Econ 220 Exam 2
6, How are the real wage rate and the quantity of labor demanded (hired) related?
Quantity of labor demanded is the total labor hours that all the firms in the economy plan to hire during a given time period at a given real wage rate. Demand for labor is the relationship between the quantity of labor demanded and real wage rate when all other influences on firms' hiring plans remain the same. The lower the real wage rate, the greater is the quantity of labor demanded.
x 25 ,How does a change in the real interest rate affect the quantity of loanable funds?
1. Disposable income 2. Wealth 3. Expected future income 4. Default risk
n30, How is the effect of a government budget surplus or deficit on the market for loanable funds shown graphically?
10. 3 p44
8, What factors affect the length of time an unemployed person searches for a job?
Demographic change Unemployment benefits Structural change
15, What is the formula for calculating labor productivity?
Real GDP/Aggregate hours
44, What is the formula for calculating the real interest rate?
Real Interest Rate = Nominal Interest Rate - Inflation Rate
34, How do banks earn a profit?
The banking system consists of The Federal Reserve The banks and other institutions that accept deposits and that provide the services that enable people and businesses to make and receive payments.
n13, What measurement do economists use to measure the standard of living?
The contribution of real GDP growth to the change in the standard of living depends on the growth rate of real GDP per person. The standard of living depends on real GDP per person.
n29, To what does the phrase "crowding-out effect" refer?
The tendency for a government budget deficit to raise the real interest rate and decrease investment is called the crowding-out effect. Reference to the stifling of private spending in areas where government purchasing is high.
36, What is a central bank?
a public authority that provides banking services to banks and regulates financial institutions and markets.
n5, What relationship does the production function graph show?
a relationship that shows the maximum quantity of real GDP that can be produced as the quantity of labor employed changes and all other influences on production remain the same
33, To what does the phrase 'store of value' refer?
any commodity or token that can be held and exchanged later for goods and services. The more stable the value of a commodity or token, the better it can act as a store of value and the more useful it is as money.
38, How do banks create money?
A bank earns a moderate interest rate on securities, but it can sell them quickly if it needs cash. Loans earn the bank a high interest rate, but they are risky and cannot be called in before the agreed date
22, What do economists call the change in the quantity of capital from one period to the next?
Net investment is the change in the quantity of capital—equals gross investment minus depreciation.
19, What is the key reason why some nations show little or no economic growth?
lack of incentives to undertake actions toward growth.
32, To what does the phrase 'fiat money' refer?
objects that are money because the law decrees or orders them to be money. The objects that we use as money today are Currency Deposits at banks and other financial institutions
18, What is the new growth theory?
our unlimited wants will lead us to ever greater productivity and perpetual economic growth. According to it, real GDP per person grows because of the choices people make in the pursuit of profit.
x 23, To what does the phrase "financial markets" refer?
refer solely to the markets that are used to raise finance: for long-term finance, capital markets are used; for short-term finance (maturity up to one year), money markets are used.
41, To what does the phrase 'the quantity of money demanded' refer?
the amount of money that households and firms choose to hold.
12, What is the formula for calculating the growth rate of real GDP?
the annual percentage change of real GDP (Real GDP in current year - Real GDP on previous year)/Real GDP in previous year
2, What is the Keynesian macroeconomic model?
the market economy is inherently unstable and it requires active government intervention to achieve full employment and sustained economic growth.
1, What is the Classical macroeconomic model?
the market economy works well and delivers the best available macroeconomic performance. Aggregate fluctuations are a natural consequence of an expanding economy with rising living standards. Government intervention can only hinder the ability of the market to allocate resources efficiently.
7, What is the unemployment rate at full employment called?
the natural unemployment
n48, What is the velocity of circulation?
the number of times in a year that the average dollar of money gets used to buy final goods and services.
14, What is the Rule of 70 used to calculate?
the number of years it takes for the level of any variable to double, which is approximately 70 divided by the annual percentage growth rate of the variable.
20, What can a government do in order to increase economic growth?
Property rights are the social arrangements that govern the protection of private property .Create incentive mechanisms Encourage saving Encourage research and development Encourage international trade Improve the quality of education A well-intentioned government cannot dial up a big increase in the growth rate.
n47, What is the quantity theory of money?
the proposition that when real GDP equals potential GDP, an increase in the quantity of money brings an equal percentage increase in the price level (other things remaining the same).
46, What determines the value of money?
the quantity of goods and services that a unit of money will buy. It is the inverse of the price level, P, which equals the GDP price index divided by 100. That is, Value of money = 1/P.
n11, How do economists define economic growth?
the sustained expansion of production possibilities. An economy grows when it develops better technology, improves the quality of labor, or increases the quantity of capital.
17, What is the classical growth theory?
the theory that the clash between an exploding population and limited resources will eventually bring economic growth to an end.
3, What is potential GDP?
the value of real GDP when all the economy's factors of production are fully employed. We produce the goods and services that make up real GDP by using factors of production: labor and human capital, physical capital, land, and entrepreneurship.
9, When does job rationing occur?
when the real wage rate is above the full-employment equilibrium level.
28, How does the government budget affect the market for loanable funds?
A government budget surplus increases the supply of loanable funds. To find the supply of loanable funds, we must add the government budget surplus to private saving supply. An increase in the supply of loanable funds brings a lower real interest rate, which decreases the quantity of private funds supplied and increases the quantity of investment and the quantity of loanable funds demanded. A government budget deficit increases the demand for loanable funds. The increase in the demand of loanable funds raises the real interest rate, which increases the quantity of private funds supplied. But the higher interest rate decreases investment and the quantity of loanable funds demanded by firms to finance investment.
x 45, How is the price level related to the demand for money?
An x percent rise in the price level brings an x percent increase in the quantity of money that people plan to hold because the number of dollars we need to make payments is proportional to the price level.
31, What is the economist's definition of money?
Any commodity or token that is generally accepted as a means of payment.
39, What happens to banking reserves if the Fed buys government securities?
By buying securities in the open market, the Fed can increase the monetary base.
40, What happens to banking reserves if the Fed sells government securities?
By selling securities in the open market, the Fed can decrease the monetary base.
16, How do the expansion of human capital and the discovery of new technologies affect real GDP and the productivity curve?
Expansion of human capital and the discovery of new technologies has increased labor productivity. When labor productivity grows, real GDP per person grows, so the growth in labor productivity is the basis of rising living standards. The discovery of new technologies has made an even greater contribution to economic growth than the growth of physical capital and the expansion of human capital. To reap the benefits of technological change, capital must increase. Some of the most powerful technologies are embodied in human capital, but most technologies are embodied in physical capital.
50, What are "shoe-leather costs" of inflation?
So-called "shoe-leather" costs arise from an increase in the velocity of circulation of money and an increase in the amount of running around that people do to try to avoid incurring losses from the falling value of money.
43, What happens to the nominal interest rate when the Fed changes the quantity of money?
Starting from a long-run equilibrium, suppose that the Fed increases the quantity of money by 10 percent. In the short run, the greater quantity of money lowers the nominal interest rate. With the lower interest rate, people and firms spend more. But with real GDP equal to potential GDP, prices start to rise. At the new long-run equilibrium, the price level will have risen by 10 percent, from 1.0 to 1.1. "When the Fed increases the quantity of money, it usually does so by an open market operation and buys government securities. In fact, the Fed buys a lot of government securities, and these securities all pay interest to the Fed. 1) If the Fed increases the quantity of money, short-term nominal interests rates fall 2) If the Fed decreases the quantity of money, short-term nominal interest rates rise
49, What kinds of problems are caused by high inflation?
Tax costs Shoe-leather costs Confusion costs Uncertainty costs
21, What is depreciation?
The decrease in the value of capital that results from its use and from obsolescence.
35, What is the main goal of a commercial bank?
The goal of a commercial bank is to maximize the long-term wealth of its stockholders.
x 26, How does the interest rate adjust to bring the market for loanable funds into equilibrium?
The loanable funds market is in equilibrium at the real interest rate at which the quantity of loanable funds demanded equals the quantity of loanable funds supplied
n37, What are the components included in the monetary base?
The monetary base is the sum of coins, Federal Reserve notes, and banks' reserves at the Fed.
42, What is the opportunity cost of holding money as cash or checkable deposits?
The opportunity cost of holding money is the interest forgone on an alternative asset. the nominal interest because it is the sum of the real interest rate on an alternative asset plus the expected inflation rate, which is the rate at which money loses buying power.
4, How is the labor market related to potential GDP?
The quantity of labor employed depends on the choices of people and businesses. So real GDP produced depends on the quantity of labor employed. To describe the relationship between real GDP and the quantity of labor employed, we use a relationship called the production function. When the economy is at full employment, real GDP equals potential GDP.
24, What is the opportunity cost of the financial resources used to finance the purchase of capital?
The real interest rate.
10, How does a minimum wage set above the equilibrium wage rate affect the labor market?
The real wage rate might be set above the full-employment equilibrium level for three reasons: Efficiency wage Minimum wage Union wage If the government sets a minimum wage above the equilibrium wage rate, unemployment results. The above-equilibrium real wage rate decreases the quantity of labor demanded and increases the quantity of labor supplied. If the real wage rate is above the full-employment equilibrium level, the natural unemployment rate increases.
27, How does a change in wealth affect the market for loanable funds?
Wealth, expected future income, or default risk increases.
