ECN 211 Final Exam

inflation rate in year 2

(CPI in Year 2 - CPI in Year 1)/price of basket in base year x 100

consumer price index formula

(price of g&s in current year/price of basket in base year) x 100

is responsible for conducting the nation's monetary policy, and it plays a role in regulating banks

The Federal Reserve

Comparative advantage

The ability to produce a good at a lower opportunity cost than another producer

Absolute advantage

The ability to produce a good using fewer inputs than another producer

determines nominal variables, but not real variables

The classical dichotomy refers to the idea that the supply of money

monitor changes in the cost of living over time

The consumer price index is used to

saver. Long term bonds have more risk than short term bonds.

A bond buyer is a

Market equilibrium

A situation in which the market price has reached the level at which quantity supplied equals quantity demanded

causes the price level to rise by 3 percent

According to the quantity theory of money, a 3% increase in the money supply

output will rise but by less than it did when the previous unit was added

All else equal, if there are diminishing returns, then which of the following is true if a country increases its capital by one unit?

rise in the short run, and rise even more in the long run

An economic expansion caused by a shift in aggregate demand causes prices to

increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public

An open-market purchase

both changes in prices and changes in the amounts being produced

Changes in the nominal GDP reflect

assets people use regularly to buy goods and services

Economists equate money with

the president and Congress and involves changing government spending and taxation

Fiscal policy is determined by

value of all final goods and services produced within a country in a given period of time

GDP is defined as the

rises, so people will want to buy more

If the price level falls, the value of a dollar

output fall and prices rise

In the short-run an increase in the costs of production makes

Factors that shift the demand curve

Income, wealth, prices of related goods, population, expected price, taste

the model of aggregate demand and aggregate supply

differs from the classical economic theories conomists use to explain the long run

sticky price theory

firms with menu costs wait to raise prices while their prices are relatively low, which increases demand for their products, so they increase output and employment

aggregate supply shifters

good downward shifts can be due to lower world oil prices, good weather, technological change, or lower nominal wages

aggregate supply slope

in the short run, as prices rise output rises

discouraged workers

individuals who would like to work but have given up looking for a job

Redistributive affects of inflation

inflation can shift purchasing power away from those who are awaiting future payments specified in dollars and toward those who are obligated to make such payments

inflation and purchasing power

inflation, an increase in the price level, decreases the purchasing power of money

Factors that shift the supply curve

input prices, price of alternatives, technology, number of firms, expectations, changes in weather, or other natural events

monetary policy tools

instruments of the fed to conduct monetary policy through the FOMC (increasing and decreasing money supply) including open market operations (primary tools), changes in the required reserve ratio, changes in the discount rate, and changes in the interest rate on reserves

nominal interest rate

interest rate not corrected for inflation

population growth

may affect living standards through stretches, natural resources, diluting the capital stock (K/L), and technological progress

Real interest rate formula

normal interest rate - inflation rate

nominal wages

number of dollars you earn not adjusted for inflation

the fed and the money supply

open market purchases increase the money supply and open market sales decrease the money supply

free trade

outward-oriented policies improve productivity and living standards and intensifies competition

objectives of the fed

price stability, full employment exchange rate stability, financial stability

sticky-wage theory

production is more profitable, so firms increase output and employment

Real wages

purchasing power of your wage adjusted for inflation: nominal wage in the year/CPI in that year * 100

nominal interest rate formula

real interest rate + inflation rate

real vs nominal GDP

real is valued at constant prices while nominal is valued at current prices

quantity theory of money

relates the amount of money in circulation to the overall price level in the economy

technological knowledge

society's understanding of the best ways to produce goods and services

functions of the fed

supervising and regulating banks, acting as a "bank for banks," issuing paper currency, check clearing, guiding the macroeconomy, dealing with financial crises

research and development

technological progress is the main reason why living standards rise over the long run

multiplier effect

the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending

the money multiplier

the amount of money the banking system generates with each dollar of reserves: 1/R

productivity

the average quantity of goods and services produced per unit of labor input

Law of supply

the claim that other things being equal, the quantity supplied of a good rises when the price of the good rises

Law of demand

the claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises

misperceptions theory

the firm may believe its relative price is rising, and may increase output and employment

marginal propensity to consume

the fraction of extra income that a household consumes rather than saves

saving

the income remaining after household pay their taxes and pay for consumption

natural resources

the inputs into production that nature provides

liquidity preference theory

the interest rate adjusts to bring money supply and money demand into balance

human capital

the knowledge of equipment and structures used to produce goods

scarcity

the limited nature of society's resources

represents the sum of the quantities demanded by all the buyers at each price of the good

the market demand curve

GDP

the market value of all final goods and services purchased within a country in a given period of time

long-run aggregate supply

the natural rate of output is the amount of output the economy produces when unemployment is at its natural rate

what you give up to get that item

the opportunity cost of an item is

has an absolute advantage in the production of that good

the producer that requires a smaller quantity of inputs to produce a certain amount of a good, relative to the quantities of inputs required by other producers to produce the same amount of that good,

catch-up effect

the property whereby poor countries tend to grow more rapidly than rich ones

investment

the purchase of new capital but not the purchase of stocks and bonds

willing and able to purchase

the quantity demanded of a good is the amount that buyers are

money

the set of assets in an economy that people regularly use to buy goods and services from other people

money supply

the set of money available in the economy which includes currency and demand deposits

fiscal policy and aggregate demand

the setting of the level of government spending and taxation by government policymakers

physical capital

the stock of equipment and structures used to produce goods and services

classical dichotomy

the theoretical separation of nominal and real variables

unit of account

the yardstick people use to post prices and record debts

unemployment

those who were not employed, were available for work, and had tried to find employment during the previous four weeks

Monetary policy tools mechanisms

tools that influence the quantity of reserves (such as open market operations and lending to banks) and tools that influence the reserve ratio (changes in the required reserve ratio and changes in the interest rates on reserves

each person spends more time producing that product in which he or she has a comparative advantage

total output in an economy increases when each person specializes because

principles of specialization and exchange

trade can benefit everyone in society because it allows people to specialize in activities in which they have comparative advantage

Increases in the capital stock (investment)

we can boost productivity by increasing capital stock, which requires investment

the capital stock increases

The long-run aggregate supply curves shifts right is

real GDP and the price level

The model of aggregate demand and aggregate supply explains the relationship between

Open-market reserves

The purchase and sale of US government bonds by the fed

sellers are willing and able to sell

The quantity supplied of a good is the amount that

is saving and the source of demand for loanable funds is investment.

The source of supply of loanable funds

the price level is higher than expected making production more profitable

The sticky-wage theory of the short-run aggregate supply curve says that the quantity of output firms supply will increase if

divided by the labor force, all times 100

The unemployment rate is computed as the number of unemployed

demand decreases and supply increases

What causes equilibrium price to fall?

When the inflation rate is positive, the nominal interest rate is necessarily greater than the real interest rate

What is correct about real and nominal interest rates?

stock prices fall for some reason other than a change in the price level

What shifts aggregate demand to the left?

aggregate demand shifts right

What would causes prices and real GDP to rise in the short run?

an increase in the price level

What would shift money demand to the right?

Opportunity cost

Whatever must be given up to obtain some item

interest rates to rise and stock prices to fall

When the Fed decreases the money supply, we expect

money demand

a decrease in the interest rate reduces the cost of holding money and raises the quantity demanded

production function

a graph or equation showing the relationship between ouput and inputs: Y = AF(L, K, H, N) where F( ) is a function that shows how inputs are combined to produce output and "A" is the level of technology

market for loanable funds

a supply-demand model of the financial system that helps us understand how the financial system coordinates caving and investment and how government policies and other factors affect saving, investment and the interest rate

Calculating the inflation rate

amount in today's dollars = amount in year t dollars * price level today/price level in year t

demand shock

an event causes the AD curve to shift

supply shock

an event that causes the AS curve to shift

aggregate demand slope

an increase in P reduces the quantity demanded because of the wealth effect (C falls), the interest rate effect (I falls), and the exchange rate effect(NX falls)

consumer price index (CPI)

an index of the cost, through time of a market basket of good purchased by a typical household

eductation

an investment in human capital that increases productivity

medium of exchange

an item that buyers give to sellers when they purchase foods and services

store of value

an item that people can use to transfer purchasing power from the present to the future

diminishing returns

as capital stock rises, the extra output from an additional unit of capital stock falls

banks and the money supply

banks are required to keep a fraction of their deposits as reserves but banks can hold more than the minimum amount they want

economic fluctuations

caused by events that shift the AD and/or AS curves

aggregate demand shifters

changes in consumption investment, government spending, or net exports. Spending more shifts curve right

long-run aggregate supply shifts

changes in natural rate of unemployment, capital, natural resources, or technology

monetary policy and aggregate demand

changes of money supply that affect aggregate demand

real interest rate

corrected for inflation: nominal interest rate - rate of inflation

the nominal interest rate was 14 percent

During a certain year, the consumer price index increased from 120 to 132 and the purchasing power of a person's bank account increased by 4 percent

stores of vallue

Dollar bills, rare paintings, and emerald necklaces

the Federal Reserve and involves changing the money supply

Monetary policy is determined by

the interest rate falls, which causes the opportunity cost of holding money to fall

People choose to hold a larger quantity of money if

goods and services produced from each unit of labor input

Productivity is defined as the quantity of

both the unemployment rate and labor-force rate would be higher

Some persons are counted as out of the labor force because they have made no serious or recent effort to look for work. however, some of these individuals may want to work even though they are too discouraged to make a serious effort to look for work. If these individuals were counted as unemployed instead of out of the labor force, then