Units 4-7 Key Terms

Question 1

if employers reduce wages for all workers, the best will leave

Answer 1

adverse selection of unemployment

Question 2

unemployment closely tied to the business cycle, like higher unemployment

Answer 2

cyclical unemployment

Question 3

those who have stopped looking for employment due to the lack of unsuitable positions available

Answer 3

discouraged workers

Question 4

the theory that the productivity of workers, either individually or as a group, will increase if the employer pays more

Answer 4

efficiency wage theory

Question 5

unemployment that occurs as workers move between jobs

Answer 5

frictional unemployment

Question 6

an unwritten agreement in the labor market that the employer will try to keep wages from falling when the economy is weak or the business cycle is having trouble, an the employee will not except a huge salary increases when the economy or the business cycle is strong

Answer 6

implicit contract

Question 7

those already working for the firm are “insiders” who know the producers; the others workers are “outsiders” who are recent or prospective hires

Answer 7

insider-outsider model

Question 8

this is the percentage of adults in an economy who are either employed or who are unemployed who are looking for a job

Answer 8

labor force participation rate

Question 9

the unemployment rate that would exist in a growing and healthy economy from the combination of economic, social, and political factors that exist at a given time

Answer 9

natural rate of unemployment

Question 10

those who are not working and not looking for work—whether they want employment or not; also termed “not in the labor force”

Answer 10

out of the labor force

Question 11

across-the-board wage cuts are hard work for an economy to implement, and workers fight against them

Answer 11

relative wage coordination argument

Question 12

unemployment that occurs because individuals lack skills valued by employers

Answer 12

structural employment

Question 13

individuals who are employed in a job below their skill

Answer 13

structural unemployment

Question 14

the percentage of adults who are in the labor force and thus seeking jobs, but who do not have jobs

Answer 14

unemployment rate

Question 15

a loan a borrower who uses to purchase a hoe in which the interest rate varies with market interest rates varies with market interest rates

Answer 15

adjustable-rate mortgage (ARM)

Question 16

arbitrary year whose value as an index number economists define as 100, so if the index number for a year is 105, then there has been exactly a 5% inflation between that year and the arbitrary year

Answer 16

base year

Question 17

a hypothetical group of different items, with specified quantities of each one, meant to represent a “typical” set of consumer purchases, used as a basis for calculation who know how the price level changes over time

Answer 17

basket of goods and services

Question 18

a measure of inflation that the U.S. government statisticians calculate based on the price level from a fixed basket of goods and services that represents the average consumer’s purchases

Answer 18

consumer price index (CPI)

Question 19

a measure of inflation typically calculated by taking the CPI and excluding volatile economic variables such as food and energy prices to better measure the underlying and persistent trend in long-term prices

Answer 19

core inflation index

Question 20

a contractual provision that wage increases will keep up with inflation

Answer 20

cost-of-living adjustments (COLAs)

Question 21

negative inflation; most prices in the economy are falling

Answer 21

deflation

Question 22

a measure of inflation based on wages paid in the labor market

Answer 22

employment cost index

Question 23

a measure of inflation based prices of all GDP components

Answer 23

GDP deflator

Question 24

an outburst of high inflation that often occurs (although not exclusively) when economies shift from a controlled economy to a market-oriented economy

Answer 24

hyperinflation

Question 25

a unit-free number derived from the price level over a number of years, which makes computing inflation rates easier, since the index number has values around 100

Answer 25

index number

Question 26

a price, wage, or interest rate is adjusted automatically for inflation

Answer 26

indexed

Question 27

a general and ongoing rise in price level in an economy

Answer 27

inflation

Question 28

a measure of inflation based on prices paid for supplies and inputs by producers of goods and services

Answer 28

producer price index (PPI)

Question 29

inflation does not calculate a fixed basket of goods over time tends to overstate the true rise in the cost of living, because it does not account for improvements in the quality of existing goods or the invention of new goods

Answer 29

quality/new goods bias

Question 30

an inflation rate calculated using a fixed basket of goods over time tends to overstate the true rise in the cost of living because it does not take into account that the person can substitute away from goods whose prices rise considerably

Answer 30

substitution bias

Question 31

supply creates its own demand

Answer 31

Say's Law

Question 32

economists who generally emphasize the importance of aggregate supply in determining the size of the macroeconomy over the long run

Answer 32

neoclassical economists

Question 33

a model that shows the total supply or total demand for the economy, and how total demand and supply interact at the macroeconomic level

Answer 33

aggregate demand/supply model

Question 34

the total quantity of output (i.e. real GDP) firms will produce and sell

Answer 34

aggregate supply (AS)

Question 35

the maximum quantity that an economy can produce given the full employment of its existing levels of labor, physical capital, technology and institutions

Answer 35

potential GDP

Question 36

the amount of total spending on domestic goods and services in an economy

Answer 36

aggregate demand

Question 37

the total spending on domestic goods and services at each price level

Answer 37

aggregate demand curve

Question 38

positive short-run relationship between the price level for output and real GDP, holding the prices of inputs fixed

Answer 38

short-run aggregate supply (SRAS) curve

Question 39

potential GDP showing no relationship between the price and the output and real GDP in the long run

Answer 39

long-run aggregate supply (LRAS) curve

Question 40

an economy experiences stagnant growth and high inflation at the same time

Answer 40

stagflation

Question 41

tax increases or cuts in government spending designed to decrease aggregate demand and reduce inflationary pressures

Answer 41

contractionary fiscal policy

Question 42

downward wage and price flexibility requires perfect information about the level of lower compensation acceptable to other laborers and market participants

Answer 42

coordination argument

Question 43

income after taxes

Answer 43

disposable income

Question 44

tax cuts or increases in government spending designed to stimulate aggregate demand and move the economy out of recession

Answer 44

expansionary fiscal policy

Question 45

Keynesian concept that asserts that a change in autonomous spending causes more than proportionate changes in real GDP

Answer 45

expenditure multiplier

Question 46

equilibrium at a level of output above potential GDP

Answer 46

inflationary gap

Question 47

occurs when what happens at the macro level is different from and inferior to what happens at the micro-level; an example would be where the upward-sloping supply curves for firms become a flat aggregate supply curve, illustrating that the price level cannot fall to stimulate aggregate demand

Answer 47

macroeconomic externality

Question 48

costs that firms face in changing prices

Answer 48

menu costs

Question 49

the trade between unemployment and inflation

Answer 49

Phillips curve

Question 50

the amount of goods and services actually sold in a nation

Answer 50

real GDP

Question 51

equilibrium at a level of output below potential GDP

Answer 51

recessionary gap

Question 52

a situation where wages and prices do not fall in response to a decrease in demand or do not rise in response to an increase in demand, or do not rise in response to an increase in demand

Answer 52

sticky wages and prices

Question 53

the theory that people look at past expensive and gradually adapt their beliefs and behavior as circumstances change

Answer 53

adaptive expectations

Question 54

a future rate of inflation that consumers and firms build into current decision making

Answer 54

expected inflation

Question 55

the philosophy that, in long run, the business cycle will fluctuate around the potential, or full-employment, level of output

Answer 55

neoclassical perspective

Question 56

the amount and kind of machinery and equipment available to help a person to produce a good or service

Answer 56

physical capita per person

Question 57

the theory that people from the most accurate possible expectations about the future can, using all information available to them

Answer 57

rational expectations

Question 58

item of value that a firm or an individual owns

Answer 58

asset

Question 59

customers can withdraw a bank's liabilities in the short-term while customers replay its assets in the long-term

Answer 59

asset-liability time mismatch

Question 60

an accounting tool that lists liabilities

Answer 60

balance sheet

Question 61

a bank's net worth

Answer 61

bank capital

Question 62

literally, trading one good or service for another without using money

Answer 62

barter

Question 63

the coins and bills that circulate in an economy that are not held by the U.S. Treasury, at the Federal Reserve Bank, or in bank vaults

Answer 63

coins and currency in circulation

Question 64

an item that is used as money, but which also has value from its use as something other than money

Answer 64

commodity money

Question 65

dollar bills or other currencies with values backed by gold or another commodity

Answer 65

commodity-backed currencies

Question 66

immediately transfers money from the credit card company's checking account to the seller, and at the end of the month, the user owes money to the credit card company; a credit card is a short-term loan

Answer 66

credit card

Question 67

like a check, is an instruction to the user's bank to transfer money directly and immediately from your bank account to the seller

Answer 67

debit card

Question 68

checkable deposit in banks that is available by making a cash withdrawal or writing a check

Answer 68

demand deposit

Question 69

institution that accepts money deposits and then users these to make loans

Answer 69

depository institution

Question 70

making loans or investments with a variety of firms, to reduce the risk of being adversely affected by events at one or a few firms

Answer 70

diversify

Question 71

a situation in which two people each want some good or service that the other person can provide

Answer 71

double coincidence of wants

Question 72

has no intrinsic that operates between a saver with financial assets to invest and an entity who will borrow those assets and pay the rate of return

Answer 72

fiat money

Question 73

any amount or debt that a firm or an individual owes

Answer 73

liability

Question 74

a narrow definition of money supply that includes currency and checking accounts in banks, and to a lesser degree, traveler's checks

Answer 74

M1 money supply

Question 75

a definition of the money supplied that includes everything in M1, but also adds saving deposits, money market funds and certificates of deposit

Answer 75

M2 money supply

Question 76

whatever is widely accepted as a method of payment

Answer 76

medium of exchange

Question 77

whatever serves society in four functions: as a medium of exchange, a store of value, a unit of account, and a standard of deferred payment

Answer 77

money

Question 78

the deposits of many investors are pooled together and invested in a safe way like short-term government bonds

Answer 78

money market fund

Question 79

total money in the economy divided by the original quantity of money, or change in the total money in the economy divided by a change in the original quantity of money

Answer 79

money multiplier formula

Question 80

the excess of the asset of value over and above the amount of liability; total assets minus total liabilities

Answer 80

net worth

Question 81

helps an economy exchange goods and services for money or other financial assets

Answer 81

payment system

Question 82

funds that a bank keeps on hand and that it does not loan out or invest in bonds

Answer 82

reserves

Question 83

bank account where you cannot withdraw money by writing a check, but can withdraw the money at a bank—or can transfer it easily to a checking account

Answer 83

savings deposit

Question 84

stores a certain amount of money on a card and then one can use the card to make purchases

Answer 84

smart card

Question 85

money must also be acceptable to make purchases today that will be paid in the future

Answer 85

standard deferred payment

Question 86

something that serves as a way of preserving economic value that one can spend or consume in the future

Answer 86

store of value

Question 87

a balance sheet with a two-column format, with the T-shape formed by the vertical line down the middle and the horizontal line under the column for "Assets" and "Liabilities"

Answer 87

T-account

Question 88

account that the depositor has a commitment to leaving in the bank for a certain amount of time, in exchange for a higher rate of interest; also called certificate of deposit

Answer 88

time deposit

Question 89

the costs associated with finding a lender or a borrower for money

Answer 89

transaction costs

Question 90

the common way in which we measure market values in an economy

Answer 90

unit of account

Question 91

when depositors race to withdraw their deposits for fear that otherwise they would be lost

Answer 91

bank run

Question 92

money supply x velocity = nominal GDP

Answer 92

basic equation of money

Question 93

institution which conducts a nation's monetary policy and regulates its banking system

Answer 93

central bank

Question 94

a monetary policy that reduces the supply of money and loans

Answer 94

contractionary monetary policy / tight monetary policy

Question 95

moving the opposite direction of the business cycle of economic downturns and upswings

Answer 95

countercyclical

Question 96

an insurance system that makes sure depositors in a bank do not lose their money, even if the bank goes bankrupt

Answer 96

deposit insurance

Question 97

the interest rate charges by the cental bank on loans gives it to other commercial banks

Answer 97

discount rate

Question 98

reserve banks hold exceed legally mandated linit

Answer 98

excess reserves

Question 99

a monetary policy that increases the supply of money and the quantity of loans

Answer 99

expansionary monetary policy / loose monetary policy

Question 100

the interest rate at which one bank lends funds to another bank overnight

Answer 100

federal funds rate

Question 101

a rule that the central bank is that is required to focus on keeping inflation rate low

Answer 101

inflation targeting

Question 102

an institution that provides short-term emergency loans in conditions of financial crisis

Answer 102

lender of last resort

Question 103

the central banks buying and selling Treasury bonds to influence the quantity of money and the level of interest rates

Answer 103

open market operations

Question 104

the purchase of long-term government and private mortgage-backed securities by central banks to make credit available in hopes of simulating aggregate demand

Answer 104

qualitative easing (QE)

Question 105

the percentage amount of its total deposits that a bank is legally obligated to either hold as cash in their vault or deposit with the central bank

Answer 105

reserve requirement

Question 106

the speed at which money circulates through the economy; calculated as the nominal GDP divided by the monetary supply

Answer 106

velocity

Question 107

tax and spending rules that have the effect of slowing down the rate of decrease in aggregate demand when the economy speeds up, without any additional change in legislation

Answer 107

automatic stabilizers

Question 108

when government spending and taxes are equal

Answer 108

balanced budget

Question 109

when the federal government spends more money than it receives in taxes in a given year

Answer 109

budget deficit

Question 110

when the government receives more money in taxes in a given year

Answer 110

budget surplus

Question 111

fiscal policy that decreased the level of aggregate demand, either through cuts in government spending or increases in taxes

Answer 111

contractional fiscal policy

Question 112

a tax imposed on corporate profits

Answer 112

corporate income tax

Question 113

federal spending and borrowing causes interest rate to rise and the business investments to fall

Answer 113

crowding out

Question 114

the government passes a new law that explicitly changes overall tax or spending level with the intent of influencing the level or overall economic activity

Answer 114

discretionary fiscal policy

Question 115

a tax on people who pass assets to the next generation—either after death in the form of gifts

Answer 115

estate and gift tax

Question 116

a tax on a specific good—on gasoline, tobacco, and alcohol

Answer 116

excise tax

Question 117

fiscal policy that increases the level of aggregate demand, either through increases in government spending or cuts in taxes

Answer 117

expansionary fiscal policy

Question 118

the time it takes for the funds relating to fiscal policy to be dispersed to the appropriate agencies to implement the programs

Answer 118

implementation lag

Question 119

a tax based on the income, or all forms, received by individuals

Answer 119

individual income tax

Question 120

the time it takes to get a fiscal policy bill passed

Answer 120

legislative lag

Question 121

the tax must be paid on all yearly income

Answer 121

marginal tax rates

Question 122

the total accumulated amount the government had borrowed, over time, and not yet paid back

Answer 122

national debt

Question 123

a tax based on the pay received form employers; the taxes provided for Social Security and Medicare

Answer 123

payroll tax

Question 124

a tax that is a flat percentage of income, regardless of level of income

Answer 124

progressive tax

Question 125

a tax that is a flat percentage of income earned, reguardless of level of income

Answer 125

proportional tax

Question 126

the tqax in which people with higher incomes pay a smaller share of the income tax

Answer 126

regressive tax

Question 127

the budget deficit or surplus in any given year adjusted to for what is would have been if the economy were producing at potential GDP

Answer 127

standardized employment budget