ECON 210: Final Exam

What shifts aggregate demand?

1. changes in consumption demand 2. changes in investment demand 3. changes in government purchases 4. change in net export demand

Characteristics of a bond

1. maturity 2. risk 3. tax status of earnings

What are the 3 different assumptions about the labor market?

1. wages and output prices are fixed (short run) 2. wages are sticky and output prices are flexible (keynesian- short run) 3. aggregate supply when wages and output prices are flexible (classical- long run)

Monetary base

=currency in the hands of the nonbank public + bank reserves (how much money we all have and how much money banks have in their vault or with deposits in the Federal Reserve)

Bank reserves

=vault cash + deposits at Fed

negative

AD has a ________ slope

1. Fear that international competition will destroy jobs 2. National Security 3. Infant industries need protection 4. Other countries subsidize their industries 5. Lose the ability to threaten with trade restrictions

Arguments against free trade

1. change in investment demand 2. change in deficit 3. changes in expected inflation

Changes in demand for loanable funds

1. Change in disposable income 2. Change in consumption spending 3. Change in capital inflows 4. Change in inflation expectations 5. Monetary Policy

Changes in supply of loanable funds

Decreases

Decrease in expected inflation, __________ demand for loanable funds

Decrease

Decrease in government spending (which decreases the deficit) will _________ demand for loanable funds

Decreases

Decrease in investment, ________ demand for loanable funds

increase

Decrease in the nominal exchange rate (E) results in an _________ in the quantity of dollars demanded both by foreign consumers and by foreign investors

increase, decrease

Decreases in the supply of loanable funds _______ equilibrium interest rates and _______ the equilibrium quantity of loanable funds

monetary base

Fed controls the money supply though the

more

Higher output prices with no equivalent increase in input costs encourage firms to produce ________

undervalued

If the exchange rate is less then price in the foreign country divided by price in the domestic country, the dollar is

Increases

Increase in expected inflation, __________ demand for loanable funds

Increase

Increase in government spending (which increases the deficit) will _________ demand for loanable funds

Increases

Increase in investment, _________ demand for loanable funds

decrease

Increase in the nominal exchange rate (E) results in a ________ in the quantity of dollars demanded both by foreign consumes and by foreign investors

higher government spending increases AD

what is the direct effect of an increase in G and D with no change in net taxes?

higher government spending increases AD, higher net taxes reduce disposable income and reduce consumption decreasing AD

what is the direct effect of an increase in G and net taxes but no change in deficit?

lower net taxes increase disposable income and consumption spending so AD rises

what is the direct effect of lower net taxes and an increase in the deficit?

higher deficit increases the demand for loanable funds, raising interest rates and decreasing AD

what is the indirect effect of an increase in G and D with no change in net taxes?

higher net taxes reduce disposable income and reduce savings; decrease in the supply of loanable funds increases the interest rate and reduces AD

what is the indirect effect of an increase in G and net taxes but no change in deficit?

lower net taxes increase disposable income and savings so the supply of loanable funds rises, higher deficit increases the demand for loanable funds, interest rates rise and AD decreases

what is the indirect effect of lower net taxes and an increase in the deficit?

decreases

when exports decrease, the demand for currency _________

increases

when exports increase, the demand for currency _________

crowding out

when government borrowing leads to higher interest rates and corresponding decreases in private investment.

Decreases

when government spending decreases, aggregate demand ___________

Increases

when government spending increases, aggregate demand __________

increase

when interest rates decrease, consumption and investment spending both ___________

decreases, increases, depreciates

when interest rates in the US decrease, demand for dollars __________ and supply of dollars __________, the dollar ___________

increases, decreases, increases

when the exchange rate decreases, which __________ exports and __________ imports, aggregate demand ___________

falls, less

when the exchange rate falls, the price of the dollar ______, so there is less incentive to sell dollars and the quantity supplied of dollars _______

decreases, increases, decreases

when the exchange rate rises, which __________ exports and ___________ imports, aggregate demand ___________

increases, decreases

when the fed buys bonds, it __________ the supply of loanable funds and __________ the interest rate

decreases, increases

when the fed sells bonds, it __________ the supply of loanable funds and __________ the interest rate

increases

when wages decrease, aggregate supply _________

decreases

when wages rise, aggregate supply __________

Municipal bonds

you don't have to pay taxes on interest earned off these

At, below

you would purchase a bond as long as the price is ____ OR _____ its present value

Bond

any agreement to repay borrowed money

macroeconomic shock

any change in monetary policy, government taxation or spending, household consumption, investment by firms, or disruption in the our level of resources available in the economy

Government

borrows money to finance the deficit

fixed exchange rate

central bank maintains the exchange rate at a fixed level

Indirect effect

change in C, I, G or net exports that affects AD through the financial market only, focuses on how changes in interest rates affect AD

Fiscal Policy

changes in taxes or government spending or borrowing

monetary policy

changes in the rate of growth of money supply

Big Mac Index

compare the price of big macs at mcdonalds around the world and see if purchasing power parity holds

Menu costs

cost of changing output prices

Devaluation

country's central bank intentionally lowers the value of the currency

decreases, decreases

decrease in US interest rates _________ capital inflows and _________ demand for the dollar

expansionary

decrease in required reserve ratio, lower interest rates, decrease in discount rate

lower

decreases in the demand for loanable funds _______ both equilibrium interest rates and the equilibrium quantity of loanable funds

Borrowers

demanders of loanable funds

Aggregate supply shocks

disruption in supply of oil, drought, labor strikes, innovation

Tax status of earnings

earnings you make on a bond (ex. municipal bonds)

Liquidity

ease of converting an asset to cash

M2

everything in M1 + savings accounts and small time certificate of deposits

managed float

exchange rate is allowed to fluctuate, but only within a narrow band

Interest rate parity

exists if the expected rates of return to lending in the domestic financial market and to lending in foreign financial markets are the same

Terms of trade

express the price of one country's goods in terms of how much of a second country's goods must be given up, also referred to as the real exchange rate

open market operations (omo)

fed buying and selling of bonds

Capital inflows

foreigners lending to the US

Potential GDP

full employment level of output

1. low inflation 2. economic growth 3. low unemployment 4. steady interest rates and exchange rates

goals of the federal reserve

Increase

higher import demand will ________ the supply of dollars on the foreign exchange market

net exports effect

higher price level increases the cost of US goods to the rest of the world; price increases, exports fall, imports rise, aggregate demand falls

interest rate effect

higher purchase level increases the amount of money it takes to purchase goods and services; when interest goes up quantity of real GDP demanded goes down

Present Value

how much one would be willing to pay today for a future payment

decreases

if the exchange rate is expected to fall that _________ the current demand for the dollar

increases

if the exchange rate is expected to rise that _________ the current demand for the dollar

Surplus

if the interest rate is above equilibrium, we'd have a ________ of loanable funds

Shortage

if the interest rate is below equilibrium, we'd have a _________ of loanable funds

Direct effect

immediate change in C, I, G, or net exports that affects AD

full employment level of real GDP

in the long run, AS is affected only by changes in ________________________ (increase investments in capital and increase investments in education and training)

purchasing power parity

in the long run, exchange rates adjust to reflect differences in the purchasing power between any two countries

increases, increases

increase in US interest rates ________ capital inflows and _________ demand for the dollar

unchanged

increase in output prices is accompanied by an equivalent increase in input costs so firm output levels are ____________ when prices rise; no profit incentive because input prices are rising at the same rate

contractionary

increase in required reserve ratio, raise interest rates, increase in discount rate

raise

increases in the demand for loanable funds _______ both equilibrium interest rates and the equilibrium quantity of loanable funds

lower, increase

increases in the supply of loanable funds _______ equilibrium interest rates and _______ the equilibrium quantity of loanable funds

Primary market

initial issue of bonds (similar to an IPO in stock)

same

interest rates and exchange rates move in the _________ direction

The federal reserve

job is to engage in monetary policy

Risk

likelihood of default, possibility that the borrower can't repay the bond; the higher the risk, the higher the rate of return (interest rate)

Reduce, increase

lower interest rates _______ capital inflows, and ________ capital outflows

aggregate demand shocks

monetary and fiscal policy, changes in consumption, investment or net exports

Flexible or floating exchange rate

nominal exchange rate is determined solely by demand and supply of currency (no central bank intervention)

Maturity

number of periods until a bond is repaid (ex. 30 year mortgage has a 30 year maturity)

velocity of money

number of times a dollar exchanges hands in the transactions that make up GDP

aggregate supply

relationship between price level and real GDP supplied bases on analysis of the output and labor markets

excess reserves

reserves held in excess of required reserves

Less likely, lower

the longer you have to wait to get your money back, the ____________ you will be willing to supply that money; the _________ present value is going to be

M1

the most basic form of money, most liquid form because it can easily be converted to cash

Nominal exchange rate (E)

the price of 1 country's currency in terms of a 2nd country's currency; how many pesos, euros, yen, etc.. does it take to purchase a dollar?

Depreciation

the price of a dollar decreases (nominal exchange rate decreases)

Appreciation

the price of a dollar increases (nominal exchange rate increases)

Real exchange rate (e)

the relative price of a country's good in terms of a second country's goods

Inverse relationship, higher, lower

there is an _________ relationship between present value and interest rates. When interest rates are _______ , thats going to _______ the present value of the bond.

Secondary market

trading of previously issued bonds

Capital outflows

US lending to foreign countries

1. increase in government spending and deficit, no change in net taxes 2. increase in government spending and increase in net taxes, no change in deficit 3. decrease in net taxes and increase in deficit, no change in government spending

What are the three examples of expansionary fiscal policy?

1. medium of exchange 2. store of value 3. unit of account

What is money?

change in potential GDP (level of labor, capital, natural resources, technology- anything that changes productivity)

What shifts aggregate supply in the long run (vertical curve)?

changes in wage or other input prices

What shifts aggregate supply in the short run?

1. Change in export demand 2. Change in interest rate in the US relative to the rest of the world 3. Change in the expected exchange rate

What shifts the demand for currency?

1. changes in the US demand for imported goods and services (depends on income) 2. changes in the interest rate in the US relative to the interest rate in the rest of the world 3. changes in the expected exchange rate

What shifts the supply of the dollar?

Lower

When bonds are tax free, interest rates tend to be

decreases

When consumption demand decreases, aggregate demand _________

increases

When consumption demand increases, aggregate demand _________

increases

When interest rates decrease which increase the incentive for investment, aggregate demand ___________

decreases

When interest rates increase which decreases the incentive for investment, aggregate demand __________

Rise, More

When the exchange rate rises, dollars become ______ expensive

rises, sell

When the exchange rate rises, the price of the dollar ______, so there is more incentive to _______ dollars (trade for foreign currency)

decreases, decreases

When the government increases borrowing, private consumption _________ and demand to borrow and invest _________ (increases taxes and interest rate)

1. Foreigners who want to buy our goods 2. Foreigners who want to invest in the U.S. 3. Americans working in other countries (U.S. owned factors of production located in other countries)

Who are the demanders of U.S. dollars?

People who want foreign currency INSTEAD of US dollars 1. Americans who want to buy foreign products 2. Americans who want to invest in foreign countries 3. Foreigners who work in the U.S. (foreign owned facts of production located in the US)

Who are the suppliers of dollars?

1. Households (people who save money through savings account) 2. Foreigners ("capital inflows"- foreigners lending to the US) 3. Depository Institutions (banks determine how much of deposits are being lended out)

Who are the suppliers of loanable funds?

because sometimes it is cheaper to buy goods from other countries than it is to produce them domestically

Why do countries trade?

Firms

_______ borrow money to finance investment (purchases of capital)

Higher, decrease

_______ nominal interest rates _________ the quantity demanded of loanable funds

Equilibrium Price

a bond's present value; determines the nominal interest rate

Nominal Interest Rate (i)

a combination of two factors, inflation and a "real" interest rate- the cost to compensate not having the money available to use for yourself (ex. if i=5% and inflation is expected to be 2%, the expected real interest rate would be 3%)

wealth effect

a higher price level reduces the purchasing power of money; decrease in the "real" value of wealth reduces consumption spending and thereby reduces the quantity of real GDP demanded

Lenders

people who supply the funds

Required reserve ratio

percentage of deposits bank is required to hold in reserves

Interest Rate

price of loanable funds

discount rate

rate the Fed charges banks

aggregate demand

summarizes relationship between price level and real GDP demanded based on analysis of output, financial, and foreign exchange markets