Macroeconomics final exam

aggregation

A collection of specific economic units treated as if they were one unit.

cost-benefit analysis

A comparison of the marginal costs of a project or program with the marginal benefits to decide whether or not to employ resources in that project or program and to what extent.

contractionary fiscal policy

A decrease in government purchases of goods and services, an increase in net taxes, or some combination of the two, for the purpose of decreasing aggregate demand and thus controlling inflation.

Laissez-faire

A hypothetical economic system in which the government's economic role is limited to protecting private property and establishing a legal environment appropriate to the operation of markets in which only mutually agreeable transactions would take place between buyers and sellers; sometimes referred to as "pure capitalism." (meaning "let it be")

expansion

A period in which real GDP, income, and employment rise. At some point, the economy again approaches full employment. If spending then expands faster than production capacity, the prices of nearly all goods and services will rise, thereby generating a bout of inflation.

demand

A schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time.

consumption schedule

A table of numbers showing the amounts household plan to spend for consumer goods at different levels of disposable income.

What is savings always equal to?

Actual investment

expansionary fiscal policy

An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output

economic growth

An outward shift in the production possibilities curve that results from an increase in resource supplies or quality or an improvement in technology; (2) an increase of real output (gross domestic product) or real output per capita. An increase in real GDP over some time period An increase in real GDP per capita over some time period. with either it is calculated as a percentage rate of growth per quarter or per year.

market

Any institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of a particular good or service.

Property rights are important because they

Are essential for promoting rapid and sustained economic growth. People will not invest if they believe that thieves, bandits, or a rapacious and tyrannical government will steal their investments or their expected returns.

When does actual investment equal savings?

At the equilibrium level of GDP

Why according to the concept of diminishing marginal utility will consumers purchase more of a good when the price falls?

Because consumers derive less satisfaction from consuming additional units of a good, they will only be willing to buy more of a particular good if the good's price decreases. In this way, the law of diminishing marginal utility helps explain the law of demand.

What agency complies the National Income and Product Accounts for the U.S. economy?

Bureau of Economic Analysis

Quantitatively which country is the United States' most important trading partner?

Canada

monetary policy

Central bank's changing of the money supply to influence interest rates and assist the economy in achieving price level stability, full employment, and economic growth.

fiscal policy

Changes in government spending and tax collections designed to achieve full employment, price stability, and economic growth.

What makes up GDP

Consumer expenditures (C) + Government Spending (G) + Investment Spending (I) + (Exports (X) - Imports (M)) final goods and services (only counted once).

What is the name given to the group of three economists who provide fiscal policy recommendations to the president?

Council of Economic Advisers

What is the most important determinant of consumer spending?

Disposable income

What is the basis of most modern banking systems

Fractional Reserve Banking system

What historical event was the basis for John Maynard Keynes creation of the aggregate expenditures model?

Great Depression

Real GDP per capita

Inflation-adjusted output per person; real GDP/population. real GDP/population

Recession

Is a period of decline in total output, income, and employment that lasts at least 6 months. They generate a widespread contraction of business activity in many sectors of the economy. Along with a decline in real GDP, unemployment increases significantly. accompanied by lower real income and higher unemployment.

recession

Is a period of decline in total output, income, and employment that lasts at least six months. It generate a widespread contraction of business activity (lower real income) in many sectors of the economy. Along with a decline in real GDP, unemployment increases significantly.

Inflation

Is a rise in the general level of prices. When it occurs, each dollar of income buys fewer goods and services than before. Inflation reduces the purchasing power of money. But it does not mean that all prices are rising. Even during periods of rapid inflation, some prices may be relatively constant, while others may even fall. It can be troublesome because family's income does not rise as fast as prices do. This will cause families to cut back on purchasing things and will lower their standard of living. it also can reduce the purchasing power of people's savings because of higher costs of living. real GDP, Unemployment, and it are the standards by which economists keep track of long run growth and short run fluctuations.

Dissavings

Is shown as the vertical distance of the consumption schedule above the 45 degree line or as the veritcal distance of the saving schedule below the horizontal axis. occurs at low DI. income- Consumption = Dissaving's

consumer surplus

It is defined as the difference between the maximum price a consumer is (or consumers are) willing to pay for a product and the actual price that they do pay. The max price a person can pay depends on the opportunity cost of that person's consumption alternatives. The maximum willingness to pay also gives us another way to understand demand curves.

What must always be the case for a nation's balance of payments?

It must always equal zero

What does the theory of comparative advantage tell us about where a good should be produced?

It will be produced in a country where the cost is least in terms of alternative goods that might otherwise be produced.

The equation of exchange states that

MV=PQ in which M is the supply of money V is the velocity of money, P is the price level, and Q is the physical volume of final goods and services produced.

What has been the tendency in countries which have experienced modern economic growth?

Move toward more democratic forms of government

What are the only two things that individuals and firms can exchange in International Financial Transactions?

Preexisting assets and currently produced goods and services.

medium of exchange

Purchasing groceries using a debit card best exemplifies money serving as a

discretionary fiscal policy

Refers to changes in government spending and taxes that are at the option of the federal government. They do not occur automatically. The current congress must pass a discretionary spending or tax bill and the president must sign it into law.

unit of account

Stock market price quotations best exemplify money serving as a

excess reserve

The amount by which a commercial bank's or thrift institution's actual reserves exceed its required reserves; actual reserves minus required reserves.

opportunity cost

The amount of other products that must be forgone or sacrificed to produce a unit of a product.

allocative efficiency

The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal, and at which the sum of consumer surplus and producer surplus is maximized.

store of value

The asset demand for money is most closely related to money functioning as a

What are the basic assumptions of the aggregate expenditures model?

The average price level in the economy is fixed

What are the two most important factors influencing investor preferences

The desire for high rates of return and dislike of risk and uncertainty.

Know the difference between money inflows and money outflows in terms of the U.S. Balance of payments.

The difference between cash inflow vs cash outflow is fairly straightforward. Cash inflow is the cash you're bringing into your business, while cash outflow is the money that's being distributed by your business.

producer surplus

The difference between the actual price a producer receives (or producers receive) and the minimum price that consumer would pay to the producer to make a particular unit of output available. A producer's minimum acceptable price for a particular unit will equal the producer's marginal cost of producing that unit. on supply curve

competition

The effort and striving between two or more independent rivals to secure the business of one or more third parties by offering the best possible terms.

International Trade

The exchange (trade) of goods and services across international borders. encompasses all cross-border purchases and sales of currently produced goods and services.

What is included in the current account section of a nation's balance of payments?

The exports of goods and services of a nation less its imports of goods and services plus its net investment income and net transfers in a year.

a nation's trading possibilities curve is positioned to the right of its production possibilities curve.

The fact that international specialization and trade based on comparative advantage can increase world output is demonstrated by the reality that:

Define M.P.C. and what it does

The fraction of any change in disposable income spent for consumer goods; equal to the change in consumption divided by the change in disposable income.

What is a bank's reserve ratio made up of?

The fraction of checkable deposits that each commercial bank or thrift institution must hold as reserves at its local Federal Reserve Bank or in its own bank vault; also called the reserve requirement.

freedom of enterprise

The freedom of firms to obtain economic resources, to use those resources to produce products of the firm's own choosing, and to sell their products in markets of their choice.

Market failure occurs when:

The inability of a market to bring about the allocation of resources that best satisfies the wants of society; in particular, the overallocation or underallocation of resources to the production of a particular good or service because of externalities or informational problems or because markets do not provide desired public goods.

foreign purchases effect

The inverse relationship between the net exports of an economy and its price level relative to foreign price levels.

velocity of money

The number of times per year that the average dollar in the money supply is spent for final goods and services; nominal GDP divided by the money supply.

Macroeconomics

The part of economics concerned with the performance and behavior of the economy as a whole. Focuses on economic growth, the business cycle, interest rates, inflation, and the behavior of major economic aggregates such as the household, business, and government sectors.

peak

The point in a business cycle at which business activity has reached a temporary maximum; the point at which an expansion ends and a recession begins. At the peak, the economy is near or at full employment and the level of real output is at or very close to the economy's capacity. The price level is likely to rise during this phase.

Trough

The point in a business cycle at which business activity has reached a temporary minimum; the point at which a recession has ended and an expansion (recovery) begins. At this the economy experiences substantial unemployment and real GDP is less than the potential output. Output and employment bottom out at their lowest point. This phase is either very short-lived or very long.

The law of demand states that

The principle that, other things equal, an increase in a product's price will reduce the quantity of it demanded, and conversely for a decrease in price.

open market operations

The purchase and sale of U.S government securities that the Federal Reserve System undertakes in order to influence interest rates and the money supply; one method by which the Federal Reserve implements monetary policy

real balances effect

The tendency for increases in the price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output, and conversely for decreases in the price level.

Value Added

The value of a product sold by a firm less the value of the products (materials) purchased and used by the firm to produce that product.

Utility

The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services).

characteristics of a public good

They are actually distinguished by nonrivalry and Nonexcludability. These characteristics create a free rider problem. Once a producer has created this good everyone including nonpayers can obtain the benefits. They would also be willing to pay for it if the producer could somehow force them to pay. However, the willingness to pay is not recorded in the market. The producer viewpoint is that free riding lower demand and that is the reason why private firms do not produce these goods except for TV because, the unprofitability of the market. However, TV is marketable because they can control which other firms get commercial ad aired. Thus, society must turn to nonmarket provisions by entities that do not have to worry about profitability. Private philanthropy is an option but it would not cover the cost of national defense or public education so the government must take care of it. It does this by funding the production of theses goods through taxation. The two ways these products are produced are by private philanthropy (firework displays and public art) and the government (national defense). The amount produced is determined through surveys or public votes. Making it where MB=MC

How did goldsmiths invent paper money

They used the money that people had deposited in their safes to back the receipt's they were issuing people for the value of the gold they deposited. They also realized that the amount they were bring in was greater than the amount that was being taken out.

Present Value

Today's value of some amount of money that is to be received sometimes in the future.

negative externality or spillover costs

a cost imposed without compensation on third parties by the production or consumption of sellers or buyers. Example: a manufacturer dumps toxic chemicals into a river, killing the fish sought by sports fishers; an external cost or a spillover cost. Occurs when producers or suppliers impose costs on third parties who are not directly involved in a market transaction. This will shift the supply curve to the right of below where they would be if firms properly accounted for all costs.

What would cause the demand for money to shift to the left?

a decline in nominal GDP.

How are federal reserve notes in circulation viewed

a liability as viewed by the Federal Reserve Banks. Currency or dollar bills.

bank panic

are a risk of fractional reserve banking but are unlikely when banks are highly regulated and lend prudently

What type of securities has the Federal Reserve added in a significant amount since the 2008 financial crisis?

common stock .corporate bonds.Treasury bills, Treasury notes, and Treasury bonds.certificates of deposit. Treasury bills, Treasury notes, and Treasury bonds.

APC

consumption/income

Cash inflows

describes all of the income that is brought to your business through its activities- any strategy to bring profits into the business. Maintaining a strong cash inflow will keep your business afloat and allow you to reinvest and grow your business as you cover general expenses. Cash Inflow Includes: Proceeds from sales of goods or services Returns on investments Financial activities Interest built over time periods Businesses typically make the majority of their cash inflow by selling products or services to customers and clients, invoicing them for the order, and then receiving payment. Growing businesses may also choose to invest in stocks or other companies and gain profits from those investments as well. It is considered a credit

What causes differences in production efficiencies among nations?

different endowments of fertile soil, different amounts of skilled labor and different levels of technological knowledge

Describe the relationship between quantity supplied and price.

direct relationship or positive relationship

What must be present for mutually beneficial trade to occur between two nations?

each nation must be able to produce at least one good relatively cheaper than the other.

What is included in a private closed economy?

households and businesses, but not government or international trade.

Why is it said to be costly to hold money?

in doing so, one sacrifices interest income.

Non-excludability

means there is no effective way of excluding individuals from the benefit of the good once it comes into existence. You cannot exclude someone from benefiting from national defense, street lighting, or global positioning.

What does real GDP measure?

measures the value of the final goods and services produced within a country's borders during a specific period of time, typically a year.

What view of economics is Milton Friedman most closely associated with?

monetarism.

What is included in the U.S. M1 money supply

narrow definition of the U.S money supply Currency ( coins and paper money) in the hands of the public Checkable deposits in commercial banks and thrift or savings institutions on which checks of any size can be drawn, at any time and as often as desired.

Cash outflows

payments in cash made by a business, such as those to suppliers and workers includes any debts, liabilities, and operating costs- any amount of funds leaving your business.

Phases of the business cycle

peak, recession, trough, expansion

purposeful behavior

people weigh costs and benefits to make decisions

To what does final goods and services refer?

products that the final consumer uses or consumes without any further processing

What must happen for a nation's real GDP per capita to rise?

real GDP must increase more rapidly than population.

How do economists use the term demand

refer to the amount of some good or service consumers are willing and able to purchase at each price.

reserve ratio formula

reserves/deposits

What industry would you expect to be most impacted by a recession?

retail

What does the business cycle show?

shows the ups and downs of the economy by looking at the phases an economy can go through.

What are the functions of money and what is meant by each?

store of value, unit of account, medium of exchange

barter

the direct exchange of one set of goods or services for another. Poses serious problems because it requires a coincidence of wants between buyers and sellers. money is not used in this. It is a medium of exchange.

aggregate demand curve shows:

the relation between the aggregate quantity of goods demanded and the price level. The relationship between the aggregate price level and the quantity of aggregate output demanded by everyone

Economics

the social science concerned with how individuals, institutions, and society make optimal (best) choices under conditions of scarcity

In terms of economic growth what does the long-run trend refer to?

the sustained upward trend in the economy's output over time

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).

What do the real-balances, interest-rate, and foreign purchases effects help explain?

why the aggregate demand curve is downsloping.

How is GDP reported?

✷ GDP is the total market value of all final goods and services produced in an economy in a specific time period, usually a year.✷ Economists typically compute GDP by adding four types of expenditures in the economy: consumption (C), investment (I), government spending (G), and net exports (NX). Net exports are total exports minus total imports.✷ For many applications, it is also necessary to compute real GDP, adjusting GDP for changes in prices (inflation).