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aggregate demand
total demand in the economy at all price levels; reflects the total expenditures in the economy
aggregate supply
total supply in the economy at all price levels; maps price levels to the real output supplied by firms
combining many different things into a single variable
average labor productivity
total output of the economy divided by the number of workers employed
bank run
when depositors rush to withdraw their deposits from a financial institution
financial intermediary; loans to businesses and accepts deposits from savers
a certificate of indebtedness with interest; highly liquid; involved in debt finance; certifies a borrower's obligations to the bond holder; involve a principal and interest payment; often sold by large firms to finance investment; can be held by a purchaser until maturity or sold earlier; priced according to changes in the interest rate; may be part of mutual fund investments; bought and sold in open-market operations
Bureau of Labor Statistics
the agency that calculates the Consumer Price Index every month
business cycle
alternation of expansions and recessions in an economy; results in cyclical unemployment; characterized by peaks and troughs; often moderated by government policy; moved in tandem with inflation from 1960 to 1979
business fixed investment
firms' purchase of factories, offices, machinery, and other capital goods
capital goods
goods that are long-lived and produced to make other goods
central bank
institution that regulates the supply of money and oversees a country's banking system
circular flow model
a model that traces the path of money, goods, and services through an economy
commodity money
money with intrinsic value
consumer durables
long-lived consumer goods
consumer nondurables
short-lived consumer goods
Consumer Price Index
measures the cost of purchasing a representative basket of goods and services at market price; used to measure inflation
spending by households
contractionary fiscal policy
spending by legislatures or the government to slow an expansion
bills and coins owned by the public; the most liquid asset
cyclical unemployment
unemployment caused by the ups and downs of the business cycle
date of maturity
specifies the date a lone will be repaid
debt finance
the sale of bonds
when the borrower of a bond fails to pay some or all of the principal or interest
demand deposits
another name for checking accounts
discount rate
interest rate that the Federal Reserve charges on loans to banks
the profits enjoyed by shareholders whenever stocks are sold
the state of either working or being on leave from a paid job
employment rate
the percentage of a labor force that has a job or is on leave from a regular job
equation of exchange
MV = PY; quantity theory of money
equity finance
sales of shares of stock
all dollar accounts held outside of the United States
periods when the economy grows faster than its long-run trend
factor market
the market where labor, land, and capital are bought and sold
factors of production
the name for land, labor, capital, and entrepreneurship
federal funds rate
the interest rate that banks charge when loaning to other banks
Federal Open Market Committee
organization that meets every six weeks in Washington, D.C. to decide on changes in monetary policy; composed of the seven Fed governors and five regional bank presidents
Federal Reserve System
central bank of the United States; created in 1913 and consists of 12 regional banks
fiat money
money with no intrinsic value
final good
goods sold to consumers; not used to produce other goods
financial institutions
coordinates the saving and investment decisions in an economy
financial markets
institutions where savers can supply their savings to those who wish to borrow the money for investment
fiscal policy
government spending
foreign direct investment
when a company or individual acquires assets in another country that they will actively manage
foreign exchange effect
at a lower domestic price level, domestic consumers will buy fewer imports, causing net exports to increase and GDP to increase; one of the reason aggregate demand slopes downward
fractional reserve banking
a type of banking where the bank will loan out some of the deposits, keeping only some in reserve
frictional unemployment
unemployment due to the process of matching employees and employers; always present
GDP deflator
a measurement of the relationship between real and nominal GDP that tells about the degree of inflation
GDP per capita
GDP divided by the number of people in a country; correlated with labor productivity; much lower in Sub-Saharan Africa compared to the rest of the world
gross domestic product
the market value of all final goods produced within a country during a certain period of time
high-powered money
another name for the monetary base; currency plus reserves
human capital
skills and experience acquired by humans through training, education, and on-the-job experience
when all prices in an economy rise together
a third party that links two others
intermediate goods
goods used up while producing another, final good
addition of unsold goods to company inventories
spending by firms on final goods and purchases of houses by households
equals domestic savings in a closed economy
includes foreign direct investment, business and residential fixed investment, and portfolio investment, or the purchases of stocks and bonds
has an inverse relationship with the real interest rate
coordinated with savings through banks and other intermediaries
Keynesian model
model using aggregate curves to explain short-run economic fluctuations; developed by John Maynard Keynes in The General Theory of Employment, Interest, and Money; depicts long-run equilibrium as an interaction of price level and real output, with equilibrium occuring at the intersection of long-run and short-run aggregate supply and aggregate demand; in which increasing the money supply causes a rightward shift of the aggregate demand curve
labor force
all people that are either employed or unemployed
lender of last resort
the Fed's responsibility, if a bank looks like it is about to fail
to a bank, the deposits of depositors; the assets of solvent banks exceeds this
how easily something can be converted into money
long run
the time period in which an economy moves back to equilibrium, during which all costs are variable
long run aggregate supply
drawn as a vertical line where output equals potential output in the Keynesian model
a component of the money stock; includes currency, demand deposits, non-bank traveler checks, and other checkable deposits
the best definition of the money supply; includes M1 along with savings accounts, time deposit, and balances in money market funds/retail money funds
the branch of economics concerned with the performance of national economies
medium of exchange
an item that can be used to buy goods
monetary base
the amount of currency plus reserves; alternative name for high-powered money
monetary policy
instrument used by the Federal Reserve to alter the money supply and offset short run economic fluctuations
anything that is a medium of exchange, unit of account, and store of value; may be fiat money or commodity money
money market accounts
a form of deposit similar to retail money funds
money multiplier
the reciprocal of the reserve ratio; determines the effect of altering the reserve ration on the stock of money in the economy
money supply
the amount of money in the economy, controlled by the Fed
mutual funds
a portfolio of stocks that inexperience savers can purchase, allowing them to diversify holdings and gain professional knowledge
national savings
equal to national income minus consumption minus government purchases
natural rate of unemployment
level of unemployment present when actual output is equal to potential output; includes only frictional and structural unemployment
net capital outflow
the purchase of foreign assets by domestic residents minus the foreign purchase of domestic assets
net exports
value of domestically made goods sold to foreigners minus value of foreign-made goods bought by domestic buyers
neutrality of money
in the long run, changes in the quantity of money have no effect on real quantities in the economy
nominal GDP
GDP calculated with current year prices
Okun's Law
every 1% that the unemployment rate is off from the natural rate of unemployment, the output gap will deviate 2%
open-market operations
the buying and selling of bonds by the Federal Reserve to alter the money supply
output gap
difference between actual output and potential output
portfolio investment
when an individual or firm buys shares of stocks or bonds issued by a foreign company
potential output
the quantity of goods that can be produced when the economy is using all of its resources at normal rates; not fixed over time
price level
the sum of all prices in the economy
the original amount loaned out
private savings
national output minus consumption minus taxes
quantity theory of money
velocity of money times the quantity of money equals nominal GDP; also called the quantity equation (MV = PY)
real GDP
GDP adjusted for inflation
real interest rate
the nominal interest rate minus the rate of inflation
periods of slow growth (or even decline) in output/GDP
reserve requirement
the amount of money banks are required to have in their vaults to pay back depositors
reserve-deposit ratio
percentage of deposits banks are required to keep as reserves
residential fixed investment
when households purchase new homes and apartment buildings
difference between a person's earnings and spending
intangible goods (eg. education, insurance, and financial services)
short run
the period of time the economy deviates from long-run predictions; usually one to three years
short-run aggregate supply
the potential supply of all goods at all price levels; upward sloping
describes a bank whose assets exceeds its liabilities
represents ownership of a portion of a company
store of value
an item that people can use to transfer purchasing power from the present into the future
structural unemployment
unemployment due to mismatches between job openings and jobs seekers
time deposits
a deposit that cannot be withdrawn for a length of time, but accrues significant interest in the meanwhile
trade deficit
when imports exceeds exports
trade surplus
when exports exceeds imports
state of actively seeking paid work, but anable to find it
unemployment rate
percentage of people who would like to work but cannot find jobs
unit of account
a yardstick that establishes the value of different goods
velocity of money
the number of times the average dollar bill is used in a year
the total value of assets, as a store of value
wealth effect
phenomenon in which money becomes more valuable and people buy more goods and services when aggregate price level declines
real per capita GDP
measure of inflation-adjusted value of domestically produced goods and services divided by population