Econ 252 Final Exam Review (HW Questions 11-15)
Given that: Y0 real GDP = $1000 (in millions), Y1 real GDP = $1100 (in millions), Y0 price level = 140, and Y1 price level = 150. The growth rate of nominal GDP is __
17.143% (the growth rate of prices + the growth rate of real GDP so -- ((150-140/140) + (1100-1000/1000)))
what caused german hyperinflation?
1919 Germany signed treaty of versailles but couldn't make payments of large reparations
Using the Okun's Law calculation: if the unemployment rate is 8.8% and real GDP grows by 3%, the new unemployment rate is __.
8.3% ((-1/2 * (3-2)) = -.5 so 8.8-.5 = 8.3)
why is cash cumbersome for banks?
ATM machines are expensive to run and maintain, they need to sort it at the cash register, and they need to transport cash in armored trucks and store it in very secure vaults
HW 9 Q10 LOOK AT PEARAON: if a country goes into a recession because firms start reducing their investments and spending after they become pessimistic about future economic activity, what happens?
LD curve shifts left
when the Fed sells U.S. treasury securities in the open market what happens?
MS shifts left which shifts the equilibrium point left and up.
Almost every day, many people sign their names on checks, which are then accepted in exchange for goods and services. Do these checks constitute money?
No, because checks simply represent a means of access to money, not money itself.
Over the last 50 years, credit cards have become an increasingly popular way for people to purchase goods and services. Are credit cards themselves money?
No, because your credit cards are not assets
what are some solutions that governments can put in place to address the problems of digital payment systems?
ensure that the phase-out of cash is gradual, need to ensure that central banks' monopoly over coins and notes is not replaced by private monopolies over digital money, and they should maintain banks' obligation to keep customer information private
T or F: from a monetary policy perspective, a cashless economy would make it easier for central banks to exert control over the amount of money that is created and that is in circulation
false
what illustrates the concept of a self-fulfilling prophecy?
firms expect an increase in demand in the future and so hire additional workers now, which leads to an increase in consumption demand
what is liquidity?
funds that are available for immediate payment
Given: growth rate of real GDP is 1.0%. growth rate of nominal GDP is 5.2%. nominal interest rate is 8.5%. real interest rate is 4.3%. money supply (M2) is $10,612 (in billions). The growth rate of the money supply must be __ and the inflation rate is __.
growth rate of money supply is 5.2% because it's the same as the growth rate of nominal GDP. the inflation rate is 4.2% because it is the growth rate of money supply - growth rate of real GDP (5.2-1.0)
what are some of the issues with bitcoins replacing major currencies?
hacking attacks, thefts, and other security problems. the value of a bitcoin is highly volatile and so people that hold them may lose money. bitcoin transactions often involve "middlemen" and transaction fees for people buying goods and services. bitcoin deposits are not insured by the government.
If wages were flexible, employment would have been ___ employment with rigid wages.
higher than
when the Fed buys government bonds from private banks, it __ the electronic reserves that banks hold
increases
inflation imposes social costs due to:
inflation tax, raising logistical costs, and distorting relative prices
the real wage is the __
inflation-adjusted wage
the federal reserve conducts open market operations when it wants to __
influence the FFR
the FFR is the ___
interest rate in the federal funds market where banks obtain overnight loans of reserves from one another
Okun's Law ___
is usually an accurate representation of the data
what are some of the benefits of digital payment methods?
it creates a credit history, helping consumers borrow funds. it enables small businesses to sell beyond their borders. it is easier for governments to monitor tax evasion and fraud
what is NOT a benefit of digital payment methods?
it facilitates economic transactions for low-income individuals
How does the federal reserve obtain a particular value for the FFR?
it finds the point on the demand curve that corresponds to that FFR and makes available the exact level of reserves associated with that point on the demand curve.
what is NOT a downside of digital payment methods?
it is harder for consumers to keep track of their spending history
what is NOT a problem of a fast transition to a cashless economy?
it is harder for small businesses to receive payments
why is bitcoin hard to value?
it is not a value-producing asset, it does not provide a stream of real capital, and it does not provide a steam of dividend income
what is a feature/implication of real business cycle theory?
it suggests that technological progress is an important determinant of long-term fluctuations in growth.
when interest goes down in the credit market, who is worse off?
lenders/creditors
According to the concept of persistence in the rate of growth, if the economy growth this quarter, it will ___
likely grow next quarter
fed uses monetary policy to pursue "dual mandate" which is:
low inflation and high employment
Because bitcoin can be used to buy goods and services, it serves as a:
medium of exchange
traditional currencies are controlled by central banks. what is a potential problem of restricting the creation of bitcoins to a total of 21 million bitcoins?
monetary authorities cannot undertake expansionary monetary policy to stimulate the economy during recessions
Medium of exchange:
money can be traded for goods and services
Fiat money:
money that has value because the government has ordered that it is an acceptable means to pay debts
if the FFR changes, that is a ___
movement along the curve
The average number of initial applications for unemployment insurance is likely to be __ with real GDP
negatively correlated
when workers are laid off, what happens to physical capital?
physical capital becomes less productive, leading firms to reduce capacity utilization
Consumer sentiment is likely to be ___ with real GDP
positively correlated
The S&P 500 stock index is likely to be __ with real GDP
positively correlated
The amount of new building permits for residential buildings is likely to be ____________ with real GDP.
positively correlated
The amount of new orders for capital goods unrelated to defense is likely to be _________ with real GDP.
positively correlated
The average weekly hours worked by manufacturing workers is likely to be __ with real GDP
positively correlated
inflation can lead to counterproductive policies such as:
price controls which creates a black market on products
why might real wage increase?
prices have deflation. making workers better off and firms worse off.
what is the fisher equation?
real interest rate = nominal interest - inflation (r = i - pie symbol)
as the price index increases, what happens to real wage?
real wage or purchasing power decreases
as the price index decreases, what happens to real wage?
real wage or purchasing power increases
what does the central bank do?
regulations, interbank transfers, and manipulating quantity of bank reserves in order to influence short-term interest rates especially FFR
the funds that are lent in this market are
reserves at the federal reserve bank
if you have more money purchasing the same goods, it makes prices:
rise
If an economic shock increases labor demand, equilibrium employment ___ and real GDP ___
rises, rises
economic fluctuations are __
short-run changes in the growth of GDP
what is the significance of the real wage as it relates to inflation?
since an increase in inflation reduces the real wage that firms must pay, firms are more willing to hire workers, thus stimulating economic activity.
If wages are flexible, the increase in employment and real GDP will be ___ the increase if wages are rigid.
smaller than
the value (in $) of bitcoin fluctuated dramatically in 2017. For savers, this has diminished its function as a
store of value
how to find the 10-year nominal interest rate:
sum interest rates of all 10 years and divide by 10
according to real business cycle theory, the economic impact of changing input prices is similar to the economic impact from ___
technology changes
a central bank is the government institution ___
that runs a country's monetary system
what was one of the key elements of John Maynard Keyne's theory of fluctuations?
the concept of multipliers
According to Keyne's view on animal spirits, ___
the economy could fluctuate beyond the level that could be explained by the underlying economic fundamentals
according to the quantity theory of money, the inflation rate is:
the gap between growth rate of money supply and growth rate of real GDP
if the inflation rate is positive, what must be true?
the growth rate of real GDP < the growth rate of money supply
if there is 0 inflation, what must be true?
the growth rate of real GDP = the growth rate of money supply
if the inflation rate is negative, what must be true?
the growth rate of real GDP > the growth rate of money supply
in the US, recessions are usually defined as __
two consecutive quarters of negative growth in real GDP
The value (in $) of bitcoin fluctuated dramatically in 2017. For people trying to quote the prices of goods and services, this has diminished its function as a
unit of account
Unit of account:
universal yardstick used to express/compare relative prices of goods and services
which of the following are included in bank reserves for private banks?
vault cash and deposits at the central bank
Okun's Law states that:
when growth in real GDP is above 2%, unemployment drops and when it is below 2%, unemployment increases
what is the most important aspect of the "greater fool theory" of investing?
you have a "greater fool" willing to buy the asset at a higher price
what are the main forces behind the phasing out of cash and the push for digital payment systems?
younger consumers want payment systems that plug seamlessly into their digital lives and banks, tech firms and telecoms companies are developing fast, easy-to-use payment technologies from which they can pull data and pocket fees
In prison camps during WWII, and in some prisons today, cigarettes circulate among prisoners. For example, today a cell phone might cost 600 cigarettes, whereas a magazine might cost two cigarettes. Which functions of money are cigarettes fulfilling in this case?
Store of value, medium of exchange, and unit of account
Would the use of use of barter dollars resolve the problem?
Yes, because you can both pay and be paid in barter dollars
the factors that would shift the demand curve for reserves include
a changing deposit base, an economic expansion or contraction, and anticipated liquidity shocks
given the way people have used bitcoin to earn a profit, many people believe bitcoin is being used primarily as
a financial investment
Barter:
a method of exchange whereby goods or services are traded directly for other goods or services without the use of money or any other medium of exchange.
if oil, which is a major input to most production processes, abruptly falls in price, the impact on the economy would be similar to ___
a productivity increase, with a resultant increase in real GDP
Okun's Law is defined as:
change in the unemployment rate = -1/2 * (g-2%)
when the fed raises interest rates and engages in tighter monetary policy it is called __ monetary policy
contractionary
recessions are periods in which the economy __, while economic expansions are defined as the periods __
contracts, between recessions
the functions of a central bank are to __
control certain key interest rates, indirectly control the money supply, and monitor financial institutions
during recessions, firms typically prefer to achieve a reduction in employment by ___. But, if this is not sufficient for reducing employment quickly, they would have to ___.
cutting back new hiring; engage in mass layoffs.
HW 9 Q9 LOOK AT PEARSON: what is the graphical effect of a negative shock on the labor demand curve in an economy assuming wages are rigid and cannot change in the short-run?
demand shifts left and then when the effects of the multipliers kick in, demand shifts left again. (need to notice the difference between rigid and flexible wages)
when does the curve for the federal funds market shift left?
economic contractions, change in liquidity needs decreases, change in deposit base not by borrowing, decrease in reserve requirement, and interest paid by Fed decreases for deposits at Fed
when does the curve for the federal funds market shift right?
economic expansions, change in liquidity needs increases, change in deposit base signifying a need to borrow, increase in reserve requirement, and interest paid by Fed increases for deposits at Fed
Store of value:
enables people to transfer purchasing power into the future
You need to get your house painted. You register with a barter website and offer your car cleaning services to someone who will paint your house in return. What problems are you likely to encounter?
Difficulty finding someone that needs you to wash his car and paint your house in return, difficult to agree on how many car washes is equivalent to painting a house, and it may take a lot of time to negotiate and finally settle on a deal that you both find fair
Growth rate of money supply =
Growth rate of nominal GDP
T or F: The feds interest rate target for the end of 2022 is 4.4%?
True
a multiplier is ___
an economic mechanism that causes an initial shock to be amplified by follow-on effects
an open market operation is __
an exchange between a private bank and the federal reserve where the fed buys or sells government bonds to private banks
an example of a multiplier is when ___
an increase in business confidence causes firms to increase production and hire employees, leading to an increase in household spending, causing firms to further increase production and employment. another example is a drop in consumer confidence reduces household spending, causing firms to cut production and lay off employees, leading to a greater reduction in household spending
If nominal GDP increases, this could be caused by:
an increase in the price level or an increase in real GDP
an economic expansion begins:
at the end of a recession
regulation:
audits financial statements of large banks (ability of banks to absorb losses) and monitors shareholders equity amounts
