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| Pregunta | Respuesta |
| Systematic Risk | Risk that failure of 1 financial institution can bring down other institutions as well Problem: Moral Hazard |
| Multiplier Effect | an additional increase in AD is caused when expansionary fiscal policy increases INCOME and thus consumer spending |
| Crowding Out | Increases in AD are reduced if gov't spending reduces private spending |
| Drop in the Bucket | The economy is so large that the government can rarely increase spending enough to have a large impact |
| Matter of timing | Timing is difficult to plan a fiscal policy so that the AD curve shifts at just the right time |
| Automatic Stabilizers | 1) Welfare 2) Consumption Smoothing |
| Liquid Asset | An asset that can be used for payments or, quickly and without loss of value, be converted into an asset that can be used for payments. |
| Federal Funds Rate | the overnight lending rate that banks charge each other. |
| Accounting Costs | explicit costs only |
| Economic Costs | Explicit + Implicit (opportunity cost) |
| MR greater than or equal to MC | Continue to produce |
| MR less than MC | Shut down |
| MC equation | Change in Variable Cost --------------------------- Change in Quantity produced -or- Change in Total Cost ----------------------- Change in Output |
| Profit in noncompetitive market | (MC-AC) x Q |
| Optimal Social Output (Noncompetitive Market) | MC=AC |
| GDP Growth equation | Change in GDP ---------------------- x 100 GDP of year 1 |
| Per Capita GDP equation | Real GDP --------------- Population |
| National Spending Approach of GDP | Y=C+I+G+NX |
| Factor Income Approach of GDP | Y= Wages+Rent+Interest+Profit -For understanding how income of production is divided between people and resources |
| Institutions | 1) Secure property rights 2) Fair and honest government 3) Political stability 4) Dependable legal system 5) Competitive open markets |
| Fractional Reserve Banking (equation) | Value of Reserves ---------------------- Value of Deposits |
| Money Multiplier (Definition) | The amount the money supply expands with each dollar increase in the reserves |
| Money Multiplier (equation) | 1/RR -or- value of deposits --------------------- value of reserves |
| Problems with Inflation | 1) Causes price confusion and money illusion 2) Redistributes wealth 3) Interacts with other taxes 4) Painful to stop |
| Money Illusion | People mistake changes in nominal prices for changes in real prices |
| Positive Real Returns | when inflation < interest rate |
| Negative real returns | when inflation > interest rate |
| Fisher effect | the tendency of nominal interest rates to rise one to one with expected inflation rates |
| Fisher effect equation | i = E(pi) + r interest rate = expected inflation + real equilibrium |
| Monetizing Debts | When government pays off debt by printing money. Wealth transferred from bond holder to gov't |
| What shifts AD Curve | 1) Fear vs Confidence 2) Wealth shocks (Negative shock lowers consumption and investment) 3) Taxes (high tax lowers consumption) 4) Changes in gov't Spending (Spending growth) 5) Changes in net exports |
| National Spending Identity | Y= C+I+C+NX GDP= Consumption + Investment+ Government Spending + Net Exports |
| Rule of 70 | -Doubling time 70 _____ x years |
| CPI (Consumer Price Index) | Measures the average price of a large basket of goods bought by a typical American consumer |
| Real Price | price that has been corrected for inflation. Used to compare the prices of goods over time. |
| Quantity Theory of Money | Mv = PY M= Money Supply V = Velocity of money P=Price Level Y= Real GDP |
| Quantity Theory in growth form | M+V = P+Y M= Money V= velocity P= Inflation Y= Real Growth |
| Institutions | 1) Property Rights 2) Honest Governments 3) Political Stability 4) Dependable Legal System 5) Competitive and Open Markets |
| GDP Calculation | Y= A sqrt(K) Y= GDP (output) A = Ideas K = physical Capital |
| Steady State | When Investment = Depreciation .02K = .3 sprt(K) |
| Solow Growth Rate | economy's potential growth rate Rate of economic growth that would occur given FLEXIBLE prices |
| Aggregate Demand Curve equation | M + v = Inflation + Real Growth SPENDING!!! |
| Positive Real Shock | Increases the potential growth rate of the economy and shifts SOLOW growth curve to RIGHT (Solow [production] Right) |
| Short-run Aggregate Supply (SRAS) | Shows positive relationship between inflation and real growth during the period when prices and wages are STICKY. |
| Inelastic demand | Elasticity < 1 Quantity is not sesitive to Price REVENUE and PRICE move in SAME direction |
| Elastic Demand | Elasticity > 1 Quantity is very sensitive to price REVENUE and PRICE move in OPPOSITE directions |
| Tragedy of the Commons | the tendency of any resource that is unowned and hence nonexludable to be overused and undermaintained |
| Ricardian Equivalence | people understand that lower taxes today mean higher taxes in the future. They save instead of pay. It DOESN'T increase aggregate demand even in the short run |
| Multiplier Effect | the additional increase in aggregate demand caused when expansionary fiscal policy increases income and thus consumption and investment spending |
| Aggregate Demand Curve | Curve that shows all the combinations of inflation and real growth that are consistent with a specified rate of spending growth (M+v) |
| Aggregate Demand Shock | a rapid and unexpected shift in the AD curve (Spending) |
| Coase theorem | the principle that if transactions costs are low and property rights are clearly defined, private bargains will ensure that the market equilibrium is efficient even when there are externalities |
| Discount Rate | The interest rate banks pay when they borrow directly from the Fed at the discount window |
| Equation for economic growth | (Year 2- Year 1) / (Year 1) *100 for percentage |
| Equation for elasticity of demand | %Change in Quantity Demanded _________________________ % Change in Price |
| Allocative Efficiency | When: Consumer Benefit = MC (P=MC) How effective a market or economy is in its dispersion of capital to the most productive opportunities |
| High elasticity | group (supply or demand) is VERY responsive to change in price 1) Many substitutes are present |
| Inelasticity | Consumers are not responsive to price changes (are willing to pay as much as is necessary) 1) Not many substitutes available |
| Inferior Good | a good for which demand decreases when income increases |
| National Saving Equation | Y-C-G Output - Consumption - Gov't Spending |
| Monopoly Profit Maximization | MR=MC |
| Increase in Aggregate Demand caused by | 1)Increase in net imports 2)Decrease in taxes 3)Increase in gov't spending 4) Increase in money supply 5) Increase in societal wealth |
| Savings equation | Private Savings + Public Savings |
| Private Savings equation | National Savings - Public Savings |
| Consumption Smoothing | BORROWING in periods of LOW income (College and retirement) & SAVING in periods of HIGH income (Working years) **Consumption is made LESS variable than income** |
| Leverage | borrowing money to finance the purchase of assets |
| Owner Equity equation | E = V-D Equity = Value of asset - Debt |
| Leverage Ratio equation | Debt ----------- Equity |
| Shadow Banking System | Alternative banks not insured by FDIC, but are heavily regulated |
| Insolvent | when liabilities > assets |
| U-Rate | # Unemployed --------------------- #Unemployed + # Employed |
| The natural unemployment rate | "Normal rate" of unemployment consisting of structural + frictional unemployment (Actual + sort of unemployed) |
| GDP deflator equation | Nominal GDP -------------------- * 100 Real GDP |
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