MACROECONOMIC DEFINITIONS-PART 2
*STARRED ITEMS WILL BE CONSIDERED ONLY FOR EXTRA CREDIT
DEFINITIONS.
36. MONEY: That part of a
person’s wealth that serves as a medium of exchange, unit of account, and a
store of value.
37. MEDIUM OF EXCHANGE: Anything that
is used to pay for goods and services.
38. STORE OF VALUE: A repository of
purchasing power over time.
39. UNIT OF ACCOUNT: Anything used to
measure value in an economy.
40. FIAT MONEY: Paper currency decreed
by a government as legal tender but not convertible into precious metal.
41. LIQUIDITY: The relative ease and
speed with which an asset can be converted into a medium of exchange.
42. FINANCIAL INTERMEDIARY: A firm that
channels funds from savers to investors by accepting deposits from savers and
making loans to investors. Such indirect finance lowers the transactions costs
of investing in an impersonal market because the firm can specialize in
discovering the creditworthiness of borrowers.
43. FRACTIONAL RESERVE SYSTEM: A system
in which banks hold reserves that are less than the amount of total deposits.
44. REQUIRED RESERVES: Minimum reserve
holdings legally mandated by the Federal Reserve.
45. LEGAL RESERVES: An asset
requirement mandated by the central bank. Only cash held by depository
institutions in their vaults or deposits held at the regional Federal Reserve
Bank qualify as legal reserves.
46. EXCESS RESERVES: Reserves held over
and above required reserves.
47. REQUIRED RESERVE RATIO: The ratio
of required reserves to total deposits mandated by the Federal Reserve. Banks
may keep a higher proportion of their assets as reserves so the ratio specified
by the Fed is a minimum.
48. NET WORTH: The
excess of assets over liabilities, or equity capital.
49. THE SIMPLE MONEY MULTIPLIER:
Relates changes in reserves in the banking system to changes in the money
supply when there are no conversions of reserves into currency or excess
reserves in the various rounds of the multiplier process.
50. THE COMPLEX MULTIPLIER: Relates
changes in the monetary base to changes in the money supply when reserves can
be converted into currency in the various rounds of the multiplier process.
51. MONETARY BASE: The sum of the
reserves in the banking system plus the amount of circulating currency.
*52. BANK RUN: A situation where deposit
holders of a bank which has pursued unwise investments will rush to their bank
and convert their deposits into currency to avoid losing their deposits when
the bank fails. The fact that bank customers can withdraw their funds when
doubts about the safety and soundness of the bank arise causes banks to avoid
unwise investments whenever possible. (NOTE: Bank runs are a form of market
discipline which minimizes the propensity for risk-taking on the part of bank
managers and contributes to the safety and soundness of a banking system.)
*53. BANKING PANIC: A run
on all banks in the banking system regardless of whether they are nearly
insolvent or highly solvent. Holders of deposits in banks will hurry to
convert those deposits to currency thereby forcing even solvent banks to sell
off significant portions of their interest earning assets, some of which are
highly illiquid. As a result, many banks will not be able to meet their
customers’ demands for currency and will become insolvent.
54. FEDERAL RESERVE SYSTEM: The central
bank in the
55. FEDERAL OPEN MARKET COMMITTEE
(FOMC): The committee which executes open market operations as part of the
Board of Governors’ monetary policy.
56. OPEN MARKET OPERATIONS: The buying
and selling of government securities by the FOMC in order to change the level
of reserves in the banking system.
57. COUNTERCYCLICAL MONETARY POLICY: A
monetary policy which is designed to stabilize the fluctuations in GDP by (a)
increasing the money supply (an expansionary monetary policy) when a recession
occurs in order to stimulate private expenditures or (b) decreasing the money
supply (a contractionary monetary policy) in the
expansion phase of the business cycle in order to reduce private expenditures and
inflation.
58. RECOGNITION LAG: A time period which begins with the emergence of a problem and ends when
policymakers recognize it as a problem.
59. ACTION (IMPLEMENTATION) LAG: A time
period which begins with the recognition of a problem and ends when
policymakers have implemented a policy designed to counter the problem.
60. RESPONSE LAG: A time period which
begins with the implementation of a policy designed to counter a problem and
ends when that policy has its desired impact on the economy.
61. PROCYCLICAL MONETARY POLICY: A
monetary policy which unintentionally destabilizes the economy by following an
expansionary monetary policy in the expansion phase of the business cycle and a
contractionary monetary policy in the recession phase
of the business cycle.
62. MONETARISM: The view that changes
in the supply of money are the primary cause of fluctuation in real GDP in the
short-run and the ultimate cause of inflation in the long-run.
63. FREE BANKING SYSTEM: A banking
system which is characterized by the lack of a central bank and the ability of
each bank to print its own currency.
64. ADVERSE CLEARINGS: The process by
which bank notes are returned to the bank of issue by those who have accepted
the notes in payment but who prefer to use the currency of their own bank. (The
issuing bank will lose reserves through this process whenever it overissues its notes.)
NOTE:
For example, Bank A’s notes will be exchanged for Bank B’s notes by those who
bank at Bank B. Bank B will then return Bank A’s notes to Bank A in return for
an equivalent value of Bank A’s reserves. Bank A will lose reserves whenever it
overissues notes because the excess notes will not
stay in circulation but will be returned to Bank A
either directly or indirectly through other banks.
*65. SECONDARY NOTE MARKET: This market
arises when a bank’s notes circulate beyond the local area where its reputation
for safety is not well known. In this case, other banks which can easily
develop knowledge about the safety of Bank A will accept its notes at face
value only when Bank A is quite safe. If Bank A is in some danger of becoming
insolvent, its notes will trade at a discount. Thus the secondary note market
can be used to distinguish safe from unsafe banks by indicating whether a
particular bank’s notes are accepted at face value or not.
66. CLEARINGHOUSES: These institutions
lower the costs of returning notes to issuing banks by acting as an
intermediary between accepting bank and issuing bank.
*67. OPTION CLAUSES: Contractual clauses
which are attached to a bank’s notes stating the conditions under which a bank
will not redeem their notes. Typically, banks in this situation offer to pay
the note holders interest as a penalty for not redeeming their notes on demand.
Such clauses help banks which are under pressure from note holders for
redemption to reduce the need for liquidating relatively illiquid assets and
thereby decrease the risk of insolvency.
SECOND
EXAM-------------------------------------SECOND EXAM