Umn Macroecon 1102H Unit 2

Front 1

Social Insurance programs

Back 1

Social security, medicare, medicaid

Front 2

Social Security

Back 2

Guaranteed income to older, disabled, and beneficiary Americans

Front 3

Medicare

Back 3

Covers health care costs for seniors

Front 4

Medicaid

Back 4

Covers health care costs for low-income Americans

Front 5

Fiscal Policy

Back 5

Use of taxes, transfers, and gov't spending to stabilize economy by shifting aggregate demand curve

Front 6

Expansionary Fiscal Policy

Back 6

Increases aggregate demand to close recessionary gap
1) increase in gov't spending on goods and services
2) cut taxes
3) increase transfers

Front 7

Contractionary Fiscal Policy

Back 7

close inflationary gap to prevent inflation
1) Reduce gov't spending
2) increase taxes
3) reducing transfers

Front 8

If government increases spending by 1$, what effect does it have on the GDP?

Back 8

Increases by 1/1-c, but take into the account the effect of taxes that dampens the increase

Front 9

If government increases taxes by 1$ what effect does it have on the GDP?

Back 9

Decreases by c/1-c

Front 10

If government increase transfers by 1$, what effect does it have on GDP?

Back 10

Increases by c/1-c

Front 11

Automatic stabilizers

Back 11

Taxes and some transfers-- when real GDP rises,certain taxes are automatically raised to adjust the difference, therefore making the jump in GDP smaller; same goes for recessions, it makes the negative effect smaller

Front 12

Cyclically Adjusted Budget Balance

Back 12

to separate effect of business cycle from other factors to estimate what budget balance would be if output was equal to potential (long run)

Front 13

Fiscal Year

Back 13

October 1-September 30, named for the year they end on

Front 14

Public Debt

Back 14

debt held by individuals and institutions outside of the government

Front 15

Effects of rising public debt

Back 15

A) Loaners refuse to loan money
B) government need to draw from financial market crowds out private investment
C) puts pressure on future budgets

Front 16

Default

Back 16

To not pay back what a country owes; attractive option when most of your lenders are foreign but causes horrible effects on public confidence as well as hurts the economy

Front 17

Debt-GDP ratio

Back 17

Shows government debt as a % of GDP, taking into account potential tax revenue to be able to pay debt off

Front 18

Implicit Liabilities

Back 18

spending promises made by the government that are FUTURE debts, and thus don't show up on usual statistics of deficit-- ie social security

Front 19

Money

Back 19

any asset that can easily be used to purchase goods and services

Front 20

Currency in Circulation

Back 20

cash held by the public

Front 21

Money Supply

Back 21

total value of financial assets in the economy considered "money"

Front 22

Medium of Exchange

Back 22

an asset that individuals acquire for the purpose of trading rather than for their own consumption

Front 23

Store of Value

Back 23

is a means of holding purchasing power over time, not limited to money

Front 24

Unit of Account

Back 24

a measure used to set prices and make economic calculations

Front 25

Roles of Money

Back 25

Medium of Exchange, Store of Value, Unit of Account

Front 26

Commodity Money

Back 26

a good used as a medium of exchange that has other uses

Front 27

Commodity-Backed Money

Back 27

medium of exchange with no intrinsic value whose ultimate value was guaranteed by a mere promise that it could be turned into valuable goods

Front 28

Fiat Money

Back 28

medium of exchange whose value derives entirely from its official status as a means of payment

Front 29

M1

Back 29

contains only currency in circulation

Front 30

M2

Back 30

adds near-monies (financial assets that aren't directly usable as medium of exchange but can be readily converted into cash or checkable bank deposits, such as savings accounts)

Front 31

bank reserves

Back 31

currency banks hold in their vaults + bank's deposits at Federal Reserve; NOT a part of currency in circulation

Front 32

Reserve Ratio

Back 32

fraction of bank deposits that a bank holds as reserves, required by Federal Reserve

Front 33

bank run

Back 33

phenomenon where many depositors try to withdraw their funds due to fears of a bank failure

Front 34

Deposit Insurance

Back 34

FDIC; a guarantee by the government that depositors will be paid even iff the bank can't come up with the money up to 100,000$

Front 35

Capital Requirements

Back 35

Capital requirements require owners of banks hold way more assets than the value of bank deposits.

Front 36

Reserve Requirements

Back 36

rules set by the Federal Reserve that determine a bank's minimum reserve ratio (10%).

Front 37

Monetary Base

Back 37

sum of currency in circulation and bank reserves (the allocation of which cannot be controlled by authorities)

Front 38

Federal Funds Market

Back 38

allows banks that fall short of the reserve requirement to borrow funds from banks with excess reserves; Interest rate is determined by supply and demand which are affected by Federal Reserve

Front 39

Federal Funds Rate

Back 39

interest rate determined in the federal funds market

Front 40

Discount Rate

Back 40

rate of interest the Fed charges on loans to banks

Front 41

Open-Market Operation

Back 41

purchase or sale of government debt (in US Government bonds, ie Treasury Bills) by the Fed to commercial banks to make business loans;

Front 42

Real quantity of money

Back 42

nominal quantity of money divided by the aggregate price level (M/P), measures purchasing power of the nominal quantity of money M
If price levels increase, demand will increase since people need more money to purchase things; effect of price shifts are proportionate to shifts in demand 1:1

Front 43

Velocity of Money

Back 43

(P*Y)/M; suggests that a unit of money can be used several times (similar to multiplier effect), velocity is how many times that dollar is used

Front 44

Quantity Equation

Back 44

M * V = P * Y

Front 45

Liquidity Preference Model of Interest Rate

Back 45

interest rate is determined by the supply and demand for money in the market for money; combines nominal money demand curve with money supply curve (the vertical line that is controlled by the Fed basically); equilibrium is where they cross

Front 46

Relationship between money supplies and price level

Back 46

Proportionate, 1:1 ratio

Front 47

Monetary Neutrality

Back 47

when changes in the money supply haves no real effects on the economy--> because prices end up proportionally acting the same, which creates really no effect… in the long run

Front 48

Effect of increase in $$ Supply on Interest Rate in the SHORT RUN

Back 48

decreases the interest rate

Front 49

Frictional Unemployment

Back 49

unemployment due to the time spent on a job search

Front 50

Structural Unemployment

Back 50

unemployment that results when there are more people seeking jobs in a labor market than there are jobs available at the current wage rate

Front 51

Minimum Wages

Back 51

government price floor for labor; causes structural unemployment and a lower Q

Front 52

Efficiency Wages

Back 52

wages employers set above equilibrium wage rate as incentive for better performance

Front 53

Natural Rate of Unemployment

Back 53

normal unemployment rate around which the actual unemployment rate fluctuates; frictional unemployment + structural unemployment

Front 54

Output Gap

Back 54

% difference between actual level of real GDP and potential output

Front 55

Okun's Law

Back 55

Unemployment Rate = Natural Rate of Unemployment - (.5 x Output Gap)

each additional % of output gap reduces the unemployment rate by less than 1%; they correspond but not proportionately

Front 56

Menu Costs

Back 56

small costs associated with the act of changing prices

Front 57

Sticky Wages

Back 57

when employers are slow to change wage rates in the face of a surplus or shortage of labor; companies don't like to lower wages until other firms do the same, making them slow to adjust

Front 58

Short Run Phillips Curve

Back 58

shows that when unemployment is high, wages fall, vice versa; negative relationship between unemployment rate and inflation rate
§ When the GDP increases, price level increases, lowering unemployment, which lowers inflation rate

Negative supply shock shifts SRPC up, positive supply shock shifts it down

Front 59

Expected rate of Inflation

Back 59

rate of inflation that employers and workers expect in the near future, affects short-run trade off between unemployment and inflation; expectation of inflation shifts SRPC up

Front 60

Long-Run Phillips Curve

Back 60

If firms tried to push unemployment down to 4% there is a 2% inflation rate --> people expect 2% inflation, which shifts the curve UP 2% --> the new 4% actual inflation will increase expectations AGAIN! Accelerated Inflation?!

Front 61

Nonaccelerating Inflation Rate of Unemployment (NAIRU)

Back 61

unemployment rate at which inflation does not change over time

Front 62

Long-Run Phillips Curve

Back 62

relationship between unemployment and inflation after expectations of inflation have had time to adjust