Econ 200 Truman State University Test 3 Chen
How is unemployment measured?
-employed, unemployed, not in labor force -measured by the BLS
Suppose that a basket of goods costs $100 in the U.S. and that taking $100 and converting it into Thai bhat would allow you to buy 3/4 of the same basket of goods in Thailand. The real exchange rate would be computed as how many Thai goods per U.S. goods?
3/4 --------------------------------------------------------- The real exchange rate measures the ratio of how goods in one country can be converted to goods in another country. In this case, a basket of goods in the U.S. converts into ¾ of a basket of goods in Thailand, so the real exchange rate is ¾.
Which of the following describes the effect of a decrease in the money supply? The money supply curve shifts to the left, the price level decreases causing the value of money to increase.
A decrease in the money supply shifts the money supply curve to the left, the value of money and the price level adjust to bring supply and demand back into balance. Now there are fewer dollars chasing the same number of goods and services. The price level decreases, making each dollar more valuable.
Union
A worker association that bargains with employers over wages, benefits, and working conditions
Suppose that autoworkers are unionized. If autoworkers choose to abolish their union, then the quantity of autoworkers demanded will rise. The supply of workers in other industries will fall.
As workers in other industries look for or accept jobs in the auto industry, the supply of labor in other industries will fall, so the wages in other industries will rise.
If a good that costs $1 in the U.S. cost two-thirds of a Swiss franc in Switzerland, the real exchange rate would be computed as how many Swiss goods per U.S. goods?
Because the real exchange rate is calculated as (Nominal exchange rate X Domestic price)/Foreign price, filling in the given values for Domestic price of 1 and Foreign price of 2/3 yields Real exchange rate = (Nominal exchange rate x 1)/2/3 = 3/2 x Nominal exchange rate = 150% x Nominal exchange rate.
If a U.S. dollar purchases 30 Thai bhat, and a bouquet of flowers costs $12 in the U.S. and 480 bhat in Thailand, what is the real exchange rate?
Because the real exchange rate is calculated as (Nominal exchange rate X Domestic price)/Foreign price, the real exchange rate in this case is (30 x 12)/480 = 360/480 = 0.75.
Bertha purchased 100 shares of BestSnack, Inc. stock for $20 per share; in one year, she sold the 100 shares for $25 a share. Over the year, the inflation rate was 3%. If the tax rate on nominal capital gain is 50%, how much tax does Bertha pay on her gain?
Bertha's capital gain is ($25 - $20) x 100 = $500, of which the government takes 50%, leaving her with $500 x (1 - 0.50) = $250. Note that the remaining 3% is taken by inflation, not the government.
The Fed's Organization
Board of governors -7 members, 14 year-terms Has two main jobs -regulate banks and ensures the health of the banking system-bank's borrow from the fed (lender of last resort) - control the quantity of money
Sadie buys stock in a company in Italy. Mike opens an espresso bar in Italy. Both Sadie and Mike are American residents. Whose purchase, by itself, increases Italy's net capital outflow?
Both Mike and Sadie's purchases are purchase of Italian assets by people outside Italy, so they both decrease Italy's net capital outflow. In other words, neither purchase increases Italy's net capital outflow.
Rudy has graduated from college and is devoting his time to searching for a job. He has seen plenty of openings but has not yet been offered one that best suits his tastes and skills. Rudy is frictionally unemployed. Frictional unemployment exists even in the long run.
Frictional unemployment is created by the time it takes for job seekers and employers to find a good match. Structural unemployment is created by above equilibrium wages. Both types of unemployment exist even in the long run, they are not created by the business cycle.
exports
Goods and Services sold to other countries
Bertha lends $1,000 to Danko for 2 years and charges an annual interest rate of 6%. Bertha had anticipated the inflation rate of 2%, but it actually turned to be 2.5%. In two years, as a result of the higher-than-expected inflation,
Higher than expected inflation makes borrowers better off at the expense of the lenders because it diminishes the real value of the debt: Danko can repay the loan in dollars that are less valuable than anticipated. Therefore Danko is better off at the expense of Bertha. This is because the real interest rate is the difference between the nominal interest rate and the inflation rate.
If the nominal exchange rate e is foreign currency per dollar, the domestic price is P, and the foreign price is P*, then the real exchange rate is defined as e(P/P*).
If the nominal exchange rate e is foreign currency per dollar, the domestic price is P, and the foreign price is P*, then the real exchange rate is defined as e(P/P*).
If the exchange rate is 0.75 Swiss francs = $1, a chocolate bar that costs 2 Swiss francs costs.
Incorrect. If the exchange rate is 0.75 Swiss francs per U.S. dollar, something that costs 2 Swiss francs will cost 2 Swiss francs x ($1/0.75 Swiss francs) = $2.67.
Suppose the Consumer Price Index has increased from 100 to 105. What is the inflation rate?
Inflation is measured as a percentage change in the overall price level: 100 x ((105 - 100)/100) = 5%.
Suppose the Consumer Price Index has increased from 105 to 107. What is the inflation rate?
Inflation is measured as a percentage change in the overall price level: 100 x ((107 - 105)/105) = 1.9%.
Which of the following explains why the demand curve for money is downward sloping?
People want to hold a larger quantity of money when each dollar buys less. Suppose the horizontal axis shows the quantity of money and the vertical axis shows the price level on a graph. Then the demand curve for money is downward sloping because people want to hold a larger quantity of money when each dollar buys less, since the value of money increases when the price level decreases. Note that the supply curve for money is vertical because the quantity of money supplied is fixed by the Federal Reserve.
Which of the following describes how inflation can be measured?
Percentage change in the GDP deflator. ----------------------------------------------- Inflation is measured as a percentage change in the consumer price index (CPI), the GDP deflator, or some other index of the overall price level.
Suppose the banking system currently has $100 billion in reserves, the reserve requirement is 10 percent, and excess reserves amount to $5 billion. What is the level of deposits?
Since $5 billion, of the $100 billion of reserves, are excess reserves, the required reserves are only $95 billion. $95 billion * (1/10% required reserves) = $950 billion in deposits. In other words, if $950 billion are deposited, a 10% reserve requirement requires the bank to keep at least $95 billion. If they hold an extra $5 billion, reserves will equal $100 billion.
In a system of fractional-reserve banking, the amount of money in the economy depends on the behavior of depositors and bankers, which prevents the Fed from perfectly controlling the money supply.
The Fed can provide incentives to lend more or less, but it does not directly control a bank's profit-maximizing decision of how much money to lend nor the decisions of households. Without being able to control or perfectly predict the behavior of banks and households, the Fed cannot perfectly control the nation's money supply.
The Federal Open Market Committee (FOMC) is NOT responsible for carrying out the Fed's tasks of regulating banks and ensuring the health of the financial system.
The Fed monitors each bank's financial condition and facilitates bank transactions by clearing checks. This task is largely left to the regional Federal Reserve banks to carry out, not the FOMC.
The Fed changes the discount rate and, as a direct result, reserves have increased. The Fed has most likely decreased the discount rate.
The discount rate is the interest rate on the loans the Fed makes to other banks. When the Fed decreases the discount rate, banks have a stronger incentive to borrow more money from the Fed since the interest they have to pay back has decreased. This will lead to increased borrowing from the Fed, and the money borrowed will end up in reserves at other banks. This means, as the Fed decreases the discount rate, borrowing increases and reserves increase.
If the reserve ratio is 20 percent, the money multiplier is
The formula for the money multiplier is 1/R, where R is represents the reserve ratio of all banks in the economy. If the reserve ratio is 20 percent, the money multiplier is 1/0.2=5.
The nominal interest rate is 10%, inflation is 4%, the marginal income tax rate is 25%. What is after-tax real rate of interest?
The government takes 25% of the nominal rate of 10%, leaving an after-tax nominal interest rate of only 10% - (10 x 0.25) = 7.5%. Thus the after-tax real interest rate is 7.5% - 4% = 3.5%.
In the U.S., the income tax treats the nominal interest earned on savings as income, even though part of the nominal interest rate merely compensates for inflation.
The income tax treats the nominal interest earned on savings as income, even though part of the nominal interest rate merely compensates for inflation. Because the after-tax real interest rate provides the incentive to save, saving is much less attractive in the economy with high inflation.
The real interest rate is 5%, inflation is 3%, and the marginal income tax rate is 25%. What is after-tax real rate of interest?
The income tax treats this entire nominal interest of 5% + 3% = 8% as income, the government takes 25% of it, leaving an after-tax nominal interest rate of only 8% - (8% x 0.25) = 6%. The after-tax real interest rate is 6% - 3% = 3%.
discount rate
The interest rate on the loans that the Fed makes to banks
In 2013 in Alaska the adult noninstitutionalized population was 537 thousand, 340 thousand people were employed, and 24 thousand people were unemployed. According to these numbers, the Alaskan labor force participation rate and unemployment rate were about 67.8%, 6.6%.
The labor force participation rate = 100 x labor force/population and the unemployment rate = 100 x unemployed/labor force. The labor force is the sum of the number unemployed and the number employed.
As the price level decreases, the value of money increases.
The primary reason people hold money is to use it as a medium of exchange. As the price level decreases, the value of money increases, so people must hold less money to purchase goods and services.
A Swedish mutual fund buys stock issued by a Norwegian company. This purchase is an example of Swedish foreign portfolio investment. It decreases Norway's net capital outflow.
The purchase of stock is portfolio investment, and since a Swedish company is acquiring stock in a company outside Sweden, it is Swedish foreign portfolio investment. Since capital is flowing into Norway, the purchase decreases Norway's net capital outflow.
A latte costs $3 in the United States. If the nominal exchange rate were 800 Japanese yen per U.S. dollar and the real exchange rate were 0.75, what would the price of a latte be in Japan?
The real exchange rate = (Nominal exchange rate X Domestic price)/Foreign price, so rearranging to solve for the Foreign price gives Foreign price = (Nominal exchange rate X Domestic price)/Real exchange rate. Substituting the values given yields Foreign price = (800 x 3)/0.75 = 3,200.
If a dollar buys less wheat in Russia than in the U.S., then the real exchange rate is less than 1; a profit may be made by buying wheat in the U.S. and selling it in Russia.
The real exchange rate for wheat between Russia and the U.S. can be calculated as the amount of wheat that can be bought with $1 in Russia divided by the amount of wheat that can be bought with $1 in the United States. If $1 buys less wheat in Russia than in the U.S., the real exchange rate is less than 1. Because more wheat can be bought for a dollar in the U.S. than in Russia, a profit could be made from taking $1 in the U.S., buying wheat here, transporting it to Russia, and selling it in Russia, where the value would be more than $1.
If the exchange rate is 7 Argentinian pesos per U.S. dollar, a side of beef costs 6,000 Argentinian pesos in Argentina, and a side of beef costs $1,000 in the U.S., then
The real exchange rate is calculated as (Nominal exchange rate X Domestic price)/Foreign price. Using the numbers for this case, the real exchange rate equals (7 Argentinean pesos per U.S. dollar x $1,000)/6,000 Argentinean pesos = 1.167. Since the real exchange rate is more than one, beef is less expensive in Argentina than in the U.S., so arbitrageurs could profit by buying beef in Argentina and selling it in the U.S.
There is no consensus among economists that unions are either good or bad for the economy.
There is no consensus among economists that unions are either good or bad for the economy. While some economists argue that unions are a type of cartel that increase unemployment, while also reducing the wages in the rest of the economy, other economists argue that unions are necessary in order to give workers some level of bargaining power against firms.
Tony has just finished high school and started looking for his first job, but has not yet found one. Other things the same, when Tony starts looking for work the unemployment rate and the labor-force participation rate both increase.
Tony is unemployed if he has looked for work during the past four weeks. The labor force is the sum of the employed and the unemployed.
Most economists agree that eliminating unemployment insurance would decrease the amount of unemployment in the economy.
Unemployment benefits stop when the unemployed find jobs. This reduces the incentives to seek and accept jobs, so unemployment insurance increases the time spent unemployed.
When inflation was expected to be high and it turns out to be low, wealth is redistributed from debtors to creditors.
Unexpected changes in prices redistribute wealth among debtors and creditors. Lower than expected inflation makes lenders (creditors) better off at the expense of the borrowers (debtors) because it increases the real value of the debt as the real interest rate is the difference between the nominal interest rate and the inflation rate.
Suppose that more Americans decide to vacation in France and that Americans purchase more French government bonds. Ignoring how payments are made for these purchases, the first action by itself lowers U.S. net exports, the second action by itself raises U.S. net capital outflow.
When Americans vacation in France, it counts as an import for the U.S. and an export for France, so more Americans vacationing in France raises American imports, which lowers American net exports. When Americans purchase more French government bonds, capital is flowing from the U.S. to France, so U.S. net capital outflow increases. Since any decrease in net exports must be matched by a decrease in net capital outflows, there would have to be other counterbalancing transactions, like exports from the U.S. to France and/or purchases of U.S. assets by French people, to equalize the changes in net exports and net capital outflows.
If Canadian purchases of foreign assets are less than purchases of Canadian assets by foreigners, then Canada has a negative net capital outflow and negative net exports.
When Canadians purchase foreign assets, capital flows out of Canada, and when foreigners purchase Canadian assets, capital flows in. In this Scenario, less capital is flowing out than in, so Canada has negative net capital outflow. Because net capital outflow always equals net exports, when a country has negative net capital outflow, it has negative net exports.
The Federal Reserve acts as a lender of last resort to banks.
When financially troubled banks find themselves short of cash, the Fed acts as a lender of the last resort. In other words, the Fed lends to those banks who cannot borrow anywhere else. The Fed makes such loans to maintain stability in the banking system.
During some year a country had $120 billion in domestic assets purchased by foreigners, had exports of $200 billion, and had imports of $70 billion. What was the value of foreign assets purchased by the country?
With exports of $200 billion and imports of $70 billion, the country had net exports of $130 billion, so it had net capital outflow of $130 billion. Since net capital outflow is the difference between the value of foreign assets purchased by the country and the value of domestic assets purchased by foreigners, the value of foreign assets purchased by the country equals the value of domestic assets purchased by foreigners ($120 billion) plus net capital outflow ($130 billion), which is $250 billion.
When inflation rises, the nominal interest rate rises, and people desire to hold less money
With the high inflation rate, people do not have the luxury of holding cash as a store of value. Rather they have to quickly convert cash into goods or keep it in the bank to earn some interest. Either way, people will hold less money.
fractional reserve banking
a banking system in which banks hold only a fraction of deposits as reserves
When Net Capital Outflow is negative, it means:
a country is experiencing capital inflow
Depreciation
a decrease in the value of a currency as measured by the amount of foreign currency it can buy
Inflation
a general increase in prices and fall in the purchasing value of money.
unemployment insurance
a government program that partially protects workers' incomes when they become unemployed
capital requirement
a government regulation specifying a minimum amount of bank capital
quantity theory of money
a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate
Purchasing Power Parity
a theory of exchange rates whereby a unit of any given currency should be able to buy the same quantity of goods in all countries
efficiency wages
above-equilibrium wages paid by firms to increase worker productivity
appreciation
an increase in the value of a currency as measured by the amount of foreign currency it can buy
central bank
an institution designed to oversee the banking system and regulate the quantity of money in the economy
medium of exchange
an item that buyers give to sellers when they want to purchase goods and services
store of value
an item that people can use to transfer purchasing power from the present to the future
demand deposit
balances in bank accounts that depositors can access on demand by writing a check
sectoral shifts
changes in the composition of demand across industries or regions of the country
Federal Open Market Committee (FOMC)
controls the amount of money (money supply) using the open market operations- the purchase and sale of gov. bonds
To increase the money supply the Fed can conduct open-market purchases. Alternatively, the Fed can
decrease the discount rate. -------------------------------------- The discount rate is the interest rate on the loans the Fed makes to other banks. When the Fed decreases the discount rate, banks will tend to borrow more money from the Fed since the interest they have to pay back has decreased. This will lead to increased borrowing from the Fed, and therefore more money will end up in bank reserves. This will enhance the ability of banks to make loans as well. In the end, the money supply will increase if the fed decreases the discount rate.
selling bonds
decreases the money supply
Reserves
deposits that banks have received but have not loaned out
When Net Capital Outflow is positive, it means:
domestic residents are spending more on foreign assets than foreigners are spending on domestic assets. - capital is flowing out
balanced trade
exports = imports
if net exports is negative
exports<imports
If net exports are positive, then
exports>imports
imports
goods produced abroad and sold domestically
Almost _______ of all unemployment end when the unemployed person leave the labor force
half ---> hard to distinguish between not in the labor force and unemployed
A wage above equilibrium ____
helps explain structural unemployment and the natural rate of unemployment. Unemployment created by above equilibrium wages is called structural unemployment. Structural unemployment is part of unemployment at its natural rate.
minimum wage laws can raise the wage about the elliquibrume causing an ____________ in labor
increase
An argument for the presence of unions is that they ____
increase the happiness and productivity of workers.
buying bonds
increases the money supply
Fed's policys determine...
inflation (long run) and employment and production (short run)
Arbitrage may not eliminate a price difference for a haircut in Paris versus a haircut in New York because ____
international travel would be too costly. Some goods and services are not easily tradable. The requirement of international travel for a service can eliminate arbitrage opportunities.
when a nation is running a trade deficit NX>0
it is buying more from foreigners than it is selling to them capital is flowing into the country NCO<0
when a nation is running a trade surplus NX>0
it is selling more to foreigners that it buying from them capital is flowing out of the country NCO>0
fiat money
money that has value because the government has ordered that it is an acceptable means to pay debts, lacks intrinstic value
commodity money
money that takes the form of a commodity with intrinsic value
Net Capital Outflow (NCO)
must always equal net exports NCO=NX
collective bargaining
negotiation of wages and other conditions of employment by an organized body of employees.
From 2000 to 2018, the U.S. had a large
net capital outflow and a trade deficit. ----------------------------------------------- From 2000 to 2018, U.S. imports far exceeded U.S. exports, so the U.S. had a large trade deficit and, as a result, a large net capital inflow.
real interest rate
nominal interest rate - inflation rate
discouraged workers
people who are available for work but have not looked for a job during the previous four weeks because they believe no jobs are available for them
reserve requirements
regulations on the minimum amount of reserves that banks must hold against deposits
During the 1770s, the United States ____
relied heavily on the inflation tax.
net exports (trade balance)
spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)
money multiplier
the amount of money the banking system generates with each dollar of reserves - reciprocal of the reserve ratio
Federal Reserve System
the central bank of the United States
menu costs
the costs of changing prices
Liquidity
the ease with which an asset can be converted into the economy's medium of exchange
quantity equation
the equation M x V = P x Y, which relates the quantity of money, the velocity of money, and the dollar value of the economy's output of goods and services
reserve ratio
the fraction of deposits that banks hold as reserves
federal funds rate
the interest rate at which banks make overnight loans to one another
natural rate of unemployment
the normal rate of unemployment around which the unemployment rate fluctuates
Fisher effect
the one-for-one adjustment of the nominal interest rate to the inflation rate
strike
the organized withdrawal of labor from a firm by a union
currency
the paper bills and coins in the hands of the public
unemployment rate
the percentage of the labor force that is unemployed =unemployed/labor force x 100
labor force participation rate
the percentage of the population aged 16 or older that is in the labor force =labor force/adult population x 100
job search
the process by which workers find appropriate jobs given their tastes and skills
monetary neutrality
the proposition that changes in the money supply do not affect real variables
open market operations
the purchase and sale of U.S. government bonds by the Fed
net capital outflow
the purchase of foreign assets by domestic residents minus the purchase of domestic assets by foreigners
money supply
the quantity of money available in the economy
real exchange rate
the rate at which a person can trade the goods and services of one country for the goods and services of another (nominal exchange rate x domestic price)/foreign price
velocity of money
the rate at which money changes hands V = (P x Y) / M p- price level (nomial GDP) y- quantity of output (real gdp) m- quantity of money
nominal exchange rate
the rate at which one country's currency trades for another
leverage ratio
the ratio of assets to bank capital
One cost of deflation is ____
the redistribution of wealth toward creditors and away from debtors. _____________________________________________ Deflation causes the value of debts to increase in real terms, transferring money from debtors to creditors.
bank capital
the resources a bank's owners have put into the institution
shoe leather costs
the resources wasted when inflation encourages people to reduce their money holdings
inflation tax
the revenue the government raises by creating money
money
the set of assets in an economy that people regularly use to buy goods and services from other people
Moentary policy
the setting of the money supply by policymakers in the central banker
classical dichotomy
the theoretical separation of nominal and real variables changes in the supply of money affect nominal variables but not real ones
labor force
the total number of workers, including both the employed and the unemployed
leverage
the use of borrowed money to supplement existing funds for purposes of investment
when the overall price level rises,
the value of money falls
unit of account
the yardstick people use to post prices and record debts
frictional unemployment
unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills
structural unemployment
unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
nominal variables
variables measured in monetary units ex $$$
real variables
variables measured in physical units (relative prices, real wages, real interest rate)
Is used to refer to the total of all store value, both money and nonmonetery assests
wealth
when you increase the amount of money
you decrease the value of money