ECO 2013 final
If a person borrows $2,000 at 5% interest and never makes any payments, how much will the loan balance be after five years?
$2,255.55
if the reserve requirement is 10%, a withdrawal of $500 leads to a potential decrease in the money supply of
$5,000
Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. how much money can the banking system create?
$6,000
If a perpetuity bond has an interest payment of $80 and your required yield is 10%, the most you would be willing to pay for the bond (the price) is:
$800
anti-trust laws
(sherman act and clayton act) put in by anti-trust division of the US justice department to prevent monopolization
Functions of the Federal Reserve Bank
-hold deposits or reserves of banks -supply the economy with currency -provide for collection of checks -acts as fiscal agent for the government -supervise the operations of commercial banks -regulate the money supply
Innovation in the banking system
1) NOW Accounts (Negotiable Order of Withdraw): checking accounts based on deposits and pay interest. 2) Share-Draft Accounts: checking account based on deposits in credit unions. 3) ATS (Automatic Transfer of Savings)
Functions of Banks
1) accept deposits 2) give loans
determinants of consumption
1) disposable income 2) wealth 3) expectations 4) demographics
determinants of demand
1) income of the consumer 2) taste and preference of the consumers 3) price of substitute goods and complementary goods 4) expectations of consumers
institutions of capitalism
1) private property or free ownership of the factors of production (john locke) 2) self-interest - the invisible hand (Adam Smith) 3) economic individualism or laissez-faire (hands-off) 4) competition and free market (economic rivalry), many buyers & sellers, and freedom of entry and exit in the market. 5) price (market) system (capitalism), resource allocation 6) limited government (establish law & order)
determinants of supply
1) production techniques 2) cost of inputs/resources used to produce product 3) expectations 4) taxes and subsidies from the government
fundamental questions of economics
1) what to produce 2) how to produce it 3) who to produce it for
value of money
1. acceptability 2. legal tender (have to accept $ for goods/services because it is the law) 3. relative scarcity (demand > $ supply)
Suppose a one-year bond with a face value of $200 is sold for $188. What is the bond's yield?
6.4%
principle of comparative advantage
A country will export the goods and services that it can produce at a low opportunity cost and import the goods and services that it would otherwise produce at a high opportunity cost.
Balance Sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date.
production possibilities curve (ppc)
A graph that shows the various combinations of output that the economy can produce given the available factors of production and the available production technology.
product market
A market in which products are sold by firms and bought by households. (goods/services)
positive question
A question that can be answered using available information or facts.
frictional unemployment
A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.
Federal Trade Commission (FTC)
An agency that regulates a variety of business practices and curbs false advertising, misleading pricing, and deceptive packaging and labeling
Capitalism
An economic system in which most of the resources are privately owned and most economic decisions are made by private owners. its a profit oriented system under predominantly competitive conditions.
fractional reserve banking system
Describes a banking system in which a portion of bank deposits are held as vault cash or in an account with the regional Federal Reserve Bank, while the rest of the deposits are loaned out to generate the money creation process.
barter
Exchange goods without involving money. Problems of the barter system include exchanges of unequal value, inefficiency, high search/transaction costs, and double coincidence of wants.
monetary policy
Government policy that attempts to manage the economy by controlling the money supply and thus interest rates. goals: -full employment -price stability -economic growth tools: -reserve ratio -discount rate -open-market operating
fiat money
It is money because the government says it is.
profit effect
Lower output prices mean less output and less profit, higher output prices mean more output and higher profits
incentives
The factors that motivate individuals and firms to make decisions in their best interest.
microeconomics
The study of the decision making by individuals, businesses, and industries
interest rate effect
The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases).
recognition lag
The time it takes for policy makers to recognize the existence of a boom or a slump.
Gross National Product (GNP)
The total market value of all final goods and services produced within a given period by factors of production owned by a country's citizens, regardless of where the output is produced.
rationality
a comparison of costs and benefits. (benefits > costs)
tax
a compulsory contribution to state revenue, levied by the government on workers' income and business profits or added to the cost of some goods, services, and transactions.
Production Possibilities Frontier (PPF)
a curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology
inferior good
a good whose demand will decrease as income increases
normal good
a good whose demand will increase as income increases
subsidy
a grant the government gives a company so that they can increase production
Law of Demand
a larger quantity will be demanded at lower price and a lesser quantity will be demanded at a higher price
price ceiling
a legally established maximum price for a good/service
price floor
a legally established minimum price above the equilibrium price for a good/service
resource market
a market in which households sell and firms buy resources or the services of resources (labor)
normative questions
a question whose answer is based on societal beliefs on what should or should not take place
cost-push inflation
a rise in the general price level caused by increased factor payments to one or more groups of resources owners.
externality
a situation in which a cost or benefit associated with an economic activity effects other parties
inflation
a sustained rise in the general/average/weighted price level
an interest rate that is low for only a short period of time is called
a teaser rate
capital intensive method
a way of production that uses more capital than labor.
deposit/money multiplier
amount of money that is created when new money is put into the economy deposit multipler= 1/reserve ratio
required reserves
an amount of funds equal to a specified percentage of its direct deposit liabilities that a commercial bank must have on deposits within the federal reserve bank in its district or as vault cash.
market
an arrangement that brings buyers and sellers together to do business with each other
which of these will cause the supply of loanable funds curve to shift leftward?
an increase in the government deficit
financial intermediary
an institution that serves as a go between lenders and borrowers. (ex. bank)
money
anything that serves as a medium of exchange, a unit of account, and a store of value
all of the following are functions of money except:
as a standard value
ceteris paribus
assumption used in economics that other relevant factors or variables are held constant
Cost-of-living adjustment (COLA)
automatic adjustments to income because of inflation.
stability
average prices should be stable, should not fluctuate too much.
regressive tax
average tax rate decreases as income increases
progressive tax
average tax rate increases as income increases
proportional tax
average tax rate remains the same despite income
tax evasion
avoid paying taxes by lying on tax forms (illegal)
central bank
bank that regulates money supply of a country. (federal reserve bank)
cost effect
cost increases make producing products more expensive. Producers will be willing to supply more only if prices also rise to cover those added costs.
standard definition of economics
economics is the study of how people choose to use their scarce resources to attempt to satisfy their unlimited wants.
equity
fairness, not equality. The market determines economic fairness.
suppose that while households are deciding to increase savings, the demand by firms for investment funds falls. in the market for loanable funds, the real interest rate will _____ and the quantity of loanable funds will _____
fall; rise, fall, or stay the same
Assume initially that market interest rates are 7% and the bondholder is receiving a $70 coupon payment per year on a bond with a face value of $1,000. If market interest rates rise to 8%, the bond price:
falls to $875
positive economics
focuses on facts and cause-and-effect relationships
non-durable good
good that last less than 3 years
durable good
good that lasts a long time (>3 years)
complementary good
goods that are related in such a way that an increase in the price of one good will cause a decrease in the demand for the other good
substitute goods
goods that are related in such a way that an increase in the price of one good will cause an increase in the demand for the other good.
which of these is not a way financial institutions reduce risk?
guaranteeing a high rate of return for all lenders
quasi-public good (merit goods)
half private, half public goods
efficency
how well resources are used and allocated.
Adjustable Rate Mortgage (ARM)
if inflation rate goes up, your payment is automatically adjusted
real balance effect
if on average prices go down, then real cash balance will increase
real income
income adjusted for inflation
nominal income
income that is not adjusted for inflation
a lower reserve requirement
increases the ability of banks to make loans
discount rate
interest rate that commercial banks pay to the fed when they use loan.
the demand curve for loanable funds represents _____ and is _____
investors; downward sloping
factors of production
land, labor, capital, entrepreneurship
tax avoidance
loopholes in paying taxes (legal)
checking deposits generally have a _______ return on investment than do certificates of deposit because checking deposits are ______
lower; more liquid
labor force
made up of individuals who are 16 or older who are employed and those who are unemployed but are actively looking for work.
horizontal summation
market demand and supply curves are found by adding together how many units of the product will be purchased or supplied at each price
surplus
occurs when the price is above market equilibrium, and quantity supplied exceeds quantity demanded
absolute advantage
one country can produce more of a good than another
comparative advantage
one country has a lower opportunity cost of producing a good than another
Traditional Individual Retirement Account (IRAs) are taxed
only when you make withdrawals
scarcity
our unlimited wants clash with limited resources, leading to scarcity. Economics focuses on the allocation of scarce resources to satisfy unlimited wants as fully as possible
technical efficiency
produce max amount of goods with minimum resources
economic efficiency
producing goods/services society wants. meet consumers preferences.
labor intensive method
production that uses more labor than capital.
when a financial institution provides a standardized financial product such as a mortgage, it is
reducing transaction costs
Nominal GDP
refers to GDP in actual market prices as they exist each year. It reflects current prices. it is the value of the good and services produced in a given year valued at that years price. it is GDP that has not been adjusted for changes in the price level.
real GDP
refers to GDP in actual prices of a previous year, or the average of actual prices in some previous years. It is the value of the final goods and services corrected for inflation/deflation.
business cycle
refers to the change which takes place in business/economic conditions over a period of time.
demand-pull inflation
refers to the fact that inflation is caused by an excess of total demand in the economy.
economic system
refers to the laws, institutions, customs, and practices that determine how a society allocates its scarce resources
underemployment
someone who is working less than their full potential.
If Jack Sparrow buries a chest of gold bullion on a deserted island and plans to come back later, then the gold is functioning as a:
store of value
private good
subject to the principle of exclusion. goods that you pay for and then you own.
public good
subject to the principle of inclusion. goods that are available to you weather or not you pay for them (taxes). ex. police service, using roads
excess reserves
the amount at which the banks actual reserves exceed it required reserves. actual reserves - required reserves
aggregate demand
the amount of goods and services in the economy that will be purchased at all possible price levels
GDP gap
the amount of production by which potential GDP exceeds actual GDP
Liquidity
the ease with which an asset can be converted into the economy's medium of exchange without financial loss.
classical economies
the economic ideas formulated by adam smith. these ideas were later refined and extended by thomas malthus, david ricardo, jean baptiste say, john strort-miel, alfred marshal, and A.C. pigou. It was the predominant body of economic theory in the western hemisphere up until the 1930's.
employment act of 1946
the government should do everything in its power to make sure the economy is functioning at, or close to, full employment
federal funds rate
the interest rate banks charge each other for overnight loans
loanable funds theory of interest
the interest rate in the economy is explained by the demand ans supply of loanable funds.
law of supply
the lower the price the lesser quantity that will be supplied, the higher the price that larger the quantity supplied
market for loanable funds
the market in which those who want to save supply funds and those who want to borrow to invest demand funds. sources of demand: buisnesses, households, and the government. sources of supply: past and present savings of households and buisnesses, and the federal reserve bank.
market equilibrium
the market is in equilibrium when the quantity demanded and the quantity supplied of a good or service are equal. There is neither a shortage nor a surplus, and there is no tendency for prices to rise or fall
willingness to pay
the maximum amount that a buyer will pay for a good
Principle of Increasing Opportunity Cost
the opportunity cost of additional units of a good generally increases as more of that good is produced
net export effect
the process of how expansionary fiscal policy decreases net exports due to rising interest rates
open market operations
the purchase and sale of U.S. government bonds by the Fed
as the real interest rate falls
the quantity demanded of loanable funds rises
demand
the quantity of a good or service that consumers are willing and able to buy
supply
the quantity of a good or service that producers are willing and able to sell at different prices
money supply
the quantity of money available in the economy. M1: Currency + checkable deposits M2: M1 + small time deposits (<$100,000) M3: M2 + large time deposits (>$100,000)
reserve ratio
the specified percentage of the commercial banks direct deposit liabilities that it must have as a reserve. reserves= r(DD) reserve ratio= Commercial banks required reserves / commercial banks direct deposit liabilities
economics
the study of how individuals, firms, and society make decisions to allocate limited resources to many competing wants
Macroeconomics
the study of the broader issues in the economy such as inflation, unemployment, and national output of goods and services
normative economics
the study of what the goals of the economy should be
administration lag
the time it takes for congress and the president to agree on what fiscal policy to use
operational lag
the time it takes for the full impact of a government program or tax change to have its effect on the economy
Aggregate Supply
the total amount of goods and services in the economy available at all possible price levels
Gross Domestic Product (GDP)
the total market value of all final goods and services produced in a country for a given time period
opportunity cost
the value of the next best alternative; what you give up to do something or purchase something
Okun's Law
this states that for every 1% unemployment, there is a 2% loss of output (GDP)
recession
two consecutive quarters quarters of declining GDP.
discouraged worker
unemployed and not looking for work.
structural unemployment
unemployment resulting from industrial reorganization, typically due to technological change, rather than fluctuations in supply or demand.
cyclical unemployment
unemployment that rises during economic downturns and falls when the economy improves
fiscal policy
use of taxes and government spending to promote stability