Unit 5 and 6 Vocabulary - Mounds View Public Schools



Final Vocab – Unit 4 +

Money Supply M1; cash, demand deposits(checking accounts), and travelers checks

M2 Less liquid form of money. Savings accounts, CDs, money market

Asset something you own; house, car, backpack

Liability something you owe to someone; car loan, mortgage, student loan

T-account balance sheet; shows assets and liabilities of a bank or other business

Required Reserves the dollar(currency) amount a bank must keep by banking rule

Excess reserves the extra money (cash) a bank is keeping on hand which could be used for loans

Reserve the percent of a bank’s demand deposits it must keep as cash and not Requirement lend out; currently set at 10% by the Federal Reserve

Money Multiplier 1/Reserve Requirement; helps determine the maximum change in the money supply

Federal Reserve America’s central bank; controls money supply – monetary policy

Monetary Policy changes in OMO, discount rate and RR that change the money supply; carried out by the Federal Reserve bank(central bank)

Open Market the buying and selling of securities by the Federal Reserve to control the Operations money supply; used most often of the three tools

Discount Rate the interest rate the FED charges banks when they take out a loan

Federal Funds the interest rate BANKS charge OTHER BANKS when they take out Rate loans from each other

Classical Economics belief that a capitalistic economy employs its resources fully

Keynesianism belief that an economy doesn’t always operate at full employment and needs fiscal and monetary policy to increase aggregate spending

Monetarism view that the main cause of changes in aggregate output and the price level are fluctuations in the money supply

Equation of exchange MV=PQ, M is the money supply, V is the velocity of money, P is the Price level, Q is the physical volume of final goods and services produced

Velocity of Money the number of times per year the average dollar in the money supply is spent for final goods and services

Crowding Out Effect rise in interest rates and decrease in investment spending due to increased money market borrowing by the government

Stagflation inflation accompanied by a stagnant GDP and a high unemployment rate

Natural Rate economy is stable in the long run at the natural rate of unemployment;

Hypothesis Phillips curve is vertical

Rational Expectations business firms and households take action for their own personal Theory interest to counteract monetary and fiscal policy

New Classical economy is stable at the full-employment level of output in the long- Economics run because of price and wage flexibility, despite short run instability

Demand-Pull Inflation increase in aggregate demand causes increase in price level

Cost-Push Inflation reduction in aggregate supply (higher resource costs) increase price level

Wage-Price Controls a policy which legally fixes the maximum amounts wages and prices may be increased in any period

Supply-Side emphasis on costs and aggregate supply in explaining inflation, Economics unemployment and economic growth

Laffer Curve relationship between tax rates and government tax revenues; illustrates maximum tax revenues

Reaganomics policies of Reagan administration based on supply-side economics and intended to reduce inflation and the unemployment rate

Autarky A situation in which a country cannot trade with other countries

Free Trade An economy unhindered by the government; no government involvement

(Open Economy) in regulating imports and exports

Tariff A tax levied on imports

Import quota A legal limit on the quantity of a good that can be imported.

Balance of payments Summarizes a country’s transactions with the rest of the world

Trade balance Difference between a county’s imports and exports of goods; included

in the balance of payments account; X-M

Current account records a nation’s exports and imports of goods and services, net investment income, and net transfers

Financial account records the flows of money from the purchase and sale of real and

financial assets(stocks, bonds, real estate) at home and abroad

Debit negative –using foreign currency to make a transaction

Credit positive – earns foreign currency

Foreign exchange Market in which currencies are exchanged

market

Exchange rates The prices at which currencies are traded

Appreciation When a currency rises against another currency

Depreciation When a currency falls against another currency

Equilibrium Matches the quantity of that currency supplied to the foreign exchange

exchange rates market to the quantity demanded

Fixed exchange Rates the government actively regulates (or “fixes”); China

Rates

Floating exchange Exchange rates that fluctuate freely in the open market ; most of the world has currency markets that are base on supply and demand

Foreign exchange reserves used to buy any surplus of a country’s currency

Reserves

Philips Curve Shows the relationship between unemployment and inflation after

(Long-run) expectations of inflation have had time to adjust (vertical line)

Philips Curve Negative short-run relationship between the unemployment rate and the

(Short-run) inflation rate – downsloping / negative or inverse relationship

Economic Growth technology and productivity–

Determinants

Human capital –

Physical capital –

Public policy – values and institutions that influence markets

Money Market Changes in supply –

Changes in Demand -

Loanable Funds Market Changes in Supply -

Changes in Demand -

Investment Demand Market

Contractionary Monetary Policy goal -

Options -

Expansionary Monetary policy goal -

Options -

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