Final Exam Definitions - Nu

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Activists

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Economists who believe thatdiscretionary changes in monetary and fiscal policy can reduce the degree ofinstability in output and employment.

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Adaptive-Expectations Hypothesis

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The hypothesisthat economic decision-makers base their future expectations on actual outcomesobserved during recent periods. Forexample, according to this view, the rate of inflation actually experiencedduring the past two or three years would be the major determinant of the rateof inflation expected for the next year.

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Administrative Lag

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The time periodafter the need for a policy change is recognized but before the policy isactually implemented.

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Automatic Stabilizers

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Built-in featuresthat tend automatically to promote a budget deficit during a recession and abudget surplus during an inflationary boom, even without a change in policy.

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Balanced Budget

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A situation inwhich current government revenue from taxes, fees, and other sources is justequal to current government expenditures.

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Bank Reserves

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Vault cash plusdeposits of banks with Federal Reserve banks.

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Budget Deficit

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a situation in which total governmentspending exceeds total government revenue during a specific time period,usually one year.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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Budget Surplus

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A situation in which total governmentspending exceeds total government revenue during a specific time period,usually a year.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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Central Bank

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An institution that regulates the bankingsystem and controls the supply of a country’s money.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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Commercial Banks

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Financialinstitutions that offer a wide range of services (for example, checkingaccounts, savings accounts, and loans) to their customers. Commercial banks are owned by stockholdersand seek to operate at a profit.

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Consumer Surplus

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The differencebetween the maximum price consumers are willing to pay and the price theyactually pay. It is the net gain derivedby the buyers of the good.

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Credit

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Funds acquired byborrowing.

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Credit Unions

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Financial cooperativeorganizations of individuals with a common affiliation (such as an employer ora labor union.) They accept deposits,including checkable deposits, pay interest (or dividends) on them out ofearnings, and lend funds primarily to members.

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Crowding-Out Effect

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A reduction inprivate spending as a result of higher interest rates generated by budgetdeficits that are financed by borrowing in the private loanable fundsmarket.

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Demand Deposits

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Non-interest-earningchecking deposits that can be either withdrawn or made payable on demand to athird party. Like currency, thesedeposits are widely used as a means of payment.

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Demand for Money

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A curve thatindicates the relationship between the interest rate and the quantity of moneypeople want to hold. Because higherinterest rates increase the opportunity cost of holding money, the quantity ofmoney demanded will be inversely related to the interest rate. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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Depository Institution

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Businesses thataccept checking and savings deposits and use a portion of them to extend loansand make investments. Banks, saving andloan association, and credit unions are examples.

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Discount Rate

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The interest ratethe Federal Reserve charges banking institutions for short-term loans.

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Discretionary Fiscal Policy

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A change, in lawsor appropriation levels that alters government revenues and/or expenditures. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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Exchange Rate

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The price of oneunit of foreign currency in terms of the domestic currency. For example, if it takes $1.50 to purchase anEnglish pound, the dollar-pound exchange rate is 1.50. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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Expansionary Fiscal Policy

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– an increase in governmentexpenditures and/or a reduction in tax rates, such as that the expected size ofthe budget deficit expands.

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Expansionary Monetary Policy

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– a shift in monetarypolicy designed to stimulate aggregate demand. Injection of additional bank reserves, lower short-term interest rates,and acceleration in the growth rate of the money supply are indications of amore expansionary monetary policy.

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Federal Reserve System

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the central bankof the United States; it carries outbanking regulatory policies and is responsible for the conduct of monetarypolicy.

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Fiat Money

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– Money that has neither intrinsic value northe backing of a commodity with intrinsic value; paper currency is an example.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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Impact Lag

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The time period after a policy change isimplemented but before the change begins to exert its primary effects.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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Index of Leading Indicators

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An index of economic variables thathistorically has tended to turn down prior to the beginning of a recession andturn up prior to the beginning of a business expansion.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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Less Developed Countries

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An index of economic variables thathistorically has tended to turn down prior to the beginning of a recession andturn up prior to the beginning of a business expansion.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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Liquid Assets

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an asset that can be easily and quicklyconverted to money without loss of value.

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M1 (Money Supply)

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The sum of (1)currency in circulation (including coins), (2) checkable deposits maintained indepository institutions, and (3) traveler’s checks.

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M2 (Money Supply)

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– Equal to M1 plus (1) savingsdeposits, (2) time-deposits (accounts of less than $100,000) held in depositoryinstitutions, and (3) money market mutual fund shares.

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Medium of Exchange

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an asset that is used to buy and sell goods orservices.

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Monetary Base

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– The sum of currency in circulationplus bank reserves (vault cash and reserves with the Fed). It reflects the purchases of financial assetsand extension of loans by the Fed.

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Money Market Mutual Fund

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Interest-earning accounts that pool depositors’funds and invest them in highly liquid short-term securities. Because these securities can be quicklyconverted to cash, depositors are permitted to write checks (which reduce theirshare holdings) against their accounts.

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Multiplier Principle

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The concept thatan increase in spending on a project will generate income for the resourcesuppliers, who will then increase their consumption spending. In turn, their additional consumption willgenerate income for others and lead to still more consumption. As this prices goes through successiverounds, total income will expand by a multiple of the initial increase in spending.

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Normative Economics

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Judgments about“what ought to be” in economic matters. Normative economic views cannot be proved false because they are basedon value judgments.

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Open Market Operations

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the buying andselling of U.S. government securities and other financial assets in the openmarket by the Federal Reserve.

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Rational-Expectations Hypothesis

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the hypothesis that economic decision-makersweigh all available evidence, including information concerning the probableeffects of current and future economic policy, when they form theirexpectations about future economic events (like the probable future inflationrate).<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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Recognition Lag –

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The time period after a policy change isneeded from a stabilization standpoint but before the need is recognized bypolicy-makers.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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Resource Market

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A highly aggregated market encompassing allresources (labor, physical capital, land, and entrepreneurship) contributing tothe production of current output. Thelabor market is the largest component of this market. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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Restrictive Fiscal Policy

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a reduction in government expenditures and/oran increase in tax rates such that the expected size of the budget deficitdeclines (or the budget surplus increases). <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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Ricardian equivalence

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The view that a tax reduction financed withgovernment debt will exert no effect on current consumption and aggregatedemand because people will fully recognize the higher future taxes implied bythe additional debt. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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Rule of 70

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If a variablegrows at a rate of x percent per year, 70/x will approximate the number ofyears required for the variable to double.

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Savings and Loan Association

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Financialinstitutions that accept deposits in exchange for shares that paydividends. Historically, these fundswere channeled into residential mortgage loans, but today they offeressentially the same services as a commercial bank.

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Store of Value

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An asset that will allow people to transferpurchasing power from one period to the next.

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Supply-side Economists

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Economists whobelieve that changes in marginal tax rates exert important effects on aggregatesupply.

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Technological Advancement

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The introduction of new techniques or methodsthat increase output per unit of input. <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

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Transaction Costs

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The time, effort,and other resources needed to search out, negotiate, and complete an exchange.

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Unit of Account

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A unit ofmeasurement used by people to post prices and keep track of revenues andcosts.

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World Trade Organization (WTO)

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The new namegiven to GATT in 1994; the WTO is currently responsible for monitoring andenforcing multilateral trade agreements among its 153 member countries.

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