Macro Econ

Employment to Population Ratio

(# of employed/WAP) x 100

Monetary Base

reserves + currency held by non-bank public

Inferior Good

as income increases, the demand willl decrease

Producer Price Index definition

average of the prices received by producers of goods and services at all stages of the production process

Net exports =

balance of trade + balance of service

Fractional Reserve Banking System

bank keeps less than 100% of deposits as reserves

Does Income Tax Refund affect M1 or M2 or both?

both

Largest component of Investments

business fixed investments

Cyclical Unemployment

caused by a business cycle recession, firms don't want to hire

Political Business Cycle

central bank increases money supply and therefore RGDP to help incumbent get reelected

Shifts in Demand and Supply curve for US

changes in the D for foreign produced goods and services, changes in desire to invest in rest of world (changing interest rate with rest of world), changes in the expectation of currency traders about the FV of foreign currency

GDP=

consumption + investment + government purchases + net exports

Speculators

currency traders who buy and sell FX in attempt to profit from changing exchange rate

M1

currency, notes, deposits

Excess Burden from Tax

deadweight loss from a tax

A shift money demand curve to the left will cause a ____ in real GDP

decrease

An increase in required reserves leads to a ____ in money supply

decrease

Decrease in Aggregate Demand causes ____ in monetary base

decrease

If supply curve for loanable funds shifts right what will happen to the tax on interest income

decrease

Money demand shift left will cause ____ in R GDP

decrease

When Fed sells securities banks reserves:

decrease

Appreciation of the dollar leads to

decrease in exports, increase imports, decrease in NX, decrease in AD, decrease in RGDP

Contractionary Fiscal Policy

decrease in government spending

Tighter Monetary Policy

decrease in money supply causing decrease in money and increase in federal funds rate

Currency Debasement

decrease in value of money that occurs when its supply increases rapidly

A currency drain ____ the amount of bank reserves

decreases

The US has a trade ______ with all major trading partners and a trade ____ with every region of the world

deficit; deficit

Asymmetric Information

difference in 2+ parties access to relevant knowledge

How do you find the interest for a treasury bill?

divide amount of interest earned by price paid for bill and multiply by 100

4 goals of macroeconomics

economic growth, full employment, stable prices, balanced trade

2 objectives of policy makers in designing a tax system

efficiency and equity

Tax laws affect

efficiency and equity

Federal government cutting taxes to stimulate economy can be classified as

expansionary fiscal policy

Source for Comparative Advantage

factor endowments, comparative advantage with experience

Supply Shock

factors that raise per unit production cost

Equity

fair distribution of economic benefits

Tax Incidence

tax is efficient if it imposes a small excess burden of a tax between buyers and sellers

CPI=

(expenditures in current year/expenditures of base year) x 100

Hidden Actions

1 person knows more than another about an action she is taking

Hidden Characteristic

1 person knows more than another about attributes of g&s being sold

Simple Money Multiplier

1/RR

If money supply increases at 15% and R GDP increase at 5% inflation will be

10%

CPI reference base period

1982-84

Income Effect

As P increases households can't afford the same quantity

Twin Deficits

Budget deficit leads to current account deficit

Efficient tax systems impose small ____ and _____

DWL and administration burdens

Part of the spending on Caldecott Tunnel project in California came from the American Reinvestment Act. This is an example of ___ aimed at increasing RGDP and employment.

Discretionary fiscal policy

Federal Balance Sheet Liabilities

FRNs in circulation, bank's deposits

Monetary Policy

Fed actions to change money supply and interest rates

2 problems Fed has implementing the monetary policies

Fed must operate in real time when much of the data is unknown and Fed's control

GNP is more accurate than

GDP

Boeing makes planes in the US. Some are exported and some stay in the US. If price of planes decreases then

GDP deflator will decrease and CPI will not change

If price of used cars decreases in US by 10% then the GDP deflator and CPI will:

GDP: unchanged CPI: decrease

McDonalds produces in Korea but is US owned. It is included in ___ of US and ___ of Korea

GNP and GDP

two taxpayers in same economic circumstances should pay the same level of taxes

Horizontal Equtiy

M2

M1 + savings deposits + mutual funds + deposit accounts

Allocative Efficiency occurs at

Marginal Cost=Marginal Benefit

Limitations of PPP Theory

NFX rates do not always move to ensure that a $ has same purchasing power in the rest of the world

Relative Price

OC or ratio of one price to another

Extensive Economic Growth

Obtaining more or new resources, increase in capital or increase in labor hours

Always trade with lowest

Opportunity Cost

Law of Demand

P decreases when Qd increases, P increases when Qd decreases

Future Value

PV x (1 + i)^N

Intensive Economic Growth

Quality improvement in existing resources: change in human capital (increase in experience or education), development of new technology or better way of producing

Limitations of Discretionary Fiscal Policy

Recognition Lag, Legislative Lag, Implementation Lag, Effectiveness Lag, Evaluation and Adjustment Lag

Depreciation in US FX Rate

US g&s (tourism) become cheaper relative to foreign g&s which leads to increased exports and decreased imports and increase in US NX

Appreciation of US FX Rate

US g&s become more expensive relative to US g&s, US exports decrease imports increase and decrease of US NX

Open Market Purchases

US government buys securities, treasury bills and bonds from the public

Federal Balance Sheet Assets

US government securities, gold, foreign exchange, loans to banks

Capital Inflow

US investor buys foreign bond or builds factory

Problems with measuring unemployment

Underestimates true unemployment rate due to discouraged workers and underemployed Overestimates: false claim of unemployment and over qualified people

Not in Labor Force

WAP - LF

Cyclical unemployment is the result of

a slowdown in the economy

Efficiency Wage

above market pay that a firm pays to increase productivity

Cost-Push Inflation

abrupt increase in cost of raw material or energy input

RGDP

adjusted for base year prices but curent year quantity

Capital Stock

amount of capital at nation's disposal

Currency Appreciation

an increase in the market value of one currency relative to another

Law of Supply

as P increases Qs increases; as P decreases Qs decreases

Normal Good

as income increases, demand will increase

CPI designed to track prices of g&s of

family of 4 living urban

Foreign Direct Investment

firms build or buy facilities in foreign country

Foreign Portfolio Investment

firms buy stock from foreign countries

Discretionary Fiscal Policy

fiscal action that is initiated by Congress to deliberate change in government spending programs, government borrowing or taxes to stimulate or slow economy

Normal Unemployment

frictional and structural unemployment

Changes in PPI can give early sign of

future movement in CPI

If a country experiences productivity growth with an unchanging population the GDP ____

grew

Vertical Equity

higher income should pay more than lower income

RFX Rate determines

how much a country exports and imports

Purchasing Power Parity Theory

if $ buys same amount of g&s in all countries, then the NFX rate must reflect the Ps of g&s in the countries

New York Fed

implements policy, conducts open market pertains, stores gold for foreign banks, securities

GDP Deflator is only affected by products produced ___

in the same year

Variables that shift market demand

income, prices of related goods, tastes, population and demographics, expected future prices

A shift in the money demand curve to the right would _____ Real GDP

increase

Aggregate Demand increase will cause ___ in monetary supply

increase

Decrease in discount rate leads to ____ in money supply

increase

Expansionary Fiscal Policy

increase government spending, decrease tax

Change in M1

increase in bank reserves x money multiplier - currency held by public

Currency Drain

increase in currency held outside banks

Depreciation of the dollar leads to

increase in exports, decrease in imports, increase in NX, increase in AD, increase in RGDP

Physical and Human Capital Growth examples

increase in number of machines, better technology, better skilled workers, new discoveries about the process or product

Looser Policy

increase in the money supply

Looser Monetary Policy

increase monetary base which increases money and decreases federal funds rate

When Fed buys securities in open market operation and bank reserves _____ and therefore lending ______

increase; increase

Federal Funds Rate

interest rate on interbank loans for short periods

GDP doesn't count

intermediate goods or used goods

tax revenue and tax rate have an _____ relationship

inverse; Laffer Curve

Net Income on Investments

investment income received - income paid

Law requiring workers to retire at age 50 would cause PPF to shift

inward

BLS gathers data to endure measure of inflation is right because

keeps measurement honest and fair and free of politics, billions $ are at stake for change in 1% of CPI, congressional advisory commission

Assertion

law of demand must be flawed ex) the P and Q of roses both increase in February

Poverty Line

level of annual income equal to 3x the amount of $ needed to purchase the minimum quantity of food required for nutrition; adjusted for family size and inflation

Inflation Tax

loss people suffer when inflation reduces the purchasing power of their assets

The country with Comparative Advantage has the

lowest opportunity cost

2 reasons PPP theory doesn't hold in practice

many g&s not easily transported, tradable g&s produced in different countries not perfect substitutes

Market Equilibrium

market clearing point

Signaling

market response where an informed party reveals private info to an uninformed party

Screening

market response where uninformed party to induce informed party to reveal private info

NGDP

measured in current price and quantity

CPI definition

measures average change over time in the prices a typical urban family of 4 pays for g&s they buy

As interest rate declines, stock become a _____ attractive investment relative to bonds and this causes the demand for stocks and their price to ______

more; rise

Discount Rate

only banks can borrow, discount loans

Monetary policy tools used by Fed

open market operations, changing discount rate, manipulating RRR

Structural Unemployment

persistent mismatch between the skills or attributes of workers and the requirements of job

Main sources of economic growth

physical or human capital accumulation, technological change

Variables that shift supply

price inputs, technological change, prices of substitutes, number of firms, expected future prices

Arbitrage

process of taking advantage of differences in Ps for the same item in different market

Net Benefit

producer and consumer surplus

Autarky

production and consumption; Production Possibilities Frontier compared to Consumption Possibilities Frontier

Fed fears recession and decides to stimulate spending by increasing quantity of money. If Fed wants to increase money supply by $2,000,000 when required reserve ratio is 0.2 what should they do?

purchase $400,000 in bonds (400,000 x (1/.2)

Federal Tax System Evolution

raise tax revenue, be fair, influence behavior (sin tax)

High efficiency of tax system if it

raises same amount of revenue at a small cost to tax payers

Demand Pull Inflation

rapid and sustained inflation caused by over issuance of money and too much spending for too few goods

Real Foreign Exchange Rate

rate at which the g&s of one country trade for the g&s of another

Balance of Payments

record of country's trade with other countries

If consumers decide to save more income then this will cause a shift ____ in the supply curve for loanable funds

right

Eminent Domain

right of government to take property for a necessary public use

Lump Sum Tax

same amount for everyone regardless of earning or actions of a person; considered efficient because it doesn't influence a person's decisions on how much to work

Financial Intermediaries

savers indirectly provide funds to borrowers

In circular flow diagram households are:

sellers in markets for the factors of production

If there is an investment tax credit demand curve for loanable funds will:

shift right

Frictional Unemployment

short term unemployment from process of matching workers with jobs (seasonal employee)

Lorenz Curve

shows distribution of income by arranging incomes from lowest to highest on the vertical axis and indicating the cumulative fraction of income earned by each fraction of households on the horizontal axis

When inflation is low, the gap between nominal and real interest rate is

small

Greenhouse Effect

spend now, cost finally comes 70 or 80 years later

Investment

spending by firms on new factories, office buildings, machines and households on houses

Consumption

spending by households on g&s, not including new homes; divided into services, nondurable and durable goods

GDI

sum of income payments to households

What would happen to market for loanable funds if government decreased tax rate on interest income?

supply of loanable funds would shift right and investment would increase

National Income Accounting

system used by BEA

Tax Revenue=

tax base x tax rate

Tax Revenue - Government Spending =

tax revenue -(G + transfers + debt int)

Negative Income Tax

tax system that collects rev from high income households and gives transfers to low income households

2 factors are key to determining labor productivitiy

technology and quantity of capital per hour worked

Total control of the money supply is up to

the Fed

Shoe Leather Cost

the OC of holding cash is high

Law of One Price

the P of the same g&s in different area should be the same

Marginal Cost

the opportunity cost of producing one more unit

Marginal Tax Rates

the percentage paid in taxes on an extra dollar of income

When competitive equilibrium is achieved

the total net benefit to society is maximized

Effectiveness Lag

time it takes the plan to work and feeling their effects on RGDP

Evaluation and Adjustment Lag

time it takes to evaluate if it worked or changed

OC of Inflation on society

time resources spent coping with inflation: foregone g&s, income, leisure

Recognition Lag

time takes to figure out fiscal policy actions are needed

Per Unit Production Cost

total input cost/units of output

Average Tax Rates

total tax paid/over income

Not included in Government Purchases

transfer payments, interest on debt

Net Transfers

transfers made - received

Fiscal Policy

use of federal budget

Open Market Opperations

used to change money supply

Rational Choice

uses the available resources most efficiently to satisfy the wants of the decision market at the time of decision

N FX Rate (e)

value of US $ in terms of another country's currency

Bank Reserves

vault cash + deposits with the Fed

If velocity is constant, growth rate is

zero