Economics test 3 Dr. Valencia SRU

If M2 is $9 and Nominal GDP is 27, then velocity of M2 equals..

$3

How to find out the amount of workers to hire?

- the value of the marginal product > the real wage - but the closest to the real wage as possible.

Assumptions about banks

1. the RRR = required reserve ratio = 10% 2. Banks want to keep excess reserves at 0 3. A person that gets a lone deposits the entire known amount into their bank

Money is:

Any asset used to make purchases

Types of Unemployment

Frictional, structural, Cyclical

What could the fed do if it wants the money multiplier to be smaller?

It would reduce the required reserve percentage.

Should the fed increase the money supply when the economy is at it's max?

No, this would cause inflation

How do you find marginal product?

Product output 2 - product output 1

Cyclical unemployment?

The extra unemployment that occurs during periods of recession.

Reservation Wage

The minimum a person is willing to work for

How do banking panics affect the money supply?

The reduce the money supply

If potential output is $15600 billion and actual output is $15000 billion, then:

There is a recessionary gap

If cyclical unemployment is positive, then the economy is experiencing....

a recessionary gap

Bank reserves:

are cash or similar assets held by banks to meet depositors withdrawals and payments.

When an individual deposited currency into a checking account

bank reserve increase, which allows banks to lend more and increase the money supply.

The reserve-deposit ratio equals ...

bank reserves divided by deposits.

The federal reserve was establishing in response to a particularly severe _______ crisis in 1907

banking

The peak is the ______ of a recession

beginning

The difference between the total unemployment rate and the natural rate of unemployment is

cyclical

The increase in unemployment in the United States that accompanied the recession that started in December 2007 is an example of _________ unemployment.

cyclical

When the economy has neither a recessionary nor an expansionary output gap, ____________ unemployment is zero

cyclical

Worker mobility between industries will ______ the wage inequality caused by international trade

decrease some of...

Skilled-biased technological change _____ the demand for higher-skilled workers relative to the demand for lower - skilled workers.

increases

When money is used to buy and sell goods and services, it functions as a:

medium of exchange

The low point of economic activity prior to a recovery is called the....

trough

European Markets tend to be more regulated than those in the U.S. as a result,

unemployment is higher in Europe.

When people measure the worth of various items in terms of money, money is performing the function of what?

unit account

What is the velocity of money formula?

v= Nominal GDP / Money Stock

The extra revenue gained by hiring an additional worker is the_______.

value of the Marginal product of labor

how do you find the output Gap?

(Real GDP - Potential GDP)/Potential GDP

Velocity

- Doesn't change much - It is the number of times that money changes hands which stays at a pretty steady rate.

According to Okun's law, if the total unemployment rate in 2011 was 8.9%, the natural rate of unemployment was 5.5%, and potential GDP was $15600 billion, then actual output was about how far below potential output?

- Find cyclical unemployment {(-2 * 3.4%) *-6.8%} * 15600

For Workers who produce goods and services that are exported abroad, international trade leads to:

- Higher employment - higher wages

Over the last several decades, the labor supply has increased because of....

- Increases in women's labor force participation rates - immigration - baby boomers entering the work force.

Which of the following are accurate statements about international trade?

- It increase efficiency - It hurts workers who produce goods and services that are imported from abroad

Assumptions for Banking

- Required reserve ratio is 10% - Banks want to keep excess reserves

Which of the following factors are likely to lead to an increase in the supply of labor?

- an increase in the population - an increase in immigration - an increase in the fraction of women who want to work

Which of the following factors lead to an increase in the demand for labor?

- an increase in worker productivity - an increase in the relative price of the product.

Which of the following are components of M1?

- currency in the hands of the public -all checkable deposits

workers who produce goods and services that are exported abroad, international trade leads to which of the following...

- higher wages - higher unemployment

Which of the following does international trade lead to for those workers in industries that face competition from imports?

- lower employment -lower wages

Suppose that a given year the natural rate of unemployment was 5 % and the actual rate of unemployment was 9%. Using Okun's law, we could approximate that the output gap as a percentage of potential output was about

-8% Okun's law suggests that ofr every 1 percent point by which the actual rate exceeds the natural rate of unemployment,a negative output gap of about 2 percent occurs, and -2* 4% = 8%

M1

-Currency -Checking account - Other checkable account Balances -Traveliers checks

Potential output is sometimes called...

-Full employment output -potential GDP

Skilled-based technological change will:

-create incentives for workers to acquire education and skills - Increase wage inequality

M1 all examples?

-currency -checking account balances -traveliers check - could be digital money - could be checks

In order to help prevent or moderate banking panics, the Fed was given the power too...

-lend money to banks -Supervise and regulate banks

What are functions of money

-medium of exchange -unit of account -store of value

The maximum sustainable level of output (real GDP) that an economy can produce is known as

-potential GDP -Full-employment output -potential output

what is open market operations?

-regularly used to affect the money supply - Involve the purchase and sales of government bonds.

The natural rate of unemployment is the part of the total unemployment rate attributable to:

-structural -frictional

In 2016, U.S. real wages were more than ______ as large as they were in 1960 and more than ______ times as large as they were in 1929.

-twice - five

If bank reserves equal $50,000 and the desried reserve-deposit ratio is 5 %, then bank deposits will equal....

1,000,000

To increase money supply

1. Buys bonds 2. Reduce Federal Funds Rate 3. Reduce Discount Rate

5 Things Happening in Industrialized Countries

1. During the 20th Century Experienced continued growth in real wages. 2. Since the early 70s, the growth rate of real wages began to slow 3. Recent decades have brought a pronounced increase in wage inequality in the U.S. 4. The number of people with jobs has grown substantially over the last few decades. 5. The rate of unemployment in western Europe have a higher rate than the U.S.

What are the tools the fed can use to change the money supply?

1. Open Market operations ----buy or sell bonds 2. Changing the federal funds interest rate. ---- the interest rate banks can charge each other. 3. Changing the Discount interest rate

5 recent trends in the labor market?

1. Substantial growth in the real wages in industrialized countries. 2. Increased U.S. wage inequality 3. The real wage growth rate has slowed 4. western Europe has experienced higher unemployment that the U.S . 5. The rate of job growth has slowed.

The type of unemployment that is associated with the process of matching workers to jobs is called _______ unemployment, while the unemployment that consists of workers who lack marketable skills is called ______ unemployment, and the type of unemployment that is caused by decline in total spending is called ______ Unemployment.

1. frictional 2. structural 3. cyclical

If the total rate is 7% and the the natural rate of unemployment is 5%, then cyclical unemployment is:

2%

Suppose bank reserves are $75,000, currency held by the public is $200,000 and the desired reserve - deposit ratio is 10% then the total money supply will equal...

200,000 +(75/0.10) = 950,000

Suppose bank reserves are $200,000, currency held by the public is $200,000, and the desired reserve- deposit ratio is 10%, then the total money supply will equal ...

2200,000

If the banks' reserves equal $25,000 and their deposits equal $100,000, then the reserve-deposit ratio equals

25% 25,000/100,000

If bank reserves equal $40,000 and the desried reserve-deposit ratio is 8% then bank deposits will equal

500,000= 40000/ .08

How do you calculate the value of marginal product?

= (price * marginal product)

Expansion of money supply equation (Infinite Series)

= 1/(1-k) * Money Multiplier

Which of the flowing workers is the most likely to lose his or her job during a recession?

A home builder because, generally, industries that produce durable goods such as cars, houses and capital equipment are more affected than others by recession and expansion.

A depression is:

A particularly severe or protracted recession

Who would be classified as out of the labor force?

A person who is willing to work but has not looked for work in two months.

Which of the following is an example of frictional unemployment?

A worker who is unemployed while searching for a job that is a good match for her skill set.

Cyclical Unemployment

Caused by recessions (reductions in real GDP) -- Can be 0% Cyclical unemployment ---- Anytime you are not in a recession

Structural Unemployment

Caused by the institution of frame work adopted by our nation Example: - a worker who lacks skills firms are looking for -descrimination -language barriers - Minimum wage laws - labor Unions - Saftey Regulations **** Can Never be 0***

Velocity

Changes when we find a new form of payment

The M1 Measures

Currency, checking deposit's, and travelers checks.

The increase in unemployment during a recession is associated with which type of unemployment

Cyclical unemployment

True or False: In the United States, the Federal Reserve is the primary organization responsible for determining the official beginning and end dates of economic recession.

False... The end dates and beginning dates are determined by The National Bureau of Economic Research (NBER)

Okun's law suggests:

For every 1% by which the actual unemployment rate exceeds the natural rate there will be negative output gap of 2%

Total Unemployment

Frictional + Structural + Cyclical **Frictional + Structural = Natural rate*** When Cyclical equals 0 that is the lowest possible unemployment.

In the Business cycle, a peak is the:

High point in economic activity prior to a downturn.

Minimum wage laws are generally thought to ____ unemployment.

Increase

If Demand were to increase workers would make more money and more people would be employed. How do you get there?

Increase VMPL - Increase in demand for computers -increase in price of computers ---> Increases Vmpl Increase Productivity - Invest in better capital - Nice work environment

international trade will _____ the demand for labor in exporting industries and ______ the demand for labor importing industries.

Increase, decrease

When actual output is greater than potential output there is an:

Inflationary Gap

Why might workers leave importing industries and seek skills/ jobs in exporting industries?

International trade lowers the wages of workers in importing industries and increases the wages of workers in exporting industries.

What is the quantity equation and what do the variables stand for?

M x V = P x Y m= money stock v= velocity p=price level y= real GDP

Which of the following accurately describes the difference between M1 and M2?

M1 is a narrower measure of the money while M2 is a broader measure

The variables in the quantity of money equation.

M= Money supply V= Velocity of money P= General level of Prices Y= Real GDP P * Y = nominal GDP

Should the Fed increase the money supply when the Fed is at its max?

No When M x V goes up than P x Y would have to go up causing inflation.

In the Market for labor, The price of labor is....

Real wages

A period in which the economy is growing at a rate significantly below normal is known as an

Recession or contraction

A glass blower who is unemployed because his skills are no longer marketable is an example of .....

Structural unemployment

Long-term unemployment that arises due to a lack of skills, language barriers, discrimination, skill mismatch, and structural features of the labor market such as unions and minimum wage laws is

Structural unemployment

In the labor market, households and individuals _______ labor

Supply

Diminishing returns to labor refers refers to the tendency for ______ to decrease as firms hire additional workers when the amount of capital and other inputs is held constant.

The Marginal Product of labor

The demand for labor depends in ______ and __________.

The Marginal Product of labor and the price per output of labor.

Nominal GDP derived by the the velocity of money equals:

The Stock of money

Cyclical unemployment is...

The extra unemployment that occurs during periods of recession

When the economy is experiencing an expansionary gap:

The total unemployment rate is less than the natural rate of unemployment.

Which of the following statements about economic recession is correct?

They are typically throughout the economy and may have a global impact

If u denotes the total unemployment rate and u^n denotes the natural rate of unemployment, then cyclical unemployment equals:

U- Un

When money is used as a yard stick for measuring the relative worth of goods and services it is functioning as a

Unit of account

VMPL

Value of the marginal productivity of labor - When the market rate increases you will hire less workers but if it decreases you will hire more.

When the Fed buys a bond from you what does that do?

When the Fed buys a bond from you it allows you to have more money to spend in the economy.

Bank deposits will increase when?

Whenever the ratio of bank reserves who bank deposits is greater than the desired reserve-deposit ratio

In the United states saving is allocated to its most productive use by:

a decentralized, market oriented financial system.

An expansion period in which the economy is growing at a rate significantly _____ normal

above

An expansionary gap occurs when...

actual output exceeds potential output...

Okun's law indicates that for every percentage point by which the _____ unemployment rate exceeds the ______ unemployment rate, a negative output gap o about 2% occur.

actual, natural

The quantity equation implies that if velocity and real GDP are constant then an 8 percent increase in money supply will lead to _______ in the price level.

an 8 % increase in price level

If cyclical unemployment is negative, then the economy is experiencing

an expansionary gap

The large increase in real wages in industrialized countries over the last 100 years is primarily the result of:

an increase in the demand for labor - due to an increase in labor productivity.

A particularly strong and protected expansion is known as a_______-

boom

According to Okun's law, each extra percentage point of _______ unemployment is associated with a _____percentage planincrease in the output gap.

cyclical: 2

Banking panics, such as those that occur during the early stages of the Great Depression, _______ the money supply.

decrease

In a fractional reserve banking system, if the public withdraws cash from banks, then the money supply will....

decrease

In the short run, if firms meet the demand for their output at preset prices, then the primary causes of recessions are:

decrease in economy wide spending

Recessions tend to be following by a _______ in the rate of inflation and are often preceded by an ________ rate of inflation.

decrease; increase

Frictional

due to the incressanr desire to "better match" employers w/ employees example: people move in order to find a better job OR Some workers quit their current job OR some firms may move their locations to find better things ****Can never be 0*** Benefits: People may find a better match and then be happier

International trade increases wage inequality the wages of workers in _______ industries and decreasing the wages of workers in ______ industries.

exporting; importing

True or False: potential output does not change over time?

false- typically increases

An important factor that makes banking panics possible is the existence of...

fractional-reserve banking

Short-term unemployment associated with the process of matching workers with jobs is known as ________

frictional unemployment

An individual is able to supply labor whenever their real wage is ____ then their reservation price

greater

When there is a recessionary gap, cyclical unemployment...

greater than 0

Governments can best deal with the problems in the domestic labor market created by international trade by...

helping workers in negatively affected industries find new jobs

Skilled-biased technological change increases wage inequality by increasing the wages of ____ workers relative to the wages of _____ workers.

higher-skilled; lower-skilled

Generally, if the value of the marginal product of labor is greater than the wage rate, the firm should

hire additional workers

An increase in the retirement age will ____ the supply of labor

increase

Bank deposits will _______ whenever the ratio of bank reserves to bank deposits is greater than the desired reserve-deposit ratio.

increase

By reducing workers' incentives to look for jobs, unemployment insurance is typically thought to ______ the duration of unemployment spells.

increase

If Banks required reserve ratio decreases from 0.15 to 0.10 the public still desires to hold the same amount of currency, and the Fed takes no actions, the money supply will....

increase

If the real price of the output that workers produce increases, then the demand for labor will...

increase

Minimum wage laws are generally thought to _______ unemployment

increase

Skill- biased technological change will ____ workers incentives to acquire education and training, provided they are at the early stages of career development

increase

When the Fed buys government bonds from the public, bank reserves

increase

Deposit insurance gives depositors______of an incentive to monitor whether their bank is making prudent loans

less

A fractional - reserve banking system is one in which the reserve - deposit ratio is _______.

less than 100%

What is structural unemployment?

long-term and chronic unemployment that exists even when the economy is producing at a normal rate

In Recent years, the rate of unemployment in the U.S. has been ______ than in western Europe.

lower

The extra output gained by hiring an additional worker is the ______.

marginal product of labor

Mpl

marginal productivity of labor -additional output produced by employing 1 additional worker.

M1 and M2 are two alternative definitions of ________.

money

Summing up the currency held by the public and bank deposits gives us the______

money supply

The purchase of the government bonds from the public by the fed is known as an

open-market purchase

The Fed can increase the supply of money through:

open-market purchases

The Fed can decrease the supply of money through....

open-market sales

In the long run, prices will adjust to eliminate:

output gaps

A banking _____ is a situation in which news or rumors of the imminent bankruptcy of one or more banks leads bank depositors to rushto withdraw their funds.

panic

There is a _________ relationship between growth in the money supply and the rate of inflation

positive. as money goes up so dies inflation.

The output gap measures the difference between actual output and potential output as a percentage of __________.

potential output

A recessionary gap occurs when:

potential output exceeds actual output

Typically, the industries that are the most affected by recessions and expansions are those that:

produce durable goods

In the long run, firms will respond to expansionary gaps by

raising prices

When potential out put there is a ________ gap

recessionary

When potential output exceeds actual output, there is a

recessionary Gap

When the total unemployment rate is greater than the natural rate of unemployment, the economy is experiencing a ________.

recessionary gap

_______ gaps imply that capital and labor resources are not being fully used, while_____ gaps typically lead to inflation. Thus, both are considered to be problems for policy makers.

recessionary, expansionary

The minimum level of compensation that leaves someone indifferent between working and not working is their ...

reservation price

A situation in which banks' reserves a equal 100 percent of their deposits is known as 100 percent _______ banking.

reserve

During an economic recession the unemployment rate typically ...

rises sharply

An open market sale is the....

sale of government bonds by the Fed to the public

If worker productivity increases, the labor demand curve will...

shift to the right

Business cycles are:

short term fluctuations in GDP

In the United States since 1929 the duration of recession on average has been

shorter than the duration of expansions.

Technological change that affects the marginal products of higher-skilled workers differently from those of lower-skilled workers is known as ___________ - _________ Technological change

skilled-biased

The best explanation for the slowdown in real wage growth starting in the early 1970s despite rapid employment growth is _____ productivity growth combined with _____ in the supply of labor.

slower: an increase

Money serves as a store of ________ because it serves as a means of holding wealth.

store of value

An Auto worker in Michigan who losses his job because the company relocated the plant to another country is an example of...

structural

The natural rate of unemployment is the unemployment rate when there is only

structural and frictional unemployment

The quantity equation implies that if the velocity of money and real GDP are constant in an economy, then the given percentage increase in the money supply leads to _____ percentage increase in the price level.

the same

Frictional unemployment is:

the short-term unemployment associated with the process of matching workers with jobs.

The end of a recession is called the...

trough

The extra revenue gained by hiring an additional worker is the...

value of the marginal product of labor

A measure of the speed at which money changes hands in translations involving final goods and services.

velocity

_____ will reverse some of the inequality caused by international trade.

worker mobility between industries

The natural rate of unemployment is the unemployment rate that prevails when cyclical unemployment is...

zero