| Term | Definition |
|---|
| fractional reserve banking | a system in women depository institutions hold reserves that are less than the amount of total deposits |
| reserves | in the U.S. Federal Reserve System, deposits held by the Feder Reserve district banks for depository institutions, plus depository institutions vault cash |
| required reserves | the value of reserves that a depository institution must hold in the form of vault cash or deposit with the Fed |
| required reserve ratio | the percentage of total transactions deposits that the Fed requires dopository institutions to hold in the form of vault cash or deposits with the Fed |
| excess reserves | the difference between actual reserves and required reserves |
| calculation of required reserves | transaction deposits X required reserve ratio |
| balance sheet | statement of the assets and liabilities of any business entity, including financial institutions and the Federal Reserve System |
| assumption # 1 for balance sheets | required reserve ratio is 10% for all transaction deposits |
| assumption #2 for balance sheets | transaction deposits are the bank's only liabilities; reserves at a Federal Reserve district bank and loans are the bank's only assets |
| assumption #3 for balance sheets | an individual bank can lend as much as it is legally allowed |
| assumption #4 for balance sheets | every time a loan is made to an individual (consumer or business), all the proceeds from the loan are put into a transaction deposit account; no cash is withdrawn |
| assumption #5 for balance sheets | depository institutions seek to keep zero excess reserves because reserves do not earn interest |
| assumption #6 for balance sheets | depository institutions have zero net worth |
| net worth | the difference between assets and liabilities |
| open market operations | the purchase and sale of existing U.S. government securities in the open private market by the Federal Reserve System |
| money multiplier | a number that, when multiplied by a change in reserves in the banking system, yields the resulting change in the money supply |
| potental money multiplier | the reciprocal of the required reserve ratio, assuming no leakages into currency and no excess reserves |
| calculation of potential money multiplier | 1/required reserve ratio |
| actual change in money supply | actual money multiplier X change in total reserves |
| leakages | the entire loan from one bank is not always desposited in another bank (two types) |
| currency drains | when deposits increase, public will want to hold more currency (currency in a person's wallet reamins outside banking system and cannot be held by banks as reserves from which to make loans) |
| excess reserves leakages | depository institutions may wish to maintain excess reserves greater than zero (greater the excess reserves, the smaller the money multiplier) |
| discount rate | interest rate that the Federal Reserve charges for reserves that it lends to depository institutions |
| Federal Funds Market | a private market (made up mostly of banks) in which banks can borrow reserves from other banks that want to lend them (usually lent for overnight use) |
| Federal Funds Rate | the interest rate that depository institutions pay to borrow reserves in the interbank federal funds market |
| sweep acount | a despository institutions account that entails regular shifts of funds from transactions deposits that are subject to reserve requirements to savings deposits that are exempt from reserve requirements |
| money balances | synonymous with money, money stock, money holdings |
| transactions demand | holding money as a medium of excahnge to make payments (the level varies directly with nominal GDP) |
| precautionary demand | holding money to meet unplanned expenditures and emergencies |
| asset demand | holding money as a store of value instead of other assets such as certificates of deposit, corporate bonds, and stocks |
| relationship between the price of existing bonds and the rate of interest | the market price of existing bonds (and all fixed-income assets) is inversely related to the rate of interest prevailing in the economy |
| direct effect of an increase in the money supply | aggregate demand rises because with an increase in the money supply, at any given price level people now want to purchase more output of real goods and services |
| indirect effect of an increase in the money supply | banks lower interest rates that they charge on loans-->encourages people to take out those loans-->businesses engage in new investment with the funds loaned-->individuals will engage in more consumption of durable goods (housing, autos, and home entertainment centers)-->generates a rise in aggregate demand--->more people involved in more spending |
| the net export effect of contractionary monetary policy | contractionary moneytary policy causes interest rates to rise (induces international inflows of financial capital-->raising the internation value of the dollar and making U.S. goods less attractive abroad) |
| equation of exchange | the formula indicating that the number of monetary units (Ms) times the number of times each unit is spent on final goods and services (V) is identical to the price level (P) times real GDP (Y) |
| income velocity of money (V) | the number of times per year a dollar is spent on final goods and services; identically equal to nominal GDP divided by the money supply |
| quantity theory of money and prices | the hypothesis that changes in the money supply lead to equiproportional changes in the price level |
| FDIC | A government agency that insures the deposits held in banks and most other depository institutions; all U.S. banks are insured this way |
| FDIC deposit insurance in U.S. | encourages banks to make riskier loans than they otherwise would |
| calculation of multiplier | 1/1-MPC or 1/MPS |
| calculation of change in equilibrium real GDP | multiplier X change in autonomous spending |
| fiduciary monetary system | a system in which money (currency) is issued by the government and is backed by the public's implicit faith in the government (that the currency represents command over goods and services) |
| transaction approach to measuring money supply (M1) | looking at money as a medium of exchange (measured as the total value of currency, transaction deposits, and traveler's checks not issued by banks) |
| marginal propensity to consume (MPC) | the percentage of an additional dollar of real disposable income that will go toward additional real consumption spending |
| keynes and followers | argued that prices were inflexible downward due to the existance of unions and long-term contracts; believed that there was no guarantee that a capitalist economy would reach a full employment |
| horizontal short-run aggregate supply curve | there is excessive unemployment and unused capacity in the economy (classical assumptino of everlasting full employment no longer holds) |
| Laffer curve | explains relationship between tax rates and tax revenues (total tax revenues initially rise but then eventually fall as the tax rate continues to increase after reaching some unspecified tax-revenue-maximizing rate at the top of the curve) |
| Federal Reserves notes | largest component of U.S. currency (paper bills); distributed by the Fed |
| Function of the Federal Reserve System #1 | supplies the economy with fiduciary currency (paper currency known as Federal Reserve notes); changes throughout the yr (ex. demands for paper currency are largers during the holiday seasons) |
| Function of the Federal Reserve System #2 | provides payment-clearing systems: long operated systems for transmitting and clearing payments |
| fedwire | electronic payments transfer system operated by the Federal Reserve System (about 2,000 U.S. depository institutions use to process interbank payments) |
| Function of the Federal Reserve System #3 | holds depository institutions' reserves |
| Function of the Federal Reserve System #4 | acts as the government's fiscal agent (helps the government collect certain tax revenues and aids in the purchase and sale of government securities) |
| Function of the Federal Reserve System #5 | supervises depository institutions: Fed periodically and without warning examine depository institutions to see what kinds of loans have been made, what has been used as security for the loans, and who has recieved them |
| Function of the Federal Reserve System #6 | acts as the "lender of last resort" (the Federal Rserve's role as an institutions that is willing and able to lend to a temporarily illiquid bank that is otherwise in good financial condition to prevent the bank's illiquid position from lending to a general loss of confidence in that banks or in others) |
| Function of the Federal Reserve System #7 | regulates the money supply |
| Function of the Federal Reserve System #8 | intervenes in foreign currency markets (attempts to keep the value of the dollar from changing by buying and selling U.S. dollars in foreign exchange markets) |
| Federal Open Market Committee (FOMC) | determines the future growth of the money supply and other important variables (composed of the members of the Board of Governors, the president of the NY Federal Reserve Bank, and presidents of 4 other Federal Reserve banks) |
| board of Governors of the Federal Reserve System | appointed by the president with the approval of the U.S. senate |
| # of Federal Reserve district banks | 12 (with a total of 25 branches) |
| Federal Reserve System | the central bank of the United States |
| Roles of Central Banks | perform banking functions for their nations' governments; provide financial services for private banks; conduct their nations' monetary policies |
| causes of inflation | decline in long-run aggregate supply (continual reductions in economywide production) and if aggregate demand curve shifts rightward over time at a faster pace then the rightward progression of the long-run aggregate supply curve |
| unit of accounting | way of placing a specific price on economic goods and services (it serves as a standard of value (yardstick) that allows people to compare the relative worth of various goods and services) |
| investment function | represented bas an inverse relationship between the rate of interest and the value of planned real investment (as interest rates fall planned investment spending increases) |
| store of value | the ability to hold value over time (a function of money), also known as purchasing power |
| how to decrease aggregate demand | cut government spending or raise taxes (note: this reduces inflationary gaps) |
| how to increase aggregate demand | reduce taxes or increase goverment spending (note: this reduces a recessionary gap) |
| fixed investment | expenditures by firms on new machines and buildings (capital goods) that are expected to yield a future stream of income |
| inventory investment | changes in business inventories |
| real diposable income | Real GDP minues net taxes, or after-tax real income (given all of the simplifying assumptions of the Keynesian model) |
| simplifying assumptions of Keynesian model | businesses pay no indirect taxes (ex. sales taxes); businesses distribute all of their profits to shareholders; there is no depreciations (capital consumption allowance), so gross private domestic investment = net investment; the economy is closed (there is no foreign trade) |
| consumption | act of using income for the purchase of consumption goods (whatever is not consumed is saved) (a flow concept) |
| consumption goods | goods purchase by households for immediate satisfaction or to use up (ex. food, movies) |
| saving | the act of not consuming all of one's current income (an action measured over time (a flow)); the amount of disposable income that is not spent to purchase consumption goods |
| savings | an accumulation resulting from the act of saving in the past (a stock: measured at a certain point or instant in time) |
| relating income to saving and consumption | saving = disposable income - consumption; or consumption + saving = disposable income |
| investment | (also a flow concept): expenditures on new machines and buildings (capital goods) that are expected to yield a future stream of income |
| consumption function | the relationship between planned real consumption expenditures of households and their current level of real disposable income; shows how much all households paln to consume per year at each level of real disposable income per year |
| main determinant of saving (classical model) | the rate of interest (the higher the rate of interest, the more peole wante to save, and therefore the less people wanted to consume) |
| main determinant of saving (Keynes) | income: Keynes argued that real saving and consumption decisions depend primarily on a household's present real disposable income |
| dissaving | a negative saving: a situation in which spending exceeds income; can occur when a household is able to borrow or use up existing assets |
| saving function | the complement of the consumption function |
| 45 degree reference line | the line along which planned real expenditures equal real GDP per year |
| autonomous consumption | the part of consumption that is independent of the level of disposable income; changes in autonomous consumption shift the consumption function |
| average propensity to consume (APC) | the proportion of total real disposable income that is consumed |
| average propensity to save (APS) | the proportion of total real disposable income that is saved |
| marginal propensity to consume (MPC) | the ratio of the change in consumption to the change in disposable income |
| marginal propensity to save (MPS) | the ratio of the change in saving to the change in disposable income |
| causes of shifts in the consumption function | a change in any other relevant economic variable (besides real disposable income); # of such determinants is unlimited |
| wealth | the stock of assests owned by a person, household, firm, or nation (for a household, wealth can consists of a house, cars, personal belongings, stocks, bonds, bank accounts, and cash) |
| lump-sum tax | a tax that does not depend on income |
| multiplier | the number by which a change in autonomous real investment or autonomous real consumption, for example, is multiplied to get the change in equilibrium real GDP |
| multiplier formula | =1/1-MPC or 1/MPS |
| properties of the multiplier | the smaller the marginal propensity to save, the larger the multiplier; the larger the marginal propensity to consume, the larger the multiplier |
| fiscal policy | the making of deliberate, discretionary changes in federal government expenditures or taxes (or both) to achieve certain national economic goals (such as high employment with price stability) |
| changes in taxes | a rise in taxes causes a reduction in aggregate demand because it reduces consumption, investment, or net exports |
| crowding-out effect | a rise in government spending, holding taxes constant (this is, deficit spending), tends to crowd out private spending, dampening the positive effect of increased government spending on aggregate demand (this decrease normally results from the rise in interest rates) |
| Ricardian Equivalence theorem | the proposition that an increase in the government budget deficit has no effect on aggregate demand |
| direct expenditure offsets | actions on the part of the private sector in spending income that offset government fiscal policy actions; any increase in government in an area that competes with the private sector will have some direct expenditure offset |
| supply-side economics | the suggestion that creating incentives for individuals and firms to increase productivity will cause the aggregate supply curve to shift outward |
| recognition time lag | the time required to gather information about the current state of the economy; months may elapse before national economic problems can be identified |
| action time lag | time between recognizing an economic problem and implementing policy to sole it; particularly long for fiscal policy (requires congressional approval) |
| effect time lag | the time that elapses between the implementation of a policy and the results of that policy |
| automatic, or built-in, stabilizers | special provisions of certain federal programs thata cause changes in desired aggregate expenditures without the action of Congress and the president (ex. federal progressive tax system and unemployment compensation) |
| government budget deficit | exists if the government spends more than it recieves in taxes (government revenue) during a given period of time |
| balanced budget | a situation in which the government's spending is exactly equal to the total taxes and other revenues it collects during a given period of time |
| government budget surplus | an excess of government revenues over government spending during a given period of time |
| public debt | the total value of all outstanding federal government securities |
| gross public debt | all federal government debt irrespective of who owns it |
| net public debt | gross public debt minus all government interagency borrowing |
| operating budget | expenditures for current operations, such as salaries and interest payments |
| capital budget | expenditures on investment items, such as machines, buildings, roads, and dams |
| entitlements | guarenteed benefits under a government program such as social security, medicare, or medicaid (often called noncontrollable expenditures) |
| noncontrollable expenditures | government spending that changes automatically without action by Congress |
| money | any medium that is universally accepted in an economy both by sellers of goods and services as payment for those goods and services and by creditors as payment for debts |
| medium of exchange | any item that sellers will accept as payment |
| barter | the direct exchange of goods and services for other goods and services without the use of money |
| liquidity | the degree to which an asset can be aquired or disposed of without much danger of any intervening loss in nominal value and with small transaction costs (money is the most liquid asset) |
| transaction deposits | checkable and debitable account balances in commercial banks and other types of financial institutions, such as credit unions and savings banks; any accounts in financial institutions from which you can easily transmit debit-card and check payments without many restrictions |
| fiduciary monetary system | a system in which money is issued by the government and its value is based uniquely on the public's faith that the currency represents command over goods and services |
| fiduciary | comes from the latin fiducia, which means "trust" or "confidence" |
| money supply | the amount of money in circulation |
| transactions approach | a method of measuring the money supply by looking at money as a medium of exchange |
| liquidity approach | a method of measuring the money supply by looking at money as a tempory store of value |
| M1 | (the transactions approach to measuring money) the money supply, measured as the total value of currency plus transactions deposits plus traveler's checks not isssued by banks |
| thrift institutions | financial institutions that receive most of their funds from the savings of the public; they include savings banks, savings and loan associations, and credit unions |
| traveler's check | financial instruments obtained from a bank or a nonbanking organization and signed during purchase that can be used as cash upon a second signature by the purchaser |
| M2 | (the liquidity approach to measuring money) M1 plus (1) savings and small-denomination time deposits at all depository institutions, (2) balances in retail money market mutual funds, and (3) money market deposit accounts (MMDAs) |
| savings deposits | interest-earning funds that can be withdrawn at any time without payment of a penalty |
| depository institutions | financial institutions that accept deposits from savers and lend funds from those deposits out at interest |
| money market deposit accounts (MMDAs) | accounts issued by banks yielding a market rate of interest with a minimum balance requirement and a limit on transactions; they have no minimum maturity |
| time deposit | a deposit in a financial institution that requires notice of intent to withdraw or must be left for an agreed period; withdrawal of funds prior to the end of the agreed period may result in a penalty |
| certificate of deposit (CD) | a time deposit with a fixed maturity date offered by banks and other financial institutions |
| money market mutual funds | funds obtained from the public that investment companies hold in common and use to acquire short-maturity credit instruments, such as certificates of deposit and securities sold by the U.S. government |
| financial intermediation | the process by which financial institutions accept savigns from businesses, households, and governments and lend the savings to other businesses, households, and governments |
| financial intermediaries | institutions that transfer funds between ultimate lenders (savers) and ultimate borrowers |
| asymmetric information | information possessed by one party in a financial transation but not by the other party |
| adverse selection | the likelihood that individuals who seek to borrow may use the funds that they receive for high-risk projects |
| moral hazard | the possibility that a borrower might engage in riskier behavior after a loan has been obtained |
| investment companies | institutions that manage portfolios of financial instruments called mutual funds on behalf of shareholders; exist largely because of cost savings from their greater scale of operations |
| liabilities | amounts owed; the legal claims against a business or household by nonowners |
| assets | amounts owned; all items to which a business or hosuehold holds legal claim |
| payment intermediaries | institutions that facilitate transfers of funds between depositors who hold transactions deposits with those institutions |
| bank runs | attempts by many of a bank's depositors to convert transactions and time deposits into currency out of fear that the bank's liabilities may exceed its assets |
| lender of last resort | the federal reserve's role as an institution that is willing and able to lend to a temporarily illiquid bank that is otherwise in good financial condition to prevent the bank's illiquid position from leading to a general loss of confidence in that bank or in others |
| money supply can increase when | additional new reserves and deposits are created by the Federal Reserve System (the fundamental way) |
| automatic transfer accounts | funds are automatically transferred from savings deposits to transactions depsits whenever the account holder makes a debit-card transaction or writes a check that would otherwise cause the balance of transactions deposits to become negative |
Combine with other sets
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