ECO3203: Exam 1

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money multiplier =

(cr + 1)/(cr + rr)

How many districts the Federal Reserve has?

12

if F(K,L) = AK^alpha x L^1-alpha is an economy's production function, what is labor's share of output?

1 - alpha alpha = (MPK x K)/Y

For each new model, you should keep track of:

1. its assumptions; 2. which variables are endogenous and which are exogenous; 3. the questions it can help us understand and those it cannot

open market operations

main way in which the Fed has traditionally controlled the supply of money

FOMC

make decisions about monetary policy; 12 members total, 7 board members and 5 regional members, one regional member must be from NY

used goods

not included in GDP

intermediate goods

not included in GDP only final goods

how the fed affects the monetary base

open market operations; discount rate

seasonal adjustment

outcome of the economy rises during the year during the 4th quarter and falls in the first quarter; allows a timely assessment of the current economic conditions and identification of turning points in key macroeconomic variables

The Fed sees that commercial banks hold adequate reserves by:

paying the banks interest on their reserves.

savings curve shifters

public savings, for private savings, technological innovation, tax laws that affect savings

The Fed's strategy of buying long-term, riskier assets in response to the Great Recession is known as:

quantitative easing.

stock

quantity measured at a given point in time

flow

quantity measured per unit of time; over time

money supply

quantity of money available in the economy

reserve deposit ratio =

r/d

production function

relationship between how much output is produced from given amounts of capital and labor

purpose of gdp

represents the dollar value of economic activity in a given period of time

how the fed can change the rr

reserve requirements' interest on reserves

profit

revenue minus cost; PF(K,L) - WL - RK

cpi overstates inflation

substitution bias, introduction of new goods, unmeasured changes in quality

discount rate

the interest rate that the fed charges on loans to banks

The neoclassical theory of distribution suggests that factor demand is based on:

the marginal productivity of that factor.

definition of money

the stock of assets that are used to carry out transactions

currency

the sum of outstanding paper money and coins

fiscal policy

the use of government spending and revenue collection to influence the economy

instruments of monetary policy

those that affect the monetary base; those that affect the rr and therefore the money multiplier

purpose of cpi

tracking changes in the typical households cost of living

what does government spending exclude

transfer payments

unmeasured changes in quality

when the quality of a good changes, the change in the goods price reflects not only a change in the cost of living but also the quality change

aggregate supply in equilibrium

y = f(kbar, lbar)

disposable income =

y-t

investment = spending

I(r) = Spbar + Sgbar = S

What is the primary function of the Federal Open Market Committee (FOMC)?

To make decisions about monetary policy

Fiscal Policy

Treasury. Government policy that attempts to manage the economy by controlling taxing and spending.

labor force =

U+E

equilibrium equation

Ybar = C(Ybar - Tbar) + I(r) + Gbar

monetary supply =

[(cr + 1)/(cr + rr)]B

rules of computing gdp

add up total expenditure

board of governors

appointed by the POTUS; 14 year term

leverage ratio

assets/capital

money supply =

c+d

pce deflator

calculated like the gdp deflator based on just the consumption component

why is cpi important in the work setting

cpi influences salary and knowledge of it is important to know how it will influence you

substitution bias

cpi measures the price of a fixed basket of goods, it does not reflect the ability of consumers to substitute towards goods whose relative prices have fallen

why cpi is not a perfect measure

it overstates inflation

definition of GDP

market value of all final goods and services produced within an economy in a given period of time; considered the best measure of how well an economy is performing

core inflation

measured the increase in price of a consumer basket that excludes foods and energy product

unit of account

money is a widely recognized measure for accounting

medium of exchange

money makes exchanges and transactions easier

storage of value

money provides a way to transfer purchsing power from the present to the future

frequency of measurement of unemployment

monthly

The neoclassical theory of distribution combined with the Cobb-Douglas production function suggest a linkage between:

productivity growth and real wages.

discouraged worker

someone who is not counted in being in the labor force, wants a job but has given up looking

functions of money

storage of value, unit of account, medium of exchange

how to measure cpi

survey consumer to determine their basket; collects the data on the prices of all basket goods every month and computes the total cost of the basket; cpi in each month equals the cost of the basket in that month divided by the cost of the basket in the base period

fractional reserve system

the bank holds of fraction of the deposits as reserves and loans the rest out; creates money

100% reserve banking system

the banks keep 100% of the deposits as reserves; does not lend out loans --> does not make money

The real wage represents:

the compensation of workers in terms of goods and services.

unemployed

those who were not employed, available for work, and had tried to find employment during the previous 4 weeks

purpose of a model

to show how exogenous variables influence endogenous variables

introduction of new goods

when a new good is introduced into the marketplace, consumers are better off because they have more products form which to choose

consumption function equation

C = C(Y-T) ; a + b x (y-t)

aggregate demand in equilibrium equation

C(ybar-tbar) + I(r) + Gbar

Which is a possible negative result of increased government spending?

Crowding out of investment Demand of LF inc. , Supply of LF dec.

who measures the cpi

Bureau of Labor Statistics

circular flow model

Economic Actors: Households, Firms, Govt. Markets: Factors of Prod, Financial, Goods/Services Assumptions: No saving all spent, No inventory all sold., No foreign trade closed mkt, Savings = Investment no leakage or injection of money.

Which is an example of the Cobb-Douglas production function?

F(K,L) = AK^alpha x L^1-alpha

Which equation describes the marginal product of a factor (MPi)?

F(j, i +1) - F(j, i)

Monetary Policy

FED. Federal Reserve decisions that shape the economy by influencing interest rates and the supply of money

why gdp is not a perfect measure

GDP is an indicator of a society's standard of living, but does not directly account for leisure, environmental quality, levels of health and education, activities conducted outside the market, etc.

Consumers and firms interacts through:

Goods and Services Markets, Labor Markets and Capital/Assets Markets

labor force participation rate =

LF/Adult pop.

m2

M1 plus savings accounts, certificates of deposit, and other liquid assets

MPL of capital to capital demand

MPL = R/P; MPL x K

MPL of labor to labor demand

MPL = W/P; MPL x L

Which of the following statements best describes the difference between microeconomics and macroeconomics?

Microeconomics focuses on the behavior of individual markets and firms, while macroeconomics deals with national economic growth and stability.

Why are models useful when studying economics?

Models can help us dispense with irrelevant details and focus on underlying connections.

Money that banks hold as reserves in the Fed are considered part of the:

Monetary Base

The public and private sector interacts through:

Monetary and fiscal policy

frequency of cpi

Monthly

gdp deflator

NGDP/RGDP

According to the usual seasonal pattern of the U.S. economy, gross domestic product (GDP) is highest in the quarter of the year that includes:

October, November, and December.

MPL x P = W ; MPL = P/W

P/W = Real Wage

In a supply-and-demand model, which variables are exogenous and which are endogenous?

Price and quantity are endogenous, income and the cost of materials are exogenous.

reserve ratio deposit

R/D

How do competitive, profit-maximizing firms determine the optimal level of a factor?

The firm demands each factor of production until that factor's marginal product equals its real factor price.

Which variable adjusts to bring the market for goods and services into equilibrium?

The real interest rate

unemployment rate =

U/LF

economic profit =

Y - (MPL x L) - (MPK x K)

marginal propensity to consume

amount by which consumption changes when disposable income increases by 1 dollar

monetary base

basic quantity of money; the sum of currency in circulation plus reserve balances

what measures the gdp

bureau of economic analysis; from administrative and survey/statistical data

monetary base =

c+r

currency deposit ratio =

c/d

presidents of regional federal banks

chosen by the banks board of directors; 12 regional banks

aggregate demand in an economy

consumption + investment + government spending (NO NX)

c

currency

m1

currency, demand deposits, traveler's checks, and other checkable deposits

market clearing

equilibrium price and quantity

frequency of getting the gdp

every 3 months; quarterly

core cpi

excludes prices of foods and energy

3 ways to measure GDP

expenditure, income, and value added

problems with monetary control

fed cannot control the monetary supply perfectly; if banks reduce their borrowing the monetary base and money supply will decrease

interest on reserves

fed pays interest on banks reserves that are deposited in the fed

reserve requirements

fed regulations impose a minimum rr

nnp

gnp minus the correction of the depreciation of the capital stock

purpose of measuring unemployment

indicates how well the economy is using the resources available

ppi

gauges inflation from the perspective of sellers

monetary policy

governments control over the money supply

disposable income

income after the payment of all taxes

inflation

increase the overall level of prices

imputations

does not have a market price


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