MACRO-FSU-Calhoun: exam 3

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Rules of the Game

"All debt does is change the mix of output from the private sector to the public sector

Tiebont Hypothesis

"Vote with your feet." Live in places that withhold your values.

History of money

"wampum" Spanish gold coins bank notes/ broken notes "greenbacks" (1800s) federal reserve noets (1913

if multiplier is 2 and the gap is $2 Trillion, how much has to be spent?

$1 trillion

if the economy was in a recession, would the 2 policies raise or reduce... -(buy or sell) gov securities -reserve ratio -discount rate -interest paid on reserves -budget deficit or surplus

-buy -reduce -reduce -reduce -deficit

TARP

-Troubled Asset Relief Program -Program created in an attempt to mitigate the fallout created by the mortgage crisis of 2007-2008 -Ben Bernanke

market basket

-a hypothetical set of consumer purchases of g/s

Union

-an association of workers that bargin collectively with employers over benefits, wages and working conditions

When does Monetary Policy loose its power?

-as you get close to 0% interest rates

Marginally Attached

-available to work and have recently worked for work but are not currently

GDP per capita

-average GDP per person real GDP/population

what spending habits are most sensitive?

-borrowing and lending -stocks and bonds -cars & major appliances -education

aggregate supply (AS) curve

-shows the relationship b/w the aggregate quantity of output supplied by all firms and overall price level -short run AS shows a positive relationship b/w these 2 variables P and Y

under what condition will FED want to raise interest rates?

-strong/booming economy -inflation rate of 2-3% -full employment

Determinants of exchange rate

1) relative price levels 2) relative rates of productivity growth 3) preferences for domestic and foreign goods 4) Tariffs and quotas

What are three types of personal revenue

1)Personal income tax 2)Payroll tax 3)Corporate income tax

Problems with inflation

1. Alters the outcome of long run decisions 2. Distorts information delivered by price 3. Protect themselves from inflation more than produce goods 4. Menu cost increase 5. Alters the distribution of income 6. Stagflation 7. Hyperinflation

The simple deposit multiplier (theory) assumes two things

1. Banks hold no excess reserves 2. All cash is held in Bank

decreases in Ag. Demand are caused by:

1. Contractionary fiscal policy (decreased gov't spending, increased taxes) 2. Contractionary monetary policy (higher int. rates) 3. changes in consumer spending 4. changes in business spending

What are the two constraints of the Fiscal Policy?

1. Fed controls monetary policy 2. Political Constraints

Fiscal policy options

1. Govt spending 2. Tax cuts/ Tax increases: slow down/ increase economy 3. Income transfers: payment to individual in which noG/S/ are exchanges

What are the two major responsibilities of the Fed?

1. Lender of Last Resort 2. Manager of Money Supply

open market operations

1. when the fed buys bonds it increases the money supply 2. when the fed sells bonds it decreases the money supply

what are the 2 problems with a bartering economy?

1. you must find the person with the good you want 2. that person must be willing to trade for what you have

what is the U.S deficit

1.3 trillion

m1 amount

1.7 trillion

What is the money multiplier formula?

1/ RRR

∆CheckingDeposits ___________________ equals ∆ Initital Deposit

1/RR

money multiplier

1/reserve requirement

Public Policy

A system of laws, regulatory measures, courses of action, and funding priorities concerning a given topic promulgated by a governmental entity or its representatives.

Why does a tax change affect aggregate demand?

A tax change alters disposable income and consumption spending.

Functions of Money 2. unit of account what does this mean?

everything has a price all in the same terms in the US

M2

everything in M1 saving account balances (majority) money market mutual funds

Positive Externalities or Positive Spillover

ex: Education benefits society.More productive society, less money needed for crime prevention or welfare programs.

55. In the short run, if prices were below equilibrium

excess aggregate demand for goods and services would place upward pressure on prices

budget deficit

excess of government spending over tax revenue

budget surplus

excess of tax revenue over government spending

The amount that a commercial bank can lend is determined by its:

excess reserve

An individual bank can lend out at most its

excess reserves.

An individual bank can lend out at most its...

excess reserves.

In order to increase the money supply, the banking system must have

excess reserves.

In order to increase the money supply, the banking system must have...

excess reserves.

exogenous variables on Xn (2)

exchange rate of a $, RGDP

which of the following statements about exchange is true?

exchange tends to move each good toward those individuals who value it more highly.

barter

exchanging of one good for another

During a recession, the actual rate of unemployment will be

greater than the natural rate of unemployment

during a recession, the actual rate of unemployment will be

greater than the natural rate of unemployment

Measured as a share of national income, government expenditures on income transfers during the last 70 years have

grown rapidly.

Deposit Insurance

guarantees that bank depositors will be paid even if the bank can't come up with the funds, up to a maximum amount per account

Constraints of Fiscal Policy Political Constraint -how is this a constraint?

hard to get politicians to agree, and once they do it takes a long time to actual implement things

When the actual reserves held by a bank exceed the legal requirement, the bank

has excess reserves, which can be used to extend additional loans

Fiat Money

has little intrinsic value and is not backed by a commodity (gold), the US has this

Store of Value

has to last to keep value over time, and be hard to copy or reproduce

2. When the consumer price index rises, the typical family?

has to spend more dollars to maintain the same standard of living

commodity money

has value beyond just the use as money ex. cold, cows, etc.

Progressive Tax

Imposes higher tax rates on higher levels of income.

Proportional Tax

Imposes the same tax rate on all levels of income.

Technology

Improved capital Improved human capital Improved production Free trade

If you deposit a $50 bill in a commercial bank that has a 10 percent legal reserve requirement the bank will:

have $45 of additional excess reserves.

38. 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

Functional Distribution of income?

Indicates how society's money (income) is divided among wages, rents, interest, and profits. Wages receive 70% of national income Rent 2% Interest 7% Profits 21%

what are 4 components of public investment?

Infastructure: communication, transportation, education, energy

What is the federal funds rate?

Interest rate banks charge each other on loans

What is the discount rate?

Interest rate that the Fed charges other banks on loans

If Congress votes to increase government purchases and at the same time decrease personal income taxes, they:

have voted for the proper policy to counteract a recession

The crowding-out effect refers to the tendency of:

have voted for the proper policy to counteract a recession.

What Doesn't in GDP

Intermediate goods-Wheat to make bread that is sold Financial Transfers- Selling of stock Foreign Production-Not within the country

Balance sheet

Inventory of assets and liabilities

Are "smart cards" or E-cash cards part of the money supply?

No, because they are merely means to transfer checking deposits.

Are jobs the key to economic progress and the achievement of high income levels?

No, it is not just employment, but employment that expands production of goods and services that others value highly relative to cost.

Are outstanding credit card balances counted as part of the money supply?

No; money is an asset, while the credit card balances are a liability. Thus, they are not included in the money supply figures.

3 Types of GDP

Nominal GDP Real GDP Per Capita GDP

What is the formula for nominal interest rate?

Nominal Interest rate = inflation rate + real interest rate.

Zeeman is a college student who is not working or looking for a job. The Bureau of Statistics count as ___.

Not in the labor force.

Crowding Out

Occurs when increases in government spending lead to decreases in private spending.

Physical Capital

One of the three primary factors of production, also known as inputs in the production function. It includes things like buildings, machinery, equipment, and computers.

What does OMO stand for?

Open Market Operations

Open economy vs. closed economy

Open: An economy that has interactions in trade or finance with other countries. Closed: An economy that has no interactions in trade of finance with other countries

When AS shifts left which is true about equilibrium price and equilibrium GDP ? (Equilibrium price and GDP are where AS and AD cross).

Price up GDP down

Automatic Stabalizers

help put brakes on the economy when it is booming and gets it going when it is in a downturn without the aid of fiscal policy; reduce the ups and downs of an economy

General Motors Corporation (a U.S.-based firm) produces a Saab vehicle in Sweden, and sells it in the United States. In which country's GDP is it included?

Sweden because it was produced there

Barter System

System of trade

Government Budget

T-G When B>0, surplus When B<0, deficit

Based on the laffer curve Republicans believe

Tax cuts to the wealthy pay for themselves by increasing incentives to work and revenue

What are the two tools of fiscal policy?

Taxes & government spending

What is an assumption of the classical monetary theory?

That the velocity of money is constant.

On a given morning France sold 40 pairs of shoes for a total of $80.

The 80 is a nominal variable. The quantity of shoes is a real variable.

Relationship btw. Phillips curve and AS/AD model

The AD-AS model indicates that slow growth in aggregate demand leads to both higher unemployment and lower inflation. This result explains why there is a short-run trade-off btw. unemployment an inflation; The Philips curve has an advantage over the AD-AS model, however, when we want to analyze explicitly changes in the inflation and unemployment rates. **Page 573**

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

18. Suppose, over the past year, the real interest rate was 3 percent and the inflation rate was 1 percent.?

The dollar value of savings increased at 4 percent, and the value of savings measured in goods increased at 3 percent.

Net foreign investment

The difference btw. capital outflows from a country and capital inflows, also equal to net foreign direct investment plus net foreign portfolio investment.

Balance of services

The difference btw. the value of the services a country exports and the value of the services a country imports.

What is mostly likely to happen if decreased government borrowing drives down real interest rates in the United States?

The dollar will depreciate leading to an increase in net exports.

Deadweight Loss

The fall in total surplus that results from a market distortion, such as a tax

Open Market Operations

The fed either buys or sells bonds to the public

Government exhaustive expenditures

The government buys G/S. Ex: When the government buys tanks, schools, highways, etc..

The discount rate is ___.

The interest rate that federal reserve charges banks.

The rational-ignorance effect refers to which of the following scenarios?

The lack of incentive voters have to become well-informed about candidates and issues because their vote is unlikely to affect the outcome of an election

Economists would predict that, other things the same, the more generous unemployment compensation a country has, ____.

The longer the duration of unemployment and a higher unemployment rate.

Minimum Wage

The lowest wage permitted by law or by a special agreement

The fed funds rate is

The rate charged when PNC bank borrows from 5th Third Bank.

Why is it important to use real rather than nominal GDP figures when making comparisons of output across time periods?

The real figures will reflect changes in the quantity of output and not changes in the general level of prices

Balance of payments

The record of a country's trade with other countries in goods, services, and assets

Direct

The relationship between nominal interest rates and inflation

Aggregate Demand

The relationship between the overall price level in the economy and output.

Which of the following is true regarding the foreign holdings of U.S. dollars?

They indicate that foreigners have confidence in the monetary policy and economy of the United States.

How is money created?

Through the fractional banking system

Problems with imlementation

Timing: - government agreement -DEconomic recognition (takes 6 months to realize and 3 months to know we're out of it Misinformation: what if one idea is off a little bit

Capital

Tools Equipment

(18)What would opening trade between two nations do?

Trade would leave the production possibilities unchanged and increase their consumption possibilities.

What are transfer payments?

Transfers of income from taxpayers to recipients who do not provide current goods and services for the payments.

If U.S. net exports are negative

U.S. consumers are spending more on foreign goods than foreign consumers are spending on U.S. goods

if US net exports are negative,

U.S. consumers are spending more on foreign goods than foreign consumers are spending on US goods.

which of the following will occur if the dollar depreciates relative to most other currencies?

US net exports will rise and AD will increase

Today, the bank funds are ___.

Uncommon because of deposit insurance.

Cyclical Unemployment

Unemployment due to the business cycle

(9)a decrease in the dollar price of the english pound will make

Us exports to england decrease

Fiscal Policy

Use of gov't spending and/or taxes to adjust, stimulate, or contract the economy congress and president decide Goal: Increase AD (stimulate economy) Decrease Taxes - (Republicans) Increase Gov't Spending (Liberals) Libertarians - Do Nothing (Self-Adjust)

What is the velocity formula?

V = (P*Y) / M

Nominal Values

Values not adjusted for inflation

Real values

Values that are adjusted for inflation

Government Spending

What did Keynesians argue that would be more effective? people would save more the less effective one

b. lower taxes or higher government spending

What fiscal policies are appropriate in a recessionary gap? a. higher taxes or lower Government spending b. lower taxes or higher government spending c. higher taxes and higher government spending d. lower taxes and lower government spending

AD decreases since disposable income falls

What happens to aggregate demand if the gov't increases the tax rate?

wages fall causing AS to rise

What happens to aggregate supply if nothing is done but we are experiencing stagflation?

wages fall causing AS to rise

What happens to aggregate supply if nothing is done but we are in a recessionary gap?

wages rise causing AS to fall

What happens to aggregate supply if nothing is done but we are in an inflationary gap?

causes crowding out(↑) but raises AD overall

What happens to the level of unemployment, RGDP, and price level if the government borrows money so that it can increase government spending?

It will increase.

What happens to the national debt if the government runs a budgetary deficit?

Federal funds rate

What one bank charges another to borrow money overnight.

Discount rate

What the fed charges banks that borrow directly from its discount window

Unanticipated Inflation

What you didn't think inflation will be. Worse than

Anticipated Inflation

What you think inflation will be

What is money?

Whatever is generally accepted in exchange for goods and services.

When is crony capitalism most likely to be present?

When businesses either implicitly or explicitly provide political decision-makers with contributions and other forms of political support in "exchange" for government favors that will improve their profitability.

Increase in real GDP will increase

a country's imports and the GDP's in other countries

Suppose long-run equilibrium is present and the government budget is in balance. Which of the following would be most likely to occur if the economy falls into a recession?

a budget deficit

According to the Keynesian model, which of the following policies would be most appropriate during a period of rapid inflation?

a budget surplus

Bond

a certificate acknowledging a debt and the amount of interest to be paid each year until repayment; an IOU

the expenditure multiplier

a change in expenditure will have a greater impact than the initial change 1/(1- MPC)

Which of the following will cause the U.S. money supply to expand?

a commercial bank uses excess reserves to extend a loan to a customer

M2

a money aggregate consisting of M1 plus savings deposits (less than $100,000), and money market mutual funds

Social Security is what type of system?

a pay as you go system

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

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

counter cyclical policy

a policy that moves the economy in the opposite direction from the force of the business cycle 1. recession: expansionary policy 2. expansion: restrictive policy

Entitlement

a program where if people meet certain incomes or demographic criteria they are automatically eligible to receive benefits

Special Interest Effect

a project that mainly benefits a small group but has high costs and minimal benefits

crowding out

a reduction in private sector borrinwg caused by increased government borrowing decreases availablity for funds for private sect if r=interest rate=price of I, then r should increase

crowding out

a reduction in private spending due to higher interest rates generated by budget deficits financed through government borrowing - believed by keynesian

Which of the following is most likely to increase the incentive to invest, produce, and employ others?

a reduction in tax rates

Which of the following most clearly indicates that fiscal policy is becoming more restrictive?

a reduction in the budget deficit relative to GDP

An increase in the required reserve ratio would be

a restrictive policy because it lowers the amount of excess reserves in the banking system.

The Fed's sale of U.S. government securities in its open market operations constitutes

a restrictive policy because it lowers the amount of total reserves in the banking system.

Asymmetric Information

a situation in which one side of the market has more reliable information than the other side

Money functions as:

a store of value, a unit of account, and a medium of exchange.

3 functions of money

a store of value: an asset that will allow people to transfer purchasing power from one period to the next - liquid asset: asset that can be easily and quickly converted to purchasing power

fractional reserve banking

a system that permits banks to hold reserves of less than 100% against depositors

why does a tax change affect aggregate demand?

a tax change alters disposable income and consumption spending

Which is more likely to stimulate aggregate demand in a timely manner?

a tax cut, because disbursement can take place quickly while spending increases are generally spread out over several years

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

3 functions of money

a unit of account - a unit of measurement used by most people to post prices and keep track of revenues and cost

Long run aggregate supply curve is

a vertical line

74. If an economy is growing, but experiences no inflation, this means

aggregate demand and aggregate supply increased by the same amount.

The immediate effect of a member bank's sale of U.S. government securities to the Fed is :

an increase in that bank's excess reserves

Higher standards of living are the result of

an increase in the availability of goods and services that people value.

If we observe an increase in the price of a good and an increase in the amount of the good bought and sold, this could be explained by

an increase in the demand for the good.

Quantity Theory of Money

an increase in the money supply will just lead to inflation

A vertical long-run aggregate supply curve indicates that

an increase in the price level will not expand an economy's output capacity in the long run

other things being equal, the effect of a decrease in the price of orange juice would be illustrated by which of the following?

an increase in the quantity demanded for orange juice

Which of the following will most likely increase long-run aggregate supply?

an increase in the rate of investment

Which of the following will most likely accompany an unanticipated reduction in aggregate demand?

an increase in unemployment

Central Bank

an instituion that oversees and regulates the banking system and controls monetary base

central bank

an institution that regulates the banking system and controls the money supply

58. An increase in the general level of prices in the goods and services market that is accompanied by a short-run expansion in output is most likely caused by

an unanticipated increase in aggregate demand

20. Which of the following is most likely to throw an economy into a recession?

an unanticipated reduction in aggregate demand

supply shock

an unexpected event that temporarily affects aggregate supply

Interst Rates

an unexpected increase in money supply will first impact what?

Money

any asset that can easily be used to purchase goods and services

what is money

any asset that is widely accepted as payment

Excess Reserve

any cash held by banks above the legal requirement

Which of the following is the best definition of money?

anything generally accepted as a payment for goods or repayment of debt

Money

anything generally accepted as a payment for goods or repayment of debt; a medium of exchange; a store of value

Asset

anything of value that is owned

Liability

anything that is owed to another individual or institution

When the Fed lowers the discount rate, it makes it

cheaper for banks to obtain additional reserves by borrowing from the Fed.

(13) when the fed lowers the discount rate, it makes it

cheaper for banks to obtain additional reserves by borrowing from the fed.

(13) in the modern US economy, most transactions are made with

checking deposits

locations of 12 central banks

cleveland, chicago, richmond, kansas city, dallas, st. louis, boston, san francisco, new york, minnepolis, philidelphia, atlanta

In order for barter to occur, traders must have a

coincidence of wants.

In the United States, the money supply (M1) is comprised of:

coins, paper currency, and checkable deposits.

In the United States, the money supply (M1) consists of

coins, paper currency, demand deposits, other checkable deposits, and traveler's checks.

Electronic Banking

conducting banking transactions over the Internet

who implements fiscal policy

congress

monetary policy

Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.

Keynes Economics

Government should join in and fix the market

Automatic stabilizer

Government spending and taxes that automatically increase or decrease along with the business cycle

Expansionary Policy

Government tries to increase RGDP, used in Recessionary Gap

Contractionary Policy

Government wants to decrese RGDP, used in Expansionary Gap

Which of the following best explains why high marginal tax rates retard output?

High marginal tax rates reduce the incentive to earn, invest, and use resources efficiently

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

39. 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

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.

Short Run

Hourly, daily, or weekly decisions that firms make and that input prices are often sticky. Firms cannot enter or exit the market and there is at least one fixed factor.

Four sectors of the economy

Households Firms Government Foreign countries

Velocity of Money

How fast a dollar bill goes through the economy in a year.

What does "Lender of Last Resort" mean?

If banks need to borrow money they can always borrow money from the federal reserve if they do not want to or cannot borrow from other banks.

increase; increase

If consumers deposit more money in the bank, then reserves ________ and the money supply will eventually ______

a. AD to increase

If fiscal policy is enacted in a recessionary gap, then we would expect a. AD to increase b. AS to increase c. AD to decrease d. AS to decrease

4 spending groups

consumer, investment/business, government, net exports

Changes in taxes have an indirect relationship with

consumption and savings schedules

C+Ig

consumption plus investment

Expectation of recessions shifts

consumption schedule down, saving schedule up

Higher interest rates shift

consumption schedule slightly lower, saving schedule slightly higher

real GDP

consumption+investment

APC (average propensity to consume)

consumption/income

If the economy is experiencing inflationary boom, and the government lowers taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to

continue inflationary pressures.

involves increasing withdrawals form the economy by reducing government spending, transfer payments, or raising taxes to decrease aggregate demand to contract output and the economy

contractionary fiscal policy

Durability, irregularity of innovations, and variability of profits and expectations

contribute to the variability of investment

Which of the following is the basic economic policy function of the Federal Reserve Banks?

controlling the supply of money

results when a supply shock hits the economy, reducing short run aggregate supply, and thus reducing output and increasing the price level

cost-push inflation

Fiscal policy designed to increase aggregate demand during economic downturns and decrease aggregate demand during economic booms is called

countercyclical fiscal policy

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

Restrictive

counters a boom

Expansionary

counters a recession

which of the following appropriately applies the law of comparative advantage?

countries that are low cost producers of agricultural products should trade those products for goods they can produce only at a high opportunity cost

North Korea

country producing the most counterfeited bills

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

what is not a part of m1 or m2

credit cards

NO liability

credit cards aren't an asset, so are they money? if not what are they.

occurs when a central bank prints too much money, the value of the existing money becomes basically worthless

currency debasement

reserves

currency in a back vault plus its deposits at the Fed

Stores need not accept your check but must accept currency because

currency is legal tender; checks are not

MI

currency+checkable deposits+travelers checks - the mire liquid form of money

m1

currency, demand deposits, checking accounts, checkable desposits, traveler's check, debit cards

Which of the following about price discrimination is true? a. Price discrimination always harms consumers and helps sellers in the short run but in the long run, consumers benefit at the expense of sellers. b. A seller must have a monopoly in order to gain from price discrimination. c. A firm must face a horizontal demand curve for its product in order to engage in effective price discrimination in a market. d. A price-discriminating seller will charge consumers with an elastic demand a lower price than consumers with an inelastic demand.

d. A price-discriminating seller will charge consumers with an elastic demand a lower price than consumers with an inelastic demand.

Which of the following is true of entrepreneurship? a. The role of the entrepreneur is not very important and that is why it is generally not included in economic models. b. Economic models are able to capture fully the important role of the entrepreneur in the market process. c. The role of entrepreneurial discovery could be easily integrated into economic models, but nonetheless economists choose not to do so. d. Entrepreneurial discovery is an important source of economic growth and higher living standards.

d. Entrepreneurial discovery is an important source of economic growth and higher living standards.

What is the strategy underlying price discrimination? a. Charge everyone the same price but limit the quantity they are allowed to buy. b. Reduce per-unit cost to the firm by charging higher prices to those with the most inelastic demand and lower prices to those with the most elastic demand. c. Charge higher prices to customers who have better access to substitutes. d. Increase total revenue by charging higher prices to those with the most inelastic demand for the product and lower prices to those with the most elastic demand.

d. Increase total revenue by charging higher prices to those with the most inelastic demand for the product and lower prices to those with the most elastic demand.

Which of the following would be the most likely scenario if firms in a competitive price-searcher market were currently earning economic profit? a. All firms in the market would continue to produce at their current levels and continue to charge the same price. b. Production inefficiencies would persist until the profit was eliminated. c. Firms would decrease their rate of output in the short run, causing a decline in profitability in the market. d. New firms would enter the market, resulting in fewer sales by existing firms.

d. New firms would enter the market, resulting in fewer sales by existing firms.

Which of the following conditions must be met if a movie theater is going to gain by charging students a dollar less than other customers? a. Students must have higher incomes than other customers. b. Other customers must enjoy movies more than students. c. The demand of students must be less elastic than that of other customers. d. The demand of students must be more elastic than that of other customers.

d. The demand of students must be more elastic than that of other customers.

Which of the following is true in markets characterized by oligopoly? a. Collective profits are always lower with cartel arrangements than they are without cartel arrangements. b. Pursuit of self-interest by profit-maximizing firms always maximizes collective profits in the market. c. Collusive agreements will always prevail. d. The oligopolists earn the highest profit when they cooperate and behave like a monopolist.

d. The oligopolists earn the highest profit when they cooperate and behave like a monopolist.

Compared to the outcome when the firms are price takers, competitive price-searcher markets will result in a. less product variety and higher prices. b. less product variety and lower prices. c. a wider variety of products and lower prices. d. a wider variety of products and higher prices.

d. a wider variety of products and higher prices.

As new firms enter a competitive price-searcher market, profits of existing firms a. rise and product diversity in the market increases. b. rise and product diversity in the market decreases. c. decline and product diversity in the market decreases. d. decline and product diversity in the market increases.

d. decline and product diversity in the market increases.

Losses are important to a competitive price-searcher market (industry) because they send a message to the market participants that a. the firms should charge lower prices. b. resources are allocated exactly as they should be. c. more resources should be devoted to a particular industry. d. resources can rise in value if diverted away from that particular industry.

d. resources can rise in value if diverted away from that particular industry.

If a firm is losing money, this implies that a. consumers do not understand the value of the product. b. this product cannot be produced profitably in the long run. c. the firm must go out of business immediately. d. the value of the resources used to make the product is being reduced.

d. the value of the resources used to make the product is being reduced.

Future sales expectations and planned inventory change are

directly related to investment demand

Expansionary fiscal policy during a recession is most effective when it:

directs the economy to full employment and resources into productive projects.

Commercial banks can borrow reserves directly from the Fed at the

discount rate

The rate at which a commercial bank can borrow from the Fed is the

discount rate

the interest rate the federal reserve charges commercial banks and other depository institutions to borrow reserves from a regional federal reserve bank

discount rate

Supply-side economics stresses that high marginal tax rates

discourage people from working harder and using their resources productively.

The legal requirement that commercial banks hold reserves equal to some fraction of their deposits

limits the ability of banks to expand the money supply by extending additional loans.

What if price level increases, what happens to MD line?

line shifts right

how quickly and reliably an asset can be converted into cash or how quickly and reliably it can be used to buy things

liquidity

Which of the following, other things the same, would make the price level decrease and real GDP increase?

long-run aggregate supply shifts right

treasury bonds

longer time horizons (1-30 years)

Discretionary fiscal spending

money authorized to be spent with the passage of an appropriations act. (ex. Farm subsides, defense spending, etc.)

if nominal GDP decreases, and interest rates increase, what will happen to money demand?

money demand will decrease

Reserves

money in vault or at the Fed which the bank did not lend out

One advantage of a money system compared to a barter system is that :

money is more efficient

Barter

money is the alternative to this

Money is used as a unit of account. This means...

money is used to measure the exchange value and costs of goods, services, assets and resources.

What is "demand for money"?

money we want to physically hold onto

Effectiveness Lag

problem with timing fiscal policy changes; even after the legislation is passed, macroeconomic effects may not be felt until 6 months later; and it might have already been cured by the invisible hand

Implementation Lag

problem with timing fiscal policy changes; there are always delays and problems passing legislation through congress

Recongition Lag

problem with timing fiscal policy changes; we don't know when the recession begins until it has started

disinflation

process of bringing the inflation rate down

the crowding out effect implies that restrictive fiscal policy will

reduce real interest rates

The crowding-out model implies that restrictive fiscal policy will:

reduce real intrest rates

recent legislation provides parents with a substantial reduction in their personal income tax liability 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

M1

paper bills, coins, checking deposits, traveler's check

Fiat Money

paper currency, has no value outside of the fact that government has said it is valuable

(13) the fed acquired the authority to do which of the following during the economic crisis of 2008

pay interest to commercial banks on their reserves

Responsibility of Fed Manager of Money Supply Tools to Manage Money Supply -Reserve Requirement: what is it?

percent of money banks must keep

how banks create money: required reserve ratio

percentage of deposits that banks are required to hold as reserves

shifter of aggregate supply

permanent changes will shift both LRAS and SRAS curves, temporary changes shifts only SRAS curve

exogenous variables on C (5)

personal wealth, borrowing, real interest rate (r), expectations, Consumer Confidence

another problem with fiscal policy

politicians have a tendency to overuse expansionary policy

structural balance

portion fo the budget due to fiscal policy structure is positive in good economic times (fiscal restraint) negative when fiscal stimulus

cyclical balance

portion of the budget due to economic conditions reflects business cycle automatic stablizers (moves with economy) - unemployment enefits and income taxes -cyclical is negative when economy is bad

which of the following most clearly distinguishes between positive and normative economics?

positive economics is the study of the fact; normative economics is concerned with what ought to be.

is relationship between confidence and spending positive or negative?

positive--higher confidence & more spending

Keynes rejected the view that lower wages would direct a recessionary economy back to full employment because

powerful trade unions and large corporations made wages highly inflexible

Inflation rate

price index year 2 - PI year 1/ price index year 1

Aggregate supply is the relationship between

price level and real GDP produced

Aggregate demand is the relationship between

price levels and real GDP purchased

net export/ foreign purchases effect

price of domestic goods up = imports up, exports down = Xn down = AD Down

real interest effect

price up = interest rate up = lower Investment spending = less interest sensitive consumer spending

real balance effect

price up = value of $ down= less consumer spending --income doesn't go as far

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.

suppose, in dollar terms, nominal GDP increased approximately 4 percent during a given year, and real GDP decreased 1 percent. which of the following best explains these events?

prices increased approximately 5 percent

Crowding out effect reduces

private investment spending

what is the difference between pro-cyclical policy and counter-cyclical policy?

pro-worse path, bad version of fed, fed acts on trough counter- better bath, good version of fed, acts on peak

If uncertainty causes commercial banks to increase their holdings of excess reserves, other things constant, this will:

reduce the size of the deposit expansion multiplier.

(18) International trade does all the following except

reduce world output

Contractionary Monetary Policy

reduces aggregate demand

When the Federal Reserve sells government bonds to the public, it directly...

reduces the M1 money supply and decreases the reserves of the commercial banking system.

an increase in the discount rate impact the money supply because it

reduces the incentive of commercial banks to borrow from the Federal Reserve

An increase in the discount rate impacts the money supply because it

reduces the incentive of commercial banks to borrow from the Federal Reserve.

An increase in the discount rate impacts the money supply because it:

reduces the incentive of commercial banks to borrow from the Federal Reserve.

8. The concept of full employment?

reflects the "shopping" of employees looking for employment and of employers seeking to hire workers.

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

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

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.

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.

relationship b/t spending and production = ?

spending < production = recession spending > production = inflation spending = production = equilibrium

induced spending

spending caused by fluctuations in income

how easy is it to shift the demand curve right?

spending more...government pretty much has no limits on this you can't make consumers spend, so it is up to gov't

1/MPS

spending multiplier

Earmark

spending that directs approved funds to be spent on specific projects in politician's districts

autonomous spending

spending that is independent of income --due to any other exogenous variables

higher inflation and higher unemployment occurring at the same time

stagflation

Paradox of Thrift/Spending

states that an economy that saves/spends too much is harmful for growth, reduces aggregate demand by saving; too much spending may lead to a depleted money supply for consumers

M3

stock bonds (M1&M2)

money will hold value over time

store of value

22. 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

what are automatic stabilizers? (2)

tax brackets government spending policies

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.

Public Choice Analysis

studies the incentives and their effects on individuals such as voters and politicians

Monetary Base

sum of currency in circulation and bank reserves

when economists say the supply of a product has increased, they mean the

supply curve has shifted to the right.

proportional

tax is the name for a tax where the average tax rate paid stays the same as the income increases (give the term, not an example)

-MPC/MPS

tax multiplier

Budget formula

tax revenue - government spending

The equilibrium rate of interest in the market for money is determined by the intersection of the:

supply of money curve and the total demand for money curve.

Mathematically, the marginal propensity to consume is

the change in consumption divided by the change in income.

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.

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 proponent of supply-side economics?

the impact of marginal tax rates on the supply and productivity of resources

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

debt-service

the interest payment on government debt

Federal Funds Rate

the interest rate at which banks lend to other BANKS; always lower than the discount rate

Federal Funds Rate

the interest rate charged in the federal funds market; the interest rate banks charge one another for overnight borrowing; the Fed's target interest rate

Discount Rate

the interest rate that banks must pay when they borrow from the Fed

Discount Rate

the interest rate the Fed charges banks that borrow reserves

anticipated changes in ling run aggregate supply- causes both LRAS and SRAS curve to shift in the same direction

the invention of a more efficient engine reducing economic freedom

What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?

the supply of loanable funds would shift right and investment would increas

which of the following would decrease the supply of sugar?

the tariff (tax) on imported sugar increases.

government spending policies

when unemployment is up, people can collect unemployment --raises debt --*has to work* unless no one buys anything --better for times of *recession* --*hard to pass*

In a world where capital moves rapidly across national boundaries, if a larger budget deficit leads to higher real interest rates

there will be an inflow of foreign capital, which will cause the dollar to appreciate and net exports to decline.

In a world where capital moves rapidly across national boundaries, if a larger budget deficit leads to higher real interest rates:

there will be an inflow of foreign capital, which will cause the dollar to appreciate and net exports to decline.

if net exports are positive, then

there will be net capital outflow, so foreign assets bought by Americans are greater than American assets bought by foreigners

75. If the underground economy is sizable, then GDP will

understate the economy's performance

If the economy is experiencing less than full-employment, the Keynesian model recommends that the government?

undertake expansionary fiscal policy to stimulate aggregate demand

If the economy is experiencing less than full-employment, the Keynesian model recommends that the government

undertake expansionary fiscal policy to stimulate aggregate demand.

in order to prosper, what must entrepreneurs do?

undertake projects that create wealth and increase the value of resources

Sally is on a temporary layoff from her factory job. If Sally participates in the BLS survey, she will be classified as

unemployed and in the labor force

sally is on temporary layoff from her factory job. if sally participates in the BLS survey, she will be classified as

unemployed and in the labor force

what happens when AD curve shifts right?

unemployment down GDP up inflation up if interests rates

Boom

when gov is pursuing countercyclical fiscal policy, it will decrease aggregate demand and run a deficit; decreasing gov spending and increasing taxes during this time

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

According to the crowding-out effect, expansionary fiscal policy will lead to

higher interest rates, an appreciated dollar, and reduced net exports.

(14) In the aggregate demand-aggregate supply model, the short-run effects of an unanticipated decrease in the money supply will be

higher real interest rates and a reduction in aggregate demand.

In the aggregate demand-aggregate supply model, the short-run effects of an unanticipated decrease in the money supply will be

higher real interest rates and a reduction in aggregate demand.

Expansionary Monetary Policy

increase aggregate demand

Recession

when gov is pursuing countercyclical fiscal policy, it will increase aggregate demand and run a surplus; increasing gov spending and decreasing taxes during this time

paradox of thrift

when many people drastically increase their savings and reduce consumption, total savings may decrease

when does a stock bubble form?

when stock prices rise above the value that is justified by the firms profits

Nondiscretionary fiscal policy

when tax revenues change automatically and in a countercyclical direction over the course of the business cycle

New Classical

when the gov decides to increase spending, taxes will rise in the future; this forces consumers to reduce their current spending; states keynes was wrong

Surplus

when the government makes more than it spends during a given year; decreases it's debt

Deficit

when the government spends more than it makes during a given year

when is the economy considered to be at full employment?

when the rate of cyclical unemployment is zero.

Wages and Interest Rates (businesses aren't investing) DECREASE

when there isn't government intervention during a recession

Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits, then bank reserves will

increase and the money supply will eventually increase

Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits, then bank reserves will?

increase and the money supply will eventually increase

Reductions in personal income tax rates that increase labor supply and work effort, can be expected to also

increase consumption spending.

12. The expansionary phase of the business cycle is characterized by?

increasing real output and declining unemployment

The expansionary phase of the business cycle is characterized by

increasing real output and declining unemployment

Investment, net exports, and government expenditures are assumed to be

independent of GDP in aggregate expenditures model

two fiscal policy tools the president and congress use -tax rates: what does it do? -if tax rates are lowered, what happens?

indirectly effects economy and has no residual effects -if tax rates are lowered, peoples personal income will increase, so consumption will increase

Other things constant, a reduction in the real interest rate will

induce businesses to increase their level of investment

2 kinds of spending

induced autonomous

what will happen if spending continues to rise?

inflation closer to 2% FED raises interest rates to decrease autonomous spending and slow down inflation

Contractionary monetary policy is only used when

inflation is out of control

Investment

injection of spending into the economy

the time it takes congress and the administration to decide on a policy once a problem is recognized

inside lags

Keynesian economists believed that the prolonged unemployment of the 1930s was the result of

insufficient aggregate demand and the failure of market forces to direct the economy back to full employment.

A collateralized default swap is

insurance for a mortgage backed security

what is federal funds rate

interbank overnight lending rate of at least $1 million

Federal Funds Rate

interest rate determined in the federal funds market

as prices fall, there is pressure on interest rates to fall,

interest rate effect

nominal interest rate

interest rate expressed in dollar terms

Liquidity Preference Model of the Interest Rate

interest rate is determined by the supply and demand for money

Discount Rate

interest rate the Fed charges on loans to banks

what is prime rate

interest rate used by banks currently about 3.25%

Long-Term Interest Rates

interest rates on financial assets that mature a number of years in the future

Short-Term Interest Rates

interest rates on financial assets that mature within less than a year

the law of demand refers to the

inverse relationship between the price of a good and the willingness of consumers to buy it

Real GDP purchased and price levels are

inversely related

Prices of imported resources are

inversely related to the U.S aggregate supply

real GDP per capita

is a key static when comparing economies real GDP/ population

according to Adam Smith, individual self-interest

is a powerful force for economic progress when it is directed by competitive markets

Currency in Circulation

is cash held by the public

Reduce

keynes believed applying restrictive policy during a boom would ________ inflation

Contractionary monetary policy could...

lead to negative growth

Increase in interest rates due to a larger budget deficit

leads to an inflow of foreign captial which will increase US imports

Saving

leakage of spending from the economy

Shortsightedness Effect

legislation is passed that provides visible benefits immediately, but leads to increasing costs in the future

During a boom, the actual rate of unemployment will be

less than the natural rate of unemployment

what you owe

liabilities

If you have a checking account at a local bank, your bank account there is

liability of the bank and an asset to you

Disposable Income and consumption spending INCREASE

why does a Tax Cut Increase AD

Keynesian analysis stresses that a tax cut that increases the government's budget deficit (or reduces its budget surplus)

will stimulate aggregate demand and, thereby, promote employment

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

worsen and prolong the recession.

is this fiscal policy... -president passes stimulus plan to jump start the economy

yes

is this fiscal policy... -to curb high unemployment, president passes a plan to build mount obama

yes

Is the US dollar... 1. durable? 2. acceptable? 3. valuable? 4. identical? 5. divisible?

yes yes not really yes yes

is the Rai Stone... 1. durable? 2. acceptable? 3. valuable? 4. identical? 5. divisible?

yes yes yes no no

Is gold... 1. durable? 2. acceptable? 3. valuable? 4. identical? 5. divisible?

yes yes yes not really not really

a production possibilities curve indicates that when resources are being used efficiently,

you can only produce more of one good only if you produce less of another good

what is the biggest issue with business cycle model?

you can't see the effects of inflation

Politicians often instruct households to spend in order to help the economy. This advice overlooks the fact that

you cannot have a strong economy if all or most households are spending just about everything they earn

You know there is growth in fiscal policy when...

you spend on a pillar of growth.

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

3 equations

ΔY = k • ΔG ΔY = -k • mpc • ΔT ΔY = k • ΔG + [-k• mpc• ΔT]

Open Market Purchase Operations

Money supply increases. Interest rate reduces. Investment is stimulated. Aggregate demand increases. Real GDP increases.

As the dollar appreciates, which of the following is most likely to occur?

More Americans will travel abroad

Fed Sells MBS

Ms down --> i* up --> I down --> Y down

Fed increases DR

Ms down --> i* up --> I down --> Y down

Fed increases r.r %

Ms down --> i* up --> I down --> Y down

Fed sells USGS

Ms down --> i* up --> I down --> Y down

Fed buys USGS

Ms up --> i* down --> I up --> Y up

Fed decreases DR

Ms up --> i* down --> I up --> Y up

Fed lowers r.r %

Ms up --> i* down --> I up --> Y up

what is another name for national income?

National GDP, national output, national production

GDP Formula (Income)

National Income+ Depreciation+ (Indirect Taxes- Subsidies)+ Net Factor Payments

Structural+ Frictional=

Natural Rate of unemployment

Negative Externality

Negative impact on a third party as a result of a transaction. EX: Pollution from a company

(14) If expansionary monetary policy reduces real interest rates in the United States, which of the following is most likely to occur?

Net foreign investment will decline, causing the dollar to depreciate and net exports to increase.

If expansionary monetary policy reduces real interest rates in the United States, which of the following is most likely to occur?

Net foreign investment will decline, causing the dollar to depreciate and net exports to increase.

The market system fails

No demand for street lights, yet they are needed, so the government must provide them.

Exclusion Principle

No effective way of excluding individuals from the benefits once these goods come into existence.

Are funds available on a credit card included in a definition of the money supply?

No, because these funds are not a store of value.

balanced budget

government revenues is equal to government expenditures

what actions are considered fiscal policy?

government spending and taxing

budget deficit

government spending is greater than government revenues

Three ways the government redistributes income

-Transfer Payments -Market Intervention -Taxation

long run AS

-shows no relationship b/w P and Y -does not depend on the overall price level

assume the bank already has $172m in total reserves. What are the excess reserves?

$172-$112 = $60m -loanable funds

If the banking system has $5 million in excess reserves, and the required reserve ratio is 25 percent, what is the maximum amount by which the money supply can be increased?

$20 million

A reserve requirement of 20 percent means a bank must have $1,000 of reserves if its checkable deposits are:

$5,000.

If the reserve ratio for all banks is 20%, then $100 of new reserves can generate ___.

$500

Suppose the Fed sells $100 million of U.S. securities to 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 decrease

a bank has $560m in deposit liabilities and the Fed sets the RR% to 20% what is this banks required reserves?

$560 x .20 = $112m -fractional reserve banking system

Assume Company X deposits $100,000 in cash in commercial Bank A. If no excess reserves exist at the time this deposit is made and the reserve ratio is 20 percent, Bank A can increase the money supply by a maximum of:

$80,000.

Best National Bank is subject to a 10 percent required-reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of

$900.

Best National Bank is subject to a 10 percent required-reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of...

$900.

Who is the Fed run by?

-The board of Governors -7 members; seven 14 year terms -one term ends every 2 years and a new member is appointed by the President and confirmed by the senate

FOMC

(Federal open market committee) meets 8 times a year on a Tuesday.

What is the equation of exchange?

(MS) x V = p x q

aggregated price function

(productivity)GDP per worker=(t)*(physical capital per worker^.4)(human capital per worker^.6)

Rate of Return

(revenue from project-cost of project)/cost of project

Long run effects

**Page 543-544**

rule of 70

**doubling a time for a variable 70/ % growth rate

Money market equilibrium

**page 492-493**

Government debt

**page 553**

Short run Phillips curve vs. long run Phillips curve

**page 574**

Expected inflations vs. actual inflation

**page 575-576**

Fed Reserve policy history

**page 584-593**

Foreign exchange market

**page 607-609**

Supply and demand shifters

**page 609-610**

Appreciation vs. depreciation

**page 611-612**

Effect of budget deficit on investment

**page 617-618**

Monetary and fiscal policy in an open economy

**page 620**

Pegged currency

**page 638-642**

International capital markets

**page 643-645**

Monetary policy

- Use and changes in the money supply to shift interest rates and stimulate or contract the economy • Decided by the FED, Federal Reserve, head bank basically

What things could increase the interest rate

- Y up -sell USGS -r.r % up -DR up -P up

the central bank in the U.S

- called the federal reserve system - carries out regulatory policies - conducts monetary policy

What is the tax multiplier?

- change in Y / change in T

the federal reserve

-"the fed" -regulates the commercial banking system, setting limits ir the the number of loans a bank can make

When was the Fed organized?

-1913 -followed the failures of several banks in 1907

Shifters of the AD curve

-AD will shift out (increase) w/ any expansionary policy whether monetary or fiscal -Ms up, G up, T down

Three types of personal expenditures

-Expenditures on Durables. -Expenditures on Non-Durables. -Expenditures on Services.

Government and Economic Growth

-Government subsidies to infrastructure -Government subsidies to education -Government subsidies to research and development -maintain a well functioning financial system -protection of property rights -political stability and governance

Too big to fail or systemic risk relates to

-If GM fails dealers and suppliers lose their jobs and communities lose tax revenue -If AIG , American Insurance Group fails, they cannot send a check to make the mortgage backed securities that fell in value that they insured good and the banks holding those mortgage backed securities will fail. HBSC bank was not prosecuted by the U.S. Government even though they helped North Korea and Iran avoid sanctions and were involved in financing drug activities since if HBSC fails it will destabilize the entire banking system.

Two ways of Correcting Externalties or Spillover Effects

-Legislation -Specific Taxes

2 forms of Fiat Money

-M1 (narrow def) -M2 (broad def)

Alan Greenspan

-Maestro -Expansionary policy 1987 -Did not raise rates during the 90's technology boom -Kept rates too low for too long 2004-2006

Janet Yellen (2014-present)

-May raise interest rates this year

Paul Volcker (1979-87)

-Monetarism -Stick with slow monetary growth to curb inflation

Fed buys MBS

-Ms up --> i* down --> I up --> Y up

Three reasons why the government must provide G/S.

-Some goods are just too expensive -Exclusion principle -The market system fails.

Ben Bernanke (2006-2014)

-TARP -Great depression specialist

sustainable long-run economic growth - 2 things

-can now continue in the face of limited natural resources and impact growth on the environment **carbon tax- tax per unit of carbon emitted **cap and trade - amount of emissions is capped and producers must buy licenses to emit more

deposit liabilities

-checking accounts -savings accounts -ect...

2nd job of the Fed

-conduct monetary policy 1. r.r % set by board of governors 2. DR set by board of governors 3. OMO: determined by Federal Open Market Committee (7 governors + 5 district presidents; one always from NY) 4. quantitative easing (QE) --> unconventional monetary policy

unit of account costs

-costs arising from the way inflation makes money a less reliable unit of measurement

total reserves

-currency held in the banks vaults, and the banks deposits at the fed -measured in terms of dollars

Long Run

-defined by the period of time it takes for all prices to fully adjust

required reserves

-deposit liabilities times the reserve requirement ratio (rr%)

two fiscal policy tools the president and congress use -government purchases: what does it do? -if government purchases increase, what happens to C

-directly impacts economy and has residual effects -if government spending increases, consumption increases

high levels of Y

-expansion -changes in Y result in large changes in P

make up of the federal reserve

-federal reserve board in DC and 12 regional federal reserve banks

Ms

-fixed and controlled by the Fed

What is the link between AS/AD and business cycle graphs?

-full employment—horizontal line / vertical line time—snap shot / continuous -unemployment on AD/AS curve... ---recession looks like equilibrium to left of full employment line

M2

-includes all of M1 and the rest of the examples ex: savings accounts, money market accounts, and other near monies

productivity in growth

-increase human capital -increase physical capital -technological progress -aggregated production function

Discount rate

-interest rate the Fed charges banks to borrow reserves -short term loans -least powerful -less common -not very effective

Convergence Theory

-international differences in real GDP per capita tend to narrow over time

reserve requirements

-lower reserve requirements will increase the money supply - an increase in reserve requirements will reduce the supply of money

Aggregated price level

-measure of the overall level of prices in the economy -to measure using the cost of market basket

producer price index

-measures changes in the prices of the g/s purchased by producers

M1

-money that can be directly used for transactions ex: currency held outside of banks, demand deposits, travelers checks, and other checkable deposits

commodity money

-money that has an intrinsic value ex: gold -worth something besides just being money

structural unemployment

-more people looking for jobs than jobs available -cause labor unions efficiency wages side effects of gov. policies mismatches between employees and employers

MBS

-mortgage backed securities

GDP deflator

-nominal GDP/real GDP -measures price level

discouraged workers

-nonworking people who have given up looking for work **NOT CONSIDERED UNEMPLOYED

critical assumption of the SRAS curve

-not all prices adjust simultaneously -some prices are "sticky"

Labor force participation

-number of adults between 16-62, who are either working for actively looking labor force+ unemployed employed =labor force/adult population

Chairman

-one of the 7 members of the board of Governors -serves a 4 year term -appointed by the president

labor productivity

-output per worker

Underemployed

-people are working part-time because they can't find full time

stagflation

-price level is going up and output down at the same time -P increases and Y decreases

low levels of Y

-recession -there are big changes in Y result in small changes in P

1st job of the Fed

-regulate banks -'lender of last resort"

growth rate differ

-savings and investment spending -education -research and development

Demand-Pull Inflation

-shift of the AD curve to the right -Ms up, G up, T down -P increases and Y increases

Cost push inflation

-shift of the AS curve to the left -increase in cost of inputs

Shifters of the AS curve

-shift to the right -increase in labor, capital, technology, energy, or decrease the cost of any of these things

Md curve

-shifts with changes in nominal income y= real aggregate output or income P= overall price level nominal income = P*Y an increase in (P*Y) equals an increase in Md If P or Y or both increase so does Md -we control Md

Inflation costs

-shoe leather costs -menu costs -unit of account costs

aggregate demand (AD) curve

-shows a negative relationship b/w the total demand for final goods and services and the overall price level -each point on the AD curve represents a point where the goods and money markets are in equilibrium

National savings

-sum of private savings and budget balance savings of gov= tax revenues-gov. transfers-gov. purchases of g/s savings of national = savings of gov + savings of private national savings = investment

price index

-the cost of purchasing a given market basket in a given year cost of market basket in given year/ cost of market basket in base year

extension of loans

-the discount rate: the interest rate the fed charges banking institutions to borrow funds - federal funds rate: the interest rate that commercial banks charge each theory a. when the fed extends more loans, money supply increase b. when the fed extends loans, money supply decreases

shoe leather costs

-the increased costs of transaction caused by inflation

Interest rate

-the price that a lender charges for the use of his/her savings in a year

menu costs

-the real cost of changing a listed price

Fiat money

-token money -no intrinsic value ex: paper money -it has value only because we give it value

Quantitative Easing (QE)

-tool # 4 of the fed -considered to be "unconventional" monetary policy -used when the other 3 classical tools have become ineffective -separate market which determines long term interest rates -fed buys MBS from banks and pays them back with reserves -long run

excess reserves

-total reserves minus required reserves

Cyclical unemployment

-unemployment correlated with the business cycle

Frictional unemployment

-unemployment due to the time workers spend in job search

Economic indicators

-unemployment rate -labor force participation rate -number of full time jobs -average wages

Inflation Rate

-yearly percentage change in price index -based on CPI price index year 2 - PI year 1/ PI year 1

APC + APS

1

MPC + MPS

1

paradox of thrift

1 person can save and get rich BUT if everyone saves, spending goes down, AD curve goes left, and it *hurts the economy*

List 3 sources of excess burden.

1) Cost of government to collect tax 2) Cost to tax payer to comply 3) Dead weight loss

What is the "Keynesian Monetary Transmission Mechanism" starting with an decrease in the money supply?

1) Fed decrease MS 2) Increase in interest rates 3) Decrease in business investment 4) Decrease in aggregate demand 5) Decrease in Real GDP

What is the "Keynesian Monetary Transmission Mechanism" starting with an increase in the money supply?

1) Fed increase MS 2) Decrease in interest rates 3) Increase in business investment 4) Increase in aggregate demand 5) Increase in Real GDP

Explain the 2 reasons why the monetary transmission mechanism might not work.

1) If business investment is insensitive to changes in the interest rate. 2) The liquidity trap--when interest rates are so low that they cannot go any lower.

List 3 reasons why government spending on social security and Medicare will increase in the near future.

1) Increase in life expectancy 2) Aging of the baby boom generation 3) The increase in the amount of health care available

What are some of the challenges faced by Micro-Drip when they tried to sell the plot-sized drip system to farmers in Pakistan?

1) It is very expensive for a farmer in Pakistan (about $360) 2) Farmers are used to the tradition of flooding their fields? 3) Salesmen weren't trained in selling and had poor selling skills 4) Joel made a worksheet, but the farmers can't read or do math 5) Farmers need a government subsidy to afford the system

The 4 factors that determine a Nation's Economic Growth.

1) Natural Resources 2) Labor 3) Capital 4) Technology

List 5 government policies that encourage positive economic growth.

1) Protect private property rights 2) Competitive markets 3) Free international trade 4) Stable prices/low inflation 5) Small government

Why doesn't the government of Kenya provide basic water and sanitation services to the slums in Nairobi?

1) The government does not recognize the slums as an official settlement 2) Also, the people who live in the slums can't afford these services

Why did Ecotat start to build toilet facilities in the city of Nairobi first, before building them in them slums where they are needed the most?

1) They wanted to create a demand in the city first. It wouldn't' work if they started in the slums and then went to the city. 2) They also needed the approval of government officials to build in the slums, which took time.

3 things that will shift both LRAS and SRAS curves

1) change in resource base 2) change in level of technology 3) change in institutional arrangements that affect productivity

temporary changes: 3 things that will shift SRAS only

1) changes in resource prices 2) changes in the expected rate of inflation 3) supply shocks

Essay Format:

1. Policy 2. Tools 3. Effect of tools A) Fiscal- change in AD B) Monetary- Money market, R, I, AD 4. Effect of change in AD, RGDP, PL **IF there is growth, "hopefully" Change in PRGDP& AS Then, change in RGDP & PL

3 tools of the Fed

1. Reserve Requirements 2. Discount Rate 3. Open Market Operations

supply side economics

1. a lower marginal tax rate will give people the incentive to work more 2. if the lower marginal rate is believed to be long term than it will shift both SRAS and LRAS 3. supply side economics is a long run, growth oriented strategy not a short run stabilization tool

What 3 things are considered M1?

1. all the currency in circulation, cash not in bank vault (coins, paper currency) 2. checking deposits/accounts 3. travelers checks

What are the 2 problems with medicare and medicaid?

1. americans are living longer 2. medical advances are increasing the cost of care

roles of the fed

1. bank's bank 2. set monetary policy 3. regulates bank

expansionary monetary policy

1. buy bonds/gov't securities 2. decrease interest rate 3. lower reserve requirement

What are the 2 monetary policy targets?

1. change money supply 2. change interest rates

the self correcting economy

1. consumption demand is relatively stable a. permanent income hypothesis: peoples combustion depends on their long run expected permanent income rather than their current income b. people will: i. save during expansion ii. spend savings during recession

problems with bartering

1. depends upon a double coincidence of wants 2. you have to know a bunch of exchange rates

high taxes retard growth because

1. discourage work effort and productivity 2. reduce capital formation 3. encourage people to purchase goods that are less desired, just because they are tax deductible

In order for an asset to be used to exchange goods and services, it must have what 5 traits?

1. durable 2. acceptable 3. valuable 4. identical 5. divisible

as the value of your home decreased, what 3 things occurred?

1. durable good consumption decreased 2. less housing improvements/additions 3. couldn't "borrow against your home"-use home as an asset

What 2 things are considered M2?

1. everything in M1 plus.... 2. savings accounts, mutual funds, CDs

increases in Ag. Demand are caused by:

1. expansionary fiscal policy 2. expansionary monetary policy 3. changes in consumer spending 4. changes in business spending

What are the two fiscal policy tools the president and congress use?

1. government purchases 2. taxes

What are the two groups that federal government expenditures can be divided into?

1. govt purchases 2. everything else.

What were congresses attempted solutions for the ratio decreasing so much? (2 things)

1. increase full benefit from age 65-67 so people work longer 2. increase payroll taxes to fund SS for elderly

increase in Ag. Supply

1. increased productivity per worker 2. increase land, labor, capital 3. decrease oil prices 4. gov't makes it easier to operate more efficiently

expansion

1. lower the r.r % 2. lower DR 3. buy USGS 4. buy MBS

What are the 4 main functions of money?

1. medium of exchange 2. unit of account 3. store of value 4. standard of deferred payment

Money

1. medium of exchange accepted as payment for g/s because otherwise banks and business would be pritning their own notes 2. store of value- can be held for future purchases 3. standard of value- serves as a yardstick for measuring prices

potential deposit expansion multiplier

1. money multiplier= inverse of required reserve ratio 2. the lower the required reserve ratio, the more money supply will expand 3. the higher the requires reserve ratio, the less money supply will expand

what are the 2 things that weaken the money multiplier

1. money not deposited into bank 2. banks don't loan out excess reserves

timing problems of fiscal policy

1. our ability to forecast is extremely limited 2. change in fiscal policy will not have an immediate impact on the economy

What are the 4 goals of monetary policy?

1. price stability 2. low unemployment 3. financial stability (non inflation) if you achieve all these you get... 4. economic growth

contractionary

1. raise the r.r % 2. raise DR 3. sell USGS 4. sell MBS

interest paid on excess bank reserves

1. reducing the interest paid on excess reserves increases the money supply 2. increasing the interest paid on excess reserves reduces the money supply

Responsibility of Fed Manager of Money Supply -What 3 tools do they use to manage money supply?

1. reserve requirement 2. discount policy 3. open market opperations

the effect of the deposit multiplier will be reduced if

1. some people decide to hold currency rather than deposit it in the bank 2. banks fail to use all of the new excess reserves to extend loans

why would investors buy over priced stocks? (2 reasons)

1. they're stupid 2. they greedy

what 2 things happen once commodity money is introduced?

1. trade becomes easier 2. no longer need to make things you need by yourself which allows for specialization

functions of money

1. unit of account 2. medium of exchange 3.store of value

Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank finds that it can safely lend out $4,500, the reserve requirement must be:

10 percent.

how many voting members are there in the Federal Open Markets Committee and who are they?

12: 7 governors and 5 of the 12 central bank presidents

what is the U.S debt

14 trillion

2014 National RGDP

16.089 Trillion

Quantitative Easing

2009-2011

what is national debt

18-19 + Trillion

The Federal Reserve System was created in:

1913

(Last Word) A "national bank holiday" that closed all banks for a week and resulted in Federal deposit insurance occurred in the United States in:

1933, following the bank panics of 1930-1933.

what qualifies as a recession?

2 consecutive quarters of decreasing GDP

what is the goal of the fed?

2% core inflation annually

the self correcting economy

2. changes in real interest rates stabilize aggregate demand and redirect economic fluctuations

the self correcting economy

3 facts that imply the economy can correct itself without government intervention

what is federal budget for the year?

4.5 T

A reserve requirement of 20 percent implies a potential money deposit multiplier of...

5

Hyperinflation is defined as inflation exceeding ____% per month.

50%

who are the leaders of the fed?

7 governors appointed by the president for 14 years

Assets: Reserves = $750, Loans = $9,250. Liabilities: Deposits = $10,000. The bank ratio is ___.

7.5%

The Rule of 70 calculation

70 —————— Investment's Rate of Return

If M = 3,000, P = 2, and Y = 12,000, what is the velocity?

8.

m2 amount

8.5 trillion

In 2010, the combined expenditures of federal, state, and local governments in the United States were approximately 40 percent of gross domestic product (GDP). Approximately what percentage of GDP were government expenditures in 1930?

9%

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.

Assets-Liabilities

=Net Worth

natural rate of unemployment

=frictional + structural

excess reserves

=total reserves - required reserves

Limitations

A bank's willingness to lend people must be willing deposits regulation

The crowding-out effect implies which of the following?

A budget deficit will increase real interest rates and, thereby, retard private spending.

Foreign Direct Investment (FDI)

A controlling ownership in a business enterprise in one country by an entity based in another country.

Crowding out

A decline in private expenditures as a result of an increase in government purchases.

a. decrease the spending multiplier

A decrease in the marginal propensity to consume will a. decrease the spending multiplier. b. increase the spending multiplier. c. lower interest rates. d. decrease investment.

Quantitative easing

A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. This increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity.

Philips Curve

A graph showing the short-run relationship between the unemployment rate and the inflation rate.

Industry

A group of firms produing the same or similar products. Ex: Steel industry, (US steel, Bethlehem Republic) Tennis Industry

Structural Unemployment

A mismatch between the skills workers can offer and the skills in demand.

New Growth Theory

A model of long-run economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system.

Reserves

A percentage of certain deposits, mainly checking accounts, that all depository institutions must set aside, required reserves can be held as cash in bank's vaults or in accounts at a regional fed bank.

Long Run

A period of time in which all factors of production and costs are variable. Entry and exit is possible and there are no fixed factors (everything is variable).

Plant

A physical establishment which helps in making and/or distributing of G/S. Ex: Warehouse, a factory, retail store, ACC.

Moral Hazard

A problem after the transaction. This may lead to programs like the FDA and FTC

Adverse Selection

A problem before the transaction. EX: The used car is a lemon

Renewable Resources

A resource which is replaced naturally and can be used again. Examples: Oxygen, Fresh Water, Solar Energy, Timber, and Biomass.

Cyclical Unemployment cause

A short-term economic fluctuations.

Unemployment

A situation where someone wants to work but cannot find a job in the current market. People who do not have jobs and are not interested in obtaining one are not counted as __________. The BLS defines _____ as people who: 1. Didn't work the previous week. 2. Were available to work if they had been offered a job. 3. We're making efforts to look for a job.

Convergence Theory

A theory speculating that, since poorer economies tend to grow more rapidly than wealthier economies, all economies in time will assemble in terms of per capita income.

Public Goods

Are G/S provided by the government.

Which of the following represents why private production tends to be more efficient then government production?

All of the above are reasons why private production tends to be more efficient then government production.

Critics of the Keynesian view argue that increases in government spending financed by borrowing will hamper the recovery from a recession and slow long term growth because

All of the above are true.

Given a horizontal AS curve , if AD increases what is the result ?

All GDP increase with no price increase

What is classical dichotomy?

Separation of nominal and real variables.

You know there's growth in monetary policy...

ALWAYS ASSUME GROWTH!

Stagflation is caused by

AS Left

An increase in productivity shifts

AS Right

Reaganomics corrects stagflation by shifting

AS right

What are excess reserves?

Actual reserves held by banks that exceed the legal requirement.

Which of the following is correct?

Actual reserves minus required reserves equal excess reserves.

Which of the following would cause prices and real GDP to rise in the short run?

Aggregate demand shifts right

If the economy is simultaneously in long-run and short-run equilibrium, which of the following is true?

Aggregate quantity demanded is equal to potential output

Which of the following provides the most reasonable explanation for why agricultural interests lobby for higher farm subsidies and price supports?

Agricultural interests seek a redistribution of income favoring themselves.

Suppose that last week 100,000 people lost (or quit) their jobs and sought employment, while 10,000 new job seekers entered the labor market and began to look for work too.

All 110,000 people are counted as unemployed.

Which of the following explains why pork-barrel spending is often approved, even when the spending is inefficient?

All of the above: Each representative has little incentive to oppose pork-barrel spending since the tax savings would accrue to taxpayers throughout the nation; General opposition to pork-barrel spending by a legislator would make it more difficult for the legislator to arrange for pork-barrel projects that provide concentrated benefits for his or her district; Logrolling increases the likelihood that pork-barrel projects will be approved.

Given a vertical AS curve, if AD increases what is the result ?

All price increase with no GDP increase

Exchange rate system

An agreement among countries about how exchange rates should be determined; **page 630**

The Rule of 70

An easy way to calculate how many years it will take an investment to double in size

Saving and investment equation

An equation that shows that national saving is equal to domestic investment plus net foreign investment; National saving = Domestic investment + Net foreign investment OR S = I + NFI

What is meant by the expression, "There is too much money chasing too few goods"?

An expansion in the supply of money relative to the availability of goods and services is causing an increase in the general level of prices.

Absolute Economic Growth

An increase in Real GDP

Which of the following best describes the crowding-out effect?

An increase in borrowing by the government will push interest rates upward, which will lead to a reduction in private spending.

An unanticipated shift to a more restrictive monetary policy by the Fed will result in which of the following?

An increase in interest rates and, thereby, reduced investment, current consumption, and aggregate demand.

Decrease in Consumption and Investment

An increase in real interest rate due to a decrease in money supply will initially lead toward....

expansionary monetary policy

An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.

Discretionary fiscal policy involves which of the following?

An intentional change in taxation or government spending.

Business Firm

An organization which owns and operates these plants

Surplus; Deficit

Automatic Stablalizers will shift the gov budget toward a ______ during expansion and a _______ during a recession

What are the two types of fiscal policy?

Automatic stabilizer and discretionary

What are Monetary Policy Targets for?

Fed uses these to indirectly influence the variables (unemployment, inflation, etc.)

Inflationary Gap

Goal: Lower AD (contract economy) Gov't Spending Decrease (Republicans) Taxes Increase (Democrats) Libertarians (Do Nothing)

Public Goods

Goods that are non- rival and non- excludable

The Federal Reserve Head whose academic specialty was the Great Depression and was FED head under Bush and Obama is

BEN BERNANKE

Fractional Reserve System -what does this allow banks to do?

Banking system that keeps under 100% of deposits in reserves and is very susceptible to bank runs and panics -allows banks to create money through the lending process

Responsibility of Fed Manager of Money Supply Tools to Manage Money Supply -Discount policy: what is it?

Banks borrow from Fed with Discount Loans

Fractional Banking system

Banks lend out a portion of the deposits that people hold at the bank.

If the Fed lends to member banks, what happens to reserves and the money supply?

Both Increase

The natural unemployment rate includes ___.

Both frictional and structural unemployment.

Which of the following is a major deficiency of fiscal policy as a stabilization tool?

Both political and economic factors make it unlikely that changes in fiscal policy will be timed correctly

Keynes view on deficits/surplus

Budget deficits and surpluses are ok -the goal of fiscal olicy shouldn't be to balance the budget, but instead to balance... Budget management: fiscal year oct 1-sept 30 -current expenditures: "uncontrollables" 80% and discretionary spending 20%

Responsibility of Fed Manager of Money Supply Tools to Manage Money Supply -Open Market Operations

Buying and selling securities to manage MS

Why do long lags make discretionary policy less effective?

By the time the impact of a policy is felt, the problem may have been corrected by market forces.

Which of the following is true when the federal government is running a budget deficit

Government expenditures exceed government revenues

When savings is greater then planned investment

C+Ig is less then GDP, and vice versa

if interest rates increase, what will happen to... C I G NX

C- decrease I- decrease G- ? yolo NX- decrease

Fiscal Policy

Government or President

Which list ranks assets from most to least liquid?

Currency, stocks, fine art.

Consumption formula (with taxes)

C= a +MPC(Net inc - (taxes - tax payments))

M2

Cash, traveler's checks, checkable bank deposits, near-moneys

Monetary Policy has two steps

Change money supply, change AD

Fiscal policy

Changes in federal taxes and purchases that are intended to achieve macroeconomic policy goals

The Keynesian fiscal policy to correct recession is

Cut taxes to less wealthy

Interest rate effect on aggregate demand

Changes in interest rates affect aggregate demand, which is the total level of spending in the economy. Aggregate demand has four components: consumption, investment, government purchases, and net exports. Changes in interest rates will not affect government purchases, but they will affect the other three components of aggregate demand in the following ways: **page 496 for descriptions**

Shifts of demand in lfm

Changes in perceived business opportunities, changes in government borrowing

Shifts of supply in lfm

Changes in private savings behaivor, changes in capital inflows

Define monetary policy.

Changes in the money supply to achieve macroeconomic goals.

Monetary Policy

Changes in the money supply to achieve macroeconomic goals.

Why does "The Acummen Fund" focus on "social entrepreneurship" rather than traditional methods of charity and foreign aid?

Charity and foreign aid alone will not eliminate poverty because: 1) There is some corruption involved 2) Doesn't address the root cause of the problem 3) If you just give money to the poor, they will always want more of it

Unemployment

Civilians that are over the age of 16, that are NOT working, but can work and have actively sought work in the past 4 weeks

Counterfeit

Columbia has had a bad rep of being the circulator or printer of forged $100 bills in S. America.

Which of the following best illustrates the use of discretionary countercyclical fiscal policy?

Congress passes a bill authorizing $100 billion in additional spending when it receives news of a deepening recession.

Three ways households spend income

Consume Save Pay taxes

What are the four things the government gets it revenue from?

Corporate taxes Other taxes Social taxes Individual taxes

Real exchange rate

Corrects the nominal exchange rate for changes in prices of goods and services.

Higher-than-expected inflation transfers purchasing power from ____ to ____.

Creditors to debtors.

d. Interest rates to fall and so private consumption and investment rise

Crowding in occurs when changes in government spending or taxes cause a. Interest rates to rise and so private consumption and investment fall b. Interest rates to fall and so private consumption and investment fall c. Interest rates to rise and so private consumption and investment rise d. Interest rates to fall and so private consumption and investment rise

Financial Assets

Currency, stocks, bonds, loans

Responsibility of Fed Lender of Last Resort -Why didn't banks borrow from the Fed?

Fed wouldn't make loans because they thought that the bank runs were due to poor investments and they didn't want to encourage risky behavior

FDCI

Federal Deposit Insurance Corporatoi

Government Consumption

Federal Expenditures on final goods+ state and local expenditures on final goods

How are four tools used under expansionary monetary policy?

Decrease RRR, DR, FFR, buy more bonds

Under expansionary fiscal policy what would the government do with these two tools?

Decrease taxes& Increase government spending

How are tools used under expansionary fiscal policy?

Decrease taxes, Increase government spending

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 inflationary booms.

TARP, created in 2008, relates to

Federal Government bailout loans to General Motors, AIG, and many banks

Which of the following is true regarding government expenditures in the United States?

Government expenditures as a share of GDP grew rapidly between 1930 and 1980.

Supply and demand shifters in money market

Demand: changes in variables other than the interest rate cause the demand curve to shift. The two most important variables that cause the money demand curve to shift are real GDP and the price level; And increase in real GDP means that the amount of buying and selling of goods and services will increase. This additional buying and selling increases the demand for money as a medium of exchange, so the quantity of money households and firms want to hold increases at each interest rate, shifting the money demand curve to the right (and visa-versa); A higher price level increases the quantity of money required for a given amount of buying and selling; An increase in the price level increases the quantity of money demanded at each interest rate, shifting the money demand curve to the right. Supply: For simplicity, we assume that the Fed is able to completely control the money supply. With this assumption, the money supply curve is a vertical line, and changes in the interest rate have no effect on the quantity of money supplied. Just as with other markets, equilibrium in the money market occurs where the money demand curve crosses the money supply curve.

Effects on net exports

Depreciation in the domestic currency will increase exports and decrease imports, thereby increasing net exports. If real GDP is currently below potential GDP--a depreciation in the domestic currency should increase net exports, aggregate demand, and real GDP. An appreciation in the domestic currency should have the opposite effect: Exports should fall, and imports should rise, which will reduce net exports, aggregate demand, and real GDP.

Which of the following best describes the economic conditions of the 1930s?

Depressed economic conditions and prolonged high rates of unemployment.

Explain the "New Growth Theory"

Developed by Paul Romer in the 1990s. Technological advances and new ideas are unlimited. Do not have diminishing marginal returns because new ideas can be shared by everyone. Technological advances are not random because people are always searching for new and better ideas.

Explain the "Neoclassical Growth Theory"

Developed by Robert Solow in the 1950s. Higher standard of living is possible but it cannot increase indefinitely. Due to the diminishing marginal return of capital eventually the added output of capital will fall. Advances in technology are random.

Explain the "Classical Growth Theory"

Developed by Thomas Robert Malthus in 1798. Amount of land on earth is fixed. Worlds population is increasing every year. Eventually we will not be able to feed everyone and some people will starve to death.

Net capital flows

Difference btw. capital inflows and capital outflows.

What did the "Classical Theory of Money" say about the relationship between the money supply and prices?

Direct and proportional relationship between money supply and prices.

YES

Does a reduction in the marginal tax rate tend to increase supply and productivity?

Problems with GDP

Doesn't measure leisure Doesn't capture the underground economy Doesn't include household production Doesn't include the impact of externalities

(18)Compared to the no-trade situation, when a country imports a good, which of the following will occur?

Domestic consumers gain, domestic producers lose, and the gains outweigh the losses.

Consumption

Durable Goods+ Nondurable goods+ Services

the Beige Book

Each Fed bank gathers anecdotal information on current economic conditions, published 2 weeks before an FOMC meeting.

Liquidity

Ease with which the type of money can be turned into g+s, M1 most liquid

What are the two groups that make up the labor force?

Employed and unemployed.

Run on bank

Everyone wants to cash out their checking deposits

In order to increase the money supply, the banking system must have which of the following?

Excess reserves.

Supply of money up, rates down, investment up, AD up would be

Expansonary monetary policy to correct recession

Budget deficit

Expenditures exceed revenues during a fiscal year

Net exports

Exports minus imports; Technically, net exports is not equal to the current account balance because this account also includes net income on investments and net transfers. Because these other two items are relatively small, it is often a convenient simplification to think of net exports as being equal to the current account balance

Net Exports

Exports- Imports

The Keynesian monetary policy to correct recession is

Fed buys bonds in open market to lower fed funds rate

Constraints of Fiscal Policy Fed controls monetary policy -how is this a constraint?

Fed can change policy at any time

Shows the predicted relationship between tax rates and revenues

Laffer curve

The group that sets the Federal Reserve Systems policy on buying and selling government securities (bills, notes, and bonds) is the:

Federal Open Market Committee (FOMC).

As it relates to Federal Reserve activities, the acronym FOMC describes the:

Federal Open Market Committee.

A $20 bill is a:

Federal Reserve Note.

The paper money used in the United States is:

Federal Reserve Notes.

Discounting

Federal Reserve lending of reserves to private banks

Open Market Operations

Federal Reserve purchases and sales of government bonds for the purpose of altering bank reserves

In recent years the Fed has communicated changes in its monetary policy by announcing changes in its policy targets for the:

Federal funds rate.

Income Tax

Federal gov't's biggest form of income...

Monetary Policy

Federal or central bank

What are the two kinds of money?

Fiat and commodity.

What are the two types of policy the government can use when the self-correcting mechanism isn't working fast enough?

Fiscal & monetary

Investment

Fixed investments(house or factory)+ changes in Inventory

Floating vs. fixed exchange rates

Fixed: do not change over long periods; Floating: assumed that exchange rates are determined in the market-good assumption for most currencies

Stagflation

Fixing one problem makes the other worse (^) Unemployment (^) Inflation

48. Which type of unemployment is most likely to help the economy become more efficient?

Frictional

In 2002, the demand for construction workers increased and the demand for textile and steelworkers diminished. This is an example of ___.

Frictional unemployment caused by sectoral shifts.

Real GDP

GDP adjusted for inflation/currency value.

Because of transactions which take place in the underground economy, the

GDP calculation tends to understate the actual value of goods sold in the economy

What is the velocity of money?

GDP divided by the money supply.

Nominal GDP

GDP measured in the market value and currently value of the year the goods and services were produced.

GDP Formula (Expenditure)

GDP(Y)= C+I+G+NX C- Consumption I- Investments G- Government Consumption NX- Net Exports

d. AS decreases causing inflation to increase while unemployment increases

If no policy is enacted in an inflationary gap, then a. none of the below correctly describe what happens if no policy is used b. AS increases causing inflation to increase while unemployment falls c. AS decreases causing inflation to decrease while unemployment increases d. AS decreases causing inflation to increase while unemployment increases e. AS increases causing inflation to decrease while unemployment falls

Increase

If the Fed wants to decrease the money supply, it will _______ discount rates

d. -4

If the MPC = .8, what is the tax multiplier? a. 4 b. 5 c. -5 d. -4 e. none of the above

c. increase taxes

If the economy is experiencing an AD excess due to an increase in consumer confidence, then what fiscal policy will liberals generally propose? a. increase government spending b. cut government spending c. increase taxes d. decrease taxes

a. increase gov't spending

If the economy is experiencing an AD shortfall due to a decrease in exports, then what fiscal policy will liberals generally propose? a. increase gov't spending b. decrease gov't spending c. increase taxes d. decrease taxes

Increase; Decrease

If the fed lends to member banks, reserves will _________ and money supply will ______

a. -$720 million

If the federal gov't lowered gov't spending by $72 million and the MPC is .9, what would be the total change in AD? a. -$720 million b. $72 million c. -$7.2 million d. $8 million e. -$80 million

d. all of the above will occur

If the federal gov't uses expansionary fiscal policy in the case of stagflation, which of the following would occur as a result? a. RGDP will rise b. the national debt will rise c. price levels will rise d. all of the above will occur e. none of the above will occur

d. $800 million

If the federal government increased spending by $80 million and the MPC is .9, what would be the total change in AD? a. $80 million b. $72 million c. $720 million d. $800 million e. $560 million

d. both b & c

If the government increases spending in the case of stagflation then its effect will be to a. increase unemployment b. decrease unemployment c. increase inflation d. both b & c e. both a and c

d. the price level to increase while unemployment decreases

If the government lowers taxes then we would expect a. the price level to decrease while unemployment increases b. both the price level and unemployment to increase c. both the price level and unemployment to decrease d. the price level to increase while unemployment decreases

b. decrease aggregate demand

In fiscal policy, Government spending decreases are used to a. stimulate aggregate demand. b. decrease aggregate demand. c. stimulate aggregate supply. d. decrease aggregate supply.

(18) Which of the following about international trade is true?

In recent decades, the volume of U.S. international trade has been increasing as a share of the economy.

a. wages will fall and AS will increase

In the event of a stagflation when no fiscal policy is used, a. wages will fall and AS will increase b. wages will fall and AS will decrease c. wages will rise and AS will increase d. wages will rise and AS will decrease e. none of the above correctly describe the adjustment process with no fiscal policy because it is AD that adjusts.

Inflation; Output

In the long run, unanticipated and anticipated expansionary monetary policy leads to ______; there is no real impact on _____.

M1

Includes currency in circulation (cash), traveler's checks, checkable bank deposits

How are the four tools used under contractionary monetary policy?

Increase RRR, DR, FFR, and sell bonds

43. If an improvement in the quality of education in the United States increases the productivity of labor, this will

Increase both long-run and short-run aggregate supply.

How are tools used under contractionary fiscal policy?

Increase taxes, Decrease government spending

What happens to the u-rate if a worker loses their job and begins looking for a new one?

Increases

Contractionary fiscal policy

Involves decreasing government purchases or increasing taxes. Policymakers use contractionary fiscal policy to reduce increase in aggregate demand that seem likely to lead to inflation; With some firms producing beyond their normal capacity and the unemployment rate very low, wages and prices will be increasing; Real GPD falls and price level falls; In practice it is extremely difficult for Congress and the president to use fiscal policy to eliminate the effects of the business cycle and keep real GDP always equal to potential GDP.

Expansionary fiscal policy

Involves increasing government purchases or decreasing taxes; A cut in taxes has an indirect effect on aggregate demand; Cutting the individual income tax will increase household disposable income and consumption spending. Cutting taxes on business income can increase aggregate demand by increasing business investment; The goal of both expansionary monetary policy and expansionary fiscal policy is to increase aggregate demand relative to what it would have been without the policy; To bring real GDP back to potential GDP, Congress an the president increase government purchases or cut taxes, which will shift the aggregate demand curve to the right; Real GDP increases and price level rises; The policy has successfully returned real GDP to its potential level. Rising production will lead to increasing employment reducing the unemployment rate.

During 2001-2011, what happened to the federal budget deficit?

It expanded and real government spending increased rapidly, indicating that fiscal policy was expansionary.

Measured as a share of GDP, what happened to the net federal debt between 1990 and 2011?

It fell during most of the 1990s, but rose sharply during 2001-2011.

Measured as a share of GDP, what happened to federal spending during 2001-2010?

It increased more rapidly than during the 1990s

Which one of the following is an area of agreement among modern macroeconomists with regard to the use of fiscal policy?

It is difficult to time changes in discretionary fiscal policy in a manner that will promote stability.

The Theory of Efficiency Wages explains why ___.

It may be in the best interest of the firms to pay wages above equilibrium level.

29. Which of the following is a positive effect of job search and the unemployment that often accompanies it?

It permits individuals to better match their skills and preferences with the requirements of a job

When the Federal Reserve System wants to increase the money supply, what does it typically do?

It purchases U.S. government securities

What is the demand curve for money?

It shows the amount of money that households and businesses wish to hold at various rates of interest.

Why is the multiplier principle important?

It shows why small shifts in investment have a powerful influence on national income.

Which of the following is true if the federal government is running a budget surplus?

It will be able to reduce its outstanding debt.

If the Fed buys a T-bill from a commercial bank, how will it pay for the T-bill?

It will give the bank new reserves.

83. How will increased usage of the Internet by employers and employees influence the job search process?

It will make job-related information less costly and, therefore, tend to reduce the rate of unemployment.

Non-Durables

Items which last less than three years. Ex: Most Clothing, Pens, Food

Durables

Items which last more than three years. Ex:Autos, Washing Machines

Which one of the following economists has played a central role in the development of the "economics of collective decision making," better known as public choice analysis?

James Buchanan

The current head of the Federal Reserve is

Janet Yellen

What does the term pork-barrel legislation refer to?

Legislation that bundles together a number of projects, each benefiting local interests at the expense of general taxpayers.

Specific taxes

Let the firm pollute, however; make them pay a heavy tax. Government takes the money and cleans up the pollution.

Structural Unemployment

Long run skills not matching problems. When people don't have the skills to perform a skill

M2

M1 + savings deposits + time deposits + money market mutual funds

What are the two types of measurements to calculate money supply in the US?

M1 and M2

Time deposits are included in

M2 only.

What if real GDP increases, what happens to the MD line?

MD line moves right

potential increase in MS formula

MS= MM x initial excess reserves

Equation of exchange

MV=PQ

Which of the following lists two things that both decrease the money supply?

Make open market sales and raise the reserve requirements.

Which of the following does supply-side economics stress?

Marginal tax rates exert important incentive effects that influence real output.

Classic Economics

Market will fix itself

Financial Markets

Markets which deal with the exchange of financial assets.

Horizontal Combination of Plants

Means each plant is at the same stage of production Ex: JC Penny's , Safeway, Footlockers

Conglomerates of Plants

Means they are plants which operate across many different markets and industries. Ex: Plants in communications, hotels, baking proudcts, educational materials..

Government Non-exhaustive expenditures

Means they contribute nothing to domestic production. Recipients make no contribution to output in return for these payments

Consumer Price Index

Measure of GPD, when many good's costs are added up and average to find what the cost of living is

Frictional Unemplyment

Measurement of time it gets to get a job. Short - run

Money Supply

Measures of money in the economy, the most narrow M1 counts only currency, traveler's checks, and most checking accounts.

"Every major contraction in the U.S. economy has either been created or greatly exacerbated by monetary instability. Every major inflation has been caused by monetary expansion." Which of the following economists made this statement?

Milton Friedman

What are three reasons for structural unemployment?

Minimum wage laws, unions, and efficiency wages.

Decisions by policy makers concerning the money supply constitute ___.

Monetary policy.

Taylor rule

Monetary rule that determines how much the fed should raise real interest rates given inflation and unemployment.

Which of the following provides the best explanation of why money is valuable?

Money is valuable because it is scarce relative to the demand for the services it provides

Why is there a market (demand) for a household solar light in India?

Over 500 Million houses in India do not have electricity. They use kerosene lanterns for light. Kerosene is dangerous and not an effective source of light. Solar lights are not expensive and are much brighter and safer.

Coase Theorem

Parties can bargain or negotiate terms that are more beneficial to both parties than the outcome of any assigned property rights

The Fed acquired the authority to do which of the following during the economic crisis of 2008?

Pay interest to commercial banks on their reserves.

Stagflation

Persistent high inflation combined with high unemployment and stagnant demand in a country's economy.

Shows the expected relationship between inflation and unemployment when aggregate demand shifts

Phillip's curve

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

Positive Externality

Positive impact on a third party as a result of a transaction. EX: Education provided by taxes

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

3. Suppose, in dollar terms, nominal GDP increased approximately 4 percent during a given year, and real GDP decreased 1 percent. Which of the following best explains these events?

Prices increased approximately 5 percent

Why do producers tend to be better represented in lobbying efforts and other elements of the political process than consumers?

Producers are generally better organized than consumers

Security

Provide a nest for retirement

Speculation

Purchase securities speculating they will increase in value.

Value of money

Purchasing power & Influence by price level

Labor

Quantity Productivity

Results of EFP

RGDP increases, unemployment falls - GOOD PL increases, inflation - BAD (Trade off between lower unemployment&Inflation)

What are the four tools of monetary policy?

RRR, Discount rate, federal funds rate, Open Market Operations

What is the primary cause of inflation?

Rapid expansion of the money supply

b. taxes will increase and so will decrease spending

Rational expectations states that if the government borrows money to finance increased spending, then consumers will expect that a. taxes will increase and so will increase spending now b. taxes will increase and so will decrease spending c. taxes will decrease and so will decrease spending d. taxes will decrease and so will increase spending now

Per Capita GDP

Real GDP divided by population. Used to measure the average output per person.

41. Within the AD/AS model, how does an economy adjust to an output beyond its long-run capacity as a result of an unanticipated increase in aggregate demand?

Resource prices and real interest rates will rise causing output to fall back to its long-run sustainable rate

Supply of money down, interest rates up, investment down, AD down is

Restrictive monetary policy to correct demand pull inflation

Which of the following is an example of an automatic stabilizer?

Revenues from the corporate income tax increase sharply during a business boom but decline substantially during a recession, even though no new tax legislation has been enacted

Reserve Requirements

Rules set by the Federal Reserve that determine the required reserve ratio for banks

M2

Savings accounts, mutual funds, time deposits, money market accounts (M1)

Two reasons for spending

Security Speculation

If Oil prices increase AS

Shifts LEFT

Which of the following would cause prices to fall and output to rise in the short run?

Short-run aggregate supply shifts right.

Money Supply Curve

Shows how the quantity of money supplied varies with the interest rate

Supply Shock

Significant events that directly affect production and the AS (Aggregate Supply) curve in the short run.

Natural Resources

Soil Weather Terrain Clean Water Rainfall Access to an ocean or sea Distance from the equator

bills

Sold to banks, corporations, some foreigners, and American citizens

Free-Rider

Someone who receives the benefit of a G/S without contributing to its cost Ex: Citizens who don't pay taxes but enjoy public goods. Illegal Immigrants

Legislation

Specific laws designed to make firms responsible. Ex: polluters, make firms install species equipment to stop the pollution.

As both the budget and regulatory powers of government grow, public choice analysis indicates that individuals and groups will find it in their interest to do which of the following?

Spend more time rent seeking

Discretionary spending

Spending set by the govt through appropriations bills, including operation expenses &salaries of govt employees (defense, environment, education, space exploration); A spending category through which governments can spend through an appropriations bill. This spending is optional as part of fiscal policy, in contrast to entitlement programs for which funding is mandatory. Refers to spending set on a yearly basis by decision of Congress. Congress usually authorizes such spending in another act.

c. earmark spending

Spending that directs approved funds to be spent on specific projects in politician's districts but is not in the best interest of the nation as a whole is called? a. logrolling b. entitlement spending c. earmark spending d. discretionary spending e. flagrant spending

Static model vs. dynamic model

Static: Ignores two important facts about the economy: 1) The economy experiences long-run growth, with the LRAS curve shifting to the right every year, and 2) the economy experiences long-run growth, with the LRAS curve shifting to the right every year. Dynamic: We use the dynamic model to gain more complete understanding of fiscal policy; Over time, potential GDP increases which we show by shifting the LRAS curve to the right; The gators that cause the LRAS curve to shift also cause firms to supply more goods and services at any given price level in the short run, which we show by shifting the SRAS curve to the right. Finally, during most years, the aggregate demand curve also shifts to the right, indicating that aggregate expenditure is higher at every price level.

People who are unemployed because wages are for some reason set above the level that brings labor supply and demand into equilibrium are best classified as ___.

Structurally unemployed.

Which of the following is true with regard to the use of countercyclical fiscal policy as a stabilization tool?

Successful fiscal policy is difficult to achieve because Congress acts slowly and our ability to predict the future is limited.

Debt

Sum of all surpluses and deficits over a specific time period.

b. raise G by 3.2 million

Suppose an AD shortfall of $32 million exists due to a decrease in consumer confidence and the MPC=.9. Which of the following policies would be appropriate if the federal government wishes to change Government spending? a. lower G by 28.8 million b. raise G by 3.2 million c. raise G by 32 million d. raise G by 8 million e. none of the above is the appropriate policy using a Government spending change

Tax cut: -1.6*(-9)= $14.4 trillion total change G cut: -1.6*10=-$16 trillion total change Thus, net effect is $14.4-$16=-1.6 Thus spending will fall $1.6 trillion Thus, a restraint is created

Suppose taxes are cut by $1.6 trillion and at the same time G is decreased by 1.6 trillion. The MPC is .9. What is the cumulative effect on spending? Would these two actions create a fiscal stimulus or restraint?

c. 5

Suppose that Government spending increases by $5 million and this causes aggregate demand to increase by $25 million.What is the spending multiplier? (Caution, solve for the spending multiplier, not the MPC) a. .25 b. .8 c. 5 d. 4 e. none of the above

Liberals will raise taxes. From above we know -150=-15*spending mult. So, Spending Mult=10 Tax mult=-9. -150=-9*tax change thus, liberals will raise taxes 150/9=$16.67 million

Suppose that an Aggregate Demand excess exists of $150 million. Furthermore, the appropriate fiscal policy proposed by conservatives is to cut Government spending by $15 million. What is the appropriate fiscal policy for the liberals to propose?

b. 5

Suppose that gov't spending decreases by $10 million and this causes aggregate demand to decrease by $50 million. What is the spending multiplier? a. -5 b. 5 c. 500 d. 10 e. none of the above

d. AD will increase by $2 billion

Suppose that taxes are increased by 2 billion at the same time that government spending is increased by 2 billion. If the MPC=.9, then what is the total effect on AD? a. AD will decrease by $4 billion b. AD will increase by $4 billion c. AD will decrease by $1 billion d. AD will increase by $2 billion e. none of the above would happen

In a recessionary gap, unemployment is high so wages will fall causing AS to increase which lowers unemployment and lowers the price level. But, this takes a long time.

Suppose that we have an Aggregate demand shortfall of $300 million due to a recessionary gap. Answer the following questions, assuming the MPC=.75 What would be the adjustment process if neither fiscal nor monetary policy is implemented?

total change=initial change *mult. Spending mult=1/(1-.75)=4 Tax mult=1-spendmult=1-4=-3 conservatives: change taxes 300=-3*taxchange 300/(-3)=-100 so, lower taxes $100 liberals: change G 300=4*G change 300/4=75 so, raise G $75

Suppose that we have an Aggregate demand shortfall of $300 million due to a recessionary gap. Answer the following questions, assuming the MPC=.75 a. What is the appropriate fiscal policy proposed by liberals and conservatives respectively

See graphs in book or notes .Using policy works more quickly but causes inflation to rise whereas doing nothing takes a long time but lowers the price level. Fiscal policy has a longer policy lag while monetary policy has a longer implementation lag. Fiscal policy could cause crowding out. All options will eventually solve the problem (lower unemployment) as long as the Government or Fed doesn't mess up.

Suppose that we have an Aggregate demand shortfall of $300 million due to a recessionary gap. Answer the following questions, assuming the MPC=.75 b. Graph how this fiscal policy affects the macroeconomic equilibrium. What are the pros and cons of using fiscal policy in this situation?

Decrease Government spending by 12

Suppose the economy is currently experiencing an AD excess of $48 billion and the MPC=.75 . Suppose that congress decides to change government spending instead to return the economy back to full employment. What is the appropriate change in G?

Increase taxes by 16

Suppose the economy is currently experiencing an AD excess of $48 billion and the MPC=.75 . Suppose that congress decides to change taxes to return the economy back to full employment. What is the appropriate tax change?

4

Suppose the economy is currently experiencing an AD excess of $48 billion and the MPC=.75 . What is the spending multiplier?

-3

Suppose the economy is currently experiencing an AD excess of $48 billion and the MPC=.75 . What is the tax multiplier?

a. decrease gov't spending by $6 million

Suppose the economy is experiencing an AD excess of $24 million and the MPC is .75, and congress decides to change gov't spending. What is the appropriate amount of government spending change cause? a. decrease gov't spending by $6 million b. decrease gov't spending by $8 million c. increase gov't spending by $18 million d. increase gov't spending by $3 million e. none of the above

c. increase taxes by $8 million

Suppose the economy is experiencing an AD excess of $24 million and the MPC is .75, and congress decides to change taxes. What is the appropriate amount of tax? a. increase taxes by $6 million b. decrease taxes by $8 million c. increase taxes by $8 million d. increase taxes by $18 million e. decrease taxes by $3 million

Balance of trade

The difference between the value of the goods a country exports and the value of the goods a country imports.

Targets

The Fed tries to keep both the unemployment and inflation rates low, but it can't affect either of these economic variable directly; monetary policy targets, that it can affect directly and that, in turn, affect variables, such as real GDP, employment, and the price level, that are closely related to the Fed's policy goals. The two main monetary policy targets are the money supply and the interest rate.

Expansionary monetary policy

The Fed's policy of decreasing interest rates to increase real GDP

Contractionary monetary policy

The Fed's policy of increasing interest rates to reduce inflation

The money supply is controlled by

The Federal Reserve

Which of the following statements is true?

The Federal Reserve does not set the Federal funds rate, but it influences it through the use of open market operations.

5. 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?

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?

The GDP of the United States because that's where it was built

The amount of unemployment that an economy normally experiences is called the ___.

The Natural Rate of Unemployment

Inflation

The OVERALL rise in price level. As time goes on your dollar is worth less

Monetary policy

The actions the Federal Reserve takes to manage the money supply and interest rates to achieve macroeconomic policy goals.

34. 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.

37. 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?

The demand for loanable funds will increase, and the interest rate will rise.

AD Shortfall

The amount of additional AD needed to achieve full employment after allowing for price changes

Reserve requirements are regulations concerning ___.

The amount of reserves banks must hold against deposits.

Define excess burden.

The amount that the burden imposed by a tax exceed the funding provided by the tax.

Excess Burden

The amount that the burden imposed by a tax exceeds the funding provided by the tax.

Which of the following best defines the velocity of money?

The average number of times a dollar is used to buy goods and services included in GDP.

Managed float

The currency exchange rate system, under which the value of most currencies is determined by demand and supply, with occasional government intervention

Fiscal Policy

The deliberate changes in taxes and government spending by the government to change the level of RGDP in the economy.

Monetarism

The macroeconomic view that the main cause of change in aggregate output and price level is fluctuations in the money supply; espoused by advocates of the monetary rule. -focus' on money supply -holds the market as highly competitive -says that a competitive market system gives the economy a high degree of macroeconomic stability.

Velocity of money

The number of times per year that the average dollar in money supply is spent for final goods and services; nominal gross domestic product (GDP) divided by money supply.

Financial account

The part if the balance of payments that records purchases of assets a country has made abroad and foreign purchases of assets in the country.

Current account

The part of the balance of payments that records a country's net exports, net income on investments, and net transfers.

Capital account

The part of the balance of payments that records relatively minor transactions, such as migrants' transfers and sales and purchases of non produced nonfinacial assets.

Define the Required Reserved Ratio

The percentage of checking deposits the banks must hold as reserves. (Cant lend this money out)

Labor Force Participation Rate

The percentage of working-age (16-64 typically) persons in an economy who are employed or are unemployed but are looking for a job.

Money demand depends on ___.

The price level and interest rate.

Money demand depends on ___.

The price level and the interest rate.

The Keynesian model provided an explanation for which of the following?

The prolonged unemployment of the 1930s.

Vicious Cycle (Poverty Trap)

The richer you are, the more able you are to pay for things that will help you be even richer in the future. The poorer you are, the less able you are to pay for the things that can make you richer.

Multiplier effect

The series of inducing increases in consumption spending that results from an initial increase in autonomous expenditures

Budget deficit

The situation in which the government's expenditures are greater than its tax revenue.

Budget surplus

The situation in which the government's expenditures are less than its tax revenue.

Static model vs. dynamic model

The static model ignores two important facts about the economy: 1)The economy experiences continuing inflation, with the price level rising every year, and 2) the economy experiences long-run growth, with the LRAS curve shifting to the right every year **further description on page 503**

Aggregate Supply

The sum total of the production of all the firms economy.

If the Federal Reserve unexpectedly decides to sell bonds, which of the following will most likely happen in the short run?

The supply of loanable funds will decrease, which will exert upward pressure on the interest rate.

Classical Growth Theory

The theory that the clash between an exploding population and limited resources will eventually bring economic growth to an end

Why will it difficult for the Fed to use monetary policy to direct the economy back to full employment and price stability from the recession of 2008-2009?

The time lags between changes in monetary policy and when the changes exert an impact on output and prices are long and variable.

What are open market operations?

The tool most often used by the Fed to alter the money supply.

Lending Capacity

The total amount a bank can loan out. (Excess reserves x money multiplier)

National Debt

The total amount the federal government owes its creditors.

Personal Distribution Income

The total income is distributed among households Poorest 3% Second 9% Middle 14.8% Fourth 19.1% Highest 54.2%

Gross Domestic Product

The total value of FINAL goods and services produced within a country over a time period

c. logrolling

The trading of votes to get spending passed in one congressman's district is referred to as a. Cardsharking b. earmarking c. logrolling d. progressive politicking e. rational expectations

Natural rate of unemployment

The unemployment rate that exists when the economy is at potential GDP.

Fiscal policy

The use of GOVERNMENT spending and taxes to alter macroeconomic conditions (govt increases, AD increases)

Nominal exchange rate

The value of one country's currency in terms of another country's currency

Classical Theory of Money

Theory holding that workers are motivated solely by money

Shifters of long run and short run Philips curves

There is a short-run Philips curve for every level of expected inflation. Each short-run Philips curve intersects the long-run Philips curve at the expected rate of inflation **more description on page 578-579**

You withdraw $100 from your checking account. How does this affect the money supply and the reserves of your bank?

There is no change in the money supply, and the reserves of your bank decline

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 no change in the supply of money; your bank's excess reserves are reduced by $800

Free- Rider

When someone receives benefits for which they didn't pay

31. Which of the following is true of high and variable rates of inflation?

When such rates are present, it will be difficult for people to accurately forecast next year's rate of inflation

Increase; buying; lower; increase; higher

When the fed uses expansionary monetary policy, it ______ the money supply by ______ bonds. This will lead to _____ interest rates, an ______ in aggregate demand, and ________ inflation.

Asset Bubble

When the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely-at which point the _____ "bursts"

Asymmetric Information

When there is not equal sharing of information A) Adverse Selection and B) Moral Hazard

Externalities or Spillover Effects

When two parties make a transaction it effects a third party. Ex: Paint producer/ Building contractor

Samuelson's Theory

When you vertically add the demand curves for a public good, then compare the cost of suppling it

a. decrease gov't spending or increase taxes

Which of the following fiscal policies would help to get us out of an inflationary gap? a. decrease gov't spending or increase taxes b. increase gov't spending or decrease taxes c. increase gov't spending or increase taxes d. decrease taxes or decrease gov't spending e. any of the above would be appropriate

c. decrease G or increase taxes

Which of the following fiscal policies would help to get us out of an inflationary gap? a. increase G or decrease taxes b. increase G or increase taxes c. decrease G or increase taxes d. decrease G or decrease taxes e. any of the above would be appropriate

a. libertarians

Which of the following groups is LEAST likely to advocate the use of fiscal policy to solve macroeconomic problems a. libertarians b. liberals c. conservatives d. all of the above are equally likely to desire the use of fiscal policy

a. The federal income tax

Which of the following is an example of a progressive tax a. The federal income tax b. A sales tax c. The KY state income tax of 6% of income earned d. None of the above is a regressive tax.

b. Fiscal policy used in a recessionary gap

Which of the following is most likely to increase the national debt and slow economic growth a. Fiscal policy used in an inflationary gap b. Fiscal policy used in a recessionary gap c. Using no policy in the event of stagflation d. All of the above are equally likely to cause an increase in debt and slowed growth e. Both a and b are equally likely to cause an increase in debt and slowed growth

b. Government run deficits lead to increases in the national debt

Which of the following is true regarding the national debt? a. The current debt/GDP ration is 90% b. Government run deficits lead to increases in the national debt c. Increases in the the national debt contributes to faster economic growth if taxes are reduced d. Our national debt has fallen over the last few decades e. All of the above are NOT true.

d. inflation falls

Which of the following is/are NOT an advantage of using fiscal policy to solve a recessionary gap a. Neither d nor e are advantages of using fiscal policy to solve a recessionary gap b. None of the below are pros of using fiscal policy c. unemployment is decreased d. inflation falls e. fiscal policy fixes the problem quicker than doing nothing

Services

Work done by Accountants, Lawyers, Financial advisers, Teachers, etc..

Frictional Unemployment

Workers who are changing location, job, or career.

Which one of the following events will leave GDP unchanged

You lose $500 playing blackjack with friends

money multiplier

^ER (1/r.r. %) = ^ in deposit liabilities or Ms (money supply)

the multiplier on investment

^I (1/1-b) = ^Y

C+Ig+Xn

adds in the net export (exports minus imports)

Laffer curve

a curve relating government tax rates and tax revenues and on which a particular tax rate (between 0 and 100 percent) maximizes tax revenues.

If the government owes $10.0 trillion and then borrows $700 billion more this year, this leads to:

a debt of $10.7 trillion and a deficit of $700 billion

for an oil-importing country such as the US, 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 increase in the general level of prices

Which of the following would cause the money supply in the United States to expand?

a decrease in reserve requirements

61. Which of the following shifts both short-run and long-run aggregate supply to the left?

a decrease in the capital stock

Target Federal Funds Rate

a desired level for the federal funds rate

Balance Sheet

a financial statement that shows assets, liabilities, and net worth at a given point in time; all these are stock measures

When commercial banks extend loans, they are able to expand the supply of money in the United States because the U.S. has...

a fractional reserve banking system.

nonexcludable

a good or service for which there is no way to prevent those who do not pay for it from consuming it.

Commodity Money

a good used as a medium of exchange that has value outside of money.

Which of the following is most important for long-run growth and a healthy economy?

a high rate of both savings and consumption

the crowding out effect stresses that increased government borrowing to cover a budget deficit will cause

a higher interest rate and appreciation of the US dollar

Money holds value because it's...

a legal tender, it's acceptability, and it's scarce

If you have a checking account at a local bank, your bank account there is

a liability of the bank and an asset to you

The stability of consumption over the business cycle and the ability of changes in the real interest rate to redirect aggregate demand indicate that?

a market economy has a self-correcting mechanism that will help guide it toward full employment.

Federal Funds Market

a market for overnight lending and borrowing of reserves among banks; the market for reserves on account at the Fed

When economists say that money serves as a medium of exchange, they mean that it is:

a means of payment.

M1

a measure in money supply that includes cash and checking deposits, or "near money"

Liquidity

a measure of the ease with which an asset can be converted into money without a significant loss of value

Commodity-backed Money

a medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods

The three basic functions of money are....

a medium of exchange, a store of value, and a unit of account.

If firms in a competitive price-searcher market are earning economic profits, which of the following scenarios would best describe the change existing firms would face as the market adjusts to long-run equilibrium? a. A decrease in demand for each firm and lower prices. b. An increase in demand for each firm and higher prices. c. An increase in demand for each firm and lower prices. d. A decrease in demand for each firm and higher prices.

a. A decrease in demand for each firm and lower prices.

If marginal revenue exceeds marginal cost, what will a profit-maximizing monopolist do to maximize profit? a. Lower price and increase output. b. Raise price and decrease output. c. Reduce both output and price. d. Hold output constant and raise price.

a. Lower price and increase output.

If profit-seeking entrepreneurs are going to be successful, what must they do? a. Produce a product that the consumers value more than the resources required for its production. b. Charge a higher price than their competitors so they can make economic profits in the long run. c. Maximize the salaries of high-level management so they will be able to attract people who will work hard. d. Produce the product more cheaply than their rivals regardless of quality.

a. Produce a product that the consumers value more than the resources required for its production.

If marginal cost exceeds marginal revenue, what will a profit-maximizing monopolist do to maximize profit? a. Restrict output to increase the price even higher. b. Attempt to maintain this position because it is consistent with profit maximization. c. Lower price and expand output to increase profit. d. Raise price and expand output to increase profit.

a. Restrict output to increase the price even higher.

What role do losses play in a competitive price-searcher market? a. They send a message that more value would be created if the resources were used to produce other goods. b. They signal that more resources are needed in a particular market. c. They show firms that barriers to entry are high. d. They penalize a firm for producing a differentiated product.

a. They send a message that more value would be created if the resources were used to produce other goods.

If a price searcher is producing at a level of output such that its marginal cost is $5 and its marginal revenue is $3, the firm should a. increase price and reduce its rate of output. b. increase output in order to reduce per-unit costs. c. decrease the price of its product and expand output. d. reduce both price and output.

a. increase price and reduce its rate of output.

When members of an oligopolistic industry agree to collude, raising their product price substantially above average cost, the passage of time (months and years): a. is likely to erode the agreement, as ways to cheat are developed by some participants and new entry is encouraged by the high price. b. is usually needed for the members to solidify their cooperation. c. seldom has any impact on the agreement, as long as the participants maintain high profit levels as a result of the agreement. d. usually results in finer control of prices and markets by the group and larger profit margins.

a. is likely to erode the agreement, as ways to cheat are developed by some participants and new entry is encouraged by the high price.

If an amusement park that is highly profitable during the summer months is unable to cover its variable costs during the winter months, it should: a. operate during the summer but shut down during the winter months. b. raise its prices during the winter months. c. operate during all months of the year as long as its profits during the summer exceed its losses during the winter. d. lower its prices during the summer months.

a. operate during the summer but shut down during the winter months.

Competition as a dynamic process implies that individual firms in a market a. use price competition as well as other forms of competition to gain the dollar votes of consumers. b. seek to utilize a variety of techniques, such as product, style, and convenience of location, to win the dollar vote of consumers, but they never use price to compete. c. produce a homogeneous product. d. cooperate, attempting to establish a price and output structure so each firm can survive and continue to serve the consumer.

a. use price competition as well as other forms of competition to gain the dollar votes of consumers.

keynesian view of fiscal policy

a.they believed in the use of counter cyclical policy, rather than balancing the budget

Of all government spending in the United States, what amount occurs at the federal level?

about three-fifths

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

acceptance of productive activities and rejection of unproductive activities.

national debt

accumulated debt of the federal government G-T= new aditions to national debt

What is monetary policy?

actions taken by the Fed to pursue a macroeconomic goal

Types of Fiscal Policy Discretionary: what is it?

actions taken by the gov that need the approval of president and congress. Requires effort and is INTENTIONAL

What is fiscal policy?

actions taken by the president AND congress to achieve economic 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 are

actual reserves held by banks that exceed the legal requirement.

Excess reserves of banks equal

actual reserves minus required reserves.

how banks create money: excess reserves

actual reserves that exceed the legal requirement

High

additional gov spending will have a bigger impact on output when the unemployment rate is

C+Ig+Xn+G

adds in government sector

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

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

Ceteris Paribus

all other things are equal

The model assumes

all prices are stuck and inflexible, which is a major limitation

Federal Funds Market

allows banks that fall short of the reserve requirement to borrow funds from banks with excess reserves

Nondiscretionary spending

also called uncontrollable spending, the portion of the federal budget that is spent on preciously enacted programs, such as Social Security, that the president and Congress are unwilling to cut; federal spending on programs that are not controlled through the regular budget process (Mandatory Spending)

The level of money that is in an economy or the Money Supply is....

always the same no matter what the interest rate is

Budget deficit

amount by which governmetn expenditures exceed revenue

total factor productivity

amount of output that can be produced with a given amount of factor inputs

Operational lag

amount of time it takes for fiscal policy taken by congress to affect output, employment, and the price level

Recessionary expenditures gap

amount that the aggregate expenditures fall short of full employment GDP

Inflationary expenditures gap

amount the aggregate expenditures schedule would have to shift downward to realize full employment equilibrium

Who among the following is most likely to favor an appreciation of the U.S. dollar?

an American professor on a tour of Austrian universities

Deduction

an amount by which your taxable income is reduced due to behaviors such as mortgage or charitable giving.

Discount Window

an arrangement in which the Federal Reserve stands ready to lend money to banks

Medium Of Exchange

an asset that individuals acquire for the purpose of trading goods and services rather than for their own consumption

A decrease in the required reserve ratio would be

an expansionary policy because it raises the amount of excess reserves in the banking system.

The Fed's purchase of U.S. government securities constitutes

an expansionary policy because it raises the amount of total reserves in the banking system.

24. Which of the following will most likely cause an increase in the long-run aggregate supply curve?

an improvement in technology that substantially reduces the cost of generating energy

which of the following will most likely occur in the united states as the result of an unexpected rapid growth in Canada and Mexico?

an increase in aggregate demand and output in the short run

(14) in the short run, which of the following is the most likely effect of an unanticipated move to a more expansionary monetary policy?

an increase in employment

In the short run, which of the following is the most likely effect of an unanticipated move to a more expansionary monetary policy?

an increase in employment

Crowding Out Effect

an increase in government borrowing to finance a larger deficit will increase the demand for loanable funds, causing real interest rates to rise; less investment by firms

Government regulation causes

an increase in per-unit production costs, shifts the AS curve to the left

crowding in

an increase in private sector borrowing caused by decreased government borrowingdecrease in borrowing should increase private sector

Which of the following will most likely accompany an unanticipated increase in short-run aggregate supply?

an increase in real GDP

what you own

assets

If a customer deposits $1,000 cash into her checking account, the bank's

assets and liabilities both rise by $1,000.

bank reserves

assets held by bank to fulfill their deposit obligations

Net Worth

assets minus liabilities

T-Account

assets on the left and liabilities on the right

why are supply costs high at higher GDP level?

at full employment, labor is more expensive

the equilibrium interest rate is determined...

at the intersection of total demand of money curve and total supply of money curve

If the firms in a competitive price-searcher market are suffering short-run losses, which of the following will occur in the long run? a. Firms will continue to incur losses. b. Customers of firms that leave the industry will switch to remaining firms. c. New firms will enter the industry. d. Firms that remain in the industry will face reduced demand.

b. Customers of firms that leave the industry will switch to remaining firms.

Why will a competitive price-taker firm be willing to remain in the industry in the long run at zero economic profit? a. It would find it too difficult to exit from the industry in the long run. b. It is covering all costs, including the opportunity cost of capital and labor. c. Its sunk costs would prevent it from leaving the industry. d. Its accounting profit would be negative.

b. It is covering all costs, including the opportunity cost of capital and labor.

Which of the following is true about the dynamic process of competition? a. It will permit business decision makers to earn long-run economic profit unless they are regulated by government. b. It puts the profit motive of sellers to work for buyers. c. It is hindered by the self-interest of business decision makers. d. It conflicts with the interest of consumers when businesses pursue profit rather than the public interest.

b. It puts the profit motive of sellers to work for buyers.

As firms exit a competitive price-searcher market, what happens to the profits of remaining firms and the diversity of products in the market? a. Profits rise and product diversity in the market increases. b. Profits rise and product diversity in the market decreases. c. Profits decline and product diversity in the market decreases. d. Profits decline and product diversity in the market increases.

b. Profits rise and product diversity in the market decreases.

the self correcting economy

b. changes in real resource prices will help redirect economic fluctuations recession: low demand- resource prices decrease, SRAS increases expansion: high demand- resource prices increase, SRAS decreases

As a group, oligopolists would always earn the highest profit if they would a. produce more than the competitive quantity of output. b. charge the same price that a monopolist would charge if the market were a monopoly. c. operate according to their own individual self-interests. d. produce the competitive quantity of output.

b. charge the same price that a monopolist would charge if the market were a monopoly.

When profits occur in a competitive market, this indicates that a. consumers value the goods less than the resources used to produce them. b. consumers value the goods more than the resources used to produce them. c. producers value the goods more than the resources used to produce them. d. producers value the goods more than consumers value the goods.

b. consumers value the goods more than the resources used to produce them.

If a firm in a competitive price-searcher market finds that its marginal revenue exceeds its marginal cost at the current production level, it should a. raise the price of the product and reduce its production. b. lower the price of the product and expand its production. c. raise the price of the product and expand its production. d. lower the price of the product and reduce its production.

b. lower the price of the product and expand its production.

When the conditions in a competitive price-taker market are such that the firms are consistently unable to cover their production costs, a. the firms will suffer short-run economic losses that will be exactly offset by long-run economic profits. b. some firms will exit from the industry, and market price will rise until the remaining firms can earn the normal rate of return. c. resource prices will increase, competition will decline, and eventually the firms in the industry will earn monopoly profit. d. all firms will go out of business since consumers will not pay prices that enable firms to cover their production costs.

b. some firms will exit from the industry, and market price will rise until the remaining firms can earn the normal rate of return.

Balanced Budget formula

balanced budget = bad eocnomic times (-cyclical) + fiscal restraint (+structural)

Checkable Bank Deposits

bank accounts on which people can write checks

Bank Run

bank depositors try to withdraw their funds due to fears of bank failure

Excess Reserves

bank reserves exceeding required reserves

reserve ratio

bank reserves/ total deposits (how much money the bank keeps)

Rent Seeking

banks and car manufacturers spent millions of dollars lobbying politicians in order to receive bailout money

Financial Intermediaries

banks and other institutions that are a link b/w those who have money to lend and those who want to borrow money ex: 1. commercial banks 2. savings and loans institutions 3. life insurance companies 4. pension funds

The Federal funds market is the market in which:

banks borrow reserves from one another on an overnight basis.

In a fractional reserve banking system:

banks can create money through the lending process.

How did the housing bubble idea begin? and what did it develop?

banks created a secondary market. They would sell mortgages to private investors so the banks could use the money they received from the investor when they bought the loan to make more loans. This developed the Shadow Banking System

Excess Reserves

banks reserves over and above its required reserves (total reserves-required reserves)

OPO

basically the buying and selling of bonds; increase money suppy you buy bonds; decrease supply then sell

If changes in monetary policy are going to help stabilize the economy, they must

be properly timed.

When the unemployment rate is low, the impact of additional spending on real output will:

be smaller than when the unemployment rate is high

Mainstream economists feel that discretionary fiscal policy should

be used in long run situations of recession or inflation

why has the gap between the ratio of people collecting SS, to workers providing that SS money, decreased so much in the last couple of years?

because baby boomers are beginning to retire, more people retiring

Attractive to Voters

because of politics, fiscal policy fails to stabalize the economy because budget deficits (low taxes, high gov spending) are....

why do consumers buy less of a good as its price increases?

because substitute goods are now relatively cheaper

Monetarists

believe that failure to control the money supply appropriately would lead to fluctuations in real GDP

classical economics

believes that market and resource prices are flexible and allow the economy to self correct fairly quickly

What are alt A borrowers?

borrowers who didn't have to prove their income

what are sub-prime borrowers?

borrowers who had poor credit history

Crowding out refers to the situation in which

borrowing by the federal government raises interest rates and causes firms to invest less.

Currency in circulation is part of:

both M1 and M2.

if the fed lends to member banks, what happens to reserves and the money supply?

both increase

Net exports affect real GDP

directly

according to the invisible hand principle, competitive markets generally

bring the self-interest of individuals into harmony with the efficient allocation of resources, even though centralized planning of economic activities is absent

exogenous variables on G (1)

budget

it will be difficult to institute fiscal policy in a stabilizing manner because politicians will find

budget deficits attractive during a recessions, but they will be reluctant to run budget surpluses during an expansion

The crowding-out effect suggests that

budget deficits that lead to higher interest rates reduce private investment spending

Mandatory spending (70% of gov't outlays)

budget items for which a previously passed law requires money to be spent Ex: Medicare, debt interest, welfare, SS, Medicaid

automatic stabilizers

built in features that automatically promote a budget deficit during a recession and a budget surplus during an expansion 1. unemployment compensation 2. the corporate profit tax 3. the progressive income tax

exogenous variables on I (3)

business confidence, expectations, r

Which of the following would be most appropriate if the Federal Reserve wanted to increase the money supply in order to stimulate the economy?

buy U.S. securities

If the Fed wanted to expand the money supply as part of an antirecession strategy, it could:

buy U.S. securities on the open market.

If the Fed wants to lower the Federal funds rate, it should:

buy government securities in the open market.

open market operations

buying and selling of United States Government Securities (USGS) in the open market

If the Federal Reserve is engaging in open market operations designed to expand the money supply, it is probably:

buying government securities from the public

if the Federal Reserve is engaging in open market operations designed to expand the money supply, it is probably,

buying government securities from the public

diminishing return

by having two of the three economic productivity human and technology fixed: an increase in physical capital will lead to a smaller increase in productivity ***increase all factors to discard diminishing returns

The money supply is backed:

by the government's ability to control the supply of money and therefore to keep its value relatively stable.

Long lags make discretionary policy less effective because:

by the time the impact of a policy is felt, the problem may have been corrected by market forces

If marginal cost exceeds marginal revenue, what would be the best strategy for a profit-maximizing firm? a. Increase quantity until marginal revenue equals price. b. Decrease quantity until price equals average total cost. c. Decrease quantity until marginal cost equals marginal revenue. d. Increase quantity until marginal cost equals marginal revenue.

c. Decrease quantity until marginal cost equals marginal revenue.

Which of the following is true when entry barriers into a market are high? a. Rival firms will enter and drive price down to the level of per-unit costs if the firms in the market are making economic profit. b. A monopolist will always be able to make an economic profit. c. Entry into the market will not take place, at least not quickly, even if the firms currently in the market are making economic profits. d. The producers in the market will have little or no incentive to produce efficiently (at a low cost).

c. Entry into the market will not take place, at least not quickly, even if the firms currently in the market are making economic profits.

Which of the following best describes the dynamic process of competition? a. It was shown by Adam Smith to be a major source of economic inefficiency. b. It provides profit-seeking sellers with little incentive to heed consumer preferences. c. It provides consumers with alternative suppliers and thus a mechanism with which they can discipline sellers. d. It will permit business decision makers to earn long-run economic profit unless they are regulated by government officials.

c. It provides consumers with alternative suppliers and thus a mechanism with which they can discipline sellers.

In the short run, how will a profit-maximizing monopolist react if its marginal cost suddenly increases? a. It will decrease the size of its production facility to lower marginal cost. b. It will increase plant size to lower marginal cost. c. It will reduce output and raise price. d. It will lower price to expand revenue possibilities. e. It will maintain the current price if profit is still positive.

c. It will reduce output and raise price.

Why do airlines generally charge travelers willing to stay over Saturday night lower fares than other customers? a. The demand of Saturday night travelers is inelastic, and therefore, the lower fares generate more revenue for the airlines. b. It cost less to transport travelers willing to stay over a Saturday night. c. The demand of Saturday night travelers is elastic, and therefore, the lower fares generate more revenue. d. The Saturday night travelers have lower incomes, and therefore, the airlines would like to help them.

c. The demand of Saturday night travelers is elastic, and therefore, the lower fares generate more revenue.

A firm that uses price discrimination to enhance its net revenues will a. expand output as long as average total costs are declining. b. charge a higher price to consumers with a more elastic demand for the firm's product. c. charge a lower price to consumers with a more elastic demand for the firm's product. d. expand output as long as price exceeds average total costs.

c. charge a lower price to consumers with a more elastic demand for the firm's product.

The two conflicting tendencies that a firm has in an oligopolistic industry are the incentive to Selected Answer: a. increase output in order to minimize per-unit costs and the incentive to reduce price in order to maximize joint profit. b. cheat to maximize joint profits and the incentive to raise prices. c. cooperate to maximize joint profits and the incentive to cheat on the agreement in order to increase the firm's share of the profit. d. cheat and avoid collusion and the incentive to raise price to maximize the firm's share of profits.

c. cooperate to maximize joint profits and the incentive to cheat on the agreement in order to increase the firm's share of the profit.

The fact that barriers to entry are low in competitive price-searcher markets means that if current firms are making economic losses, a. new firms will enter the market, causing no change in the demand curves that face the existing firms in the market. b. these losses will remain in the long run because no firms can exit the market. c. current firms will exit the market, causing the demand curves that face the remaining firms to increase. d. new firms will enter the market, causing the demand curves that face the existing firms to decrease.

c. current firms will exit the market, causing the demand curves that face the remaining firms to increase.

In an oligopolistic market, if rival sellers act independently, each will have a strong incentive to a. restrict output and raise price in order to achieve higher profits. b. increase price in order to get a larger share of the market and make larger profits. c. reduce price in order to increase sales and gain a larger share of the total market. d. maintain agreements to lower price and decrease product quality in order to earn higher profits.

c. reduce price in order to increase sales and gain a larger share of the total market.

When barriers to entry are high, a monopolist (or cartel) will often be able to increase their profits by Selected Answer: a. expanding their output so they can increase their price. b. expanding their output so they can lower their price. c. reducing their output so they can raise their price. d. reducing their output so they can lower their price.

c. reducing their output so they can raise their price.

why isn't fiscal policy called consumer or investment policy?

can't rely on consumers or firms to spend during recession

Debit Card

cards that tap directly into the depositor's bank account to fund purchases; also called a check card, and usually doubles as an ATM card

Other things constant, an increase in the real interest rate will?

cause consumers to reduce their purchases of durable items like appliances and automobiles.

The multiplier effect refers to the fact that a change in spending (aggregate demand) will

cause nominal output to rise by some multiple of the initial increase in spending.

Who is Janet Yeller?

chair woman of federal reserve bank

MPC (marginal propensity to consume)

change in consumption/change in income

what is discretionary fiscal policy?

change in government spending or taxes discretionary=the overall umbrella under which expansionary and contractionary FP fall

MPS (marginal propensity to save)

change in savings/change in income

anticipated changes

changes foreseen by individuals, giving them time to adjust before the changes occur

Types of Fiscal Policy Automatic Stabilizer: what is it?

changes in gov spending and taxes to automatically stabilize economy, no effort required

the expenditure multiplier indicates that

changes in investment, government, or consumption spending can trigger much larger changes in output

Supply-side economics stresses that

changes in marginal tax rates exert important effects on real output and employment.

within the framework of the Keynesian model,

changes in output rather than changes in prices direct the economy to equilibrium

Which of the following provides the best information about the direction of the government's fiscal policy?

changes in the size of the federal government's budget deficit or surplus

unanticipated changes

changes that are not forseen

The owners of a firm are earning economic profit if: a. return on their capital is lower than the opportunity cost of employing that capital in their industry. b. their total revenues exceed the monetary payments to labor and other resources in the long run after all plant size adjustments are made. c. price exceeds average variable costs at the shutdown point. d. they are earning a return on their capital that is higher than what can generally be earned in other markets.

d. they are earning a return on their capital that is higher than what can generally be earned in other markets.

if money supply increases, what happens to interest rates?

decrease

increase in output means ____ unemployment

decrease

contractionary fiscal policy

decrease G &/or increase T --used during times of inflation --shifts AD left

If the public decides to hold more currency and fewer deposits in banks, bank reserves

decrease and the money supply eventually decreases.

Crowding In

decrease gov't borrowing leads to increased private investment and consumption.

if the economy is in too big of an expansion, what should the president and congress do to solve the problem? what is this called?

decrease government spending and increase taxes called contraction of fiscal policy

If policy makers believe that an inflationary boom is about to begin, the Keynesian view indicates that they should

decrease government spending and or raise taxes.

If policy makers believe that an inflationary boom is about to begin, the Keynesian view indicates that they should

decrease government spending and/or raise taxes

If policy makers believe that an inflationary boom is about to begin, the Keynesian view indicates that they should

decrease government spending and/or raise taxes.

If policy makers believe that an inflationary boom is about to begin, the Keynesian view indicates that they should:

decrease government spending and/or raise taxes.

Contractionary fiscal policy

decrease government spending, increase taxes

Contractionary Policy

decrease in the money supply aimed at decreasing aggregate output (Y)

If the economy expanded too much, what should the Fed do to resolve this problem?

decrease money supply, which would increase interest rates

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

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.

When the Fed sells Treasury Bonds on the open market, it will tend to

decrease the money supply and raise interest rates

Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to _______, which will ___________ investment spending.

decrease; increase

An increase in the legal reserve ratio:

decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.

32. The recessionary phase of the business cycle is characterized by

decreasing real output and increasing unemployment.

two groups that federal government expenditures can be divided into -examples of government purchases

defense, president salary, FBI salary, research

fiscal policy

deliberate changes in tax policy and or government expenditures designed to affect the budget deficit or surplus

Which one of the following is the largest component of the money supply (M1) in the United States?

demand and other checking deposits

why are supply costs low at lower GDP level?

demand is low wage costs are low because people are unemployed so they can't insist on high wages

results when aggregate demand expands so much that Equilibrium output exceeds full employment output and the price level rises

demand-pull inflation

the value of a good

depends on many factors, including who uses it and under what circumstances

Which one of the following is presently a major deterrent to bank panics in the United States?

deposit insurance

Checkable Deposits

deposits in financial institutions against which checks can be written and ATM or debit cards can be applied

Demand deposits are

deposits of individuals that can either be withdrawn or made payable on demand to a third party by a check

Time Deposits

deposits that earn a fixed rate of interest if held for the specified period, which can range from several months to several years' also called certificates of deposits

Savings Deposits

deposits that earn interest but have no specific maturity date

Aggregate demand is inversely related to

deprecation of the dollar

36. 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.

federal open market committee

determines the feds policy with respect to the purchase and sale of government bonds

Fed

determines the supply of money

Excess reserves refer to the:

difference between actual reserves and required reserves.

budget balance

difference between government spending and tax revenue

the part of the budget that works its way through the appropriations process of congress each year and includes such programs as national defense, transportation, science, environment, and income security

discretionary federal spending

Time Implementation

discretionary fiscal policy fails to be effective since it is difficult to _______

Changes in government spending and/or taxes as the result of legislation, is called

discretionary fiscal policy.

APC is indirectly related to

disposable income

APS is directly related to

disposable income

Consumption and savings are directly related to

disposable income

Savings

disposable income-consumption

10. High and variable rates of inflation will?

distort the information delivered by market prices.

NO

do interest rates affect money supply?

If you deposit $100 of currency into a demand deposit at a bank, this action by itself

does not change the money supply.

What does the Fed NOT control? who controls it then?

does not control money demand, we control it

In order for barter trades to occur, there must be a

double coincidence of wants.

In order for barter trades to occur, there must be a...

double coincidence of wants.

Responsibility of Fed Lender of Last Resort -Why did 5,000 banks fail in the Great Depression?

due to bank runs

49. Actual GDP will be below potential GDP

during a recession

Expansionary is used..

during a recessionary gap

Contractionary is used...

during expansionary gap

Unemployment Compensation

during recessions, people don't have jobs then it will kick in, helps get the economy back on track

A monopolist earning short-run economic profit determines that at its present level of output, marginal revenue is $23 and marginal cost is $30. Which of the following should the firm do to increase profit? a. Lower output but leave price unchanged. b. Raise price and raise output. c. Lower price and lower output. d. Lower price and raise output. e. Raise price and lower output.

e. Raise price and lower output.

Exemption

earned income that is not taxable (ex. Interest on gov't bonds) also amount not taxable based on the size of your family

economics indicates that government funding of special interest projects and favoritism of some business firms relative to other will lead to

economic inefficiency because the funding will be driven by political rather than economic considerations

Supply Side

economic view that stresses changes in marginal tax rates exert important effects on real output and employment

human capital

education and knowledge embodied by the workforce

The primary benefit of a monetary system of exchange compared to a barter system is the increased...

efficiency in arranging transactions.

The political incentive structure tends to?

encourage budget deficits during both recessions and expansions.

Rent Seeking

engaging in costly non-productive actions in search of profit Ex: lobbying and political campaigns

66. After a particular loan has been paid off, neither the borrower nor the lender has lost purchasing power. Therefore, it must be true that actual inflation was

equal to expected inflation

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

Reserve Requirements

establish revenue requirements ratio, which is the percent of deposit liabilities a bank must keep as reserves ex) a bank has $200 billion in deposits; a r.r% of 10% = $20 billion in reserves

Responsibility of Fed Lender of Last Resort -How did congress try and prevent bank runs?

established FDIC which ensures deposits up to 250K

growth accounting

estimates the contribution of each factor of the aggregated production function to economic growth

compared to a permanent reduction in tax rates, a temporary tax cut will generally

exert a smaller impact on output and employment because the temporary cut will not exert impact on long-term income or the incentive to earn

budget surplus

exists when government spending is less than government revenues in a given year.

how do we increase autonomous consumer spending?

exogenous variables --change consumer *confidence* and *expectations* --decrease *interest* rates --get ball rolling with *government* -usually the only willing and able entity that can borrow during recession

involves increasing government spending, increasing transfer payments, or decreasing taxes to increase aggregate demand to expand output in the economy

expansionary fiscal policy

keynesian view of fiscal policy

expansionary fiscal policy 1. increasing government expenditure 2. reducing tax rates - designed to bring the economy out of recession by increasing aggregate demand - expansionary policy will increase the size of the budget deficit

keynesian economist

expansionary fiscal policy during a recession will stimulate aggregate demand and pull us out of a recession

increases money supply, decreases interest rate, increases investment spending which increases AD

expansionary monetary policy

lowering taxes and increasing government spending

expansionary policies

The potential output of an economy is the level of output produced when the

expected price level equals the actual price level

deficit ceiling

explicit legislation hat puts a limit int he size of deficit

debt ceiling

explicit legislation that puts alimit onthe size of outstanding national debt

what interest rates increase, bond prices ____

fall

Given the strict quantity theory of money, if the quantity of money were decreased by 50 percent, prices would

fall by 50 percent.

(14) given the strict quantity theory of money, if the quantity of money were decreased by 50%, prices would

fall by 50%

The money rate of interest will be less than the real rate of interest when decision makers anticipate

falling prices in the future

A balanced budget is present when

government revenues equal government expenditures.

inside lags for monetary policy is ____

fast

outside lags for fiscal policy is ____

fast

unanticipated changes in short run aggregate supply only shifts the SRAS curve and it shifts back to its original position

favorable weather, temporary increase in oil prices

who implements monetary policy

fed

Automatic stabilizer

federal expenditure or revenue item that automatically responds counter cyclically to change in natural income Ex: unemployment benefits and income taxes

Keynes' autmoatic stablizers

federal expenditures or reveues that automatically respond counter-cyclically to changes in National Income ("uncontrollables"

Overnight loans from one bank to another for reserve purposes entail an interest rate called the:

federal funds rate

the interest rate financial institution charge each other for overnight loans used as reserves

federal funds rate

monetary policy

federal reserve bank's role

Near Moneys

financial assets that can't be directly used as a medium of exchange but can be readily converted into cash or checkable bank deposits

expansionary

fiscal policy is the name given to all forms of fiscal policy that are designed to increase aggregate demand

Adding short-run aggregate supply

for a given shift of the aggregate demand curve, the steeper the short-run aggregate supply curve, the smaller the increase in real GDP and the larger the increase in the price level

Goals of monetary policy and Fed

four main monetary policy goals: 1) Price stability 2) High employment 3) Stability of financial markets and institutions 4) economic growth **See page 488-489 for descriptions**

What is the length of the term of the members of the Board of Governors of the Federal Reserve System?

fourteen years

Reserve Ratio

fraction of bank deposits that a bank holds (require reserves/total checking deposit)

A system that permits banks to hold less than 100 percent of their deposits as reserves is called a...

fractional reserve banking system.

Most modern banking systems are based on:

fractional reserves

Functions of Money 4. Standard of Deferred Payment What does this mean?

given an invoice as a promise to pay back within 30 days. Efficient way of making transactions

One difficulty of computer the value of GDP is that there are no market prices for

government goods and services

Multiplier Effect

government purchases increase aggregate demand which stimulates the other factors such as consumption; magnifies small changes in gov spending into larger changes in output and employment

crowding out effect

government raises interest rates, which causes less investment spending

budget surplus

government revenue is greater than government spending

21. 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?

higher resource prices, a decrease in SRAS, and an increase in the general level of prices

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

higher resource prices, a decrease in SRAS, and an increase in the general level of prices

Higher interest charges on the public debt leads to

higher taxes and dampen incentives to work, invest, and innovate

According to the Keynesian view, if real GDP is slowing and the economy appears to be headed for a recession, a reduction in tax rates is?

highly appropriate because it will stimulate aggregate demand and, thereby, help to strengthen the economy

Modern bankers :

hold only a fraction of their assets in the form of reserves against their deposits.

Modern bankers...

hold only a fraction of their assets in the form of reserves against their deposits.

endogenous variables on AS/AD model

horizontal: GDP, output/production/income vertical: inflation

liquidity

how easily an asset can be converted to money

Lower Taxes; Increase gov spending

how government implements expansionary fiscal policy

Raise Taxes; Decrease gov spending

how government implements restrictive fiscal policy

marginal propensity to consume

how much we spend of each dollar

Flow

how much you earn per period

Stock of money

how much you have right now

Liquidity

how quickly a good can be converted into a generally accepted medium of exchange at face value

physical capital

human-made resources (buildings and machines

Loanable Funds Market

hypothetical market that shows the market outcome of the demand for funds generated by borrowers and supply of funds provided by lenders

Crowding Out

if gov't borrows to finance increased expenditures, demand for loans increases and interest rates will rise -> less private C and I

Increase

if prices fall, the value of the dollar (purchasing power) will ______

the fallacy of composition is the incorrect view that

if something is true for an individual, then it must also be true for the group.

when would you not want spending to increase?

if the economy is growing too quickly--inflation

Decrease

if the fed wants to increase the money supply it will _______ interest rates paid on excess reserves

The Quantity Theory of Money

if the velocity of money is stable, or at least predictable, changes in the money supply have predictable effects on nominal GDP

individual views on fiscal policy

if you are liberal, you want government spending if you are conservative, you don't

Decrease $90

if you withdraw $100 from your checking account and reserve requirement is 10%, what happens to excess reserves

Liabilities

in a bank, this includes checking and savings deposits and whatever they borrow

Assets

in a bank, this includes vault cash, reserves at the Fed, loans outstanding to customers and bonds/securities

Buy

in order to increase the money supply, the fed will _____ securities/bonds

Fractional

in the US, banks are able to increase the money supply by extending the loans becuase of this reserve banking system

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

Reserves

include vault cash and deposits with the Fed

U.S. exports are

included in U.S. GDP because they are produced domestically

synonyms for GDP

income, output, production

real income

income/ price level

if money supply decreases, interest rates..?

increase

increase in price level means ___ inflation

increase

expansionary fiscal policy

increase G &/or decrease T --used during recession --shifts AD right

If the economy is in a recession, what should the president and congress do to solve the problem? what is this called?

increase government spending or decrease taxes called expansionary fiscal policy

Depreciation of the dollar causes

increase in GDP and employment

Ricardian equivalence

increase in debt has same effect on economy as increase in current taxes

Fisher Effect

increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged

42. If Europe and Japan experience rapid growth in their incomes, other things constant, this will cause a(n)

increase in the exports of the United States

Expansionary Policy

increase in the money supply aimed at increasing aggregate output (Y)

If the economy is in a recession, what should the Fed do to resolve this problem?

increase money supply, which would decrease interest rates

25. An increase in capital formation that expands long-run aggregate supply will?

increase output and decrease prices

(9)other things constant, an increase in resource prices will do which of the following

increase the cost of producing goods and services, which will lead to a higher price level.

If the Fed wanted to shift to a restrictive monetary policy and reduce the money supply, it could:

increase the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans

13. In the short run, an unexpected increase in prices will?

increase the profits of firms, thereby leading them to expand output

Within the framework of the AD-AS model, an increase in savings by households will

increase the supply of loanable funds and reduce interest rates.

(9)other things constant, a decrease in resource prices will lead to

increased profits and increase in the short-run aggregate supply

Tax cut

increases AD

The government is pursuing an expansionary fiscal policy if it

increases government spending and/or reduces taxes.

Increases in aggregate supply causes

increases in both price levels and real domestic output

Expansionary fiscal policy

increases in government spending, decrease in taxes

79. 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

Which of the following assets can a commercial bank count as reserves?

its vault cash and deposits with the Fed.

Cost- push inflation

increases in the price level (inflation) resulting from an increase in resource costs (for example raw material prices) and hence in per unit production costs; inflation caused by reductions in aggregate supply.

Demand-pull inflation

increases in the price level (inflation) resulting from increases in aggregate demand.

Higher business taxes

increases per-unit production costs, decrease in AS

Deficit

increases the government's debt; the difference between spending and taxes; a yearly amount

When a banker accepts a deposit of $1,000 in cash and puts $200 aside as required reserves and then makes a loan of $800 to a new borrower, this set of transactions

increases the money supply by $800

When a banker accepts a deposit of $1,000 in cash and puts $200 aside as required reserves and then makes a loan of $800 to a new borrower, this set of transactions...

increases the money supply by $800.

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

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

Tom loses his job and immediately begins looking for another. Other things the same, the unemployment rate

increases, and the labor-force participation rate is unaffected

If the prices of goods and services fall, the value of money (its purchasing power)

increases.

A recession abroad would

reduce U.S. net exports and reduce aggregate demand

The amount of money reported as M2:

is larger than the amount reported as M1.

discretionary spending

is money authorized to be spent with the passage of an appropriations act

The Fed is institutionally independent. A major advantage of this is that monetary policy..

is not controlled by politicians.

$18.2 Trillion

is the current amount of US federal national debt (give your answer in millions, billions, trillions, etc).

Saving Deposits

is the only thing only included in M2 along with time deposits and money market mutual funds

Pareto improvement

is when no one made worse while someone made better

Discretionary Fiscal Policy involves

issuing bonds government spending Taxation borrowing policies

refinancing

issuing new debt to pay for debt when it comes due

why is government spending the only type not affected by interest rate?

it HAS to continue...the cost of borrowing money doesn't matter that much

what is flat money

it has no value outside of its use as money

Though many assets can be used as a store of value, money is a particularly attractive method to store value because

it is the most liquid of all assets.

Though many assets can be used as a store of value, money is a particularly attractive method to store value because:

it is the most liquid of all assets.

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

which of the following is a positive effect of a job search and the unemployment that often accompanies it?

it permits individuals to better match their skills and preferences with the requirements of a job

When the Federal Reserve System wants to increase the money supply, what does it typically do?

it purchases U.S. government securities

what gave money printed in 1928 its meaning?

it was backed by gold, you could go into the bank and exchange gold for dollar bills

in the short run, what effect will an unexpected increase in product prices have?

it will increase the profits of firms, thereby leading them to expand output.

whats a major advantage of monetary policy?

its speed and flexibility

The greater the required reserve ratio, the:

lower is the monetary multiplier.

within the AD/AS model, if an unanticipated reduction in aggregate demand results in less than the full employment rate of output,

lower resource prices and declining interest rates will direct the economy back to full employment

Within the AD/AS model, if an unanticipated reduction in aggregate demand results in less than the full-employment rate of output

lower resource prices and declining interest rates will direct the economy back to full employment.

m2

m1, savings account, money market, mutual funs, small deposits,

The main purpose of the Fed is to

maintain the proper functioning of our money system

Rational Expectations Theory

make decisions based on expectations about future

What are the functions of a bank?

make profit, protect wealth, pool risk, bring together borrowers&savers

Price wars, menu costs, and wage contracts

makes prices inflexible downward

How do banks create money?

making loans

spending authorized by permeant laws that does not go through the same appropriation process as discretionary spending. Includes social security, medicare, and interest on the national debt

mandatory federal spending

In computing GDP, market prices are used to value final goods and services because

market prices reflect the values of goods and services to the buyer

Vertical combination of Plants

means the firm owns plants at the various stages of the production process. Ex:Exxon/Mobil 1)Oil recovery 2)Refining 3)Transport 4)Selling (Retail at a Gas Station)

Unit Of Account

measure used to set prices and make economic decisions

Money Aggregates (Totals)

measures of the economy's money supply

Whats the different between medicare and medicaid?

medicare- elderly medicaid- poor

money eliminates the need for trade

medium of exchange

What are the functions of money?

medium of exchange, store of value, unit of account

3 functions of money

medium of exchange: used to buy goods and services 1. it is more efficient to use money than to barter goods 2. fiat money: money that has no intrinsic value

(13) who owns the fed?

member banks

Who owns the Fed?

member banks

chained dollars

method of calculating changes in real GDP using the average between the growth rate calculated on an early base year & the growth rate calculated on a late base year

changing the money supply to affect interest rates and therefore aggregate demand

monetary policy

what solves the bartering problem

money

To increase the Federal funds rate, the Fed can:

sell government bonds to commercial banks.

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

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.

Increase in the money supply=

more spending (long run) which leads to a higher nominal GDP

$20 bill

most forged bill in the U.S.

$100 bill

most forged bill in the world

if the bank lowers interest rates, on a graph, do you move down along the line of money demand (MD) or move the MD line left?

move down along the line

shifter of aggregate demand: changes in real interest rates

move in opposite direction

shifter of aggregate demand: changes in real wealth

move in same direction

1/(1-MPC)

multiplier

Change in real GDP/initial change in spending

multiplier

k

multiplier 1/ 1 - MPC

Total change in spending Formula

multiplier x intiation change in spending (AD shortfall) = (1/(1-MPC)) x (fiscal stimulas)

Non-rival

my consumption does not limit your construction.

actual rate of unemployment

natural + cyclical

is relationship between interest rate and spending positive or negative?

negative/inverse spending goes down when interest is up cost of borrowing money is greater

If net exports are positive, then?

net capital outflow is positive, so foreign assets bought by Americans are greater than American assets bought by foreigners.

as U.S price levels fall relative to the world, we export more

net export effect

ricardian equivalence

new classical economist - belief that a tax reduction financed with government debt will stimulate additional consumption and aggregate demand

new classical view of fiscal policy

new classical economists do not believe that budget deficits will stimulate additional consumption and aggregate demand why not? because people will save for the expected future tax increase

actual deposit multiplier

new currency reserves will not expand money supply by as much as the potential multiplier

is this fiscal policy... -cutting taxes for people buying an energy efficient car?

no

is this fiscal policy... -gov of delaware increasing spending to replenish the eroding delaware beaches

no

is this fiscal policy... -increase in spending on aid and national guard salaries to help Haiti

no

is this fiscal policy... -president increasing govt spending on defense to fight the war on terror

no

bartering economy

no money, just trading goods

Non-excludable

no way to exclude those who don't pay

(13) are outstanding credit card balances counted as part of the money supply?

no, money is an asset, while the credit card balances are a liability. thus they are not included in the money supply figures

In an economy with persistent inflation

nominal GDP will grow faster than real GDP

In the short run it is assumed that

nominal wages are not affected by changes in the price level

Public good

non excludable and non-rival

U.S. imports are?

not added to U.S. GDP because they are produced abroad

Crowding Out

occurs when a government deficit drives up the interest rate and leads to reduced investment spending

Inflation Targeting

occurs when the central banks sets an explicit target for the inflation rate and set monetary policy in order to hit that target

The power of seculation

on person speculates the bank low on cash, everyone takes out money self fulfilling prphecy no bank would be able to pay all his clients if they all withdraw at the same time

A large grain crop resulting from favorable weather conditions would shift which of the following curves?

only short-run aggregate supply

a large grain crop resulting from favorable weather conditions would shift which of the following curves?

only short-run aggregate supply

Which of the following is a tool of monetary policy?

open market operations

Which of the following is the primary tool the Fed uses to control the supply of money?

open market operations

16. When the actual rate of unemployment is less than the natural rate of unemployment, the economy?

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

operates at an output greater than its long-run potential

shifter of aggregate demand: changes in exchange rates

opposite direction

shifter of aggregate demand: changes in expectations of businesses and households

optimistic: AD increases pessimistic: AD decreases

Shortage happens when

output from producers is less than output desired by buyers, increase in price level

once decision makers fully adjust to an increase in the general price level,

output will return to full-employment level

35. When prices in the goods and services market are below the level anticipated

output will temporarily fall short of the economy's long-run potential

how quickly citizens respond to policy

outside lags

Which of the following is not a component of the M1 money supply?

outstanding balances on credit cards

Monetary Aggregate

overall measure of the money supply

If an unanticipated reduction in aggregate demand throws a market economy into a recession

ower real resource prices and interest rates will act as a stabilizing force and direct the economy back to its full employment potential.

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 product (efficient) will tend to be favored by an overwhelming majority of voters

Treasury bonds

promissary notes (IOU's) issued by the US treasury

Gov

protect individuals property rights provide goods

The primary purpose of the legal reserve requirement is to:

provide a means by which the monetary authorities can influence the lending ability of commercial banks.

Real GDP per person

provides more meaningful comparisons across time and countries than real GDP

the economic analysis of public and political decision making, looking at issues such as voting, the impact of election incentives on politicians, the influence of special interest groups, and rent-seeking behaviors

public choice theory

Open-Market Operation

purchase or sale of governement debt by the Fed

what will happen if the demand for bicycles increases?

quantity supplied will increase

If the monetary authorities want to reduce the monetary multiplier, they should:

raise the required reserve ratio.

Money Multiplier

ratio of the money supplied to the monetary base (1/reserve ratio)

Economists refer to the lack of incentive that voters have to search for and obtain information to help make better political choices as the

rational-ignorance effect.

Why is AD curve downward sloping? (3)

real balance effect real interest effect net export effect

The downward slope is caused by

real balance effect, interest-rate effect, and foreign purchase effect

82. The amount of U.S. exports purchased by the rest of the world is primarily determined by

real disposable income in other nations

Cost-push inflation causes

real domestic output to decrease and the price level to rise

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

51. If the nominal interest rate was 12 percent and the inflation rate was 10 percent in 1980, while the nominal interest rate was 7 percent and the inflation rate was 2 percent in 2009, then

real rates were higher in 2009

keynesian economics

reason for sticky wages and prices 1. trade unions and large corporations enter into long term contracts 2. menu costs: the costs of changing prices as a result of sticky prices, businesses produce the amount demanded

Retirement of internally held public debt would result in

redistribution of the nations wealth among citizens

In 2006, the American Association of Retired Persons (AARP) spent over $70 million on lobbying-related expenses in an attempt to get policies enacted that would benefit retirees. In economics, the term used to describe such activity is

rent seeking.

The fraction that banks must, by law, hold as reserves against the checking deposits of their customers is called the

required reserve ratio.

The funds that banks are required by law to hold in the form of either vault cash or deposits with the Fed are called

required reserves

The funds that banks are required by law to hold in the form of either vault cash or deposits with the Fed are called

required reserves.

which responsibility of the fed in manager of money supply has not been used in many many years?

reserve ratio

the amount of money banks must hold in case customers want to take their money out of the bank

reserve requirement

if an economy operates a short-run equilibrium output that exceeds its long run capacity, which of the following will be most likely to direct the economy toward full employment?

resource prices will increase, causing the SRAS curve to shift to the left

shifter of SRAS only

resource prices: opposite direction expected inflation: opposite direction supply shocks: positive, increase negative, decrease

keynesian view of fiscal policy

restrictive fiscal policy 1. decreasing government expenditures 2. raising tax rates - designed to bring the economy down from an expansion by decreasing aggregate demand - restrictive policy will reduce the size of the budget deficit

Balanced budget

revenue exactly equals exenditures

Taylor Rule for Monetary Policy

rule for setting the federal funds rate that takes into account both the inflation rate and the output gap

shifter of aggregate demand: changes in income abroad

same direction

shifter of aggregate demand: expected inflation

same direction

Counter-cyclical fiscal policy

save when times are good and spending when times are bad

what is the limiting factor on the snowball effect?

savings --we don't spend every dollar of income

saving-investment

savings = investment always equal for the economy as a whole

M2

savings deposits, money market mutual funds, and other time deposits. They are less liquid and cannot as quickly be converted into cash as M1.

APS (average propensity to save)

savings/income

price must increase more as you have more and more production in order to increase production by same amount—why?

scarcity of resources --during recession, a lot of people are unemployed so it is easier to get more resources --as economy picks up, fewer resources are idle so it costs more to get more

If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to:

sell government securities, raise reserve requirements, raise the discount rate, and reduce the amount of reserves available through the term auction facility.

Which of the following actions would the Fed undertake if it wants to follow a more restrictive monetary policy?

sell some of its holdings of government bonds

Most spells of unemployment are

short term

treasury bills

shorter time horizons (6 months)

Money Demand Curve

shows the relationship between the quantity of money demanded and interest rate

Keynesian

since prices, wages, and interest rates were sticky, the government needed to step in to boost output during recession and reduce output during a boom; countercyclical balances a budget

inside lags for fiscal policy is ____

slow

outside lags for monetary policy is ____

slow

if prices are increasing, the multiplier effect gets.... why?

smaller and smaller because goods cost more

Required Reserve Ratio

smallest fraction of deposits that the Federal Reserves allow banks to hold

7. In a dynamic economy under ideal conditions?

some unemployment would be present due to workers temporarily being out of work while changing jobs

Function Def of Money

something is considered to be money if it performs these 3 functions 1. generally excepted medium of exchange 2. unit of account 3. store of value

Liability

something of value they owe

Asset

something of value they own

What is a Financial Security?

something that can be sold on an open/secondary market. Stocks bonds mutual funds

as interest rates fall, people wish to hold more money

speculative demand for money

tax brackets

taxes decrease along with income--gives us a little more money to spend --raises debt --*no guarantee* because people are trying to save --better for times of *inflation* (easier to make people stop spending) --only helps those who are *already working* --*passed by congress much faster*

What factors shift aggregate supply curve? (3)

technology, productivity, cost of production (rent, wages, interest, profit)

Fiat money is money

that has little intrinsic value and is not backed by a commodity

Restrictions that limit sugar imports, subsidies for the construction of sports stadiums, and federal spending on programs like the construction of an indoor rain forest in Iowa all provide examples of government programs

that reflect the political attractiveness of special-interest issues.

Equilibrium GDP happens when

the 45 degree line intersects the aggregate expenditures curve

Which of the following is responsible for decision making regarding the purchase and sale of bonds by the Fed?

the Federal Open Market Operations Committee

The conduct of monetary policy is the responsibility of

the Federal Reserve System.

Logrolling

the act of trading votes on legislation to get the desired legislation passed

15. When an economy is in long run equilibrium,?

the actual and natural rates of unemployment will be equal

when an economy is in long run equilibrium

the actual and natural rates of unemployment will be equal

14. 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.

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

9. When full employment is present?

the actual rate of unemployment will equal the natural rate.

54. 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

Within the framework of the AD/AS model, when the current price level in the goods and services market is above the level anticipated at the time decision makers agreed to long-term resource contracts

the actual rate of unemployment will fall below the natural rate of unemployment

The crowding-out effect refers to the tendency of:

the additional borrowing accompanying larger budget deficits to increase interest rates and reduce private spending

If the U.S. price level increased relative to price levels in foreign countries, what would be the impact on domestic aggregate supply and aggregate demand curves?

the aggregate demand curve would shift inward and the aggregate supply curve would remain unchanged

If the U.S. price level decreased relative to price levels in foreign countries, what would be the impact on domestic aggregate supply and aggregate demand curves?

the aggregate demand curve would shift outward and the aggregate supply curve would remain unchanged

Budget surplus

the amount by which governmet revenues exceed government exenditure

marginal propensity to consume

the amount of addition income that is consumed additional consumption/ additional income

unemployment

the amount of people in the labor force without a job unemployed/ labor force

Velocity of money

the average number of times per year each dollar is used to purchase final goods and services

Progressive tax

the average tax rate (^) as incomes (^) Ex: federal income tax since 1913

Proportional tax

the average tax rate stays = as incomes (^) Ex: sales tax

If a customer deposits $1,000 cash into her checking account, the bank's:

the banks assets and liabilities rise by 1000$

supply side economics

the belief that changes in the marginal tax rate will exert important effects on aggregate supply

Bank Run

the concerted action of depositors who try to withdraw their money from a bank because the think it will fail

Wealth effect shifts

the consumption schedule up, saving schedule down

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.

Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change smaller than would otherwise be the case?

the crowding-out effect

increase; decrease

the crowding-out effect refers to the tendancy of the additional borrowing accompanying larger budget deficits _______ interest rates and ________ private spending

Budget Deficit

the crowing-out effect states that this leads to higher interest rates which decrease private spending

Bank Reserves

the currency banks hold in their vaults plus their deposits at the Federal Reserve

The main source of profit for financial institutions is

the difference between interest paid on deposits and interest received on loans.

net exports

the difference between value of exports and value of imports

Both Keynesians and non-Keynesians now recognize

the difficulties involved in timing discretionary changes in fiscal policy in a stabilizing manner.

Required Reserves

the dollar amount of reserves a bank is obligated by regulation to hold

If a budget surplus leads to a decrease in U.S. real interest rates, the lower rates will tend to cause?

the dollar to depreciate.

(18) who would most likely be helped by an increase in tariff on foreign- produced automobiles?

the domestic producers of automobiles

The natural rate of unemployment is not zero because

the economy is characterized by dynamic change and imperfect information

if there is an increase in both the supply and demand for a good, which of the following will definitely occur?

the equilibrium quantity will increase

(18) he primary source of purchasing power used to buy imported goods is

the exports of a nation.

The Keynesian analysis of fiscal policy implies that:

the federal budget should be used to maintain aggregate demand at a level consistent with full employment.

The primary tool of fiscal policy is

the federal budget.

A bank finds itself short of required reserves and therefore borrows from another commercial bank. The interest rate on this loan is

the federal funds rate

according to the Keynesian view, if purchasers buy more goods and services than businesses expect

the inventories of firms would decline, and the firms would expand output in order to restore their inventories to desired levels

Crony Capitalism

the lack of the market process present when politicians give favors to businesses in return for political contributions

The larger the marginal propensity to consume,

the larger the multiplier.

Full employment

the level of employment reached when there is no cyclical unemployment

An individual should continue to spend time searching for a job as long as

the marginal benefit expected from additional search exceeds the marginal cost

money multiplier

the maximum amount of money the banking system can create from $1 of excess rserves MM=1/RRR

potential deposit expansion multiplier

the maximum potential increase in the money supply as a ratio of new reserves injected into the banking system

required reserves

the minimum amount of reserves that a bank is required by law to keep on hand to back up its deposits

Monetary policy works through...

the money market

M1 (money supply)

the most liquid currency in circulation (majority) checking account blanace traveler's checks

Money Multiplier

the multiple by which the money supply increases as a result of an increase in fresh reserves by which the money supply can increase

M1

the narrowest measure of the money supply, consisting of currency and coins held by the non-banking public, checkable deposits, and traveler's checks

What is meant by stockholders equity?

the net worth of the bank

Higher Taxes

the new classical theory suggests that when gov increases spending this will inevitably occur

real interest rate

the nominal interest rate-rate of inflation

11. Suppose that a large number of men who used to work or seek work now no longer do either. Other things the same, this makes the?

the number of people unemployed and the labor force both falls

53. Suppose that a large number of men who used to work or seek work now no longer do either. Other things the same, this makes the

the number of people unemployed and the labor force both falls

During an economic boom

the output of the economy will exceed its long-run potential output

What is Money Demand

the potion of your assets you want to hold as money rather than as investment bearing asset

1. If this year the CPI is 110 and last year it was 100, then?

the price level as measured by the CPI has increased by 10 percent

Aggregate supply

the sum total of all goods and services firms and governments are willing and able to produce at any given price level

When Consumers Choose to Save Rather than Spend

the problem with the multiplier effect

Open Market Purchases

the purchase of U.S. government bonds by the Fed to increase the money supply

(9)which of the following is true if there is a shortage of loanable funds?

the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium

(9) which of the following is true if there is a surplus of loanable funds?

the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium

Yield

the rate of return on a bond; the annual interest payment divided by the bond's price

Require Reserve Ratio

the ratio of reserves to deposits that banks are obligated by regulation to hold

why is it important to use real rather than nominal GDP figures when making comparisons of output across time periods?

the real figures will reflect changes in the quantity of output and not changes in the general level of prices

unanticipated aggregate demand causes both the AD and the SRAS curve to shift in opposite directions

the real interest rate declines, Canada experiences a depression

Demand for Money

the relationship between how much money people want to hold and the interest rate; the higher the economy's price level, the greater the demand for money

The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of:

the reserve ratio

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

(14) an analysis of countries experiencing rapid inflation indicates that inflation is generally

the result of rapid growth in the money supply

An analysis of countries experiencing rapid inflation indicates that inflation is generally

the result of rapid growth in the money supply.

Open Market Sale

the sale of U.S. government bonds by the Fed to reduce the money supply

Which of the following will increase interest rates in the short run?

the sale of bonds by the Federal Reserve in the open market

Which of the following explains why elected representatives will find borrowing to be an attractive method of financing current government programs?

the shortsightedness effect

if required reserve ratio was lowered, what would happen?

the size of the monetary multiplier would increase

Aggregate demand

the sum total of all domestic goods and services that consumers, businesses, the government, and foreign actors want to buy at any given price level

crowding out

the tendency fro increases in Government spending to cause reductions in private investments -as G increases --> Y up --> Md up --> r up --> I down

(14) why will it be difficult for the fed to use monetary policy to direct the economy back to full employment and price stability from the recession of 2008-2009?

the time lags between changes in monetary policy and when the changes exert an impact on output and prices are long and variable

(13) what are open market operations?

the tool most often used by the fed to alter the money supply

Debt

the total amount of outstanding government bonds; a cumulative amount

Money Supply

the total value of financial assets in the economy that are considered money

real GDP

the total value of that final g/s produced in the economy during a given year **calculated with BASE YEAR PRICES

57. When an economy is in a recession

the unemployment rate will rise above its natural rate

(13) the primary source of earnings of commercial banks is income derived from

the use of deposits to extend loans and undertake investments

The primary source of earnings of commercial banks is income derived from

the use of deposits to extend loans and undertake investments.

which of the following statements about trade is true?

the value of a good generally depends on who uses it and circumstances such as when and where it is used

nominal GDP

the value of all final g/s produced in the economy during a given year **calculated with CURRENT YEAR

value of money

the value of money is determined by demand relative to supply

Supply-side economics

the view of macroeconomics that emphasizes the role of costs and aggregate supply in explaining inflation, unemployment and economic growth.

Public debt should be based on

the wealth and productive capacity of the economy as related to GDP

(9)it the dollar appreciates relative to the yen, it can be said that

the yen depreciates relative to the dollar

FED

their primary purpose is to control the money supply

-how many district banks are there across the nation? -are they publicly or privately owned? -are they publicly or privately controlled? -What is their main goal? -where is the Board of Governors, which heads the district banks, located?

there are 12 districts banks -privately owned -publicly controlled -main goal is control MS and interest rates to promote general economic welfare Washington DC

Both the crowding-out and new classical models indicate that:

there are side effects of budget deficits that will substantially, if not entirely, offset their expansionary impact on aggregate demand

AD-AS model and business cycles

there are two causes of a recession: 1) an unanticipated fall in aggregate demand 2) an unanticipated fall in short run aggregate supply there are two causes of expansion: 1) an unanticipated rise in aggregate demand 2) an unanticipated rise in short run aggregate supply

Checking account deposits are counted as part of the M1 money supply because

they are widely used as a means of making payment.

Because banks were only receiving profits from making house loans and not interest, what did this cause them to do?

they began making loans to non-credible people

which of the following a primary action of modern banks?

they hold only a fraction of their assets in the form of required reserves relative to their deposits.

When the bubble burst, what was the feds response?

they lowered interest rates to near 0 but this still wasn't enough.

how do markets coordinate output decisions?

they push the price up when there is a shortage

what will people do because information is costly to acquire?

they will rationally choose not to become fully informed when making decisions

(14) when the fed decreases the money supply, what will happen to nominal interest rates?

they will rise

if the fed wants to shift toward a more expansionary policy, it often announces that it is going to change the federal funds interest rate. the fed controls the federal funds interest rate

through its policy of open market operations

For activities in which the benefits are concentrated and the costs widespread, governments are likely to undertake

too much of these activities relative to what would be efficient.

Open market operations is the

tool most often used by the Fed to alter the money supply.

National Debt

total amount of money owed by the federal gov't

Total budget formula

total budget= cyclical balance + structural balance

based off income, as income increases, money demand increases.

transactions demand for money

6. GDP is not a perfect measure of welfare because it?

treats a dollar spent on candy bars the same as a dollar spent on education

Inflation

triggered by expansionary policies

price conveys information, we know what $100 buys

unit of account

A $70 price tag on a sweater in a department store window is an example of money functioning as a:

unit of account.

Accounting Unit

units of money measure the value of goods, services, assets and resources

Lack of Profit Motive

unlike private firms, the public sector lacks the incentive to produce efficiently becasue they don't have fear of bankruptcy and little competition

Functions of Money 1. medium of exchange what does this mean?

use money to buy what you want. Money acts as a middle man

Payments that users (consumers) are required to make if they want to receive certain services provided by the government are called

user charges.

Ordinary commercial banks can expand the supply of money by

using a portion of their deposits to extend additional loans.

Ordinary commercial banks can expand the supply of money by...

using a portion of their deposits to extend additional loans.

Pork Barrel Legislation

usually passed by congress because benefits are concentrated to a few constituents while consts are spread out over millions of taxpayers

Functions of Money 3. store of value what does this mean?

value can be easily stored with money. Money doesn't go bad.

Which of the following compose the reserves of a commercial bank?

vault cash and deposits of the bank with the Federal Reserve

bank reserves

vault cash+ the deposits of banks with the fed

The equation of exchange states that

velocity multiplied by money supply equals real output times the price level.

what does full employment look like on AS/AD model?

vertical line

real wage

wage rate/ price level

families usually hold some of their wealth in financial assets such as savings accounts,bonds and cash, and a rising aggregate price level means that the purchasing power of this money wealth declines, reducing output demanded

wealth affect

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?

Inverse

what kind of relationship do the interest rate and the demand for money have

Direct

what kind of relationship does money supply and the price level have numerically

Money is

whatever is generally accepted in exchange for goods and services.

what is the snowball effect?

when a person or the gov't spends, it becomes income to someone else --the next person spends it and it becomes someone else's income, etc.

when does a stock bubble end?

when enough investors realize stock is overpriced and begin selling

AD=AS

when equilibrium is achieved

multiplier effect

•Strength depends on level of economic activity/GDP ---Not as strong during a recession because people are reluctant to start spending •On average, we say the multiplier is 2 ---In a recession, mpc is low, so the multiplier is lower

Simple Deposit Multiplier

∆CheckingDeposits ___________________ ∆ Initital Deposit


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