Econ quiz #2

Labor force participation rate:

: the percentage of adults in the labor force

Deflation

A decrease in the average level of prices

Disinflation

A reduction in the inflation rate

Inflation -

An increase in the average level of prices

Quantity theory of money

General relationship between money, velocity, real output, and prices. Helps explained the role of the money supply in determining the inflation rate.

Catching-up growth:

Growth due to capital accumulation (catch up to other countries; decreases over time) (ex: japan--went from catch-up after WWII, now at cutting-edge)

The rule of 70:

How long it takes for a variable (investments) to double. Doubling time = 70/growth rate in %.

Can you explain the rule of 70?

How long it takes investments to double. Equation-> doubling rate=70/growth rate%

Human capital:

Human capital: The stuff between the ears. Brains that create new ideas to fuel cutting-edge growth.

Which of the choices is the best example of creative destruction?

In the past month, there were 20,000 layoffs but 22,000 new hires.

________ are a mechanism by which crowding out occurs.

Increases in interest rates

Which of the situations is an example of the crowding-out effect on investment as it pertains to macroeconomics?

Jack wants to borrow money to create a cowboy-themed inflatable bounce house for kids called "Wild Wild West." However, the government is running a deficit which has increased interest rates so much that Jack can no longer afford to borrow the money.

banks are financial intermediaries, not institutions?

Physical organizations are not institutions!!

So institutions are conditions?

Principles that determine if you trust an economy or not....

What are examples of institutions?

Property rights, honest government (not the govt itself), political stability, dependable legal system, competitive and open markets, ultimate causes of wealth

As interest rate decreases, what happens to the quantity of loanable funds demanded?

Quantity demanded will increase.

According to the rule of 70, if a sum of money was invested at 7%, how long would it take to double?

10 years

What are the factors that determine the supply of savings?

Smoothing consumption, impatience, marketing and psychological factors, and interest rates

What stage of growth is the US at? Is this short-term or long-term, and slow or long?

The US is at cutting edge growth, where it's growth is slow and long-term

If the projected rate of return for a project is less than the interest rate for a loan that is necessary to complete the project, how will the borrowing business act?

The business will not take out the loan.

Marginal product of capital

The increase in output caused by the addition of one or more unit of capital. The marginal product of capital diminishes as more and more capital is added.

What is the price of savings?

The interest rate

Consumer price index

a measure of the average price for a basket of goods and services. Measures inflation.

Inflation is always and everywhere a...

a monetary Phenomenon - Milton Friedman, 1912-2006 because price level and

What is crowding out?

a reduction in consumption and investment spending that results from government borrowing

Identify an example of consumption smoothing.

all of these are examples of consumption smoothing

What is inflation?

an increase in the overall price level

What causes inflation?

an unexpected increase in the money supply.

Crowding out

ecrease in private consumption and investment when the government borrows more money

The growth rate of output per capita will

increase as the country benefits from high marginal product of capital.

What happens to the marginal product of each additional unit of capital, all else equal?

increases output at a diminishing rate.

The _______ represents the price of a loan.

interest rate

Which of the terms acts as the "price" in the market for loanable funds?

interest rate

Physical capita

machines, structures, equipment

What is the catch‑up effect concerning developed and developing countries?

may grow faster than developed countries because they lack the most basic tools and capital investment leads to higher productivity growth.

What's the iron law of diminishing returns and how does it play a factor in growth rates?

over time the return from an investment/profit will not continue to increase if things stay constant.

Underemployed workers:

part-time workers who would rather have a full-time position.

Structural unemployment

persistent, long-term unemployment caused by long-lasting shocks or permanent features of an economy that make it more difficult for some workers to find jobs

Interest rate:

price of money

Investment-

putting your money into banks, or cds; giving your money to other people/institutions for them to give you more monies (profit)

Which of the choices is most directly related to cyclical unemployment?

recessions

Which of the factors would decrease the rate of frictional unemployment?

the advent of the Internet, which makes finding available jobs easier

Steady-state level of capital:

the capital stock is neither increasing or decreasing; where investment=depreciation. When the amount you are cycling into the system is the same you are cycling out.

Unemployment rate:

the percentage of the labor force without a job (Older than 16, Not institutionalized, Willing and able to work, Looking for work)

Default risk:

the risk that someone will not pay back a loan Collateral property, vehicles; things worth a monetary value that can be used when you are risky for them to give a loan to.

Institutions

the rules of the game". Laws, regulations, customs, culture. They promote growth and create incentives that align self-interest with social interest.

Fisher effect:

the tendency of nominal interest rates to rise with expected inflation rates.

Technological knowledge:

things that people learn, like skills and on the job training

The source of the _______ for loanable funds is investment.

to demand

When the economy is doing well, a significant share of unemployment is frictional.

true

Cyclical unemployment:

unemployment with the business cycle

Discouraged workers:

workers who have stopped looking for a job, haven't looked in the past month but have looked in the past year

What are the 4 qualifications of an unemployed individual?

- Older than 16 - Not institutionalized - Willing and able to work - Looking for work

What are the factors of production?

-Physical Capital, Human Capital, Ideas/innovation,

What's the deal with the Solow model? What's it used for/why do we use it?

A model used to explain why some countries grow economically faster than others (cutting-edge vs. catching up growth) looking at long-term economic growth potential--how much a country can grow if it has the right institutions to do so

Real price

A price that has been corrected for inflation. Real prices are used to compare the prices of goods over time.

Nominal price

A price that has not been corrected for inflation. Uses a number set from one year across multiple others.

Institutions are like rights and laws,etc, correct?

Institutions for increasing economic growth are property rights, honest government, political stability, a dependable legal system, and competitive and open markets.

How does the average GDP per capita relate to most of the world's GDP per capita?

The average GDP per capita is above most of the world's GDP per capita (most of the world is below average) Rich countries raise the average GDP because they are just that much richer.

Time preference

The desire to have goods and services sooner rather than later (all else being equal)

How does the official unemployment rate compare to the total portion of people that don't have work? -

The official unemployment rate only accounts for those who do not have a job, but are in the labor force, meaning that they are not institutionalized, of age, and have looked within the last 4 weeks.

The natural rate of unemployment equals

frictional unemployment plus structural unemployment.

The marginal product of capital is

greater in the less‑developed country of Unestablished, resulting in a faster growth rate in output.

The life cycle theory of savings

the life cycle theory of savings puts the demand to borrow and savings together. (Borrow, spend when you are in schooling , savings stage--working years, then dissave when you retire/age till it hits zero). Know borrowing, saving, and dissaving

Natural unemployment

the rate of structural plus frictional unemployment.

The shadow banking system refers to

the unregulated non-bank financial firms that engage in borrowing from investors and lending to households and firms.

What's an example of a spillover?

when an idea benefits other firms and consumers, like how computers have advanced mankind's ability to do research and advance in technology through the further sharing of ideas on the internet

Free rider

when effort is divorced from payment ... Someone who benefits though they did not participate/contribute. Leads to tragedy of the commons.

Hyperinflation

when inflation is so great that the term inflation is useless to use.

Market for loanable funds :

when savers trade with borrowers (trading), determines the equilibrium

Cutting-edge growth:

GDP growth by the leading countries due to new ideas (slower and never ends)

Which of the choices most accurately describes the role of securitization in contributing to the crisis?

Banks bundled mortgages together and then sold them on the market as a financial asset. However, the risk level of these securitized assets was often much higher than the purchaser thought.

What're examples of financial intermediaries?

Banks, the bond market, the stock market, the government.

Why can't we stop inflation?

Because stopping inflation would be painful. Workers would become unemployed as the increase in their real wage makes them unaffordable, there would be confusion as to what is inflation vs. reduction in demand, and firms would reduce output and employment

How does corruption connect to GDP and economic growth?

Corruption, often seen in bad institutions, reduces incentives for people to make more stuff thus keeping the GDP low

What's the quantity theory of money? Why do we care about it? How does it work?

M times v=P times Yr or money supply times velocity equals inflation times real GDP, and it is important because it helps you predict the rate of inflation, since the supply of money is directly linked to inflation as Real GDP and velocity of money do not change much.

Let's talk about the components: what do each of them mean?

M= Money supply P=Price level V=Velocity of money Mv=Actions of buyers PYR= actions of sellers YR= Real GDP

Saving

Money we don't spend on consumption of goods

Spillover

Our Ideas can inspire others to new ideas

What effect will an increase in interest rates have on the quantity of loanable funds supplied?

Quantity supplied will increase.

What's the purpose of financial intermediaries?

Reduce cost of connecting borrowers and savers

Conditional convergence:

The tendency- among countries with similar steady state levels of output- for poorer countries to grow faster than richer countries and thus for poor and rich countries to converge in income

Can you explain Free riders or give an example?

Those who don't contribute but reap the benefits. The reason people hate group projects.

What are factors that increase/decrease labor force participation rates?

Unemployment benefits, salaries....

What are the impacts of unemployment?

Unemployment can cause shortages in our economy because we don't have enough labor to keep up with consumer demand

Growth miracles:

When a country's GDP growth is a much larger percentage than expected, Japan

Insolvent:

When a firm has liabilities that exceed its assets

Growth disasters:

When a nation's GDP falls and is close to zero for an extended period of time, Argentina

Money illusion:

When people mistake changes in nominal prices for changes in real prices.

How do interest rate and the market for loanable funds connect?

When the interest rate is high, savings are high, and when the interest rate is low, the quantity of funds demanded is higher

Can you explain catching up growth one more time? Can you give a specific example?

When you try to catch up to other countries. Ex. Japan... After the world war they were in catching up growth. Short term, really fast, all based on capital accumulation. Happens when there is a focus on education in low income countries.

Why do institutions matter?

Without institutions, the economy would suffer because there is not enough protection of personal and intellectual property, meaning that few advancements can be made and few people would come up with new ideas. Allows us to participate in the economy and allow the economy to grow. Honest government, property rights, political stability, and competitive and open markets makes us feel safer putting our money in that economy. The government, the bank are not institutions. A bank is not an institution.

Which of the following best defines a financial intermediary?

a financial institution that transforms investor funds into financial assets

Financial intermediaries

banks, bond markets, and stock markets - move savings from savers to borrowers and investors

Select the definition of consumption smoothing.

borrowing in periods of low income and saving in periods of high income to make consumption less variable than income

How do governments monetize the debt?

by printing more money to pay it off.

Frictional unemployment:

short-term unemployment caused by the ordinary difficulties of matching employee to employer

Unemployed workers

someone who is older than 16, not institutionalized, willing and able to work, and has looked for a job in the last 4 weeks

The typewriter industry goes bankrupt and lays off all its workers. In sharp contrast, the burgeoning electronic word processing industry hires 10,000 workers that same year. This type of unemployment resulting from the shift in industries would best be catagorized under

structural unemployment.

The source of the _______ for loanable funds is saving.

supply