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ECON 102

Exam II

Keynes’ law “demand creates its own supply”
neoclassical economists economists who generally emphasize the importance of aggregate supply in determining the size of the macroeconomy over the long run
Say’s law “supply creates its own demand”
aggregate demand (AD) the amount of total spending on domestic goods and services in an economy
aggregate supply (AS) the total quantity of output (i.e. real GDP) firms will produce and sell
aggregate demand (AD) curve the total spending on domestic goods and services at each price level
aggregate supply (AS) curve the total quantity of output (i.e. real GDP) that firms will produce and sell at each price level
aggregate demand/aggregate supply model a model that shows what determines total supply or total demand for the economy, and how total demand and total supply interact at the macroeconomic level
full-employment GDP another name for potential GDP, when the economy is producing at its potential and unemployment is at the natural rate of unemployment
long run aggregate supply (LRAS) curve vertical line at potential GDP showing no relationship between the price level for output and real GDP in the long run
potential GDP the maximum quantity that an economy can produce given full employment of its existing levels of labor, physical capital, technology, and institutions
short run aggregate supply (SRAS) curve positive short run relationship between the price level for output and real GDP, holding the prices of inputs fixed
stagflation an economy experiences stagnant growth and high inflation at the same time
intermediate zone portion of the SRAS curve where GDP is below potential but not so far below as in the Keynesian zone; the SRAS curve is upward-sloping, but not vertical in the intermediate zone
Keynesian zone portion of the SRAS curve where GDP is far below potential and the SRAS curve is flat
neoclassical zone portion of the SRAS curve where GDP is at or near potential output where the SRAS curve is steep
Barter literally, trading one good or service for another, without using money
commodity money an item that is used as money, but which also has value from its use as something other than money
commodity-backed currencies are dollar bills or other currencies with values backed up by gold or another commodity
double coincidence of wants a situation in which two people each want some good or service that the other person can provide
fiat money has no intrinsic value, but is declared by a government to be the legal tender of a country
medium of exchange whatever is widely accepted as a method of payment
money whatever serves society in four functions
standard of deferred payment money must also be acceptable to make purchases today that will be paid in the future
store of value something that serves as a way of preserving economic value that can be spent or consumed in the future
unit of account the common way in which market values are measured in an economy
coins and currency in circulation 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
credit card immediately transfers money from the credit card company’s checking account to the seller, and at the end of the month the user owes the money to the credit card company; a credit card is a short-term loan
debit card like a check, is an instruction to the user’s bank to transfer money directly and immediately from your bank account to the seller
demand deposit checkable deposit in banks that is available by making a cash withdrawal or writing a check
M1 money supply a narrow definition of the money supply that includes currency and checking accounts in banks, and to a lesser degree, traveler’s checks.
M2 money supply a definition of the money supply that includes everything in M1, but also adds savings deposits, money market funds, and certificates of deposit
money market fund the deposits of many investors are pooled together and invested in a safe way like short-term government bonds
savings deposit 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
smart card stores a certain value of money on a card and then the card can be used to make purchases
time deposit account that the depositor has committed to leaving in the bank for a certain period of time, in exchange for a higher rate of interest; also called certificate of deposit
asset item of value owned by a firm or an individual
asset–liability time mismatch a bank’s liabilities can be withdrawn in the short term while its assets are repaid in the long term
balance sheet an accounting tool that lists assets and liabilities
bank capital a bank’s net worth
depository institution institution that accepts money deposits and then uses these to make loans
diversify 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
financial intermediary an institution that operates between a saver with financial assets to invest and an entity who will borrow those assets and pay a rate of return
liability any amount or debt owed by a firm or an individual
net worth the excess of the asset value over and above the amount of the liability; total assets minus total liabilities
payment system helps an economy exchange goods and services for money or other financial assets
reserves funds that a bank keeps on hand and that are not loaned out or invested in bonds
T-account 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 headings for “Assets” and “Liabilities”
transaction costs the costs associated with finding a lender or a borrower for money
money multiplier formula 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
central bank institution which conducts a nation’s monetary policy and regulates its banking system
bank run when depositors race to the bank to withdraw their deposits for fear that otherwise they would be lost
deposit insurance an insurance system that makes sure depositors in a bank do not lose their money, even if the bank goes bankrupt
lender of last resort an institution that provides short-term emergency loans in conditions of financial crisis
discount rate the interest rate charged by the central bank on the loans that it gives to other commercial banks
open market operations the central bank selling or buying Treasury bonds to influence the quantity of money and the level of interest rates
reserve requirement the percentage amount of its total deposits that a bank is legally obligated to to either hold as cash in their vault or deposit with the central bank
contractionary monetary policy a monetary policy that reduces the supply of money and loans
countercyclical moving in the opposite direction of the business cycle of economic downturns and upswings
expansionary monetary policy a monetary policy that increases the supply of money and the quantity of loans
federal funds rate the interest rate at which one bank lends funds to another bank overnight
loose monetary policy see expansionary monetary policy
quantitative easing (QE) the purchase of long term government and private mortgage-backed securities by central banks to make credit available in hopes of stimulating aggregate demand
tight monetary policy see contractionary monetary policy
basic quantity equation of money money supply × velocity = nominal GDP
excess reserves reserves banks hold that exceed the legally mandated limit
inflation targeting a rule that the central bank is required to focus only on keeping inflation low
velocity the speed with which money circulates through the economy; calculated as the nominal GDP divided by the money supply
Created by: EdL



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