Economics and Personal Finance Glossary (K-M)


K

Keynesian multiplier effect- An effect where an increase (or decrease) in a component of aggregate demand (i.e., consumption, investment, or government spending) produces an increase (or decrease) in national income that is greater than the initial increase (or decrease) in the component. This greater-than-proportional change in national income is the result of chain reactions that generate more (or less) activity than the original increase (or decrease).

L

Labor- The quantity and quality of human effort directed toward producing goods and services. Also known as human resources.

Labor force- The total number of workers, including both the employed and the unemployed.

Labor force participation rate- The number of people who are either employed or are actively looking for work, usually expressed as a percentage.

Labor market- The exchange of labor by workers who want to sell labor and businesses that want to purchase labor. (Also known as the job market).

Lags- The time between the recognition of an economic problem, the negotiation and implementation of a solution, and the realization of results in the economy.

Law of demand- As the price of a good or service rises, the quantity demanded of that good or service falls. Likewise, as the price of a good or service falls, the quantity demanded of that good or service rises.

Law of supply- As the price of a good or service rises, the quantity supplied of that good or service rises. Likewise, as the price of a good or service falls, the quantity supplied of that good or service falls.

Legacy benefits- Benefits that accrue over time.

Lender- An individual or organization that provides money to a borrower with the expectation that the borrower will pay the money back.

Liability- Money owed; debt. 2. Legal responsibility.

Liar loan- An industry term for a low- or no-documentation loan, typically Alt-A or subprime, where there is a suspicion the borrower, mortgage broker, or loan officer may have fraudulently overstated the income and/or assets to qualify for a larger loan. These loans are typically “stated income” or “stated asset” loans, where the lender does not verify the income and instead records income based on the borrower’s verbal statement.

LIBOR index- An index used to determine interest rate changes for certain ARM plans, based on the average interest rate at which international banks lend to or borrow funds in the London interbank market.

Lien- The legal right to take or sell property as security for a debt.

Liquid asset- An asset that is easily convertible to cash with relatively little loss of value in the conversion process.

Liquidation- The sale of a debtor’s nonexempt property and the distribution of the proceeds to creditors. Chapter 7 of the U.S. Bankruptcy Code provides for the liquidation of the filer’s assets and distribution of the proceeds to the filer’s creditors.

Liquidity- The quality that makes an asset easily convertible into cash with relatively little loss of value in the conversion process.

Loan- A sum of money provided temporarily on the condition that the amount borrowed be repaid, usually with interest.

Loanable funds- Money made available to borrowers through the actions of savers.

Loanable funds market- A virtual market that consists of (i) borrowers, including money demanders, consumers, and firms who want loans to buy goods and services or invest in capital or inventory; and (ii) savers, such as money suppliers, households, and firms that save money. It is the market in which the supply and demand for loanable funds determines the interest rate.

Long-term savings goals- Goods or services you want to buy in a year or longer.

M

Macroeconomics- The study of the broad economy, such as how an economy grows and how growth is maintained.

Magnetic stripe- A magnetic stripe on the back of a plastic card that activates card information stored on the card which swiped through a card reader; also called a magnetic strip or magstripe.

Mandatory spending- Government spending required by current law.

Manufacture- To make or process goods, especially in large quantities and by means of industrial machines.

Margin call- “Margin” refers to borrowing money using securities or other collateral that fluctuates in value. If the value of the collateral falls below the lender’s maintenance requirement, the lender generally will “make a margin call,” which means it will require the deposit of additional collateral.

Marginal satisfaction- The extra satisfaction from consuming 1 more unit of some good or service.

Market (marketplace)- Buyers and sellers coming together to exchange goods, services, and/or resources.

Market basket- A selected group of consumer goods and services whose prices are tracked for calculating a consumer price index and measuring the coat of living.

Market price- The price at which buyers and sellers trade a good or service in the marketplace where the quantity demanded equals the quantity supplied. Also known as the market clearing price or the equilibrium price.

Mark-to-market- An accounting rule (Financial Accounting Standards Board [FASB] 157) that requires companies to value assets at prices determined in the marketplace.

Means-tested- Programs in which eligibility depends on the level of one’s current income or assets.

Median- The value in an ordered set of values below and above which there is an equal number of values; the number that divides numerically ordered data into two equal halves; the middle number of a set of numbers.

Median value- The middle number of a set of numbers; the number that divides numerically ordered data into two equal halves.

Medicaid- A jointly administered federal and state health care program for low-income people.

Medicare- A federal health care program that pays for certain medical and hospital costs for people aged 65 and older (and for some people who are under the age of 65 and disabled); part of Social Security.

Medicare tax- A payroll tax that is part of FICA, collected from most employees and employers to fund the hospital insurance provided under the Medicare system. Used to provide medical benefits for certain individuals when they reach age 65. Workers, retired workers, and the spouses of workers and retired workers are eligible to receive Medicare benefits upon reaching age 65.

Medium of exchange- Anything that is generally acceptable in exchange for goods and services.

Medium-term notes- Debt securities issued by corporations, with typical maturities between 5 and 10 years; however, the maturity may be as short as 1 year. Usually issued at floating rates.

Menu costs- The costs to a firm incurred as a result of changing prices. The term comes from the cost incurred for printing new menus when a restaurant raises prices.

Microeconomics- The study of the markets that make up the broad economy.

Microloan- A small, short-term loan at low interest, often used by self-employed individuals or entrepreneurs for start-up expenses, inventory, or equipment.

Minimum wage- The lowest wage that employers may legally pay for an hour of labor.

Monetary policy- Central bank actions involving the use of interest rate or money supply tools to achieve such goals as maximum employment and stable prices.

Money- Anything widely accepted in exchange for goods and services.

Money creation- An increase in the money supply generated by the banking system through the lending of reserves.

Money market mutual fund- A mutual fund (SEC-registered investment fund) that invests primarily in money market instruments and/or other short-term debt instruments. All money market mutual funds must hold assets with a weighted average maturity of no more than 90 days.

Money neutrality- An economic theory stating that, in the long run, changes in the money supply cause changes in variables, such as price and wages, but not in unemployment or real (or inflation-adjusted) variables, such as real GDP (gross domestic product) and real consumption.

Money supply- The quantity of money available in an economy. The basic money supply in the United States consists of currency, coins, and checking account (demand) deposits. Also known as money stock.

Monoline bond insurers- A financial guaranty (insurance) company that guarantees all scheduled interest and principal payments on the bonds it insures and writes no other line of insurance.

Monopolistic competition- A market structure where many firms produce similar but not identical products.

Moral hazard- The risk that one party to a transaction will engage in behavior that is undesirable from the other party’s view.

Mortgage debt- A debt owed for loans for homes and real estate.

Mortgage-related assets- Generally defined to be whole mortgage loans, mortgage-backed securities (MBS), collateralized debt obligations (CDOs) that contain MBS, or derivative instruments that refer to any of the above, such as credit default swaps. Many of these assets are held on the balance sheets of financial institutions.

Multiplier- A factor of proportionality that measures how much an endogenous variable changes in response to a change in an exogenous variable. Some examples include the government spending multiplier, the money multiplier, and the Keynesian multiplier.

Mutual fund- A company that pools investors’ money and then issues shares to its investors.

Mutually beneficial trade- In order for a trade to be mutually beneficial among each party involved, the price of the good or service must fall between the opportunity costs of producers involved in the trade. Importers will pay no more for goods or services than what it costs to produce them, while exporters will sell goods or services for no less than what it costs to produce them.