MacroEcon Test 2

A surplus of labor is eliminated by ________ in the real wage rate and a shortage of labor is eliminated by ________ in the real wage rate.

a decrease; an increase

Minimum Wage Policy

a government-mandated floor on the price of labor.

bequest saving

for leaving inheritence

Pre cautionary saving

for unexpected situations

Real GDP=Potential GDP, Actual U-rate=NROU

full employment

the supply of loanable funds is from

households and the government if it has a budget surplus.

supply of labor

is the relationship between the quantity of labor supplied and the real wage rate when all other influences on work plans remain the same.

Quantity of labor demanded

is the total labor hours that all the firms in the economy plan to hire during a given time period at a given real wage rate.

An increase in the supply for loanable funds ...

leads to a fall in the equilibrium interest rate

A decrease in the demand for loanable funds . . .

leads to a fall in the equilibrium interest rate.

An increase in the demand for loanable funds . . .

leads to a rise in the equilibrium interest rate.

A decrease in the supply for loanable funds...

leads to a rise in theequilibrium interest rate

The demand for loanable funds curve illustrates

the quantity of loanable funds demanded at any given level of the real interest rate.

Which of the following events would result in higher equilibrium interest rate and greater equilibrium quantity of loanable funds?

The demand for loanable funds shifted rightward.

NROU

The natural rate of unemployment is a combination of frictional and structural unemployment that persists in an efficient, expanding economy when labor and resource markets are in equilibrium.

crowding-out effect

The tendency for a government budget deficit to raise the real interest rate and decrease investment

crowding-out effect.

The tendency for a government budget deficit to raise the real interest rate and decrease investment is called the

Why does the govt. borrow

To fund social security payments To buy office supplies, etc. To pay down its outstanding debts To finance a deficit To invest in some megaprojects

Standard of living declines when growth rate of population is greater than growth rate of Real GDP

True

Supply of loanable funds

the relationship between the quantity of loanable funds supplied and the real interest rate when all other influences on lending plans remain the same.

Quantity of loanable funds demanded

the total quantity of funds demanded to finance investment, the government budget deficit, and international investment or lending during a given period.

Potential GDP

the value of Real GDP when all of the economy's factors of production are fully employed. Potential GDP = (natural rate of employment) ÷ (actual rate of employment) * (actual GDP)

why do households borrow

to buy houses

why does the govt. save

to improve public sector

Why do firms borrow

to invest

job rationing

when the real wage rate is above the full-employment equilibrium level

Gr. rate of RGDP per capita

(RGDP t- RGDP t-1)/ (RGDP t-1)

Budget balance

T-(G+Tr)

Checkable bank deposits

are bank accounts on which people/businesses can write checks.

the demand for labor curve

downward sloping, showing that the quantity of labor demanded increases when the real wage falls.

diminishing returns

each additional hour of labor employed produces a successively smaller additional amount of real GDP

Currency in circulation

is cash held by the public. It is the paper bills and coins in the hands of the (non-bank) public

Demand for Labor

is the relationship between the quantity of labor demanded and real wage rate when all other influences on firms' hiring plans remain the same.

Functions of FED

1. THE FED MAKES LOANS TO BANKERS WHEN THEY WANT TO BORROW. 2. THE FED SUPPLIES CURRENCY TO THE ECONOMY. 3. THE FED PROVIDES A SYSTEM OF CHECK COLLECTION AND CLEARING. 4. THE FED HOLDS RESERVES FROM BANKS AND OTHER DEPOSITORY INSTITUTIONS AND REGULATES BANKS. 5. THE FED CONDUCTS MONETARY POLICY.

When the real interest rate ________ the equilibrium real interest rate, there is a ________ of loanable funds and the real interest rate ________.

is less than; shortage; rises

Assumptions

1. There is only one financial market. 2. All savers deposit their saving in this market. 3. All borrowers take out loans from this market. 4. There is one interest rate, which is both the return to saving and the cost of borrowing.

Quantity of labor supplied

is the number of labor hours that all the households in the economy plan to work during a given time period and at a given real wage rate.

Demand for loanable funds

is the relationship between the quantity of investment demanded and the real interest rate, other things remaining the same.

store of value

A store of value is any commodity or token that can be held and exchanged later for goods and services.

FED

America's central bank. created in 1913. The FED in the US consists of the Federal Reserve Banks, the Board of Governors, and the FOMC. 12 federal reserve districts

Cause demand curve for loanable funds to shift

Changes in perceived business opportunities Expected profits Changes in the government policies Government budget deficit

Causes supply of loanable funds to shift

Changes in private savings behavior Change in disposable income Change in wealth Change in expected future income Changes in capital inflows Change in government policies Budget surplus

M1

Currency in circulation + travelers' checks + checkable deposits owned by individuals and businesses.

Borrowers

Firms, households, government

Growth rate of real GDP per person

Growth rate of Real GDP - Growth rate of population

Who are savers in the loanable funds market

Households

M2

M1+ savings deposits + small time deposits + money market mutual funds + other deposits

facts about M1 and M2

M2 is the broader measure of money commonly used and is used by economists to estimate the entire supply of money within an economy. The most basic measure of money in the US is M1. M2 is a key economic indicator used to forecast inflation.

Functions of money

MONEY SERVES AS A MEDIUM OF EXCHANGE, MONEY SERVES AS A UNIT OF ACCOUNT, MONEY SERVES AS A STORE OF VALUE,

NGDP per capita

NGDP/Population

Labor productivity

RGDP/# of labor hours

RGDP per capita

RGDP/Population...Standard of living

A nation's standard of living is best measured by its

Real GDP per person

Money market mutual funds

allow you to write checks and make electronic transfers, but most accounts establish a minimum dollar amount. Electronic, telephone and pre-authorized transactions are limited by federal regulations to six per month, with no more than three being by check, draft or debit card.

What is obtainable?

anything on or inside the curve

Holding all other influences constant, the quantity of labor supplied in a given time period depends

directly on the real wage rate so that a higher real wage increases the quantity of labor supplied.

When the labor market is in equilibrium,

i. the quantity demanded of labor equals the quantity supplied. ii. there is full employment. iii. potential GDP is produced

If real GDP grows at a faster rate than does population, then the standard of living, as measured by real GDP per person,

imrpove

The idea of "diminishing returns" means that real GDP ________ as the quantity of labor increases.

increases at a slower rate

A govt. budget surplus...

increases quantity of loanable funds, decreases interest rate

Union Wage

is a wage rate that results from collective bargaining between a labor union and a firm.

Other things remaining the same, the ________ the real interest rate, the ________.

lower; greater the quantity of loanable funds demanded

3 reasons for structural employment

minimum-wage laws, labor unions, and efficiency wages.

Structural Employment

occurs when there are fewer jobs than workers

Loanable funds

refers to all income that ppl. have chosen to save and lend out. the amount of money that investors have chosen to borrow.

production function

relationship that shows the maximum quantity of Real GDP that can be produced as the quantity of labor employed changes and all other influences on production remain the same

traveler's check

s a preprinted, fixed-amount check designed to allow the person signing it to make an unconditional payment to someone else as a result of having paid the issuer for that privilege.

Efficiency Wage

s a real wage rate that is set above the full-employment equilibrium wage rate to induce greater work effort.

Life-cycle saving

saving to meet long term objectives (Retirement, new house, car

If the real interest rate is less than the equilibrium real interest rate, there is a ________ of loanable funds, and ________.

shortage; some borrowers cannot find the funds they want