Exam 2 Flashcards by Jazmin Mendez

Prices of traded assets reflect all publicly available information

efficient market hypothesis

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Warren Buffett

Genius investor (market genius)

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to buy stocks and then hold them for the long run, regardless of what prices do in the short run

buy and hold

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higher returns come at the price of higher risk

risk-return trade-off

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adults who do not have a job but who are looking for work

unemployed workers

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labor force

all workers

employed + unemployed

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unemployment rate

the percentage of the labor force without a job

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labor force participation rate

percentage of adults in the labor force

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discouraged workers

workers who have given up looking for work but who would still like a job

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underemployment rate

A Bureau of Labor Statistics measure that includes part-time workers who would rather have a full-time position and people who would like to work but have given up looking for a job.

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Frictional unemployment

short-term unemployment caused by the ordinary difficulties of matching employee to employer

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Structural unemployment

(persistent), long-term unemployment caused by long-lasting shocks or permanent features of an economy that make it more difficult for some workers to find jobs

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unemployment benefits

the most obvious labor regulation that can increase unemployment rates

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median wage

the wage such that one-half of all workers earn wages below the median and one-half of all workers earn wages above the median

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union

an association of workers that bargains collectively with employers over wages, benefits, and working conditions

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The employment at-will doctrine

says an employee may quit and an employer may fire an employee at any time and for any reason. It is the most basic U.S. employment law.

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active labor market policies

work test, job search assistance and job retraining programs focus on getting unemployed workers back to work

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cyclical unemployment

unemployment correlated with the business cycle

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natural unemployment rate

the rate of structural plus frictional unemployment

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baby boomers

the people born during the high birthrate years, 1946-1964

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inflation

an increase in the average level of prices

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inflation rate

the percentage change in the average level of prices (as measured by a price index) over a period of time.

(P2 - P1)/ P1

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Price that has been corrected for inflation. They are used to compare the price of goods over time.

real price

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the average number of times a dollar is spent on final goods and services in a year

v, velocity of money

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money supply

price level

velocity of money

real GDP

Quantity Theory of Money

When v and Y are fixed (indicated by a top bar), increase in M must cause increase in P Mv=PY

a decrease in the average level of prices (a negative inflation rate)

deflation

a reduction in the inflation rate

disiflation

when people mistake changes in nominal prices for changes in real prices

money illusion

the rate of return that does not account for inflation

nominal rate of return

Real rate of return or (real interest rate)

(nominal rate - inflation rate)

the tendency of nominal interest rates to rise with expected inflation rates

Fisher effect

when the government pays off its debts by printing money

Monetizing the debt

fluctuations in the growth rate of real GDP around its trend growth rate

Business fluctuations

a significant, widespread decline in real income and employment

recession

shows all the combinations of inflation and real growth that are consistent with a specified rate of spending growth (M`+v`) ` = arrow at the top

aggregate demand curve

M` + v` = inflation + Real growth

Key equation for quantity theory

An economy's potential growth rate, the rate of economic growth that would occur given flexible prices and the existing real factors of production.

Solow growth rate

real shock

- aka productivity shock | - any shock that increases or decreases the potential growth rate

aggregate demand shock

a rapid and unexpected shift in the AD curve (spending)

short-run aggregate supply curve (SRAS)

shows the positive relationship between inflation and real growth during the period when prices and wages are sticky

Nominal wage confusion

when workers respond to their nominal wage instead of their real wage

menu cost

the cost of changing prices

In the ________, unexpected inflation always turns into expected inflation and the SRAS curve shifts up and to the left.

long run

The short-run aggregate supply (SRAS) curve is ______ sloping

upward

The allocation of consumption, work, and leisure across time to maximize well-being

inter-temporal substitution

They have high value only under specific conditions - they cannot be easily moved, adjusted, or reversed if conditions change.

Irreversible investments

the cost of shifting workers from declining sectors of the economy to the growing sectors

labor adjustment costs

the tendency for economic activities to be coordinated at common points in time

Time bunching

A valuable asset that is pledged to a lender to secure a loan

Collateral

- a reduction in the value of collateral | - they make borrowing and lending more difficult

collateral shock

Equity

value of the asset minus the debt E = V - D

money

a widely accepted means of payment

An asset that can be used for payments or, quickly ad without loss o value, be converted into an asset that can be used for payments

liquid asset

When banks hold only a fraction of deposits in reserve, lending the rest.

Fractional reserve banking

reserve ratio RR

the ratio of reserves to deposits

Money multiplier MM

the amount o money supply expands with each dollar increase in reserves MM = 1/RR

open market operations

when the Fed buys and sells government bonds

Quantitative easing

When the Fed buys longer-term gov. bonds or other securities

Quantitative tightening

when the Fed sells longer-term gov. bonds or other securities

Federal Funds rate

the overnight lending rate from one major bank to another

A lender of last resort

loans money to banks and other financial institutions when no one else will

The interest rate banks pay when they borrow directly fro the Fed

Discount rate

solvency crisis

occurs when banks become insolvent

insolvent bank

Has liabilities that are greater than its assets

Liquid crisis

occurs when banks are illiquid

illiquid bank

Has shot-term liabilities that are greater than its short-term assets but overall has assets that are greater than its liabilities

The risk that the failure of one financial institution can bring down other institutions as well

Systematic risk

Occurs when banks and other financial institutions take on too much risk, hoping that the Fed and regulators will later bail them out

Moral hazard