ECO2013 Final FSU
expenditure approach
A method of computing GDP that measures the total amount spent on all final goods and services during a given period. less accurate than income approach
Change in Quantity Demanded
A movement along the curve and can only be caused by a change in PRICE of THAT particular good
Change in quantity supplied
A movement along the curve and can only be caused by a change in the PRICE of THAT good
What is the Term Auction Facility (TAF)?
A newly established procedure used by the fed to auction credit for an eighty four day period to depository institutions willing to bid the highest interest rates for the funds
According to the Keynesian view, if policy makers thought the economy was about to fall into a recession, which of the following would be most appropriate?
A planned increase in the budget deficit.
you can only produce more of one good only if you produce less of another good.
A production possibilities curve indicates that when resources are being used efficiently,
Her real salary has fallen and her nominal salary has risen.
A professor of economics gets a $100 a month raise. She figures that even with her new monthly salary she will be unable to buy as many goods and services as she could 12 months ago. Given this scenario, which of the following is true?
Depression
A prolonged recession with a sharp decline in economic activity
the marginal benefit of the action exceeds the marginal cost of the action.
A rational decision maker takes an action if and only if
Certificate of Deposit
A savings alternative in which money is left on deposit for a stated period of time to earn a specific rate of return. Are not insured by the FDIC
Aggregate demand
A schedule or curve that shows the total quantity of goods and services demanded (purchased) at different price levels.
Change in supply
A shift of the entire curve
bank run
A situation in which many depositors simultaneously decide to withdraw money from a bank
equilibrium
A situation in which the market price has reached the level at which quantity supplied equals quantity demanded
crowding out
A situation when increased interest rates lead to a reduction in private investment spending such that it dampens the initial increase of total investment spending is called crowding out effect
Why is the PPF sometimes a straight line
A straight PPF would mean that as you produce more of one product you constantly give up the same proportion of another.
According to the Keynesian view, if policy makers thought the economy was about to enter an expansionary period, which of the following would be most appropriate?
A tax increase.
What is the Quantity Theory of Money?
A theory that says a change in the money supply will cause a proportional change in the price level
income approach
A traditional means of appraising property based on the assumption that value is equal to the present worth of future rights to income.
What is a Unit of Account?
A unit of measurement used by people to post prices and keep track of revenues and costs *When you use dollar prices to compare costs*
What is Medium of Exchange?
An asset that is used to buy and sell goods and services *without a medium of exchange, bartering*
What is Store of Value?
An asset that will allow people to transfer purchasing power from one period to the next *when you put money aside each month to save up for spring break*
Free Market Economy
An economic system in which there is free competition and prices are determined by the interaction of supply and demand, encourages growth
• What is a market economy?
An economy in which private individuals, rather than a centralized planning authority, make the decisions.
Market Economy
An economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
Which of the following is the strongest evidence of a shift toward a more expansionary fiscal policy?
An increase in government spending as a share of the economy and an expansion in the size of the budget deficit
Who demands goods/services?
Consumers
FDIC
Federal Deposit Insurance Corporation: a federally sponsored corporation that insures accounts in national banks and other qualified institutions
GNP
Everything in GDP produced by US citizens as well as production in foreign countries by US citizens
M2 money supply
Everything in M1 as well as savings deposits, time deposits of less than $100,000 at all depository institutions, and money market mutual funds
Which of the following statements about exchange is true?
Exchange tends to move each good toward those individuals who value the good more highly.
directs the economy to full employment and resources into productive projects
Expansionary fiscal policy during a recession is most effective when it
Fiscal policy
Expansionary policy - when is it used and impact on output/price • Contractionary policy - when is it used and impact on output/price
Factors that affect consumption spending (and saving) - 7 factors
Expected future income Wealth (or level of debt) Interest rates Preferences Consumer confidence Taxes Purchases of new capital
higher interest rates, higher taxes, and sluggish future growth.
Federal budget projections for the next ten years indicate both higher levels of government spending and large budget deficits. Non-Keynesian economists argue that this will lead to
Which of the following is a correct statement?
Fiscal policy is the use of tax and spending policies by Congress and the president. Chap 9
Which of the following is a major insight of the Keynesian model?
Fluctuations in aggregate demand are an important potential source of business instability. Chap 11
Business Cycle (What happens to unemployment and GDP?)
Fluctuations in the level of economic activity, measured by changes in real GDP and unemployment rate. Expansions have peaks and contractions have troughs.
should be counted only to the extent that they are more expensive at college than elsewhere.
For a college student who wishes to calculate the true costs of going to college, the costs of room and board
Which one of the following statements about pitfalls to avoid is correct?
Government programs can be implemented with good intentions but can lead to undesirable outcomes because of unintended consequences.
the created jobs are highly visible, while the secondary effects of lost jobs in other areas, higher interest rates, and higher future taxes are less visible
Government spending programs that create jobs are often popular because
Government budget balance
Government's Expenditures − Government's Income
Fiscal policy refers to
Governments spending, taxing, and borrowing policies
GDP
Gross Domestic Product- the total market value of all final goods and services produced annually in an economy
uniformity
Having always the same form, manner, or degree; not varying or variable.
A local restaurant offers an "all you can eat" Sunday brunch for $12. Susan eats four servings but leaves half of a fifth helping uneaten. Why?
Her marginal value of food has fallen to zero.
distort the information delivered by market prices.
High and variable rates of inflation will
An individual should trade for those economic goods for which it is a
High opportunity cost producer
Which of the following is true?
High unemployment rates over lengthy time periods are indicative of structural factors that are adversely affecting the natural rate of unemployment. Chap 8
According to non-Keynesians, how will an increase in government spending financed by borrowing during a recession affect recovery?
Higher future taxes and interest rates will be required to finance the larger debt and this will weaken the recovery.
What are the results of an unanticipated increase in AD (boom)
Higher interest rates and Higher price levels
Which of the following adjustments will most likely occur when output exceeds the economy's long-run capacity?
Higher resource prices and costs will reduce short-run aggregate supply until output falls to the economy's long-run capacity.
Give an example of Store of Value.
Houses
They push the price up when there is a shortage
How do markets coordinate output decisions?
What is the economic way of thinking?
How economists try to understand human choices.
What are market prices?
How much consumers value the good
(I) Changes in the age composition of the labor force will affect the natural rate of unemployment (for example, an increase in the relative number of youthful workers). (II) Institutional changes such as an increase in the minimum wage may increase cyclical unemployment but will not affect the natural rate of unemployment.
I is true; II is false. Chap 8
When output is greater than the economy's long-run capacity, which of the following is most likely to occur?
Increases in real interest rates and real resource prices.
Law of comparative advantage
Individuals should produce the goods for which they have the LOWEST opportunity cost
If timed correctly, expansionary monetary policy will do what during a boom or full employment?
It will cause inflation
If timed correctly, restrictive monetary policy will do what during a boom?
It will help fight inflation during a boom
If timed correctly, expansionary monetary policy will do what during a recession?
It will help restore full employment
If the crowding-out effect is strong, how will the potency of discretionary fiscal policy be affected?
It will make fiscal policy less potent. Chap 12
A decrease in the money supply will have which of the following effects?
It will raise the interest rate, causing a decrease in investment and a decrease in GDP.
An increase in the money supply will have which of the following effects?
It will reduce the interest rate, causing an increase in investment and an increase in GDP.
Which of the following would be most appropriate if the Federal Reserve wanted to increase the money supply in order to stimulate the economy?
It would buy U.S. securities
What are Required Reserves?
It's the minimum amount that banks are required to keep on hand to back up deposits.
Which of the following assets can a commercial bank count as reserves?
Its vault cash and deposits with the Fed
Which scenario will most likely happen as employers and employees increase their usage of the Internet in the job search process?
Job-related information will become less costly and frictional unemployment will go down. Chap 8
The use of resources to produce a good has an opportunity cost because of scarcity.
What does the expression "There's no such thing as a free lunch" mean?
Incentives __
Matter, meaning you will be more likely to do something if you are paid more and less likely when it costs more
What is being rational?
Maximizing utility
Unemployment insurance
Money paid by the government to people who are unemployed
What is Fiat money?
Money that has neither intrinsic value or the backing of a commodity with intrinsic value. -Example: Currency
Is GDP a perfect measure of economic activity? How about the welfare of the population?
NO! People in China have lower income because of the high population.
The amount of U.S. exports purchased by the rest of the world is primarily determined by which of the following?
Real disposable income in other nations
Which of the following is the most accurate statement about real and nominal interest rates?
Real interest rates can be either positive or negative, but nominal interest rates must be positive.
Real wage vs. nominal wage
Real wage = nominal wage adjusted for inflation Nominal Wage = the amount of money you earn per hour
Why might increases in government spending be ineffective during a recession?
Recessions often reflect a coordination problem related to the composition of aggregate demand, not just its level. Chap 12
If the Fed lends to member banks, what happens to required reserves, excess reserves, and the money supply?
Required reserves remain the same, excess reserves increase, and the money supply will increase.
Who is in the working age population but not in the labor force?
Retired, independently wealthy, stay at home spouse, full time students, discouraged workers
Three basic decisions must be made by all economies. What are they?
What goods will be produced; how will goods be produced; for whom will goods be produced?
What is a normative statement?
What is a normative statement?
Fallacy of composition
What is good for the individual is not always good for the group
What are society's three questions
What to produce? How to produce it? For whom to produce it for?
Quantity supplied will increase.
What will happen if the demand for bicycles increases?
Which of the following is a major implication of the invisible hand concept?
When directed by competitive market prices, the actions of self-interested individuals will tend to promote overall economic prosperity.
price of the product has fallen, and consequently, suppliers are producing less of it.
When economists say the quantity supplied of a product has decreased, they mean the
Tariffs
Taxes placed on imported goods
What are the three methods for measuring GDP?
The "value-added" approach =final cost -The income approach =wages, interest, profit, rent -The expenditure approach =C+I+G+Nx
The labor force participation rate (LFPR)
The # of people in the labor force divided by the working age population *tells us what fraction of the population wants to be working whether or not they actually have a job Equation - (labor force/ working-age population) x 100
the actual rate of unemployment will equal the natural rate.
When full employment is present,
Increases in real interest rates and real resource prices
When output is greater than the economy's long-run capacity, which of the following is most likely to occur?
Where does equilibrium of market price occur
When quantity supplied equals quantity demanded (all gains from trade have been realized)
operates at an output greater than its long-run potential
When the actual rate of unemployment is less than the natural rate of unemployment, the economy
In which of the following situations is the political process likely to result in the inefficient and wasteful use of resources?
When the benefits are concentrated and the costs widespread.
has to spend more dollars to maintain the same standard of living.
When the consumer price index rises, the typical family
strong demand for resources will place upward pressure on resource prices.
When the economy is operating at an output beyond its full-employment potential, the
unitary elastic demand
When the percent change in quantity is exactly equal to the percent change in price for some good. When the calculated elasticity is 1.
Which of the following is an important insight of Keynesian analysis?
When widespread unemployment is present, increases in aggregate demand will exert a larger impact on real output than when the economy is operating at or near full employment. Chap 11
Equilibrium (Include SR + LR)
Where the lines connect. SR: Occurs at the intersection of the aggregate demand (AD) and short-run aggregate supply curve (SRAS) LR: Occurs where aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) all intersect at a single point.
Market prices are determined
Where the supply and demand curves intersect
Which of the following is the best explanation of how expansionary fiscal policy can crowd out net exports?
The higher interest rates associated with expansionary fiscal policy attract foreign investors. To buy U.S. financial assets, foreigners bid up the real exchange rate, which in turn causes net exports to fall. Chap 12
Opportunity Cost
The highest valued alternative that must be sacrificed when choosing an option.
Paradox of Thrift
The idea that when many households try to increase saving, actual saving may not increase. Reality- Saving is the source of investment capital - More saving ---> higher growth of GDP - More saving ---> greater future GDP
Law of Demand
There is an inverse (negative) relationship between the price of a good and the quantity that buyers are willing to purchase. As price increases, quantity demanded decreases.
Suppose you withdraw $1,000 from your checking account. If the reserve requirement is 20 percent, how does this transaction affect the supply of money and the excess reserves of your bank?
There is initially no change in the supply of money; your bank's excess reserves are reduced by $800.
What is the Federal Reserve System?
The central bank of the U.S.; It carries out banking regulatory policies and is responsible for conducting monetary policy. -The Fed.
The working age population
The civilian, nonconstitutional population aged 16 and over (excluding military and jail inmates)
Scarcity
The concept that there is less of a good freely available from nature than people would like.
Inflation is measured using
The consumer price index (CPI) and the GDP deflator
positive statements are based on fact while normative statements are based on opinion
The difference between positive economic statements and normative economic statements is that
stock split
The division of a single share of stock into more than one share when the price of a stock becomes too high
Suppose an economy is operating at its maximum sustainable output rate. Neither recession nor economic boom are present. Which of the following would be true?
The economy would be considered at full employment. Chap 8
increasing real output and declining unemployment
The expansionary phase of the business cycle is characterized by
Disposable income
Y - T = YD; C + S
GDP calculation
Y=C+I+G+X Consumption Investment Government purchase Net exports (exports-imports)
The labor supply curve
a graph showing the relationship between the total labor supplied in the economy and the wage rate Shifts are caused by: Change in preferences, Changes in population, Change in related price or goods, Change in expecatations
Bureau of Labor Statistics
The government organization responsible for regularly gathering data about the economic status of the population.
The law of comparative advantage indicates that
a group of people can increase their output when each good or service is supplied by the low opportunity cost producer. Chap 1&2
supply shock
a sudden shortage of a good
rationing
a system of allocating scarce goods and services using criteria other than price
Which of the following would not cause a shift in the short-run aggregate supply curve?
a decrease in the real interest rate. Chap 10
trade offs
an alternate we sacrifice when making a decision
store of value
an asset that will allow people to transfer purchasing power from one period to the next
A rise in the price of oil would be most likely to cause which of the following in the United States?
an economic slowdown or recession. Chap 10
What is a positive statement?
a factual claim about how the world actually works
labor demand curve
a graph showing the relationship between the total labor demanded from all the firms in the economy and the wage rate shifts are caused by : Output prices, Technological change, supply of other factors
efficient economy
an economy that uses its resources to make the most of goods and services
OTC market
an electronic marketplace for stocks and bonds
If output is less than full employment in the Keynesian model, what is needed to restore full employment?
an increase in aggregate demand. Chap 11
productivity
average output produced per worker during a specific time period
Increasing interest rates will: a. Increase the money supply b. Decrease the money supply
b. Decrease the money supply
Increasing Reserve Requirements: a. Increases money supply b. Decreases money supply
b. Decreases money supply
Buying bonds will: a. Decrease money supply b. Increase money supply
b. Increase money supply
Lowering interest payments on reserves held at the fed will: a. Decrease the money supply b. Increase the money supply
b. Increase the money supply
A hail storm that breaks lots of windows in buildings is
bad for the economy because wealth was destroyed and more spending on repairs will result in less spending on other goods and services.
If the expected rate of inflation is zero, the real interest rate must
be equal to the money (nominal) interest rate.
If a fiscal policy change is going to exert a stabilizing impact on the economy, it must
be timed correctly. Chap 11
absolute advantage
being able to produce a good using the fewest resources
Classical Economics
believes that market and resource prices are flexible and allow the economy to self-correct fairly quickly. Says that crowding out ruins fiscal policy. Politicians overuse expansionary policy.
Crowding out effect
The tendency of the additional borrowing accompanying larger budget deficits to increase interest rates and decrease private spending
a group of buyers and sellers of a particular good or service.
The term market always refers to
Ricardian Equivalence
The theory that raising taxes and running a budget deficit are essentially equivalent and will have no impact on consumption of Aggregate Demand.
Comparative Advantage
The total output of a group of individuals, an entire economy, or a group of nations will be greatest when the output of each good is produced by whoever has the lowest opportunity cost.
Opportunity Cost
The value of the BEST foregone alternative
What does GDP measure
The wealth of a nation Higher GDP -> Higher income
If future prices are expected to be higher
Then demand shifts to the right
Law of Supply
There is a direct relationship between the price of a good or service and the amount that suppliers are willing to produce. As price increases, quantity supplied increases.
demand pull theory
demand for goods and services exceeds existing supply
Just before Valentine's Day, the price of roses increases dramatically. This is because
demand increases while the supply of roses remains relatively constant. Chap 3
The value of a good
depends on many factors, including who uses it and under what circumstances.
If the dollar price of the English pound goes from $1.50 to $2.00, the dollar has
depreciated, and the English will find U.S. goods cheaper.
If the dollar price of the English pound goes from $1.50 to $2.00, the dollar has
depreciated, and the English will find U.S. goods cheaper. Chap 9
consumer surplus
difference between the maximum price consumers are willing and able to pay and what they actually pay
producer surplus
difference between the minimum price suppliers are willing and able to sell and what they actually sell it for
What counts in GDP? What does not count in GDP? Think of different examples.
final goods and services all produced within a country produced within a given time period
Who demands labor?
firms
Who supplies goods/services?
firms
countercyclical policy
fiscal policy used to counter business cycle (make booms smaller and contractions smaller)
business cycle
fluctuations of GDP either above or below potential level of GDP in the economy
The business cycle
fluctuations of GDP either above or below the potential level of GDP in the economy
anticipated change
foreseen by decision makers in time for them to make adjustments
If Sam Jackson voluntarily quits one job, possesses marketable skills, and expects to find a new job in a few weeks, then Mr. Jackson is considered
frictionally unemployed.
business cycle trough
lowest point in the business cycle (recession)
Within the Keynesian model, the multiplier effect tends to
magnify small changes in spending into much larger changes in output and employment
Within the Keynesian model, the multiplier effect tends to
magnify small changes in spending into much larger changes in output and employment.
cyclical unemployment
occurs when the economy is doing poorly, employment decreases in many sectors
During the last several decades the labor force participation rate
of women has increased substantially. Chap 8
A basic flaw in the infant-industry argument is that
once a tariff is granted, political pressure will likely prevent the withdrawal of the tariff even when the industry matures.
opportunity cost
one most highly valued thing you give up when you choose one option over another
self interest
one's own personal gain
normative economics (subjective)
opinion, not provable or disprovable
The highest valued alternative that must be given up in order to choose an action is called its
opportunity cost. Chap 1&2
aggregate supply, long run
our output capacity/potential
Productivity
output produced per worker
Once decision makers fully adjust to an increase in the general price level,
output will return to the full-employment level.
Within the Keynesian model, if the output of an economy is less than the full-employment level, then
output will tend to remain below full-employment capacity unless aggregate expenditures increase. Chap 11
Which of the following is not a component of the M1 money supply?
outstanding balances on credit cards. Chap 13
general partnership
partnership in which partners share equally both responsibility and liability
Transfer payments
payments from government accounts to individuals for programs, like Social Security, that do not involve a purchase of goods or services
inflation rate
percentage of change from one year to the next in inflation
Required Reserve Ratio
percentage of deposits that banks are required to hold as reserves.
unemployment rate
percentage of those able to work. economy works best when rate is 4-6%
Continuous rapid growth of the money supply relative to the growth of real output will most likely lead to
persistent inflation. Chap 14
In the Keynesian aggregate expenditure model, the equilibrium level of income is achieved when
planned aggregate expenditures equal total output. Chap 11
Economic data suggest that the size of government will be
positively related to economic growth at small levels of government but is negatively related to economic growth at large levels of government.
An increase in the long-run aggregate supply curve indicates that
potential real GDP has increased. Chap 10
interest rate
price borrowers pay for impatience; reward that savers earn for patience
If nominal GDP increased 2 percent during a year, while real GDP increased 4 percent, the
price level must have decreased approximately 2 percent compared to the prior year.
When economists say the quantity demanded of a product has increased, they mean the
price of the product has fallen, and consequently, consumers are buying more of it.
capital deepening
process of increasing the amount of capital per worker. One of the most impt. sources of growth in modern economies
Technology
processes a firm uses to turn inputs into goods and services
If new regulations make it illegal to sell older model electrical appliances, then
producers of new models that meet the regulations will see demand for their output rise.
non-market production
production that does not involve a market transaction (painting your house, mowing your lawn, taking care of your kids, etc.)
When output is less than the economy's long-run capacity, which of the following is most likely to occur?
reductions in real interest rates and real resource prices. Chap 10
The major overall purpose of the Federal Reserve System is to
regulate the money supply and, thereby, provide a monetary climate that is in the best interest of the economy.
In the context of aggregate supply, the short run is defined as the period during which
some prices are set by contracts and cannot be adjusted.
entrepreneur
someone who brings together the 3 resources (capital, labor, land) and produces something
What is an incentive?
something that causes people to behave in a certain way by changing the trade-offs they face
luxury
something that is an indulgence rather than a necessity
Middlemen, such as grocers, stockbrokers, and realtors
specialize in reducing transactions costs. Chap 1&2
What is comparative advantage?
the ability to produce a good or service at a lower opportunity cost than others
What is absolute advantage?
the ability to produce more of a good or service than others can with a given amount of resources
aggregate supply, short tun
relationship between the average price level and the level of real GDP, the sum total of all goods and services produced in the U.S. in a given year
Economists would say that the demand for tacos is
relatively elastic because there are many substitutes for tacos. Chap 3
Keynesian fiscal policy
reliance on government spending and taxes to influence irregular aggregate demand levels
surplus
situation in which quantity supplied is greater than quantity demanded; also known as excess supply
The larger the reserve requirement, the
smaller the potential deposit multiplier. Chap 13
The actual rate of unemployment will be greater than the natural rate of unemployment when
the actual output is less than the economy's potential output
People make decisions at the margin. Thus, when deciding whether to purchase a second car, they would compare
the additional benefits of the second car with the additional costs of the second car. Chap 1&2
The tax multiplier
the amount GDP decreases when government taxes increase by $1
The government spending multiplier
the amount by which GDP increases when government spending increases by $1
Marginal propensity to consume
the amount that consumption increases when disposable income increases by one-dollar
The velocity of money is
the average number of times one dollar is used to buy final goods and services during a year. Chap 14
Which of the following would be counted in the calculation of GDP?
the brokerage commission from the sale of 100 shares of Microsoft stock. Chap 7
horizontal merger
the combination of two or more firms competing in the same market with the same good or service
vertical merger
the combination of two or more firms involved in different stages of producing the same good or service
Marginal Cost
the cost of producing one more unit of a good
The consumer price index (CPI) and the GDP deflator are designed to measure the degree to which
the cost of purchasing a bundle of goods has changed over time. Chap 7
Government spending programs that create jobs are often popular because
the created jobs are highly visible, while the secondary effects of lost jobs in other areas, higher interest rates, and higher future taxes are less visible.
When economists say the demand for a product has decreased, they mean
the demand curve has shifted to the left.
The crowding-out effect suggests that
the demand stimulus effects of a budget deficit will be weak because the borrowing to finance the deficit will lead to higher interest rates. Chap 12
lassez faire
the doctrine that states that government generally should not intervene in the marketplace
If a reduction in government borrowing leads to lower real interest rates in the United States,
the dollar will depreciate in the foreign exchange market. Chap 12
If you win the lottery this would be great for you, but if everyone simultaneously won the lottery this wouldn't be nearly as good, why?
the fallacy of composition. Chap 1&2
search costs
the financial and opportunity costs consumers pay when searching for a good or service
If the GDP deflator in 2006 was 130 compared to a value of 100 during the 1996 base year, this would indicate that
the general level of prices during 2006 was 30 percent higher than during 1996
The three reasons why the aggregate demand curve slopes downward are
the real balance effect, the international substitution effect and the interest rate effect. Chap 9
The macroeconomy is said to be in long-run equilibrium only if
the resource, loanable funds, foreign exchange, and goods and services markets are all in equilibrium. Chap 9
Inflation rate
the size of the change in the overall price level i= (cpi this year ) -(cpi last year)/ (cpi last year)
physical capitol
the stock of equipment and structures that are used to produce goods and services
What is economics
the study of how people, individually and collectively, manage resources
The natural rate of unemployment equals
the sum of frictional and structural unemployment. Chap 8
Provide a precise definition of GDP.
the sum of the market values of all final goods and services produced within a country in a given period of time
Adam Smith's invisible hand principle stresses
the tendency of the competitive market process to direct self-interested individuals into activities that enhance the economic welfare of society.
What is purchasing power parity?
the theory that price levels in different countries should be the same when stated in a common currency
Potential GDP
the total amount of output a country could produce if all of its resources were fully engaged.
law of comparative advantage
the total output will be greatest when the output of each good is produced by the person with the lowest opportunity cost for producing that good
Government transfer payments
the transfer is made without any exchange of goods or services.Examples of certain transfer payments include welfare (financial aid), social security, and government making subsidies for certain businesses (firms).
When an economy is in a recession,
the unemployment rate will rise above its natural rate. Chap 10
The expression "There's no such thing as a free lunch" means
the use of resources to meet one need means that those resources can no longer be used to meet another need. Chap 1&2
Which of the following would be included in this year's GDP?
the value of a new domestic automobile, at its sale price. Chap 7
What is opportunity cost?
the value of what you have to give up in order to get something; the value of your next-best alternative
new classical economics
theory that focuses on free markets and the belief that the market if left alone, will self-correct. Strong believers in the business cycle.
quantity theory of money
theory that hypothesizes that a change in the money supply will cause a proportional change in the price level because velocity and real output are unaffected by the quantity of money
law of supply
there is a positive relationship between price and quantity supplied
law of demand
there is an inverse relationship between price and quantity demanded
Producers are willing to offer greater quantities for sale at higher prices because
they have the incentive to pay the increasing opportunity cost of resources necessary to attract them from alternative uses. Chap 3.
If domestic producers have a comparative advantage in producing a good
they will be able to compete effectively in a competitive world market.
When individuals and businesses are permitted to trade freely over a larger market area
they will be able to produce a larger output and consume a more diverse bundle of goods.
When individuals and businesses are permitted to trade freely over a larger market area,
they will be able to produce a larger output and consume a more diverse bundle of goods.
cooperative
to proceed with a given task; done what is told to do willingly
privatize
to sell to individuals state-run firms, which are then allowed to compete with one another in the marketplace
In a competitive market economy, a resource in short supply will be allocated
to those firms that can make the most profitable use of it
Keynes' definition of unemployment
too little aggregate demand
Keynes' definition of inflation
too much aggregate demand
Trade balance
trade deficit - a negative balance of trade; a greater amount of imports than exports trade surplus - a positive balance of trade; a greater amount of exports than imports
If the value of a nation's imports exceeds exports, the nation has a
trade deficit. Chap 9
oligopoly
two to four firms producing 70-80% of the output
labor force
unemployed + employed (only counts those 16+, non-institutionalized, and civilian)
If a country's population (age 16 and over) is 50 million, with 2 million unemployed and 23 million currently holding jobs, the
unemployment rate is 8.0 percent, and the labor force participation rate is 50 percent. Chap 8
supply shock
unexpected event that temporarily increases or decreases aggregate supply (natural disasters, bad weather, change in foreign oil prices, etc.)
unit of account (standard of value)
unit of measurement used by people to post prices and keep track of revenues and costs. Allows cost-benefit analysis.
If you were required to write a paper for your history class (or a report for your job) in which you were using dollar valued data across different years, you would
use a price index to remove the effects of inflation to have reliable data measuring changes in the real value of things. Chap 7
People respond to ___________________
Incentives
The price of an airline ticket from Denver to Washington, D.C. costs $600. A bus ticket costs $150. Traveling by plane takes 6 hours compared with 51 hours by bus. Other things constant, an individual would gain by choosing air travel if, and only if, his time were valued at more than
$10 per hour. Chap 1&2
Suppose the Fed purchases $10 million of U.S. securities from the public. If the reserve requirement is 10 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a:
$100 million increase in the money supply. Chap 13
Susan sells life insurance and is considering buying a $50,000 Mercedes for business purposes (thus, the expense reduces her taxable income). If Susan is in the 40 percent marginal tax bracket, how much after-tax income will she have to give up in order to enjoy the Mercedes?
$30,000. Chap 12
Suppose the Fed purchases $100 million of U.S. securities from the public. If the reserve requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a
$500 million increase in the money supply. Chap 13
monopoly
(economics) a market in which there are many buyers but only one seller, example-professional sports league
What is the Federal Open Market Committee (FOMC)?
- A committee of the Federal Reserve that established Fed policy with regard to the buying and selling of government securities- the primary mechanism used to control the money supply. - It is composed of the seven members of the Board of Governors and the twelve district bank presidents of the Fed.
Crowding-out Theory 1. Definition 2. Budget Deficits
- A reduction in private spending as a result of budget deficits financed by borrowing in the private loan-able funds market. - Budget Deficits lead to: 1. Higher interest rates 2. No impact on AD, output, or unemployment
What is Fiscal Policy and who is it conducted by?
- Changing taxes or government spending with the purpose of achieving macroeconomic goals. - Conducted by congress and the president.
New Classical Economists 1. Government Borrowing 2. Loan-able Funds Market
- Economy tends toward full employment - Government Borrowing - Shifts the timing of taxes, but not their magnitude - Interest payments -In the loan-able funds market - Demand increases (because of higher government borrowing) - Supply increases (because of more private saving)
Keynesian beliefs about: 1. Equilibrium 2. Resource Prices
- Equilibrium is present when the total spending in the economy equals total output. - Resource prices may never adjust to restore the economy toward full employment.
Crowding-out Theory 1. Expansionary Fiscal Policy 2. Rising Interest Rates
- Expansionary Fiscal Policy won't restore the economy to full employment - When interest rates rise, private investment is crowded out -Output of capital goods falls -Reduces long-run economic growth rates
What is the FDIC?
- Federal Deposit Insurance Corporation - A federally chartered corporation that insures the deposits held by commercial banks, savings and loans, and credit unions.
What is the difference between real and nominal GDP? How do you calculate each?
- GDP calculation in which goods and services are valued at current prices GDP calculation in which goods and services are valued at constant prices
Keynesian view of Fiscal Policy: Recession
- Government should run a deficit by increasing spending or by cutting taxes. - This will shift Aggregate Demand to right and restore full employment.
Keynesian view of Fiscal Policy: Expansian
- Government should run a surplus by decreasing spending of raising taxes. - This will shift Aggregate Demand to the left and fight inflation.
Automatic Stabilizers
- Help mitigate booms and busts. - Tend to lead to a budget deficit during a recession and a surplus during a boom, does not require a change in policy. - Examples: Unemployment Compensation, Corporate profit tax, Progressive income tax.
Supply-Side Economist 1. Laffer Curve
- If marginal tax rates are very high, a cut could increase government revenue. (increase tax revenues)
Supply-Side Economists 1. Lower Tax Rates 2. High Tax Rates
- Lower tax rates - Increase the incentive to work and invest - Investment causes technological progress and capital formation - This increases long-run aggregate supply *Policy for Long-Run growth* - Higher tax rates - Reduce incentive to be productive - Decrease investment - Encourage purchases of fancy tax-deductible stuff
Restrictive Monetary Policy: 1. Nominal Interest Rate 2. Real Interest Rate 3. Aggregate Demand
- Nominal Interest Rate will rise - Real Interest Rate will rise - AD shifts left (assuming policy was unanticipated) -Price level falls -Real GDP, output, falls
Multiplier Principle
- Small changes in spending have a big impact - One individual's expenditures become the income of another, small disruptions quickly become recessions. - Indicates that spending is always good.
Keynesian argued that cutting taxes and increasing government spending would have the same expansionary affect on Aggregate Demand. What to supply-side economists argue and the reasoning why?
- Supply-side economist disagree. They argue that a tax cut is far superior to an increase in government spending. - The reason is that high tax rates reduce an individual's incentive to work hard, be productive and increase GDP.
Marginal Propensity to Consume (MPC)
- The proportion of additional income that households choose to spend on consumption. - Indicates how much additional income will be created by $1 of additional spending. - Multiplier= 1/(1-MPC)
According to New Classical Economists, increasing government spending by running budget deficits won't shift Aggregate Demand. Why is this true and what is the result?
- This is because consumers know that the deficits will eventually have to be paid off. - When the government increases borrowing, consumers will save to pay off future taxes (reducing consumer spending). - The result will be no change in interest rates and no shift of the Aggregate Demand curve.
According to the Crowding-out Theory, increasing government spending by running a budget deficit won't shift Aggregate Demand. Why is this true and what is the result?
- This is because the spending will be financed by government borrowing which will shift the demand for loan-able funds to the right and drive up interest rates. - The result will be a decline in consumer spending, business spending, and net exports, offsetting any change that would have occurred from increasing government spending.
Classical economist beliefs about: 1. Recessions 2. Equilibrium 3. Resource Prices
- Thought recovery from recessions would occur without fiscal policy and happen quickly. - Equilibrium is present when the expected price level is the actual price level. - Resource prices will adjust to restore full employment.
Use the table below to answer the following question(s). Table 7-14 Personal consumption expenditures $900 Personal taxes 180 Government consumption and gross investment 300 Interest income 60 Exports 40 Imports 75 Depreciation 60 Gross investment 200 Refer to Table 7-14. What is this country's net exports?
-35. Chap 7
A demand shift is when there is a change in:
-Consumer income -The number of consumers -Tastes -Demographics -Price of a related good -Expectations
recession
2 consecutive quarters (6 monhts) of a decline in GDP
Economists now agree: -Monetary policy impacts in short run versus long run
-In the short run, monetary policy impacts real GDP and inflation (price level) -In the long run, monetary policy will only impact inflation (price level)
What is opportunity costs?
-It is what is given up -The cost of best alternative
Expansionary Monetary Policy: 1. Nominal Interest rate 2. Real Interest Rate 3. Aggregate Demand Shifts
-Nominal interest rate will fall -The real interest rate will fall - AD shifts right (assuming policy was unanticipated) -Price level rises -Real GDP, output, rises
Scarcity means:
-Not freely available in nature -It has a price -Cannot produce all goods and services that people want
A supply curve shift happens when there is a change in:
-Resource Prices (Price of inputs) -Taxes -Technology -Political disruptions and nature
What is unemployment?
-Seeking and available for work -IN the labor force
AD/AS model
-Short run equilibrium -Long run equilibrium
What do banks do and what do their systems include?
-They match borrowers with savers and their profitable projects promote economic growth -Banking system includes saving and loan associations, credit unions, commercial banks.
Use the table below to answer the following question(s). Table 7-14 Personal consumption expenditures $900 Personal taxes 180 Government consumption and gross investment 300 Interest income 60 Exports 40 Imports 75 Depreciation 60 Gross investment 200 Refer to Table 7-14. What is this country's gross domestic product?
1,365. Chap 7
LRAS Shifters (3)
1. Change in resource base 2. Change in level of technology 3. Change in institutional arrangements that affect productivity
SRAS Shifters (6)
1. Change in resource base 2. Change in level of technology 3. Change in institutional arrangements that affect productivity 4. Changes in resource prices 5. Changes in the expected rate of inflation 6. Supply shocks
AD Shifters (6)
1. Changes in Real Wealth 2. Changes in the real interest rate (decrease will shift right bc more ppl will consume; increase rate shifts left) 3. Changes in the expectations of businesses and households about the future (optimism shifts right) 4. Changes in the expected rate of inflation (expected inflation in future decrease shifts left current) 5. Changes in income abroad (FC increases shifts right bc ppl want more) 6. Changes in exchange rates ($ depreciates shifts right, foreigners want to invest)
Business Cycle: Boom 1. GDP 2. Resource Demand 3. Actual Unemployment 4. Actual Employment 5. Profits
1. Higher than potential 2. High 3. Lower than potential 4. Higher than potential 5. Higher than potential
Major sources of economic growth
1. Investment in physical and human capital (Entrepreneurship) 2. Technological advancement 3. The institutional environment Population growth, abundance of natural resources, receiving foreign aid.
velocity of money
average number of times a dollar is spent during a year
Business Cycle: Bust 1. GDP 2. Resource Demand 3. Actual Unemployment 4. Actual Employment 5. Profits
1. Lower than potential 2. Weak 3. Higher than potential 4. Lower than potential 5. Lower than potential
What are the 3 functions of money?
1. Medium of Exchange 2. Store of Value 3. Unit of Account
Uses of Money (3)
1. Medium of exchange 2. Store of value 3. Unit of account
Five types of unemployment {definition and examples}
1. Natural rate of unemployment - the normal level of unemployment that persists in an economy in the long run (equilibrium rate of unemployment) 2. Frictional Unemployment - unemployment caused by workers who are changing location, job, or career 3. Structural Unemployment - unemployment that results from a mis- match between the skills workers can offer and the skills demanded 4. Real-wage or Classical unemployment - unemployment that results from wages being higher than the market-clearing level 5. Cyclical unemployment - unemployment caused by short-term economic fluctuations
Restrictive Monetary Policy: 1. Reserve Requirements 2. Open Market Operations 3. Extended Loans 4. Pay interest on excess bank reserves
1. Raise reserve requirements 2. Sell bonds and other assets. This will raise the federal funds rate 3. Fewer loans. Raising (discount rate) interest charged 4. Increase interest payments
Expansionary Monetary Policy: 1. Reserve Requirements 2. Open Market Operations 3. Extended Loans 4. Pay Interest on excess bank reserves
1. Reduce reserve requirements 2. Buy bonds and other assets. This will lower the federal funds rate 3. More loans. Lower (discount rate) interest charged 4. Reduce interest payments
What factors increase supply (cause a shift to the right)?
1. Technology Improvement- Increase Supply 2. Input Prices Decrease- Increase in Supply 3. Prices of Alternatives Decrease- Increase in Supply 4. Number of Firms Increase- Increase in Supply 5. Expected future Prices Lower- Increase in supply
How the Fed affects the money supply (Monetary Policy)
1. open market operations 2. reserve requirements 3. extension of loans 4. interest paid on excess bank reserves
Components of Economic Freedom of the World (EFWI)
1. provide secure protection of privately owned property, 2. provide evenhanded enforcement of contracts, 3. provide a stable monetary environment, 4. keep taxes low, 5. refrain from creating barriers to both domestic and 5. international trade, and, 6. rely more fully on markets rather than governments to allocate goods and resources.
If the Consumer Price Index in 2008 was 150 and the CPI in 2009 was 165, the rate of inflation between 2008 and 2009 would be
10 percent. Chap 7
Use the data below to answer the following question(s). Table 8-3 Population 200 million Number employed 120 million Number unemployed 30 million Refer to Table 8-3. What is the labor force of the economy?
150 million. Chap 8
Use the data below to answer the following question(s). Table 8-3 Population 200 million Number employed 120 million Number unemployed 30 million Refer to Table 8-3. What is the unemployment rate of the economy?
20 percent. Chap 8
During this century, the growth rate of real GDP in the United States has averaged approximately
3 percent. Chap 8
Average growth rate
3%
Natural rate of unemployment percent
5%
natural rate of unemployment
5% are unemployed
A reserve requirement of 20 percent implies a potential money deposit multiplier of
5. Chap 13
If the consumer price index (CPI) was 125 at year-end of 2008 and 132.5 at year-end 2009, inflation during 2009 was
6.0 percent. Chap 8
Suppose that the consumer price index at year-end 2008 was 140 and by year-end 2009 had risen to 150. What was the inflation rate during 2009?
7.1 percent. Chap 8
Rule of 70
70 / growth rate = approximate number of years required for the level of income to double.
Use the data below to answer the following question(s). Table 8-3 Population 200 million Number employed 120 million Number unemployed 30 million Refer to Table 8-3. What is the labor force participation rate of the economy?
75 percent. Chap 8
Full employment percent
95%
real interest rates
= nominal interest rates - inflation
nominal interest rates
= real interest rates + inflation
Which of the following would increase U.S. GDP?
A Japanese automobile company produces cars within the U.S. Chap 7
Why is the PPF sometimes bowed out?
A bowed out PPF would mean that as you produce more of one product you are constantly giving up a larger proportion of another.
According to Keynesian theory, which of the following would most likely stimulate an expansion in real output if the economy were in a recession?
A budget deficit
sole proprietorship
A business owned and managed by a single individual, least regulated type of business. Negative-lack of permanence
What is a price taker?
A buyer or seller who cannot affect the market price.
bonds
A certificate issued by a government or private company which promises to pay back with interest the money borrowed from the buyer of the certificate. low risk
A change in what variable causes a movement along the supply curve?
A change in the price of a good (supply curve)
A change in what variable causes a movement along the demand curve?
A change in the price of a good.
interest
A charge made by a lender for the use of money. Largest source of income for banks
What is a liquid asset?
An asset that can be easily converted to money without loss of value
decrease, which is a shift to the left of the demand curve.
A decrease in the expected future price of a good will cause the current demand for the good to
What are explicit costs?
A firm's monetary payments made for the use of resources owned by others A firm's monetary payments to those who supply labor services, materials, fuel, and transportation services.
What is a standardized good?
A good for which any two units have the same features and are interchangeable.
What is a supply curve?
A graph of the information in the supply schedule.
What is a demand curve?
A graph showing how the demand for a commodity or service varies with changes in its price.
Production Possibilities frontier
A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good
Production Possibilities Curve
A graph that describes the maximum amount of one good that can be produced for every possible level of production of the other good.
What is a market?
A group of buyers and sellers who trade a particular good or service.
Suppose the economy is in long-run equilibrium at the level of potential output. What will be the long-run effect of an expansionary monetary policy?
A higher price level
Quota
A limit on the number of foreign goods that are imported
What is the Federal Funds Market?
A loanable funds market in which banks seeking additional reserves borrow short-term funds (generally for seven days or less) from banks with excess reserves
What is a competitive market?
A market in which fully informed, price-taking buyers and sellers easily trade a standardized good or service.
natural monopoly
A market that runs most efficiently when one large firm supplies all of the output
Nominal GDP
A measure of GDP using prices from that year/quarter
What is currency?
A medium of exchange made of metal or paper
Higher future taxes and interest rates will be required to finance the larger debt and this will weaken the recovery
According to non-Keynesians, how will an increase in government spending financed by borrowing during a recession affect recovery?
Rent Seeking
Actions taken by individuals and groups in order to use the political process to take the wealth of others.
Real GDP
Adjusts for inflation in order to compare GDP across different year/quarters
Which of the following attributes of trade explain why it is important for economic prosperity?
All of the above. Chap 1&2
Private rights
Allow the right of exclusive use, the right to protect, and the right to transfer or sell the property
If the general level of prices is lower than business decision makers anticipated when they entered into long-term contracts for raw materials and other resources, which of the following is most likely to occur?
An actual rate of unemployment that is greater than the natural rate of unemployment. Chap 10
Within the framework of the AS/AD model, which of the following is a true statement regarding short-run aggregate supply?
An increase in prices temporarily improves profit margins because important components of costs are fixed in the short run. Chap 9
Which one of the following is a positive economic statement?
An increase in the minimum wage will reduce employment. Chap 1&2
Which of the following will most likely occur as the result of an unanticipated increase in aggregate demand that pushes output beyond long-run capacity?
An increase in the real interest rate.
Which of the following would reduce the price of DVD players and increase the quantity sold?
An increase in the supply of DVD players.
What is a Central Bank?
An institution designed to oversee the banking system and regulate the amount of money in the economy. -U.S. Central Bank is the Fed.
Special Interest (Logrolling + Pork-barrel legislation)
An issue that generates substantial benefits for a small group by generating minimal costs to a large group. (in aggregate, losses may exceed benefits). Logrolling: trading votes Pork-barrel: local areas > federal expenses
Which is most likely to cause a temporary spurt in the growth of GDP that cannot be maintained in the long run?
An unanticipated increase in aggregate demand. Chap 10
Excess reserves
Any cash held by banks above the legal requirement (10%)
Define the word "Money."
Anything that is generally accepted as a form of payment for goods and services.
What are normal goods?
Are determined by an increase in income causes an increase in demand
Law of supply
As price increase, producers are willing to make more of a good
Law of demand
As price rises, consumers will buy less and as price falls, consumers will buy more (Inverse relationship)
Suppose people gain more confidence in the banking system so they hold relatively less currency and deposit more into checking accounts. What will happen to bank reserves and the money supply?
Bank reserves will increase and the money supply will eventually increase
Give examples of Depository Institutions.
Banks, savings and loan associations and credit unions are examples.
Why are most macroeconomic variables measured in real terms?
Because it assess performance of the economy as a whole.
GDP is used to measure output of a nation because?
Because it is the best available measure value of final goods and services.
Why do we use market prices to measure GDP?
Because it measures the VALUE to the buyer.
rational if Libby values sleep more highly than the benefit she expects to receive from attending the class.
Because of a late night out with friends, Libby decided to sleep in rather than attend her 8 a.m. economics class. According to economic analysis, her choice was
There is no such thing as a free lunch
Because of scarcity, there will always be an opportunity cost
Are certain items not accurately counted in GDP? Does this matter?
Because the population of the countries are of different sizes. It matters because any country with the same GDP as the U. S. can have a greater or lower population
Why is Fiat money valuable?
Because we trust it's value and it is scarce.
Why would it be valid to say that sometimes the official inflation rate will overstate inflation from your point of view?
Because with CPI, it overstates inflation due to substitution bias. Its hard to measure quality change, new products, and outlet store bias
municipal bonds
Bonds issued by state and local governments
savings bonds
Bonds issued by the federal government as a way of borrowing money; they are purchased at half the face value and increase every 6 months until full face value is reached
Give an example of a Liquid asset
Bonds, Currency, and Checking accounts
Which of the following is true regarding an unanticipated increase in inflation?
Borrowers will be better off and lenders will be worse off. Chap 9
(I) The height of the demand curve for a commodity indicates the maximum amount the consumer would be willing to pay for each unit of the good. (II) The height of the supply curve for a commodity indicates the minimum price the seller would accept for each unit of the good.
Both I and II are true. Chap 3
(I) If long-run equilibrium is present in the goods and services market, the current price level will equal the price level buyers and sellers anticipated. (II) When an economy is in long-run equilibrium, the actual rate of unemployment will equal the natural rate of unemployment.
Both I and II are true. Chap 9
If the Fed lends to member banks, what happens to reserves and the money supply?
Both increase
In which case is the political process most likely to result in the acceptance of efficient projects and rejection of inefficient projects?
Both the benefits and costs are widespread among voters.
New Classical Economists 1. Budget Deficits lead to what?
Budget deficits will lead to: - No change in interest rates - No impact on Aggregate Demand, output, or unemployment
Three types of investment
Business Fixed- businesses' spending on equipment and structures for use in production. Residential investment: purchases of new housing units (either by occupants or landlords). Inventory investment:the value of the change in inventories of finished goods, materials and supplies, and work in progress.
What are Depository Institutions?
Businesses that accept checking and savings deposits and use a portion of them to extend loans and make investments.
Which of the following would a Keynesian economist be most likely to stress?
Businesses will not produce goods and services if they do not think people will buy them. Chap 11
If the FED wants to increase the money supply it will
Buy bonds
What are Open Market Operations?
Buying and selling of U.S. securities and other financial assets in the open market by the Fed.
What factors increase demand (cause a shift to the right)?
Change in population, preferences, expectations, or related goods.
When the Fed changes the money supply, the nominal interest rate (changes, doesn't change)
Changes
Supply shocks - impact in the short run and long run
Changes in production, independent of spending change LRAS: technology, capital, labor, education, natural resources
What can cause a change in supply
Changes in resource prices Changes in technology Changes in tax Political unrest and weather
Demand shocks - impact in the short run and long run
Changes in spending
Largest component of GDP
Consumption
The consumption function
Consumption is a function of current income; C = 200 + 0.75YD
The period of declining growth in real GDP between the peak of the business cycle and the trough is called the
Contractionary phase. Chap 8
Primary purpose of the FED
Control the money supply in order to maintain stable prices and achieve economic growth
What is equilibrium?
Convergence of supply with demand happens at the point where the demand curve intersects the supply curve.
What's the difference between the standard of living and the cost of living?
Cost of living is like how much a dollar is worth vs. with standard living is when one can truly be happy with their income
Opportunity Cost
Cost of the next best alternative use of money, time, or resources when one choice is made rather than another, can be examined by using a production possibilities graph
Keynesian Economics
Counter-cyclical policy: Expansionary / restrictive policies to pull out of recession / expansion bc market is inflexible.
The number of cattle slaughtered every year for meat far exceeds the number of elephants slaughtered every year for their ivory. Despite this, cows can be found everywhere while elephants are on the verge of extinction in some countries. Which of the following best explains this difference?
Cows can be privately owned while in many countries elephants can not.
Give an example of Medium of Exchange.
Currency and Checking Accounts
M1 money supply
Currency in circulation, checkable deposits, and traveler's checks
Starting from long-run equilibrium at point A, which of the following points would occur immediately following an unanticipated decrease in stock prices?
D. chap 10
Which of the following is true?
Decision makers are generally able to anticipate slow steady rates of inflation with a fairly high degree of accuracy. Chap 8
Which of the following best expresses the central idea of countercyclical fiscal policy?
Deficits are planned during economic recessions, and surpluses are utilized to restrain expansionary periods.
Minimum wages impact on quantity of labor demanded and supplied
Definition - the lowest wage that a firm is legally allowed to pay it's workers *Stops wage rates from falling *If minimum wage is below equilibrium unemployment would stay the same (Non-binding minimum wage)
Efficiency wages impact on quantity of labor demanded and supplied
Definition - wages that are deliberately set above the market rate to increase productivity
GDP deflator
Deflator = (nominal GDP/ real GDP in base year prices)x100
When price and quantity move in the same direction
Demand has shifted
Inelastic
Describes demand that is not very sensitive to a change in price
What are inferior goods?
Determined when as income increases, demand decreases.
Which of the following has resulted from the North American Free Trade Agreement (NAFTA)?
Domestic producers in the United States, Canada, and Mexico have free access to larger markets.
Demand of the money graph
Downward sloping; opportunity cost of holding money is the interest you are giving up
Keynesian economists believe that resource prices are:
Downward sticky and the economy will very slowly correct itself, if it ever does.
the output of the economy will exceed its long-run potential output.
During an expansionary period,
Business cycle
Economic fluctuations that occur in industrialized nation
Real variable
Economic variable expressed in constant or physical monetary units.
Effects of International Trade
Economies of scale + more competitive markets. Lower prices (and more domestic consumption) for imported products. Higher prices (and less domestic consumption) for exported products.
How do economist believe the Fed helped cause the housing crisis of 2008?
Economists believe that the Fed helped by keeping interest rates low and making credit cheap
Other things are assumed to be constant.
Economists use the term ceteris paribus to indicate which of the following?
What are some old ideas of monetary policy?
Economists used to think that monetary policy could impact inflation, but would not influence real GDP. *This idea is false and outdated!*
If you were a government official that wanted to raise the equilibrium price of milk, which of the following actions would you take?
Encourage farmers to produce less milk.
EEOC
Enforces laws to prevent unfair treatment on the job due to sex, race, color, religion, national origin, disability, or age.
Which of the following is a driving force underlying economic growth?
Entrepreneurial discovery and production of improved products.
What is the M2 Money Supply?
Equal to the M1 plus savings deposits, time deposits (accounts of less than $100,000) held in depository institutions, and money market mutual fund shares.
Labor market equilibrium
Equilibrium in the labor market requires that the marginal revenue product of labor is equal to the wage rate, and that MPL/PL=MPK/PK
A freeze in Florida devastates the orange crop at the same time a new study is released showing the health benefits of vitamin C (leading consumers to want to buy more orange juice). How will the equilibrium price and quantity of orange juice change in response to the combination of these two events?
Equilibrium price will increase, the effect on quantity is ambiguous. Chap 3
Suppose demand decreases and supply increases. Which of the following will happen?
Equilibrium quantity will rise, fall, or stay the same while equilibrium price will decrease.
True or False: The demand for money is the same as the demand for wealth.
FALSE
A positive statement is based on ___
Fact and can be proven
Vladimir Lenin
Founder of the Russian Communist Party, this man led the November Revolution in 1917 which established a revolutionary soviet government based on a union of workers, peasants, and soldiers.
What is the law of supply?
Fundamental characteristic of supply which states that, all else equal, quantity supplied rises as price rises.
real GDP
GDP adjusted for changes in the price level (taking inflation out)
Real GDP
GDP calculation in which goods and services are valued at constant prices
Nominal GDP
GDP calculation in which goods and services are valued at current prices
nominal GDP
GDP expressed at current prices
Value added
GDP is calculated as the sum of the value added to good and services in production across all productive units in the economy. Value Added = Sum of Goods and Services produced minus value of all intermediate goods used in production of such good and services.
Public Good
Goods and services that government supplies to its citizens that can be used by many people at one time.
Which of the following is not a problem or shortcoming of GDP?
Goods produced in one period that are sold in the following period fail to get counted in any period. Chap 7
What are complements?
Goods that are consumed together, so that purchasing one will make a consumer more likely to purchase the other.
What are substitute goods?
Goods that serve similar-enough purposes that a consumer might purchase one in place of the other.
Crusoe should specialize in producing good X and Friday in producing good Y; trade should occur to maximize joint consumption.
If Crusoe and Friday want to maximize their consumption possibilities,
The GDP of the United States because that is where it was built
If Honda (a Japan-based firm) produces a car in Ohio and exports it to Japan, in which country's GDP will the car be counted?
their total output can be expanded if Susan specializes in waxing and Kim in washing
If Kim can wash 10 cars or wax 2 cars during a day, and Susan can wash 8 cars or wax 2 cars during a day, then according to the law of comparative advantage,
higher resource prices and a decrease in SRAS
If an unanticipated increase in aggregate demand results in an output beyond the economy's long-run capacity, long-run equilibrium will eventually be restored by
there will be net capital inflow, so American assets bought by foreigners are greater than foreign assets bought by Americans.
If net exports are negative, then
The immediate effect of a member bank's sale of U.S. government securities to the Fed is
If the Fed injects additional reserves into the banking system, why will banks generally want to expand their loans and investments?
depreciated, and the English will find U.S. goods cheaper.
If the dollar price of the English pound goes from $1.50 to $2.00, the dollar has
The equilibrium quantity will increase.
If there is an increase in both the supply and demand for a good, which of the following will definitely occur?
appreciated relative to the peso. Other things the same, the appreciation would make you more likely to travel to Mexico.
If you go to the bank and notice that a dollar buys more Mexican pesos than it used to, then the dollar has
Marginal product of labor
In economics, the marginal product of labor (MPL) is the change in output that results from employing an added unit of labor. Formula - MPL= change in output/ change in labor
What is specialization?
In economics, the term specialization refers to people, companies or countries focusing on providing a single good or service, instead of a range of different goods or goods and services in a particular area as opposed to a large one so that they can increase their efficiency and profit.
Short run vs. long run equilibrium {what is the difference?}
In macroeconomics, the long run is the period when the general price level, contractual wage rates, and expectations adjust fully to the state of the economy, in contrast to the short run when these variables may not fully adjust
Are wages sticky?
In short run (contracts and wages adjust slowly)
Which one of the following is a major difference between market and collective action through government?
In the market sector, there is generally a one-to-one link between payment and consumption; this link is often absent in the government sector.
Which of the following accurately indicates the relationship between the short-run and long-run aggregate supply curves?
In the short run, aggregate supply is sloped upward to the right, and in the long run, it is vertical. Chap 9
Both the benefits and costs are widespread among voters.
In which case is the political process most likely to result in the acceptance of efficient projects and rejection of inefficient projects?
The program provides substantial benefits to a small interest group, and the costs are widespread among voters.
In which of the following situations is representative democracy most likely to lead to the adoption of an inefficient government program?
Which of the following is a danger of high rates of inflation?
Inflation will encourage people to spend less time producing and more time trying to protect the value of their assets. Chap 8
With time, which one of the following strategies would most likely result in an outward shift in the production possibilities curve of an economy?
Instituting a tax policy encouraging investment at the expense of consumption
What are Money Market Mutual Funds?
Interest earning accounts that pool depositors funds and invest them in highly liquid short-term securities. Because these securities can be quickly converted to cash, depositors are permitted to write checks (which reduce their shareholdings) against their accounts.
Key drivers of the self correcting mechanism
Interest rates and resource prices
What are Other checkable deposits?
Interest-earning deposits that are also available for checking
The government borrows money by
Issuing bonds
What is Fractional Reserve Banking?
It allows banks to hold less than 100% of their loans against deposits. -This increases the money supply
What is Restrictive Monetary Policy?
It is decreasing monetary policy.
What is Expansionary Monetary Policy?
It is increasing the monetary policy.
Which of the following is true about public choice analysis?
It is the study of the decision making of individual actors (such as voters, politicians, and bureaucrats) in the public sector.
What does "credit" mean?
It means funds are acquired by borrowing. -Credit and Credit cards are never money.
When the Federal Reserve System wants to increase the money supply, what does it typically do?
It purchases U.S. government securities
Which of the following is true regarding the concept of full employment?
It reflects the "shopping" of employees looking for employment and of employers seeking to hire workers.
Why is GDP not a perfect measure of welfare?
It treats a dollar spent on candy bars the same as a dollar spent on education
If time correctly, restrictive monetary policy will do what during full employment or a recession?
It will cause a recession or make the recession worse.
What is the law of demand?
Law that states that as the price of a good falls, the quantity demanded will rise, holding all other factors constant.
If the Fed injects additional reserves into the banking system, why will banks generally want to expand their loans and investments?
Loans and investments generally earn more interest income for the banks than excess reserves.
Countries will trade away goods in which they are a __ opportunity cost producer and trade for goods in which they are a __ opportunity cost produce
Low, High
What are the results of an unanticipated decrease in AD (recession)
Lower interest rates and Lower price levels
M2
M1 + savings deposits + time deposits (less than $100,000) + money market mutual funds less liquid, broader definition
equation of exchange
MV = PY (or MV = PQ) where M is the money supply, V is velocity of money, P is the average price level and Y or Q is the real output of goods and services produced in an economy. MV equals total spending. PQ equals nominal GDP and also Total Revenue.
Individuals think on the ___
Margin, meaning an individual thinks about the additional (marginal) benefit vs. the additional (marginal) cost before making a decision
Factors that affect investment spending
Marginal product of capital (Influenced by technology) Price of capital Price level (of output) Buy new capital if MB > MC Interest rates Confidence level of the firms Taxes
What is Gross Domestic Product (GDP)?
Market prices of final goods and services produced within a country in a given year
Are business cycles predictable?
No, varying lengths of time.
How to calculate Nominal GDP
Nominal GDP in year X = prices in year X times quantities in year X
Which of the following is true in an economy with persistent inflation?
Nominal GDP will grow faster than real GDP.
What are demand deposits?
Non-interest earning deposits that can be either withdrawn of made payable on demand to a third party. Like currency, these deposits are widely used as means of payment
Which of the following would be officially classified as unemployed?
None of the above would be officially classified as unemployed. Chap 8
scarce good
Not abundant in nature so it is priced
What are final goods?
Not intermediate goods-goods purchased for resale or for use in producing another good and service.
Not being in the labor force means:
Not seeking work -example: Retired, Students, Homemakers
Unemployed
Not working, but is looking for a job or waiting to begin/return to a job
representative money
Objects that have value because the holder can exchange them for something else of value. Ex- IOU note
OSHA
Occupational Safety and Health Administration, a government agency in the Department of Labor to maintain a safe and healthy work environment
A normative statement is based on ___
Opinion ( "Should be" or ''Ought to be")
How can we use the PPF to measure opportunity cost?
Opportunity cost is represented graphically by the slope of the production possibilities frontier.
acceptance of productive activities and rejection of unproductive activities
Other things constant, if both the benefits and costs of a public-sector activity are widespread among voters, the political process will generally result in the
Factors that affect net export spending
Our income affects imports Foreign income affects exports Interest rates
Inflation from Price Index (PI, CPI, GDP deflator) ****
PI = Cost of bundle in current year / Cost of same bundle in base year CPI = Compares the cost of a typical market basket in a specific period to the cost of the same basket in a different period. GDP deflator: reveals the cost during the current period of purchasing the items included in GDP relative to the cost during the base year.
Labor force
People who are in the working-age population and are either employed or unemployed; people who are currently working or who are actually trying to find a job
Discouraged workers
People who have looked or work in the past year but have given up looking because of the condition of the labor market
Why is economic growth important? (Growth in real capita GDP)
Per capita GDP is a broad indicator of general living standards.
Economic freedom is a method of organizing economic activity characterized by
Personal choice Voluntary exchange Competition Property rights
Which of the following most accurately indicates the political incentive to spend and/or tax?
Politicians are rewarded for providing programs that benefit their constituents and punished for raising taxes.
Which of the following will make it difficult to institute fiscal policy in a stabilizing manner?
Politicians will find budget deficits attractive during a recession, but they will be reluctant to run budget surpluses during an expansion. Chap 12
Which of the following most clearly distinguishes between positive and normative economics?
Positive economics is the study of the facts; normative economics is concerned with what ought to be
What is the relationship between real GDP and potential GDP?
Potential GDP is a measure of the perfect world where every worker is matched with the perfect job. Real GDP is a measure of the real world and its financial status.
Which of the following is true?
Poverty implies that some basic level of need has not been attained. Chap 1&2
When there is a shift in both curves __
Price can't be determined
The Equation of Exchange
Price level*Real GDP = Money Supply*Velocity of Money PY=MV P~ Price Level Y~ Real GDP M~ Money Supply V~ Velocity of Money PY~ Nominal GDP *Assume velocity of money is constant*
If the supply of a good increased, what would be the effect on the equilibrium price and quantity?
Price would decrease and quantity would increase. Chap 3
Suppose the dollar value of GDP increased approximately 2 percent between October 2007 and August 2008, but real GDP fell 1 percent during the period. Which of the following best explains these data?
Prices increased approximately 3 percent during period.
collective bargaining
Process by which a union representing a group of workers negotiates with management for a contract
Intermediate good
Products that are purchased for resale or further processing or manufacturing
Keynesians and non-Keynesians would largely agree on which one of the following statements?
Proper timing of discretionary fiscal policy is difficult to achieve. Chap 12
rent seeking will be less attractive if the nation's legal (or constitutional) structure makes it difficult to use the political process to take the property or income of others.
Public choice analysis indicates
Competition
Purpose is to act as a regulating force in the marketplace
Individuals choose ___
Purposefully, meaning people are rational
Which of the following occurs when a shortage occurs in the market for a good?
Quantity demanded exceeds quantity supplied and the market mechanism pushes the price up, which in turn encourages more production and less consumption.
What does this equation mean? Y/POP = (Y/L) x (L/POP)
RGDP per capita = average labor productivity x share of population employed
What is the Equation of Exchange written in terms of growth rates?
Rate of inflation + Growth of real output = Growth rate of money supply + Growth rate of velocity
New Classical Economics
Ricardian Equivalence: Budget deficits wont stimulate consumption or AD bc ppl will save for expected tax increase. Paradox of thrift: total savings decrease even if ppl increase savings (run out of jobs, etc)
How will a high level of saving impact long-run economic growth?
Saving provides the source of investment capital that allows businesses to expand production and the economy to grow. Chap 12
low risk bonds
Savings bonds, municipal bonds, treasury bonds
Which of the following are leakages from the circular flow of income?
Savings, taxes, and imports. Chap 9
Time is __
Scarce
Economics is the study of how individuals make choices that are subject to constraints such as ___
Scarcity
Invisible hand
Self-interested individuals will produce what is valued by society the most without the direction of a central authority
If the FED wants to decrease the money supply it will
Sell bonds
To finance a budget deficit the government would
Sell bonds (borrow money)
Change in demand
Shift of the entire curve
Keynesian view
Since prices, wages, and interest rates wouldn't change quickly, then the government needed to step in to boost output during a recession and reduce output during a boom
As methods of economic organization, the market and the public sector are similar in which of the following ways?
Someone must cover the cost associated with the provision of scarce goods in both sectors.
Steve gains $1,000 of value, and Jennifer gains $3,000 of value.
Steve values his Honda Accord at $10,000, and Jennifer values it at $14,000. If Jennifer buys it from Steve for $11,000, which of the following is true?
A shift to a more expansionary monetary policy will
Stimulate output and employment, but only after a time lag that is generally long and variable
When price and quantity move in opposite directions
Supply has shifted
The demand for loanable funds will increase, and the interest rate will rise.
Suppose business decision makers become more optimistic about future economic conditions and desire additional funds to expand their plant capacity. What is the likely effect on the loanable funds market?
Equilibrium quantity will rise, fall, or stay the same and equilibrium price will increase.
Suppose demand increases and supply decreases. Which of the following will happen?
Why did the monetary base increase rapidly during the economic crisis of 2008?
The Fed increased both its purchase of assets and quantity of loans extended. Chap 13
Why did the monetary base increase rapidly during the economic crisis of 2008?
The Fed purchased more assets and extended more loans. Chap 13
Which of the following indicates the primary mechanism by which the money supply expands?
The Fed purchases additional bonds, which increases the reserves available to the banking system
What is marginal benefit?
The amount by which an additional unit of an activity increases its total benefit
What is marginal cost?
The amount by which an additional unit of an activity increases its total cost
Money Supply
The amount of money in the economy, determined by the Fed. Vertical.
What is the Velocity of Money?
The average number of times a dollar is used to purchase final goods and service during a year.
The economy is in short run equilibrium when
The SRAS curve intersects the AD curve
The economy is in long run equilibrium when
The SRAS, LRAS, and AD all intersect
divisibility
The ability for a number to be divided by another number without a remainder.
Actual GDP
The actual output that occurs in the nation
Which of the following is necessarily true when an economy is in long-run equilibrium?
The actual rate of unemployment equals the natural rate of unemployment.
the actual output is less than the economy's potential output.
The actual rate of unemployment will be greater than the natural rate of unemployment when
Which of the following is true if the actual price level is lower than the expected price level reflected in long-term contracts?
The actual rate of unemployment will exceed the natural rate of unemployment.
What are Excess Reserves?
The actual reserves that exceed the legal requirement.
Open market operations
The buying and selling of bonds
The dollar value of GDP increased approximately 4 percent during the year, but real GDP fell 2 percent. Which of the following best explains this data?
The inflation rate was approximately 6 percent during the year. Chap 7
Federal funds rate
The interest rate at which banks lend to other banks
What is the Federal Funds Rate?
The interest rate in the federal funds market
Discount rate
The interest rate that banks must pay when they borrow from the FED
What is a Discount Rate?
The interest rate the Fed charges banks for short-term loans.
Crony capitalism
The lack of the market process present when politicians give favors to businesses in return for political contributions
Diminishing returns to labor and capital
The law of diminishing returns (also law of diminishing marginal returns or law of increasing relative cost) states that in all productive processes, adding more of one factor of production, while holding all others constant, will at some point yield lower per-unit returns.
Suppose there was a sharp reduction in stock prices and a sharp increase in the world price of crude oil. Within the framework of the AD/AS model, how would these two changes influence the U.S. economy?
The lower stock prices would reduce AD, and the higher crude oil prices would reduce SRAS; as a result, output would tend to decline. Chap 10
Which of the following will occur if consumer tastes are changing more in favor of the consumption of a particular good?
The market demand curve would shift to the right
GDP Definition + Eqn
The market value of all final goods and services produced within a country during a specific period (usually a year). Y = C + I + G + NX
GDP
The market value of all final goods and services produced within a country, during a specific time
What is the Potential Deposit Expansion Multiplier?
The maximum potential increase in the money supply as new reserves are injected. *PDEM= 1/Required Reserve Ratio
Suppose the U.S. Treasury issues and sells $100 million of U.S. government securities (bonds) to the public. How will this affect the money supply and the national debt?
The money supply will be unaffected; the national debt will increase. Chap 13
Cows can be privately owned while in many countries elephants can not.
The number of cattle slaughtered every year for meat far exceeds the number of elephants slaughtered every year for their ivory. Despite this, cows can be found everywhere while elephants are on the verge of extinction in some countries. Which of the following best explains this difference?
Potential GDP
The output that occurs when the nation is operating at the natural rate of unemployment
encourage budget deficits during both recessions and expansions
The political incentive structure tends to
How do we find equilibrium price and quantity?
The price and quantity at market equilibrium
Suppose that the United States eliminated its tariff on automobiles, granting foreign-produced automobiles free entry into the U.S. market. Which of the following would be most likely to occur?
The price of automobiles to U.S. consumers would decline, and the demand for U.S. export products would increase.
Suppose the United States reduced the tariff on television sets, allowing foreign-produced televisions to more freely enter the U.S. market. Which of the following would most likely occur?
The price of televisions to U.S. consumers would fall, and the demand for U.S. export products would rise.
Quantity demanded changes when:
The price of the good changes. There is movement along the demand curve
Quantity Supplied changes when:
The price of the good changes. There is movement along the supply curve.
If there is both an increase in the supply of a good and a decrease in demand for a good, which of the following will definitely occur?
The price of the good will decrease.
Which of the following makes it more difficult for monetary policy makers to time policy changes correctly?
The primary effects of the policy change will not be felt for 6 to 15 months into the future. Chap 14
What is quantity demanded?
The quantity of a commodity that people are willing to BUY at a particular price at a particular point of time.
What is the Required Reserve Ratio?
The ratio of reserves relative that banks are required to maintain in the vaults
decreasing real output and increasing unemployment
The recessionary phase of the business cycle is characterized by
Which of the following most clearly limits the ability of the commercial banking industry to expand the money supply?
The reserve requirements mandated by the Fed
For the following question(s), assume that the economy is in long-run equilibrium in the aggregate demand/aggregate supply model and that some sort of event takes place. In each case, mark the most likely impact of the event on the aggregate demand/aggregate supply diagram given below. Refer to Figure 10-19. Good weather allows agricultural output to double
The short-run aggregate supply curve would shift to the right. Chap 10
politicians have a strong incentive to support projects that yield immediate and easily recognized benefits, especially when the costs of the projects are difficult to identify and are observable only in the distant future
The shortsightedness effect suggests that
What is Monetary Base?
The sum of currency in circulation plus bank reserves (vault cash and reserves with the Fed; it reflects the purchase of financial assets and extensions of loans by the Fed.
What is the M1 Money Supply?
The sum of currency in circulation, checkable deposits maintained in depository institutions, and travelers checks
Natural rate of unemployment is
The sum of the structural and frictional unemployment rates when there is no cyclical unemployment
A cold spell in Florida extensively reduced the orange crop, and as a result, California oranges commanded a higher price. Which of the following statements best explains the situation?
The supply of Florida oranges fell, causing their price to increase and the demand for California oranges to increase. Chap 3
Which of the following would be expected if the tariff on foreign-produced automobiles were increased?
The supply of foreign automobiles to the domestic market would decline, causing auto prices to rise
Property rights are important because
They create incentives to protect and conserve resources, and distribute them to the people who value them the most
Why are prices often described as sticky?
They don't fluctuate often
What do tariffs do to economic growth
They hurt economic growth because they increase consumer prices and reduce the overall quantity sold and creates a deadweight loss
entrepreneur
This is a person who organizes, manages, and takes on the risks of a business.
Purchasing Power Parity (PPP)
This method uses a common bundle of goods to measure purchasing power. The purchasing power of each currency is then used to convert the income levels of each country to a common currency, typically the U.S. dollar.
Which of the following is a potential drawback of an expansion of government spending projects during a recession?
Those benefiting from spending projects will lobby for a continuation of these projects long after the economy has recovered. Chap 12
How to calculate Real GDP
To calculate real GDP in a certain year, multiply the quantities of goods produced in that year by the prices for those goods in the base year.
Main reason for tariffs
To protect domestic producers
Transfers
Transfers of income from some individuals to others (social security, unemployment benefits, welfare, etc.)
Recession
Two consecutive quarters of declining GDP
Imagine that there are only two nations in the world, the United States and Mexico. Ceteris paribus, what will happen if Americans buy more goods made in Mexico?
U.S. demand curve for Mexican pesos will shift rightward
The argument that import restrictions save jobs and promote prosperity fails to recognize that
U.S. imports provide people in other countries with the purchasing power required for the purchase of U.S. exports
Which of the following is a true statement?
Unanticipated inflation is a change in the general level of prices that catches most decision makers by surprise. Chap 8
Frictional Unemployment
Unemployment due to lack of information between potential employer/employee
Structural Unemployment
Unemployment due to lack of skills of a potential employee
Cyclical Unemployment
Unemployment due to recessions
CPI
Uses a market basket of 211 goods to measure the general rise in prices
Does trade create value?
VOLUNTARY trade creates value for both parties
What are Bank Reserves?
Vault cash plus deposits of banks with the Federal Reserve banks.
Supply of the money graph
Vertical; determined by the Fed.
Four categories of income
Wages, Interest, Rent, and Profit
Higher resource prices and costs will reduce short-run aggregate supply until output falls to the economy's long-run capacity.
Which of the following adjustments will most likely occur when output exceeds the economy's long-run capacity?
When directed by competitive market prices, the actions of self-interested individuals will tend to promote overall economic prosperity.
Which of the following is a major implication of the invisible hand concept?
The unbiased development and testing of theories about how the world works.
Which of the following is the best description of the scientific method in economics?
The actual rate of unemployment will exceed the natural rate of unemployment.
Which of the following is true if the actual price level is lower than the expected price level reflected in long-term contracts?
Nominal GDP will grow faster than real GDP.
Which of the following is true in an economy with persistent inflation?
The actual rate of unemployment will equal the natural rate.
Which of the following is true when an economy is operating at its full employment rate of output?
Central planning and political bargaining will replace market forces.
Which of the following is true when collective decision making is utilized to resolve economic questions regarding the allocation of resources?
Quantity demanded exceeds quantity supplied and the market mechanism pushes the price up, which in turn encourages more production and less consumption.
Which of the following occurs when a shortage occurs in the market for a good?
Short-run aggregate supply shifts right.
Which of the following would cause prices to fall and output to rise in the short run?
an increase in the supply of DVD players
Which of the following would reduce the price of DVD players and increase the quantity sold?
Because substitute goods are now relatively cheaper.
Why do consumers buy less of a good as its price increases?
They reduce the opportunity cost of job search and, hence, increase the search time.
Why do higher unemployment insurance benefits tend to increase unemployment?
It treats a dollar spent on candy bars the same as a dollar spent on education
Why is GDP not a perfect measure of welfare?
Why do people, firms, and countries specialize?
With specialization and trade, two parties can increase production and consumption, and each ends up better off.
Instituting a tax policy encouraging investment at the expense of consumption
With time, which one of the following strategies would most likely result in an outward shift in the production possibilities curve of an economy?
Resource prices and real interest rates will rise causing output to fall back to its long-run sustainable rate.
Within the AD/AS model, how does an economy adjust from an output beyond its long-run capacity as a result of an unanticipated increase in aggregate demand?
Higher tax rates will force people to
Work less
Underemployed workers
Workers who are either working less than they would like to or are working in jobs below their skill level
Suppose you received a 3 percent increase in your nominal wage. Over the year, inflation ran about 6 percent. Which of the following is true?
Your real wage fell
Nominal wage
Your stated wage
Real wage
Your wages adjusted to inflation
Keynesian countercyclical budget policy suggests that
a budget deficit is needed if the economy is operating at less than full employment. Chap 11
stock
a certificate of ownership in a corporation
aggregate demand curve
a curve that shows the relationship between the overall price level in the economy and total demand Shifts in change of consumption,investment, government spending, and net exports There are three basic reasons for the downward sloping aggregate demand curve. These are Pigou's wealth effect, Keynes's interest-rate effect, and Mundell-Fleming's exchange-rate effect.
For an oil-importing country such as the United States, the immediate effect of a supply shock caused by an increase in the price of imported oil would tend to be
a decrease in real output and an increase in the general level of prices.
Which of the following would most likely cause both a decrease in the price of plasma screen TVs and a decrease in the number sold
a decrease in the demand for plasma screen TVs
Which of the following would most likely increase the demand for peanut butter?
a decrease in the price of jelly, a good that is often used with peanut butter. Chap 3
Which of the following will cause an increase in aggregate demand within the AS/AD model?
a decrease in the real interest rate. Chap 10
The crowding-out effect stresses that increased government borrowing to cover a budget deficit will cause
a higher interest rate and appreciation of the U.S. dollar.
Which of the following would be officially classified as unemployed?
a laid-off construction worker waiting to return to a previous job
Which of the following is not one of the major sources of economic growth?
a large government sector
What is a production possibilities frontier (PPF)?
a line or curve that shows all the possible combinations of two outputs that can be produced using all available resources
Per capita GDP is
a measure of income per person. Chap 7
GDP deflator
a measure of the overall increase in prices in an economy, using the ratio between real and nominal GDP
Price index
a measure showing how much the cost of a market basket has risen or fallen relative to the cost in a base period or location
CPI - define and how to calculate
a measure that tracks changes in the cost of a basket of goods and services purchased by a typical U.S. household; calculated by the Bureau of Labor Statistics (BLS), an agency of the U.S. government CPI=(Current Basket/Base Year Basket) * 100
price floor
a minimum price for good or service
Recession
a period of significant economic decline
Expansion
a period of significant economic growth
Classical economists, who adhered to the quantity theory of money, believed that an increase in the money supply would cause
a proportional change in prices. Chap 14
The sharp increase in the excess reserves held by the commercial banking system since the second half of 2008 increases the potential for
a rapid increase in the money supply, potentially leading to inflation.
The crowding-out effect suggests that
a reduction in private spending that results from higher interest rates caused by a budget deficit will largely offset the expansionary effects of the deficit. Chap 12
In the short run, an unanticipated shift to a more restrictive monetary policy is most likely to result in
a reduction in the growth rate of real GDP.
As prices rise, consumers and businesses will want to hold larger money balances. This will lead to
a reduction in the supply of loanable funds and an increase in the interest rate. Chap 9
According to the paradox of thrift, if many families decided to save an additional $200 a month, this would lead to
a reduction in total output and little or no increase in total saving. Chap 12
savings and loan crisis of 1980's
a serious scandal emerged within the Savings and Loan industry, which the Reagan administration had helped deregulate in the early 1980's. By the end of the decade the industry was in chaos, and the government was forced to step in to prevent a complete collapse. The cost of the debacle to the public eventually ran to more than half a trillion dollars.
Safety Net
a set of government programs that protect people who face unfavorable economic conditions including joblessness, injuries and natural disasters
Which of the following would lead to an increase in the demand for rental apartments in your area?
a sharp increase in the number of out-of-town students attending the local college. Chap 3
economic efficiency
a state in which all potential gains from trade have been realized.
Which of the following will most likely cause an increase (shift to the right) in both the long-run and short-run aggregate supply curves?
a technological improvement in robotics that substantially increases labor productivity. Chap 10
If an economy was initially in long-run equilibrium, an unanticipated increase in aggregate demand will tend to cause
a temporarily high level of output and employment that cannot be maintained. Chap 10
Which of the following interest rates will be least affected by a shift in monetary policy that alters the money supply?
a thirty-year home mortgage. Chap 14
Selling bonds will: a. Decrease money supply b. Increase money supply
a. Decrease money supply
Increasing the interest payments on reserves held at the fed will: a. Decrease the money supply b. Increase the money supply
a. Decrease the money supply
Lowering interest rates will: a. Increase the money supply b. Decrease the money supply
a. Increase the money supply
Lowering Reserve Requirements: a. Increases money supply b. Decreases money supply
a. Increases money supply
free good
abundant in nature so it is free and not priced
treasury
accounting office of the U.S. Government. They pay the bills of the government and receive tax revenue from U.S. citizens.
Monetary policy
actions by the central bank to manage the money supply, in pursuit of certain macroeconomic goals
When the economy is operating at an output rate below its full-employment level, the
actual level of unemployment will exceed the natural rate of unemployment.
excess reserves
actual reserves that exceed the legal requirement
The marginal propensity to consume (MPC) is
additional consumption expenditures divided by additional disposable income. Chap 11
The GDP deflator is designed to
adjust nominal GDP for changes in the price level. Chap 7
Economic efficiency requires that
all economic activity generating more benefits than costs to individuals in the economy be undertaken.
Which of the following actions of the Fed would increase the money supply?
all of the above are correct. Chap 13
When the Fed unexpectedly increases the money supply, it will cause an increase in aggregate demand because
all of the above are correct. Chap 14
The aggregate demand curve slopes downward to the right because
all of the above are correct. Chap 9
Use the figure to answer the following question. In Figure 2-11, which shows the production possibilities curve,
all of the above are true. Chap 1&2
If an economy is in equilibrium at a given price level and a given output level, the aggregate demand/aggregate supply (AD/AS) model indicates that an unanticipated decrease in aggregate demand will cause
all of the above. Chap 10
Historically, Keynesian economists have argued that government spending will stimulate aggregate demand more than tax cuts because
all of the spending will add to aggregate demand, but a portion of the tax cut will be saved.
When economists use the term ceteris paribus, they indicate
all other factors are assumed to be constant. Chap 1&2
Common rights
allow multiple people to claim ownership rights
Over the past 20 years both the quantity of health care provided and health care prices have been rising rapidly. Economic theory would suggest that the observed data could best be explained as
an increase in demand, while supply remained relatively constant. Chap 3
According to the Keynesian view, if policy makers thought the economy was about to fall into a recession, which of the following would be most appropriate?
an increase in government expenditures and/or a reduction in taxes. Chap 11
Which of the following will most likely accompany an unanticipated increase in aggregate demand?
an increase in real output. Chap 10
A hurricane damaged much of the housing in Miami. Shortly thereafter, the price of plywood rose significantly. The events suggest that
an increase in the demand for plywood caused the price of plywood to rise. chap 3
Which of the following will most likely result from an unanticipated decrease in aggregate supply due to unfavorable weather conditions in agricultural areas?
an increase in the general level of prices. Chap 10
If the Federal Reserve increases its bond purchases, the short-run effects will be
an increase in the money supply and lower real interest rates
Which of the following would cause an increase in the price of gasoline and an expansion in the equilibrium quantity?
an increase in the popularity and use of Sport Utility Vehicles that consume a lot of gasoline per mile driven. Chap 3
Which of the following would most likely shift the supply curve to the left for Wii video games?
an increase in the price of electronic components used to produce the Wii games. Chap 3
Which of the following is most likely to help promote the efficient use of resources and rapid economic growth?
an open and competitive capital market
capital
anything man-made that is used to produce or create other things
transaction costs
anything that makes a transaction more expensive
If you go to the bank and notice that a dollar buys more Mexican pesos than it used to, then the dollar has
appreciated relative to the peso. Other things the same, the appreciation would make you more likely to travel to Mexico.
Measured as a share of the economy, the size of the trade sector (exports plus imports) of the United States has
approximately doubled since 1980 and tripled since 1960.
Final good
are purchased by their end users.
In economics, the demand for a good refers to the amount of the good people
are willing to buy at various prices.
Competitive behavior occurs
as a reaction to scarcity. Chap 1&2
Short run aggregate supply curve - definition and shifts (Upward slope)
as overall price levels increase, firms are willing to produce more; reacts to price changes where firms are willing to change how much they supply based on price Shifts: Changes in input prices (supply shock)
medium of exchange
asset used to buy and sell goods or services
business license
authorization to start a business issued by the local government
Trade restrictions that limit the sale of low-price foreign goods in the U.S. market
benefit domestic producers in the protected industries at the expense of consumers and domestic producers in export industries.
Other things constant, if the Fed decreased the discount rate,
borrowing from the Fed will tend to increase and the money supply will tend to expand. Chap 13
A "stable monetary environment" is used to describe monetary policy consistent with
both b and c.
On average, countries that have a larger degree of economic freedom tend to have
both higher per capita income levels and more rapid growth rates than countries with less economic freedom.
If improvements in education and training programs increased the productivity of persons in the labor force,
both short-run and long-run aggregate supply. Chap 10
If there is a decrease in demand for laptop computers, we would expect
both the price and quantity sold to decrease
The crowding-out model implies that a
budget deficit will increase real interest rates and, thereby, reduce private spending
The persistence of budget deficits during the last several decades is not surprising because politicians will find
budget deficits more attractive than budget surpluses. Chap 12
If the Federal Reserve wanted to expand the money supply in order to increase output, it should
buy government bonds, which will increase the money supply; this will cause interest rates to fall and aggregate demand to rise
If the Federal Reserve wanted to expand the money supply in order to increase output, it should
buy government bonds, which will increase the money supply; this will cause interest rates to fall and aggregate demand to rise.
open market operations
buying and selling of bonds by the Fed
positive economics (objective)
can be proven or disproven
unanticipated change
cannot be foreseen by decision makers and the choices they made prior to the change did not take it into account
An analysis of countries experiencing rapid inflation indicates that inflation is generally
caused by rapid growth in the money supply
Which of the following is the primary source of changes in output within the framework of Keynesian analysis?
changes in aggregate demand. Chap 11
fiscal policy
changes in government spending and taxes using the government budget to impact unemployment and output
The expenditure multiplier indicates that
changes in investment, government, or consumption spending can trigger much larger changes in output.
The long-run aggregate supply curve is vertical, reflecting the fact that
changes in price have no effect on output in the long run. In the long run, the price of goods and the price of resources move together and firms have no incentive to change their output. Chap 9
fiscal policy
changes in the government spending and tax rates by the government
monetary policy
changes in the money supply by the Federal Reserve
M1 money
coins and currency, checkable deposits, traveler's checks
M2 money
coins and currency, checkable deposits, traveler's checks, savings deposits, time deposits, money market mutual fund shares
In the United States, the money supply (M1) consists of
coins, paper currency, demand deposits, other checkable deposits, and traveler's checks. Chap 13
What is marginal analysis?
comparison of additional benefits of a choice against the additional costs it would bring, without considering related benefits and costs of past choices
discretionary fiscal policy
congress can carry out fiscal policy whenever they want
economic freedom of the world index
considers factors such as property rights, nets for the labor market, stability of prices to measure economic freedom
When both exports and imports are considered, the major advantage of international trade is that it allows us to
consume a larger, more diverse quantity of goods and services at lower prices than would otherwise prevail.
Law Of Demand
consumers buy more of a good when its price decreases and less when its price increases
For an economy, aggregate demand equals
consumption plus investment plus government purchases plus (exports minus imports).
"A reduction in gasoline prices caused the demand for gasoline to increase. The lower gas prices also led to an increase in demand for large cars, causing their prices to rise." These statements
contain one error; the lower gasoline prices would cause an increase in the quantity demanded of gasoline, not an increase in demand. Chap 3
Keynes' fiscal policy cure for inflation
contractionary fiscal policy (increase T and decrease G)
Rather than using the purchase and sale of only government bonds in the conduct of open market operations, in 2008 the Fed also began buying and selling
corporate bonds, commercial paper, and mortgage-backed securities from commercial banks and other financial institutions. Chap 13
spillover cost
cost of production that affects people who have no control over how much of a good is produced
What are implicit costs
costs are intangible and not obvious costs associated with using self-owned resource
From the standpoint of society as a whole, rent seeking is
counterproductive because it takes resources away from the creation of wealth in the private sector.
Accurate measurement of GDP is important to business decision-makers because this information will help them better determine the
course of the economy and the direction of demand for their products. Chap 7
The replacement of the phonograph by the cassette tape player and the eventual replacement of the latter by CD and MP3 players is an example of
creative destruction.
The process by which new products and methods of production are continuously replacing old ones is known as:
creative destruction. Chap 1&2
M1
currency + checkable deposits + travelers checks more liquid
Second National Bank confronts a reserve requirement of 20 percent and currently holds millions of dollars in excess reserves. If a depositor withdraws $35,000, the excess reserves of the bank will
decline by $28,000. Chap 13
As prices rise, a fixed money supply will be able to buy fewer goods and services. This effect is due to a(n)
decline in the purchasing power of money. Chap 9
In the aggregate demand/aggregate supply model, when the output of an economy is less than its long-run potential, the economy will experience
declining real wages and interest rates that will stimulate employment and real output.
If the Fed wanted to expand the money supply as part of an antirecession strategy, it could
decrease the interest rate paid on excess reserves encouraging banks to extend more loans.
A decrease in the expected future price of a good will cause the current demand for the good to
decrease, which is a shift to the left of the demand curve.
If the Fed unexpectedly decreases the money supply, real GDP
decreases because the resulting increase in the interest rate leads to a decrease in investment.
The recessionary phase of the business cycle is characterized by
decreasing real output and increasing unemployment.
Capital
definition: any human-made resource that is used to create other goods or services importance: capital is what help produces the goods and services. Thus, is essential in creating a businesses as it creates products relates to: human and physical capital, land, labor
price elasticity of demand
degree of responsiveness of a consumer to a change in price
Diminishing returns to labor and capital
diminishing returns to a factor of production when hiring an additional unit of that factor results in less additional output than the hiring of the previous unit.
The most effective fiscal stimulus will
direct the economy to full employment and direct resources toward economically productive projects. Chap 12
Supply-side economics stresses that high marginal tax rates
discourage people from working harder and using their resources productively
High and variable rates of inflation will
distort the information delivered by market prices.
If you deposit $100 of cash into a checking account at a bank, this action by itself
does not change the money supply.
Given the strict quantity theory of money, if the quantity of money doubled, prices would
double. Chap 14
Actual GDP will be below potential GDP
during a recession.
According to the law of comparative advantage,
each product should be produced by the lowest opportunity cost producer in order to maximize output. Chap 1&2
portability
easy to carry around
socialism
economic system in which production is owned and controlled by the government; goods and services are allocated through government central planning
capitalism
economic system in which productive resources are owned privately and goods and resources are allocated through market pricing
supply side economics
economics that focuses on aggregate supply . Alternative to Keynesian economics.
great depression
ended largely because of an increase in defense spending related to world war II
The difference between the total reserves that a bank holds and the amount that is required by law are called
excess reserves. Chap 13
The new classical model implies that a shift to a more expansionary fiscal policy will
exert little or no impact on the real interest rate, aggregate demand, and employment. Chap 12
Since the mid-1980s, if the Fed wanted to shift to a more expansionary monetary policy, it would
expand the reserves available to the banking system, which would drive down short-term interest rates. Chap 14
Keynes' fiscal policy cure for unemployment
expansionary fiscal policy (increase G or decrease T)
The tax reductions, increases in defense expenditures, and budget deficits of the 1980s are characteristic of
expansionary fiscal policy. Chap 12
A trade surplus is when
exports are greater than imports of goods and services. Chap 9
Net exports
exports minus imports; the value of goods and services produced domestically and consumed abroad minus the value of goods and services produced abroad and consumed domestically
Persistently expansionary monetary policy that stimulates aggregate demand and leads to inflation will
fail to increase real output once decision makers fully anticipate the inflation. Chap 14
During an economic contraction, housing and stock prices generally
fall, leading to a reduction in aggregate demand. Chap 10
The most important factor for producing long-run economic growth is
good policies and institutions.
intermediate goods
goods purchased for resale or for use in producing another good or service
Capital good
goods that are used in producing other goods, rather than being bought by consumers.
What are resources?
goods that we can buy
government bond sales
government borrowing money to finance the deficit
Fiscal policy
government decisions about the level of taxation and government spending
automatic stabilizers
government programs already in existence that tend to create deficits in times of recession and surpluses during times of inflation (unemployment compensation, progressive income tax, etc.)
When the federal government is running a budget surplus,
government revenues exceed government expenditures. Chap 11
balanced budget
government spending = tax revenue
business cycle
graph that shows the ups and downs of the economy over the years
hyperinflation
greater than 100% inflation per year
monetarists
group of economists who believe monetary instability is the major cause of fluctuation in real GDP and that rapid growth of the money supply is the major cause of inflation
A nation that protects its workers from unemployment by limiting the use (by employers) of technological improvements will
grow less rapidly because technological change is an important factor contributing to the growth of output.
Growth rate GDP
growth rate of RGDP=growth rate of NGDP-inflation-population growth rate
technical progress
happens when a patent is issued to a company that invents a new product, training programs for workers, reducing the scale of the market for a new product
When private ownership of a resource is clearly defined and enforced, the private owner
has a strong incentive to use the resource wisely and to consider seriously the wishes of others when deciding how to employ the resource.
Henry Ford made millions of dollars producing and marketing automobiles. Many workers and consumers must have suffered in order for Ford to amass such enormous wealth." The person who made this observation
has failed to understand that specialization and exchange generally result in mutual economic gain.
underemployed
have a job, but overqualified for it.
stagflation
high rates of inflation and unemployment
Cross country data illustrates that rapid expansion in the supply of money over a lengthy period of time (for example, a decade) leads to
high rates of inflation. Chap 14
Keynesian critics would argue that expansion in government debt during a recession would lead to
higher future interest payments and tax rates. Chap 12
Federal budget projections for the next ten years indicate both higher levels of government spending and large budget deficits. Non-Keynesian economists argue that this will lead to
higher interest rates, higher taxes, and sluggish future growth.
business cycle peak
highest point in the business cycle (economic boom)
Who supplies labor?
households
liquidity
how easy it is to convert something into cash
"If gasoline were taxed, the price of gasoline would rise. Consequently, the demand for gasoline would fall, causing the price to fall to the original level." This statement is
incorrect--demand and quantity demanded are confused. The price increase would reduce quantity demanded, not demand.
"If income were redistributed in favor of the poor, we would eliminate scarcity." The preceding statement is
incorrect; it confuses the elimination of poverty with the elimination of the constraint imposed by scarcity. Chap 1&2
What causes productivity to rise?
increase human capital increase natural resource better technology
inflation
increase in general level of prices
The crowding-out effect refers to the possibility that an
increase in government borrowing will result in higher interest rates, which will crowd out private investment and consumption. Chap 12
crowding out
increase in interest rates cause by gov. deficit spending (selling bonds) which decreases the private sector, either C or I
If the Fed sells bonds and, thereby, unexpectedly shifts to a more restrictive monetary policy, in the short run, the primary impact of this policy will tend to
increase real interest rates
Other things constant, an increase in resource prices will
increase the cost of producing goods and services, which will lead to a higher price level.
During the 1980s, the top marginal tax rate on personal income was reduced from 70 percent to less than 40 percent and it has remained below 40 percent since that time. In recent years, the share of the personal income tax collected from the top one-half of one percent of earners has
increased substantially from the level of years prior to 1981. Chap 12
The low interest rate policies of the Federal Reserve during 2002-2004,
increased the demand for housing, placing upward pressure on housing prices. Chap 14
The government is pursuing an expansionary fiscal policy if it
increases government spending and/or reduces taxes.
Anna has just finished high school and started looking for her first job, but has not yet found one. As a result, the unemployment rate
increases, and the labor-force participation rate increases.
company benefits
indirect forms of payment for work other than money. ex- company paying into social security
In the context of aggregate supply, the long run is defined as the period during which
individuals have sufficient time to modify their behavior in response to price changes.
In the long-run, the primary effect of rapid monetary growth is
inflation.
When competition is present and private ownership rights are clearly defined and securely enforced by the legal system, business firms will have a strong incentive to
innovate and develop better products and lower cost production methods.
nonprofit organization
institution that functions much like a business, but does not operate for the purpose of generating profits
If a poor country is going to grow rapidly and achieve a high level of per capita income, which of the following is most important?
institutions and policies that encourage productive activities
John Maynard Keynes and his followers argued that the Great Depression was primarily the result of
insufficient aggregate spending on goods and services. Chap 11
money market mutual funds
interest earning accounts that pool depositors' funds and invest them in highly liquid short term securities
discount rate
interest rate the federal reserve changes banking institutions for short term loans
Money Multiplier ***
inverse of required reserve ratio
Investment vs. financial investment
investment- Economic investment allows companies to provide more or better products and services. New buildings, equipment and vehicles obviously represent economic investment, but so can spending on education and health care. Financial investment- A share of stock is a quintessential example of a financial investment. If you're like most investors, when you buy a share of stock, you're not planning to "do something" with it.
Discretionary fiscal policy
involves adjusting government spending and tax policies with the express short-run goal of moving the economy toward full employment, expanding economic growth, or controlling inflation
Investment Inventory
is a component of gross domestic product (GDP). What is produced in a certain country is naturally also sold eventually, but some of the goods produced in a given year may be sold in a later year rather than in the year they were produced.
According to Adam Smith, individual self-interest
is a powerful force for economic progress when it is directed by competitive markets.
consumer sentiment index
looks at many macro variables (unemployment rates, inflation rates, GDP, etc.) to determine whether consumers are optimistic or pessimistic about the near future. An increase means optimism, a decrease means pessimism.
In the short run, an unanticipated increase in the money supply will
lower interest rates and shift the aggregate demand curve to the right. Chap 14
Which of the following would most likely increase the supply of beef?
lower prices of grains used to feed cattle
Which of the following would most likely decrease the price of beef?
lower prices of grains used to produce cattle feed. Chap 3
The natural rate of unemployment
is associated with the economy's maximum sustainable output rate. Chap 8
Long run aggregate supply curve - definition and shifts (Vertical line)
is fixed at potential output; prices do not influence the level of output in the economy Shifts: economic growth
The value (purchasing power) of each unit of money
is inversely related to prices (in other words, money's value falls as prices rise and vice versa). Chap 13
A movement along a demand curve
is the result of a change in the price of the good. Chap 3
If an economy is operating at a point inside the production possibilities curve,
its resources are not being used Chap 1&2
Share of the population employed {formula}
labor force employed/ total population
Why are real wages higher in some countries?
labor supply higher in some countries - labor is more productive in some countries
What is scarcity?
lack of enough resources to satisfy all desired uses of those resources
natural resource
land and anything contained within the law (fish, trees, oceans, etc.)
factors of production
land, labor, capital; the three groups of resources that are used to make all goods and services
collective
large farm leased from the state to groups of peasant farmers
When the economy enters a recession, automatic stabilizers create
larger budget deficits. Chap 11
zoning law
law in a city or town that designates separate areas for residency and for business
Each trading nation can gain by specializing in producing those things for which it is a low-opportunity cost producer. This statement best describes the implications of the
law of comparative advantage.
In the new classical model, a $100 billion increase in government purchases financed by borrowing will
leave the interest rate, aggregate demand, and real output unchanged. Chap 12
self-correcting mechanism
leaving market to its own devices to correct itself. Alternative to fiscal policy.
During an expansionary period, the actual rate of unemployment will be
less than the natural rate of unemploymen
standard of living
level of economic prosperity
quota
limit on the number or value of goods that can be imported
scarcity
limited quantities of resources to meet unlimited wants
The legal requirement that commercial banks hold required reserves equal to some fraction of their deposits
limits the ability of banks to expand the money supply by extending additional loans.
If there is a "long and variable time lag" between when a change in monetary policy is instituted and when it impacts aggregate demand and output, this will
make it more difficult for the Fed to properly time changes in monetary policy. Chap 14
resources market
market for four major resources: land, labor, capital, and entreprenuership.
invisible hand principle
market prices coordinate the actions of self interested individuals and direct them toward activities that promote the general welfare
gross national product
market value of all final goods and services produced by the citizens of a country during a specific time period (who produces it)
gross domestic product (GDP)
market value of all final goods and services produced within a country during a specific time period (where it's produced)
Average product of labor
measures the output of the average worker AP=Q/L
currency
medium of exhange made of metal or paper
expenditures approach
method for calculating GDP. Y= C + I + G + (X-M)
income approach
method for calculating GDP. Y= rent + wages + interest + profit
required reserves
minimum amount of reserves a bank is required by law to keep on hand to back up its deposits
assets
money and other valuables that belong to the corporation or partnership
transfer payments
money taken from one sector of the economy in taxes and distributed to another sector of the economy in government benefits
fiat money
money that has neither intrinsic value nor the backing of a commodity with intrinsic value (has value because government says it has value)
fiat money system
money that has value because the government has ordered that it is an acceptable means to pay debts
According to the law of supply,
more of a good will be offered by suppliers as the price rises
If the government cuts the tax rate, workers get to keep
more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right
deposit expansion multiplier (DEM)
multiple by which an increase in reserves will increase the money supply
Opportunity costs differ among nations primarily because
nations have different amounts of land, labor skills, capital, and technology.
creative destruction
new products/methods of production replacing old ones
Nominal Variable
no numbers involved . Like age or gender
In a country where many families make their own clothes, GDP will be understated because the clothes making represents
nonmarket production. Chap 7
Mary is a homemaker. Last week, she was busy with her normal household activities. She is
not a member of the labor force.
How much would be added to this year's GDP if you sold your four-year-old automobile for $4,000 and purchased a two-year-old model from an acquaintance for $10,000.
nothing. Chap 7
employment to population rate
number employed out of the total population (E/P x 100)
unemployment rate
number of unemployed in the labor force (unemployed/LF X 100)
consumer price index (CPI)
number used to compare costs of purchasing lists of good that a typical consumer might buy in one period to that same list of goods in a different time period
structural unemployment
occurs from changed in supply or demand conditions in particular industries. Your skills no longer match the jobs available.
frictional unemployment
occurs from lack of information. You want a job that matches your skills.
When the tax to fund a government project is allocated among voters in proportion to the benefits they receive from the project,
projects that are productive (efficient) will tend to be favored by an overwhelming majority of voters.
If the economy is in a recession, and the government raises taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to
prolong the recession and increase its severity. Chap 11
A legal system that protects private property and enforces contracts in an even-handed manner helps promote economic growth because it
provides people with a strong incentive to supply others with things that they value at an economical price.
Federal Reserve
public entity that controls the U.S. money supply. Owned by private commercial banks but regulated by the U.S. government.
Ceteris paribus, an increase in the price of a good will cause the
quantity supplied of the good to increase.
embargo
quota of zero. No economic trading can take place at all.
According to the Keynesian view, an unanticipated reduction in spending will
raise business inventories and lead to a decline in output. Chap 11
During the nine months following July 2008, the Fed doubled the monetary base and generated huge excess reserves within the commercial banking system. This policy increases the danger of
rapid future growth of the money supply and inflation. Chap 14
Keri decided to sleep in today rather than attend her 9 a.m. economics class. According to economic analysis, her choice was
rational if Keri values sleep more highly than the benefit she expects to receive from attending the class. Chap 1&2
In the loanable funds market, the true burden of borrowers and the true yield to lenders is the
real (inflation adjusted) interest rate. Chap 9
How to calculate Real GDP
real GDP in year X= prices in the base year times quantity in year X
The primary value of real GDP is its ability to measure year to year changes in
real output. Chap 7
What is PPP-adjustment
recalculating economic statistics to account for differences in price levels across countries
business cycle
recurring fluctuations in the economy
The crowding-out effect implies that restrictive fiscal policy will
reduce real interest rates
An unanticipated shift to a more expansionary monetary policy by the Fed will
reduce real interest rates and, thereby, stimulate investment, current consumption, and aggregate demand.
The crowding-out model implies that restrictive fiscal policy will
reduce real interest rates.
Recent legislation provides parents with a substantial reduction in their personal income tax liability for each child that they have. The economic way of thinking indicates that legislation of this type will
reduce the after-tax cost of raising children and, therefore, increase the birth rate.
Automatic stabilizers are government programs that tend to
reduce the ups and downs in aggregate demand without legislative action. Chap 11
Trade restrictions like tariffs and quotas will
reduce the value of goods and services that we will be able to produce and consume.
An increase in the discount rate impacts the money supply because it
reduces the incentive of commercial banks to borrow from the Federal Reserve.
Public choice analysis indicates
rent seeking will be less attractive if the nation's legal (or constitutional) structure makes it difficult to use the political process to take the property or income of others.
reserve rate
required reserve plus excess reserves
Reserves that banks are required by law to keep on hand to back up their deposits are called:
required reserves. Chap 13
A decrease in the price of flour will shift the supply curve for donuts
rightward, causing the equilibrium price to decrease and equilibrium quantity to increase. Chap 3
losses
sales revenue < cost of production
profits
sales revenue > the cost of production
Which of the following is not part of the M1 money supply?
savings deposits. Chap 13
demand
schedule of all goods/services consumers are willing and able to buy at various prices
If the Fed wanted to use all four of its major monetary control tools to decrease the money supply, it would
sell bonds, increase the discount rate, increase reserve requirements, and increase the interest rate paid on excess reserves. Chap 13
According to the law of supply, as the price of a good falls,
sellers will produce less of the good. Chap 3
Which of the following would be most likely to cause an increase in current aggregate demand in the United States?
sharp increase in the value of stocks owned by Americans. Chap 10
long run phillips curve
shows NO relationship between inflation and unemployment
short run phillips curve
shows inverse relationship between inflation and unemployment
phillips curve
shows relationship between inflation and unemployment
The demand curve for money
shows the amount of money balances that individuals and businesses wish to hold at various interest rates. Chap 14
The demand curve for money
shows the relationship between the quantity of money demanded and the interest rate. Chap 14
Government purchases
spending on goods and services by all levels of government
When an economy is experiencing an economic boom and operating beyond its long-run capacity,
strong demand for investment funds will push interest rates upward. Chap 10
When the economy is operating at an output beyond its full-employment potential, the
strong demand for resources will place upward pressure on resource prices.
Full employment is the situation in which the economy operates at an unemployment rate equal to the sum of
structural and frictional unemployment.
In the early 1990s, the U.S. government substantially reduced defense expenditures. The resulting unemployment of defense-related workers, who possessed skills no longer needed by the economy, is an example of
structural unemployment. Chap 8
national debt
sum of total outstanding U.S. Treasury bonds; sum total of all deficits over time
aggregate demand
sum total of all goods and services purchased in the U.S. in a given year; measured as real GDP
When the residents of a nation are free to trade with foreigners, domestic producers will be able to
supply a larger quantity of goods they can produce at a relatively low cost
If Georgia experiences a late frost that damages the peach crop, we should expect the
supply curve for peaches to shift to the left and the price of peaches to rise.
When economists say the supply of a product has increased, they mean the
supply curve has shifted to the right.
Which of the following will be required for a country to move up the income ladder and achieve high-income status?
sustained economic growth
Which of the following is most important if a country wants to move from a low-income to a high-income status?
sustained economic growth.
federal reserve banking
system that permits banks to hold reserves of less than 100 percent against their deposits
underemployed
taking a job that does not challenge skill level
Which of the following restricts the volume of international trade?
tariffs
tariff
tax on goods imported into a country. Levied by the importing country.
budget deficit
tax revenue < government spending
budget surplus
tax revenue > government spending
Automatic stabilizers
taxes and government spending that affect fiscal policy without specific action from policy-makers
The value (purchasing power) of each unit of money:
tends to decline as the money supply expands in relation to the availability of goods and services. Chap 13
The highest interest rates in the world are found in countries
that have followed an expansionary monetary policy that resulted in high rates of inflation. Chap 14
If national income accountants fail to make an adequate adjustment for increases in the quality of goods and services over time,
the GDP deflator will overestimate inflation. Chap 7
If the federal government is running a budget deficit,
the U.S. Treasury will finance the deficit by issuing additional bonds. Chap 11
If the United States imports low-cost goods produced in low-wage countries instead of producing the goods domestically,
the United States will gain and domestic resources will be employed more productively.
Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand, but it can also reduce aggregate supply if
the higher taxes cause workers to work less.
Which of the following attributes of fiscal policy will most likely be stressed by a supporter of supply-side economics?
the impact of marginal tax rates on the supply and productivity of resources
The multiplier effect
the increase in consumer spending that occurs when spending by one person causes others to spend more too, increasing the impact of the initial spending on the economy
human capitol
the knowledge and skills that workers acquire through education, training, and experience.
When the loanable funds and foreign exchange markets are in equilibrium,
the leakages from the circular flow will equal the injections into it. Chap 9
liability
the legally bound obligation to pay debts
In the Keynesian view, equilibrium takes place when
the level of total spending in the economy is equal to current output.
Which of the following will make it difficult for the Fed to institute shifts in monetary policy in a manner that will promote economic stability?
the long and variable time lags between shifts in monetary policy and impact on output and employment. Chap 14
A rational decision maker takes an action if and only if
the marginal benefit of the action exceeds the marginal cost of the action.
product market
the market in which households purchase the goods and services that firms produce
Marginal Benefit
the maximum amount they are willing to pay to consume that additional unit of a good or service
The cost of holding money balances increases when
the money interest rate increases. Chap 14
If equilibrium is present in the foreign exchange market and a nation is experiencing a trade deficit,
the nation must be experiencing a net capital inflow.
A depreciation of a nation's currency would cause
the nation's exports to increase and imports to decline. Chap 9
As the real interest rate in the domestic loanable funds market increases,
the net inflow of capital from abroad will increase. Chap 9
If the real interest rate in the domestic loanable funds market increases,
the net inflow of foreign capital will tend to increase. Chap 9
The unemployment rate
the number of unemployed people divided by the number of people in the labor force formula- (# of unemployed/ labor force) x 100
What is the rule of 70?
the number of years it takes a variable to double = 70 divided by the growth rate in percentage terms
During an expansionary period,
the output of the economy will exceed its long-run potential output.
Which points on the production possibilities frontier are feasible?
the points inside the ppf
Which points on the production possibilities frontier are efficient?
the points of the ppf
dividend
the portion of corporate profits paid out to stockholders
Gross domestic product is the sum of
the purchase price of all final goods and services produced domestically during the period. Chap 7
What is quantity supplied?
the quantity of a commodity that producers are willing to SELL at a particular price at a particular point of time.
If a used-car dealer purchases a used car for $1,000, restores it, and resells it for $1,500, the dealer contributes
value added equal to $500, and consequently $500 is added to GDP. Chap 7
Which of the following compose the reserves of a commercial bank?
vault cash and deposits of the bank with the Federal Reserve. Chap 13
In the equation of exchange, V stands for
velocity, or the annual rate at which money changes hands in the purchase of final products. Chap 14
ricardian equivalence
view that a tax reduction financed with government debt will exert no effect on current consumption and aggregate demand because people will fully recognize the higher future taxes implied by the additional debt
Key Economic Question
what goods and services should be produced, how should they be produced, and who consumes these goods and services?
labor force participation rate
what percent is in the labor force, either employed or unemployed (LF/population x 100)
Three basic decisions must be made by all economies. What are they?
what will be produced, how goods will be produced, and for whom goods will be produced. Chap 1&2
contractionary phase
when GDP is declining in the business cycle
expansionary phase
when GDP is growing in the business cycle
full employment
when approximately 95% of labor force is employed
Chronic inflation
when businesses can not anticipate their costs
change in demand
when consumers buy a different amount/good because of a change in anything but price (income, feelings, expectations, etc.)
change in quantity demanded
when consumers buy a different amount/good than before because of price changes
excess demand
when quantity demanded is more than the quantity supplied
market equilibrium
when quantity supplied equals quantity demanded
Government budget deficit
when the government is spending more than it earns
The multiplier principle indicates that if business decision makers become more optimistic about the future and, as a result, increase their investment expenditures by $50 billion, real GDP
will increase by more than $50 billion if the economy was initially operating well below capacity. Chap 11
durability
will last for a period of time
Labor
workers
Jim, a U.S. citizen, gets a summer job working in Germany. His summer earnings
would count as part of U.S. GNP and German GDP. Chap 7
On a PPC you can only produce more of one good if
you produce less of the other good
An increase in the price level results in:
• An interest rate effect • A wealth effect • A net export effec
