Econ Exam #3

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Double Coincidenses of Wants

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I have what you want, you have what I want

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3 functions of money

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1. medium of exchange

2. unit of accct

3. store of value

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fiat money

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money w/o intrinsic value used as money bc of gov. decree(current us $)

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money suppy(or money stock)

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quantity of money available in economy

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demand(checkable) deposits

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balances in bank accts that deposites can access on demand by writing a check

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measures of us money suppl

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m1- currency, demand, deposits, travellers check

m2- everything in M1 plus savings deposits, small time deposits, mutual funds

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bank reserves

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central bank of us

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fractional reserve banking system

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bank keeps a fraction of deposits as reserves and use rest 2 make loans

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goldsmith principle

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bank keep 100%

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reserve requirments

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regulations on the min amnt of reserves that banks must hold against depposits

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actual reserves

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what bank actually hold

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required reserves

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what banks must hold

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excess reserves

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any amnt beyond what bank must hold

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reserve ratio

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fraction of deposits that banks hold as reserves

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money multiplier

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the amnt of money the banking system generates with each dollar of reserves; 1/R

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banking t acct

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a simplified accting statement that shows a banks assets and liab

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bank capital

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assets- liab

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leverage ratio

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the ratio of asssets to bank capital

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capital req

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a gov regulation that specifies a min amnt of capital intended to ensure banks will be a ble to pay off depositers and debts

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credit crunch

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banks with too little capital; reduce lending

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financial crisis of 08-09

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banks suffered losses on mortgage loans and mortgage backed securities due to widespread defaults

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cpi

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primary measure of inflation use in us

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colas

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cost of living adjustment

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problem with cpi

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doesnt measure standard of living; unmeasured quality of change

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substitution bias

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when prices rise you are going to digress to purchasing lower prices

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indexation

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automatically corrected by law or contract for inflation

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real interest rate

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nominal rate- inflation rate

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nominal rate

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real int rate + inflation rate

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inflation fallacy

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inflation erodes real incomes

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expected inflation

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can be built into costs

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unexpected inflation

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cannot be built into costs

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income & expenditure

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income equals expenditure bc every dollar a buyer spends is a dollar of income for the seller

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gdp

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market value of all final g&s produced within a country in a given period of time

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final goods

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goods that are ultimately consumed

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intermediate goods

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goods that go into the production of other goods

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components of gdp:

consumption(c)

investment(I)

nex exports(nx)

gov purchases (g)

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C+I+G+NX

total consumers spending on g&s

bus spending(not bonds/stocks)

trade balance, surplus or deficit

spending on g&s purchased by gov at all levels

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business cycle phases:

peak

recession

trough

recovey

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-during bus. cycle, highest pt of output; b4 a recession begins

-a significant decline in real gdp

- during bus. cycle, b4 a recovery begins

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nominal gdp

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values output using current prices, not corrected for inflation

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real gdp

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values output using the prices of a base yr that is corected 4 inflation

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gdp deflator

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price index; measure of overal price levels

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gdp per capita

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main indicator of the avg person standard of living

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productivity

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the value of output produced per unity labor input

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physical capital=K

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equipment and structures used to produce g&s

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human capital= H

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knowledge and skills workers acquire

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natural resources=N

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nature provides input

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growth policies:

foreign direct investment

foreign policy investment

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- a capital investment that is owned and operated by a foreign entity

- a capital investment financed w/ foreign money but operated by domestic entity

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Free trade:

Inward

Outward

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-aim to raise living standards by avoiding interaction w/ other countries

-promote integration w/ world economy

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technological advances

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main reason why living standards rise over long run

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population growth affect living standards in 3 ways

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1. stretch natural resources

2. dilute capital stock

3. promote tech progress

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unemployment rate

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100 x # of unemployed/ labor foce

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labor particptation rate

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100 x labor force/ adult population

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natural rate of u

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made of frictional and structural; long run average

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frictional unemployment

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when workers spend time searching for the jobs that best suit their skills

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unemployment insurance

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gov. program that provides some income to U workers

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costs/ benefits of unemplotment insurance

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costs- increase frictional u

benefits- more time to search for jobs

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structural u

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skills of workers aren't valued by job market; long term; fewer jobs then workers

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efficiency wages

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firms voluntarily pay above equilibrium wages to boost employee performance