Macro Final

1) In macroeconomics, equilibrium is defined as that point at which A) saving equals consumption. B) planned aggregate expenditure equals aggregate output. C) planned aggregate expenditure equals consumption. D) aggregate output equals consumption minus investment.

B) planned aggregate expenditure equals aggregate output.

5) If you earn additional $500 in disposable income one week for painting your neighbors house, A) the total of your consumption and saving will increase by more than $500. B) the total of your consumption and saving will increase by $500. C) the total of your consumption and saving will increase by less than $500. D) your consumption will increase by more than $500, even if your MPS is 0.1.

B) the total of your consumption and saving will increase by $500.

Negative supply shock

Demand driven recession which people stop purchasing and inventories buildup leading to less production; recessions in the 1960s and 70s

Borrowing

Demand for financial capital

Structural unemployment

Due to more people are seeking jobs in a labor market than there are jobs available at the current wage rate; - A particular labor force is not in demand - Change in the structure of economy cause changes in demand for jobs - Minimum wage increase unemployed low-skilled people

Financial capital

Economic resources measured in terms of money

Demand and Supply Models

Explain existing levels of, and how economic events will cause changes in, prices and quantities

1) As interest rates fall, spending decreases.

FALSE

1) If actual investment is greater than planned investment, unplanned inventories decline.

FALSE

1) The larger the MPC, the smaller the multiplier.

FALSE

1) When aggregate expenditure is greater than aggregate output, there will be an unplanned build up of inventories.

FALSE

2) Firms react to an unplanned inventory investment by increasing output.

FALSE

2) Uncertainty about the future is likely to increase current spending.

FALSE

4) If planned saving exceeds planned investment, injections are greater than leakages.

FALSE

4) If the marginal propensity to consume is .8, the marginal propensity to save is 8.

FALSE

5) An increase in the MPC, reduces the multiplier.

FALSE

5) If aggregate expenditure decreases, then equilibrium output increases.

FALSE

Deflation

Falling overall level of prices

5) Over which component of investment do firms have the least amount of control? A) purchases of new equipment B) construction of new factories C) changes in inventories D) building new machines

C) changes in inventories

8) Uncertainty about the future is likely to A) increase current spending. B) have no impact on current spending. C) decrease current spending. D) either increase or decrease current spending.

C) decrease current spending.

24) Related to the Economics in Practice on p. 154 [466]: According to the "paradox of thrift," increased efforts to save will cause a(n) A) increase in income and an increase in overall saving. B) increase in income but no overall change in saving. C) decrease in income and an overall decrease in saving. D) decrease in income but an increase in saving.

C) decrease in income and an overall decrease in saving.

7) Saving is a ________ variable and savings is a ________ variable. A) flow; flow B) stock; stock C) flow; stock D) stock; flow

C) flow; stock

4) If the MPS is .60, MPC A) is 1.60. B) is .30. C) is .40. D) cannot be determined by the given information.

C) is .40.

44) A decrease in planned investment causes A) output to increase. B) output to decrease, but by a smaller amount than the decrease in investment. C) output to decrease, but by a larger amount than the decrease in investment. D) output to decrease by an amount equal to the decrease in investment.

C) output to decrease, but by a larger amount than the decrease in investment.

4) If unplanned inventory investment is positive, then A) planned investment must be zero. B) planned aggregate spending must be greater than aggregate output. C) planned aggregate spending must be less than aggregate output. D) planned aggregate spending must equal aggregate output.

C) planned aggregate spending must be less than aggregate output.

21) If autonomous consumption increases, the size of the multiplier would A) increase. B) decrease. C) remain constant. D) either increase or decrease depending on the size of the change in autonomous consumption.

C) remain constant.

29) The fraction of a change in income that is consumed or spent is called A) the marginal propensity of income. B) the marginal propensity to save. C) the marginal propensity to consume. D) average consumption.

C) the marginal propensity to consume.

10) If planned investment exceeds actual investment, A) there will be an accumulation of inventories. B) there will be no change in inventories. C) there will be a decline in inventories. D) none of the above

C) there will be a decline in inventories.

43) Aggregate output will increase if there is a(n) A) increase in saving. B) unplanned rise in inventories. C) unplanned fall in inventories. D) decrease in consumption.

C) unplanned fall in inventories.

3) If aggregate output is greater than planned spending, then A) unplanned inventory investment is zero. B) unplanned inventory investment is negative. C) unplanned inventory investment is positive. D) actual investment equals planned investment.

C) unplanned inventory investment is positive.

GDP of a nation(Y)

C+I+G+NX

AEplanned=

C+Iplanned

consumption function with taxes

C=A+MPC*(Y-Tax)

GDP: Consumption expenditures

Component of GDP

GDP: Government spending

Component of GDP

Employed

Currently working for pay

S + (M-X)

(G-T)

Macroeconomic framework

- Aggregate demand/supply - Keynesian model - Neoclassical model

Counted in GDP

- Consumption - Business investment - Gov't expenditure - Net exports (Ex-Im)

Macroeconomic goals

- Economic growth - Low unemployment - Low inflation

Hurt by inflation when

- Holding cash - Financial asset investment with nominal return that doesn't keep up with inflation - Wages lag behind inflation - Receiving a private pension

Not counted in GDP

- Intermediate goods - Used goods - Illegal goods - Financial assets (stocks)

Causes of convergence

- International differences in real GDP per capita tend to narrow over time - Diminishing marginal returns - Low-income countries can apply already established technologies

Macroeconomic policy tools

- Monetary policy - Fiscal policy

GDP is measured in

- The total dollar value of what consumers purchase in the economy - The total dollar value of what the country produces

(Neo-)Classical Economists

- There should be no cyclical unemployment - Believe that there is no sticky price

GDP & Well-Being of society

-Decrease in crime is not reflected in GDP -Increase in leisure is sometimes associated with a decrease in GDP -Housework and child care are not counted in GDP -GDP does not show the distribution of output

Actual inflation < Anticipated inflation

-Higher real interest rate -Creditors win, Debtors lose

Actual inflation > Anticipated inflation

-Lower real interest rate -Debtors win, Creditors lose

income-expenditure model assumptions

-changes in overall spending lead to changes in aggregate output -interest rate is fixed -government expenditure=0 -net exports=0

Interest rate affects investment how?

-lower interest rates encourage capital investment(cheaper to borrow) -lower interest rates encourage new residential investment

MPS

1-MPC

Determinants of Labor productivity

1. Human capital - accumulated knowledge, skills 2. Technological change - invention & innovation 3. Economies of scale - cost advantages that obtained due to size

Types of exchange rate

1. Market exchange rates - Short term 2. Purchasing power parity - Long term

Macroeconomic concerns

1. Output growth 2. Unemployment 3. Inflation and deflation

Long-run growth is measured in

1. Output growth - growth rate of output of the entire economy 2. Per-capita output growth 3. Productivity growth - growth rate of output per worker

multiplier

1/(1-MPC) or delta y/delta i or 1/MPS

14) Without the government or the foreign sector in the income-expenditure model, planned aggregate expenditure equals A) consumption plus actual investment. B) consumption plus inventory adjustment. C) consumption minus planned investment. D) consumption plus planned investment.

D) consumption plus planned investment.

16) Related to the Economics in Practice on p. 147 [459]: Early results from the Save More Tomorrow retirement plans have shown ________ in the savings rates of the enrolled. A) very little change B) mixed results C) significant decreases D) dramatic increases

D) dramatic increases

CPI

= (Current yr GDP/Base Yr GDP) x 100

Disposable income

= (Income) - (Personal income taxes); the actual amount of money people can spend

Real GDP

= (Nominal GDP)/(Price Index/100)

Calculate: GDP Deflator - Does not include imports

= (nGDP/rGDP)×100

Value added

= (sales) - (value of intermediate goods/services)

Unemployment rate

= (unemployed people/total labor force) *100; - Can overstate b/c even if the labor market is healthy, it takes time to find the right job - Can understate b/c there are people who involuntarily left the labor market

Calculate GDP

= C + I + G + NX

GDP: Net exports

= Export - Import

Natural unemployment

= Frictional unemployment + Structural unemployment

GDP per capita

= GDP / population; Better measure than GDP

Net National Product (NNP)

= GNP - Depreciation

Net Investment

= Gross Investment - Depreciation

End Capital

= Initial Capital + Net Investment

Actual unemployment

= Natural unemployment + Cyclical unemployment

Nominal Interest Rate

= Real interest rate + Inflation rate

Calculate: Inflation rate

= {(Price_yr2 - Price_yr1)/Price_yr1} ×100 = {(Index_t - Index_(t-1))/Index_(t-1)} ×100

Calculate: CPI - consumer basket of goods

= {(Q_t×P_t)/(Q_base×P_base )}×100

Calculate: PPI - producer inputs

= {(Q_t×P_t)/(Q_base×P_base )}×100

planned investment at equilibrium

=saving

Sustained long-term economic growth

Increase in worker productivity

Underemployed

Individuals who are employed in a job that is below their skills

C =

A + MPC * Y

aggregate ouput(income)(Y)

A combined term used to remind the exact equality between aggregate output and aggregate income

Inflation

A general rise in the level of prices in an entire economy -Does not refer to a change in relative (individual) prices -Monetary policies determine inflation

CPI: Basket of goods and services

A hypothetical fixed group of different items, with specified quantities of each one meant to represent a "typical" set of urban consumer purchases - Computed using a weighted average

quota

A limit placed on the quantities of a product that can be imported

Recession

A period of economic decline; identified by a fall in GDP in two successive quarters (6 months)

Modern economic growth

A period of rapid economic growth from 1870 onward

Sticky Prices

A period of time in which prices do not change or do not change very much

Hyperinflation

A period of very rapid increases in the overall price level (e.g. gov't prints more money to pay their own debts)

Minimum wage

A price floor that makes it illegal for an employer to pay employees less than a certain hourly rate

Depression

A prolonged and deep recession

taylor rule

A rule developed by John Taylor that links the Fed's target for the federal funds rate to economic variables

Index number

A unit-free number derived from the price level over a number of years, which makes computing inflation rates easier, since the index number has values around 100

9) Assuming there is no government or foreign sector, the formula for the multiplier is A) 1/(1 - MPC). B) 1/MPC. C) 1/(1 + MPC). D) 1 - MPC.

A) 1/(1 - MPC).

40) Using the saving/investment approach to equilibrium, the equilibrium condition can be written as A) C + I = C + S. B) C = S + I. C) C - S = I. D) C + S = I.

A) C + I = C + S.

3) Saving equals A) Y - C. B) Y - planned I. C) Y - actual I. D) Inventory changes.

A) Y - C.

64) If the consumption function is below the 45-degree line, A) consumption is less than income and saving is positive. B) consumption is less than income and saving is negative. C) consumption exceeds income and saving is positive. D) consumption exceeds income and saving is negative.

A) consumption is less than income and saving is positive.

11) In a closed economy with no government, aggregate expenditure is A) consumption plus investment. B) saving plus investment. C) consumption plus the MPC. D) MPC + MPS.

A) consumption plus investment.

19) As the MPS decreases, the multiplier will A) increase. B) decrease. C) remain constant. D) either increase or decrease depending on the size of the change in investment.

A) increase.

10) Consumption is A) positively related to household income and wealth and households' expectations about the future, but negatively related to interest rates. B) negatively related to household income and wealth, interest rates, and households' expectations about the future. C) determined only by income. D) positively related to household income and wealth, interest rates, and households' expectations about the future.

A) positively related to household income and wealth and households' expectations about the future, but negatively related to interest rates.

42) Firms react to unplanned increases in inventories by A) reducing output. B) increasing output. C) increasing planned investment. D) increasing consumption.

A) reducing output.

1) The MPC is A) the change in consumption divided by the change in income. B) consumption divided by income. C) the change in consumption divided by the change in saving. D) the change in saving divided by the change in income.

A) the change in consumption divided by the change in income.

2) The MPS is A) the change in saving divided by the change in income. B) 1 + MPC C) income divided by saving. D) total saving divided by total income.

A) the change in saving divided by the change in income.

4) Which of the following is an investment? A) the purchase of a new printing press by a business B) the purchase of a corporate bond by a household C) the purchase of a share of stock by a household D) a leveraged buyout of one corporation by another

A) the purchase of a new printing press by a business

5) If aggregate output equals planned aggregate expenditure, then A) unplanned inventory investment is zero. B) unplanned inventory adjustment is negative. C) unplanned inventory adjustment is positive. D) actual investment is greater than planned investment.

A) unplanned inventory investment is zero.

increase in interest rates

AD shifts left

Y =

AE

increase in price level causes

AE and real GDP to fall

decrease in price level causes

AE and real GDP to rise

Relative wage coordination argument

Across-the-board wage cuts are hard for an economy to implement

invisible hand

Adam Smith's concept that individuals' self-interested behavior can lead to positive social outcomes

National Income Approach

Adding up all the income produced in a year; the total value of a nation's output is equal to the total value of income

Real interest rate

Adjusted for inflation (= nominal interest rate - rate of inflation)

Personal saving

Amount of disposable income that is left after total personal spending in a given period

Fisher effect

An increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged

Market for loanable funds model

An interaction of borrowers and lenders determining the market interest rate and the quantity of loanable funds exchanged

12) If Wanda's income is reduced to zero after she loses her job, her consumption will be ________ and her saving will be ________. A) less than zero; less than zero B) greater than zero; greater than zero C) less than zero; greater than zero D) greater than zero; less than zero

D) greater than zero; less than zero

23) Related to the Economics in Practice on p. 154 [466]: According to the "paradox of thrift," as individuals increase their saving, A) income in the economy increases because there is more money available for firms to invest. B) income in the economy increases because interest rates will fall and the economy will expand. C) income in the economy will remain constant because the change in consumption equals the change in saving. D) income in the economy will fall because the decreased consumption that results from increased saving causes the economy to contract.

D) income in the economy will fall because the decreased consumption that results from increased saving causes the economy to contract.

2) The economy can be in equilibrium if, and only if, A) planned investment is zero. B) actual investment is zero. C) planned investment is greater than actual investment. D) planned investment equals actual investment.

D) planned investment equals actual investment.

Intertemporal decision making

Deciding when to consume goods, now or in the future

Substitution bias

Inflation rate calculated based on CPI overstate the true rise in the cost of living, because a person can substitute away from goods whose prices rise considerably - The Bureau of Labor Statistics uses alternative mathematical methods for calculating the CPI

Quality/new goods bias

Inflation rate calculated based on CPI overstate the true rise in the cost of living, because there is invention of new goods - Updates the basket of goods behind the CPI more frequently, so that it can include new and improved goods

Intermediate goods/services

Inputs for production of final goods/services

GDP: Gross private domestic investment

Investment in capital includes nonresidential(machines) and residential(houses)

Catch-up

The growth rate of less developed countries will exceed the growth rates of developed countries

discount rate

The interest rate on the loans that the Fed makes to banks

Labor force

The number of employed plus the unemployed

Living wage

The amount a full-time worker would need to make to afford the essentials of life: good clothing, shelter, and healthcare

Change in inventories

The amount by which firms' inventories change during a period - Inventories are intended to sell later - GDP = Final sales + ΔInventories - Buildup of inventories mean people aren't spending as much

Business cycle

The cycle of short-term ups and downs in the economy

Derived demand

The demand for a good/service resulting from the demand for an intermediate or related good/service

interest on reserves

The payment by a central bank of interest on the deposits (required reserves plus excess reserves, if any) held by commercial banks at the central bank.

Interest rate

The price of borrowing in the financial market; a rate of return on an investment

Depreciation

The process by which capital ages over time and therefore loses its value

Efficiency wage theory

The productivity of workers, will increase if the employer pays them more

Aggregate output

The total quantity of goods/services produced in an economy in a given period

to avoid accelerating inflation over time

The unemployment rate must be high enough that the actual rate of inflation matches the expected rate of inflation

Labor productivity

The value of what is produced per worker, or per hour worked

Insider-outsider model

Those working for the firm are "insiders" who know the procedures; and recent or prospective hires are "outsiders"

The Big Mac Index

Tool for calculating purchasing power parity that compares prices of a Big Mac throughout the world.

Gross National Product (GNP)

Total market value of final goods/services produced within a given period by factors of production owned by a country's citizens, regardless of where the output is produced

Gross Domestic Product (GDP)

Total market value of the output of all final goods/services produced within a country in a given year - No intermediate, second-hand goods/services, stock market

National Bureau of Economic Research (NBER)

Tracks business cycles for the U.S. economy

international trade effect

US price rises faster than prices in other countries, exports fall, imports rise, net exports to fall

Frictional unemployment

Unemployed due to the time workers spend in job search

Cyclical unemployment

Unemployment correlated with the business cycle - the deviation from the natural cycle

Implicit contract

Unwritten agreement in the labor market that the employer will try to keep wages from falling when the economy is weak or the business is having trouble, and the employee will not expect huge salary increases when the economy is strong

velocity of money equation

V = (P x Y) / M or (Nominal GDP)/M

Exchange rate

Value of one currency in terms of another currency

Adverse selection of wage cuts argument

When employers reduce wages, the best will leave

Capital deepening

When society increases the level of capital per person - education, infrastructure, scientific research, special economic zones

Price stability

When the overall level of prices changes slowly or not at all

Industrial revolution

Widespread use of power-driven machinery and the economic and social changes that resulted int he first half of 1800s - Increased the inequality among nations - Real GDP per capita is the key statistic

Equilibrium =

Y = C + I

GDP(output)

Y(income)

Sprivate

Y+TR-C-T

S=

Y-C-G

assume closed economy

Y=C+I+G

Cobb-Douglas production function

Y=F(A,K,L) Real GDP is affected by productivity, capital stock, and labor

current account balance

a broad measure of the balance of trade that includes trade in goods and services, as well as international flows of income and foreign aid

change in prices is not caused by

a component of real GDP changing

floating exchange rate

a country lets the exchange rate market determine its currency's value

gain from trade

a country that can consume more than it can produce as a result of sepcialization and trade

net borrower

a country that is borrowing more from the rest of the world than it is lending to the rest of the world

dollarize

a country that is not the United States uses the US dollar as its currency

aggregate demand

a curve showing the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government

LRAS curve

a curve that shows the relationship in the long run between the price level and the quantity of real GDP supplied

phillips curve

a curve that shows the short-run trade-off between inflation and unemployment

Keynesian Cross

a diagram that identifies income-expenditure equilibrium as the point where a planned aggregate spending line crosses the 45-degree line

production possibilities frontier (PPF)

a diagram that shows the productively efficient combinations of two products that an economy can produce given the resources it has available.

circular flow diagram

a diagram that views the economy as consisting of households and firms interacting in a goods and services market and a labor market

inferior good

a good in which the quantity demanded falls as income rises, and in which quantity demanded rises and income falls

normal good

a good in which the quantity demanded rises as income rises, and in which quantity demanded falls as income falls

substitute

a good that can replace another to some extent that greater consumption of one good can mean less of the other

demand curve

a graphic representation of the relationship between price and quantity demanded of a certain good or service, with quantity on the horizontal axis and the price on the vertical axis

price ceiling

a legal maximum price

price floor

a legal minimum price

supply curve

a line that shows the relationship between price and quantity supplied on a graph, with quantity supplied on the horizontal axis and price on the vertical axis

goods and services market

a market in which firms are sellers of what they produce and households are buyers

underground economy

a market where the buyers and sellers make transactions in violation of one or more government regulations

means of payment

a method of settling a debt

Head Start program

a program for early childhood education directed at families with limited educational and financial resources

theory

a representation of an object or situation that is simplified while including enough of the key features to help us understand the object or situation

demand schedule

a table that shows a range of prices for a certain good or service and the quantity demanded at each price

supply schedule

a table that shows a range of prices for a good or service and the quantity supplied at each price

individual income tax

a tax bases on the income, of all forms, received by individuals

corporate income tax

a tax imposed on corporate profits

regressive tax

a tax in which people with higher incomes pay a smaller share of their income in tax

excise tax

a tax on a specific good--on gasoline, tobacco, and alcohol

estate and gift tax

a tax on people who pass assets to the next generation-- either after death or during life in the form of gifts

progressive tax

a tax that collects a greater share of income from those with high incomes than from those with lower incomes

proportional tax

a tax that is a flat percentage of income earned, regardless of level of income

quantity theory of money

a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate

purchasing-power-parity theory

a theory of international exchange rates are set so that the price of similar goods in different countries is the same

net inflow of foreign financial investment always accompanies

a trade deficit

a net outflow of financial investment always accompanies

a trade surplus

A=

autonomous consumption

shift factors of SRAS

availability of the factors of production, improvements in technology, future expectations, negative supply shock

trade balance

balance of trade looking at goods and services

In a closed economy with no government, aggregate expenditure is

consumption plus investment

SRAS is upward sloping because

contracts make some wages/prices sticky, firms are often slow to adjust wages, and menu costs make some prices sticky

sunk costs

costs that we make in the past that we cannot recover

M1 is composed of

currency held by individuals and businesses, traveler's checks, and checkable deposits owned by individuals and businesses

taylor rule formula

current inflation rate + equilibrium real federal funds rate + (1/2*inflation gap) +(1/2*output gap)

what happens if the Fed sells government securities

decreases money supply, decreases output, decreases aggregate demand, decreases inflation

twin deficits

deficits that occur when a country is running both a trade and a budget deficit

MPC

delta C / delta Y

statistical discrepancy

differences between current account and capital account, if there is any. it should be zero

Tools Fed uses

discount rate, reserve requirements, open market operations, interest on reserves

When Maria deposits $100 in currency in her checkable deposit at Bank of America, the immediate effect is that the quantity of M1 ________ because ________

does not change; both currency and checkable deposits are included in M1

If the AD curve shifts from year to year and the AS curve does not, then the short run Phillips curve would be

downward sloping

free trade agreement

economic agreement between countries to allow free trade between members

economic union

economic agreement between countries to allow free trade between members, a common external trade policy, and coordinated montary and fiscal policies

common market

economic agreement between countries to allow free trade in goods, services, labor, and financial capital between members while having a common external trade policy

fiscal policy

economic policies that involve government spending and taxes

aggregate income is always _______ to the aggregate output

equal

current account plus capital account (balance of payments)

equals zero

marginal analysis

examination of decisions on the margin, meaning a little more or a little less from the status quO

autonomous consumption

expenditures that consumers must make even when they have no disposable income

crowding out

federal spending and borrowing causes interest rates to rise and business investment to fall

short and long-run effects of Increase in AD

firms become more optimistic, increase investment(AD shifts right), unemployment falls(wages increase), increased demand(increase price level, SRAS -->), firms and workers raise expectations about the price level (SRAS<--) and long-run equilibrium restored

contractionary fiscal policy

fiscal policy that decreases the level of aggregate demand, either through cuts in government spending or increases in taxes

expansionary fiscal policy

fiscal policy that increases the level of aggregate demand, either through increases in government spending or cuts in taxes

international capital flows

flow of financial capital across national boundaries either as portfolio investment or direct investment

financial investments that cross international boundaries and require exchanging currency

foreign direct investment, portfolio investment, hedge, forward exchange rate, arbitrage

General Agreement on Tariffs and Trade (GATT)

forum in which nations could come together to negotiate reductions in tariffs and other barriers to trade; the precursor to the World Trade Organization

marginal propensity to consume(MPC)

fraction of a change in income that is consumed or spent

As firms search for the best employee to fill an opening and the unemployed search for the job that best fits their skills, the economy experiences

frictional unemployment

forward exchange rate

future rate

complements

goods that are often used together so that consumption of one good tends to enhance consumption of the other

price control

government laws to regulate prices instead of letting market forces determine prices

protectionism

government policies to reduce or block imports

interest rate affects net exports how?

high US interest rates attract foreign funds, raising the $US exchange rate, causing net exports to fall

≡

identity

law of one price

if the costs of transportation are small, the price of the same good in different countries should be roughly the same

current account

in the balance of payments, records transactions involving the export or import of goods and services

Increase AD-->

increase in production and price

what two variables does the phillips curve look at?

inflation and unemployment

disruptive market change

innovative new product or production technology which disrupts the status quo in a market, leading the innovators to earn more income and profits and the other firms to lose income and profits, unless they can come up with their own innovations

market

interaction between potential buyers and sellers; a combination of demand and supply

factors that drive investment

interest rate expected future of real GDP current level of business capacity

short and long-run effects of decrease in AD

interest rates rise, planned investments fall(causing AD to shift left), lose job and sales(recession), workers accept lower wages and firms expect lower prices(SRAS shifts right), SRAS shifting right restores long-run equilibrium (lower price level)

intra-industry trade

international trade of goods within the same industry

planned investment spending

investment that businesses intend to undertake during a given period

when a government borrows money in the financial capital market

it causes a shift in the demand for financial capital to the right

identity

it is always true by definition

even though investment is much smaller than consumer spending...

it tends to drive the booms and busts in the business cycle

The Federal Reserve monetary policy goals of maximum employment means

keeping the unemployment rate close to the natural unemployment rate.

anti-dumping laws

laws that block imports sold below the cost of production and impose tariffs that would increase the price of these imports to reflect their cost of production

an increase in aggregate demand

leads to both inflation and a fall in the unemployment rate

are deposits assets or liabilities

liabilities, since the bank owes the saver their deposits

financial capital includes

long-term financial and physical assets

loanable funds model concern

long-term real rate of interest rate

During the financial crisis of 2008-2009, the Fed's actions to supply reserves to the banking system was an attempt to

make certain the banks had enough liquidity to not collapse

a recession does what to a trade deficit

makes it smaller, or a trade surplus larger

banks earn a profit by

making loans at a higher interest rate than the rates that they offer on their deposits.

splitting up the value chain

many of the different stages of producing a good happen in different geographic locations

positive current account balance

means a country is a net lender to the rest of the world

gross domestic product (GDP)

measure of the size of total production in an economy

opportunity cost

measures cost by what we give up/forfeit in exchange; opportunity cost measures the value of the forgone alternative

functions of money

medium of exchange, store of value, unit of account

NAIRU

non-accelerating inflation rate of unemployment

Discouraged workers are classified by the BLS as

not in the labor force

import quotas

numerical limits on the quantity of products that a country can import

World Trade Organization (WTO)

organization that seeks to negotiate reductions in barriers to trade and adjudicate complaints about violations of international trade policy; successor to the General Agreement on Tariffs and Trade (GATT)

ceteris paribus

other things being equal

unplanned rise in inventory

output falls, more inventory produced than was sold, so you will be wasting money by continuing to produce that much inventory, positive change in inventory

unplanned fall in inventory

output rises, more demand than they planned to supply, so they will rise to fix it, negative change

unilateral transfers

payments that government, private charities, or individuals make in which they send money abroad without receiving any direct good or service

monetary policy

policy that involves altering the level of interest rates, the availability of credit in the economy, and the extent of borrowing

LRAS occurs at

potential/full-employment GDP

long run aggregate supply is not affected by

price changes

Vertical axis

price of: o Good/service o Wage o Rate of return (interest rate) in the financial market

imports

products (goods and services) made abroad and then sold domestically

exports

products (goods and services) made domestically and sold abroad

Foreign Direct Investment (FDI)

purchasing a firm (at least 10%) or starting up a new enterprise in another country

foreign direct investment (FDI)

purchasing more than ten percent of a firm or starting a new enterprise in another country

Horizontal axis

quantity of: o Good/service o Labor o Financial capital

what happens if the fed increases reserve requirements?

reduces the volume of deposits that can be supported by a given level of reserves and, in the absence of other actions, reduces the money stock and raises the cost of credit

interest rate effect

rising price (interest rate rise) investment falls

wealth effect

rising price decreases real value of household wealth, consumption falls

utility

satisfaction, usefulness, or value one obtains from consuming goods and services

dumping

selling internationally traded goods below their cost of production

the FOMC consists of

seven members of the Board of Governors, the president of the New York bank, and four presidents from the other 11 reserve banks

increase in the expected price of natural resources

shifts SRAS left because costs of producing output rises

increase in the expected future price level

shifts SRAS left because workers and firms increase wages in price

increase in productivity

shifts SRAS right because costs of producing output falls

increase in the labor force or the capital stock

shifts SRAS right because more output can be produced at every price level

positive shock

shifts SRPC down

negative supply shock

shifts SRPC up

increase in personal income taxes or business taxes

shifts left because consumption spending falls when personal taxes rise, and investment falls when business taxes rise

increase in the growth rate of domestic GDP relative to the growth rate of foreign GDP

shifts left because imports will increases faster than exports

increase in the exchange rate

shifts left because imports will rise and exports will fall

increase in households' expectations of their future incomes

shifts right because consumption spending and the residential investment component of investment spending increase

increase in government purchases

shifts right because government purchases are a component of aggregate demand

Increase in firms' expectations of the future profitability of investment spending

shifts right because investment spending increases

money market model concern

short-term nominal rate of interest rate

SRAS curve

shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms

store of value

something that keeps its value if it is stored rather than used

normative statement

statement which describes how the world should be

positive statement

statement which describes the world as it is

When we keep part of our wealth in a bank checking account, we are using money as a

store of value

private enterprise

system where private individuals or groups of private individuals own and operate the means of production (resources and businesses)

automatic stabilizers

tax and spending rules that have the effect of slowing down the rate of decrease in aggregate demand when the economy slows down and restraining aggregate demand when the economy speeds up, without any additional change in legislation

tariffs

taxes that governments place on imported goods

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

national interest argument

the argument that there are compelling national interests against depending on key imports form other nations

merchandise trade balance

the balance of trade looking only at good

one reason to demand a currency on the foreign exchange market

the belief that the currency's value is about to increase

consumer surplus

the benefit consumers receive from buying a good or service, measured by what the individuals would have been willing to pay minus the amount that they actually paid

microeconomics

the branch of economics that focuses on actions of particular agents within the economy, like households, workers, and business firms

macroeconomics

the branch of economics that focuses on broad issues such as growth, unemployment, inflation, and trade balance

standardized employment budget

the budget deficit or surplus in any given year adjusted for what it would have been if the economy were producing at potential GDP

open market operations

the buying and selling of government securities to alter the supply of money

if a country experiences a relatively high inflation rate compared with other countries

the buying power of its currency is eroding, and will tend to discourage anyone from wanting to acquire or to hold the currency

law of supply

the common relationship that a higher price leads to a greater quantity supplied and a lower price leads to a lower quantity supplied, while all other variables are held constant

law of demand

the common relationship that a higher price leads to a lower quantity demanded of a certain good or service and a lower price leads to a higher quantity demanded, while all other variables are held constant

exports of goods and services as a percentage of GDP

the dollar value of exports divided by the dollar value of a country's GDP

PPP exchange rate

the exchange rate that equalizes the price of bundles of domestic and foreign goods

purchasing power parity (PPP)

the exchange rate that equalizes the prices of internationally traded goods across countries

one reason to supply a currency on the foreign exchange market

the expectation that the currency's value is about to decline

producer surplus

the extra benefit producers receive from selling a good or service, measured by the price the producer actually received minus the price the producer would have been willing to accept

if the Fed had not bailed out the larger financial institutions during the Great Recession,

the fall in overall stock prices would likely have been larger

when there is a current account deficit, it is likely that

the financial account has a surplus

balance of trade

the gap, if any, between a nation's exports and imports

discretionary fiscal policy

the government passes a new law that explicitly changes overall tax or spending levels with the intent of influencing the level or overall economic activity

financial capital

the international flows of money that facilitates trade and investment

deadweight loss

the loss in social surplus that occurs when a market produces an inefficient quantity

labor market

the market in which households sell their labor as workers to business firms or other employers

foreign exchange market

the market in which people use one currency to buy another currency

aggregate saving

the part of aggregate income that is not consumed

reserve requirement

the percentage of deposits that banking institutions must hold in reserve

asset bubble

the price of an asset is pushed to an unreasonably high level due to expectations of further price gains

exchange rate

the price of one country's currency in terms of another country's currency; the ratio at which two currencies are traded for each

equilibrium price

the price where quantity demanded is equal to quantity supplied

arbitrage

the process of buying a good and selling goods across borders to take advantage of international price differences

quantitative easing

the purchase of long term government and private mortgage-backed securities by central banks to make credit available in hopes of stimulating aggregate demand

equilibrium quantity

the quantity at which quantity demanded and quantity supplied are equal for a certain price level

Output Y refers to

the quantity of goods and services(not $$)

velocity of money

the rate at which money changes hands

demand

the relationship between price and the quantity demanded of a certain good or service

supply

the relationship between price and the quantity supplied of a certain good or service

long run aggregate supply

the relationship between the quantity of real GDP supplied and the price level when the money wage rate changes in step with the price level to maintain full employment

Long-Run Phillips Curve (LRPC)

the relationship between unemployment and inflation after expectations of inflation have had time to adjust to experience

aggregate consumption function

the relationship for the entire economy between aggregate income and aggregate spending

inputs

the resources such as labor, materials, and machinery that are used to produce goods and services; also called factors of production

factors of production

the resources such as labor, materials, and machinery that are used to produce goods and services; also called inputs

trade surplus

the situation when a country exports more than it imports

trade deficit

the situation when a country imports more than it exports

equilibrium

the situation where quantity demanded is equal to the quantity supplied; the combination of price and quantity where there is no economic pressure from surpluses or shortages that would cause price or quantity to change

economics

the study of how humans make choices under conditions of scarcity

net wealth of a country

the sum of all its past current account balances

social surplus

the sum of consumer surplus and producer surplus

balance on capital account

the sum of the change in private us assets abroad, the change in foreign private assets in the united states, net transactions in derivatives, the change in us government assets abroad, and the change in foreign government assets in the united states

Labor market

the supply and demand for labor

Ricardian Equivalence

the theory that rational private households might shift their saving to offset government saving or borrowing

implementation lag

the time it takes for the funds relating to fiscal policy to be dispersed to the appropriate agencies to implement the programs

recognition lag

the time it takes to determine a recession has occured

legislative lag

the time it takes to get a fiscal policy bill passed

national debt

the total accumulated amount the government has borrowed, over time, and not yet paid back

quantity demanded

the total number of units of a good or service consumers are willing to purchase at a given price

quantity supplied

the total number of units of a good or service producers are willing to sell at a given price

national saving and investment identity

the total of private savings and public savings (a government budget surplus)

globalization

the trend in which buying and selling in markets have increasingly crossed national borders

division of labor

the way in which different workers divide required tasks to produce a good or service

unit of account

the yardstick people use to post prices and record debts

if $ depreciates

then it will be worth less than before in terms of another currency

If $ appreciates

then it will be worth more than before in terms of another currency

if private domestic savings goes up

then the trade deficit must fall (M-X)

if domestic investment goes up(I)

then the trade deficit rises (M-X)

if public domestic savings goes down

then trade deficit M-X must rise

equilibrium occurs when

there is no tendency for change

what happens if the Fed lowers the discount rate?

this increases excess reserves in commercial banks throughout the economy and expands the money supply.

what happens if the Fed increases the discount rate?

this lowers excess reserves in commercial banks throughout the economy and contracts the money supply

depreciate

to decrease in value

a higher interest rate tends

to discourage firms from making physical capital investments

appreciate

to increase in value

planned aggregate expenditure

total amount the economy plans to spend in a given period

aggregate income

total income received by all factors of production in a given period

aggregate consumption/spending

total quantity of goods/services produced in an economy in a given period

traditional economy

typically an agricultural economy where things are done the same as they have always been done

horizontal axis of phillips curve

unemployment rate

how do unemployment and inflation relate in the long run?

unemployment stays constant

Overestimated sales

unintended additions to inventories I unplanned is positive

underestimated sales

unintended drops in inventories. I unplanned is negative

The function of money that helps assess the opportunity cost of an activity is money's use as a

unit of account

the word "fiat" is

used to describe today's money because it is money set by law.

hedge

using a financial transaction as protection against risk

nontariff barriers

ways a nation can draw up rules, regulations, inspections, and paperwork to make it more costly or difficult to import products

price

what a buyer pays for a unit of the specific good or service

imports

what we do not produce and have to buy from others

exports

what we produce and sell to others

shift in demand

when a change in some economic factor (other than price) causes a different quantity to be demanded at every price

shift in supply

when a change in some economic factor (other than price) causes a different quantity to be supplied at every price

comparative advantage

when a country can produce a good at a lower cost in terms of other goods; or, when a country has a lower opportunity cost of production

current account deficit

when a country imports more goods and services and pays more abroad than it exports and receives from abroad

depreciating

when a currency is worth less in terms of other currencies; also called "weakening"

appreciating

when a currency is worth more in terms of other currencies; also called "strengthening"

merged currency

when a nation chooses to use another nation's currency

balanced budget

when government spending and taxes are equal

scarcity

when human wants for goods and services exceed the available supply

productive efficiency

when it is impossible to produce more of one good (or service) without decreasing the quantity produced of another good (or service)

absolute advantage

when one country can use fewer resources to produce a good compared to another country; when a country is more productive compared to another country

race to the bottom

when production locates in countries with the lowest environmental (or other) standards, putting pressure on all countries to reduce their environmental standards

economies of scale

when the average cost of producing each individual unit declines as total output increases

budget deficit

when the federal government spends more money than it receives in taxes in a given year

allocative efficiency

when the mix of goods produced represents the mix that society most desires

long-run macroeconomic equilibrium

when the point of short-run macroeconomic equilibrium is on the long-run aggregate supply curve

specialization

when workers or firms focus on particular tasks for which they are well-suited within the overall production process

Shifts in labor demand

• Demand for output • Education and training • Technology • Number of companies • Government regulations • Price and availability of other inputs

Shifts in labor supply

• Number of workers • Required education • Government policies

opportunity set

all possible combinations of consumption that someone can afford given the prices of goods and the individual's income

budget constraint

all possible consumption combinations of goods that someone can afford, given the prices of goods, when all income is spent; the boundary of the opportunity set

market economy

an economy where economic decisions are decentralized, private individuals own resources, and businesses supply goods and services based on demand

command economy

an economy where economic decisions are passed down from government authority and where the government owns the resources

hard peg

an exchange policy in which the central bank sets a fixed and unchanging value for the exchange rate

soft peg

an exchange rate policy in which the government usually allows the market to set the exchange rate, but in some cases, specially if the exchange rate seems to be moving rapidly in one direction, the central bank will intervene

portfolio investment

an investment in another country that is purely financial and does not involve any management responsibility

medium of exchange

anything that is used to determine value during the exchange of goods and services

law of diminishing returns

as we add additional increments of resources to producing a good or service, the marginal benefit from those additional increments will decline

law of diminishing marginal utility

as we consume more of a good or service, the utility we get from additional units of the good or service tends to become smaller than what we received from earlier units

excess supply

at the existing price, quantity supplied exceeds the quantity demanded; also called a surplus

surplus

at the existing price, quantity supplied exceeds the quantity demanded; also called excess supply

excess demand

at the existing price, the quantity demanded exceeds the quantity supplied; also called a shortage

shortage

at the existing price, the quantity demanded exceeds the quantity supplied; also called excess demand

Core Inflation Index

Takes the CPI and excludes volatile economic variables, like energy and food prices

the fundamental force that generates international trade

comparative advantage

Law of labor demand

Negative relationship; Higher wage leads to decrease in the quantity of labor demanded by employers (and vice versa)

Base year

Arbitrary year whose value as an index number economists define as 100

22) In practice, the actual size of the multiplier is about A) 1. B) 1.4. C) 2. D) 4.

B) 1.4.

8) Assuming no government or foreign sector, the formula for the multiplier is A) 1/MPC. B) 1/MPS. C) 1/(1 + MPC). D) 1 - MPC.

B) 1/MPS.

3) Which of the following is NOT considered investment? A) The acquisition of capital goods B) The purchase of government bonds C) The increase in planned inventories D) The construction of a new factory

B) The purchase of government bonds

9) Higher interest rates are likely to A) have no effect on consumer spending or saving. B) decrease consumer spending and increase consumer saving. C) decrease both consumer spending and consumer saving. D) increase consumer spending and decrease consumer saving.

B) decrease consumer spending and increase consumer saving.

41) Firms react to unplanned inventory reductions by A) reducing output. B) increasing output. C) reducing planned investment. D) increasing consumption.

B) increasing output.

1) The ratio of the change in the equilibrium level of output to a change in some autonomous variable is the A) elasticity coefficient. B) multiplier. C) automatic stabilizer. D) marginal propensity of the autonomous variable.

B) multiplier.

AE=

C + I

AE

C + I + G

Y - T

C + S

Yd

C + S

Y

C + S + T

11) If Inventory investment is higher than firms planned, A) actual and planned investment are equal. B) actual investment is less than planned investment. C) actual investment is greater than planned investment. D) actual investment must be negative.

C) actual investment is greater than planned investment.

Contraction/Recession/Slump

From a peak down to a trough; output and employment decline

Expansion/Boom

From a trough up to a peak; output and employment grow

how was banking "invented"?

Goldsmiths in the sixteenth century issued gold receipts which entitled its owners to reclaim their gold on demand.

Measuring labor productivity

Growth rate of its GDP per capita

S+T

I+G

Shift in the demand for loanable funds

Left = Interest rate & Investment decrease - Increase in corporate taxes Right = Interest rate & Investment increase - Increase in expected future profits

Shift in the supply of loanable funds

Left = Interest rate increase and Investment decrease - Increase in the gov't budget deficit - Increase in the desire of households to consume now Right = Interest rate decrease and Investment increase - Increase in the tax benefits for saving, such as 401(k) retirement plan, which increase the incentive to save

Interest rate affects consumption how?

Lower interest rates discourage saving

quantity theory of money equation

M x V = P x Y

I-S-(T-G)

M-X

Healthy economic growth

Markets that allow personal/business rewards/incentives

Long-run growth

Measured by total output per capita

PCE

Monetary policy makers tend to use this (Price index of personal consumption expenditure) - Federal use this to set inflation goals b/c it tends to have lower inflation rate than CPI

Salary or wage

Money paid for work or a service

Nominal interest rate

Not adjusted for inflation

Out of the labor force

Not working and not looking for work

Unemployed

Out of work and actively looking for a job; Unemployment has negative relationship with growth in economy

Stagflation

Output decreases but prices increase

Economic expansion

Output increase, unemployment decrease, increase in general level of price

Economic convergence

Pattern in which economies with low per capita incomes grow faster than economies with high per capita incomes

there is only one point when real GDP=

Planned Aggregate Expenditure

Law of labor supply

Positive relationship; Higher wage leads to increase in the quantity of labor supplied (and vice versa)

GDP deflator

Price Index (CPI, PPI are other examples of price index); = (Nominal GDP/Real GDP) x 100

Production function

Process whereby a firm turns economic inputs like labor, machinery, and raw materials into outputs like goods and services that consumers use - Micro level

Aggregate production function

Process whereby an economy as a whole turns economic inputs such as human capital, physical capital, and technology into output measured as GDP per capita - Macro level

Inflation

Rising overall level of prices

at equilibrium,

S = I

aggregate saving formula

S ≡ Y - C

Final goods/services

Sold to the final user

Real value

Statistic adjusted for inflation - Real is more important - Base year: Nominal GDP = Real GDP

Nominal value

Statistic at the time

Discouraged workers

Stopped looking for employment due to the lack of suitable positions available

Savings

Supply of financial capital

Spublic

T-G-TR

2) The smaller the MPS, the larger the multiplier.

TRUE

2) When there is an unplanned draw down of inventories, firms will increase production.

TRUE

3) Actual investment equals planned investment plus unplanned changes in inventories.

TRUE

3) Firms react to negative inventory investment by increasing output.

TRUE

3) The marginal propensity to consume is the change in consumption per change in income.

TRUE

4) When the economy is in equilibrium, savings equals planned investment.

TRUE

5) If planned investment increases, equilibrium will be restored only when saving has increased by exactly the amount of the initial increase in planned investment, assuming there is no government or foreign sector.

TRUE

6) Assuming there is no government or foreign sector, the economy will be in equilibrium if, and only if, planned investment equals actual investment.

TRUE

6) Related to the Economics in Practice on p. 154 [466]: The paradox of thrift is that all people deciding to save more could lead to them saving less.

TRUE

for an asset to be a "means of payment" the asset

can be used to settle a debt.

shifts of aggregate consumption function

changes in aggregate wealth changes in expected future disposable income changes in anticipated interest rates

If government expenditures on goods and services increases by $20 billion, then aggregate demand

increases by more than $20 billion

what happens if the Fed buys government securities

increases money supply, increases output, increases aggregate demand, accelerates inflation

what happens if the fed decreases reserve requirements

increases the volume of deposits that can be supported by a given level of reserves and, in the absence of other actions, increases the money stock, and lowers the cost of credit

paradox of thrift

individuals try to save more during an economic recession, which essentially leads to a fall in aggregate demand and hence in economic growth.

Shift factor

monetary policy(interest rate), fiscal policy(gov't purchases and income taxes), future expectations, exchange rates

what happens when us increases ownership in foreign assets

money flows, out, we turn from a borrower to a lender nation. we export capital

investment income

money that US financial investors receive on their foreign investments and payments to foreign investors who invest their funds here. from an economic perspective, income in just as much as an economic transaction as car, wheat, or oil shipments: it is trade that is happening in the financial capital market

Are unemployment and inflation in a negative or positive relationship?

negative