econ final
If a bank that desires to hold no excess reserves and has just enough reserves to meet the required reserve ratio of 15 percent receives a deposit of $600, it has a
$510 increase in excess reserves and a $90 increase in required reserves
A bank's reserve ratio is 8 percent and the bank has $1,000 in deposits. Its reserves amount to
$80
GDP deflator
(Nominal GDP/Real GDP) x 100 real = constant prices using base year and more accurate
inflation in year 2
)GDP deflator year 2- GDP deflator year 1)/ GDP deflator year 1 X 100
household to firm
- $250 clancy spends - elleen's labor
Which of the following statements about the debate over stabilization policy are correct?
- Advocates of active stabilization policy believe that the government can adjust monetary and fiscal policy to counteract waves of excessive optimism and pessimism among consumers and businesses. - Opponents of active stabilization policy believe that significant time lags in both fiscal and monetary policy often exacerbate economic fluctuations.
Which of the following, if true, would illustrate why price indexes such as the CSPI might overstate inflation in the cost of going to college? Check all that apply.
- As the price of textbooks increased, more and more students turned to the used-book market or chose not to buy textbooks at all, instead using the copies on reserve in the library. - A new, safe method of memory enhancement became available for purchase. - The quality and design of calculators improved dramatically from 2014 to 2016. For example, calculators made in 2016 accept memory cards, whereas those made in 2014 do not, but this quality change is hard to measure.
Difference in GDP deflator and CPI
- GDP reflects prices of all goods and services produced domestically whereas CPI shows what is bought bu consumers
Suppose a senator considers introducing a bill to legislate a minimum hourly wage of $7.50.
- In the absence of price controls, a shortage puts upward pressure on wages until they rise to the equilibrium. - If the minimum wage is set at $10.50, the market will not reach equilibrium.
Which of the following help to explain the increase in international trade and finance since the 1950s
- Services such as web conferencing and teleconferencing that facilitate international meetings - Better high-speed rail lines - International trade agreements such as the North American Free Trade Agreement (NAFTA) - International trade agreements such as the General Agreement on Tariffs and Trade (GATT)
Suppose that, in an attempt to combat severe inflation, the government decides to decrease the amount of money in circulation in the economy.
- This monetary policy decreases the economy's demand for goods and services, leading to lower product prices. In the short run, the change in prices induces firms to produce fewer goods and services. This, in turn, leads to a higher level of unemployment. - In other words, the economy faces a trade-off between inflation and unemployment: Lower inflation leads to higher unemployment.
the bond market
- a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond. Put simply, a bond is an IOU - a saver, long term bonds are higher risk
Firm --> Household
- car wash i receive - $225 per week Sam earns
One important variable that shifts the aggregate-demand curve is monetary policy
- fed increases money supply by buying gov bonds - shift MS to the right - lowers interest rate and increases quant of goods and services demanded, shifting AD to the right
interest- rate effect
- higher PL raises money demand - higher money demand leads to higher interest rate - higher interest rate reduces the quantity of goods and services demanded
Suppose the Fed announces that it is lowering its target interest rate by 75 basis points, or 0.75 percentage point.
- increase the supply of money by buying bonds from the public - targeting a lower interest rate will reduce the cost of borrowing, causing residential and business investment spending to increase and the quantity of output demanded to increase at each price level
against active stabilization
- long laf - passive monetary policy
reason for phillips curve
- low unemployment is associated with high AD - The Phillips curve shows the combinations of inflation and unemployment that arise in the short run as shifts in the aggregate-demand curve move the economy along the short-run aggregate-supply curve
positive versus normative statements
- positive make a claim about how the world is EX: In the past decade, U.S. companies have outsourced millions of jobs overseas. - normative is how the world should be EX: Companies that outsource jobs are acting immorally.
A special cost of unexpected inflation
- redistributes wealth among the population in a way that has nothing to do w merit or need bc many loans are specicifed in terms of the unit of account - money
Which of the following probably occurred as the U.S. economy experienced increasing real GDP in 1950?
- sales increased - unemployment declined - consumer spending increased
Initially, the government's budget is balanced; then the government responds to the conclusion of a war by significantly reducing defense spending without changing taxes.
- supply to the right - demand to the left
Employment act implications
- the government should avoid being a cause of economic fluctuations - the government should respond to changes in the private economy to stabilize aggregate demand
Which of the following probably occurred as the U.S. economy experienced declining real GDP in 1957?
- unemployment rate increased - corporate profits declined - total real income declined - retail sales declined
why AG demand is sloped downwards
- wealth effect: Consumers are wealthier, which stimulates the demand for consumption goods. - interest rate effect: Interest rates fall, which stimulates the demand for investment goods. - exchange-rate effect: The currency depreciates, which stimulates the demand for net exports.
A Starbucks Grande Latte costs $3.75 in the U.S. and 28 yuan in China. The nominal exchange rate is 6.75 yuan per dollar. The real exchange rate is
.904. If purchasing power parity held the nominal exchange rate would be higher.
The nominal interest rate is 4%, the inflation rate is 1% and the tax rate is 20%. Given U.S. tax laws, how is after-tax real return computed?
0.04(1-0.20) - 0.01
Name three parts of government that regularly rely on advice from economists.
1). The president 2). Congress 3). The Federal Reserve
Problems in controlling the money supply
1. fed does not control the amount of money that households choose to hold as deposits in banks (The Fed cannot control the amount of money that households choose to hold as currency) 2. fed does not control the amount that bankers choose to lend (The Fed cannot control whether and to what extent banks hold excess reserves)
FOMC (Federal Open Market Committee)
12 Memeber group that buys and sells US gov. securities to influence the money supply and BoG has 7 who serve 14 year terms - primary tool is open-market operation: the purchase and sale of US gov bonds - only 5 bank presidents - to DECREASE $, they will sell gov bonds or increase discount rate (open-market sale) - to INCREASE will purchase US gov bonds
Suppose the economy is closed with national saving of $3 trillion, consumption of $10 trillion, and government purchases of $4 trillion. What is GDP?
17 trillion
James owns two houses. He rents one house to the Johnson family for $10,000 per year. He lives in the other house. If he were to rent the house in which he lives, he could earn $12,000 per year in rent. How much do the housing services provided by the two houses contribute to GDP?
22,000
If the reserve ratio is 4 percent, then the money multiplier is
25
With the economy in a recession because of inadequate aggregate demand, the government increases its purchases by $1,200. Suppose the central bank adjusts the money supply to hold the interest rate constant, investment spending is fixed, and the marginal propensity to consume is ⅔. How large is the increase in aggregate demand?
3600
A bank's reserve ratio is 5 percent and the bank has $2,280 in reserve. Its deposits amount to
45,600
In a small closed economy investment is $50 billion and private saving is $45 billion. What are public saving and national saving?
5 billion and 50 billion
A U.S.-owned automobile factory uses $100,000 worth of parts purchased from foreign countries along with U.S. inputs to produce 30 cars worth $20,000 each. Twenty of these cars are sold and 10 are left in inventory. How much did these actions add to GDP?
500,000 (30*20,000) - 100,000
An economy's production form takes the form Y = AF(L, K, H, N).
A = technology K = physical capital only
union
A worker association that bargains with employers over wages, benefits, and working conditions, type of cartel - 11% of US workers - contribute to both structural unemployment and the natural rate of unemployment. - raise wages in unionzed countries
exchange rate effect
Additionally, as the price level falls, the impact on the domestic interest rate will cause the real value of the dollar to FALL in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore RISE , and the number of foreign products purchased by domestic consumers and firms (imports) will FALL. Net exports will therefore RISE , causing the quantity of domestic output demanded to RISE
supply shock
An unexpected event that causes the short-run aggregate supply curve to shift - an event that directly alters firms' costs and prices, shifting the economy's aggregate-supply curve and thus the Phillips curve - increase in price of oil
wealth effect
As the price level falls, the purchasing power of households' real wealth will RISE , causing the quantity of output demanded to RISE
interest rate effect
As the price level rises, the cost of borrowing money will RISE, causing the quantity of output demanded to FALL
changes in taxes
Because it increases consumer spending, the tax cut shifts the aggregate-demand curve to the right. Similarly, a tax increase depresses consumer spending and shifts the aggregate-demand curve to the left
municipal bonds
Bonds issued by state and local governments - bond owners are not required to pay federal income tax on interest income and so these pay a lower interest rate than bonds by corporations or fed govt
Harvey receives his first paycheck for working as an ice cream vendor. To which of the arrows does this transaction directly contribute?
C and D - households to factors to firms - firms to factor to household
If people have rational expectations, the sacrifice ratio could be much higher than suggested by the short-run Phillips curve. If people have rational expectations, the sacrifice ratio could be much smaller than suggested by the short-run Phillips curve.
FALSE TRUE
Why LRAS is vertical
In the long run factors of production are fixed, so LRAS is constant. - price level does not determine the long-run determinents
Moving along phillips curve
Increases in the money supply, increases in government spending, or cuts in taxes expand aggregate demand and move the economy to a point on the Phillips curve with higher inflation and lower unemployment. Decreases in the money supply, cuts in government spending, or increases in taxes contract aggregate demand and move the economy to a point on the Phillips curve with lower inflation and higher unemployment.
inflation fallacy
Inflation does not in itself reduce people's real purchasing power - nominal income rises with rising prices
quantity 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
Other things the same, if a country saves more, then
NCO rises so NE rise
always true in an open economy
NX = Y - C - G - I NX = S - I NX = NCO
Why the Short-Run Aggregate-Supply Curve Might Shift
RIGHT - increase in quantity of labor - increase in physical or human capital - increase in natural resources - advance in tech - decrease in expected PL LEFT - higher inflation expectations - increase in input prices - increase in tax rates - increase in regulations
Long Run Phillips Curve
Relationship between the inflation rate and the unemployment rate in the long run, looks at long-term natural rate of unemployment. - vertical and does not deoend on money growth and inflation (monetary neutrality) - A policy change that reduced the natural rate of unemployment would shift the long-run Phillips curve to the left.
Y - C - G = I + NX
S = I + NX S = I + NCO
Why the LRAS Curve Might Shift
Shifts caused by factors of production. labor, capital, technology, natural resources INCREASE - more adults to find work - increase skill of workforce - scientific breakthrough DECREASE - increasing minimum wage - ceasing exports - going to foreign countries - natural disaster destroys production facilities
Which of the following are arguments in favor of active stabilization policy by the government
Shifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses.
Suppose Susan can wash three windows per hour or she can iron six shirts per hour. Paul can wash two windows per hour or he can iron five shirts per hour.
Susan has an absolute advantage over Paul in washing windows. Susan has a comparative advantage over Paul in washing windows. Paul has a comparative advantage over Susan in ironing shirts.
Expenditures must equal income?
TRUE
If people have rational expectations, the economy may not have to endure an unemployment rate as high as predicted by the short-run Phillips curve.
TRUE
supply for loanable funds
The amount of saving made available for lending at each real interest rate - saving is the source - rises when interest rate rises - change in tax law that encourages saving shift right - gov spends more than it receives, lowers saving shift LEFT ^^ crowding out (
Which of the following events would cause the price of oranges to fall?
The price of land throughout Florida decreases, and Florida produces a significant proportion of the nation's oranges.
What does the previous analysis suggest about the market for money?
The quantity of money demanded decreases as the interest rate rises.
variables that influence net captial outflow
The real interest rates paid on foreign assets The real interest rates paid on domestic assets The perceived economic and political risks of holding assets abroad The government policies that affect foreign ownership of domestic assets
Which of the following statements best represents economists' beliefs about the bias in the CPI as a measure of the cost of living?
There is still debate among economists on the severity of the CPI bias and what to do about it.
Suppose savers either buy bonds or make deposits in savings accounts at banks. Initially, the interest income earned on bonds or deposits is taxed at a rate of 20%. Now suppose there is an increase in the tax rate on interest income, from 20% to 25%
This change in the tax treatment of interest income from saving causes the equilibrium interest rate in the market for loanable funds to rise and the level of investment spending to decrease - supply left
A Minnesota farmer buys a new tractor made in Iowa by a German company. As a result,
U.S. investment and GDP increase, but German GDP is unaffected.
If U.S. residents purchase $600 billion worth of foreign assets and foreigners purchase $300 billion worth of U.S. assets,
U.S. net capital outflow is $300 billion; capital is flowing out of the U.S.
Components of GDP
Y = C+I +G +NX
When you calculate your true costs of going to college, what portion of your room-and-board expenses should be included?
You should include only the amount by which your room-and-board expenses exceed the expenses for rent and food if you were not in college.
fractional reserve banking
a banking system that keeps only a fraction of funds on hand and lends out the remainder
Foreign Direct Investment
a capital investment that is owned and operated by a foreign entity - A U.S. beverage company opens a bottling plant in Russia.
forward guidance
a central bank commitment to a future path of the policy interest rate
aggregate supply curve
a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level - long-run it is vertical - short-run it slopes upwards
aggregate demand curve
a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level
Phillips Curve
a curve that shows the short-run trade-off between inflation and unemployment inflation rate * unemployment rate decreasing!!!
Depreciation
a decrease in the value of a currency as measured by the amount of foreign currency it can buy - exchange rate falls from 80 to 70 yen per dollar, dollar depreciates - weaken
unemployment insurance
a government program that partially protects workers' incomes when they become unemployed - increase frictional unemployment
capital requirement
a government regulation specifying a minimum amount of bank capital
core CPI
a measure of the overall cost of consumer goods and services excluding food and energy
CPI
a measure of the overall cost of the goods and services bought by a typical consumer - price in current year / price in base year
A checking deposit functions as
a medium of exchange and as a store of value.
liquidity trap
a situation in which conventional monetary policy is ineffective because nominal interest rates are up against the zero bound
marginal change
a small incremental adjustment to a plan of action
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 arbitrage = taking advantages of price differences for same item - same real value in every country
The CPI is a measure of the overall cost of the goods and services bought by
a typical consumer
efficiency wages
above-equilibrium wages paid by firms to increase worker productivity - increase worker health - worker turnover, less likely to leave - worker qualiity - worker effort - labor surplus and increase unemployment
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
closed economy
an economy that does not interact with other economies in the world, no international trade is NX = 0 Y = C + I + G
Externality
an impact, positive or negative, of one individual's activities on the well-being of a bystander EX: A manufacturing plant dumps chemical waste into a nearby river, poisoning the water supply for a small town downstream
appreciation
an increase in the value of a currency as measured by the amount of foreign currency it can buy - exchange rate raises from 80 to 90 yen per dollar, dollar appreciates - strong
mutual fund
an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds - allow people with little money to diversify their holdings - give ordinary people access to the skills of professional money managers
foreign portfolio investment
an investment that is financed with foreign money but operated by domestic residents
store value
an item that people can use to transfer purchasing power from the present to the future
In the basket of goods that is used to compute the consumer price index, which of the following categories of consumer spending is the smallest?
apparel
In a system of 100-percent-reserve banking
banks do not make loans
equality
beneifts are distributed uniformly among society's members
increase in MS benefits
borrowers
Treasury Bonds are
both liquid and a store of value
what is included in GDP
both the market value of rental housing services and the market value of owner-occupied housing services
Shift in the Aggregate demand curve.
change in consumption: spending more, demand shifts right change in investment: firm invest more, demand shift right change in gov purchases: increase in purchases shift demand right change in NX: raising spending on net exports shifts right TO DECREASE wealth = decrease taxes = increase interest rates = increase value of domestic to foreign = appreciate TO INCREASE expectations = improve gov spending = increase expected rate = increase income from other countries = increase
automatic stabilizers
changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action - tax system!!! EX: personal income taxes, unemployment, corporate income taxes
misperceptions theory
changes in the overall price level can temporarily mislead suppliers about what is happening in the individual markets in which they sell their output. As a result of these short-run misperceptions, suppliers respond to changes in the level of prices, and this response leads to an upward-sloping aggregate-supply curve.
Economists speaking like policy advisers make
claims about how the world should be
The Federal Reserve's target rate for the federal funds rate
commits the Fed to set a particular money supply so that it hits the announced target.
when fed slows the rate at which the MS is growing
contracts aggregate demand, reduces quant of goods and services and rise in unemployment
The goal of the consumer price index is to measure changes in the
cost of living
An American brewery sells dollars to obtain euros. It then uses the euros to buy brewing equipment from a German company. These transaction
decrease U.S. net capital outflow because Germans obtain U.S. assets
If the government wants to contract aggregate demand, it can ________ government purchases or ________ taxes.
decrease, increase
A Japanese bank buys U.S. government bonds, this purchase
decreases U.S. net capital outflow, but increases Japanese net capital outflow.
An increase in the minimum wage
decreases the quantity of labor demanded but increases the quantity of labor supplied.
When the quality of a good improves while its price remains the same, the purchasing power of the dollar
decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
When the money market is drawn with the value of money on the vertical axis, as the price level increases, the value of money
decreases, so the quantity of money demanded increases
An investment tax credit effectively lowers the tax bill of any firm that purchases new capital in the relevant time period. Suppose the government implements a new investment tax credit.
demand right
price level increases from 90 to 105
demand shifts right - quantity of money demanded at the initial interest rate of 6% will be greater than the quantity of money supplied by the Fed at this interest rate. People will try to increase their money holdings. In order to do so, people will sell bonds and other interest-bearing assets, and bond issuers will find that they have to offer higher interest rates until the money market reaches its new equilibrium at an interest rate of 8% - The change in the interest rate that you found previously will cause residential and business investment spending to fall , leading to a decrease in the quantity of output demanded in the economy.
reserves
deposits that banks have received but have not loaned out demand deposits - loans - demand deposits are a type of *checking account*
All saving in the U.S. economy shows up as
either investment in the U.S. economy or U.S. net capital outflow
When the Federal Reserve increases the money supply, it ___ aggregate demand and moves the economy along the Phillips curve to a point with ____ inflation and ___ unemployment
expands, higher, lower
net exports
exports - imports - Sean's employer assigns him to provide consulting services to an Australian firm that's opening a manufacturing facility in China.
Which of the following can lead to market failure?
externalities and market power
The value of money rises as the price level
falls, because the number of dollars needed to buy a representative basket of goods falls.
If people decide to hold more currency relative to deposits, the money supply
falls. The larger the reserve ratio is, the less the money supply falls
financial markets
financial institutions through which savers can directly provide funds to borrowers - bond and stock market
financial intermediaries
financial institutions through which savers can indirectly provide funds to borrowers - banks and mutual funds
Limitations of Purchasing Power Parity
first reason-many goods are not easily traded(haircut more expensive in Paris then New York) 2.Even tradable goods are not always perfect substitutes when they are produced in different countries. (German vs. US cars) -Thus, both because some goods are not tradable and because some tradable goods are not perfect substitutes with foreign counterparts, purchasing power parity is not a perfect theory of exchange rate determination.
When the government's budget deficit increases
gov is borrowing more and public savings falls - changes supply of loanable funds
stagflation
he short-run economic outcome resulting from the increase in production costs
For an actual economy, total expenditures on goods and services by households does not equal GDP because
household expenditures on goods and services falls short of GDP, since household save for the future.
Which of the following correctly lists what is included in the consumption component of GDP?
household purchases of services, nondurable goods, and durable goods other than residential construction
market for goods and services (product market)
households are buyers and firms are sellers - antonio spends $250 on legal service - caroline spends $9 for gas
market for factors of production (inputs)
households are sellers and firms are buyers - caroline earns $525 per week
firms earn revenue when
households purchase goods and servcies in markets for goods and services
The nominal interest rate tells you
how fast the number of dollars in your bank account rises over time
The real interest rate tells you
how fast the purchasing power of your bank account rises over time.
Money demand refers to
how much wealth people want to hold in liquid form
Paul, a U.S. citizen, builds a telescope factory in Israel. His expenditures
increase U.S. net capital outflow, but decrease Israeli net capital outflow
Why AG slopes upward in short run
increase in the overall level of prices in the economy tends to raise the quantity of goods and services supplied The quantity of output supplied deviates from its long-run, or natural, level when the actual price level in the economy deviates from the price level that people expected to prevail
The principle of monetary neutrality implies that an increase in the money supply will
increase price level but not real GDP - relevant in long run
If the United States government lowers the income taxes on the wealthiest Americans, while decreasing welfare payments to the poorest Americans, the result will likely bean __________ in efficiency and a __________ in equality in the United States
increase, decrease
If the central bank wants to expand aggregate demand, it can ________ the money supply, which would ________ the interest rate.
increase, decrease
If the Federal Reserve increases the rate of money growth and maintains it at the new higher rate, eventually expected inflation will ___ and the short-run Phillips curve will shift ____
increase, upward
The shape of Germany's production possibilities frontier (PPF) should reflect the fact that as Germany produces more trucks and fewer smartphones, the opportunity cost of producing each additional truck
increases
On a production function, as capital per worker increases, output per worker
increases. This increase is smaller at larger values of capital per worker
change aimed at expanding aggregate demand
increasing the money supply or as lowering the interest rate
According to Adam Smith, the success of decentralized market economies is primarily due to
individuals' pursuit of self-interest
When NX < 0 (trade deficit)
it is buying more goods and services from foreigners than it is selling to them. How is it financing the net purchase of these goods and services in world markets? It must be selling assets abroad. Capital is flowing into the country (NCO < 0).
When NX > 0 (trade surplus)
it is selling more goods and services to foreigners than it is buying from them. What is it doing with the foreign currency it receives from the net sale of goods and services abroad? It must be using it to buy foreign assets. Capital is flowing out of the country (NCO > 0).
Wealth is redistributed from creditors to debtors when inflation was expected to be
low and turns out to be high
Fiat money
money that has value because the government has ordered that it is an acceptable means to pay debts - no intrinsic value- monopoly money and paper dollars
Which of the following ins an example of an automatic stabilizer? When the economy goes into a recession,
more people become eligible for unemployment insurance benefits
Suppose that real interest rates in the U.S. rise relative to real interest rates in other countries. This increase would make foreigners
more willing to purchase U.S. bonds, so U.S. net capital outflow would fall
relative liquidity
most: $10 bill Funds in saving account share of stocks car
If a country has negative net capital outflows, then its net exports are
negative and it's saving is smaller than its domestic investment
NCO = NX
net capital outflow = net exports
The logic behind the catch-up effect is that
new capital adds more to production in a country that doesn't have much capital than in a country that already has much capital
real interest rate formula
nominal interest rate - inflation rate
sticky wage theory
nominal wages are slow to adjust to changing economic conditions - If the actual price level turns out to be 110, the firm's output prices will RISE , and the wages the firm pays its workers will remain fixed at the contracted level. The firm will respond to the unexpected increase in the price level by INCREASING the quantity of output it supplies. If many firms face similarly rigid wage contracts, the unexpected increase in the price level causes the quantity of output supplied tor RISE ABOVE t the natural level of output in the short run.
If your firm's production function has constant returns to scale, and if you double all your inputs, then your firm's productivity will
not change
labor force participation rate
number in labor force/ adult population
Which of the following firms is most likely to have market power? - grocery store in metro area - convenience in suburb - pub in college town - only gasoline station in rural area
only gasoline station in rural area &&&&& cable TV provider in tusla
Real GDP will increase
only when output increases
short run economic fluctuations focuses on
output of goods and services, real GDP (real) average level of prices, CPI or GDP deflator (nominal) model of aggregate demand and aggregate supply vertical: overall price level horizontal: overall quantity of goods and services
In the simple circular-flow diagram, households
own the factors of production
the stock market
ownership in a firm and is, therefore, a claim to the profits that the firm makes - raise money = equity finance - sale of bonds = debt finance - claim to a share of the profits, ownership in a firm and equity finance
1/P = e/P*
p = price in US p* = price in japan e = nominal exchange rate 1 = eP/p* - if the purchasing power of the dollar is always the same at home and abroad, then the real exchange rate—the relative price of domestic and foreign goods—cannot change.
rational people
people who systematically and purposefully do the best they can to achieve their objectives
The term price takers refers to buyers and sellers in
perfectly competitive markets.
Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following?
price level, inflation rate
Which of the following factors explains most of the differences in standards of living among countries around the world?
productivity - the amount of goods and services that can be produced for each unit of labor input. Countries with high productivity, in which workers can produce large amounts of goods and services, tend to have higher standards of living
The Federal Deposit Insurance Corporation
protects depositors in the event of bank failures
A decrease in government spending and the enactment of an investment tax credit would definitely cause
quantity of loanable funds traded to decrease
equation for quantity of output supplied
quantity of output supplied = natural level of output + a(actual price - expected price) a = determines how much output responds to unexpected changes in the price level
A nation's standard of living is best measured by its
real GDP per person
Suppose the price level rises, but the number of dollars you are paid per hour stays the same. This means that your
real wage is lower
Shoeleather cost refers to
resources used to maintain lower money holdings when inflation is high - more trips to the bank
As price levels fall the value of money
rises
saving versus investment
saving = tim buys government bond and purchas stock at a medicine company investment = brian purchases a condo in Denver or new oven for her cupcake-baking business
If the government's expenditures exceeded its receipts, it would likely
sell bonds directly to the public
When an adverse supply shock shifts the short run aggregate supply curve to the left, it also
shifts the short run phillips curve to the right
If the central bank in the preceding question instead holds the money supply constant and allows the interest rate to adjust, the change in aggregate demand resulting from the increase in government purchases will be
smaller but still positive
The mainstream view among economists is that
society faces a tradeoff between unemployment and inflation, but only in the short run
scarcity
society has limited resources and therefore cannot produce all the goods and services people wish to have
efficiency
society is getting the maximum benefits from its scarce resources
consumption
spending by households on goods and services, exception of new housing - durable goods (cars) and nondurable goods (food) - services include intangibale items haircuts and medical *** largest *** - Sean buys a sweater made in Guatemala && gets a video cam made in US
government purchases
spending on goods and services by local, state, and federal governments - salaries of govt workers, expenditures on public works - The state of Pennsylvania repaves highway PA 320, which goes through the center of Swarthmore - The city of Las Vegas, Nevada pays a private firm to collect garbage in that city.
You saved $500 in currency in your piggy bank to purchase a new laptop. The $500 you kept in your piggy bank illustrates money's function as a _______. The laptop's price is posted as $500. The $500 price illustrates money's function as a _____. You use the $500 to purchase the laptop. This transaction illustrates money's function as a ______.
store of value, unit of account, medium of exchange
In calculating the CPI, a fixed basket of goods and services is used. The quantities of the goods and services in the fixed basket are determined by
surveying consumers
The length of time until a bond matures is called the
term
invisible hand
term economists use to describe the self-regulating nature of the marketplace - free market
characteristics of bonds
term, credit risk (probability that the borrower will fail to pay some of the interest - default) , tax treatment - borrowing directly from the public
The discount rate is the interest rate that
the Fed charges banks for loans
Suppose the United States has a comparative advantage over Mexico in producing pork. The principle of comparative advantage asserts that
the United States should produce more pork than what it requires and export some of it to Mexico.
market power
the ability of an individual economic agent, or small number of economic agents, to influence the market price of a good or service - single public utilities company is responsible for supplying electricity for an entire state. as a result, the company can set the price
multiplier effect
the additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending multipler = 1/(1 - MPC)
money multipler
the amount of money the banking system generates with each dollar of reserves - 1/R (reserve ratio)
From one year to the next, inflation rises from 4% to 5%, while unemployment rises from 6% to 7%. Which of the following events could be responsible for this change?
the appointment of a new fed chairman increases expected inflation
indexed
the automatic correction by law or contract of a dollar amount for the effects of inflation
Federal Reserve
the central bank of the United States - regulate banks and ensure health - when troubled banks are short of cash, Fed acts as a lender of last resort - control quantity of money (money supply) - monetary policy made by FOMC every 6 weeks
natural rate hypothesis
the claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation
In most societies, resources are allocated by
the combined actions of millions of households and firms
A COLA automatically raises the wage when
the consumer price index increases
menu costs
the costs of changing prices - Bob manages a grocery store in a country experiencing a high rate of inflation. To keep up with inflation, he spends a lot of time every day updating the prices, printing new price tags, and sending out newspaper inserts advertising the new prices. His employees regularly deal with customer annoyance over the frequent price changes
The two loops in the circular-flow diagram represent
the flows of inputs and outputs and the flow of dollars
reserve ratio
the fraction of deposits that banks hold as reserves - influenced by gov regulation and bank policy - the Fed sets a minimum amount of reserves that banks must hold, called a reserve requirement. In addition, banks may hold reserves above the legal minimum, called excess reserves, so they can be more confident that they will not run short of cash
From on year to the next, inflation falls from 5% to 4%, while unemployment rises from 6% to 7%. Which of the following events could be responsible for this change?
the government cuts spending and raises taxes to reduce the budget deficit
In a closed economy, if Y is 10,000, T is 1,000, G is 3,000, and C is 5,000, then
the government has a budget surplus and investment is 1,000
private saving
the income that households have left after paying for taxes and consumption Y-T-C S = Y - C - T S = I
theory of liquidity preference
the interest rate adjusts to bring money supply and money demand into balance - money supply ( Fed buys government bonds, the dollars it pays for the bonds are typically deposited in banks, and these dollars are added to bank reserves. When the Fed sells government bonds, the dollars it receives for the bonds are withdrawn from the banking system, and bank reserves fall) - interest rate is the opportunity cost of holding money -
federal funds rate
the interest rate at which banks make overnight loans to one another - when they sell, quantity in banking system decreases - banks need to borrow increases and ff rate increases
GDP
the market value of all final goods and services produced within a country in a given period of time - the total income earned by everyone in the economy and the total expenditure on the economy's output of goods and services MUST BE EQUAL
sacrifice ratio
the number of percentage points of annual output lost in the process of reducing inflation by 1 percentage point
crowding-out effect
the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending
Fisher effect
the one-for-one adjustment of the nominal interest rate to the inflation rate (long-term) - when fed increases rate of money growth, the long-run result is higher inflation and higher nominal interest rate
Money demand depends on
the price level and the interest rate
sticky price theory
the prices of some goods and services also adjust sluggishly in response to changing economic conditions. This slow adjustment of prices occurs in part because there are costs to adjusting prices, called menu costs. These menu costs include the cost of printing and distributing catalogs and the time required to change price tags. As a result of these costs, prices as well as wages may be sticky in the short run.
diminishing returns
the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases
net capital outflow
the purchase of foreign assets by domestic residents - the purchase of domestic assets by foreigners
investment
the purchase of goods (called capital goods) that will be used in the future to produce more goods and services - sum of purchases of business capital, residential capital, and inventories - Bob buys a new set of tools to use in his plumbing business.
nominal exchange rate
the rate at which a person can trade the currency of one country for the currency of another e = p*/p
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 * domestic price) / foreign price
velocity of money
the rate at which money changes hands V = (P * Y)/M P = price level (GDP deflator) Y = quantity of output (real GDP) M = quantity of money - relatively stable over tiem
leverage ratio
the ratio of assets to bank capital (assets/capital)
demand for loanable funds
the relationship between the quantity of loanable funds demanded and the real interest rate - investment is the source - falls when interest rate rises - passage of an investment tax credit encourage firms to invest more, shift right
inflation tax
the revenue the government raises by creating money - like a tax on everyone bc $$ becomes less valuable
Advocates of the theory of rational expectations believe that
the sacrifice ratio can be much smaller if policymakers make a credible commitment to low inflation
fiscal policy
the setting of the level of government spending and taxation by government policymakers
human capital vs tech knowledge
the skills and knowledge gained by a worker through education and experience - society's understanding of the best ways to produce goods and services
Macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and economic growth - increase in money supply - effect on gov budget deficit - borrowing by fed govt
microeconomics
the study of how households and firms make decisions and how they interact in markets - effect of cigarette tax
economics
the study of how society manages its scarce resources
public saving
the tax revenue that the government has left after paying for its spending T-G
classical dichotomy
the theoretical separation of nominal and real variables
rational expectations
the theory that people optimally use all the information they have, including information about government policies, when forecasting the future
Friedman rule
the theory that small and predictable amounts of deflation would be good; lower the nominal interest rate (recall the Fischer Effect), thereby reducing the cost of holding money; the Shoeleather costs of holding money would be minimized by a nominal interest rate close to zero, which would require deflation equal to the real interest rate
leverage
the use of borrowed money to supplement existing funds for purposes of investment
unit of account
the yardstick people use to post prices and record debts
Most entrepreneurs do not have enough money of their own to start their businesses. When they acquire the necessary funds from someone else,
their investments are being financed by someone else's saving.
transfer payments
they are not made in exchange for a currently produced good or service - alter household income, do not reflect economy's production
Unemployment data are collected
through a regular survey of about 60,000 households
In order to maintain stable prices, a central bank must
tightly control the MS
Bank capital is equal to ________ minus ________.
total assets - total liabilities - the resources a bank's owners have put into the institution
Excluding discouraged workers from the official unemployment rate may cause the official rate to ______ the true extent of underemployment.
understate
frictional unemployment
unemployment that occurs when people take time to find a job - Kyoko is a physician who has decided to relocate to California to be closer to her family. She is currently interviewing with several prestigious hospitals in the San Francisco Bay Area. - change in demand for labor among firms - source: changes in the composition of demand among industries or regions - job searching && short spells
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 - longer spells - Jacques left his job as a plumber when his wife took a position in another region. The quantity of plumbing services demanded is considerably lower in the new region, in part because of high union-negotiated wages. He would like to work at the high union wage but remains unemployed due to a lack of plumbing jobs.
cyclical unemployment
unemployment that rises during economic downturns and falls when the economy improves - Rina is a real estate agent. House sales in her area have declined because the region has been going through a recession. She has no clients and is currently looking for a new full-time job
nominal varibales
variables measured in monetary units - income of corn farmers
real variables
variables measured in physical units - quantity of corn - monetary neutrality (the proposition that changes in the money supply do not affect real variables)
The measure of the money stock called M1 includes
wealth held by people in their checking accounts.
opportunity cost
whatever must be given up to obtain some item
quantitative easing
when the Fed buys longer-term government bonds or other securities
Commodity money & intrinsic value
would have value even if it were not used as money - gold
GDP and GNP are identical when
all domestic production is by domestically owned producers and no foreign production is carried out by domestic producers.
Tesla builds a new vehicle, and completes it in December 2015. It sells the vehicle in January 2016. The value of this vehicle affects U.S. GDP
for 2015 only, since it was completed in December of 2015
