Midterm 2 Flashcards
Financial system
the group of institutions in the economy that help to match one person’s saving with another person’s investment
Financial Markets
financial institutions through which savers can directly provide funds to borrowers
Bond
a certificate of indebtedness
Stock
a claim to partial ownership in a firm
Financial intermediaries
financial institutions through which savers can indirectly provide funds to borrowers
Mutual fund
an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and/or bonds
National saving
the total income in the economy that remains after paying for consumption and government purchases
Private saving
the income that households have left after paying for taxes and consumption
Public saving
the tax revenue that the government has left after paying for its spending
Budget surplus
an excess of tax revenue over government spending
Budget deficit
a shortfall of tax revenue from government spending
Market for loanable funds
the market in which those who want to save supply funds and those who want to borrow to invest demand funds
Government debt
the sum of all past budget deficits and surpluses
Crowding out
a decrease in investment that results from government borrowing
Vicious circle
the cycle that results when deficits reduce the supply of loanable funds, increase interest rates, discourage investment, and result in slower economic growth; slower growth leads to lower tax revenue and higher spending on income-support programs, and the result can be even higher budget deficits
Virtuous circle
the cycle that results when surpluses increase the supply of loanable funds, reduce interest rates, stimulate investment, and result in faster economic growth; faster growth leads to higher tax revenue and lower spending on income-support programs, and the result can be even higher budget surpluses
Government net debt
the difference between the value of government financial liabilities and financial assets
Labour force
the total number of workers, including both the employed and the unemployed
Unemployment rate
the percentage of the labour force that is unemployed
Labour-force participation rate
the percentage of the adult population that is in the labour force
Discouraged searchers
individuals who would like to work but have given up looking for a job
Natural rate of unemployment
the rate of unemployment to which the economy tends to return in the long run
Cyclical unemployment
the deviation of unemployment from its natural rate
Frictional unemployment
unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills
Structural unemployment
unemployment that results because the number of jobs available in some labour markets is insufficient to provide a job for everyone who wants one
Job search
the process by which workers find appropriate jobs given their tastes and skills
Employment Insurance (EI)
a government program that partially protects workers’ incomes when they become unemployed
Union
a worker association that bargains with employers over wages and working conditions
Collective bargaining
the process by which unions and firms agree on the terms of employment
Strike
the organized withdrawal of labour from a firm by a union
Efficiency wages
above-equilibrium wages paid by firms in order to increase worker productivity
Money
the set of assets in an economy that people regularly use to buy goods and services from other people
Medium of exchange
an item that buyers give to sellers when they want to purchase goods or services
Unit of account
an item that buyers give to sellers when they want to purchase goods or services
Store of value
an item that people can use to transfer purchasing power from the present to the future
Liquidity
the ease with which an asset can be converted into the economy’s medium of exchange
Commodity money
money that takes the form of a commodity with intrinsic value
Flat money
money without intrinsic value that is used as money because of government decree
Currency
the paper bills and coins in the hands of the public
Demand deposits
balances in bank accounts that depositors can access on demand by writing a cheque or using a debit card
Bank of Canada
the central bank of Canada
Central Bank
an institution designed to regulate the quantity of money in the economy
Money Supply
the quantity of money available in the economy
Monetary policy
the setting of the money supply by policymakers in the central bank
Reserves
deposits that banks have received but have not loaned out
Fractional reserve banking
a banking system in which banks hold only a fraction of deposits as reserves
Reserve ratio
the fraction of deposits that banks hold as reserves
Capital requirement
a government regulation specifying a minimum amount of bank capital
Bank rate
the interest rate charged by the Bank of Canada on loans to the commercial banks
Overnight rate
the interest rate on very short-term loans between commercial banks
Open-market operations
the purchase or sale of government of Canada bonds by the Bank of Canada
Quantitative easing
the purchase and sale by the central bank of nongovernment securities or government securities with long maturity terms
Foreign exchange market operations
the purchase or sale of foreign money by the Bank of Canada
Sterilization
the process of offsetting foreign exchange market operations with open-market operations, so that the effect on the money supply is cancelled out
Reserve requirement
regulations on the minimum amount of reserves that banks must hold against deposits
Money multiplier
the fraction of deposits that banks hold as reserves
Quantity theory of money
a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
Nominal variables
variables measured in monetary units
Real variables
variables measured in physical units
Classical dichotomy
the theoretical separation of nominal and real variables
Monetary neutrality
the proposition that changes in the money supply do not affect real variables
Velocity of money
the rate at which money changes hands
Quantity equation
the equation M × V = P × Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy’s output of goods and services
Inflation tax
the revenue the government raises by creating money
Fisher effect
the one-for-one adjustment of the nominal interest rate to the inflation rate
Shoe-leather cost
the resources wasted when inflation encourages people to reduce their money holdings
Menu cost
the costs of changing prices
