Macroeconomics Final

Explain how banks create money

Banks create new money whenever they make loans

Briefly describe how banks periodically evaluate their financial condition, including a description of the tool used in this process.

Banks evaluate their financial condition by comparing their assets, which are defined as items of value owned by the firm, with their liabilities, which are any amounts or debts owed by the firm. A balance sheet is an accounting tool that lists assets and liabilities. Because of the two-column format of the balance sheet, with the T-shape formed by the vertical line down the middle and the horizontal line under "Assets" and "Liabilities," it is sometimes called a T-account.

Identify and briefly explain the circumstances that could lead to a bank developing a negative net worth, and the various methods that banks may employ to protect themselves from this type of outcome.

Banks run the risk of negative net worth if the value of their assets declines. The value of assets can decline because of an unexpectedly high number of defaults on loans, or if interest rates rise and the bank suffers an asset liability time mismatch in which the bank is receiving a low rate of interest on its long-term loans but must pay the currently higher market rate of interest to attract depositors. Banks can protect themselves against these risks by choosing to diversify their loans or to hold a greater proportion of their assets in bonds and reserves.

Explain the concept of barter

Barter is literally, trading one good or service for another, without using money

Why does $100 in the future not have the same value as $100 today?

Because of inflation

How can a bank protect themselves against risk of default?

By choosing to diversify their loans or to hold a greater proportion of their assets in bonds and reserves.

Which of the following institutions determines the quantity of money in the economy as its most important task?

Central Bank

Explain the 2 types of money.

Commodity money = an item used as money bu also has value from its use as something other than money Fiat money = has no intrinsic value, but is declared b a government to be the legal tender of a country

Explain what it means if a country has a comparative advantage?

Comparative advantage is when a good can be produced at a lower cost in terms of other goods.

Explain some pros and cons of trade deficits and surpluses

Trade surpluses are no guarantee of economic health like trade deficits are no guarantee of economic weakness. Either trade deficits or surpluses can work out well or poorly, depending on whether the corresponding flows of financial capital are wisely invested.

What benefits are to be gained from countries producing according to the concept of comparative advantage? What if a country is absolutely more productive in all goods?

When countries produce according to the concept of comparative advantage, and then trade, the consumption possibilities expand for all countries involved. This is because producing goods for which a country has a comparative advantage means that goods are produced at the lowest relative opportunity cost, thus freeing resources for the production of more goods. Even if a country has an absolute advantage, it will still gain from trade, because it is comparative, not absolute, advantage that determines which countries should produce which goods.

Briefly explain how a budget deficit arises and what corresponding action is typically by taken by a government in this type of circumstance

When the federal government spends more than it collects in taxes in a given year, it runs a budget deficit. The government borrows funds to cover its budget deficits by issuing treasury bonds, thus borrowing from the public and promising to repay with interest in the future.

If a government reduces taxes in order to increase the level of aggregate demand, what type of fiscal policy is being used?

expansionary

Goods and services produced in one country that are then sold in other countries are called ____________.

exports

A welder who quits his job and moves from Pittsburgh to Madison to try to get a better welding job is said to be:

frictionally unemployed.

A country's current account balance refers to a broad measure of the balance of trade that includes:

goods and services, international flows of income, and foreign aid.

The term __________ is used to describe what those in one country buy from those in other countries.

imports

Inflation implies that the level of all prices _____________________.

increase

The percentage change in the price level from one time period to the next, whether the price level is measured in terms of money or as a price index, will be the _____________.

inflation rate

When the central bank decides to increase the discount rate, the:

interest rates increase

The unemployment rate may underestimate the true extent of unemployment if:

many people become discouraged and cease looking for work.

Which of the following is a traditional tool used by the Fed during recessions?

open market operations

Reginald looked for work for six months but could not find a job to his liking. He now spends his time at the beach. For purposes of employment he is considered:

out of the labor force.

The Producer Price Index is based on prices paid for supplies and inputs by:

producers of goods and services

One of the reasons that a rise in the price of a fixed basket of goods over time tends to overstate the rise in a consumer's true cost of living, is:

substitution bias

The most commonly cited measure of inflation in the United States is:

the Consumer Price Index (CPI)

Inflation can be calculated in terms of how the overall cost of ___________________ changes over time.

the basket of goods

When the central bank decides it will sell bonds using open market operations:

the money supply decreases

When the central bank lowers the reserve requirement on deposits:

the money supply increases and interest rates decrease.

The U.S. unemployment rate moves up and down as the economy moves in and out of recessions. But over time, the unemployment rate seems to return to a range of ____________.

4%-6%

Each month the Census Bureau carries out the Current Population Survey (CPS) (which has been carried out every month since 1940). A total of __________ households are contacted every month.

60,000

If the unemployment rate is 8 percent, then this means:

8 percent of the labor force is unemployed

Provide a breakdown of a banking institution's sources of revenue and categories of expenses.

A bank receives revenue from two sources- interest payments to the bank from those who have received bank loans, and other fees and charges imposed by the bank. Banks have four main categories of expenses- interest payments to depositors; loans that are not repaid; operating costs of employees, office space and equipment; and taxes.

Briefly explain what a central bank is and what its most important task is

A central bank is an institution which conducts a nation's monetary policy and regulates its banking system.

What is a cost-of-living-adjustment (COLA)?

A contractual provision that wage increases will keep up with inflation

Explain what happens when a country has an absolute advantage

A country has an absolute advantage in those products in which it has a productivity edge over other countries, meaning it takes fewer resources to produce a product

List the major categories that the U.S. government spends its tax revenue on and indicate what percentage of tax revenue is spent on these categories on an annual basis.

About 70% of government spending goes to four major areas: national defense, social security, health care, and interest payments on past borrowing.

List and explain 3 types of unemployment.

Cyclical---unemployment closely tied to the business cycle, like higher unemployment during a recession Frictional---unemployment that occurs as workers move between jobs Structural--unemployment that occurs because individuals lack skills valued b employers

When we want to measure wage inflation in the labor market, we use the:

Employment Cost Index

What happens when a country has an absolute advantage in all goods?

Even when one country has an absolute advantage in all products, trade can still benefit both sides. This is because gains from trade come from specializing in one's comparative advantage.

Contrast government debt with budget deficit or surplus.

Government debts refers to the total amount that the government has borrowed over time; in contrast, the budget deficit or the budget surplus refers to how much has been borrowed in one particular year.

Define fiscal policies

Fiscal policies are the set of policies relating to government spending, taxation, and borrowing.

The ____________________ is based on the prices of merchandise that are exported or imported.

International Product Index

Explain how money is measured in terms of M1 and M2

M1 includes currency and money in checking accounts ,or demand deposits. Traveler's checks are a component of m1, but are declining in use M2 includes all of m1, plus savings deposits, time deposits such as CDs, and money market funds

Briefly discuss the effects of time lags in relation to fiscal policy, including: a comparison to monetary policy, what the level of fiscal policy will be, and its effect on fiscal policy during recession.

Monetary policy can be changed several times each year, but fiscal policy is much slower to be enacted. Many fiscal policy bills about spending or taxes propose changes that start in the next budget year or would be phased in gradually over time. Moreover, the exact level of fiscal policy to be implemented is never completely clear. After a recession has started, it can take many months or even more than a year to begin an expansionary fiscal policy, and even then, uncertainty will remain over exactly how much to expand or contract taxes and spending.

Define money economically and explain some of its functions.

Money is whatever serves society in four functions: as a medium of exchange, a store of value, a unit of account, and a standard of deferred payment.

Explain the money multipler and provide the formula for calculating the multiplier

Money multiplier formula is total money in the economy divided by the original quantity of money, or change in the total money in the economy divided by a change in the original quantity of money

Steve and Craig have been shipwrecked on a deserted island in the South Pacific. Their economic activity consists of either gathering pineapples or fishing. We know Steve can catch four fish in one hour or harvest two baskets of pineapples. In the same time Craig can reel in two fish or harvest two baskets of pineapples.

Steve would be better off because he has more total than Craig. Steve has an absolute advantage in fish production

Steve and Craig have been shipwrecked on a deserted island in the South Pacific. Their economic activity consists of either gathering pineapples or fishing. We know Steve can catch four fish in one hour or harvest two baskets of pineapples. In the same time Craig can reel in two fish or harvest two baskets of pineapples. If they each spend four hours a day fishing and four hours a day harvesting pineapples, how many of each will Steve produce? How many will Craig produce? What will their total production be?

Steve would produce 16 fish and 8 baskets of pineapples. Craig would produce 8 fish and 8 baskets of pineapples. together they would produce 24 fish and 16 baskets pineapples.

Describe "the value chain" and illustrate with an example.

The "value chain" describes how a good is produced in stages; for example, the value chain for making a toaster oven would include making metal, plastic, elements that provide the heat, electrical cords, designing how the parts will fit together, assembly of the toaster ovens, packaging, shipping, and selling in a retail store.

Which of the following institutions oversees the safety and stability of the U.S. banking system?

The Federal Reserve

Briefly explain what the term "balance of trade" refers to from a macroeconomic perspective and include a brief description of how exports and imports influence the balance of trade.

The balance of trade refers to the gap, if any, between a nation's exports, or what its producers sell abroad, and a nation's imports, or the foreign-made products and services purchased by households and businesses. If exports exceed imports, the economy is said to have a trade surplus. If imports exceed exports, the economy is said to have a trade deficit. If exports and imports are equal, then trade is balanced.

Briefly discuss the terms "merchandise trade balance" and "current account balance."

The merchandise trade balance measures only imports and exports of goods. The current account balance includes trade in goods, services, payments on foreign investments, and unilateral transfers.

Identify the most commonly cited measure of inflation in the United States and explain how it is calculated.

The most commonly cited measure of inflation in the United States is the Consumer Price Index (CPI). The CPI is calculated by government statisticians at the U.S. Bureau of Labor Statistics based on the price level based on a basket of goods and services that represents the purchases of the average consumer.

Briefly explain the purpose served by payroll taxes and how they are collected. Describe any comment that economists point out with regard to payroll taxes.

The payroll taxes collect revenues to fund social security and medicare. In both cases, the taxes are technically collected half from employee paychecks and half from employers. However, as economists are quick to point out, the employer's half of the taxes is probably passes along to the employees in the form of lower wages.

Identify and briefly describe all the sources of federal taxes.

The primary sources of federal taxes are individual income taxes and the payroll taxes that finance Social Security and Medicare. Corporation income taxes, excise taxes, and other taxes provide smaller shares of revenue. The government also imposes an estate and gift tax on people who pass large amounts of assets to the next generation—either after death or during life in the form of gifts. Other federal taxes, which are also relatively small in magnitude, include tariffs collected on imported goods, and charges for inspections of goods entering the country.

Describe the formula used to calculate the annual rate of inflation

The rate of inflation is measured as the percentage change between price levels or index numbers over time

Describe what the trade balance measures.

The trade balance measures the gap between a country's exports and its imports.

What do goods like gasoline, tobacco, and alcohol typically share in common

They are all subject to government excise taxes

The labor force consists of

all adults who are working or actively seeking work.

How are the specific interest rates for the lending and borrowing markets determined?

by the forces of supply and demand

A typical ____________________________ fiscal policy allows government to decrease the level of aggregate demand, through increases in taxes.

contractionary

What term is used to describe the interest rate charged by the central bank when it makes loans to commercial banks?

discount rate

Identify the three government policies for assuring safe and stable banking systems

the three government policies for assuring safe and stable banking systems are 1. the provision of deposit insurance to reassure households that their bank deposits are safe 2. examining the financial records of banks to ensure that they have positive net worth and 3. making emergency short-term loans to banks in times of financial chaos.

The term _____________ describes circumstances where a country's imports exceed its exports.

trade deficit

The term _____________ describes circumstances where a country's exports exceed its imports.

trade surplus

Gomer loses his job as a road construction worker and cannot find another position with equivalent pay and benefits. As a result, he is still checking the want ads and reporting to the unemployment office on a weekly basis. He is considered to be:

underemployed

The unemployment rate measures

unemployed workers as a percentage of the labor force.