Econ 210 test 2
Match the following descriptions with the correct aggregate supply curve
Immediate short run -The price level is fixed -A horizontal line Short run -An upsloping curve -Output prices are flexible, but input prices are fixed Long run - A vertical line -Output is fixed
Frictional unemployment
Individuals searching for jobs or waiting to take jobs soon
Federal Reserve Functions
Issue currency Set reserve requirements Lend money to banks Collect checks Act as a fiscal agent for U.S. government Supervise banks Control the money supply
How does the purchasing power of money relate to the price level?
It is inversely related to the price level.
Assets
Liabilities + Networth
Redistribution Effects of Inflation
Nominal income: Unadjusted for inflation. Real income: Nominal income adjusted for inflation
Structural unemployment
Occurs due to changes in the structure of the demand for labor
What determines the value (domestic purchasing power) of money?
People's willingness to accept it in exchange for goods and services
Productivity formula
Productivity = Outputs/Inputs
What type of tax system would have the most built-in stability?
Progressive tax system, because it increases at an increasing rate as incomes rise, thus having more of a dampening effect on rising (or falling) incomes.
Determinants of aggregate demand
Shift factors affecting C, I, G, Xn.
Who measures the labor force, and how is it defined?
The U.S. Bureau of Labor Statistics (BLS) measures the labor force as people over 16 years of age who are employed and those who are actively seeking work.
The explanation for a downsloping aggregate demand curve differs from the explanation for the downsloping demand curve for a single product because
a downsloping, single-product demand curve assumes constant money income such that a lower price causes a substitution of the now relatively cheaper product for those whose prices have not changed.
Other than its main role of controlling the supply of money, functions of the Federal Reserve include
issuing Federal Reserve Notes, providing for check collection, and supervising the operation of banks.
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
An asset on a bank's balance sheet is something
owned by the bank, whereas a liability is something owed by the bank.
In sequential order, the four phases of the business cycle are
peak, recession, trough, and expansion.
unemployed
people not working who have looked for work during previous 4 weeks
Rapid inflation can undermine money's ability to perform its functions. During periods of runaway inflation,
people often revert to barter because money fails as a medium of exchange.
employed
people who are currently holding a job in the economy, either full time or part time
A political business cycle is the idea that
politicians are more interested in reelection than in stabilizing the economy.
Real GDP formula
real gdp = nominal gdp - change in price level
Government's fiscal policy options for ending severe demand-pull inflation include
reducing government spending, increasing taxes, or both
The long-run aggregate supply curve is vertical because the economy's potential output is determined by
the availability and productivity of real resources, not by the price level.
The Board of Governors of the Federal Reserve System
coordinates policies for the 12 Federal Reserve Banks
If there is an increase in the unemployment rate, the size of the labor force
could increase or decrease.
The problem of time lags in enacting and applying fiscal policy is
in the time it takes to identify the situation, enact a policy, and allow it to work, economic circumstances may have changed.
Hyperinflation
A very rapid rise in the price level; an extremely high rate of inflation.
Balance Sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date.
Spending Multiplier
1/(1-MPC)
Monetary multiplier formula
1/required reserve ratio
Inflation Rate Formula
(Current year CPI ) - (Earlier Year CPI) / (Earlier Year CPI) x100 (Current year CPI ) - (Base Year CPI) / (Base Year CPI) x100
The Federal Reserve and the Banking System
- Historical background - Has a Board of Governors - 12 Federal Reserve Banks: •Serve as the central bank •Quasi-public banks - Banker's banks
Functions of Money
- Medium of exchange: Used to buy and sell goods. - Unit of account: Goods valued in dollars. -Store of value: Hold some wealth in money form. Money is liquid.
Cost-push inflation
-Due to a rise in per-unit input costs -Supply shocks -Cost-push ends in a recession -Reduces real output. -Redistributes a decreased level of real income. -more likely to be associated with a negative GDP gap
Cyclical Impact
-Durable goods affected most (capital goods, consumer durables) -Nondurable consumer goods affected less (services, food and clothing)
Federal Reserve Independence
-Established by Congress as an independent agency -Protects the Fed from political pressures -Enables the Fed to take actions to increase interest rates in order to stem inflation as needed
Demand-pull inflation
-Excess spending relative to output -Central bank issues too much money -Demand-pull continues as long as the excess spending continues -One view is that zero inflation is best. -Another view is that mild inflation is best. -more likely to be associated with a positive GDP gap
Who is hurt by inflation?
-Fixed income receivers: Real incomes fall. -Savers: Value of accumulated savings deteriorates. -Creditors: Lenders get paid back in "cheaper dollars."
Who Is Unaffected by Inflation?
-Flexible income receivers •COLAs •Social Security recipients •Union members -Debtors: Pay back the loan with "cheaper dollars."
Anticipated Inflation (expected)
-Real interest rate: Rates adjusted for inflation. -Nominal interest rate: Rates not adjusted for inflation.
Consumer Price Index (CPI) formula
= (current or most recent cost of market basket/base year cost of market basket) x 100
Which of the following is not a function of the Fed?
Advising Congress on fiscal policy
M2
All of M1 + less immediate (liquid) forms of money to include savings (MMDA), money market mutual funds, and small denomination time deposits.
The business cycle
Alternating increases and decreases in economic activity over time
In the United States, who is responsible for maintaining money's purchasing power?
Board of Governors of the Federal Reserve System
Which of the following will shift the aggregate supply curve to the right?
Business taxes fall A new networking technology increases productivity all over the economy.
Cyclical unemployment
Caused by the recession phase of the business cycle
Determinants of aggregate supply
Collectively position the AS curve Changes raise or lower per-unit production costs
Consumer Spending
Consumer wealth Household borrowing Consumer expectations Personal taxes
fiscal policy
Deliberate changes in: •Government spending •Taxes Designed to: •Achieve full-employment •Control inflation •Encourage economic growth Discretionary or nondiscretionary
Okun's Law
Every 1% of cyclical unemployment creates a 2% negative GDP gap
Which of the following will shift the aggregate demand curve to the left?
The government raises corporate profit taxes Interest rates rise
foreign purchases effect
The inverse relationship between the net exports of an economy and its price level relative to foreign price levels.
Securitization
The process of slicing up and bundling groups of loans into new securities
What "Backs" the Money Supply?
There is no concrete backing to the money supply in the United States.
Inflation
a general increase in prices and fall in the purchasing power
Consumer Price Index (CPI)
a measure of the overall cost of the goods and services bought by a typical consumer
The crowding-out effect is
a reduction in investment spending caused by an increase in interest rates arising from an increase in government spending
GDP Gap
actual gdp - potential gdp (can be negative)
Excess reserve
actual reserve - required reserve
money
anything that serves as a medium of exchange, a unit of account, and a store of value
Net worth is equal to
assets - liabilities
in inflation
borrows gain, fixed incomes in nominal terms loose
The multiplier
causes an initial change in spending to generate an even larger change in the aggregate demand curve.
required reserves
checkable deposits reserve ratio
reserve ratio formula
commercial bank's required reserves/commercial bank's checkable deposit liabilities
M1
consists of currency and checkable deposits
Expectations of a near-term policy reversal weaken fiscal policy because
consumers may hesitate to increase their spending because they believe that tax rates will rise again.
When demand increases
demand curve shifts right, increasing equilibrium
The Council of Economic Advisers (CEA) advises the president on
economic matters and provides recommendations for discretionary fiscal policy action.
An important reason why members of the Federal Reserve's Board of Governors are each given extremely long, 14-year terms is to:
insulate members from political pressures that could result in inflation.
The Federal Open Market Committee (FOMC) includes
members of the Board of Governors and 5 of the 12 presidents of the Federal Reserve Banks, of which the president of the New York Fed has a permanent voting seat.
Some politicians have suggested that the United States enact a constitutional amendment requiring that the federal government balance its budget annually. Such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy experienced a severe recession because
net tax revenue falls and transfer payments rise during a recession, so balancing the budget would require lowering transfer payments and raising taxes
real interest rate
nominal interest rate - inflation rate
Seasonal variations and long-run trends complicate the measurement of the business cycle because
normal seasonal variations do not signal boom or recession.
Government Spending
spending by all levels of government on final goods and services Government spending increases: •Aggregate demand increases (as long as interest rates and tax rates do not change) •More transportation projects Government spending decreases: •Aggregate demand decreases Less military spending
Investment Spending
spending on new productive physical capital, such as machinery and structures, and on changes in inventories
Built-in (automatic) stabilizers work by changing __________ so that changes in GDP are reduced.
taxes and government payouts
Each member of the Board of Governors of the Federal Reserve System is selected by
the U.S. president and confirmed by the Senate.
The short-run aggregate supply curve is relatively flat to the left of the full-employment output because
there are large amounts of unused capacity and idle human resources
If the annual interest payments on the U.S. public debt sharply increased as a percentage of GDP, then
the government would have to use tax revenues or go deeper into debt.
The downsloping aggregate demand curve can be explained by
the interest-rate effect, the real-balances effect, and the foreign purchases effect
The unemployment rate that is consistent with full employment is
the natural rate of unemployment
Deflation means
the price level is falling, whereas with inflation overall prices are rising. Correct
Aggregate Demand
the relationship between average price level and demand for all goods and services inverse relationship between average price level and real output demanded
labor force
the total number of workers, including both the employed and the unemployed Involuntary part-time workers counted as full-time. Discouraged workers are not counted as unemployed
The business cycle affects output and employment in capital goods industries and consumer durable goods industries more severely than in industries producing consumer nondurables because
these goods last, so that purchases can be postponed
Economists nearly uniformly support an independent Fed rather than one beholden directly to either the president or Congress because
this independence allows the Fed to more effectively control the money supply and maintain price stability.
Per-unit production cost formula
total input cost/total output
Unemployment rate formula
unemployed/labor force x 100
A positive unemployment rate—more than zero percent—is fully compatible with full employment because at full employment,
unemployment includes frictional unemployment, which is always positive because people are transitioning to new jobs
The shape of the short-run aggregate supply curve is
upsloping, because wages adjust more slowly than the price level.
The length of a complete business cycle
varies greatly in duration and intensity.
The Federal Open Market Committee (FOMC)
votes on the Fed's monetary policy and directs the purchase or sale of government securities.
real balances effect
when a price increases, your buying power is decreased, causing you to buy less
Natural Rate of Unemployment (NRU)
•Full employment level of unemployment. •Can vary over time due to: •Demographic changes •Changing job search methods •Public policy changes •Actual unemployment can be above or fall below the NRU.
The business cycle
•Peak-- highest point •Recession-- gpd is falling (6 months or more continuous) •Trough-- lowest points •Expansion-- gdp is rising
Causes of economic shock
•Political events •Financial instability •Irregular innovation •Productivity changes Monetary factors
Core inflation
•Without food and energy goods. Focuses on more stable prices
