Econ Midterm 2

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M2

-everything from M! -money market deposit accounts - savings account deposits -certificates of deposit -miscellaneous near-monies.

discount rate is the interest rate that

the Fed charges banks for loans

comparative advantage:

the ability of a party to produce a particular good or service at a LOWER OPPERTUNITY COST than another

deadweight loss

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

MPC (marginal propensity to consume)=

the fraction of extra income that a household consumes rather than saves.

diminishing returns:

the more capital an economy has, the less additional output the economy gets from an extra unit of capital

fiscal policy

the setting of the level of government spending and taxation by government policymakers (contractionary and expansionary)

GDP multiplier

1/1- MPC

multiplier (mm)=

1/1-MPC

rule of 72

72/ annual rate of return

average income in "n" years=

current average income (1+g)^n

According to the long-run Phillips curve, in the long run monetary policy influences

A. the inflation rate but not the unemployment rate.

producer surplus is located

ABOVE the SUPPLY curve

consumer surplus is located

BELOW the DEMAND curve

Inflation rate

CPI year 1 - CPI year 2 --------------------------- x100 CPI year 1

What is the fundamental basis for trade among nations?

Comparative Advantage

What is the fundamental basis for trade among nations?

Comparative advantage

after importing, the price goes

DOWN

world price goes ____________ after importing

DOWN

∆GDP=

GDP mult X initial spending

The short-run relationship between inflation and unemployment is often called

The Phillips Curve

T or F: A given short-run Phillips curve shows that an increase in the inflation rate will be accompanied by a lower unemployment rate in the short run.

Tru

after exporting, the price goes

UP

world price goes ____________ after exporting

UP

unit of account

a common reference point for valuing goods and services provided to sellers

store of value

a means of transferring purchasing power from the present to the future

To find an amount in today's dollars=

amt. in year T x price level today ---------------------- price level in year T

medium of exchange

an accepted method of payment for goods and services

The Catch-Up Effect

countries that start off poor tend to grow more rapidly than countries that start off rich

M1

currency, traveler's checks, and checkable deposits.

To increase the money supply, the Federal Reserve will...

buy government bonds

According to the Phillips curve, policymakers would reduce inflation but raise unemployment if they

decreased the money supply

required reserves (rr)=

demand deposits x rr ratio (given percentage)

reserves=

demand deposits- loans

under a fractional-reserve banking system, banks

generally lend out a majority of funds depostied

Crowding-Out:

govt raises prices

purchasing power

initial deposit / price

CPI

price of basket of GOS in current year --------------------------------------------- x100 price of basket in base year

expansionary policy

reducing the RR, purchasing govt bonds, lower discount rate

Multiplier Effect

shift in AD could be larger than expected from certain amount

The Phillips Curve:

trade-off between inflation and unemployment (inverse)

GDP deflator

value of all goods and services produced this year using this year's prices / value of all goods and services produced this year using the base year's price

absolute advantage:

when a producer requires FEWER INPUTS than another to produce the same output

MPC=

∆ consumption/ ∆ income

deadweight loss=

∆consumer surplus (neg) + ∆producer surplus + ∆govt revenue


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