Final Review Econ
Commodity money
money that has "intrinsic value." That is, it has value independent of its use as money. Gold, silver, and cigarettes in a prisoner-of-war camp are all examples of commodity money. When a country uses gold as money, it is operating under a gold standard.
Fiat money
money without intrinsic value. It is money by government fiat or declaration. Paper dollars are an example of fiat money.
S = I
national savings = investment
A bank which must hold 100 percent reserves opens in an economy that had no banks and a total initial money supply (currency) of $1,000. If customers deposit $87 into the bank, what is the value of the money supply?
$1,000 Banks in a 100-percent-reserve-banking system accept deposits, but do not loan out the reserves. banks do not influence the money supply in a system of 100-percent-reserve banking. In this case, if a customer deposits $87 into her checking account, currency will decrease by $87 but at the same time demand deposits will increase by $87 leaving M1 unchanged. Therefore, the money supply does not change and remains at $1,000.
how is a municipal bond unique?
(bond issued by state or local government) Municipal bonds are tax exempt. Thus, municipal bonds pay lower interest.
National Saving formula
(income left after paying consumption and government purchases) I = Y - C - G S = Y - C - G
Unemployment rate =
(number of unemployed/labor force) * 100
What does the fed do
1.To regulate the banks and ensure the health of the banking system. The Fed monitors each bank's financial condition and helps clear checks. In a crisis, when banks find themselves short of cash, the Fed may act as the lender of last resort to the banks. 2.To control the quantity of money in the economy, called the money supply. The Fed's decisions about the money supply are called monetary policy.
Which of the following is not correct about the Fed? A. the Federal Reserve Chair is appointed by the speaker of the house to a four-year term. B. The Board of Governors has 7 members C. the Federal Reserve has 12 regional banks. D. members of the Board of Governors serve 14-year terms.
A. The chair of the Fed, who directs staff, presides over board meetings and testifies in front of congress, is appointed (and potentially reappointed) by the president for terms of 4 years.
An investment tax credit shifts what curve?
An investment tax credit would encourage borrowing at each real interest rate level. As a result, the demand curve for loanable funds will shift to the right causing both the equilibrium quantity of loanable funds and the equilibrium interest rate to increase.
Consider two economies with diminishing returns to capital. The economies are identical except one has a higher capital per worker than the other. Suppose that the saving rates in both countries increase. A. Over the next few years, the growth rate of technological knowledge will be lower in the country that started with less capital per worker. B. Over the next few years, the growth rate of real GDP per worker will be higher in the country that started with less capital per worker. C. Over the next few years, the growth rate of real GDP per worker will be higher in the country that started with more capital per worker. D. Over the next few years, the growth rate of human capital will be higher in the country that started with less capital per worker.
B. growth rate of real GDP per worker will be higher in the country that started with less capital per worker. The accumulation of capital is subject to diminishing returns: The more capital an economy has, the less additional output the economy gets from an extra unit of capital.
A perpetuity is distinguished from other bonds in that it: A. will be used to purchase another bond when it matures unless the owner specifies otherwise. B. never matures. C. pays continuously compounded interest. D. pays interest only when it matures.
B. never matures A bond that never matures is called a perpetuity.
The worker health version of the efficiency wage theory is A. less relevant for explaining unemployment in less developed countries than in developed countries. B. less relevant for explaining unemployment in developed countries than in less developed countries. C. equally relevant for explaining unemployment in less developed countries and in developing countries. D. not relevant for explaining unemployment.
B.Efficiency wages are above equilibrium wages to increase productivity. By providing a nutritious diet workers may be stronger and have fewer sick days. Given the lower level of real wages in developing countries, this explanation is most relevant for developing countries.
type of financial intermediaries.
Banks and mutual funds
Consider the market for loanable funds, which is initially in equilibrium. Suppose the government allows workers to increase the maximum contribution limits to 401(k) and 403(b) tax-deferred retirement accounts. Which of the following describes the effect of this change on the market for loanable funds? A. The interest rate would increase and the quantity of loanable funds would decrease. B. The interest rate and quantity of loanable funds would decrease. C. The interest rate would decrease and the quantity of loanable funds would increase. D. The interest rate and quantity of loanable funds would increase
C. The interest rate would decrease and the quantity of loanable funds would increase. Other things being the same, if people can increase their tax-deferred savings, the amount of loanable funds increases at each real interest rate level. As a result, the supply curve of loanable funds shifts to the right causing the equilibrium interest rate to decrease and the equilibrium quantity of loanable funds to increase.
The source of the demand for loanable funds is: A. GDP. B. saving. C. investment. D. imports.
C. investments The demand for loanable funds comes from households and firms who wish to borrow to make investments. Thus investment is the source of the demand for loanable funds.
Which of the following describes the difference between compounding and discounting?
Compounding produces a future value, whereas discounting produces a present value.
compounding
Compounding refers to interest being earned on previously-earned interest.
Other things the same, when an economy increases its saving rate, consumption increases now and production rises later. True False
False Because resources are scarce, devoting more resources to producing capital requires devoting fewer resources to producing goods and services for current consumption. That is, for society to invest more in capital, it must consume less and save more of its current income. The growth that arises from capital accumulation requires that society sacrifice consumption in the present to enjoy higher consumption in the future. Thus when an economy increases its saving rate, consumption falls now, but production rises late.
Efficiency wages A. increase turnover and so create frictional unemployment. B. increase turnover and so create structural unemployment. C. create a surplus of labor and so create frictional unemployment. D. create a surplus of labor and so create structural unemployment.
D. By providing a high wage, efficiency wages reduce turnover. However, a wage above the equilibrium creates structural unemployment.
Which of the following most accurately describes what data are included in fundamental analysis of the value of a stock?
Dividends, the expected final sale price, and the ability of the corporation to earn profits.
GDP per capita formula
Economy $/population
Efficiency wages
Efficiency wages are above equilibrium wages intended to raise productivity and profits, but they also raise unemployment.
If the supply curve of loanable funds shifts to the left, then the equilibrium interest rate falls and the quantity of loanable funds rises True False
False A shift of the supply curve of loanable funds to the left causes the equilibrium interest rate to increase. The higher interest rate will discourage investment and decrease the equilibrium quantity of loanable funds.
The term junk bond refers to bonds that have been resold many times. True False
False Financially shaky corporations raise money by issuing junk bonds, which pay very high interest rates to compensate for the high risk of default.
Suppose an economy experiences an increase in its saving rate. The higher saving rate leads to a higher growth rate of productivity in the long-run. True False
False The accumulation of capital is subject to diminishing returns: The more capital an economy has, the less additional output the economy gets from an extra unit of capital. As a result, although higher saving leads to higher growth for a period of time, growth eventually slows down as capital, productivity, and income rise.
An index fund holds only stocks and bonds that are indexed to inflation. True False
False An index fund holds all the stocks in a given stock index
If the government were to decrease the tax rate on interest income, there the equilibrium amount of loanable funds would increase and the equilibrium interest rate would decrease. True False
False Supply shift Other things being the same, a lower tax on interest income would encourage saving at each real interest rate level. As a result, the supply of loanable funds curve would shift to the right causing the equilibrium interest rate to decrease and the equilibrium quantity of loanable funds to increase.
In the late 1800's, Japan was the richest country in the world. True False
False In 1870, the United Kingdom was the richest country in the world with real GDP per person of $4,853, whereas real GDP per person in Japan was only $1,517.
What happens when a country receives foreign investments.
Investment from abroad is a way for a country to grow. Even though some of the benefits from this investment flow back to the foreign owners, this investment does increase the economy's stock of capital, leading to higher productivity and higher wages.
Over the last century, which of the following countries had the highest growth rate of real GDP per person? Mexico The United Kingdom Japan China
Japan
labor force =
Labor force = employed + unemployed
M1 =
M1: Currency, demand deposits, traveler's checks, other checkable deposits
M2 =
M2 includes everything in M1, plus savings deposits, small time deposits, money market mutual funds and the miscellaneous categories of M2. DOES NOT INCLUDE LAGE TIME DEPOSIT AND CREDIT CARD BALANCE
Which of the following countries is a middle-income country, which over the past century had a higher rate of economic growth than the United States? Argentina Canada Mexico Japan
Mexico
Japan's status as a rich nation is attributable to international trade, but not to Japan's domestic quantities of natural resources.
Natural resources are not necessary for an economy to be highly productive in producing goods and services. Japan, for example, is one of the richest countries in the world, despite having few natural resources. International trade makes Japan's success possible. Japan imports many of the natural resources it needs, such as oil, and exports its manufactured goods to economies rich in natural resources.
Savings = private saving + public saving (tax)
S = (Y - T - C) + (T - G) Private Savings = (Y - T - C) Public Savings = (T-G)
The members of the Federal Reserve's Board of Governors
The board of governors of the Fed is made up of the seven members that must be appointed by the president and confirmed by the U.S. senate. The governors serve terms of 14-years in order to insulate them from the current political climate and allow them to make more objective decisions.
employed
The employed include paid employees, those who work in their own business, those who work in a family business without pay, and those who are temporarily absent from work due to illness, weather, or vacation.
Productivity
The quantity of goods and services produced from each unit of labor input.
frictional unemployment
The resulting unemployment is caused by the fact that it takes time for workers to search for the jobs that best suit their tastes and skills.
Japan is an advanced economy, and over the past century its rate of economic growth has been higher than that of the United States. True False
True
Suppose an economy experiences an increase in its saving rate. The higher saving rate leads to a higher growth rate of productivity in the short- run. True or False?
True
The traditional view of the production process is that capital is subject to diminishing returns. So that other things the same, real GDP in poor countries should grow at a faster rate than in rich countries. True False
True
All other things being the same, the future value of a deposit in a savings account will be larger the longer a person waits to withdraw the funds. True False
True The future value of the deposit ($X) is the amount of money in the future (say, in n years) that $X will yield, given prevailing interest rates (r): $X × (1 + r)n. The formula implies a positive relationship between the future value and the time period, n. In other words, if the interest rate remains the same, the future value of $X will be larger the longer the deposit is not withdrawn.
Real GDP per person more accurately measures a nation's standard of living than nominal GDP per person. True False
True Real GDP is adjusted for inflation, whereas nominal GDP is not. Thus, nominal GDP will often appear higher than real GDP.
GDP in terms of Y (formula)
Y = C + I + G + NX GDP = consumption + investment + government expenditure + net exports
Which of the following lists accurately describes M1? a. Demand deposits, traveler's checks, other checkable deposits and currency. b. Only currency. C. Savings deposits, checking deposits, and currency. d. Savings deposits, small time deposits, money market mutual funds and other minor categories
a. In general, M1 includes the most liquid assets, while M2 includes everything in M1 plus a few additional assets which are less liquid.
Financial markets
allow firms to borrow directly from those who wish to lend. The two most important financial markets are the bond market and the stock market
bond market
allows large borrowers to borrow directly from the public. The borrower sells a bond (a certificate of indebtedness or IOU), which specifies the date of maturity (the date the loan will be repaid), the amount of interest that will be paid periodically, and the principal (the amount borrowed and to be repaid at maturity). The buyer of the bond is the lender.
Which of the following includes everyone in the adult population that the Bureau of Labor Statistics counts as "unemployed?"
anyone who is not employed, is available for work, has looked for work in the past four weeks, and anyone who is waiting to be recalled from a job from which they have been laid off.
The downside of pursuing a policy that increases saving and investment is
current consumption of goods and services decreases.
debt finance vs equity finance
debt finance = bonds equity finance = stock
Suppose that in a country people lose confidence in the banking system and so hold relatively more currency and less deposits. As a result, bank reserves will ____________ and the money supply will eventually __________
decrease and the money supply will eventually decrease.
cyclical unemployment
deviation in unemployment from the natural rate
The rate charged at the Fed's "discount window" is known as the
discount rate- discount rate is the interest rate on the loans the Fed makes to other banks. Traditionally, these loans are made from the Fed's discount window.
True or False: The Fed most often influences the money supply by changing reserve requirements for banks.
false The Fed most frequently influences the money supply using open market operations. This is because open market operations are easy to carry out, on either a smaller or larger scale, and typically do not require changes in laws or regulations.
Suppose that consumers decide to ride buses more often and own fewer cars. Bus companies hire more drivers, while automobile companies lay off workers. The unemployment this creates is an example of
frictional unemployment created by sectoral shifts.
A reduction in government debt and deficits
increases public saving (T-G) so more national saving is available at each real interest rate. Graphically, this policy will shift the supply of loanable funds to the right, decrease the real interest rate, and increase the quantity demanded of funds for investment. Real interest rates fall, and saving and investment rise.
Effect of reduced taxation on interest and dividends
increases the return to saving for any real interest rate and, thus, increases the desire to save and loan at each real interest rate. Graphically, this policy will shift the supply of loanable funds to the right, lower the real interest rate, and raise the quantity demanded of funds for investment. Real interest rates fall while saving and investment rise.
Structural unemployment
is defined as unemployment created by above equilibrium wages.
Commodity money
is money that takes the form of a commodity with intrinsic value
diminishing marginal utility
less utility she gets from an additional dollar. In other words, the function gets flatter as wealth increases.
If outsiders had more say in union contracts then it is likely that union wages would be
lower which would make structural unemployment lower. Outsiders are those who become unemployed when the union raises wages. They'd prefer to the union reduce wages so they would be hired back. Moving the wage closer to equilibrium would reduce structural unemployment.
growth rate formula
new GDP - old GDP/old x 100
Labor force participation rate =
participation rate = (labor force/ adult population) * 100
credit risk
probability of default The probability that the borrower will fail to pay some of the interest or principal.
Real interest equation
real interest = nominal interest - inflation
Fundamental analysis
refers to a detailed analysis of a company to determine its value.
The source of the supply of loanable funds is
savings The supply of loanable funds comes from people who have some extra income they want to save and lend out. This lending can occur directly or indirectly. In both cases, saving is the source of the supply of loanable funds.
Cyclical unemployment
the deviation of unemployment from its value at the natural rate. Deviations from the natural rate are associated with changes in real GDP and is closely associated with the short-run ups and downs of economic activity.
Financial decisions involve what two elements
time and risk
According to the efficient markets hypothesis, asset prices reflect all publicly available information about the value of an asset. true false
true
If the efficient markets hypothesis is correct, that all stocks are fairly valued all the time and that no stock is a better buy than any other. true fase
true
Marginally attached workers
workers who are not currently working nor looking for work but have looked for work sometime in the recent past.
