Econ ~ Ch. 3

What can be a source of short-run macroeconomic instability?

Financial market fluctuations

The table contains information on the price per month and the monthly demand and supply of online music streaming subscriptions. Price Quantity demanded (thousands) Quantity supplied (thousands) $ 10.80 290 220 $ 11.00 250 250 $ 11.20 200 320 $ 11.40 120 450 What is the quantity demanded at $ 11.20 ? What is the quantity supplied at $ 11.20 ? At what price is the quantity supplied equal to 220,000?

Quantity demanded is 200 thousand subscriptions Quantity supplied is 320 thousand subscriptions $11

Liquid Asset

Quickly converted to cash

An increase in the supply of loanable funds leads to a _______ in the equilibrium interest rate.

fall or decrease

The table contains information on the price per month and the monthly demand and supply of online music streaming subscriptions. Price Quantity demanded (thousands) Quantity supplied (thousands) $11.40 590 440 $11.60 530 460 $11.80 490 490 $12.00 440 560 What are the equilibrium price and quantity? Equilibrium price: Equilibrium quantity:

$ 11.80 490 thousand subscriptions

Consumer spending goes up by $6 billion Disposable Income goes up by $10 billion What is the MPC?

$6 Billion ----------- = 0.6 $10 Billion

What are the 3 factors investment spending depends on?

1. Interest Rate 2. Expected future level of real GDP 3. Current level of production capacity

The accompanying graph represents a hypothetical market for luxury automobiles. Suppose that a major luxury car producer exits the market in order to produce more economy cars. At the same time, a market research group reports that the average price of a luxury car is increasing and the number of luxury cars sold is increasing. Manipulate the graph to demonstrate what must be happening to supply and demand.

Demand is maxed and Supply increases

An increase in the demand for loanable funds leads to a _________ in the equilibrium interest rate.

rise or increase

Fisher Effect

the expected real interest rate is unaffected by the change in expected future inflation

Marginal Propensity to Save (MPS)

the fraction of additional dollar of disposable income that is saved

Marginal Propensity to Consume (MPC)

the increase in consumer spending when disposable income rises by $1

Crowding out

the negative effect of budget deficits on private investment, which occurs because government borrowing drives up interest rates

Multiplier

the ratio of the total change in real GDP caused by an autonomous change in aggregate spending to the size of that autonomous change

consumption function

the relationship between consumption spending and disposable income

The accompanying graph represents the supply of printer ink cartridges. The current price of ink (per cartridge) is $20 and indicated by the point on the supply curve. Suppose the price of cartridges increases to $24. Illustrate on the graph how the market for Ink Cartridges changes.

line stays the same, point moves along line to $24

Savings = _______________ + __________________

national savings + net capital inflow

net capital inflow

the total inflow of funds into a country minus the total outflow of funds out of a country

Stone and brick are substitutes in home construction. Consider the market for bricks depicted below. Suppose the price of stone increases due to new regulations for the stone quarrying industry. Illustrate the impact this will have on the market for bricks. 1. Equilibrium price 2. Equilibrium quantity

1. Increases 2. Increases Graph - Supply stays the same, Demand increases

USA's equilibrium interest rate is 6% Britain's is 2%. Where does the capital flow from and to who?

From Britain to the USA

What is the GDP equation?

GDP = C + I + G + X - IM

What causes the DEMAND curve for loanable funds to shift right?

Increase in government deficit.

The higher the interest rate, the qty of loanable funds supplied ___________?

Increases

Diversification

Investing in several assets to reduce risk

Supposed the expected inflation rate rises from 3% to 6%. How will the real interest rate be effected?

It will remain unchanged (Fisher effect)

The accompanying graph contains individual supply curves for the only two firms in a hypothetical market for stuffed animals. Place the market supply curve at the correct location on the graph. What happens to the market if a third supplier enters the market, holding all else constant?

Market line is 5000 animals for $1 & 9000 animals for $8. This is the total from both firms combined. Market Supplies increases.

Who collects annual data on family income and spending?

(BLS) Bureau of Labor Statistics

What causes the DEMAND curve for loanable funds to shift left?

1. Changes in business opportunities 2. Changes in government borrowing

What are the 2 causes of shifts of the aggregate consumption function?

1. Changes in expected future disposable income 2. Changes in aggregate wealth

The U.S. government has subsidized ethanol production since 1978. With the advent of affordable electric cars, policymakers are considering whether to allow the subsidy to expire. The accompanying graph represents the market for ethanol. Move the supply and/or demand curves to show how reducing the subsidy will affect the ethanol market Equilibrium price Equilibrium Quantity

1. Increases 2. Decreases Demand remains the same and supply decreases.

Andrew, a college student, loves drinking coffee late at night to study for exams. Having no income, he is used to buying cheap, bad-tasting coffee, such as Beanlightened, that he needs to grind and brew himself. The coffee tastes putrid but, with enough cream and sugar, Andrew is able to tolerate it. Occasionally, he does go out to Starbucks when he has spare money. After graduation, Andrew gets a job working at a database firm as a programmer. His income is now a healthy $75,000 a year, and he decides he has had enough bad-tasting coffee. He ends up buying coffee daily from Starbucks, even though it costs significantly more than Beanlightened. 1. In economic terms, Starbucks coffee is for Andrew a(n) 2. Beanlightened coffee is for Andrew a(n) 3. Andrew's demand for Starbucks Coffee changed as a result of...

1. Normal Good 2. Inferior Good 3. a change in income.

3 versions of slope

1. Rise over run 2. Change in (c) / Change in (yd) 3. MPC

Suppose the cost of lithium-ion batteries, an input into the production of electric vehicles, has dropped more steeply than expected. The accompanying graph depicts a market for electric vehicles. Demonstrate the effect of a reduction in the price of lithium-ion batteries by adjusting the accompanying diagram. Equilibrium price Equilibrium Quantity

1. decreases 2. increases Demand remains the same and supply increases.

Types of financial intermediaries

1. mutual funds 2. pension funds 3. life insurance companies 4. banks

Three tasks of a financial system

1. reducing transaction costs 2. reducing risk 3. providing liquidity

The demand schedule for chicken feet, a dim sum delicacy served at some Chinese restaurants, is shown in the table. Although some people find the texture strange, others have developed a taste for it. Price of chicken feet (per pound) Quantity of chicken feet demanded (millions of pounds) in 2008 Quantity of chicken feet demanded (millions of pounds) in 2018 $ 3.00 3.0 9.2 $ 2.50 3.2 9.9 $ 1.25 3.6 10.3 $ 1.00 4.1 12.2 $ 0.50 5.7 15.0 How many more chicken feet were demanded in 2018 , at a price of $3.00 a pound, than in 2008 ? Based on the demand schedule, you conclude...

6.2 million pounds the demand curve shifted to the right.

The accompanying table contains the individual demand schedules of dark chocolate for Vanessa and Angela. Assuming they are the only people in the market for dark chocolate, place each of their individual demand curves and the market demand curve at the correct locations on the accompanying graph. Price of dark chocolate (per pound) Pounds of dark chocolate demanded by Vanessa Pounds of dark chocolate demanded by Angela $8 1 3 $1 3 5 After a while, Angela gets sick of eating the bitter chocolate and decides to cut back on dark chocolate and enjoy white chocolate more. What happens as a result of Angela's decision? Select all of the correct answers.

Angela's individual demand for white chocolate increases. Angela's individual demand for dark chocolate decreases. The market demand for dark chocolate will decrease.

During the Obama administration, the development of low-cost batteries for electric cars received large amounts of federal funding in terms of subsidies. Meanwhile, American households gave a higher priority towards minimizing their environmental impact. Consider the market for zero-emissions electric vehicles where there is an upward-sloping supply curve and a downward-sloping demand curve. Which direction will demand and supply shift? What will happen to the equilibrium price? What will happen to the equilibrium quantity?

Both curves will shift right. Change is ambiguous. Quantity increases.

What does the GDP equation stand for? GDP = C + I + G + X - IM

C = consumer spending I = Investment Spending G = Government purchases X = Exports IM = Imports

The accompanying supply and demand graph represents a hypothetical market for spaghetti pasta. Demonstrate how an increase in the price of penne, a different type of pasta, and a decrease in the price of meatballs will affect the supply and demand of spaghetti pasta. Assume that producers of spaghetti pasta do not also produce penne.

Graphs Supply is same Demand is more

What is the multiplier if MPC is 0.5 and 0.8?

MPC = 0.5 Multiplier : 1/(1 - 0.5) = 2 MCP = 0.8 Multiplier : 1/(1-0.8) = 5

Supposed the expected inflation rate rises from 3% to 6%. How will the nominal interest rate be effected?

Rise by 3%

Classify each scenario according to whether the change in quantity is caused by a shift in the supply curve or movement along the supply curve.

Shift of the supply curve - After discovering that flash-steaming tuna before using mechanical processes to extract meat removes more tuna flesh, more cans of tuna arrive on the shelves at all major grocers. - Amplitude decides to join the smartphone market. Movement along the supply curve - Rising wages for construction workers in Toronto result in construction workers moving to Toronto. - Americans sell their gold and silver jewelry as a result of rising prices. - A national consumer products company produces less of its premium quality soap as a result of lower soap prices.

The accompanying graph depicts a hypothetical market for analog TVs. In June 2009, the U.S. Federal Communications Commission (FCC) mandated that all over-the-air television broadcasts originating in the U.S. must be broadcast digitally instead of the traditional analog signal. These digital transmissions cannot be decoded by traditional analog TVs but require either a digital decoder be attached to an analog TV or a natively digital TV. Both producers and consumers were made aware of the upcoming switch from analog transmission to digital several years before the mandate took effect. Demonstrate on the graph how the market for analog TVs changed immediately following the announcement of the switch to digital.

Supply increases and demand decreases

Bank Deposit

a claim on a bank that obliges the bank to give the depositor his or her cash when demanded

According to the law of demand,

a decrease in price increases quantity demanded.

autonomous change in aggregate spending

an initial rise or fall in aggregate spending at a given level of real GDP

MPC = ?

change in consumer spending/change in disposable income

As there is more retired people in the economy, the supply of loanable funds ___________

decreases

As there is a net capital inflow into the economy, the supply of loanable funds ____________

increases

The lower the interest rate, the quantity of loanable funds demanded ___________?

increases

The demand curve

is a graphical representation of the relationship between price and quantity demanded.

What is the most important factor affecting interest rates?

is changing expectations about future inflation.

Suppose the accompanying graph depicts a market for one pound bags of candy. Place the line labeled Excess Demand at a price that would generate an excess demand (shortage). Then, determine the size of the excess demand.

line = anything below equilibrium Excess demand = 4 million bags

Multiplier =

1 --------- 1 - MPC

Four main types of financial assets

1) loans 2) bonds 3) stocks 4) bank deposits

MPS = __________

1-MPC

Suppose that there has been a sudden influx of refugees in the small town of Dallon, leading to a doubling of the local population. The accompanying graph depicts Dallon's market for food. Adjust the graph to show the immediate impact that this rise in population has on the food market. Then determine what happens to equilibrium price and quantity. 1. Equilibrium price 2. Equilibrium quantity

1. Increases 2. Increases Graph - Supply stays the same, Demand increases

Categorize each scenario as describing a movement along a demand curve or a shift of the demand curve.

Shift of the demand curve -A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes even though price remains the same. Movement along the demand curve -A movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship.

For each example listed, decide if the good is a normal good or an inferior good. Make sure you answer from the perspective of the individual or individuals doing the buying or consuming. 1.Billy's mom increases his weekly allowance by $5 . As a result, Billy increases the number of apps he downloads on his smartphone. Smartphone apps are 2.Susan gets a 15 percent performance bonus at work. She can finally stop eating so many frozen pizzas and eat something more tasty. Frozen pizzas are 3.Mike is an appliance salesman. Refrigerator sales in his store have fallen and so has his commission. Mike decides to switch from name brand cereal to generic cereal. Generic cereal is 4.Hair stylist Molly loses a few of her clients. Molly cuts back on the number of smoothies she buys during the week. Smoothies are

1. a normal good 2. an inferior good 3. an inferior good 4. a normal good

The figure shows the supply and demand for online music. Suppose that an economic downturn decreases household wealth and erodes consumer confidence. Move the supply and/or demand curves to reflect the primary effect this would have on the market for online music. You can assume that online music is a normal good. Also select the end result of equilibrium price and quantity. 1. Equilibrium price 2. Equilibrium quantity

1. decreases. 2.decreases. graph - Supply stays the same, Demand decreases

T or F An increase in the demand for loanable funds leads to a rise in the interest rate.

True

T or F Investment in physical capital is necessary for long-run economic growth.

True

Does savings always equal investment spending?

Yes