ECO3203: Exam 1
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