Econ Midterm 2

MPS formula

1-MPC

three tasks of a financial system

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

human-made resources such as buildings and machines

Physical capital

if the marginal propensity to consume is greater than zero but less than one, when disposable income rises by $1, consumption will:

rise by less than $1

savings-investment spending identity

savings and investment spending are always equal for the economy as a whole

creates frictional unemployment:

scarcity of information

the increased costs of transactions caused by inflation

shoe-leather costs

holding everything else constant in an economy, the larger the MPS, the _____

smaller the value of the multiplier

a _____ is a share in the ownership of a company held by a shareholder

stock

a hypothetical market that illustrates the market outcome of the demand for funds generated by borrowers and the supply of funds provided by lenders

the loanable funds market

even small differences in growth rates get magnified over time:

the magic of compounding

aggregate demand will increase if:

the public becomes more optimistic.

an association of workers that bargains collectively with employers over wages, benefits, and working conditions

union

cots arising from the way inflation makes money a less reliable unit of measurement

unit-of-account costs

the value of a households accumulated savings:

wealth

price index in a given year formula

(price of market basket in specific year/price of same basket in base year) x 100

a wage offered by an employer as an incentive for more work effort and performance and that exceeds the equilibrium wage rate is known as an ________wage

Efficiency

GDP per capita formula:

GDP/population

which of the following is true of an open economy?

GDP=C+I+G+X-IM

Who pays for private investment spending?

In the modern economy, individuals and firms that create physical capital often do it with other people's money

Infrastructure includes:

New York city's public transportation system

GDP deflator

Nominal GDP/Real GDP x 100

the rule of 70

Number of years for variable to double = 70/Annual growth rate of variable

Present Value Formula

PV=FV/(1+r)^n r- interest rate n-number of years (or periods)

similar to the CPI but measures changes in the prices of goods purchased by producers

producer price index (PPI)

more people are seeking jobs in a particular labor market than there are jobs available at the current wage rate (mismatch of skills)

Structural unemployment

long run growth that can continue in the face of the limited supply of natural resourced and the impact of growth on the environment:

Sustainable long run economic growth

an advance in technology means of production in goods and services

Technological progress

other things being equal, it there is a decrease in the interest rate below 8% _____ quantity of loanable funds will be demanded

a larger

value of market basket

add total of each year, then add both totals together

a graphical representation of the relationship between the total quantity of goods and services demanded and the price level is the:

aggregate demand curve

a measure of the overall level prices in the economy

aggregate price level

a financial intermediary that provides liquid assets in the form of bank deposits to lenders and uses those funds to finance the illiquid investment spending needs of borrowers who don't want to use the stock or bond markets

bank

a _____ is borrowing in the form of an IOU that pays interest

bond

the difference between tax revenue and government spending

budget balance

The excess of government spending over tax revenue is:

budget deficit

excess of tax revenue over government spending

budget surplus

all else equal:

ceteris paribus

MPC formula

change in consumption/change in income

Income divided by the price level is _____ income.

real

the standard of living in a country can be best measured by

real GDP per capita

the nominal interest rate minus the rate of inflation

real interest rate

the MPC equals change in _____ divided by the change in ______

consumer spending; disposable income

international differences in real GDP per capita tend to narrow over time:

convergence hypothesis

is the deviation from the natural rate in the actual rate of unemployment

cyclical definition

unemployment correlated with the business cycle

cyclical unemployment

a _____ occurs when a borrower fails to make payments as specified by the loan or loan contract

default

the three tasks of a financial system does NOT include

determination of fiscal policy

each successive increase in the amount of physical capital per worker leads to a smaller increase in productivity:

diminishing returns to physical capital

the process of brining down the inflation rate

disinflation

income after taxes are paid and government transfers are received

disposable income

investing in several assets with unrelated, or independent, risks; reduces risk

diversification

true or false: frictional unemployment is a special type of structural unemployment

false

true or false: if you expect to get a substantial raise six months from now and if you are like most people, it will not affect your current consumption because you haven't received the money yet

false

true or false: shoe-leather costs may be especially important in that tax system when inflation distorts the measures of income on which taxes are collected

false

a ______ is a paper claim that entitles the buyer to future income from the seller

financial asset

a ______ is an institution that transforms the funds it gathers from many individuals into financial assets

financial intermediary

______ channel the savings of households to businesses that want to borrow in order to purchase capital equipment

financial markets

uncertainty about future outcomes that involve financial losses or gains:

financial risk

Unemployment due to the time workers spend in job search

frictional unemployment

natural unemployment:

frictional unemployment + structural unemployment

the wage rate divided by the price level

real wage

a business will want to borrow to undertake an investment project when the rate of return on that project is________rate

higher that the interest

the improvement in labor created by the education and knowledge embodied in the workforce

human capital

if interest rates on bonds rise, holding other things constant, stock prices will:

increase

Productivity increases when

increase in physical & human capital, technological progress

in the long run, an increase in saving will generally:

increase the rate of economic growth

the percentage increase in the overall level of prices

inflation rate

the yearly percentage change in a price index, typically based on consumer price index, the most common measure of aggregate price level

inflation rate

the price that a lender charges for the use of his or her savings for one year

interest rate

Output per worker=

labor productivity

a decrease in savings by the private sector will shift they supply of loanable funds to the _____ and ______ the interest rate

left; increase

a _______ is a requirement to pay income in the future

liability

sells policies that guarantee a payment to a policyholder's beneficiaries when the policyholder dies

life insurance company

a lending agreement made between an individual lender and an individual borrower

loan

a ______ is an asset created by pooling individual loans and selling shares in that pool

loan-backed security

how much consumers spend when they receive income

marginal propensity to consume (MPC)

the fraction of an additional dollar of disposable income that is saved

marginal propensity to save (MPS)

a hypothetical set of consumer purchases of goods and services

market basket

the real cost of changing a listed price

menu cost

which item does not qualify as physical capital?

mineral deposits

financial intermediary that builds a stock portfolio and resell shares of this portfolio to individual investors

mutual fund

the sum of private savings and the budget balance (the total amount of savings generate within the economy)

national savings

actual unemployment

natural unemployment + cyclical unemployment

whenever planned aggregate spending exceeds real GDP, unplanned inventory investment is:

negative

the total flow of funds into a country minus the total flow of funds out of a country

net capital inflow

the interest rate expressed in dollar terms

nominal interest rate

real interest rate formula

nominal interest rate - inflation rate

a type of mutual fund that holds assets to provide retirement income to its members

pension fund

a _____ is a tangible object that can be used to generate future income

physical asset

actual investment equals planned investment:

plus unplanned investment.

an amount that would equal a particular future value if deposited today at a specific interest rate is the:

present value

the cost of purchasing a given market basket in a given year, where the cost is normalized so that it is equal to 100 in the selected base year

price index

inflation formula:

price year 2 - price year 1/ price year 1 x100

according to the _______ a dollar today is worth more than having a dollar a year from now

time value of money principle

the amount of output that can be produced with a given amount of factor inputs:

total factor productivity

the expenses of negotiating and executing a deal

transaction costs

true or false: during times of high inflation, people hold less cash and make more withdrawals, so banks often. open new branches

true