Quiz 3 Flashcards
Crowding out effect
The rise in interests rates and the resulting decrease in investment spending in the economy caused by increased government borrowing in the loanable funds market. Seen as a disadvantageous Sid effect of expansionary fiscal policy.
Consumer Price Index
An index that measures the price of a fixed market basket of consumer goods bought by a typical consumer. The CPI is used to calculate the inflation rate in a nation.
Contractionary monetary policy
A demand side policy whereby the central bank reduces the supply of money,increasing interest rates and reducing aggregate demand. Could be used to bring down high inflation rates.
Cyclical unemployment
Unemployment caused by a fall in aggregate demand in a nation. Not included in the natural rate of unemployment. When a nation is in a recession, there will be cyclical unemployment.
Devaluation
When a government intervenes in the market for its own currency to weaken it relative to another currency.
Discount rate
One of the three tools of monetary policy , it is the interest rate that the federal government charges on the loans it makes to commercial banks.
Fiscal policy
Changes in government spending and tax collections implemented by government with the aim of either increasing or decreasing aggregate demand to achieve the macroeconomic objectives of full employment and price level stability.
Fractional reserve banking
A banking system in which banks hold only a fraction of deposits as required reserves and can lend some of the money deposited by their customers to other borrowers.
Inflationary spiral
The rapid increase in average price level silting from demand-pull inflation leading to higher wages, causing cost push inflation.
Interest rate
The opportunity cost of money. Either the cost of spending money or borrowing money ( ie the interest rate is what would be given up by not saving money). Conversely, this is the price a lender is paid for allowing someone else to use money for a time.
Long Run
The period of time over which the wage rate and price level of inputs in a nation are flexible. In the long run, any changes in AD are cancelled out due to the flexibility of wages and prices and an economy will return to its full employment or potential level of output.
M1
A component of the money supply including currency and checkable deposits.
Natural rate of unemployment
The level of employment that prevails in an economy that is producing at its full employment level of output. Includes structural and frictional unemployment. While countries’ NRUs can vary, the NRUS in the US tends to be close to 5 percent.
Open market operations
The central banks buying and selling of government bonds on the open market from commercial banks and the public. Aimed at increasing and decreasing the level of reserves in the banking system and thereby affects the interest rate and the level of aggregate demand.
Recessionary gap
The difference between an economy’s equilibrium level of output and its full employment level of output when an economy is in recession.
