ECO2030 Final Exam

Define budget deficit and budget surplus.

A budget deficit is when we do not have enough money to spend. A budget surplus is when we have extra money to spend.

What is "inflation"? What causes inflation?

A continuing increase in the average price level Cost of living is rising

What are quotas? Give an example.

A direct quantity restriction on imports- this much and no more. Japanese car quota in 1980s US - about 2 million a year.

How does a budget deficit affect national debt?

Budget deficit = extra borrowing this year vs National debt = all the borrowing we've ever done cumulative borrowing), that hasn't been permanently repaid

What is the definition of a budget deficit? How do we usually finance it?

Budget deficit: gov't spending > tax revenue (know for test) Normally, through gov't borrowing. The US gov't sells (Treasury) bonds, which bring in money (until the bonds have to be repaid). In general, around the world these are called sovereign bonds.

Explain arguments against and in favor of U.S. foreign aid.

Critics: Don't give foreign aid "we can't afford it" due to big budget deficits etc. Self-interest: it helps us too if other are not poor, sick Religious/ humanitarian reasons - duty doesn't stop at border Justice - sometimes we've caused a mess and should clean it up- previous support of Saddam Hussein in Iraq

Who was David Ricardo and what did he say about comparative advantage?

David Ricardo said every country has a least one comparative advantage, and everybody specializing in compare advantage makes the world more efficient and richer

What causes a stronger dollar?

Dollar will get stronger if US products become more attractive

Why did counterfeiting increase in the 1980s? How has the gov't been fighting it?

Drug-related demand for dollars. International transactions: North Korea. More recently, terrorism. fight it with continued strict penalties (secret service); copier/printer redesign (recognize currency and can't reproduce properly); redesigning the currency itself (more colors, detailed portrait, color-changing ink, watermarks, security thread)

What are the U.S. government's definitions of "employed" and "unemployed"?

Employed = have a job, even if it is part-time Unemployed = no job, but actively looking for one in past 4 weeks

to fight inflation, what should the Fed do to interest rates? Why?

Expansion/inflation: too much demand and spending. Fed's goal is to restrain spending. Monetary policy to fight inflation = cut the money supply (or slow down its growth—partly banks decide what happens).

Differences between fiscal and monetary policy: Who is responsible for fiscal policy (whose job is it)? Monetary policy? What does fiscal policy do to the money supply?

Fiscal policy: Responsibility of the president and congress (executive and legislative branches) And fiscal policy just moves around the money supply, through taxes and spending and transfers. fight recession and inflation Monetary policy: Responsibility of the central bank, which in the US is called the Federal Reserve (the Fed) Monetary policy causes the total money supply to grow or shrink. (or, to grow faster or grow slower)

to fight recession, how might policy-makers change G, TR, and TA?

G ↑. TR ↑. TA ↓.

how would policy-makers change G, TR, TA to fight inflation?

G ↓. TR ↓. TA ↑.

During a recession, what happens to GDP, unemployment, and inflation? What happens during an expansion?

GDP goes down, employment goes up, inflation up GDP goes up, employment goes down, inflation up

Banking: In order to maximize its profit and avoid losses, how does a bank change its lending in recessions? How does it change lending in expansions? Why? Why does this behavior make the business cycle worse (more unstable)?

In a recession, banks get cautious—they worry borrowers won't be able to repay loans ("default")—so banks cut loans in recession (credit crunch) to protect their profit. Every new loan = more fees, more interest, more profit for the bank. Banks help their profit by making more loans during expansion. increases inflation banks are businesses and as they try to make profit, their actions reinforce other up-or-down trends in the economy.

To fight a recession, how does the Fed change the money supply? Interest rates? Why? In a recession, what open-market operation is best - buy bonds or sell bonds?

In a recession: Increase the money supply, and cut interest rates. (monetary policy) Recession: Fed buys bonds (from the banks) w/ new money it has just created

If the free market fixes a recession by itself (no government action), what is the technical term for that in economics?

It is called self-correcting. Neoclassical (Adam Smith) hands off let it do it itself. Keynesian = government control.

Who is the current chair of the Federal Reserve?

Jerome Powell

To fight a recession, what would Keynesians recommend that the government do with government spending? Transfer payments? Taxes?

Keyn's say, people save for many long-term reasons, not just because they get paid interest. They will probably keep saving even if i is lower. Keep saving for retirement, kids' education, and emergencies

Define M1 and M2

M1: currency + value of checking accounts M2: M1 + saving accounts + other small time deposits + non-retirement money market accounts

What are the functions of money? Which is the most important function?

MEDIUM OF EXCHANGE is the most important. unit of account (prices are stated in terms of money) store of value (people have savings in form of money)

Define real GDP and per capita GDP.

Real GDP takes inflation into account. Per capita GDP is per person so GDP is divided by the population.

What is administrative protection? Give an example.

Rules that accidentally or deliberately hurt imports. accidental: US Marine Mammal Protection Act - Said you has to fish for tuna will dolphin-safe nets, US could afford the new nets. Mexico said they could not afford new nets, sued US Deliberate: Japan said all turn signals had to be orange - Japanese cars were already that way, US cars had to be changed to meet that rule (expensive).

What are tariffs? Give an example.

Taxes on imported goods. 1930 Smoot-Hawley tariff. US also has steel tariff off and on

What does it mean that the Federal Reserve is "politically independent"? How this might be good, and bad, for the US?

Technically the Fed is a private organization, but its top people are appointed by the gov't, so it is essentially a gov't organization in practice. Fed can take tough action even if it's unpopular. For example, fight inflation by raising interest rates. Fed is very powerful but undemocratic.

Difference between "deficit" and "debt"?

The deficit is amount the government owes for one fiscal year. The national debt is the total amount that the government owes.

How does a weaker dollar affect US exports? US imports? A stronger dollar?

The dollar can't buy as much as foreign currency as the day before. (You need more dollars to get 1 foreign currency)

Who decides the size of the money supply? What causes money multiplication?

The gov't and banks working TOGETHER Gov't creates the "base money supply" and then banks "multiply" it into a bigger amount, through lending and re-lending them in capitalism, so money supply is not totally under government control Money multiplier: banks take the base money and turn it into a bigger money supply. Lending + re-lending

what is the problem of "lags"? Name the U.S. automatic stabilizers. Why do unemployment benefits stabilize the economy?

The problem of lags is that sometimes fiscal policy action is delayed too much—so then a 'correct' policy becomes a wrong policy—because the economy has already moved on to the next stage. Unemployment benefits The income tax system The minute that a recession starts happening and people start losing their jobs, they can apply for u. benefits.

What is a trade deficit?

Trade deficit means imports > exports.

Do global investors usually want some US Treasury bonds? Why are US Treasury bonds considered safe financial investments?

US Treasury bond is probably the most-trusted financial asset in the world. (people see it as an extremely safe asset), bc the US has never really defaulted on its bonds in the past 200 years.

Why is using money more efficient than bartering?

You have to negotiate the rate of exchange between every 2 products in economy. With money, just say, 1 cow = $5000. Everyone knows what that means.

Explain potential benefits and problems of a budget deficit

a budget deficit can help fight a recession or crisis in the economy - get money moving again, get spending going. deficit can finance "necessary" gov't spending (or "necessary" tax cuts) during good times: "US bankruptcy" dollar crash Psychological effects (fear) Bad news → fear → confidence ↓→ recession

Explain why we use paper money (and electronic equivalents) and what keeps it valuable.

culture (people decided they like paper money) gov't command (fiat currency; taxes must be paid in dollars) scarcity (dollar retains value if it is kept "just scarce enough)

On a demand and supply graph, say that demand decreases. What happens to the equilibrium price? Equilibrium quantity? What if the supply decreases?

demand increases, prices goes up. supply decreases, price goes up

What real-life examples make economists think that culture is more important than government laws, in deciding what is socially-acceptable "money"?

dollar coin or two dollar bill

What are the key values of Conservatives? Do they think capitalism is good or bad? Do they think gov't action is good or bad?

efficiency and freedom for. THEY LOVE FREE MARKET AND NOT A LOT OF GOV'T efficiency: non-wastefulness freedom for: personal freedom LOVE free market. limited gov't. gov't role is to support market and provide a good foundation support these 4 gov't functions: law and order (inc defense), education, stable financial system, infrastructure

What are the key values of Liberals? Do they think capitalism is good or bad? Do they think gov't action is good or bad?

equity and stability equity: fairness - equal opportunity to get an education and job, and maybe "safety net" (programs to help people in economic trouble so they don't starve). unemployment $, medicare, etc stability: steadiness - (ideally) no huge fluctuations or crises the liberals believe free market is sometimes unfair and unstable. they like it, but are a little skeptical liberals believe gov't can help and should do more than the 4 minimum functions of gov't. they like gov't. ex. anti-poverty programs / stimulus

What is the fundamental economic problem having to do with resources vs. desires?

finite resources, infinite desires

If the government cuts income taxes, what will probably happen to consumer spending? What happens to aggregate demand?

goes up goes up

How is business investment in machines and buildings affected by interest rate changes?

if I goes up, businesses invest in more machines, buildings, IP

What are the key values of Radicals? Do they think capitalism is good or bad? Do they think gov't action is good or bad?

key value: equity!!! equity: fairness - usually interpreted as equal opportunity to get an education and job, and maybe "safety net" (programs to help people in economic trouble so they don't starve). unemployment $, medicare, etc radicals believe capitalism is extremely unfair to the MAJORITY. radicals believe that capitalism cannot be fixed. radicals think free market IS VERY BAD! capitalism cannot be fixed and don't trust gov't programs

The Federal Reserve is responsible for what sort of policy? If the Fed wants to boost the GDP, what will it probably do with interest rates and the money supply?

monetary policy. lower interest rates, increase money supply

Who believes more strongly that government action is unnecessary, (neo)classical economists or Keynesians?

neoclassical economists

What's the difference between frictional and structural unemployment?

people between jobs or looking for their first job. They have the skills, just need time to search for the best match Often short-term Solutions: job fairs, resume help, mock interviews Structural u. = a mismatch between job-seeker characteristics and what employers are looking for This u. last a long time because mismatches are hard to fix Lack of correct skills or correct attitudes Geographic mismatches Discrimination Government regulation and taxes (like a too-high minimum wage?)

What does it mean if a country has a "comparative advantage" in producing and exporting something? How do tariffs affect imports?

product(s) you are best at. A comparative advantage is a good or service that you are efficient at producing, compared to other countries. tariffs increase the cost of imports

Define "comparative advantage." Give examples.

product(s) you are best at. A comparative advantage is a good or service that you are efficient at producing, compared to other countries. US: creativity and customer service make entertainment and service exports strong Germany: High-quality engineering (but expensive) Japan: quality manufacturing at a lower price (teamwork)

Who holds the US currency? In the 1800s debate whether to use gold money only, or also silver money, which side did the Wizard of Oz book take, if it's an allegory?

silver money is best for our country (check this bc idK)

How are flexible exchange rates decided? If I show you the exchange rate from 2 different days, be able to tell me which currency got stronger or weaker.

the exchange rate is set by free market demand and supply and changes every day (floats). The demand changes, the ER changes. Almost all currencies float.

On a demand and supply graph, where is the equilibrium? What happens to the product price if there is a shortage? A surplus?

where D and S collide. shortage = price goes up surplus = price goes down