diagram
- plots total real expenditure against real income. Marks off points where income and expenditure are equal
- aggregate demand curve
- shows the quantity of domestic product that is demanded at each possible value of the price level.
- recessionary gap
- amount by which the equilibrium level of real GDP falls short of potential GDP
- inflationary gap
- amount by which equilibrium real GDP excees the full-employment level of GDP
- coordination pailure
- when party A would like to change his behavior if party B would change his, and vice versa, and yet the two changes do not take place because the decisions of A and B are not coordinated.
- multilier
- ratio of the change in equilibrium GDP (Y) divided by the original change in spending that cases the change in GDP.
- induced increase in consumption
- an increase in consumer spending that stems from an increase in consumer incomes. It is represented on a graph as a movement along afexed consumption function
- autonomous increase in consumption
- an increase in consumer spending without any increase in consumer incomes. It is represented on a graph as a shift of the entire consumption function.
- aggregate supply curve
- shows, for each possible price level, the quantity of goods and servies that all the nation's businesses are willing to produce during a specified period of time, holding all other determinants of aggregate quantity supplied constant
- productivity
- amount of output produced by a unit of input
- self-correcting mechanism
- refers to the way money wages react to either a recessionary gap or an inflationary gap. Wage changes shift the aggregate supply curve and therefore change equilibrium GDP and the equilibrium price level.
- stagflation
- inlfation that ocurs while the economy is growing slowly or having a recession
- automatic stabilizer
- a feature of the economy that reduces its sensitivity to shocks, such as sharp increases or decreases in spending
- fiscal policy
- government's plan for spending and taxations. It is designed to steer aggregate demand in some desired direction
- run on a bank
- occurs when manydepositors withdraw cash from their accounts all at once
- barte
- system of exchange in which people directly trade one good for another, without using money as an intermediate step.
- money
- the standard object used in exchanging goods and services. In short, money is the medium of exchange.
- unit of account
- the standard unit for quoting prices
- store of value
- an item used to store wealth from one point in time to another
- commodity money
- an object in use as a medium of exchange that also has a substantial value in alernative (nonmonetary) uses
- Fiat money
- money that is decreed as such by the government. It is of little value as a commodity, but it maintains its value as a medium of exchange because people have faith that the issuer will stand behind the pieces of printed paper and limit their production
- M1
- the sum of all counts and paper money in circulation, plus certain checkable deposit balances at banks and savings institutions
- M2
- the sum of all coints and paper money in circulation, plus all types of checking account balances, plus most forms of savings acount balances, plus shares in money market mutual funds.
- near moneys
- liquid assets that are close substitutes for money
- liquidity
- the ease with which an asset can be converted into cash
- fractional reserve banking
- a system under which bankers keep as reserves only a fraction of the funds they hold on deposit
- deposit insurance
- a system that guarantees that depositor's will not lose money even if their bak goes bankrupt.
- moral hazard
- the idea that, when people are insured against the consequences of a risk, they will engage in riskier behavior
- required reserves
- the minimum amount of reserves (in cash or the equivalent) required by law. Normally, required reserves are proportional to the volume of deposits
- systemic risk
- risks to the entire system of banks or financial institutions. It arises because these institutions, especially the largest ones, are interlinked in many ways
- systemically important ("too big to fail")
- financial institutin is one which, by virtue of its size or interconnectedness, can threaten the entire system if it runs into trouble.
- asset
- an item of value that the individual or firm owns
- liability
- an individual or business firm is an item of value that the individual or firm owes. Many known as debts
- balance sheet
- an accounting statement listing the values of all assets on the left side and the values of all liabilities and net worth on the right side
- net worth
- the value of all assets minus the value of all liabilities
- deposit creation
- refers to the process by which a fractional reserve banking system turns $1 of bank reserves into several dollars of bank deposits
- excess reserves
- any reserves held in excess of the legal minimum
- money multiplier
- the ratio of newly created bank deposits ot new reserves