Econ Final

Medium of Exchange

-money acts as an intermediary between the buyer and the seller -Instead of exchanging accounting services for shoes, the accountant now exchanges accounting services for money.

Aggregate Supply

-refers to the total quantity of output firms will produce and sell -AS slopes up because as the price level for outputs rises with the price of inputs remaining fixed, firms have an incentive to produce more to earn higher profits

Aggregate demand

-the amount of total spending on domestic goods and services in an economy. -AD curve shows the total spending on domestic goods and services at each price level

Phillips curve

-the tradeoff between unemployment and inflation -If one is higher, the other must be lower -The phillips curve is the tradeoff between unemployment and inflation. Low inflation, high unemployment. High inflation, low unemployment.

Store of Value

something that serves as a way of preserving economic value that one can spend or consume in the future Take the shoemaker trading shoes for accounting services; she risks having her shoes go out of style, especially if she keeps them in a warehouse for future use—their value will decrease with each season

National Credit Union Administration (NCUA)

supervises credit unions

Expansionary fiscal policy

tax cuts or increases in government spending designed to stimulate aggregate demand and move the economy out of a recession

Contractionary fiscal policy

tax increases or cuts in government spending designed to decrease aggregate demand and reduce inflationary pressures

Unit of Account

that it is the ruler by which we measure value an accountant may charge $100 to file your tax return. That $100 can purchase two pair of shoes at $50 a pair.

Real GDP

the amount of goods and service that actually sold in a nation

Barter

trading one good or service for another

Keynes' law:

-"Demand creates its own supply." -Keynes argued that the Great Depression (and other recessions) were not caused by a drop in the ability of the economy to supply goods as measured by labor, physical capital, or technology. -He argued that the economy produced less than its potential because a lack of demand in the economy as a whole led to inadequate incentives for firms to produce.

Say's law

-"Supply creates its own demand." -Say's Law argues that a given value of supply must create an equivalent value of demand somewhere else in the economy -Neoclassical economists are economists that subscribe to the Say's law view on the importance of supply for determining the size of the macroeconomy

Money multiplier formula

-(1/Reserve Requirement) -Total Change in the M1 Money Supply= (1/Reserve Requirement) x Excess Requirement

Sticky wages and prices

-A situation where wages and prices do not fall in response to a decrease in demand, or do not rise in response to an increase in demand -Keynesian economists believe in sticky wages and prices because while people might get laid off, the ones working will still have the same wages. Also during a recession, prices of goods will not change because people will still need them. -Neoclassical economists do not believe in sticky wages and prices

Two sets of factors can cause shifts in export and import demand

-Changes in relative prices -Changes in relative growth rates

Gov spending facts

-Government spending historically has been about 18-22% of the total GDP -73% of all federal spending is allocated to national defense, social security, healthcare and interest payments

Changing reserve requirements

-Greater amount in reserves, less money available to lend out -Can raise or lower the reserve requirement (% of each bank's deposits that is legally required to hold either as cash in their vault or on deposit with the central bank

How Government Macroeconomic Policy Choices Can Shift AD

-Higher government spending will cause AD to shift to the right -Low government spending will cause AD to shift to the left -Tax policy typically affects consumption and investment spending

How Changes by Consumers and Firms Can Affect AD

-If consumers are confident about the future of the economy, they tend to spend more. -If business confidence is high, investments will rise. -Confidence is typically high when there is growth in the economy, and low when a recession is coming

Taxation

-Largest source of tax revenue is personal income tax, representing almost half of total tax revenue -The second largest source of tax revenue is payroll tax, this provides funds for social security and medicare -Income tax is progressive, meaning the rates increase as a households income increases

How Banks Create Money: IMPORTANT!

-Money Creation by a Single bank Look more at chapter 14

Keynes recognized that the government budget offered a powerful tool for influencing aggregate demand.

-More government spending could stimulate AD (or less government spending reduce it) -Lowering or raising tax rates

Changing the discount rate

-The interest rates banks pay for such loans (last resort) -Banks make loans against its outstanding loans 'at a discount' of their face value -Raise discount rate, commercial banks will reduce their borrowing from the Fed

National debt

-The total amount the government has borrowed over time -This differs from the budget deficit, the total amount the government has borrowed in a year

Commodity money

-an item that is used as money, but which also has value from its use as something other than money -For example, people have used gold throughout the ages as money although today we do not use it as money but rather value it for its other attributes.

Fiat money

-as no intrinsic value, but is declared by a government to be the country's legal tender -The United States' paper money, for example, carries the statement: "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE." In other words, by government decree, if you owe a debt, then legally speaking, you can pay that debt with the U.S. currency, even though it is not backed by a commodity.

Keynesian economics

-focused on the economy in the short run, recessions -focuses on the idea that firms produce output only if they expect it to sell.

Explanation of Double coincidence of wants

-if an accountant wants a pair of shoes, this accountant must find someone who has a pair of shoes in the correct size and who is willing to exchange the shoes for some hours of accounting services. Such a trade is likely to be difficult to arrange -Another problem with the barter system is that it does not allow us to easily enter into future contracts for purchasing many goods and services -Bartering prevents normal-sized economies from growing

If aggregate supply is vertical, what role does aggregate demand play in determining output? In determining the price level?

Due to the vertical shape of the LRAS curve, the AD curve does not play any role in determining the output produced by the economy. This is because even the AD curve shifts leftwards or rightwards, the vertical LRAS curve ensures that the output produced remains the same. The output can only be changed if there is an increase in the physical and human capital, which will cause the LRAS curve to shift rightwards. The shift will show an increase in the output.

Economic growth and decline can affect deficits and surpluses

Ex: Powerful economic growth in the 1990s fueled a tax boom, this in turn decreased the government spending as a portion of GDP throughout the decade

Deposit insurance

FDIC is responsible for this,; makes sure depositors in a bank don't lose their money even if bank goes bankrupt

The FED

Fed has three important functions: conduct monetary policy, promote stability of the financial system, provide banking services to commercial banks

Lender of last resort

Fed stands ready to lend to banks/ other financial institutions when they cannot obtain funds anywhere else

If the economy is suffering through a rampant inflationary period, would a Keynesian economist advocate for stabilization policy that involves higher taxes and higher interest rates? Explain your answer.

Keynesian economists were critical of it as it implemented policies that would not bring the desired results in the short-run and in turn will affect the long-run output. The neoclassical economists were critical f it as it was basically a Keynesian package, and went against their principles. This package had enough potential that it can create large amount of inflation in the economy

Does neoclassical economics focus on the long term or the short term? Explain your answer?

Neoclassical Economics focuses on long term. The key policy is this: the government should focus more on long term growth and on controlling inflation than on worrying about recession or cyclical unemployment. This focus on long run growth rather than the short run fluctuations in the business cycle means that neoclassical economic analysis is more useful for analyzing the macroeconomic short run.

Do neoclassical economists tend to focus more on long term economic growth or on recessions? Explain briefly.

Neoclassical economists focus more on long term economic growth than on fighting on recessions. This is because the neoclassical economists recessions will get eliminate in few years and people cannot do much to end recessions.

Do neoclassical economists tend to focus more on cyclical unemployment or on inflation? Explain briefly

Neoclassical economists tend to focus more on controlling the inflation than on worrying about cyclical unemployment. The reason for this is that neoclassical economics applies to the long-run, and they tend to focus more on that. Also, if there is an attempt to correct the cyclical unemployment, it will lead to rise inflation rate only which can further worsen the situation of the economy.

Do neoclassical economists see a value in tolerating a little more inflation if it brings additional economic output? Explain your answer.

Neoclassical economists tend to focus on long-term growth over inflation. The economy is self adjusting in the long run, so there might be fluctuations in the price level, but the output remains constant

What is the difference between rational expectations and adaptive expectations?

Rational expectations: can kind of predict the future and are more informed. Adaptive expectations: handles things as they come about and base off past experience

Chapter 18: The Impacts of Borrowing

Read chapter and look at study guide for this chapter

Double coincidence of wants

a situation in which two people each want some good or service that the other person can provide

A neoclassical economist and a Keynesian economist are studying the economy of Vineland. It appears that Vineland is beginning to experience a mild recession with a decrease in aggregate demand. Which of these two economists would likely advocate that the government of Vineland take active measures to reverse this decline in aggregate demand? Why?

The Keynesian economist would advocate that the government must take active measures to reverse the decline in the aggregate demand. According to them, the economy does not have capability to self regulate itself and they view the economy to be led by the aggregate demand. This brings the economy out of recession, the aggregate demand needs to be stimulated. This cuts tax and increases spending. The neoclassical economist would advocate that no active fiscal or monetary policy be implemented as it would only cause increase inflation, rather than increase in GDP. Neoclassical economists believe that the economy is self-correcting, that is, it would get back to the equilibrium on its own.

What is the shape of the neoclassical long-run Phillips curve? What assumptions do economists make that lead to this shape

The Phillips curve shows the tradeoff between inflation and unemployment. In the Neoclassical model, as the LRAS curve is a vertical shape, it implies that there is no tradeoff between inflation and unemployment, that is, natural unemployment rate is not affected by the prices. Therefore, the neoclassical long-run Phillips curve is also vertical. An assumption is that the LRAS curve is vertical. Another assumption is the natural rate of unemployment is constant in the long-run.

Balanced Budget

The government spends an equal amount of money that they receive in taxes in a given year

Budget Surplus

The government spends less money than it receives in taxes in a given year

Budget deficit

The government spends more money than it receives in taxes in a given year

Does neoclassical economics view prices and wages as sticky or flexible? Why?

The neoclassical economics view prices and wages as both sticky and flexible. Flexible in the long run and sticky in the short run

What shape is the long-run aggregate supply curve? Why does it have this shape?

The shape of the long run aggregate supply curve is vertical because the economy's potential output is determined by the productivity not the price level, is determined

When the economy is experiencing a recession, why would a neoclassical economist be unlikely to argue for aggressive policy to stimulate aggregate demand and return the economy to full employment? Explain your answer.

When the economy is experiencing a recession, the neoclassical economist would advocate that no active fiscal or monetary policy be implemented as it would only cause increase in inflation, rather than increase in GDP. Neoclassical economists believe that the economy is self-correcting, that is, it would get back to the equilibrium on its own

Bank runs

depositors racing to the bank to withdraw their deposits, creates instability in the banking system

Short Run

if demand is too low (or too high), it is possible for produces to supply less GDP

Standard of Deferred Payment

if money is usable today to make purchases, it must also be acceptable to make purchases today that the purchaser will pay in the future Loans and future agreements are stated in monetary terms and the standard of deferred payment is what allows us to buy goods and services today and pay in the future.

Long Run

producers are limited to producing at potential GDP.

Open market operations

when central bank buys/sells US Treasury bonds in order to influence the quantity of bank reserves & level of interest rates -Federal Open Market Committee -Can reduce quantity of $ and loans in the economy