ECO 2013 final

If a person borrows $2,000 at 5% interest and never makes any payments, how much will the loan balance be after five years?

$2,255.55

if the reserve requirement is 10%, a withdrawal of $500 leads to a potential decrease in the money supply of

$5,000

Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. how much money can the banking system create?

$6,000

If a perpetuity bond has an interest payment of $80 and your required yield is 10%, the most you would be willing to pay for the bond (the price) is:

$800

anti-trust laws

(sherman act and clayton act) put in by anti-trust division of the US justice department to prevent monopolization

Functions of the Federal Reserve Bank

-hold deposits or reserves of banks -supply the economy with currency -provide for collection of checks -acts as fiscal agent for the government -supervise the operations of commercial banks -regulate the money supply

Innovation in the banking system

1) NOW Accounts (Negotiable Order of Withdraw): checking accounts based on deposits and pay interest. 2) Share-Draft Accounts: checking account based on deposits in credit unions. 3) ATS (Automatic Transfer of Savings)

Functions of Banks

1) accept deposits 2) give loans

determinants of consumption

1) disposable income 2) wealth 3) expectations 4) demographics

determinants of demand

1) income of the consumer 2) taste and preference of the consumers 3) price of substitute goods and complementary goods 4) expectations of consumers

institutions of capitalism

1) private property or free ownership of the factors of production (john locke) 2) self-interest - the invisible hand (Adam Smith) 3) economic individualism or laissez-faire (hands-off) 4) competition and free market (economic rivalry), many buyers & sellers, and freedom of entry and exit in the market. 5) price (market) system (capitalism), resource allocation 6) limited government (establish law & order)

determinants of supply

1) production techniques 2) cost of inputs/resources used to produce product 3) expectations 4) taxes and subsidies from the government

fundamental questions of economics

1) what to produce 2) how to produce it 3) who to produce it for

value of money

1. acceptability 2. legal tender (have to accept $ for goods/services because it is the law) 3. relative scarcity (demand > $ supply)

Suppose a one-year bond with a face value of $200 is sold for $188. What is the bond's yield?

6.4%

principle of comparative advantage

A country will export the goods and services that it can produce at a low opportunity cost and import the goods and services that it would otherwise produce at a high opportunity cost.

Balance Sheet

A financial statement that reports assets, liabilities, and owner's equity on a specific date.

production possibilities curve (ppc)

A graph that shows the various combinations of output that the economy can produce given the available factors of production and the available production technology.

product market

A market in which products are sold by firms and bought by households. (goods/services)

positive question

A question that can be answered using available information or facts.

frictional unemployment

A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.

Federal Trade Commission (FTC)

An agency that regulates a variety of business practices and curbs false advertising, misleading pricing, and deceptive packaging and labeling

Capitalism

An economic system in which most of the resources are privately owned and most economic decisions are made by private owners. its a profit oriented system under predominantly competitive conditions.

fractional reserve banking system

Describes a banking system in which a portion of bank deposits are held as vault cash or in an account with the regional Federal Reserve Bank, while the rest of the deposits are loaned out to generate the money creation process.

barter

Exchange goods without involving money. Problems of the barter system include exchanges of unequal value, inefficiency, high search/transaction costs, and double coincidence of wants.

monetary policy

Government policy that attempts to manage the economy by controlling the money supply and thus interest rates. goals: -full employment -price stability -economic growth tools: -reserve ratio -discount rate -open-market operating

fiat money

It is money because the government says it is.

profit effect

Lower output prices mean less output and less profit, higher output prices mean more output and higher profits

incentives

The factors that motivate individuals and firms to make decisions in their best interest.

microeconomics

The study of the decision making by individuals, businesses, and industries

interest rate effect

The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases).

recognition lag

The time it takes for policy makers to recognize the existence of a boom or a slump.

Gross National Product (GNP)

The total market value of all final goods and services produced within a given period by factors of production owned by a country's citizens, regardless of where the output is produced.

rationality

a comparison of costs and benefits. (benefits > costs)

tax

a compulsory contribution to state revenue, levied by the government on workers' income and business profits or added to the cost of some goods, services, and transactions.

Production Possibilities Frontier (PPF)

a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology

inferior good

a good whose demand will decrease as income increases

normal good

a good whose demand will increase as income increases

subsidy

a grant the government gives a company so that they can increase production

Law of Demand

a larger quantity will be demanded at lower price and a lesser quantity will be demanded at a higher price

price ceiling

a legally established maximum price for a good/service

price floor

a legally established minimum price above the equilibrium price for a good/service

resource market

a market in which households sell and firms buy resources or the services of resources (labor)

normative questions

a question whose answer is based on societal beliefs on what should or should not take place

cost-push inflation

a rise in the general price level caused by increased factor payments to one or more groups of resources owners.

externality

a situation in which a cost or benefit associated with an economic activity effects other parties

inflation

a sustained rise in the general/average/weighted price level

an interest rate that is low for only a short period of time is called

a teaser rate

capital intensive method

a way of production that uses more capital than labor.

deposit/money multiplier

amount of money that is created when new money is put into the economy deposit multipler= 1/reserve ratio

required reserves

an amount of funds equal to a specified percentage of its direct deposit liabilities that a commercial bank must have on deposits within the federal reserve bank in its district or as vault cash.

market

an arrangement that brings buyers and sellers together to do business with each other

which of these will cause the supply of loanable funds curve to shift leftward?

an increase in the government deficit

financial intermediary

an institution that serves as a go between lenders and borrowers. (ex. bank)

money

anything that serves as a medium of exchange, a unit of account, and a store of value

all of the following are functions of money except:

as a standard value

ceteris paribus

assumption used in economics that other relevant factors or variables are held constant

Cost-of-living adjustment (COLA)

automatic adjustments to income because of inflation.

stability

average prices should be stable, should not fluctuate too much.

regressive tax

average tax rate decreases as income increases

progressive tax

average tax rate increases as income increases

proportional tax

average tax rate remains the same despite income

tax evasion

avoid paying taxes by lying on tax forms (illegal)

central bank

bank that regulates money supply of a country. (federal reserve bank)

cost effect

cost increases make producing products more expensive. Producers will be willing to supply more only if prices also rise to cover those added costs.

standard definition of economics

economics is the study of how people choose to use their scarce resources to attempt to satisfy their unlimited wants.

equity

fairness, not equality. The market determines economic fairness.

suppose that while households are deciding to increase savings, the demand by firms for investment funds falls. in the market for loanable funds, the real interest rate will _____ and the quantity of loanable funds will _____

fall; rise, fall, or stay the same

Assume initially that market interest rates are 7% and the bondholder is receiving a $70 coupon payment per year on a bond with a face value of $1,000. If market interest rates rise to 8%, the bond price:

falls to $875

positive economics

focuses on facts and cause-and-effect relationships

non-durable good

good that last less than 3 years

durable good

good that lasts a long time (>3 years)

complementary good

goods that are related in such a way that an increase in the price of one good will cause a decrease in the demand for the other good

substitute goods

goods that are related in such a way that an increase in the price of one good will cause an increase in the demand for the other good.

which of these is not a way financial institutions reduce risk?

guaranteeing a high rate of return for all lenders

quasi-public good (merit goods)

half private, half public goods

efficency

how well resources are used and allocated.

Adjustable Rate Mortgage (ARM)

if inflation rate goes up, your payment is automatically adjusted

real balance effect

if on average prices go down, then real cash balance will increase

real income

income adjusted for inflation

nominal income

income that is not adjusted for inflation

a lower reserve requirement

increases the ability of banks to make loans

discount rate

interest rate that commercial banks pay to the fed when they use loan.

the demand curve for loanable funds represents _____ and is _____

investors; downward sloping

factors of production

land, labor, capital, entrepreneurship

tax avoidance

loopholes in paying taxes (legal)

checking deposits generally have a _______ return on investment than do certificates of deposit because checking deposits are ______

lower; more liquid

labor force

made up of individuals who are 16 or older who are employed and those who are unemployed but are actively looking for work.

horizontal summation

market demand and supply curves are found by adding together how many units of the product will be purchased or supplied at each price

surplus

occurs when the price is above market equilibrium, and quantity supplied exceeds quantity demanded

absolute advantage

one country can produce more of a good than another

comparative advantage

one country has a lower opportunity cost of producing a good than another

Traditional Individual Retirement Account (IRAs) are taxed

only when you make withdrawals

scarcity

our unlimited wants clash with limited resources, leading to scarcity. Economics focuses on the allocation of scarce resources to satisfy unlimited wants as fully as possible

technical efficiency

produce max amount of goods with minimum resources

economic efficiency

producing goods/services society wants. meet consumers preferences.

labor intensive method

production that uses more labor than capital.

when a financial institution provides a standardized financial product such as a mortgage, it is

reducing transaction costs

Nominal GDP

refers to GDP in actual market prices as they exist each year. It reflects current prices. it is the value of the good and services produced in a given year valued at that years price. it is GDP that has not been adjusted for changes in the price level.

real GDP

refers to GDP in actual prices of a previous year, or the average of actual prices in some previous years. It is the value of the final goods and services corrected for inflation/deflation.

business cycle

refers to the change which takes place in business/economic conditions over a period of time.

demand-pull inflation

refers to the fact that inflation is caused by an excess of total demand in the economy.

economic system

refers to the laws, institutions, customs, and practices that determine how a society allocates its scarce resources

underemployment

someone who is working less than their full potential.

If Jack Sparrow buries a chest of gold bullion on a deserted island and plans to come back later, then the gold is functioning as a:

store of value

private good

subject to the principle of exclusion. goods that you pay for and then you own.

public good

subject to the principle of inclusion. goods that are available to you weather or not you pay for them (taxes). ex. police service, using roads

excess reserves

the amount at which the banks actual reserves exceed it required reserves. actual reserves - required reserves

aggregate demand

the amount of goods and services in the economy that will be purchased at all possible price levels

GDP gap

the amount of production by which potential GDP exceeds actual GDP

Liquidity

the ease with which an asset can be converted into the economy's medium of exchange without financial loss.

classical economies

the economic ideas formulated by adam smith. these ideas were later refined and extended by thomas malthus, david ricardo, jean baptiste say, john strort-miel, alfred marshal, and A.C. pigou. It was the predominant body of economic theory in the western hemisphere up until the 1930's.

employment act of 1946

the government should do everything in its power to make sure the economy is functioning at, or close to, full employment

federal funds rate

the interest rate banks charge each other for overnight loans

loanable funds theory of interest

the interest rate in the economy is explained by the demand ans supply of loanable funds.

law of supply

the lower the price the lesser quantity that will be supplied, the higher the price that larger the quantity supplied

market for loanable funds

the market in which those who want to save supply funds and those who want to borrow to invest demand funds. sources of demand: buisnesses, households, and the government. sources of supply: past and present savings of households and buisnesses, and the federal reserve bank.

market equilibrium

the market is in equilibrium when the quantity demanded and the quantity supplied of a good or service are equal. There is neither a shortage nor a surplus, and there is no tendency for prices to rise or fall

willingness to pay

the maximum amount that a buyer will pay for a good

Principle of Increasing Opportunity Cost

the opportunity cost of additional units of a good generally increases as more of that good is produced

net export effect

the process of how expansionary fiscal policy decreases net exports due to rising interest rates

open market operations

the purchase and sale of U.S. government bonds by the Fed

as the real interest rate falls

the quantity demanded of loanable funds rises

demand

the quantity of a good or service that consumers are willing and able to buy

supply

the quantity of a good or service that producers are willing and able to sell at different prices

money supply

the quantity of money available in the economy. M1: Currency + checkable deposits M2: M1 + small time deposits (<$100,000) M3: M2 + large time deposits (>$100,000)

reserve ratio

the specified percentage of the commercial banks direct deposit liabilities that it must have as a reserve. reserves= r(DD) reserve ratio= Commercial banks required reserves / commercial banks direct deposit liabilities

economics

the study of how individuals, firms, and society make decisions to allocate limited resources to many competing wants

Macroeconomics

the study of the broader issues in the economy such as inflation, unemployment, and national output of goods and services

normative economics

the study of what the goals of the economy should be

administration lag

the time it takes for congress and the president to agree on what fiscal policy to use

operational lag

the time it takes for the full impact of a government program or tax change to have its effect on the economy

Aggregate Supply

the total amount of goods and services in the economy available at all possible price levels

Gross Domestic Product (GDP)

the total market value of all final goods and services produced in a country for a given time period

opportunity cost

the value of the next best alternative; what you give up to do something or purchase something

Okun's Law

this states that for every 1% unemployment, there is a 2% loss of output (GDP)

recession

two consecutive quarters quarters of declining GDP.

discouraged worker

unemployed and not looking for work.

structural unemployment

unemployment resulting from industrial reorganization, typically due to technological change, rather than fluctuations in supply or demand.

cyclical unemployment

unemployment that rises during economic downturns and falls when the economy improves

fiscal policy

use of taxes and government spending to promote stability