| Term | Definition |
| Federal Funds Market | a market where banks lend reserves to one another, usually for short periods |
| Reserve Requirement | the Fed rule that specifies the amount of reserves a bank must hold to back up deposits |
| Proportional Income Tax | an income tax system in which a person’s tax rate is the same regardless of taxable income |
| Money | any good that is widely accepted for purposes of exchange and the repayment of debt |
| Checkable Deposits | deposits on which checks can be written |
| Incomplete Crowding Out | the decrease in one or more components of private spending that only partially offsets the increase in gov’t spending |
| Marginal Propensity to Consume (MPC) | the ratio of the change in consumption to the change in disposable income |
| Complete Crowding Out | a decrease in one or more components of private spending that completely offsets the increase in gov’t spending |
| Federal Funds Target Rate | the interest rate that the Fed wants the federal funds market rate to be |
| Fiscal Policy | changes in gov’t expenditures and/or taxes to achieve economic goals, such as low unemployment, stable prices, and economic growth |
| Financial Intermediary | a financial intermediary transfers funds from those who want to lend funds to those who want to borrow them |
| Automatic Fiscal Policy | changes in gov’t expenditures and/or taxes that occur automatically w/o (additional) congressional action |
| Expansionary Fiscal Policy | increases in gov’t expenditures and/or decreases in taxes to achieve particular economic goals |
| Medium of Exchange | anything that is generally acceptable in exchange for goods and services; a function of money |
| M1 | currency held outside banks plus checkable deposits plus traveler’s checks |
| Recessionary Gap | the condition in which the Real GDP that the economy is producing is less than the Natural Real GDP and the unemployment rate is greater than the natural unemployment rate |
| Moral Hazard | a condition that exists when one party to a transaction changes his/her behavior in a way that is hidden from and costly to the other party |
| Efficiency Wage Models | these models hold it is sometimes in the best interest of business firms to pay their employees higher-than-equilibrium wage rates |
| Asset | anything of value that is owned or that one has claim to |
| Adverse Selection | a phenomenon that occurs when the parties on one side of the market, who have info not known to others, self-select in a way that adversely affects the parties on the other side of the market |
| Laissez-faire | a public policy of not interfering with market activities in the economy |
| Unit of Account | a common measure in which relative values are expressed; a function of money |
| Double Coincidence of Wants | in a barter economy, a requirement which must be met before a trade can be made; it specifies that a trader must find another trader who at the same time is willing to trade what the first trader wants and wants what the first trader has |
| Progressive Income Tax | an income tax system in which one’s tax rate rises as taxable income rises (up to some point) |
| Public Debt | the total amount that the federal gov’t owes its creditors |
| Open Market Operations | the buying and selling of gov’t securities by the Fed |
| Indirect Finance | funds are loaned and borrowed through a financial intermediary |
| Regressive Income Tax | an income tax system in which a person’s tax rate declines as his or her taxable income rises |
| Consumption Function | the relationship between consumption and disposable income. In the consumption function used in this text, consumption is directly related to disposable income and is positive even at zero disposable income |
| Simple Deposit Multiplier | the reciprocal of the required reserve ratio, 1/r |
| Direct Finance | borrowers & lenders come together in a market setting, ie, the bond market |
| Open Market Purchase | the buying of gov’t securities by the Fed |
| Reserves | the sum of bank deposits at the Fed and vault cash |
| Contractionary Fiscal Policy | decreases in gov’t expenditures and/or increases in taxes to achieve economic goals |
| Required Reserves | the minimum dollar amount of reserves a bank must hold against its checkable deposits, as mandated by the Fed |
| M2 | M1 plus savings deposits (inc money market deposit accounts) plus small-denomination time deposits plus money market mutual funds (retail) |
| Fractional Reserve Banking | a banking arrangement that allows banks to hold reserves equal to only a fraction of their deposit liabilities |
| Federal Open Market Committee (FOMC) | the 12-member policy-making group in the Fed; this committee has the authority to conduct open market operations |
| Money Market Mutual Fund (MMMF) | an interest-earning account at a mutual fund company, for which a minimum balance is usually required and most of which offer limited check-writing privileges; only retail MMMF’s are part of M2 |
| Federal Funds Rate | the interest rate in the federal funds market; the interest rate banks charge one another to borrow reserves |
| ECON 1 test 4
Arnold Ch 9-13
Ch 9 Classical Macroeconomics and the Self-Regulating Economy
Say’s Law | supply creates its own demand. Production creates enough demand to purchase all the goods and services produced. |
| Balance Sheet | a record of the assets and liabilities of a bank |
| Excess Reserves | any reserves held beyond the required amount; the difference between (total) reserves & required reserves |
| Asymmetric Information | relates to an economic agent on one side of a transaction having information that an economic agent on the other side of the transaction does not have |
| Laffer Curve | the curve that shows the relationship between tax rates and tax revenues; as tax rates rise from 0, tax revenues rise, reach a maximum at some point, and then fall w/ further increases in tax rates (dome curve) |
| Liability | anything that is owed to someone else |
| Discount Loan | a loan the Fed makes to a commercial bank |
| Cash Leakage | occurs when funds are held as currency instead of deposited into a checking account |
| Autonomous Consumption | the part of the consumption that is independent of disposable income |
| Board of Governors | the governing body of the Federal Reserve System |
| Structural Deficit | the part of the budget deficit that would exist even if the economy were operating at full employment |
| Insolvency | a condition in which one’s liabilities are greater than one’s assets |
| Marginal (Income) Tax Rate | the change in a person’s tax payment divided by the change in taxable income |
| Discount Rate | the interest rate the Fed charges depository institutions that borrow reserves from it; the interest rate charged on a discount loan |
| Currency | coins or paper money |
| Balanced Budget | gov’t expenditures equal to tax revenues |
| Crowding Out | the decrease in private expenditures that occurs as a consequence of increased gov’t spending or the financing needs of a budget deficit |
| Budget Deficit | gov’t expenditures greater than tax revenues |
| Tax Base | in terms of income taxes, the total amount of taxable income |
| Money Market Deposit Account (MMDA) | an interest-earning account at a bank or thrift institution, for which a minimum balance is usually required and most of which offer limited check-writing privileges |
| Reserve Deficit/Deficient | the situation that exists when a bank holds fewer reserves than specified by the required reserve ratio |
| Budget Surplus | tax revenues greater than gov’t expenditures |
| Discretionary Fiscal Policy | deliberate changes of gov’t expenditures and/or taxes to achieve economic goals |
| Store of Value | the ability of an item to hold value over time; a function of money |
| Open Market Sale | the selling of gov’t securities by the Fed |
| Multiplier | the # that is multiplied by the change in autonomous spending to obtain the overall change in total spending; multiplier (m) = 1/(1-MPC) |
| Barter | exchanging of goods and services for other goods and services w/o the use of money |
| Monetary Policy | changes in the money supply or in the rate of change of the money supply, intended to achieve stated macroeconomic goals |
| Required Reserve Ratio (r) | a %age of each dollar deposited that must be held in reserve form (specifically, as bank deposits at the Fed or vault cash) |
| Savings Deposit | an interest-earning account at a commercial bank or thrift institution; normally, checks can’t be written on savings deposits, and the funds in a savings deposit can be withdrawn at any time w/o penalty payment |
| Federal Reserve Notes | paper money issued by the Federal Reserve |
| Term Auction Facility (TAF) Program | a program under which the Fed auctions funds to depository institutions; each TAF auction is for a fixed amount, with the TAF rate determined by the auction process (subject to a minimum bid rate) |
| Marginal Propensity to Save (MPS) | the ratio of the change in saving to the change in disposable income |
| Cyclical Deficit | the part of the budget deficit that is a result of a downturn in economic activity |
| S Treasury Securities | bonds and bond-like securities issued by the US Treasure when it borrows |
| Federal Reserve System (the Fed) | the central bank of the United States |
| Time Deposit | an interest-earning deposit w/ a specified maturity date; these deposits are subject to penalties for early withdrawal (withdrawal before maturity date); small-denomination time deposits are less than $100,000 |
| Inflationary Gap | the condition in which the Real GDP that the economy is producing is greater than the Natural Real GDP and the unemployment rate is less than the natural unemployment rate |
