UARK ECON 2143 - Final Exam Study Guide

The higher the reserve ratio...

the smaller the money multiplier

Leverage

the use of borrowed money to supplement existing funds for investment purposes

When banks make loans...

they create money (increase money supply)

Aggregate Supply

total amount of goods and services in the economy available at all possible price levels

Wealth

total of all stores of value, including both money and non-monetary assets

Short run Aggregate supply is curve is...

upward sloping

Long run Aggregate supply curve is...

vertical

Unions

worker association that bargains with employers over wages, benefits, and working conditions 1. exert their market power to negotiate higher wage for workers 2. typical union worker earns 10-20% higher wages and gets more benefits than a non-union worker

Unit of account

yardstick people use to post prices and record debts

Liabilities

Deposits, debt, equity

Efficiency Wages

firms voluntarily pay above-equilibrium wages to boost worker productivity and increase firm profitability

If Aggregate Supply is vertical...

fluctuations in Aggregate Demand do not cause fluctuations in output or employment

Reserve Ratio, R

fraction of deposits that banks hold as reserves, total reserves as a percentage of total deposits

Medium of exchange

item that buyers give to sellers when they want to purchase goods and services

Store of value

item that people can use to transfer purchasing power from the present to the future

Commodity money

money that takes the form of a commodity with intrinsic value (intrinsic value = would have value even if it was not used as money) (gold coins)

Flat money

money without intrinsic value, used as money because of government decree (U.S. dollar)

Why the Long-Run Aggregate-Supply Curve Might Shift

1. Changes in L or natural rate of unemployment: (immigration, retirement) 2. Changes in K or H: (investment in factories equipment, more people get degrees) 3. Changes in natural resources: (new discoveries, changing weather patterns) 4. Changes in technology: (

3 Functions of Money

1. Medium of exchange 2. Unit of Account 3. Store of value

Benefits of UI

1. Reduces income uncertainty 2. Unemployed have more time to search 3. Unemployed can look for jobs that better suit their tastes and skills 4. Improves ability of economy to match each worker with the most appropriate job

What does the u-rate NOT do?

1. does not include discouraged workers 2. does not distinguish between full-time and part-time 3. some people misreport work status

Minimum wage laws

1. may exceed the equilibrium wage for the least skilled and least experienced workers, causing structural unemployment 2. Quantity of labor supplied exceeds quantity demanded 3. Workers are unemployed because they are waiting for openings

Jobs of the Fed

1. monetary policy 2. central banking 3. bank regulation

Barter

Exchange goods without involving money.

Why does the aggregate demand curve slope downward?

Increase in P reduces quantity demanded of goods and services (because of wealth effect, interest-rate effect, exchange-rate effect)

Assets

Reserves, loans, securities (stocks & bonds)

Aggregate Supply Curve

a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level

Aggregate Demand Curve

a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level

Unemployment Insurance (UI)

a government program that partially protects workers' incomes when they become unemployed - reduces hardship of unemployment - increases unemployment (receiving benefits w/o having to work)

Capital requirement

a government regulation that specifies a minimum amount of capital, intended to ensure banks will be able to pay off depositors and debts

Exchange-Rate Effect

a lower price level causes the real exchange rate to depreciate, which stimulates spending on net exports (P and NX)

Which of the following would necessarily create a surplus at the original equilibrium interest rate in the loanable funds market? a. An increase in the supply of or a decrease in the demand for loanable funds b. An increase in the supply of or an increase in the demand for loanable funds c. A decrease in the supply of or a decrease in the demand for loanable funds d. A decrease in the supply of or an increase on the demand for loanable funds

a. An increase in the supply of or a decrease in the demand for loanable funds

Which of the following counts as part of the supply of loanable funds? a. Bank deposits and purchases of bonds b. Bank deposits but not purchases of bonds c. Purchases of bonds but not bank deposits d. Neither purchases of bonds nor bank deposits

a. Bank deposits and purchases of bonds

When opening a print shop you need to buy printers, computers, furniture, and similar items. Economists call these expenditures... a. capital investment b. investment in human capital c. business consumption expenditures d. personal saving

a. Capital investment

Which of the following lists is included in what economists call "money"? a. Cash b. Cash and stocks and bonds c. Cash and stocks and bonds and real estate d. Cash and stocks and bonds and real estate and all other assets

a. Cash

Institutions that help match one person's saving with another person's investment are collectively called the... a. financial system b. Federal Reserve system c. banking system d. monetary system

a. Financial system

You pay for cheese and bread from the deli with currency. Which function of money does this best illustrate? a. Medium of exchange b. Unit of account c. Store of value d. Liquidity

a. Medium of exchange

Given that Monika's income exceeds her expenditures, Monika is best described as a... a. saver or as a supplier of funds b. saver or as a demander of funds c. borrower or as a supplier of funds d. borrower or as a demander of funds

a. Saver or as a supplier of funds

When output rises, unemployment falls. a. True b. False

a. True

The natural rate of unemployment includes... a. both frictional and structural unemployment b. neither frictional nor structural unemployment c. structural but not frictional unemployment d. frictional but not structural unemployment

a. both frictional and structural unemployment

The money supply increases when the Fed... a. buys bonds. The increase will be larger, the smaller is the reserve ratio. b. buys bonds. The increase will be larger, the larger is the reserve ratio. c. sells bonds. The increase will be larger, the smaller is the reserve ratio. d. sells bonds. The increase will be larger, the larger is the reserve ratio.

a. buys bonds. The increase will be larger, the smaller is the reserve ratio.

Crowding out occurs when investment declines because a budget... a. deficit makes interest rates rise b. deficit makes interest rates fall c. surplus makes interest rates rise d. surplus makes interest rates fall

a. deficit makes interest rate rise

When the Fed buys bonds, the supply of money... a. increases and so aggregate demand shifts right d. decreases and so aggregate demand shifts left c. decreases and so aggregate demand shifts right d. increases and so aggregate demand shifts left

a. increases and so aggregate demand shifts right

The source of the supply of loanable funds... a. is saving and the source of demand for loanable funds is investment b. is investment and the source of demand for loanable funds is saving c. and the demand for loanable funds is saving d. and the demand for loanable funds is investment

a. is saving and the source of demand for loanable funds is investment

A bond that never matures is known as a... a. perpetuity b. an intermediary bond c. an indexed bond d. a junk bond

a. perpetuity

An increase in the government's budget surplus means public saving is... a. positive and increasing b. positive and decreasing c. negative and increasing d. negative and decreasing

a. positive and increasing

A larger budget deficit... a. raises the interest rate and investment b. reduces the interest rate and investment c. raises the interest rate and reduces investment d. reduces the interest rate and raises investment

a. raises the interest rate and investment

Other things the same, a higher interest rate induces people to... a. save more, so the supply of loanable funds slopes upward b. save less, so the supply of loanable funds slopes downward c. invest more, so the supply of loanable funds slopes upward d. invest less, so the supply of loanable funds slopes downward

a. save more, so the supply of loanable funds slopes upward

Frictional unemployment is inevitable because... a. sectoral shifts are always happening b. there is a federal minimum-wage law in the U.S. c. some people do not want to be employed d. unions are very popular in the U.S.

a. sectoral shifts are always happening

If the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, there is a... a. surplus and the interest rate is above the equilibrium level b. surplus and the interest rate is below the equilibrium level c. shortage and the interest rate is above the equilibrium level d. shortage and the interest rate is below the equilibrium level

a. surplus and the interest rate is above the equilibrium level

In a closed economy, private saving is... a. the amount of income that households have left after paying for their taxes and consumption b. the amount of income that businesses have left after paying for the factors of production c. the amount of tax revenue that the government has left after paying for its spending d. always equal to investment

a. the amount of income that households have left after paying for their taxes and consumption

Aggregate demand includes... a. the quantity of goods and services the government, households, firms, and customers abroad want to buy. b. neither the quantity of goods and services the government, households, nor firms want to buy nor the quantity of goods and services customers abroad want to buy. c. the quantity of goods and service the government wants to buy, but not the quantity of goods and services households, firms, or customers abroad want to buy. d. the quantity of goods and services households and firms want to buy, but not the quantity of goods and services the government wants to buy.

a. the quantity of goods and services the government, households, firms, and customers abroad want to buy.

The labor-force participation rate measures the percentage of the... a. total adult population that is in the labor force b. total adult population that is employed c. labor force that is employed d. labor force that is either employed or unemployed

a. total adult population that is in the labor force

The natural rate of unemployment... a. varies less than the measured unemployment rate b. cannot be changed by government policy c. is closely associated with the ups and downs in economic activity d. is set by the Federal Reserve

a. varies less than the measured unemployment rate

Natural rate of output (Yn)

amount of output the economy produces when unemployment is at its natural rate

Central bank

an institution designed to oversee the banking system and regulate the quantity of money in the economy

If the reserve ratio is 4%, then the money multiplier is... a. 2.5 b. 25 c. 0.04 d. 10

b. 25

(Refer to Table 28-2) In the proper order, which age group has the highest unemployment rate and which has the highest labor-force participation rate? a. Under 55, 55 and older b. 55 and older, under 55 c. 55 and older, 55 and older

b. 55 and older, under 55

Which of the following would shift the long-run aggregate supply curve right? a. Both an increase in the capital stock and an increase in the price level b. An increase in the capital stock, but not an increase in the price level c. An increase in the money supply, but not an increase in the capital stock d. Neither an increase in the money supply nor an increase in the capital stock

b. An increase in the capital stock, but not an increase in the price level

In which case can we be sure aggregate demand shifts left overall? a. People want to save more for retirement and the Fed increases the money supply b. People want to save more for retirement and the Fed decreases the money supply c. People want to save less for retirement and the Fed increases the money supply d. People want to save less for retirement and the Fed decreases the money supply

b. People want to save more for retirement and the Fed decreases the money supply

Long-term bonds are... a. riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds b. riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds c. less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than interest rates on short-term bonds d. less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds

b. Riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than interest rates on short-term bonds

(Refer to Figure 26-1) What is measured among the vertical axis of the graph? a. The tax rate b. The interest rate c. The quantity of investment d. The quantity of saving

b. The interest rate

The leverage ratio is calculated as... a. assets minus liabilities b. assets divided by bank capital c. the reciprocal of the required reserve ratio d. the required reserve ratio multiplied by bank capital

b. assets divided by bank capital

The price of a stock will rise if the... a. managers of a stock exchanged decide the price should be higher b. demand for the stock rises c. supply of the stock rises d. demand for the stock falls

b. demand for the stock rises

A bank has an 8 percent reserve requirement, $10,000 in deposits, and has loaned out all it can, given the reserve requirement... a. it has $80 in reserves, and $9,920 in loans b. it has $800 in reserves, and $9,200 in loans c. it has $1,250 in reserves and $8,750 in loans d. it has $8,000 in reserves and $2,000 in loans

b. it has $800 in reserves, and $9,200 in loans

Labor Force

employed + unemployed

Not in the labor force

everyone else in adult population (not working or seeking work)

Cyclical unemployment refers to... a. the portion of unemployment created by job search b. short-run fluctuations around the natural rate of unemployment c. changes in unemployment due to changes in the natural rate of unemployment d. the portion of unemployment created by wages set above the equilibrium level

b. short-run fluctuations around the natural rate of unemployment

The economy's two most important financial markets are... a. the investment market and the savings market b. the bond market and the stock market c. banks and the stock market d. financial markets and financial institutions

b. the bond market and the stock market

Demand deposits

balances in bank accounts that depositors can access on demand by writing a check

Fractional reserve banking system

banks keeps a fraction of deposits as reserves as use the rest to make loans

Open Market Operations

buy U.S. government bonds to increase the money supply; sell U.S. government bonds to decrease the money supply

Suppose that in a closed economy GDP is equal to 20,000, consumption equal to 15,000, government purchases equal 4,000, and taxes equal 3,000. What are private saving, public saving, and national saving? a. -2,000, 1,000, and 2,000, respectively b. 1,000, 2,000, and 3,000, respectively c. 2,000, -1,000, and 1,000, respectively d. 2,000, 1,000, and 2,000, respectively

c. 2,000, -1,000, and 1,000, respectively

Which of the following does the Federal Reserve not do? a. Conduct monetary policy b. Act as a lender of last resort c. Conduct fiscal policy d. Serve as a bank regulator

c. Conduct fiscal policy

Suppose that a large number of people who used to work or seek work no longer do either. Other things the same, this makes... a. the number of people unemployed rise but does not change the labor force b. the number of people unemployed rise but makes the labor force fall c. both the number of people unemployed and in the labor force fall d. the number of unemployed fall but does not change the labor force

c. both the number of people unemployed and in the labor force fall

Sandy has graduated from college and is devoting her time to searching for a job. She has seen plenty of openings but has not yet been offered one that best suits her tastes and skills. Sandy is... a. structurally unemployed. Structural unemployment exists even in the long run b. structurally unemployed. There is no structural unemployment in the long run c. frictionally unemployed. Frictional unemployment can exist even in the long run d. frictionally unemployed. There is no frictional unemployment in the long run

c. frictionally unemployed. Frictional unemployment can exist even in the long run

Esther is considering expanding her dress shop. If interest rates rise she is... a. less likely to expand. This illustrates why the supply of loanable funds slopes downward b. more likely to expand. This illustrates why the supply of loanable funds slopes downward c. less likely to expand. This illustrates why the demand for loanable funds slopes downward d. more likely to expand. This illustrates why the demand for loanable funds slopes upward

c. less likely to expand. This illustrates why the demand for loanable funds slopes downward

When the government's budget deficit increases the government is borrowing... a. less and public savings falls b. less and public savings increases c. more and public savings falls d. more and public savings increases

c. more and public savings falls

The effect of an increase in the price level on the aggregate-demand curve is represented by a... a. shift to the right of the aggregate-demand curve b. shift to the left of the aggregate-demand curve c. movement to the left along a given aggregate-demand curve d. movement to the right along a given aggregate-demand curve

c. movement to the left along a given aggregate-demand curve

Frictional unemployment is thought to explain relatively... a. short spells of unemployment as is structural unemployment b. long spells of unemployment as is structural unemployment c. short spells of unemployment, while structural unemployment is thought to explain relatively long spells of unemployment d. long spells of unemployment, while structural unemployment is thought the explain relatively short spells of unemployment

c. short spells of unemployment, while structural unemployment is thought to explain relatively long spells of unemployment

The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for... a. the slope of short-run aggregate supply b. the slope of long-run aggregate supply c. the slope of the aggregate-demand curve d. shifts in the aggregate-demand curve

c. the slope of the aggregate-demand curve

Why the Aggregate-Demand Curve Might Shift

changes in consumption: (stock market crash, tax cuts) changes in investment: (firms buy new equipment, interest rates) changes in government purchases: (federal spending, state/local spending) changes in net exports: (booms/recessions in countries that buy exports)

Sectoral shifts

changes in the composition of demand among industries or regions of the country

Which of the following statements about the term of a bond is correct? a. Term refers to the various characteristics of a bond, including its interest rate and tax treatment b. The term of a bond is determined entirely by its credit risk c. The term of a bond is determined entirely by how much sales commission the buyer of the bond pays when he or she purchases the bond d. Interest rates on long-term bonds are usually higher than interest rates on short-term bonds

d. Interest rate on long-term bonds are usually higher than interest rates on short-term bonds

In a closed economy, what does (Y-T-C) represent? a. National saving b. Government tax revenue c. Public saving d. Private saving

d. Private saving

Which of the following is not a function of money? a. Unit of account b. Store of value c. Medium of exchange d. Protection against inflation

d. Protection against inflation

Which of the following is NOT an example of monetary policy? a. The Federal Open Market Committee decides to sell bonds. b. The Federal Open Market Committee decides to buy bonds. c. The Federal Reserve reduces the reserve the reserve requirement. d. The Federal Reserve facilitates bank transactions by clearing checks.

d. The Federal Reserve facilitates bank transactions by clearing checks.

Consider the expressions (T-G) and (Y-T-C). Which of the following statements is correct? a. Each one of these is equal to national saving b. Each one of these is equal to public saving c. The first of these is private saving; the second one is public saving d. The first one of these is public saving; the second one is private saving

d. The first one of these is public saving; the second one is private saving

The natural rate of unemployment is the... a. unemployment rate that would prevail with zero inflation b. rate associated with the highest possible level of GDP c. difference between the long-run and short-run unemployment rates d. amount of unemployment that the economy normally experiences

d. amount of unemployment that the economy normally experiences

Financial intermediaries are... a. the same as financial markets b. individuals who make profits by buying a stock low and selling it high c. a more general name for financial assets such as stocks, bonds, and checking accounts d. financial institutions in which savers can indirectly provide funds to borrowers

d. financial institutions in which savers can indirectly provide funds to borrowers

Financial intermediaries are... a. the same as financial markets b. individuals who make profits by buying a stock low and selling it high c. a more general name for financial assets such as stocks, bonds, and checking accounts d. financial institutions through which savers can indirectly provide funds to borrowers

d. financial institutions through which savers can indirectly provide funds to borrowers

What do economists call financial institutions through which savers can indirectly provide funds to borrowers? a. stock markets b. monetary institutions c. financial markets d. financial intermediaries

d. financial intermediaries

The Federal Reserve... a. was created in 1896 b. is part of the executive branch of government c. is only responsible for controlling the money supply d. is the central bank of the United States

d. is the central bank of the United States

You saved $500 in currency in your piggy bank to purchase a new laptop. The $500 you kept in your piggy bank illustrates money's function as a _______. The laptop's price is posted as $500. The $500 price illustrates money's function as a _____. You use the $500 to purchase the laptop. This transaction illustrates money's function as a ______. a. store of value, medium of exchange, unit of account b. store of value, unit of account, medium of exchange c. medium of exchange, unit of account, store of value d. medium of exchange, store of value, unit of account

d. medium of exchange, store of value, unit of account

Josh is a full-time college student who is not working or looking for a job. The Bureau of Labor Statistics counts Josh as... a. employed b. unemployed c. marginally attached worker d. not in the labor force

d. not in the labor force

In a closed economy, what does the difference between the tax revenue and government purchases, (T-G), represent? a. National saving b. Investment c. private saving d. public saving

d. public saving

At the broadest level, the financial system moves the economy's scarce resources from... a. the rich to the poor b. financial institutions to business firms and government c. households to financial institutions d. savers to borrowers

d. savers to borrowers

Interest-Rate Effect

occurs when a change in the price level leads to a change in interest rates and, therefore, in the quantity of aggregate demand (P and I)

Structural unemployment

occurs when number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one. usually long term

Frictional unemployment

occurs when workers spend time searching for the jobs that best suit their skills and tastes. short term for most

Employed

paid employees, self-employed, and unpaid workers in a family business

Unemployed

people not working who have looked for work during previous 4 weeks

Labor force participation rate

percentage of the adult population that is in the labor force = ((labor force) / (adult population)) x 100

Unemployment rate

percentage of the labor force that is unemployed = ((# of unemployed) / (labor force)) x 100

Job search

process by which workers find appropriate jobs given their tastes and skills (some frictional unemployment is inevitable)

Classical Dichotomy

separation of real and nominal variables

If Aggregate Supply slopes up, then...

shifts in Aggregate Demand DO affect output and unemployment

Federal Open Market Committee

the 12 member group that determines the purchase and sale policies of the Federal Reserve Banks in the market for U.S. government securities

Aggregate Demand

the amount of goods and services in the economy that will be purchased at all possible price levels

Money multiplier

the amount of money the banking system generates with each dollar of reserves (reciprocal of reserve ratio)

Federal Reserve

the central bank of the United States

Cyclical unemployment

the deviation of unemployment from its natural rate

Liquidity

the ease with which an asset can be converted into the economy's medium of exchange

Wealth Effect

the increase in spending that occurs because the real value of money increases when the price level falls (P and C)

Natural rate of unemployment

the normal rate of unemployment around which the unemployment rate fluctuates

Currency

the paper bills and coins in the hands of the public

Money stock

the quantity of money circulating in the economy

Leverage ratio

the ratio of assets to bank capital

Bank capital

the resources a bank obtains by issuing equity to its owners (Assets - liabilities)

Money

the set of assets in an economy that people regularly use to buy goods and services from others