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OU / Economics / ECON 1113 / What are unit of account costs?

What are unit of account costs?

What are unit of account costs?


School: University of Oklahoma
Department: Economics
Course: Principles of Economics-Macro
Professor: William clark
Term: Fall 2018
Tags: Macroeconomics, Money, Banking, MonetaryPolicy, moneycreation, interestrates, financialeconomics, and internationaltrade
Cost: 50
Name: Macroeconomics Final Study Guide
Description: This is the Final Study Guide, covering chapters 14,15,16,17, and 20
Uploaded: 12/06/2018
10 Pages 55 Views 4 Unlocks


What are unit of account costs?



Money, Banking, and Monetary Policy

A. Key Terms and Concept

i. Medium of Exchange: A function of money as a convenient  means of exchanging goods and services.

ii. Unit of Account: Another function of money as a standard unit in  which prices can be stated and the value of goods and services can  be compared

iii. Store of Value: The last function of money as an asset set aside  for future use

iv. Liquidity: the ease as which one can collect their money (cash is  perfectly liquid)

v. M1: Money Supply; the currency in the hands of the public and the  checkable deposits of commercial banks and thrift institutions vi. Federal Reserve Notes: Paper money issued by the Federal  Reserve

What are the functions of money and how do you keep money for future use?

If you want to learn more check out How can some things be the same entity but still be separate?

vii. Token Money: bills or coins

viii. Checkable Deposit: any deposit in a commercial bank or thrift  institution against which a check may be written

ix. Commercial Bank: A firm that engages in the business of banking x. Thrift Institution: A savings and loan association, mutual savings  bank, or credit union

xi. Near-Money: Financial assets that are not considered a medium of exchange but have extremely high liquidity and can be converted  into money Don't forget about the age old question of How many levels of reality are there according to plato?

xii. M2: A more broadly defined money supply, equal to M1 plus  noncheckable savings account, small time deposits, and individual  money market mutual fund balances

What is a federal reserve note worth?

xiii. Savings Account: A deposit in a commercial bank or thrift  institution on which interest payments are received

xiv. Money Market Deposit Accounts (MMDAs): Interest-bearing  accounts offered by commercial banks and thrift institutions that

invest deposited funds into a variety of short-term securities.  Depositors may write checks against their balances but there are  minimum-balance requirements as well as limits on the frequency  of check writing and withdraws.  We also discuss several other topics like What is the sum of the number of protons and neutrons in the nucleus?

xv. Time Deposit: An interest-earning deposit in a commercial bank or thrift institution that the depositor can withdraw without penalty  after the end of a specific period.

xvi. Money Market Mutual Funds: Mutual funds that invest in short term securities. Depositors can write checks in minimum amount or  more against their accounts

xvii. Legal Tender: Any form of currency that by law must be accepted  by creditors (lenders) for the settlement of a financial debt; a  nation’s official currency is legal tender within its own borders

xviii. Federal Reserve System (AKA Fed): the U.S. central bank,  consisting of the Board of Governors of the Federal Reserve and the 12 Federal Reserve Banks, which controls the lending activity of the nation’s banks and thrifts and thus the money supply If you want to learn more check out What is the meaning of cockfighting?
Don't forget about the age old question of What is the meaning of trigonometric substitution integrals?

xix. Board of Governors: The seven-member group that supervises  and controls the money and banking system of the United States;  the Board of Governors of the Fed

xx. Federal Reserve Banks: The 12 banks chartered by the U.S.  government that collectively act as the central bank of the United  States. They set monetary policy and regulate the private banking  system under the direction of the Board of Governors and the  Federal Open Market Committee. Each of the 12 a quasi-public bank and acts as a banker’s bank in its designated geographic region

xxi. Federal Open Market Committee (FOMC): The 12-member  group within the Federal Reserve System that decides U.S.  monetary policy and how it is executed through open-market  operations (buying and selling of U.S. government securities by the  Fed)

xxii. Subprime Mortgage Loans: High-interest-rate loans to home  buyers with above-average credit risk

xxiii. Mortgage-backed Securities: Bonds that represent claims to all  or part of the monthly mortgage payments from the pools of  mortgage loans made by leaders to borrowers to help them  purchase residential property.

xxiv. Securitization: The process of aggregation many individual  financial debts, such as mortgages or student loans, into a pool and then issuing new securities backed by the pool. The holders of the  new securities are entitled to receive the debt payments made on  the individual financial debts in the pool Don't forget about the age old question of What is the meaning of delayed offset?


xxv. Troubled Asset Relief Program (TARP): A 2008 federal  government program that authorized the U.S. Treasury to loan up to $700 billion to critical financial institutions and other U.S. firms that  were in extreme financial trouble and at high risk of failure.

xxvi. Moral Hazard Problem: The possibilities that individuals or  institutions will change their behavior as the result of a contract or  agreement.

xxvii. Financial Services Industry: The broad category of firms that  provide financial products and services to help households and  businesses earn interest, receive dividends, obtain capital gains,  insure against losses, and plan for retirement.  

xxviii. Wall Street Reform and Consumer Protection Act of 2010:  The law that gave authority to the Fed to regulate all large financial  institutions, created an oversight council to look for growing risk to  the financial system, established a process for the federal  government to sell off the assets of large failing financial  

institutions, provided federal regulatory oversight of asset-backed  securities, and created a financial consumer protection bureau  within the Fed.  


Money Creation

A. Key Terms and Concepts

i. Fractional Reserve Banking System: system in which only a  portion of checkable deposits are backed up by reserves of currency in bank vaults or deposits at the central bank

ii. Balance Sheet: a statement of assets (things owned by the bank  or owed to the bank) and claims on those assets, belonging to a  commercial bank or thrift

iii. Vault Cash: cash held by the bank, at the bank (AKA till money) iv. Required Reserves: an amount of funds equal to a specified  percentage of the bank’s own deposit liabilities – held at the Federal Reserve Bank…hence the name

v. Reserve Ratio: the “specified percentage” of checkable-deposit  liabilities that a commercial bank must keep as reserves

 = (commercial bank’s required reserves) / (commercial bank’s  checkable-deposit liabilities)

vi. Excess Reserves: any extra amount of reserve a bank keeps at  the Fed


vii. Actual Reserves: how much money a bank actually keeps at the  Fed

viii. Federal Funds Rate: the interest rate paid on overnight loans  (when one bank lends its excess loans, overnight, to another bank  that is deficient in required reserves)

ix. Monetary Multiplier: the relationship between any new excess  reserves in the banking system and the magnified creation of new  checkable-deposit money by banks as a group

= 1/ (required reserve ratio)


Interest Rates and Monetary Policy

A. Key Terms and Concepts

i. Monetary Policy: deliberate changes in the money supply to  influence interest rates and thus the total level of spending in the  economy made by the Fed – main goal is to achieve and maintain  price-level stability, full employment, and economic growth

ii. Interest: the price paid or the use of money – also the price that  borrowers need to pay lenders for transferring purchasing power to  the future

iii. Transaction Demand for Money: the demand for money as a  medium of exchange  

iv. Asset Demand for Money: the demand to hold money as an  asset

v. Total Demand for Money: the sum of Transaction Demand for  Money and Asset Demand for Money

vi. Open-Market Operations: bond market transactions in which the  Fed either buys or sells government bonds (U.S. Securities) outright, or uses them as collateral on loans of money (buying bonds leads to an increase in the money supply and vice versa)

vii. Collateral: the promise of a borrower to a lender that if the  borrower fails to repay the loan with cash, the lender gets to keep a specified, valuable asset

viii. Repos: or repurchase agreement, a collateralized loan with bonds/  government securities used as the collateral made by the Fed to  borrowers

ix. Reverse Repos: the opposite, when the Fed is borrowing money  from a financial institution that offers bonds as collateral


x. Discount Rate: the interest charged by the Fed on loans they  grant to commercial banks (the higher the discount rate, the lower  the money supply and vice versa)

xi. Reserve Ratio: as a function of monetary policy, the higher the  reserve ratio, the lower the money supply and vice versa

xii. Federal Funds Rate: an equilibrium interest rate charged on  overnight loans, is determined by the demand and supply for  reserves

xiii. Expansionary Monetary Policy: or “easy money policy”, is the  use of monetary policy in order to increase the supply of credit in  the economy and, hopefully, aggregate demand and real output  (buying bonds in open market operations, lowering reserve ratio,  lowering discount rate, lowering interest rates)

xiv. Prime Interest Rate: the benchmark interest rate used by banks  as a reference point for a wide range of interest rates charged on  loans to businesses and individuals

xv. Zero Lower Bound Problem: problem under which a central bank is constrained in its ability to stimulate the economy with lower  interest rates because interest rates less than zero encourage  consumers to withdraw money from banks, which reduces the  lending ability of the banking system

xvi. Quantitative Easing (QE): looks like open-market purchases of  bonds that the Fed made before 2008 to lower the federal funds  rate, only with the intention of increasing the quantity of reserves in the banking system and not to lower the federal funds rate

xvii. Restrictive Monetary Policy: Monetary policy used to constrict  the money supply (selling bonds in open market operations, raising  reserve ratio, raising discount rate, and raising interest rates)

xviii. Taylor Rule: an assumption that the Fed has a 2 percent “target  rate of inflation” that it is willing to tolerate and that the FOMC  (federal open market committee) follows three rules when setting  its target for the federal funds rate;  

1. When real GDP=potential GDP and inflation is at a target  rate of 2%, the fed funds rate target should be 4%

2. For each 1 percent increase of real GDP about potential GDP,  the fed should raise the fed funds rate by ½%

3. For each 1 percent increase of inflation above 2%, the fed  should raise the fed funds rate by ½%  

xix. Zero Interest Rate Policy (ZIRP): Federal policy aimed to keep  short-term interest rates near zero to stimulate the economy


xx. Cyclical Asymmetry: the thought that Monetary policy is highly  effective in slowing expansions and controlling inflation but less  reliable in pushing the economy from a severe recession

xxi. Liquidity: a situation in which adding more liquidity to banks has  little or no additional positive effect on lending, borrowing,  investment, or aggregate demand


Financial Economics  

A. Key Terms and Concepts

i. Economic Investment: either paying for new additions to the  capital stock or new replacements for capital stock that has worn  out (new assets replacing old)

ii. Financial Investment: either buying an asset or building an asset  in the expectation of financial gain  

iii. Present Value: very simply, the present-day value or worth, of  returns or costs that are expected to arrive in the future

iv. Compound Interest: how quickly an investment increases in value when interest is paid, or compounded, not only on the original  amount invested but also on all interest payments that have been  made

v. Stocks: ownership shares in a corporation

vi. Bankrupt: when firms are unable to make timely payments on  their debts

vii. Limited Liability Rule: limits the risk involved in investing in  corporations and encourages investors to invest in stocks by  capping their potential losses at the amount that they paid for their  shares

viii. Capital Gains: when investors sell their shares in the corporation  for more money than they paid for them

ix. Dividends: equal shares of the corporation’s profits given to  investors

x. Bonds: debt contracts that are issued most frequently by  governments and corporations

xi. Default: failure by a corporation or government that has issued  bonds to make the bond’s promised payments

xii. Mutual Funds: a company that maintains a professionally  managed portfolio either stocks or bonds

xiii. Portfolios: a collection


xiv. Index Funds: selected portfolios aimed to exactly match a stock or bond index

xv. Actively Managed Funds: funds that have managers who  constantly buy and sell assets in an attempt to generate high  returns

xvi. Passively Managed Funds: because of the assets in their  portfolios, funds that are chosen to exactly match whatever stock or bonds are contained in their respective underlying indexes

xvii. Percentage Rate of Return: the percentage gain or loss over a  given period of time, typically a year.  

xviii. Arbitrage: the buying and selling process that leads profit-seeking  investors to equalize the average expected rates of return  generated by identical or nearly identical assets – happens when  investors try to take advantage and profit from situations where two identical or nearly identical assets have different rates of return

xix. Risk: the fact that investors never know with certainty what those  future payments will turn out to be

xx. Diversification: the strategy of investing in a large number of  investments to reduce the overall risk to the entire portfolio xxi. Diversifiable Risk: the risk that is specific to a given investment  and that can be eliminated by diversification

xxii. Nondiversifiable Risk: or “systemic risk” pushes all investments  in the same direction at the same time so that there is no possibility of using good effects to offset bad effects

xxiii. Average Expected Rate of Return: the probability-weighted  average of the investment’s possible future rates of return xxiv. Probability-weighted Average: each of the possible future rates  of return is multiplied by its probability expressed as a decimal  before being added together to obtain the average

xxv. Beta: a relative measure of nondiversifiable risk – it measures how  the nondiversifiable risk of a given asset or portfolio of assets  compares with that of the market portfolio

xxvi. Market Portfolio: a portfolio that contains every asset available in the financial markets

xxvii. Time Preference: the fact that because people tend to be  impatient, they typically prefer to consume things in the present  rather than in the future

xxviii. Risk-Free Interest Rate: short-term U.S. government bonds that  generate a rate of return that is not in any way a compensation for  risk (shown as )


xxix. Security Market Line: a simple model of a line shoeing the  average expected rate of return of all financial investments at each  level of nondiversifiable risk

xxx. Risk Premium: the rate that compensates for risk  Average expected rate of return = + risk premium


International Trade

A. Key Terms and Concepts

i. Labor-Intensive Goods: goods that require a lot of labor to  produce; i.e. Textiles, electronics, apparel, toys, and sporting goods ii. Land-Intensive Goods: goods that require a lot of land to  produce; i.e. Beef, wool, and meat

iii. Capital -Intensive Goods: goods that require a lot of capital to  produce; i.e. airplanes, automobiles, agricultural equipment,  machinery, and chemicals

iv. Opportunity-Cost Ratio: an equivalency showing the number of  units of two products that can be produces with the same resources v. Comparative Advantage: a situation in which a person or country can produce a specific product at a lower opportunity cost than  some other person or country – the key determinant in whether or  not nations can gain from specialization and trade

vi. Principle of Comparative Advantage: total output will be  greatest when each good is produces by the nation that has the  lowest domestic opportunity cost for producing that good

vii. Terms of Trade: the rate at which units of one product can be  exchanged for units of another product

viii. Trading Possibilities Line: a model showing the amounts of the  two products that a nation can obtain by specializing in one product and trading for the other

ix. World Price: the price that equates the quantities supplied and  demanded globally

x. Domestic Price: the price that would prevail in a closed economy  that does not engage in international trade

xi. Export Supply Curve: an upward-sloping curve that shows the  amount of a product that domestic firms will export at each world  price that is above the domestic price


xii. Import Demand Curve: a downward-sloping curve showing the  amount of a product that an economy will import at each world  price below the domestic price

xiii. Equilibrium World Price: the price of an internationally traded  product that determines the amount of the product demanded by  importers with the quantity of the product supplied by exporters

xiv. Tariffs: excise taxes or “duties” on the dollar values of physical  quantities of imported goods – may be imposed to obtain revenue  or to protect domestic firms

xv. Revenues Tariff: a tariff designed to produce income for the  federal government – applied to a product that is not being  produced domestically

xvi. Protective Tariff: a tariff implemented to shield domestic  producers from foreign competition – impede free trade by  increasing the prices of imported goods and therefore shifting sales  toward domestic producers

xvii. Import Quota: a limit on the quantities of total values of specific  items that are imported in some period – more effective than tariffs  in impeding international trade

xviii. Nontariff Barrier (NTB): rules and regulations pertaining to  product quality, or simply bureaucratic hurdles and delays in  customs procedures

xix. Voluntary Export Restriction (VER): trade barrier by which  foreign firms “voluntarily” limit the amount of their exports to a  particular country – same effect as import quotas

xx. Export Subsidy: a government payment to a domestic producer of export goods and is designed to aid that producer – the subsidies  enable the domestic firm to charge a lower price and thus to sell  more exports in world markets

xxi. Dumping: the sale of a product in a foreign country at prices either below cost or below the prices commonly charged at home xxii. Smoot-Hawley Tariff Act: meant to reduce imports and stimulate  U.S. production, the high tariffs it authorized prompted adversely  affected nations to retaliate with tariffs equally high

xxiii. General Agreement on Tariffs and Trade (GATT): provided a  forum for the multilateral negotiation of reduced trade barriers xxiv. World Trade Organization (WTO): oversees trade agreements  reached by the member nations, and rules on trade disputes among them – also provides forums for further rounds of trade negotiations xxv. Doha Development Agenda: aimed at further reducing tariffs and quotas, as well as agricultural subsidies that distort trade


xxvi. European Union (EU): had abolished tariffs and import quotas on  nearly all products traded among the participating nations and  established a common system of tariffs applicable to all goods and  received from nations outside the EU – also liberalized the  movement of capital and labor within the Eu and has created  common policies in other economic matters of joint concern, such  as agriculture, transportation, and business practices

xxvii. Eurozone: an EU policy where 19 members of the EU recognize the euro as a common currency

xxviii. North American Free Trade Agreement (NAFTA): 1993 treaty  that established an international free-trade zone composed of  Canada, Mexico, and the United States

xxix. Trade Adjustment Assistance Act: introduces some innovative  policies to help those hurt by shifts in international trade patterns  (2002)

xxx. Offshoring: shifting work that had previously been done by  domestic workers to workers abroad to increase profitability


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