Macro Econ Test 2 Vocab

Front 1

Consumer Wealth

Back 1

Your hard assets plus liquid assets. Includes cash, savings, and durable goods that youve held for over a year. Serves as a buffer against changes in income. One of the determinants of consumption. (More consumer wealth, consume more; Less consumer wealth, consume less)

Front 2

Frictional Unemployment

Back 2

People who are changing jobs, returning to the work force, or newly entering the labor force. Temporary & voluntary. Will always exist, counts for 5% of unemployment rate. Can be seen as a positive because when workers find better jobs, their productivity will increase, which increases GDP. It is desirable

Front 3

Structural Unemployment

Back 3

Due to decline in industry as a result of increased technology. Workers skills are not fully adaptable to the job market. Workers must be retrained before they can find new jobs. Old industries disapear as new industries emerge.

Front 4

Cyclical Unemployment

Back 4

Layoffs due to a downturn in the business cycle, nothing positive about cyclical unemployment. Policy makers tend to fight this by changing government spending and taxes.

Front 5

Excess Reserves

Back 5

The discretionary holdings that banks keep in addition to required reserves. Banks can either lend out or hold excess reserves. Ideally, banks would choose to hold no excess reserves, but sometimes they do in anticipation of an increase in money demand. If banks choose to hold excess reserves, it decreases the max amount that the money supply can expand. Total Reserves - Required Reserves = Excess Reserves.

Front 6

Default Risk

Back 6

The risk associated with a debtor not paying back a loan. The greater the default risk, the greater the interest rate (vice versa)

Front 7

Inventory Adjustment Mechanism

Back 7

The process by which suppliers adjust unsold inventories to achieve equilibrium. Inventories serve as a buffer against supply and demand side shocks. The inventory adjustment mechanism provides a smoother transition to equilibrium by reducing surpluses and shortages. Producers will move along the AsK curve until they reach equilibrium

Front 8

Effects of unanticipated inflation on creditors & Debtors

Back 8

If there is unanticiapted inflation, debtors win and creditors lose. The real value of money is greater when the debtor borrows it than when the creditor is repayed, even if the nominal value is constant

Front 9

Effects of anticipated inflation on creditors & debtors

Back 9

If the inflation rate were anticipated by the creditor, then they would charge an interest rate that is least equal to the expected rate. Creditors win and debtors lose

Front 10

GDP Gap

Back 10

The dollar value that represents the goods and services not being produced as a result of unemployment. The larger the GDP gap, the more severe the unemployment problem. GDP gap is one of the ways unemployment is measured. The horizontal distance between equilibrium GDP and employment GDP on a Keynesian cross.

Front 11

Quantity Theory of Money

Back 11

%∆Ms+%∆V= %∆P+%∆Q
Ms= nominal money supply: currency+ demand deposits
V= velocity = average # of times Ms is spent and respent over time
P= general or overall price level as measured by some price index like CPI(consumer price index)
Q= real output or GDP

Front 12

Three Functions of Money

Back 12

1) medium of exchange(good that trades for all other material goods)
2) store of value- store purchasing power over time
Real value of money = fixed nominal value/general price level
3) unit accounts- the value of all sorts of goods and services may be expressed in terms of their money values or market prices

Front 13

How Inflation Affects Creditors

Back 13

If there is inflation, then creditors lose money on their loans and buyers aren’t technically paying as high a price as they agreed to due to the inflated dollar. Inflation causes credit rates to rise to cover the inflation.

Front 14

Nominal GDP

Back 14

The dollar value of all domestically produced goods and services valued at current prices

Front 15

Real GDP

Back 15

The dollar value of all domestically produced goods + services valued at constant (base period) prices

Front 16

Keynesian Cross Equilibrium

Back 16

equilibrium occurs when Planned TE=Actual TE or when Planned TE crosses ASK
Relationship: if , then inventories are not at desired levels and hence y will adjust

Front 17

Term to Maturity

Back 17

the term within a loan must be paid back. Longer term to maturity = greater interest rate

Front 18

Tax Treatment

Back 18

tax free bonds, such as municipal bonds pay lower interest than tax bonds. The way the tax code views interest payments can lead to different interest rates

Front 19

Marginal Propensity to Consume

Back 19

The fraction of additional income which is devoted to additional consumption

Front 20

Monetary Policy

Back 20

How the fed changes money supply to control unemployment or inflation