Econ 210 final exam

Illiquid Bank

A bank whose short-term liabilities are greater than its short-term assets but overall has assets that are greater than its liabilities

Insolvent bank/firm

A bank/firm whose liabilities are greater in value than its assets

Zero-coupon bond (or discount bond)

A bond that pays only at maturity

Human Capital

A business that pays for its workers to attend a technical college is increasing its:

research and development

A country increases its technological knowledge by engaging in:

left and up

A decrease in the supply of savings is shown by shifting the SUPPLY curve to the:

Patent

A government grant of temporary monopoly rights, typically 20 years from the date of filing

Lender of Last Resort

A lender that loans money to banks & other financial institution when no one else will, often a central bank or a country's Treasury or Finance department

Illiquid

A liquidity crisis occurs when banks are:

A money market mutual fund

A metal fund invested in relatively safe short-term debt & government securities

Private marginal benefit

A profit-maximizing firms invests in research & development so long as the _________________ is greater than the marginal cost

the growth rate of human capital

A reliable way to achieve faster growth in real GDP per capita is to increase:

Solvency Crisis

A situation that exists when money banks are insolvent

Liquidity Crisis

A situation that occurs when banks do not have enough liquid assets to meet their liability demands

Bond

A sophisticated IOU that documents who owes how much and when payment must be made

Fractional reserve banking

A system in which banks hold only a portion of deposits in reserve, lending the rest

Money

A widely accepted means of payment

labor, capital, and ideas

According to the Solow Model, output is a function of the quantity of:

Default Risk

All bonds involve a risk that when the payments come due, the borrower will not be able to pay, this is called a:

Demand, left

All else equal, if consumers decide to borrow less the _________ curve in the market for loanable funds will shift to the __________

raise prices above competitive levels

An argument agains patents is that they:

create incentives for research and development

An argument in favor of patents is that they:

Liquid asset

An asset that can be used for payments, or quickly & without loss of value, can be converted into a asset used for payments

An increase in economic growth

An increase in physical capital will lead to:

right and down

An increase in the supply of savings is shown by shift the SUPPLY curve to the:

Returns

Arbitrage ensures that equally risky assets earn equal ________

increases, increases

As a result of an increase in the growth of the money supply, real GDP growth __________ only in the short run, and the inflation rate ____________ in both the short run & the long run

charging more for their loans than they pay for the savings

Banks earn profit by:

Borrow

Based on the lifecycle theory, people in college tend to:

Dissave

Based on the lifecycle theory, people in retirement tend to:

Save

Based on the lifecycle theory, people in their prime working years tend to:

Change in Reserves x money multipliers

Change in money supply equation

Market Transaction

Cleaning your own home is not included in GDP because it does not involve a:

The monetary Base (MB)

Currency & total reserves held at the Fed

M1

Currency plus checkable deposits

capital accumulation, technological development

Difference between catching up growth from cutting edge growth: Catching-up growth comes primarily from ___________ while cutting-edge growth comes from __________________

the marginal product of capital

Diminishing returns to capital implies that _________ dimities as more capital is added

E= value of the asset - the debt

Equity equation

An increase in the politicization of lending

Financial intermediation may fail if something causes:

both the factor income & national spending approaches

GDP can be calculated by which approach

GDP per capita

GDP divided by a countrys population

Protecting intellectual property

Governments can play a role in supporting the production of new ideas by:

Supply of funds

Greater risk can reduce the ___________________ to the market as a whole

Federal Deposit Insurance Corporation

Guarantees bank deposits up to $250,000 for each depositor named on an account

Savings

Higher interest raters usually call forth more _____________

1260

If GDP for a certain economy is $1200 billion at the end of the year 1 & it grows by 5%, what will be the GDP at the end of year of 2?

5.5%

If GDP in year 1 is $10,000 & GDP in year 2 is $10,500 then they growth rate between the 2 years is?

28 years

If GDP per capita is $1,000 & it grows at 5% annual interest, approximately how long will it take before it is $4,000?

100,000

If banks wants to maintain a RR of 1/10, & the Fed increases by $10,000, but how much must the money supply increase?

savings

If for a certain individual money spent on goods and & money spent on services < income, then this individual also has:

decrease, rise, decrease

If individuals become more impatient, what will happen in the market for loanable funds?--> The supply of loanable funds will ______, interest rates will ________, and the quantity of saving & borrowing will _________.

3.2%

If nominal GDP in 2006 for the U.S. was $13,177.3 billion & real GDP in 2006 (using 2005 as the base year) was $12,958.5 billion, how much was there between 2005 & 2006?

Real

If pressed to choose a single indicator of current economic performance, most economists would probably choose ______ GDP growth

Sell bonds in open market operations

If the Fed wants to increase interest rates, it should:

buy

If the Fed wants to increase the money supply, it will _______ Treasury Securities

Temporary (to encourage firms to invest quickly)

If the government offers an investment tax credit during a recession in order to stimulate investment demand, it will probably make the tax credit:

Decrease, decrease

If the government raises taxes on investment returns, then they demand for loanable funds will __________ & the equilibrium interest rate will __________

Both, increase

If the interest rate increases, then ______ the quantity saved & the quantity supplied of loanable funds will ____________

Depositors

In a commercial bank, the money comes from:

Investors

In an investment bank, the money comes from:

poor

In regard to distribution of income, GDP is a _______ measure

Savings

Income that is not spent on consumption goods

formal education and job-specific training

Increase in human capital can come from:

Smooth

Individuals want __________ consumption over time

A decrease in the supply of savings

Insecure property rights typically lead to:

Opposite Directions

Interest rates & bond rates move in ___________________

Capital Growth equation

Investment - Depreciation

create incentives to research and develop new products while avoiding too much monopoly power

It can be difficult for policymakers to:

M2

M1 plus saving deposits, money market mutual funds, & small time deposits

large-scale production

Many goods in India were produced inefficiently, because prohibitions against ______________ prevented Indian manufacturers from taking advantage of economies of scale

Gross National Product (GNP)

Measures what is produced by the labor and property supplied by U.S. permanent residents wherever in the world that labor or capital is located, rather than what is produced within in the U.S. border

Y=? (in national spending approach)

Nominal GDP

Slow and consistent

Over the past 200 years, economic growth in the U.S. has been:

Decrease

Paying a higher interest rate on reserves held at the Fed will tend to _____________ the money supply

Investment spending

Private spending on tools, plant, and equipment used to produce future output (i.e., the purchase of new capital goods) (business spending)

capital, marginal product of capital

Reason why growth in China has been so rapid recently: China began with very little ______, so its ______________ was very high

The Term of Auction Facility

Sets a certain quality of reserves, and then the Fed reduces the interest rate until banks borrow the money

Government spending

Spending by all levels of government on final goods and services not including transfers

stock exchanges

Stocks are traded on organized markets called:

Institutions

The "rules of the game: that structure economic incentives

Short-term real interest rates

The Fed has the most influence over:

12

The Fed is _____ Federal Reserve Banks, each headquartered in a different region of the country

The government and private banks

The Federal Reserve's customers are:

19th

The U.S. & Western European countries began to experience accelerated economic growth during the ___________ century

Fed

The _____ is a quasi private, quasi public institution

Economies of scale

The advantages of large-scale production that reduce average cost as quantity increases

Open market operations

The buying & selling of government bonds by the Fed

Crowded Out

The decrease in private consumption & investment that occurs when government borrows more

Owners Equity

The difference between the value of a house & the unpaid amount on the mortgage

Iron Logic of diminishing returns

The first unit of capital increases output by one unit, but as more & more capital is added, output increases by less & less

recapitalization

The goal of ________________ is to get banks on their feet again and thus get them lending again

decrease in investment demand

The government may offer an investment tax credit during a recession in order to counteract the:

3.3%

The growth rate of the population is 1.2% and the real GDP growth per capita is 2.1&. The real GDP growth rate is?

Interest, smaller

The higher the ________ rate, the __________ the quantity of funds demanded for investment

Supply of loans

The increase in the money supply increases the:

Discount Rate

The interest rate banks pay when they borrow directly from the Fed at the discount window

institutions; incentives

The key to producing & organizing the factors of production are _____________ that create appropriate _____________

Savings accounts, money market mutual funds, & small time deposits

The largest means of payment are:

The New York Stock Exchange (NYSE)

The largest stock exchange in the world

Quantity of loans demanded

The lower interest rates increase the:

Interest, greater

The lower the __________ rate, the ___________ the quantity of funds demanded for investment

Loans

The main asset of fractional reserve banks

NX=? (in national spending approach)

The market value exports minus the market value of imports

G=? (in national spending approach)

The market value of government purchases

I=? (in national spending approach)

The market value of investment goods, also called capital goods

U.S. GNP only

The market value of the output produced in another country by a permanent U.S. citizen would be included in:

mathematics, physics, & molecular biology

The modern world is founded on:

The Federal Reserve

The money we use in the U.S. is provided by just one bank:

Currency, total reserves held by banks at the Fed, checkable deposits, & saving deposits, money market mutual funds & small-time deposits

The most important assets that serve as means of payment in the U.S. are:

Federal Funds Rate

The overnight lending rate from one major bank to another

Leverage Ratio

The ratio of debt to equity ( D/E)

Systematic Risk

The risk that the failure of one financial institution can bring down other institutions as well

Advances in technological knowledge

The source of cutting-edge growth is:

The nations payment system

The system of accounts that make it possible to write checks from one bank to another

Net Exports

The value of exports minus the value of imports

real

Time preference reflects the fact that today feels more _________ than tomorrow

The market value of only goods & services

To calculate GDP we use:

Carry out open market purchases and/or lower the discount rate

To increase the money supply in the economy, the Fed would:

the social benefits exceed the private benefits

To say that research & development generate spillovers is to say that:

easy to buy & sell and the U.S. government is unlikely to default on its payments

Treasury Securities are desirable for money investors because they are:

Property rights

Under communal property, effort is divorced from payment, so there is little incentive to work. This demonstrates the important of _________________ as an institution

Currency

Usually the most liquid asset

countries with higher rates of investment will be wealthier

What does the Solow Model predict?

increases both m1 & m2

What effect does an increase in reserves have on the money supply?

there are few entrepreneurs

What is a result of a high level of government corruption?

Profit

What is left over after everyone else have been paid

Interest

When __________ rates rise, bond prices fall

Moral Hazard

When an agent tries to exploit an information advantage in a dishonest or undesirable way

moral hazard

When banks take on too much risk with the hope that the Fed will eventually bail them out, a condition of ________________ exists

Securitized

When mortgage loans are bundled together & sold on the market as financial assets

Initial Public Offering

When new stocks are issued & it is the first time a stock is sold to the public

Decreases, increase

When the Fed sells government bond in the open market, the monetary base _____________ & interest rates ___________

Quantitative Tightening

When the Fed sells longer-term government bonds or other securities

rightward, supply

Which events would cause the equilibrium interest rate in the market for loanable funds to decrease: A __________ shift in the ________ of loanable funds

Fire Sale

Without the short-term loans, the investment bank no long has enough operating funds & it is forced to sell off assets quickly in what is often called a:

National Spending approach to GDP

Y=C+I+G+NX

Factor Income approach to GDP

Y=wages + rent + interest + profit

Nominal, real

Your _______ wage is the number on your paycheck, but your _______ wage is that number adjusted for changing prices

Transfers

________, such as Security Payments, are not included in government purchases

GDP Deflator

a price index that can be used to measure inflation

The national bureau of economic research (NBER)

a research organization based in cambridge, Massachusetts, is considered the most authoritative source on identifying U.S. recessions

Recessions

a significant, widespread decline in real income & employment

Nominal GDP

calculated using prices at the time of sale

Real GDP

calculated using the same price in all years

The logical of diminishing returns

eventually capital & output will stop growing

A production function

expresses a relationship between output and the factors of production, namely the exact way in which more inputs will produce more outputs

INTERMEDIATE goods and services

goods & services that are sold to firms and then bundled or processed with other goods for sale at a later stage

Catching-up growth

growth due to capital accumulation

Cutting-edge growth

growth due to new ideas

Rule of 70

if the annual growth rate of a variable is X%, then the doubling time is 70/x years

Steady State

in a model of economic growth, a situation in which the capital stock is neither increasing nor decreasing

Property rights, honest government, political stability, a dependable legal system, competitive & open markets

institutions of economic growth

Financial intermediaries

institutions such as banks, bond markets, and stock markets that reduce the costs of moving funds from savers to borrows & investors

The discount window

intende to help out banks in financial stress when they cannot borrow from the private sector

Technological knowledge

knowledge about how the world works that is used to produce goods & services -- it is potentially boundless

Liabilities

legal debts plus other amounts owed (ex: wage payments)

The Solow Model

model of the wealth of nations & economic growth

GDP deflator formula

nominal gdp / real gdp x 100

Non priced production

occurs when valuable goods & services are produced but no explicit monetary payment is made

Facts of production

physical capital, human capital, and technological knowledge

Consumption

private spending on financial goods & services (household spending)

Tax Credit

projects that were unprofitable without the credit are profitable with the credit, so at any given interest rate firms are willing to invest more when this is available

The lifecycle theory of savings

puts the demand to borrow & save together

National Wealth

refers to the value of a nations entire stock of assets

Stocks

shares of ownership in a corporation

FINAL goods or services

sold to final users and then consumed or held in personal inventories

Free Rider

someone who consumes the benefits of a public good without playing a share of the costs

Collateral

something of value that by agreement becomes the property of the lender if the borrower defaults

Growth rate of GDP

tells us how rapidly the country's production is rising or falling over time

Discount window borrowing

tends to be used for short-run "tide-me-overs" rather than for long-run monetary policy decisions

Money Multiplier (MM)

the amount the money supply expands with each dollar increase in reserves-- 1/RR

Investment=Depreciation

the capital stock & outputs are constant

Investment>Depreciation

the capital stock grows & output next period is bigger

Investment<Depreciation

the capital stock shrinks and output next period is smaller

Checkable deposits

the deposits we use most often in making daily transactions

Time preference

the desire to have goods and services sooner rather than later

Economic growth

the growth rate of real GDp per capita

Marginal product of Capital

the increase in output caused by the addition of one more unit of capital

C=? (in national spending approach)

the market value of consumption goods & services

Market for loanable funds

the market where suppliers of loanable funds (savers) trade with demanders of loanable funds (borrowers), thereby determining the equilibrium interest rate

Arbitrage

the practice of taking advantage of price differences for the same goods in different markets by buying low in one market & selling high in another market

Reserve Ratio (RR)

the ration of reserves to deposits-- determined by how liquid banks wish to be

Business fluctuations or Business Cycle

the short-run movements in real GDP around its long-term trend

decline in real GDP

the single best indicator of a recession

Physical capital

the stock of tools including machines, structures, and equipment (pencils, desks, tractors, cell phones, etc.)

Conditional Convergence

the tendency among countries with similar steady state levels of output

Gross Domestic Product (GDP)

the value of all final goods and services produced within a country in a year

Human capital

tools of the mind, the stuff in peoples heads that makes them productive-- it is not something we are born with, it is produced by an investment of time & other resources in eduction, training, & experience

M1 & M2

what has the most significant effect on aggregate demand

Non-Rivalrous goods

when one person's use of the good does not reduce the ability of another person to use the same good