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57 Cards in this Set
- Front
- Back
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Consumer Price Index (CPI)
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total cost of goods (current year)/ total cost of goods (base year)
designed to track average prices paid by typical consumer in U.S. for a FIXED basket |
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Inflation Rate
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Current year CPI - Previous Year CPI / Previous Year CPI
Percentage Change |
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Producer Price Index (PPI)
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a measure of the cost of a basket of goods and services bought by firms (calculated the same way as CPI)
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Problems in measuring CPI
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1. (Commodity) Substitution Bias
2. Unmeasured quality change 3. Introduction of new goods 4. Outlet Substitution Bias |
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Monetary Policy
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money supply and INTEREST rate
a. loose b. tight |
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Fiscal Policy
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spending and tax
a. expansionary b. constrictionary |
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Indexation
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the automatic correction by law or contract of a dollar amount for the effects of inflation
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Nominal Interest Rate
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the interest rate as usually reported without a correction for the effects of inflation
NOMINAL = REAL + INFLATION RATE |
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Real Interest Rate
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the interest rate corrected for the effects of inflation
REAL = NOMINAL - INFLATION RATE |
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Financial markets
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financial institutions through which savers can directly provide funds to borrowers
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Bond
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a certificate of indebtedness (IOU)
long term bonds = higher interest rates short term bonds = lower interest rates |
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Stock
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a claim to partial ownership in a firm
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Bond term
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the length of time until the bond matures
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Perpetuity
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the UK bond that never matures and is paid back interest forever
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Financial Intermediaries
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financial institutions through which savers can indirectly provide funds to borrowers
(banks, mutual funds, credit unions) |
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Mutual Fund
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institution that sells shares to the public and uses the proceeds to buy a portfolio of diversified stocks and bonds
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Dividend
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PRICE OF SHARE * DIVIDEND YIELD
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Dividend Yield
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DIVIDEND / PRICE OF SHARE
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Price/ Earnings Ratio
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PRICE OF SHARE / EARNINGS
EARNINGS = RETAINED + DIVIDEND |
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IDENTITY for GDP (Y)
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Y = C + I + G + NX
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Closed Economy
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one that does not interact with other economies
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Open Economies
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they interact with other economies around the world
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National Savings
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the total income in the economy that remains after paying for consumption and government purchases
PRIVATE + PUBLIC (govt.) S = (Y - T - C) + (T - G) |
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Private Savings
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the income that households have left over after paying for taxes and consumption
I (private)= Y - T - C |
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Public Savings
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the tax revenue that the government has left over after paying for its spending
I (public)= T - G |
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Budget Surplus
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Tax Revenue > Govt. Spending
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Budget Deficit
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Tax Revenue < Govt. Spending
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Market for Loanable Funds (and shifts)
PAGE 167 - 175 |
1. Tax on interest income
-reduces incentive to save 2. Reduction of tax -incentive for HH to save -increase supply of loanable funds 3. Investment tax credit: gives a tax advantage to firms building a new factory or buying a new piece of equipment 4. Budget Deficit -interest rate rises, investment falls -crowding out 5. Budget Surplus -supply of loanable funds increase, interest rate decreases, stimulates investment |
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Crowding out
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government borrowing money leads to government spending > tax revenue which leads to INVESTMENT DECREASING
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Present Value
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the amount of money TODAY that would be needed using prevailing interest rates, to produce a given future amount of money
PV = FV/ (1 + i ) ^ N |
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Future Value
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the mound of money in the future that an amount of money today will yield given prevailing interest rates
FV = PV * (1 + i ) ^ N |
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Compounding
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accumulation of a sum of money (bank account)
(1 + r) ^ N |
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Rule of 70
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the amount of years it takes for a certain variable to double
70/ (1 + i ) ^ N |
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Risk Averse
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a dislike of uncertainty
The utility function shows that if someone loses more utility from a loss than they gain from a win, then they are risk averse |
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Diversification
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reduction of risk by replacing a single risk with a larger number of smaller, unrelated risks
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Firm-specific Risk
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risk that affects only a single company
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Market risk
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risk that affects all companies in the stock market
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Fundamental Analysis***
maybe |
the study of a company's accounting statements and future prospects to determine its value
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Efficient markets hypothesis***
maybe |
the theory that asset prices reflect all publicly available information about the value of an asset
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labor force
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employed + unemployed
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unemployment rate
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number unemployed / LF * 100
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labor force participation rate
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LF / WAP (working age population)
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Employed
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paid employees (full time and part time) also includes temporarily absent workers for illness, vacation, or bad weather
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unemployed
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not employed for 4 weeks, available, and SEARCHING
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not in labor force
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not looking, not in job
full time student, homemaker, or retiree |
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Natural rate of unemployment
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normal rate of unemployment around which the unemployment rate fluctuates
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Cyclical Unemployment
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deviation of unemployment from its natural rate
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Frictional Unemployment
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unemployment because it takes time for workers to search for jobs that match their tastes
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Structural Unemployment
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not enough jobs available in market for everyone that wants one
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job search
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process by which workers find appropriate jobs
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discouraged workers
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individuals who would like to work but gave up
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Unemployment Insurance
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government program that partially protects workers incomes when they become unemployed
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Minimum wage laws
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surplus of labor = unemployment when minimum wage price floor is binding
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Union
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bargains with employers over wages, benefits, and working conditions
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collective bargaining
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the process by which unions an firms agree on terms of employment
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strike
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organized withdrawal of labor from a firm by a union
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efficiency wages
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raising wages to raise productivity
1. Increase worker health 2. Decrease worker turnover 3. Increase worker quality to apply for job 4. Increase worker effort Ford started this |
