when a market exchange affects a third party who is outside or “external” to the exchange; sometimes called a “spillover
negative externality
a situation where a third party, outside the transaction, suffers from a market transaction by others
positive externality
a situation where a third party, outside the transaction benefits from a market transaction by others.
social costs
costs that include both the private costs incurred by firms and also costs incurred by third parties outside the production process, like cost of pollution
market failure
a situation in which the market on its own fails to allocate resources efficiently in a way that blances social costs and benefits; externalitites are one example of a market failure
command and control regulation
laws that specify allowable quantities of pollution and may also detail which pollution-control tenchologies must be used
pollution charge
a tax imposed on the quantityt of pollution that a firm emits; also called a pollution tax
marketable growth
a permit that allows a firm to emit a certain amount of pollution, where firms with more permits than pollutions can sell the reamaining permits to other firms.
property rights
the legal rights of ownership on which others are not allowed to infringe without paying compsation
public good
a good that is nonexculdable and nonrivalrous, and thus is difficult for market producers to sell to individual consumers
a good where, when one person uses the good, others can also use it.
when it is costly or impossible to exculede someone from using the good and thus hard to charge for it.
free rider
those who want others to pay for the public good and then plan to use the good themselves; if many people act as free riders, the public good may never be provided
trading one good or service for another without using money
double coincidence of wants
a situation in which both of two people each wants some good or service that the other person can provide
medium of exchange
whatever is widely accepted as a method of payment
unit of account
the common way in which market values are measured in an economy
store of value
something that serves as a way of preserving economic value that can be spent or consumed in the future
whatever serves society in three function: medium of exchange, unit of account and store of value
coins and paper bills
demand deposits
deposits in banks that are available by making a cash withdrawal or writing a check.
anarrow definiotn of the money supply that includes currency, traveler’s checks and checking accounts in banks
a definition of the money supply that includes everything in M1 but also adds savings deposits, money market funds, and certificates of deposit.
savings deposits
bank accounts where you cant withdraw money by writing a check but can withdraw the money at a bank or can tranfer it easily to a checking account
money market funds
where the deposits of many investors are pooled together and invested in a safe way like short-termgovernment bonds.
certificates of deposit
accounts that the depositor has committed to leaving in the bank for a certain period of time, in echcange for a higher rate of interest; also called time deposits.
time deposits
accounts that the depositor has committed to elaving in the bank for a certain period of time, in echange for a higher rate of interest also called a CD
financial intermediary
an institution that receives money from savers and provides funds to borrowers.
items of value owned by a firm or an individual
any amounts or debts owed by a firm or an individual.
a financial instrument through which corps. and governments borrow money from financial investors and promise to repay with interest
funds that the bank keeps on hand and that are not loaned out or invested in bonds
net worth
total assets minus its total liabilities
asset-liability time mismatch
a bank’s liabilities can be withdrawn in the short term while its assets are repaid in the long term
reserve ratio
the proportion of deposits that the bank holds in the form of reserves
money multiplier
toatl money in the economy divided by the original quantity of money or change in the total money in the economy divided by a change in the original quantity of money.
monetary policy
policy that involves altering the quantity of money and thus affecting the level of interest rates and the extent of borrowing
central bank
an instituiton to conduct monetary policy and regulate the banking system
open market operations
the central bank buying or selling bonds to influence the quantity of money and the level of interest rates
reserve requirement
the proportion of its deposits that a bank is legally required to deposit with the central bank
discount rate
the interest rate charged by the central bank when it makes loans to commercial banks
expansionary monetary policy
a monetary policy that increases the supply of money and the quantity of loans also called a loose monetary policy
contactionary monetary policy
a monetary policy that reduces the supply of money and loans; also called a tight
federal funds rate
the interest rate of which one bank lends funds to another bank overnight
excess reserves
reserves taht banks hold above the legally mandated limit
the speedy with which money circulates through the economy, calculated as the nomial GDP divided by the money supply
basic quantity equation of money
money supply * velocity = nominal GDP
deposity insurance
an insurance system that makes sure depositors in a bank do not lose their money, even if the bank goes bankrupt
bank run
when depositors raced to the bank to withdraw for fear that otherwise they would be lost
unemployment rate
the percentage of adults who are in the labor force and thus seeking jobs, but who do not have jobs
implicit contract
an unwritten agreement in the labor market that the employer will try to keep wages from falling when the economy is weak or the business is having trouble, and the employee will not expect huge salary increases when the economy or business is strong.
efficiency wage theory
the theory that the productivity of workers will increase if they are paid more.
cyclical unemployment
unemployment closely tied to the business cycle, like higher unemployment during a recessions
natural rate of unemployment
the unemployment rate that would exist in a growing and healthyeconomy from the combination of economic, social and polical factors that exist at a time.
frictional unemployment
unemployment that occurs as workers move between jobs
the value of the output of all goods and services produced within a country
trade balance
gap btwn exports and imports
trade surplus
when exports exceed imports
trade deficit
when imports exceed exports
human capital
the skills and education of workders
all the ways in which amke existing machines produce more or higher quality as well as producing different and altogether new products.