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Economic growth
answer
The sustained (key idea) expansion of real GDP over a given period.
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economic growth rate
answer
the (average) annual percentage change of real GDP.
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GDP per capita
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is the GDP of a country divided by its population.
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Rule of 72
answer
the number of years it takes for the
level of a variable to double is approximately 72
divided by the annual percentage growth rate of the variable.
level of a variable to double is approximately 72
divided by the annual percentage growth rate of the variable.
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Sources of Economic Growth
answer
1) Increases in labor
2)Increases in capital
3) Increases in land/resources
4) Increases in productivity
2)Increases in capital
3) Increases in land/resources
4) Increases in productivity
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Labor productivity growth
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fundamental precondition for labor productivity
growth is the incentive system
growth is the incentive system
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An essay on the Principle of Population
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Thomas Malthus's essay written in 1798 that stated: that the fixed supply of arable land implied diminishing returns for agricultural production. Insufficient resources to support a rapidly expanding population.
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Money is:
answer
A medium of exchange, a store of value, and a unit of account.
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Barter
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The direct exchange of goods and services for other goods and services.
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Flaws in barter system:
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requires a double coincidence of wants for a trade to take place. An issue money eliminates.
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Liquidity of assets:
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Accessibility of assets. Most liquid= money
Less liquid a CD or bond.
Less liquid a CD or bond.
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Commodity monies
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are items used as money that also have intrinsic value in some other use.
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Fiat, or token
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money is money that is intrinsically worthless.
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Legal tender
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is money that a government has required to be accepted in settlement of debts.
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Currency debasement
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is the decrease in the value of money that occurs when its supply is increased rapidly (causing high inflation).
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M1, or transactions money
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is money that can be directly used for transactions.
M1=
Currency held outside banks
Demand deposits
Traveler's checks
Other checkable deposits
M1=
Currency held outside banks
Demand deposits
Traveler's checks
Other checkable deposits
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M2, or broad money
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includes near monies, or close substitutes for transactions money. (usually more stable than m1 over time)
M2= M1 +
Savings accounts
Money Market accounts
Other near monies
M2= M1 +
Savings accounts
Money Market accounts
Other near monies
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depository institution
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is a firm that takes deposits from households and firms and makes loans to other households and firms.
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Benefits of depository institutions
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create liquidity
pool risk
lower the cost of borrowing
lower the cost of monitoring borrowers
pool risk
lower the cost of borrowing
lower the cost of monitoring borrowers
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Net worth
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Assets-liabilities
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Assets
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net worth+ liabilities
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Loans
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A banks most important assets
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Debts and deposits
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a bank's liabilties are called debts. Deposits are debts owed to the banks depositors.
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How banks create money
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People deposit money in banks, Banks offer loans at a price (with interest), the loans that they make become money for other customers, and money has been created.
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excess reserves
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actual reserves- required reserves
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Money multiplier
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the multiple by which deposits can increase for every dollar increase in reserves. (1/required reserve ratio)
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The Federal Reserve System
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The central bank of the US
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Reserves
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the deposits that a bank has at the Federal Reserve bank plus its cash on hand.
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required reserve ratio
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the percentage of its total deposits that a bank must keep as reserves (either on hand or at the Federal Reserve)
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Responsibilities of the fed
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Controls the money supply
Clears interbank payments
Regulates banking practices
Acts as the lender of last resort
Clears interbank payments
Regulates banking practices
Acts as the lender of last resort
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lender of last resort
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the Fed provides funds to troubled banks that cannot find any other sources of funds.
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federal funds rate
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the interest rate at which banks borrow from one another.
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discount rate
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the interest rate that banks pay to the Fed to borrow from it.
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Open market operations
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are the purchase and sale by the Fed of government securities (i.e., bonds, such as U.S. Treasury bills "T-bills") in the open
market.
market.
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bond
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a promise from a government or a firm to repay a loan, with interest paid (in "coupons") at fixed intervals.
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coupons
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Interest payments paid by maturing bonds.
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current yield
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the measure of this implied interest from the coupon value and the price of the bond. Current yield= coupon/ price
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yield curve
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a graph that shows the relationship between yield and the length of bonds issued by the same entity.
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Federal Open Market Committee (FOMC)
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sets goals regarding the money supply and interest rates
and directs the operations of the Open Market Desk in New York.
and directs the operations of the Open Market Desk in New York.
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Open Market Desk
answer
an office in the New York Federal Reserve Bank from which government securities are bought and sold by the Fed.
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Monetary policy
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the behavior of the Federal Reserve concerning the money supply.
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Interest
answer
the fee that borrowers pay to lenders for the use of their funds.
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interest rate
answer
the annual interest payment on a loan expressed as a percentage of the loan. (interest received per year/ amount of loan *100)
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Total demand for money
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is the sum of the demand for checking account balances and cash by both households and firms.
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transaction motive
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the main reason that people hold money—to buy things.
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speculation motive
answer
investors may hold their investments based on the speculation that they will be able to sell their investment at a higher profit.
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