Macro In Class Quiz #2

Frictional Unemployment

occurs when workers spend time searching for the jobs that best suit their skills and tastes - short term for most workers

Employed

paid/self employed includes unpaid workers in family businesses

Currency

paper bills and coins in the hands of the public

Unemployed

people not working and have not looked for work within the previous 4 weeks

Increases in budget deficit causes...

crowding out

Money supply =

currency + deposits

Male participation rate has...

declined in the labor force from 86% to 68.7%

A bank has capital of $200 and a leverage ratio of 5. If the value of the bank's assets declines by 10%, then its capital will be reduced to

$100

If the reserve ratio is 1/4 and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by

$480

Cyclical unemployment =

% of labor force (U-3) - % natural rate

Labor-force participation rate =

(labor force/adult pop.) x 100

Unemployment Rate =

(number of unemployed/labor force) x 100

Fractional reserve banking system (modern banking)

- assume no one holds cash - banks are fully loaned up ( no excess reserves) depositors have 100 in deposits, borrowers have 90 in currency money supply = 90 + 100 = 190

What does the Federal Reserve Consist of?

- board of governors - 12 regional Fed banks - federal open market committee (FOMC)

Worker turnover

- hiring & training new workers is costly - paying high wages gives workers more incentive to stay, reduces turnover

Worker Effort

- monitor the efforts of their workers, "shrinkers" are fired

Worker Quality

- offering higher wages attracts better job applicants, increases quality of the firm's workforce

What are the assumptions for the Market of Loanable Funds (4)

- only one financial market - all savers deposit their saving in this market - all borrowers take out loans from this market - there is one interest rate, which is both the return to saving and the cost of borrowing

What happens when unions raise the minimum wage above equilibrium:

- quantity of labor demanded falls and unemployment results

What are the benefits of unemployment insurance?

- reduces uncertainty over incomes - gives the unemployed more time to search, resulting in better job matches and thus higher productivity

The Fed establishes fractional reserve requirements..

- the minimum amount of reserves that banks must hold against deposits - banks may hold more than this minimum if they choose

In our example, suppose bank assets appreciate by 5%, from $1000 to $1050:

- this increases bank capital!! from 50 to 100, doubling owners equity

Are unions good or bad from the advocates point of view?

- unions counter the market power of large firms, make firms more responsive to workers concerns

Money Supply in 3 different cases to determine banks' impact on money supply:

1. no banking 2. 100% reserve banking system (banks hold 100% of deposits as reserves, make no loans) 3. fractional reserve banking system

What are the four reasons for firms paying higher wages?

1. worker health 2. worker turnover 3. worker quality 4. worker effort

Money multiplier =

1/R

Change in MS =

1/r x deposits

The population of Ectenia is 100 people: 40 work full-time, 20 work half-time but would prefer to work full-time, 10 are looking for a job, 10 would like to work but are so discouraged they have given up looking, 10 are not interested in working because they are full-time students, and 10 are retired. What is the number of unemployed?

10

Unionized workers are paid about ____________ percent more than similar nonunion workers

15

M1

3.2 trillion (May '16) sum of currency, demand deposits, traverlers checkers, and other checkable deposits ****does NOT include many assets but is highly liquid (accessible quickly and cheaply)

Using the numbers in the preceding question, what is the size of Ectenia's labor force?

70

Budget Deficit

A budget deficit reduces national saving the the supply of loanable funds --> it increases the equilibrium interest rate and decreases the equilibrium quantity

What is a government budget deficit? How does it affect interest rates, investment, and economic growth?

A government budget deficit arises when the government spends more than it receives in tax revenue. Because a government budget deficit reduces national saving, it raises interest rates, reduces private investment, and thus reduces economic growth

Bank A has a leverage ratio of 10, while Bank B has a leverage ratio of 20. Similar losses on bank loans at the two banks cause the value of their assets to fall by 7%. Which banks shows a larger change in bank capital? Does either bank remain solvent? Explain.

Bank B will show a larger change in bank capital. The decrease in assets will render Bank B insolvent because its assets will fall below its liabilities, a decrease in bank capital of 140%. Bank A will suffer a large decline in bank capital (70%) but will remain solvent.

Labor Force Statistics are produced by:

Bureau of Labor Statistics, in the U.S. Dept. of Labor - based on regular survey of 60,000 households - based on "adult population" (16 yrs or older)

Are unions good or bad?

Economists disagree

The economy of Elmendyn contains 2,000 $1 bills. If people hold all money as demand deposits and banks maintain a reserve ratio of 10%, what is the quantity of money?

If banks have a reserve ratio of 10%, the money multiplier is 1/0.10 = 10. So if people hold all money as demand deposits, the quantity of money is 10 x 2,000 = $20,000

The economy of Elmendyn contains 2,000 $1 bills. If people hold equal amounts of currency and demand deposits and banks maintain 100% reserves, what is the quantity of money?

If people have $1,000 in currency and $1,000 in demand deposits, the quantity of money is $2,000

The economy of Elmendyn contains 2,000 $1 bills. If people hold all money as currency, what is the quantity of money?

If people hold all money as currency, the quantity of money is $2,000

What is investment? How is it related to national saving in a closed economy?

Investment refers to the purchase of new capital, such as equipment or buildings. It is equal to national saving in a closed economy

Elaine wants to buy and operate an ice-cream truck but doesn't have the financial resources to start the business. She borrows $10,000 from her friend George, to whom she promises an interest rate of 7%, and gets another $20,000 from her friend Jerry, to whom she promises a third of her profits. What best describes this situation?

Jerry is a stockholder, and George is a bondholder

Structural Unemployment

Occurs when there are not enough jobs to go around, when wage is kept above equilibrium

The reserve Ratio

R = fraction of deposits that banks must hold as reserves = reserves/deposits

Federal Reserve (FED)

U.S. central bank

Explain whether each of the following events increases, decreases, or has no effect on the unemployment rate and the labor-force participation rate: after a long search, Jon finds a job

When Jon finds a job after a long search, the unemployment rate decreases and there is no effect on the labor-force participation rate because Jon was and continues to be part of the labor force and the adult population

Explain whether each of the following events increases, decreases, or has no effect on the unemployment rate and the labor-force participation rate: Tyrion, a full-time college student, graduates and is immediately employed

When Tyrion graduates and is immediately employed, the unemployment rate decreases because the labor force increases, and the labor-force participation rate increases because Tyrion was part of the adult population is now part of the labor force

Explain whether each of the following events increases or decreases the money supply. After a rash of pickpocketing, people decide to hold less currency

When people decide to hold less currency, they likely deposit their currency in a bank and the bank will lend portion of that money so the money supply increases

From 2008 to 2012, the ratio of government debt to GDP in the United States

increased markedly

Crowding out

a fall in investment -- the government borrows to finance its deficit, leaving less funds available for investment

Unemployment Insurance (UI)

a government program that partially protects workers incomes when they become unemployed

Capital requirement

a government regulation that specifies a minimum amount of capital - intended to ensure banks will be able to pay off depositors and debts

T-Account

a simplified accounting statement that shows a banks assets and liabilites

While cleaning your apartment, you look under the sofa cushion and find a $50 bill. you deposit the bill in your checking account. The Fed's reserve requirement is 20% of deposits. A. What is the max amount that the money supply could increase? B. What is the minimum amount that the money supply could increase?

a: 1/R = 1/.2 = 5 max possible increase in deposits: 5 x 50 = 250 **just money supply but also, money supply includes currency, which fall by 50!! SO max increased in money supply= 250-50 = 200 B: 0 if your ban k makes no loans from your deposit, currency falls by $50, deposits increase by $50, money supply does not change

In June 2009, at the trough of the Great Recession, the Bureau of Labor Statistics announced that of all adult Americans, 140,196,000 were employed, 14,729,000 were unemployed, and 80,729,000 were not in the labor force. Use this information to calculate: a:) the adult pop b:) the labor force c:) the labor-force participation rate d:) the unemployment rate

a:) adult pop = # of employed + # of unemployed # those not in the labor force = 140,196,000 + 14,729,000 + 80,729,000 = 235,654,000 b:) labor force = # of employed + number of unemployed 140,196,000 + 14,729,000 = 154,925,000 c:) the labor-force participation rate = labor force/adult population 154,925,000/235,654,000 = 65.7% d:) unemployment rate= # of unemployed/labor force 14,729,000/154,925,000 = 9.5%

Public training programs

aim to equip workers displaced from declining industries with the skills needed in growing industries

Market for Loanable Funds

all savers go to this market to deposit their saving, and all borrowers go to this market to take out their loans *supply-demand model of the financial system

Which of the following actions by the Fed would reduce the money supply?

an increase in the interest rate paid on reserves

Central Bank

an institution that oversees the banking system and regulates money supply

Policy 2: Investment Incentives

an investment tax credit increases the demand for loanable funds --> this raises the equilibrium interest rate and increases the equilibrium quantity *** this would make your mortgage rate higher

Medium of Exchange

an item buyers give to sellers when they want to purchase goods and services

Store of Value

an item people can use to transfer purchasing power from the present to the future

Leverage ratio =

assets/capital ** if it is a large leverage ratio, then the bank is exposed to more RISK

Demand deposits

balances in bank checking accounts that depositors can access on demand by writing checks or using their debit cards

Bank capital =

bank assets - bank liabilities

If bank assets decrease by 5% from 1050 to 1000...

bank capital falls from 50 to 0

If bank assets decrease more than 5%

bank capital is negative and bank is insolvent

Fractional Reserve Banking System

banks keep a fraction of deposits as reserved and use the rest to make loans

Liabilities

besides deposits, banks also obtain funds from issuing debt and equity

Assets

besides reserves and laons, banks also hold securities

How does the government finance deficits?

borrowing (selling government bonds)

A fractional reserve banking system creates money...

but not wealth

Sectoral shifts

changed in the competition of demand across industries or regions of the country - displace some workers, who must search for new jobs appropriate for their skills & tastes

If the business community becomes more optimistic about the profitability of capital, the ______________ curve for loanable funds would shift, driving the equilibrium interest rate _____________

demand, up

Is being fired a good deterrent?

depends on how hard it is to find another job - if market wage is above equilibrium wage, there aren't enough jobs to go around, so workers have more incentive to work not shrink.

Bank's liabilities include:

deposits

M2

everything in M1 plus savings deposits, small time deposits, money market funds, and a few minor categories - includes more items than M1 but is less liquid

According to the theory of efficiency wages,

firms may find it profitable to pay above equilibrium wages

Fractional =

fragile !!

Unemployment insurance increases...

frictional unemployment - because people respond to incentives - UI benefits end when a workers takes a job, so workers have less incentive to search or take jobs while eligible to receive benefits

Persistent deficits lead to...

government debt

What does knowing the duration of unemployment do?

helps policy makers design better policies to help unemployed

100% reserve banking system

holds 100% of deposit as reserves: money supply = 0 + 100 = 100 ***** banks do not affect the size of money supply, double entry bookkeeping

Economists use labor-market data to evaluate how well an economy is using its most valuable resource---- its people. Two closely watched statistics are the unemployment rate and the employment-population ration (calculated as the percentage of the adult population that is employed). Explain what happens to each of these in the following scenarios: A stock market boom induces newly enriched 60-year old workers to take early retirement

if a stock market boom induces earlier retirement, the unemployment rate will rise and the employment-population ratio will fall

Economists use labor-market data to evaluate how well an economy is using its most valuable resource---- its people. Two closely watched statistics are the unemployment rate and the employment-population ration (calculated as the percentage of the adult population that is employed). Explain what happens to each of these in the following scenarios: Numerous students graduate form college and immediately begin new jobs

if numerous students graduate and immediately find new jobs, the unemployment rate will fall and the employment-population ratio will rise

The economy of Elmendyn contains 2,000 $1 bills. if people hold all money as demand deposits and banks maintain 100% reserves, what is the quantity of money?

if people hold all money as demand deposits at banks with 100% reserves, the quantity of money is $2,000

The economy of Elmendyn contains 2,000 $1 bills. If people hold equal amounts of currency and demand deposits and banks maintain a reserve ratio of 10%, what is the quantity of money?

if people hold equal amounts of currency and demand deposits and the money multiplier for reserves is 10, then two equations must be satisfied (1) C = D, so that people have equal amounts of currency and demand deposits; and (2) 10 × ($2,000 - C) = D, so that the money multiplier (10) times the number of dollar bills that are not being held by people ($2,000 - C) equals the amount of demand deposits (D). Using the first equation in the second gives 10 × ($2,000 - D) = D, or $20,000 - 10D = D, or $20,000 = 11 D, so D = $1,818.18. Then C = $1,818.18. The quantity of money is C + D = $3,636.36

Economists use labor-market data to evaluate how well an economy is using its most valuable resource---- its people. Two closely watched statistics are the unemployment rate and the employment-population ration (calculated as the percentage of the adult population that is employed). Explain what happens to each of these in the following scenarios: After an unsuccessful search, some of the laid-off workers quit looking for new jobs

if some of the unemployed workers give up looking for a job, the unemployment rate will fall and the employment-population ratio will remain the same

Economists use labor-market data to evaluate how well an economy is using its most valuable resource---- its people. Two closely watched statistics are the unemployment rate and the employment-population ration (calculated as the percentage of the adult population that is employed). Explain what happens to each of these in the following scenarios: Numerous students graduate form college but cannot find work

if students graduate and cannot find work the unemployment rate will rise and the employment population ratio will remain unchanged

Worker health

in less developed countries, poor nutrition is a common problem. - paying higher wages allows workers to eat better, makes them healthier, more productive

The main policy goal of the unemployment insurance system is to reduce the

income uncertainty that workers face

Banks can...

increase and decrease the money supply

In a competitive labor market, when the government increases the minimum wage, the result is a ______________ in the quantity of labor supplied and a ____________ in the quantity of labor demanded

increase, decrease

The economy is always changing so some frictional unemployment is...

inevitable, this is not necessarily bad for the economy as it can increase efficiency by matching workers with suitable jobs thus reducing turnover

The demand for loanable funds comes from:

investment - firms borrow the funds they need to pay for new equipment, factories, buildings - households borrow funds to purchase new houses

The u-rate...

is not a perfect indicator of joblessness or the health of the labor market - it excludes discouraged workers - it does not distinguish between full and part time - some people misreport their work status in the survey

Chloe takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply ___________, but if the bank lends out some of the $100, the money supply ______________

is unchanged, increases

Assets include:

laonds and reserves

The money supply includes all of the following EXCEPT

lines of credit accessible with credit cards

Minimum Wage Laws

minimum wage may exceed the equilibrium wage for the least skilled or experienced workers, causing structural unemployment -----> but this is a very small part of the labor force, so the minimum wage laws cannot explain most unemployment

Money Multiplier example, R = 10%

money multiplier = 1/R = 10 $100 of reserves creates 1000 of money (100x10)

Fiat Money

money without intrinsic value, used as money because of government decree ex:) the U.S. dollar

In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hold ___________ currency or if banks choose to hold _____________ excess reserves

more, more

The duration of unemployment

most spells of unemployment are short. yet most observed employment is long term - the small group of long-term unemployed persons has fairly little turnover, so it accounts for most of the unemployment observed over time

The supply of loanable funds comes from:

national saving - households with extra income loan it out to earn interest - public saving, if positive, adds to national saving and the supply of loanable funds - if negative, it reduces national saving and the supply of loanable funds

Since 1950, female participation has...

nearly doubled from 34% to 56.7%

What are some causes of women's role in American society changing dramatically over the past century?

new technologies reducing the time to do household tasks (washing machine, clothes dryer, fridge), improved birth control (reduced the number of children born into a typical family, changing political and social attitudes

Not in the labor force

no in either employed or unemployed category

Labor Force =

number of employed + number of unemployed

Structural Unemployment

occurs when there are fewer jobs than workers - usually long term

If the government collects more in tax revenue than it spends, and households consumer more than they get in after-tax income, then

private saving is negative, but public saving is positive

Economists use labor-market data to evaluate how well an economy is using its most valuable resource---- its people. Two closely watched statistics are the unemployment rate and the employment-population ration (calculated as the percentage of the adult population that is employed). Explain what happens to each of these in the following scenarios: Advances in healthcare prolong the life of many retirees

prolonging the life of retirees will not affect the unemployment rate and will lower the employment-population ratio

Government employment agencies:

provide information about job vacancies to speed up the matching of workers with jobs

No banking system

public holds the $100 as currency Money supply 100+0=100

Leverage ratio

ratio of assets to bank capital

a fall in interest rate...

reduces the cost of borrowing, which increases the quantity of loanable funds

Loanable Funds

refers to all income that people have chosen to save and lend out, rather than use it for consumption

Bank capital

resources a bank obtains by issuing equity (stocks) to its owners

Using money

solves the problems of barter and double coincidence of wants

The theory of efficiency wages...

states that some firms voluntarily pay above equilibrium wages to boost worker productivity

If a popular TV show on personal finance convinces Americans to save more for retirement, the _____________ curve for loanable funds would shift, driving the equilibrium interest rate _____________

supply, down

You take $100 you had kept under your mattress and deposit it in your bank account. If this $100 stays in the banking system as reserves and if banks hold reserves equal to 10% of deposits, by how much does the total amount of deposits in the banking system increase? By how much does the money supply increase?

take $100 that you held as currency and put it into the banking system, then the total amount of deposits in the banking system increases by $1,000, because a reserve ratio of 10% means the money multiplier is 1/0.10 = 10. Thus, the money supply increases by $900, because deposits increase by $1,000 but currency declines by $100.

Commodity Money

takes the form of commodity with intrinsic value ex:) gold coins, cigarettes in POW camps

Workers have different:

tastes & skills, and jobs have different requirements

Policy 1: Saving Incentives

tax incentives for saving goes up, the supply of loanable funds which reduces the equilibrium interest rate and increases the equilibrium quantity of loanable funds

Money Multiplier

tells us the amount of money the banking system generates with each dollar of reserves

Cyclical Unemployment

the deviation in unemployment from the natural rate

Cyclical unemployment

the deviation of unemployment from its natural rate - is associated with business cycles - short term

Equilibrium

the interest rate adjusts to equate supply and demand - the equilibrium quantity of loanable funds = equilibrium investment and equilibrium national saving

Natural rate of unemployment

the normal rate of unemployment around which the actual unemployment rate fluctuates - it is the trend of the unemployment rate

U-3:

the official unemployment rate, total unemployed, as a percent of the civilian labor force

Job search

the process of matching the skills of the unemployed with appropriate jobs - long term

Money Supply

the quantity of money available within the economy including: currencies, demand deposits

Monetary Policy

the setting of the money supply by policymakers in the centeral bank

Explain whether each of the following events increases, decreases, or has no effect on the unemployment rate and the labor-force participation rate: Daenerys quits her job to become a stay-at-home mom

the unemployment rate increases because the labor force decreases, and the labor-force participation rate decreases because Daenery's is still part of the adult population but is no longer part of the labor force

Explain whether each of the following events increases, decreases, or has no effect on the unemployment rate and the labor-force participation rate: Jorah dies working long hours at the office

the unemployment rate increases because the labor force decreases, and the labor-force participation rate decreases because the labor force and the adult population both decreases by one

Economists use labor-market data to evaluate how well an economy is using its most valuable resource---- its people. Two closely watched statistics are the unemployment rate and the employment-population ration (calculated as the percentage of the adult population that is employed). Explain what happens to each of these in the following scenarios: An auto company goes bankrupt and lays off its workers, who immediately start looking for a new job

the unemployment rate will rise and the employment-population ratio will fall

Double coincidence of wants

the unlikely occurence that 2 people each have a good the other wants

Leverage

the use of borrowed funds to supplement existing funds for investment purposes

Unit of account

the yardstick people use to post price and record debt

Discouraged Workers

those who lose their jobs - would like to work but have given up looking for jobs - are classified as "not in the labor force" rather than unemployed

U-6:

total unemployed, plus all marginally attached workers, plus total employed part-time for economic reasons, as a percent of the civilian labor force plus all marginally attached workers ***** includes discouraged workers

Without money...

trade would require barter, the exchange of one good for another requires a double coincidence of wants

What happens to the u-rate? Does the u-rate give an accurate impression of what's happening in the labor market? Sue lost her job and begins looking for a new one

u-rate goes up, a rising u rate gives the impression that the labor market is worsening

What happens to the u-rate? Does the u-rate give an accurate impression of what's happening in the labor market? Jon, a steelworkers who has been out of work since his mill closed last year, becomes discouraged and gives up looking for work

u-rate: goes down, falls because he is not counted as unemployed and not in the labor force

What happens to the u-rate? Does the u-rate give an accurate impression of what's happening in the labor market? Sam, the sole earner in his family of 5, just lost his $80,000 job as a research scientists. Immediately, he takes a part-time job at McDonald's until he can find another job in his field

u-rate: is unchanged, because he found a new job, person is employed whether they are part time or full time - things in the economy are worse but the u-rate fails to show it

Insolvent

unable to pay debts owed

Explain whether each of the following events increases, decreases, or has no effect on the unemployment rate and the labor-force participation rate: After an unsuccessful job search, Arya gives up looking and retires

unemployment rate decreases because Arya is no longer considered unemployed and has left the labor force and the labor-force participation rate decreases

Are unions good or bad from the critics point of view:

unions are cartels - they raise wages above equilibrium which causes unemployment and/or depresses wages in non-union labor markets

Historically, the debt-GDP ratio...

usually rises during wartime and falls during peacetime - until the early 1980s

Explain whether each of the following events increases, decreases, or has no effect on the unemployment rate and the labor-force participation rate: Cersei dies while enjoying retirement

when Cersei dies while enjoying retirement, there is no effect on the unemployment rate. the labor-force participation rate increases because the adult population decreases

Explain whether each of the following events increases, decreases, or has no effect on the unemployment rate and the labor-force participation rate: Jaime has a birthday, becomes an adult, and starts looking for a job

when Jaime becomes an adult and begins looking for work, the unemployment rate increases and the labor-force participation rate increases because the labor force and adult population both increased by one

Explain whether each of the following events increases, decreases, or has no effect on the unemployment rate and the labor-force participation rate: Sansa has a birthday, becomes an adult, but has no interest in working

when Sansa becomes an adult but does not look for work, there is no effect on the unemployment rate. the labor-force participation rate decreases because Sansa is now part of the adult population but is not part of the labor force

Explain whether each of the following events increases or decreases the money supply. Fearful of bank runs, bankers decide to hold more excess reserves

when bankers decide to hold more excess reserves, the money supply decreases

How does the money grow in a fractional reserve banking system?

when banks make loans, they create money - the borrower gets $90 in currency- an asset counted in the money supply $90 in new debt - a liability that does not have an offsetting effect on the money supply

Explain whether each of the following events increases or decreases the money supply. Citibank repays a loan it had previously taken from the Fed

when citibank repays a loan from the fed, the money supply decreases

Explain whether each of the following events increases or decreases the money supply. The FOMC increases its target for the federal funds rate

when the FOMC increases its target for the federal funds rate, the money supply decreases

Explain whether each of the following events increases or decreases the money supply. The Fed buys bonds in open-market operations

when the Fed buys bonds in open market operations, the money supply increases

Explain whether each of the following events increases or decreases the money supply. The Fed reduces the reserve requirement

when the Fed reduces the reserve requirement, the money supply increases

Explain whether each of the following events increases or decreases the money supply. The Fed increases the interest rate it pays on reserves

when the fed increases the interest rate it pays on reserves, the money supply decreases

Union

worker association that bargains with employers over wages, benefits, and working conditions - unions exert their market power, ability to call a strike, to negotiate higher wages for workers - the typical union worker earns 20% higher wages and gets more benefits than a nonunion worker for the same type of work

"Outsiders"

workers who lose their jobs, are worse off - some outsiders go to non-unionized labor markets, which increases labor supply and reduces wage in those markets

"Insiders"

workers who remain employed, are better off

Why is there a fall in the participation of men in the labor force?

young men now stay in school longer than their fathers and grandfathers did, older men retire earlier and live longer, with more women employed more fathers now stay at home to raise their children