Final Flashcards
Inflation
A rise in the overall levels of prices in the economy and therefore a fall in the purchasing power of money (⬆️⬇️)
When prices go up, you can’t buy as much with the money you have
Deflation
The fall in the overall level of prices and therefore a rise in the purchasing power of money (⬇️⬆️)
As things become less expensive, people can buy more with the money they have
Efficiency
The optimal production and allocation of resources given existing factors of production
Equity
How resources are distributed throughout society
Vertical equity
Concerned with the relative income and welfare of the whole population
Ex: higher taxes for high income earners
Horizontal equity
Treating everyone in the same situation the same
Ex: everyone earning the same amount should pay the same amount of taxes
Indexing
When payments are automatically adjusted with changes in the price level
Nominal value
The face value
Real value
Underlying true value
Aggregate demand
The sum of all goods and services that individual consumers and private enterprises and governments are prepared to purchase in a given year
Aggregate expenditure
The total nominal amount that individuals and enterprises and governments plan to spend
Aggregate expenditure equation
AE = C + I + G - T + X - M
C, consumption
Total expenditures individuals make as consumers purchasing things (ex: clothes, food)
I, investment
Total expenditures private enterprises make for items (ex: new buildings)
G, government spending
Total amount government spends on roads, schools, military
T, government taxation
Total funds the government takes out of the hands of individuals and enterprises in the form of taxes
X, exports
Total amount of expenditures that domestic residents, enterprises, and government make for the products of other nations
M, imports
Total amount of expenditures that domestic residents, enterprises, and governments make for the products of other nations
Aggregate income
The amount of production in the economy,because the funds paid for that production become people’s income
Current nominal aggregate income
How much was spent in the economy and therefore how much income was earned
Consumption function
C = b(PY) + A
PY
Nominal aggregate income
b
Marginal propensity to consume
A
Autonomous consumption
Treasury department
Department of the executive branch under the president, it collects the federal taxes and pays the federal governments bills, if the governments tax revenues are not sufficient to pay those bills the government budget position is in deficit
Financial system
The arrangement of institutions that coordinate the intentions of suppliers and demanders of financial capital
Asset
Anything you have that has value in the market
Ex: a car
Liability
A claim by others on your assets, if you gave a loan you have a liability
Portfolio
All the assets and liabilities you have
Liquid asset
An asset that can change form quickly without losing value
Illiquid asset
As asset that cannot be changed quickly without losing value (will lose value)
Fractional reserve system
Holding a fraction of assets as reserves and loaning out the rest to make a return, this allows financial capital to be constantly active
Structural unemployment
Mismatch of skills, worker might have to retrain to be qualified
Frictional unemployment
The in between period, there is a job and worker who is right for it, but they haven’t found each other yet
Demand deficient unemployment
Excess supply of workers, not enough jobs for them
Member of the FOMC
12 voting members: 1 NY district bank president, 4 rotating district bank presidents, and 7 members of the fed board
Reserves
A banks liquid assets, a prudent bank will keep a portion of its assets as reserves and loan out the rest to make a return
Fractional reserve system
A system in which banks hold a portion of assets as reserves and loan out the rest to make a return, thereby allowing capital to be constantly active
Moral hazard
A situation in which people choose more risky behavior because they believe that they are protected from the consequences of the additional risk
Ex: people who take fewer precautions against auto theft because they’re covered by insurance
