MACRO-FSU-Calhoun: exam 3
Rules of the Game
"All debt does is change the mix of output from the private sector to the public sector
Tiebont Hypothesis
"Vote with your feet." Live in places that withhold your values.
History of money
"wampum" Spanish gold coins bank notes/ broken notes "greenbacks" (1800s) federal reserve noets (1913
if multiplier is 2 and the gap is $2 Trillion, how much has to be spent?
$1 trillion
if the economy was in a recession, would the 2 policies raise or reduce... -(buy or sell) gov securities -reserve ratio -discount rate -interest paid on reserves -budget deficit or surplus
-buy -reduce -reduce -reduce -deficit
TARP
-Troubled Asset Relief Program -Program created in an attempt to mitigate the fallout created by the mortgage crisis of 2007-2008 -Ben Bernanke
market basket
-a hypothetical set of consumer purchases of g/s
Union
-an association of workers that bargin collectively with employers over benefits, wages and working conditions
When does Monetary Policy loose its power?
-as you get close to 0% interest rates
Marginally Attached
-available to work and have recently worked for work but are not currently
GDP per capita
-average GDP per person real GDP/population
what spending habits are most sensitive?
-borrowing and lending -stocks and bonds -cars & major appliances -education
aggregate supply (AS) curve
-shows the relationship b/w the aggregate quantity of output supplied by all firms and overall price level -short run AS shows a positive relationship b/w these 2 variables P and Y
under what condition will FED want to raise interest rates?
-strong/booming economy -inflation rate of 2-3% -full employment
Determinants of exchange rate
1) relative price levels 2) relative rates of productivity growth 3) preferences for domestic and foreign goods 4) Tariffs and quotas
What are three types of personal revenue
1)Personal income tax 2)Payroll tax 3)Corporate income tax
Problems with inflation
1. Alters the outcome of long run decisions 2. Distorts information delivered by price 3. Protect themselves from inflation more than produce goods 4. Menu cost increase 5. Alters the distribution of income 6. Stagflation 7. Hyperinflation
The simple deposit multiplier (theory) assumes two things
1. Banks hold no excess reserves 2. All cash is held in Bank
decreases in Ag. Demand are caused by:
1. Contractionary fiscal policy (decreased gov't spending, increased taxes) 2. Contractionary monetary policy (higher int. rates) 3. changes in consumer spending 4. changes in business spending
What are the two constraints of the Fiscal Policy?
1. Fed controls monetary policy 2. Political Constraints
Fiscal policy options
1. Govt spending 2. Tax cuts/ Tax increases: slow down/ increase economy 3. Income transfers: payment to individual in which noG/S/ are exchanges
What are the two major responsibilities of the Fed?
1. Lender of Last Resort 2. Manager of Money Supply
open market operations
1. when the fed buys bonds it increases the money supply 2. when the fed sells bonds it decreases the money supply
what are the 2 problems with a bartering economy?
1. you must find the person with the good you want 2. that person must be willing to trade for what you have
what is the U.S deficit
1.3 trillion
m1 amount
1.7 trillion
What is the money multiplier formula?
1/ RRR
∆CheckingDeposits ___________________ equals ∆ Initital Deposit
1/RR
money multiplier
1/reserve requirement
Public Policy
A system of laws, regulatory measures, courses of action, and funding priorities concerning a given topic promulgated by a governmental entity or its representatives.
Why does a tax change affect aggregate demand?
A tax change alters disposable income and consumption spending.
Functions of Money 2. unit of account what does this mean?
everything has a price all in the same terms in the US
M2
everything in M1 saving account balances (majority) money market mutual funds
Positive Externalities or Positive Spillover
ex: Education benefits society.More productive society, less money needed for crime prevention or welfare programs.
55. In the short run, if prices were below equilibrium
excess aggregate demand for goods and services would place upward pressure on prices
budget deficit
excess of government spending over tax revenue
budget surplus
excess of tax revenue over government spending
The amount that a commercial bank can lend is determined by its:
excess reserve
An individual bank can lend out at most its
excess reserves.
An individual bank can lend out at most its...
excess reserves.
In order to increase the money supply, the banking system must have
excess reserves.
In order to increase the money supply, the banking system must have...
excess reserves.
exogenous variables on Xn (2)
exchange rate of a $, RGDP
which of the following statements about exchange is true?
exchange tends to move each good toward those individuals who value it more highly.
barter
exchanging of one good for another
During a recession, the actual rate of unemployment will be
greater than the natural rate of unemployment
during a recession, the actual rate of unemployment will be
greater than the natural rate of unemployment
Measured as a share of national income, government expenditures on income transfers during the last 70 years have
grown rapidly.
Deposit Insurance
guarantees that bank depositors will be paid even if the bank can't come up with the funds, up to a maximum amount per account
Constraints of Fiscal Policy Political Constraint -how is this a constraint?
hard to get politicians to agree, and once they do it takes a long time to actual implement things
When the actual reserves held by a bank exceed the legal requirement, the bank
has excess reserves, which can be used to extend additional loans
Fiat Money
has little intrinsic value and is not backed by a commodity (gold), the US has this
Store of Value
has to last to keep value over time, and be hard to copy or reproduce
2. When the consumer price index rises, the typical family?
has to spend more dollars to maintain the same standard of living
commodity money
has value beyond just the use as money ex. cold, cows, etc.
Progressive Tax
Imposes higher tax rates on higher levels of income.
Proportional Tax
Imposes the same tax rate on all levels of income.
Technology
Improved capital Improved human capital Improved production Free trade
If you deposit a $50 bill in a commercial bank that has a 10 percent legal reserve requirement the bank will:
have $45 of additional excess reserves.
38. When output is greater than the economy's long-run capacity, which of the following is most likely to occur?
Increases in real interest rates and real resource prices
Functional Distribution of income?
Indicates how society's money (income) is divided among wages, rents, interest, and profits. Wages receive 70% of national income Rent 2% Interest 7% Profits 21%
what are 4 components of public investment?
Infastructure: communication, transportation, education, energy
What is the federal funds rate?
Interest rate banks charge each other on loans
What is the discount rate?
Interest rate that the Fed charges other banks on loans
If Congress votes to increase government purchases and at the same time decrease personal income taxes, they:
have voted for the proper policy to counteract a recession
The crowding-out effect refers to the tendency of:
have voted for the proper policy to counteract a recession.
What Doesn't in GDP
Intermediate goods-Wheat to make bread that is sold Financial Transfers- Selling of stock Foreign Production-Not within the country
Balance sheet
Inventory of assets and liabilities
Are "smart cards" or E-cash cards part of the money supply?
No, because they are merely means to transfer checking deposits.
Are jobs the key to economic progress and the achievement of high income levels?
No, it is not just employment, but employment that expands production of goods and services that others value highly relative to cost.
Are outstanding credit card balances counted as part of the money supply?
No; money is an asset, while the credit card balances are a liability. Thus, they are not included in the money supply figures.
3 Types of GDP
Nominal GDP Real GDP Per Capita GDP
What is the formula for nominal interest rate?
Nominal Interest rate = inflation rate + real interest rate.
Zeeman is a college student who is not working or looking for a job. The Bureau of Statistics count as ___.
Not in the labor force.
Crowding Out
Occurs when increases in government spending lead to decreases in private spending.
Physical Capital
One of the three primary factors of production, also known as inputs in the production function. It includes things like buildings, machinery, equipment, and computers.
What does OMO stand for?
Open Market Operations
Open economy vs. closed economy
Open: An economy that has interactions in trade or finance with other countries. Closed: An economy that has no interactions in trade of finance with other countries
When AS shifts left which is true about equilibrium price and equilibrium GDP ? (Equilibrium price and GDP are where AS and AD cross).
Price up GDP down
Automatic Stabalizers
help put brakes on the economy when it is booming and gets it going when it is in a downturn without the aid of fiscal policy; reduce the ups and downs of an economy
General Motors Corporation (a U.S.-based firm) produces a Saab vehicle in Sweden, and sells it in the United States. In which country's GDP is it included?
Sweden because it was produced there
Barter System
System of trade
Government Budget
T-G When B>0, surplus When B<0, deficit
Based on the laffer curve Republicans believe
Tax cuts to the wealthy pay for themselves by increasing incentives to work and revenue
What are the two tools of fiscal policy?
Taxes & government spending
What is an assumption of the classical monetary theory?
That the velocity of money is constant.
On a given morning France sold 40 pairs of shoes for a total of $80.
The 80 is a nominal variable. The quantity of shoes is a real variable.
Relationship btw. Phillips curve and AS/AD model
The AD-AS model indicates that slow growth in aggregate demand leads to both higher unemployment and lower inflation. This result explains why there is a short-run trade-off btw. unemployment an inflation; The Philips curve has an advantage over the AD-AS model, however, when we want to analyze explicitly changes in the inflation and unemployment rates. **Page 573**
Which of the following indicates the primary mechanism by which the money supply expands?
The Fed purchases additional bonds, which increases the reserves available to the banking system
18. Suppose, over the past year, the real interest rate was 3 percent and the inflation rate was 1 percent.?
The dollar value of savings increased at 4 percent, and the value of savings measured in goods increased at 3 percent.
Net foreign investment
The difference btw. capital outflows from a country and capital inflows, also equal to net foreign direct investment plus net foreign portfolio investment.
Balance of services
The difference btw. the value of the services a country exports and the value of the services a country imports.
What is mostly likely to happen if decreased government borrowing drives down real interest rates in the United States?
The dollar will depreciate leading to an increase in net exports.
Deadweight Loss
The fall in total surplus that results from a market distortion, such as a tax
Open Market Operations
The fed either buys or sells bonds to the public
Government exhaustive expenditures
The government buys G/S. Ex: When the government buys tanks, schools, highways, etc..
The discount rate is ___.
The interest rate that federal reserve charges banks.
The rational-ignorance effect refers to which of the following scenarios?
The lack of incentive voters have to become well-informed about candidates and issues because their vote is unlikely to affect the outcome of an election
Economists would predict that, other things the same, the more generous unemployment compensation a country has, ____.
The longer the duration of unemployment and a higher unemployment rate.
Minimum Wage
The lowest wage permitted by law or by a special agreement
The fed funds rate is
The rate charged when PNC bank borrows from 5th Third Bank.
Why is it important to use real rather than nominal GDP figures when making comparisons of output across time periods?
The real figures will reflect changes in the quantity of output and not changes in the general level of prices
Balance of payments
The record of a country's trade with other countries in goods, services, and assets
Direct
The relationship between nominal interest rates and inflation
Aggregate Demand
The relationship between the overall price level in the economy and output.
Which of the following is true regarding the foreign holdings of U.S. dollars?
They indicate that foreigners have confidence in the monetary policy and economy of the United States.
How is money created?
Through the fractional banking system
Problems with imlementation
Timing: - government agreement -DEconomic recognition (takes 6 months to realize and 3 months to know we're out of it Misinformation: what if one idea is off a little bit
Capital
Tools Equipment
(18)What would opening trade between two nations do?
Trade would leave the production possibilities unchanged and increase their consumption possibilities.
What are transfer payments?
Transfers of income from taxpayers to recipients who do not provide current goods and services for the payments.
If U.S. net exports are negative
U.S. consumers are spending more on foreign goods than foreign consumers are spending on U.S. goods
if US net exports are negative,
U.S. consumers are spending more on foreign goods than foreign consumers are spending on US goods.
which of the following will occur if the dollar depreciates relative to most other currencies?
US net exports will rise and AD will increase
Today, the bank funds are ___.
Uncommon because of deposit insurance.
Cyclical Unemployment
Unemployment due to the business cycle
(9)a decrease in the dollar price of the english pound will make
Us exports to england decrease
Fiscal Policy
Use of gov't spending and/or taxes to adjust, stimulate, or contract the economy congress and president decide Goal: Increase AD (stimulate economy) Decrease Taxes - (Republicans) Increase Gov't Spending (Liberals) Libertarians - Do Nothing (Self-Adjust)
What is the velocity formula?
V = (P*Y) / M
Nominal Values
Values not adjusted for inflation
Real values
Values that are adjusted for inflation
Government Spending
What did Keynesians argue that would be more effective? people would save more the less effective one
b. lower taxes or higher government spending
What fiscal policies are appropriate in a recessionary gap? a. higher taxes or lower Government spending b. lower taxes or higher government spending c. higher taxes and higher government spending d. lower taxes and lower government spending
AD decreases since disposable income falls
What happens to aggregate demand if the gov't increases the tax rate?
wages fall causing AS to rise
What happens to aggregate supply if nothing is done but we are experiencing stagflation?
wages fall causing AS to rise
What happens to aggregate supply if nothing is done but we are in a recessionary gap?
wages rise causing AS to fall
What happens to aggregate supply if nothing is done but we are in an inflationary gap?
causes crowding out(↑) but raises AD overall
What happens to the level of unemployment, RGDP, and price level if the government borrows money so that it can increase government spending?
It will increase.
What happens to the national debt if the government runs a budgetary deficit?
Federal funds rate
What one bank charges another to borrow money overnight.
Discount rate
What the fed charges banks that borrow directly from its discount window
Unanticipated Inflation
What you didn't think inflation will be. Worse than
Anticipated Inflation
What you think inflation will be
What is money?
Whatever is generally accepted in exchange for goods and services.
When is crony capitalism most likely to be present?
When businesses either implicitly or explicitly provide political decision-makers with contributions and other forms of political support in "exchange" for government favors that will improve their profitability.
Increase in real GDP will increase
a country's imports and the GDP's in other countries
Suppose long-run equilibrium is present and the government budget is in balance. Which of the following would be most likely to occur if the economy falls into a recession?
a budget deficit
According to the Keynesian model, which of the following policies would be most appropriate during a period of rapid inflation?
a budget surplus
Bond
a certificate acknowledging a debt and the amount of interest to be paid each year until repayment; an IOU
the expenditure multiplier
a change in expenditure will have a greater impact than the initial change 1/(1- MPC)
Which of the following will cause the U.S. money supply to expand?
a commercial bank uses excess reserves to extend a loan to a customer
M2
a money aggregate consisting of M1 plus savings deposits (less than $100,000), and money market mutual funds
Social Security is what type of system?
a pay as you go system
According to the Keynesian view, if policy makers thought the economy was about to fall into a recession, which of the following would be most appropriate?
a planned increase in the budget deficit
according to the Keynesian view, if policy makers thought the economy was about to fall into a recession, which of the following would be most appropriate?
a planned increase in the budget deficit
counter cyclical policy
a policy that moves the economy in the opposite direction from the force of the business cycle 1. recession: expansionary policy 2. expansion: restrictive policy
Entitlement
a program where if people meet certain incomes or demographic criteria they are automatically eligible to receive benefits
Special Interest Effect
a project that mainly benefits a small group but has high costs and minimal benefits
crowding out
a reduction in private sector borrinwg caused by increased government borrowing decreases availablity for funds for private sect if r=interest rate=price of I, then r should increase
crowding out
a reduction in private spending due to higher interest rates generated by budget deficits financed through government borrowing - believed by keynesian
Which of the following is most likely to increase the incentive to invest, produce, and employ others?
a reduction in tax rates
Which of the following most clearly indicates that fiscal policy is becoming more restrictive?
a reduction in the budget deficit relative to GDP
An increase in the required reserve ratio would be
a restrictive policy because it lowers the amount of excess reserves in the banking system.
The Fed's sale of U.S. government securities in its open market operations constitutes
a restrictive policy because it lowers the amount of total reserves in the banking system.
Asymmetric Information
a situation in which one side of the market has more reliable information than the other side
Money functions as:
a store of value, a unit of account, and a medium of exchange.
3 functions of money
a store of value: an asset that will allow people to transfer purchasing power from one period to the next - liquid asset: asset that can be easily and quickly converted to purchasing power
fractional reserve banking
a system that permits banks to hold reserves of less than 100% against depositors
why does a tax change affect aggregate demand?
a tax change alters disposable income and consumption spending
Which is more likely to stimulate aggregate demand in a timely manner?
a tax cut, because disbursement can take place quickly while spending increases are generally spread out over several years
according to the Keynesian view, if policy makers thought the economy was about to enter an expansionary period, which of the following would be most appropriate?
a tax increase
3 functions of money
a unit of account - a unit of measurement used by most people to post prices and keep track of revenues and cost
Long run aggregate supply curve is
a vertical line
74. If an economy is growing, but experiences no inflation, this means
aggregate demand and aggregate supply increased by the same amount.
The immediate effect of a member bank's sale of U.S. government securities to the Fed is :
an increase in that bank's excess reserves
Higher standards of living are the result of
an increase in the availability of goods and services that people value.
If we observe an increase in the price of a good and an increase in the amount of the good bought and sold, this could be explained by
an increase in the demand for the good.
Quantity Theory of Money
an increase in the money supply will just lead to inflation
A vertical long-run aggregate supply curve indicates that
an increase in the price level will not expand an economy's output capacity in the long run
other things being equal, the effect of a decrease in the price of orange juice would be illustrated by which of the following?
an increase in the quantity demanded for orange juice
Which of the following will most likely increase long-run aggregate supply?
an increase in the rate of investment
Which of the following will most likely accompany an unanticipated reduction in aggregate demand?
an increase in unemployment
Central Bank
an instituion that oversees and regulates the banking system and controls monetary base
central bank
an institution that regulates the banking system and controls the money supply
58. An increase in the general level of prices in the goods and services market that is accompanied by a short-run expansion in output is most likely caused by
an unanticipated increase in aggregate demand
20. Which of the following is most likely to throw an economy into a recession?
an unanticipated reduction in aggregate demand
supply shock
an unexpected event that temporarily affects aggregate supply
Interst Rates
an unexpected increase in money supply will first impact what?
Money
any asset that can easily be used to purchase goods and services
what is money
any asset that is widely accepted as payment
Excess Reserve
any cash held by banks above the legal requirement
Which of the following is the best definition of money?
anything generally accepted as a payment for goods or repayment of debt
Money
anything generally accepted as a payment for goods or repayment of debt; a medium of exchange; a store of value
Asset
anything of value that is owned
Liability
anything that is owed to another individual or institution
When the Fed lowers the discount rate, it makes it
cheaper for banks to obtain additional reserves by borrowing from the Fed.
(13) when the fed lowers the discount rate, it makes it
cheaper for banks to obtain additional reserves by borrowing from the fed.
(13) in the modern US economy, most transactions are made with
checking deposits
locations of 12 central banks
cleveland, chicago, richmond, kansas city, dallas, st. louis, boston, san francisco, new york, minnepolis, philidelphia, atlanta
In order for barter to occur, traders must have a
coincidence of wants.
In the United States, the money supply (M1) is comprised of:
coins, paper currency, and checkable deposits.
In the United States, the money supply (M1) consists of
coins, paper currency, demand deposits, other checkable deposits, and traveler's checks.
Electronic Banking
conducting banking transactions over the Internet
who implements fiscal policy
congress
monetary policy
Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.
Keynes Economics
Government should join in and fix the market
Automatic stabilizer
Government spending and taxes that automatically increase or decrease along with the business cycle
Expansionary Policy
Government tries to increase RGDP, used in Recessionary Gap
Contractionary Policy
Government wants to decrese RGDP, used in Expansionary Gap
Which of the following best explains why high marginal tax rates retard output?
High marginal tax rates reduce the incentive to earn, invest, and use resources efficiently
According to non-Keynesians, how will an increase in government spending financed by borrowing during a recession affect recovery?
Higher future taxes and interest rates will be required to finance the larger debt and this will weaken the recovery
39. Which of the following adjustments will most likely occur when output exceeds the economy's long-run capacity?
Higher resource prices and costs will reduce short-run aggregate supply until output falls to the economy's long-run capacity
Which of the following adjustments will most likely occur when output exceeds the economy's long-run capacity?
Higher resource prices and costs will reduce short-run aggregate supply until output falls to the economy's long-run capacity.
Short Run
Hourly, daily, or weekly decisions that firms make and that input prices are often sticky. Firms cannot enter or exit the market and there is at least one fixed factor.
Four sectors of the economy
Households Firms Government Foreign countries
Velocity of Money
How fast a dollar bill goes through the economy in a year.
What does "Lender of Last Resort" mean?
If banks need to borrow money they can always borrow money from the federal reserve if they do not want to or cannot borrow from other banks.
increase; increase
If consumers deposit more money in the bank, then reserves ________ and the money supply will eventually ______
a. AD to increase
If fiscal policy is enacted in a recessionary gap, then we would expect a. AD to increase b. AS to increase c. AD to decrease d. AS to decrease
4 spending groups
consumer, investment/business, government, net exports
Changes in taxes have an indirect relationship with
consumption and savings schedules
C+Ig
consumption plus investment
Expectation of recessions shifts
consumption schedule down, saving schedule up
Higher interest rates shift
consumption schedule slightly lower, saving schedule slightly higher
real GDP
consumption+investment
APC (average propensity to consume)
consumption/income
If the economy is experiencing inflationary boom, and the government lowers taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to
continue inflationary pressures.
involves increasing withdrawals form the economy by reducing government spending, transfer payments, or raising taxes to decrease aggregate demand to contract output and the economy
contractionary fiscal policy
Durability, irregularity of innovations, and variability of profits and expectations
contribute to the variability of investment
Which of the following is the basic economic policy function of the Federal Reserve Banks?
controlling the supply of money
results when a supply shock hits the economy, reducing short run aggregate supply, and thus reducing output and increasing the price level
cost-push inflation
Fiscal policy designed to increase aggregate demand during economic downturns and decrease aggregate demand during economic booms is called
countercyclical fiscal policy
from the standpoint of society as a whole, rent seeking is
counterproductive because it takes resources away from the creation of wealth in the private sector
Restrictive
counters a boom
Expansionary
counters a recession
which of the following appropriately applies the law of comparative advantage?
countries that are low cost producers of agricultural products should trade those products for goods they can produce only at a high opportunity cost
North Korea
country producing the most counterfeited bills
the number of cattle slaughtered every year for meat far exceeds the number of elephants slaughtered every year for their ivory. despite this, cows can be found everywhere while elephants are on the verge of extinction in some countries. which of the following best explains this difference?
cows can be privately owned while in many countries elephants can not
what is not a part of m1 or m2
credit cards
NO liability
credit cards aren't an asset, so are they money? if not what are they.
occurs when a central bank prints too much money, the value of the existing money becomes basically worthless
currency debasement
reserves
currency in a back vault plus its deposits at the Fed
Stores need not accept your check but must accept currency because
currency is legal tender; checks are not
MI
currency+checkable deposits+travelers checks - the mire liquid form of money
m1
currency, demand deposits, checking accounts, checkable desposits, traveler's check, debit cards
Which of the following about price discrimination is true? a. Price discrimination always harms consumers and helps sellers in the short run but in the long run, consumers benefit at the expense of sellers. b. A seller must have a monopoly in order to gain from price discrimination. c. A firm must face a horizontal demand curve for its product in order to engage in effective price discrimination in a market. d. A price-discriminating seller will charge consumers with an elastic demand a lower price than consumers with an inelastic demand.
d. A price-discriminating seller will charge consumers with an elastic demand a lower price than consumers with an inelastic demand.
Which of the following is true of entrepreneurship? a. The role of the entrepreneur is not very important and that is why it is generally not included in economic models. b. Economic models are able to capture fully the important role of the entrepreneur in the market process. c. The role of entrepreneurial discovery could be easily integrated into economic models, but nonetheless economists choose not to do so. d. Entrepreneurial discovery is an important source of economic growth and higher living standards.
d. Entrepreneurial discovery is an important source of economic growth and higher living standards.
What is the strategy underlying price discrimination? a. Charge everyone the same price but limit the quantity they are allowed to buy. b. Reduce per-unit cost to the firm by charging higher prices to those with the most inelastic demand and lower prices to those with the most elastic demand. c. Charge higher prices to customers who have better access to substitutes. d. Increase total revenue by charging higher prices to those with the most inelastic demand for the product and lower prices to those with the most elastic demand.
d. Increase total revenue by charging higher prices to those with the most inelastic demand for the product and lower prices to those with the most elastic demand.
Which of the following would be the most likely scenario if firms in a competitive price-searcher market were currently earning economic profit? a. All firms in the market would continue to produce at their current levels and continue to charge the same price. b. Production inefficiencies would persist until the profit was eliminated. c. Firms would decrease their rate of output in the short run, causing a decline in profitability in the market. d. New firms would enter the market, resulting in fewer sales by existing firms.
d. New firms would enter the market, resulting in fewer sales by existing firms.
Which of the following conditions must be met if a movie theater is going to gain by charging students a dollar less than other customers? a. Students must have higher incomes than other customers. b. Other customers must enjoy movies more than students. c. The demand of students must be less elastic than that of other customers. d. The demand of students must be more elastic than that of other customers.
d. The demand of students must be more elastic than that of other customers.
Which of the following is true in markets characterized by oligopoly? a. Collective profits are always lower with cartel arrangements than they are without cartel arrangements. b. Pursuit of self-interest by profit-maximizing firms always maximizes collective profits in the market. c. Collusive agreements will always prevail. d. The oligopolists earn the highest profit when they cooperate and behave like a monopolist.
d. The oligopolists earn the highest profit when they cooperate and behave like a monopolist.
Compared to the outcome when the firms are price takers, competitive price-searcher markets will result in a. less product variety and higher prices. b. less product variety and lower prices. c. a wider variety of products and lower prices. d. a wider variety of products and higher prices.
d. a wider variety of products and higher prices.
As new firms enter a competitive price-searcher market, profits of existing firms a. rise and product diversity in the market increases. b. rise and product diversity in the market decreases. c. decline and product diversity in the market decreases. d. decline and product diversity in the market increases.
d. decline and product diversity in the market increases.
Losses are important to a competitive price-searcher market (industry) because they send a message to the market participants that a. the firms should charge lower prices. b. resources are allocated exactly as they should be. c. more resources should be devoted to a particular industry. d. resources can rise in value if diverted away from that particular industry.
d. resources can rise in value if diverted away from that particular industry.
If a firm is losing money, this implies that a. consumers do not understand the value of the product. b. this product cannot be produced profitably in the long run. c. the firm must go out of business immediately. d. the value of the resources used to make the product is being reduced.
d. the value of the resources used to make the product is being reduced.
Future sales expectations and planned inventory change are
directly related to investment demand
Expansionary fiscal policy during a recession is most effective when it:
directs the economy to full employment and resources into productive projects.
Commercial banks can borrow reserves directly from the Fed at the
discount rate
The rate at which a commercial bank can borrow from the Fed is the
discount rate
the interest rate the federal reserve charges commercial banks and other depository institutions to borrow reserves from a regional federal reserve bank
discount rate
Supply-side economics stresses that high marginal tax rates
discourage people from working harder and using their resources productively.
The legal requirement that commercial banks hold reserves equal to some fraction of their deposits
limits the ability of banks to expand the money supply by extending additional loans.
What if price level increases, what happens to MD line?
line shifts right
how quickly and reliably an asset can be converted into cash or how quickly and reliably it can be used to buy things
liquidity
Which of the following, other things the same, would make the price level decrease and real GDP increase?
long-run aggregate supply shifts right
treasury bonds
longer time horizons (1-30 years)
Discretionary fiscal spending
money authorized to be spent with the passage of an appropriations act. (ex. Farm subsides, defense spending, etc.)
if nominal GDP decreases, and interest rates increase, what will happen to money demand?
money demand will decrease
Reserves
money in vault or at the Fed which the bank did not lend out
One advantage of a money system compared to a barter system is that :
money is more efficient
Barter
money is the alternative to this
Money is used as a unit of account. This means...
money is used to measure the exchange value and costs of goods, services, assets and resources.
What is "demand for money"?
money we want to physically hold onto
Effectiveness Lag
problem with timing fiscal policy changes; even after the legislation is passed, macroeconomic effects may not be felt until 6 months later; and it might have already been cured by the invisible hand
Implementation Lag
problem with timing fiscal policy changes; there are always delays and problems passing legislation through congress
Recongition Lag
problem with timing fiscal policy changes; we don't know when the recession begins until it has started
disinflation
process of bringing the inflation rate down
the crowding out effect implies that restrictive fiscal policy will
reduce real interest rates
The crowding-out model implies that restrictive fiscal policy will:
reduce real intrest rates
recent legislation provides parents with a substantial reduction in their personal income tax liability each child that they have. The economic way of thinking indicates that legislation of this type will
reduce the after-tax cost of raising children and, therefore, increase the birth rate
M1
paper bills, coins, checking deposits, traveler's check
Fiat Money
paper currency, has no value outside of the fact that government has said it is valuable
(13) the fed acquired the authority to do which of the following during the economic crisis of 2008
pay interest to commercial banks on their reserves
Responsibility of Fed Manager of Money Supply Tools to Manage Money Supply -Reserve Requirement: what is it?
percent of money banks must keep
how banks create money: required reserve ratio
percentage of deposits that banks are required to hold as reserves
shifter of aggregate supply
permanent changes will shift both LRAS and SRAS curves, temporary changes shifts only SRAS curve
exogenous variables on C (5)
personal wealth, borrowing, real interest rate (r), expectations, Consumer Confidence
another problem with fiscal policy
politicians have a tendency to overuse expansionary policy
structural balance
portion fo the budget due to fiscal policy structure is positive in good economic times (fiscal restraint) negative when fiscal stimulus
cyclical balance
portion of the budget due to economic conditions reflects business cycle automatic stablizers (moves with economy) - unemployment enefits and income taxes -cyclical is negative when economy is bad
which of the following most clearly distinguishes between positive and normative economics?
positive economics is the study of the fact; normative economics is concerned with what ought to be.
is relationship between confidence and spending positive or negative?
positive--higher confidence & more spending
Keynes rejected the view that lower wages would direct a recessionary economy back to full employment because
powerful trade unions and large corporations made wages highly inflexible
Inflation rate
price index year 2 - PI year 1/ price index year 1
Aggregate supply is the relationship between
price level and real GDP produced
Aggregate demand is the relationship between
price levels and real GDP purchased
net export/ foreign purchases effect
price of domestic goods up = imports up, exports down = Xn down = AD Down
real interest effect
price up = interest rate up = lower Investment spending = less interest sensitive consumer spending
real balance effect
price up = value of $ down= less consumer spending --income doesn't go as far
suppose the dollar value of GDP increased approximately 2 percent between october 2007 and August 2008, but real GDP fell 1 percent during the period. which of the following best explains these data?
prices increased approximately 3 percent during period.
suppose, in dollar terms, nominal GDP increased approximately 4 percent during a given year, and real GDP decreased 1 percent. which of the following best explains these events?
prices increased approximately 5 percent
Crowding out effect reduces
private investment spending
what is the difference between pro-cyclical policy and counter-cyclical policy?
pro-worse path, bad version of fed, fed acts on trough counter- better bath, good version of fed, acts on peak
If uncertainty causes commercial banks to increase their holdings of excess reserves, other things constant, this will:
reduce the size of the deposit expansion multiplier.
(18) International trade does all the following except
reduce world output
Contractionary Monetary Policy
reduces aggregate demand
When the Federal Reserve sells government bonds to the public, it directly...
reduces the M1 money supply and decreases the reserves of the commercial banking system.
an increase in the discount rate impact the money supply because it
reduces the incentive of commercial banks to borrow from the Federal Reserve
An increase in the discount rate impacts the money supply because it
reduces the incentive of commercial banks to borrow from the Federal Reserve.
An increase in the discount rate impacts the money supply because it:
reduces the incentive of commercial banks to borrow from the Federal Reserve.
8. The concept of full employment?
reflects the "shopping" of employees looking for employment and of employers seeking to hire workers.
The major overall purpose of the Federal Reserve System is to
regulate the money supply and, thereby, provide a monetary climate that is in the best interest of the economy
The major overall purpose of the Federal Reserve System is to:
regulate the money supply and, thereby, provide a monetary climate that is in the best interest of the economy
The major overall purpose of the Federal Reserve System is to...
regulate the money supply and, thereby, provide a monetary climate that is in the best interest of the economy.
the major overall purpose of the federal reserve system is to
regulate the money supply and, thereby, provide a monetary climate that is in the best interest of the economy.
relationship b/t spending and production = ?
spending < production = recession spending > production = inflation spending = production = equilibrium
induced spending
spending caused by fluctuations in income
how easy is it to shift the demand curve right?
spending more...government pretty much has no limits on this you can't make consumers spend, so it is up to gov't
1/MPS
spending multiplier
Earmark
spending that directs approved funds to be spent on specific projects in politician's districts
autonomous spending
spending that is independent of income --due to any other exogenous variables
higher inflation and higher unemployment occurring at the same time
stagflation
Paradox of Thrift/Spending
states that an economy that saves/spends too much is harmful for growth, reduces aggregate demand by saving; too much spending may lead to a depleted money supply for consumers
M3
stock bonds (M1&M2)
money will hold value over time
store of value
22. When the economy is operating at an output beyond its full-employment potential, the?
strong demand for resources will place upward pressure on resource prices
what are automatic stabilizers? (2)
tax brackets government spending policies
When the economy is operating at an output beyond its full-employment potential, the
strong demand for resources will place upward pressure on resource prices.
Public Choice Analysis
studies the incentives and their effects on individuals such as voters and politicians
Monetary Base
sum of currency in circulation and bank reserves
when economists say the supply of a product has increased, they mean the
supply curve has shifted to the right.
proportional
tax is the name for a tax where the average tax rate paid stays the same as the income increases (give the term, not an example)
-MPC/MPS
tax multiplier
Budget formula
tax revenue - government spending
The equilibrium rate of interest in the market for money is determined by the intersection of the:
supply of money curve and the total demand for money curve.
Mathematically, the marginal propensity to consume is
the change in consumption divided by the change in income.
Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand, but it can also reduce aggregate supply if
the higher taxes cause workers to work less.
Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand, but it can also reduce aggregate supply if:
the higher taxes cause workers to work less.
Which of the following attributes of fiscal policy will most likely be stressed by a proponent of supply-side economics?
the impact of marginal tax rates on the supply and productivity of resources
which of the following attributes of fiscal policy will most likely be stressed by a supporter of supply-side economics?
the impact of marginal tax rates on the supply and productivity of resources
debt-service
the interest payment on government debt
Federal Funds Rate
the interest rate at which banks lend to other BANKS; always lower than the discount rate
Federal Funds Rate
the interest rate charged in the federal funds market; the interest rate banks charge one another for overnight borrowing; the Fed's target interest rate
Discount Rate
the interest rate that banks must pay when they borrow from the Fed
Discount Rate
the interest rate the Fed charges banks that borrow reserves
anticipated changes in ling run aggregate supply- causes both LRAS and SRAS curve to shift in the same direction
the invention of a more efficient engine reducing economic freedom
What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?
the supply of loanable funds would shift right and investment would increas
which of the following would decrease the supply of sugar?
the tariff (tax) on imported sugar increases.
government spending policies
when unemployment is up, people can collect unemployment --raises debt --*has to work* unless no one buys anything --better for times of *recession* --*hard to pass*
In a world where capital moves rapidly across national boundaries, if a larger budget deficit leads to higher real interest rates
there will be an inflow of foreign capital, which will cause the dollar to appreciate and net exports to decline.
In a world where capital moves rapidly across national boundaries, if a larger budget deficit leads to higher real interest rates:
there will be an inflow of foreign capital, which will cause the dollar to appreciate and net exports to decline.
if net exports are positive, then
there will be net capital outflow, so foreign assets bought by Americans are greater than American assets bought by foreigners
75. If the underground economy is sizable, then GDP will
understate the economy's performance
If the economy is experiencing less than full-employment, the Keynesian model recommends that the government?
undertake expansionary fiscal policy to stimulate aggregate demand
If the economy is experiencing less than full-employment, the Keynesian model recommends that the government
undertake expansionary fiscal policy to stimulate aggregate demand.
in order to prosper, what must entrepreneurs do?
undertake projects that create wealth and increase the value of resources
Sally is on a temporary layoff from her factory job. If Sally participates in the BLS survey, she will be classified as
unemployed and in the labor force
sally is on temporary layoff from her factory job. if sally participates in the BLS survey, she will be classified as
unemployed and in the labor force
what happens when AD curve shifts right?
unemployment down GDP up inflation up if interests rates
Boom
when gov is pursuing countercyclical fiscal policy, it will decrease aggregate demand and run a deficit; decreasing gov spending and increasing taxes during this time
a local restaurant offers an "all you can eat" sunday brunch for $12. Susan eats four servings but leaves half of a fifth helping uneaten. Why?
her marginal value of food has fallen to zero
According to the crowding-out effect, expansionary fiscal policy will lead to
higher interest rates, an appreciated dollar, and reduced net exports.
(14) In the aggregate demand-aggregate supply model, the short-run effects of an unanticipated decrease in the money supply will be
higher real interest rates and a reduction in aggregate demand.
In the aggregate demand-aggregate supply model, the short-run effects of an unanticipated decrease in the money supply will be
higher real interest rates and a reduction in aggregate demand.
Expansionary Monetary Policy
increase aggregate demand
Recession
when gov is pursuing countercyclical fiscal policy, it will increase aggregate demand and run a surplus; increasing gov spending and decreasing taxes during this time
paradox of thrift
when many people drastically increase their savings and reduce consumption, total savings may decrease
when does a stock bubble form?
when stock prices rise above the value that is justified by the firms profits
Nondiscretionary fiscal policy
when tax revenues change automatically and in a countercyclical direction over the course of the business cycle
New Classical
when the gov decides to increase spending, taxes will rise in the future; this forces consumers to reduce their current spending; states keynes was wrong
Surplus
when the government makes more than it spends during a given year; decreases it's debt
Deficit
when the government spends more than it makes during a given year
when is the economy considered to be at full employment?
when the rate of cyclical unemployment is zero.
Wages and Interest Rates (businesses aren't investing) DECREASE
when there isn't government intervention during a recession
Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits, then bank reserves will
increase and the money supply will eventually increase
Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits, then bank reserves will?
increase and the money supply will eventually increase
Reductions in personal income tax rates that increase labor supply and work effort, can be expected to also
increase consumption spending.
12. The expansionary phase of the business cycle is characterized by?
increasing real output and declining unemployment
The expansionary phase of the business cycle is characterized by
increasing real output and declining unemployment
Investment, net exports, and government expenditures are assumed to be
independent of GDP in aggregate expenditures model
two fiscal policy tools the president and congress use -tax rates: what does it do? -if tax rates are lowered, what happens?
indirectly effects economy and has no residual effects -if tax rates are lowered, peoples personal income will increase, so consumption will increase
Other things constant, a reduction in the real interest rate will
induce businesses to increase their level of investment
2 kinds of spending
induced autonomous
what will happen if spending continues to rise?
inflation closer to 2% FED raises interest rates to decrease autonomous spending and slow down inflation
Contractionary monetary policy is only used when
inflation is out of control
Investment
injection of spending into the economy
the time it takes congress and the administration to decide on a policy once a problem is recognized
inside lags
Keynesian economists believed that the prolonged unemployment of the 1930s was the result of
insufficient aggregate demand and the failure of market forces to direct the economy back to full employment.
A collateralized default swap is
insurance for a mortgage backed security
what is federal funds rate
interbank overnight lending rate of at least $1 million
Federal Funds Rate
interest rate determined in the federal funds market
as prices fall, there is pressure on interest rates to fall,
interest rate effect
nominal interest rate
interest rate expressed in dollar terms
Liquidity Preference Model of the Interest Rate
interest rate is determined by the supply and demand for money
Discount Rate
interest rate the Fed charges on loans to banks
what is prime rate
interest rate used by banks currently about 3.25%
Long-Term Interest Rates
interest rates on financial assets that mature a number of years in the future
Short-Term Interest Rates
interest rates on financial assets that mature within less than a year
the law of demand refers to the
inverse relationship between the price of a good and the willingness of consumers to buy it
Real GDP purchased and price levels are
inversely related
Prices of imported resources are
inversely related to the U.S aggregate supply
real GDP per capita
is a key static when comparing economies real GDP/ population
according to Adam Smith, individual self-interest
is a powerful force for economic progress when it is directed by competitive markets
Currency in Circulation
is cash held by the public
Reduce
keynes believed applying restrictive policy during a boom would ________ inflation
Contractionary monetary policy could...
lead to negative growth
Increase in interest rates due to a larger budget deficit
leads to an inflow of foreign captial which will increase US imports
Saving
leakage of spending from the economy
Shortsightedness Effect
legislation is passed that provides visible benefits immediately, but leads to increasing costs in the future
During a boom, the actual rate of unemployment will be
less than the natural rate of unemployment
what you owe
liabilities
If you have a checking account at a local bank, your bank account there is
liability of the bank and an asset to you
Disposable Income and consumption spending INCREASE
why does a Tax Cut Increase AD
Keynesian analysis stresses that a tax cut that increases the government's budget deficit (or reduces its budget surplus)
will stimulate aggregate demand and, thereby, promote employment
If the economy is in a recession, and the government raises taxes in an effort to balance the budget, the Keynesian model indicates the likely effect will be to
worsen and prolong the recession.
is this fiscal policy... -president passes stimulus plan to jump start the economy
yes
is this fiscal policy... -to curb high unemployment, president passes a plan to build mount obama
yes
Is the US dollar... 1. durable? 2. acceptable? 3. valuable? 4. identical? 5. divisible?
yes yes not really yes yes
is the Rai Stone... 1. durable? 2. acceptable? 3. valuable? 4. identical? 5. divisible?
yes yes yes no no
Is gold... 1. durable? 2. acceptable? 3. valuable? 4. identical? 5. divisible?
yes yes yes not really not really
a production possibilities curve indicates that when resources are being used efficiently,
you can only produce more of one good only if you produce less of another good
what is the biggest issue with business cycle model?
you can't see the effects of inflation
Politicians often instruct households to spend in order to help the economy. This advice overlooks the fact that
you cannot have a strong economy if all or most households are spending just about everything they earn
You know there is growth in fiscal policy when...
you spend on a pillar of growth.
suppose you received a 3 percent increase in your nominal wage. over the year, inflation ran about 6 percent. which of the following is true?
your real wage fell
3 equations
ΔY = k • ΔG ΔY = -k • mpc • ΔT ΔY = k • ΔG + [-k• mpc• ΔT]
Open Market Purchase Operations
Money supply increases. Interest rate reduces. Investment is stimulated. Aggregate demand increases. Real GDP increases.
As the dollar appreciates, which of the following is most likely to occur?
More Americans will travel abroad
Fed Sells MBS
Ms down --> i* up --> I down --> Y down
Fed increases DR
Ms down --> i* up --> I down --> Y down
Fed increases r.r %
Ms down --> i* up --> I down --> Y down
Fed sells USGS
Ms down --> i* up --> I down --> Y down
Fed buys USGS
Ms up --> i* down --> I up --> Y up
Fed decreases DR
Ms up --> i* down --> I up --> Y up
Fed lowers r.r %
Ms up --> i* down --> I up --> Y up
what is another name for national income?
National GDP, national output, national production
GDP Formula (Income)
National Income+ Depreciation+ (Indirect Taxes- Subsidies)+ Net Factor Payments
Structural+ Frictional=
Natural Rate of unemployment
Negative Externality
Negative impact on a third party as a result of a transaction. EX: Pollution from a company
(14) If expansionary monetary policy reduces real interest rates in the United States, which of the following is most likely to occur?
Net foreign investment will decline, causing the dollar to depreciate and net exports to increase.
If expansionary monetary policy reduces real interest rates in the United States, which of the following is most likely to occur?
Net foreign investment will decline, causing the dollar to depreciate and net exports to increase.
The market system fails
No demand for street lights, yet they are needed, so the government must provide them.
Exclusion Principle
No effective way of excluding individuals from the benefits once these goods come into existence.
Are funds available on a credit card included in a definition of the money supply?
No, because these funds are not a store of value.
balanced budget
government revenues is equal to government expenditures
what actions are considered fiscal policy?
government spending and taxing
budget deficit
government spending is greater than government revenues
Three ways the government redistributes income
-Transfer Payments -Market Intervention -Taxation
long run AS
-shows no relationship b/w P and Y -does not depend on the overall price level
assume the bank already has $172m in total reserves. What are the excess reserves?
$172-$112 = $60m -loanable funds
If the banking system has $5 million in excess reserves, and the required reserve ratio is 25 percent, what is the maximum amount by which the money supply can be increased?
$20 million
A reserve requirement of 20 percent means a bank must have $1,000 of reserves if its checkable deposits are:
$5,000.
If the reserve ratio for all banks is 20%, then $100 of new reserves can generate ___.
$500
Suppose the Fed sells $100 million of U.S. securities to the public. If the reserve requirement is 20 percent, the currency holdings of the public are unchanged, and banks have zero excess reserves both before and after the transaction, the total impact on the money supply will be a?
$500 million decrease
a bank has $560m in deposit liabilities and the Fed sets the RR% to 20% what is this banks required reserves?
$560 x .20 = $112m -fractional reserve banking system
Assume Company X deposits $100,000 in cash in commercial Bank A. If no excess reserves exist at the time this deposit is made and the reserve ratio is 20 percent, Bank A can increase the money supply by a maximum of:
$80,000.
Best National Bank is subject to a 10 percent required-reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of
$900.
Best National Bank is subject to a 10 percent required-reserve ratio. If this bank received a new checkable deposit of $1,000, it could make new loans of...
$900.
Who is the Fed run by?
-The board of Governors -7 members; seven 14 year terms -one term ends every 2 years and a new member is appointed by the President and confirmed by the senate
FOMC
(Federal open market committee) meets 8 times a year on a Tuesday.
What is the equation of exchange?
(MS) x V = p x q
aggregated price function
(productivity)GDP per worker=(t)*(physical capital per worker^.4)(human capital per worker^.6)
Rate of Return
(revenue from project-cost of project)/cost of project
Long run effects
**Page 543-544**
rule of 70
**doubling a time for a variable 70/ % growth rate
Money market equilibrium
**page 492-493**
Government debt
**page 553**
Short run Phillips curve vs. long run Phillips curve
**page 574**
Expected inflations vs. actual inflation
**page 575-576**
Fed Reserve policy history
**page 584-593**
Foreign exchange market
**page 607-609**
Supply and demand shifters
**page 609-610**
Appreciation vs. depreciation
**page 611-612**
Effect of budget deficit on investment
**page 617-618**
Monetary and fiscal policy in an open economy
**page 620**
Pegged currency
**page 638-642**
International capital markets
**page 643-645**
Monetary policy
- Use and changes in the money supply to shift interest rates and stimulate or contract the economy • Decided by the FED, Federal Reserve, head bank basically
What things could increase the interest rate
- Y up -sell USGS -r.r % up -DR up -P up
the central bank in the U.S
- called the federal reserve system - carries out regulatory policies - conducts monetary policy
What is the tax multiplier?
- change in Y / change in T
the federal reserve
-"the fed" -regulates the commercial banking system, setting limits ir the the number of loans a bank can make
When was the Fed organized?
-1913 -followed the failures of several banks in 1907
Shifters of the AD curve
-AD will shift out (increase) w/ any expansionary policy whether monetary or fiscal -Ms up, G up, T down
Three types of personal expenditures
-Expenditures on Durables. -Expenditures on Non-Durables. -Expenditures on Services.
Government and Economic Growth
-Government subsidies to infrastructure -Government subsidies to education -Government subsidies to research and development -maintain a well functioning financial system -protection of property rights -political stability and governance
Too big to fail or systemic risk relates to
-If GM fails dealers and suppliers lose their jobs and communities lose tax revenue -If AIG , American Insurance Group fails, they cannot send a check to make the mortgage backed securities that fell in value that they insured good and the banks holding those mortgage backed securities will fail. HBSC bank was not prosecuted by the U.S. Government even though they helped North Korea and Iran avoid sanctions and were involved in financing drug activities since if HBSC fails it will destabilize the entire banking system.
Two ways of Correcting Externalties or Spillover Effects
-Legislation -Specific Taxes
2 forms of Fiat Money
-M1 (narrow def) -M2 (broad def)
Alan Greenspan
-Maestro -Expansionary policy 1987 -Did not raise rates during the 90's technology boom -Kept rates too low for too long 2004-2006
Janet Yellen (2014-present)
-May raise interest rates this year
Paul Volcker (1979-87)
-Monetarism -Stick with slow monetary growth to curb inflation
Fed buys MBS
-Ms up --> i* down --> I up --> Y up
Three reasons why the government must provide G/S.
-Some goods are just too expensive -Exclusion principle -The market system fails.
Ben Bernanke (2006-2014)
-TARP -Great depression specialist
sustainable long-run economic growth - 2 things
-can now continue in the face of limited natural resources and impact growth on the environment **carbon tax- tax per unit of carbon emitted **cap and trade - amount of emissions is capped and producers must buy licenses to emit more
deposit liabilities
-checking accounts -savings accounts -ect...
2nd job of the Fed
-conduct monetary policy 1. r.r % set by board of governors 2. DR set by board of governors 3. OMO: determined by Federal Open Market Committee (7 governors + 5 district presidents; one always from NY) 4. quantitative easing (QE) --> unconventional monetary policy
unit of account costs
-costs arising from the way inflation makes money a less reliable unit of measurement
total reserves
-currency held in the banks vaults, and the banks deposits at the fed -measured in terms of dollars
Long Run
-defined by the period of time it takes for all prices to fully adjust
required reserves
-deposit liabilities times the reserve requirement ratio (rr%)
two fiscal policy tools the president and congress use -government purchases: what does it do? -if government purchases increase, what happens to C
-directly impacts economy and has residual effects -if government spending increases, consumption increases
high levels of Y
-expansion -changes in Y result in large changes in P
make up of the federal reserve
-federal reserve board in DC and 12 regional federal reserve banks
Ms
-fixed and controlled by the Fed
What is the link between AS/AD and business cycle graphs?
-full employment—horizontal line / vertical line time—snap shot / continuous -unemployment on AD/AS curve... ---recession looks like equilibrium to left of full employment line
M2
-includes all of M1 and the rest of the examples ex: savings accounts, money market accounts, and other near monies
productivity in growth
-increase human capital -increase physical capital -technological progress -aggregated production function
Discount rate
-interest rate the Fed charges banks to borrow reserves -short term loans -least powerful -less common -not very effective
Convergence Theory
-international differences in real GDP per capita tend to narrow over time
reserve requirements
-lower reserve requirements will increase the money supply - an increase in reserve requirements will reduce the supply of money
Aggregated price level
-measure of the overall level of prices in the economy -to measure using the cost of market basket
producer price index
-measures changes in the prices of the g/s purchased by producers
M1
-money that can be directly used for transactions ex: currency held outside of banks, demand deposits, travelers checks, and other checkable deposits
commodity money
-money that has an intrinsic value ex: gold -worth something besides just being money
structural unemployment
-more people looking for jobs than jobs available -cause labor unions efficiency wages side effects of gov. policies mismatches between employees and employers
MBS
-mortgage backed securities
GDP deflator
-nominal GDP/real GDP -measures price level
discouraged workers
-nonworking people who have given up looking for work **NOT CONSIDERED UNEMPLOYED
critical assumption of the SRAS curve
-not all prices adjust simultaneously -some prices are "sticky"
Labor force participation
-number of adults between 16-62, who are either working for actively looking labor force+ unemployed employed =labor force/adult population
Chairman
-one of the 7 members of the board of Governors -serves a 4 year term -appointed by the president
labor productivity
-output per worker
Underemployed
-people are working part-time because they can't find full time
stagflation
-price level is going up and output down at the same time -P increases and Y decreases
low levels of Y
-recession -there are big changes in Y result in small changes in P
1st job of the Fed
-regulate banks -'lender of last resort"
growth rate differ
-savings and investment spending -education -research and development
Demand-Pull Inflation
-shift of the AD curve to the right -Ms up, G up, T down -P increases and Y increases
Cost push inflation
-shift of the AS curve to the left -increase in cost of inputs
Shifters of the AS curve
-shift to the right -increase in labor, capital, technology, energy, or decrease the cost of any of these things
Md curve
-shifts with changes in nominal income y= real aggregate output or income P= overall price level nominal income = P*Y an increase in (P*Y) equals an increase in Md If P or Y or both increase so does Md -we control Md
Inflation costs
-shoe leather costs -menu costs -unit of account costs
aggregate demand (AD) curve
-shows a negative relationship b/w the total demand for final goods and services and the overall price level -each point on the AD curve represents a point where the goods and money markets are in equilibrium
National savings
-sum of private savings and budget balance savings of gov= tax revenues-gov. transfers-gov. purchases of g/s savings of national = savings of gov + savings of private national savings = investment
price index
-the cost of purchasing a given market basket in a given year cost of market basket in given year/ cost of market basket in base year
extension of loans
-the discount rate: the interest rate the fed charges banking institutions to borrow funds - federal funds rate: the interest rate that commercial banks charge each theory a. when the fed extends more loans, money supply increase b. when the fed extends loans, money supply decreases
shoe leather costs
-the increased costs of transaction caused by inflation
Interest rate
-the price that a lender charges for the use of his/her savings in a year
menu costs
-the real cost of changing a listed price
Fiat money
-token money -no intrinsic value ex: paper money -it has value only because we give it value
Quantitative Easing (QE)
-tool # 4 of the fed -considered to be "unconventional" monetary policy -used when the other 3 classical tools have become ineffective -separate market which determines long term interest rates -fed buys MBS from banks and pays them back with reserves -long run
excess reserves
-total reserves minus required reserves
Cyclical unemployment
-unemployment correlated with the business cycle
Frictional unemployment
-unemployment due to the time workers spend in job search
Economic indicators
-unemployment rate -labor force participation rate -number of full time jobs -average wages
Inflation Rate
-yearly percentage change in price index -based on CPI price index year 2 - PI year 1/ PI year 1
APC + APS
1
MPC + MPS
1
paradox of thrift
1 person can save and get rich BUT if everyone saves, spending goes down, AD curve goes left, and it *hurts the economy*
List 3 sources of excess burden.
1) Cost of government to collect tax 2) Cost to tax payer to comply 3) Dead weight loss
What is the "Keynesian Monetary Transmission Mechanism" starting with an decrease in the money supply?
1) Fed decrease MS 2) Increase in interest rates 3) Decrease in business investment 4) Decrease in aggregate demand 5) Decrease in Real GDP
What is the "Keynesian Monetary Transmission Mechanism" starting with an increase in the money supply?
1) Fed increase MS 2) Decrease in interest rates 3) Increase in business investment 4) Increase in aggregate demand 5) Increase in Real GDP
Explain the 2 reasons why the monetary transmission mechanism might not work.
1) If business investment is insensitive to changes in the interest rate. 2) The liquidity trap--when interest rates are so low that they cannot go any lower.
List 3 reasons why government spending on social security and Medicare will increase in the near future.
1) Increase in life expectancy 2) Aging of the baby boom generation 3) The increase in the amount of health care available
What are some of the challenges faced by Micro-Drip when they tried to sell the plot-sized drip system to farmers in Pakistan?
1) It is very expensive for a farmer in Pakistan (about $360) 2) Farmers are used to the tradition of flooding their fields? 3) Salesmen weren't trained in selling and had poor selling skills 4) Joel made a worksheet, but the farmers can't read or do math 5) Farmers need a government subsidy to afford the system
The 4 factors that determine a Nation's Economic Growth.
1) Natural Resources 2) Labor 3) Capital 4) Technology
List 5 government policies that encourage positive economic growth.
1) Protect private property rights 2) Competitive markets 3) Free international trade 4) Stable prices/low inflation 5) Small government
Why doesn't the government of Kenya provide basic water and sanitation services to the slums in Nairobi?
1) The government does not recognize the slums as an official settlement 2) Also, the people who live in the slums can't afford these services
Why did Ecotat start to build toilet facilities in the city of Nairobi first, before building them in them slums where they are needed the most?
1) They wanted to create a demand in the city first. It wouldn't' work if they started in the slums and then went to the city. 2) They also needed the approval of government officials to build in the slums, which took time.
3 things that will shift both LRAS and SRAS curves
1) change in resource base 2) change in level of technology 3) change in institutional arrangements that affect productivity
temporary changes: 3 things that will shift SRAS only
1) changes in resource prices 2) changes in the expected rate of inflation 3) supply shocks
Essay Format:
1. Policy 2. Tools 3. Effect of tools A) Fiscal- change in AD B) Monetary- Money market, R, I, AD 4. Effect of change in AD, RGDP, PL **IF there is growth, "hopefully" Change in PRGDP& AS Then, change in RGDP & PL
3 tools of the Fed
1. Reserve Requirements 2. Discount Rate 3. Open Market Operations
supply side economics
1. a lower marginal tax rate will give people the incentive to work more 2. if the lower marginal rate is believed to be long term than it will shift both SRAS and LRAS 3. supply side economics is a long run, growth oriented strategy not a short run stabilization tool
What 3 things are considered M1?
1. all the currency in circulation, cash not in bank vault (coins, paper currency) 2. checking deposits/accounts 3. travelers checks
What are the 2 problems with medicare and medicaid?
1. americans are living longer 2. medical advances are increasing the cost of care
roles of the fed
1. bank's bank 2. set monetary policy 3. regulates bank
expansionary monetary policy
1. buy bonds/gov't securities 2. decrease interest rate 3. lower reserve requirement
What are the 2 monetary policy targets?
1. change money supply 2. change interest rates
the self correcting economy
1. consumption demand is relatively stable a. permanent income hypothesis: peoples combustion depends on their long run expected permanent income rather than their current income b. people will: i. save during expansion ii. spend savings during recession
problems with bartering
1. depends upon a double coincidence of wants 2. you have to know a bunch of exchange rates
high taxes retard growth because
1. discourage work effort and productivity 2. reduce capital formation 3. encourage people to purchase goods that are less desired, just because they are tax deductible
In order for an asset to be used to exchange goods and services, it must have what 5 traits?
1. durable 2. acceptable 3. valuable 4. identical 5. divisible
as the value of your home decreased, what 3 things occurred?
1. durable good consumption decreased 2. less housing improvements/additions 3. couldn't "borrow against your home"-use home as an asset
What 2 things are considered M2?
1. everything in M1 plus.... 2. savings accounts, mutual funds, CDs
increases in Ag. Demand are caused by:
1. expansionary fiscal policy 2. expansionary monetary policy 3. changes in consumer spending 4. changes in business spending
What are the two fiscal policy tools the president and congress use?
1. government purchases 2. taxes
What are the two groups that federal government expenditures can be divided into?
1. govt purchases 2. everything else.
What were congresses attempted solutions for the ratio decreasing so much? (2 things)
1. increase full benefit from age 65-67 so people work longer 2. increase payroll taxes to fund SS for elderly
increase in Ag. Supply
1. increased productivity per worker 2. increase land, labor, capital 3. decrease oil prices 4. gov't makes it easier to operate more efficiently
expansion
1. lower the r.r % 2. lower DR 3. buy USGS 4. buy MBS
What are the 4 main functions of money?
1. medium of exchange 2. unit of account 3. store of value 4. standard of deferred payment
Money
1. medium of exchange accepted as payment for g/s because otherwise banks and business would be pritning their own notes 2. store of value- can be held for future purchases 3. standard of value- serves as a yardstick for measuring prices
potential deposit expansion multiplier
1. money multiplier= inverse of required reserve ratio 2. the lower the required reserve ratio, the more money supply will expand 3. the higher the requires reserve ratio, the less money supply will expand
what are the 2 things that weaken the money multiplier
1. money not deposited into bank 2. banks don't loan out excess reserves
timing problems of fiscal policy
1. our ability to forecast is extremely limited 2. change in fiscal policy will not have an immediate impact on the economy
What are the 4 goals of monetary policy?
1. price stability 2. low unemployment 3. financial stability (non inflation) if you achieve all these you get... 4. economic growth
contractionary
1. raise the r.r % 2. raise DR 3. sell USGS 4. sell MBS
interest paid on excess bank reserves
1. reducing the interest paid on excess reserves increases the money supply 2. increasing the interest paid on excess reserves reduces the money supply
Responsibility of Fed Manager of Money Supply -What 3 tools do they use to manage money supply?
1. reserve requirement 2. discount policy 3. open market opperations
the effect of the deposit multiplier will be reduced if
1. some people decide to hold currency rather than deposit it in the bank 2. banks fail to use all of the new excess reserves to extend loans
why would investors buy over priced stocks? (2 reasons)
1. they're stupid 2. they greedy
what 2 things happen once commodity money is introduced?
1. trade becomes easier 2. no longer need to make things you need by yourself which allows for specialization
functions of money
1. unit of account 2. medium of exchange 3.store of value
Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank finds that it can safely lend out $4,500, the reserve requirement must be:
10 percent.
how many voting members are there in the Federal Open Markets Committee and who are they?
12: 7 governors and 5 of the 12 central bank presidents
what is the U.S debt
14 trillion
2014 National RGDP
16.089 Trillion
Quantitative Easing
2009-2011
what is national debt
18-19 + Trillion
The Federal Reserve System was created in:
1913
(Last Word) A "national bank holiday" that closed all banks for a week and resulted in Federal deposit insurance occurred in the United States in:
1933, following the bank panics of 1930-1933.
what qualifies as a recession?
2 consecutive quarters of decreasing GDP
what is the goal of the fed?
2% core inflation annually
the self correcting economy
2. changes in real interest rates stabilize aggregate demand and redirect economic fluctuations
the self correcting economy
3 facts that imply the economy can correct itself without government intervention
what is federal budget for the year?
4.5 T
A reserve requirement of 20 percent implies a potential money deposit multiplier of...
5
Hyperinflation is defined as inflation exceeding ____% per month.
50%
who are the leaders of the fed?
7 governors appointed by the president for 14 years
Assets: Reserves = $750, Loans = $9,250. Liabilities: Deposits = $10,000. The bank ratio is ___.
7.5%
The Rule of 70 calculation
70 —————— Investment's Rate of Return
If M = 3,000, P = 2, and Y = 12,000, what is the velocity?
8.
m2 amount
8.5 trillion
In 2010, the combined expenditures of federal, state, and local governments in the United States were approximately 40 percent of gross domestic product (GDP). Approximately what percentage of GDP were government expenditures in 1930?
9%
If the Fed injects additional reserves into the banking system, why will banks generally want to expand their loans and investments?
: Loans and investments generally earn more interest income for the banks than excess reserves.
Assets-Liabilities
=Net Worth
natural rate of unemployment
=frictional + structural
excess reserves
=total reserves - required reserves
Limitations
A bank's willingness to lend people must be willing deposits regulation
The crowding-out effect implies which of the following?
A budget deficit will increase real interest rates and, thereby, retard private spending.
Foreign Direct Investment (FDI)
A controlling ownership in a business enterprise in one country by an entity based in another country.
Crowding out
A decline in private expenditures as a result of an increase in government purchases.
a. decrease the spending multiplier
A decrease in the marginal propensity to consume will a. decrease the spending multiplier. b. increase the spending multiplier. c. lower interest rates. d. decrease investment.
Quantitative easing
A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. This increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity.
Philips Curve
A graph showing the short-run relationship between the unemployment rate and the inflation rate.
Industry
A group of firms produing the same or similar products. Ex: Steel industry, (US steel, Bethlehem Republic) Tennis Industry
Structural Unemployment
A mismatch between the skills workers can offer and the skills in demand.
New Growth Theory
A model of long-run economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system.
Reserves
A percentage of certain deposits, mainly checking accounts, that all depository institutions must set aside, required reserves can be held as cash in bank's vaults or in accounts at a regional fed bank.
Long Run
A period of time in which all factors of production and costs are variable. Entry and exit is possible and there are no fixed factors (everything is variable).
Plant
A physical establishment which helps in making and/or distributing of G/S. Ex: Warehouse, a factory, retail store, ACC.
Moral Hazard
A problem after the transaction. This may lead to programs like the FDA and FTC
Adverse Selection
A problem before the transaction. EX: The used car is a lemon
Renewable Resources
A resource which is replaced naturally and can be used again. Examples: Oxygen, Fresh Water, Solar Energy, Timber, and Biomass.
Cyclical Unemployment cause
A short-term economic fluctuations.
Unemployment
A situation where someone wants to work but cannot find a job in the current market. People who do not have jobs and are not interested in obtaining one are not counted as __________. The BLS defines _____ as people who: 1. Didn't work the previous week. 2. Were available to work if they had been offered a job. 3. We're making efforts to look for a job.
Convergence Theory
A theory speculating that, since poorer economies tend to grow more rapidly than wealthier economies, all economies in time will assemble in terms of per capita income.
Public Goods
Are G/S provided by the government.
Which of the following represents why private production tends to be more efficient then government production?
All of the above are reasons why private production tends to be more efficient then government production.
Critics of the Keynesian view argue that increases in government spending financed by borrowing will hamper the recovery from a recession and slow long term growth because
All of the above are true.
Given a horizontal AS curve , if AD increases what is the result ?
All GDP increase with no price increase
What is classical dichotomy?
Separation of nominal and real variables.
You know there's growth in monetary policy...
ALWAYS ASSUME GROWTH!
Stagflation is caused by
AS Left
An increase in productivity shifts
AS Right
Reaganomics corrects stagflation by shifting
AS right
What are excess reserves?
Actual reserves held by banks that exceed the legal requirement.
Which of the following is correct?
Actual reserves minus required reserves equal excess reserves.
Which of the following would cause prices and real GDP to rise in the short run?
Aggregate demand shifts right
If the economy is simultaneously in long-run and short-run equilibrium, which of the following is true?
Aggregate quantity demanded is equal to potential output
Which of the following provides the most reasonable explanation for why agricultural interests lobby for higher farm subsidies and price supports?
Agricultural interests seek a redistribution of income favoring themselves.
Suppose that last week 100,000 people lost (or quit) their jobs and sought employment, while 10,000 new job seekers entered the labor market and began to look for work too.
All 110,000 people are counted as unemployed.
Which of the following explains why pork-barrel spending is often approved, even when the spending is inefficient?
All of the above: Each representative has little incentive to oppose pork-barrel spending since the tax savings would accrue to taxpayers throughout the nation; General opposition to pork-barrel spending by a legislator would make it more difficult for the legislator to arrange for pork-barrel projects that provide concentrated benefits for his or her district; Logrolling increases the likelihood that pork-barrel projects will be approved.
Given a vertical AS curve, if AD increases what is the result ?
All price increase with no GDP increase
Exchange rate system
An agreement among countries about how exchange rates should be determined; **page 630**
The Rule of 70
An easy way to calculate how many years it will take an investment to double in size
Saving and investment equation
An equation that shows that national saving is equal to domestic investment plus net foreign investment; National saving = Domestic investment + Net foreign investment OR S = I + NFI
What is meant by the expression, "There is too much money chasing too few goods"?
An expansion in the supply of money relative to the availability of goods and services is causing an increase in the general level of prices.
Absolute Economic Growth
An increase in Real GDP
Which of the following best describes the crowding-out effect?
An increase in borrowing by the government will push interest rates upward, which will lead to a reduction in private spending.
An unanticipated shift to a more restrictive monetary policy by the Fed will result in which of the following?
An increase in interest rates and, thereby, reduced investment, current consumption, and aggregate demand.
Decrease in Consumption and Investment
An increase in real interest rate due to a decrease in money supply will initially lead toward....
expansionary monetary policy
An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.
Discretionary fiscal policy involves which of the following?
An intentional change in taxation or government spending.
Business Firm
An organization which owns and operates these plants
Surplus; Deficit
Automatic Stablalizers will shift the gov budget toward a ______ during expansion and a _______ during a recession
What are the two types of fiscal policy?
Automatic stabilizer and discretionary
What are Monetary Policy Targets for?
Fed uses these to indirectly influence the variables (unemployment, inflation, etc.)
Inflationary Gap
Goal: Lower AD (contract economy) Gov't Spending Decrease (Republicans) Taxes Increase (Democrats) Libertarians (Do Nothing)
Public Goods
Goods that are non- rival and non- excludable
The Federal Reserve Head whose academic specialty was the Great Depression and was FED head under Bush and Obama is
BEN BERNANKE
Fractional Reserve System -what does this allow banks to do?
Banking system that keeps under 100% of deposits in reserves and is very susceptible to bank runs and panics -allows banks to create money through the lending process
Responsibility of Fed Manager of Money Supply Tools to Manage Money Supply -Discount policy: what is it?
Banks borrow from Fed with Discount Loans
Fractional Banking system
Banks lend out a portion of the deposits that people hold at the bank.
If the Fed lends to member banks, what happens to reserves and the money supply?
Both Increase
The natural unemployment rate includes ___.
Both frictional and structural unemployment.
Which of the following is a major deficiency of fiscal policy as a stabilization tool?
Both political and economic factors make it unlikely that changes in fiscal policy will be timed correctly
Keynes view on deficits/surplus
Budget deficits and surpluses are ok -the goal of fiscal olicy shouldn't be to balance the budget, but instead to balance... Budget management: fiscal year oct 1-sept 30 -current expenditures: "uncontrollables" 80% and discretionary spending 20%
Responsibility of Fed Manager of Money Supply Tools to Manage Money Supply -Open Market Operations
Buying and selling securities to manage MS
Why do long lags make discretionary policy less effective?
By the time the impact of a policy is felt, the problem may have been corrected by market forces.
Which of the following is true when the federal government is running a budget deficit
Government expenditures exceed government revenues
When savings is greater then planned investment
C+Ig is less then GDP, and vice versa
if interest rates increase, what will happen to... C I G NX
C- decrease I- decrease G- ? yolo NX- decrease
Fiscal Policy
Government or President
Which list ranks assets from most to least liquid?
Currency, stocks, fine art.
Consumption formula (with taxes)
C= a +MPC(Net inc - (taxes - tax payments))
M2
Cash, traveler's checks, checkable bank deposits, near-moneys
Monetary Policy has two steps
Change money supply, change AD
Fiscal policy
Changes in federal taxes and purchases that are intended to achieve macroeconomic policy goals
The Keynesian fiscal policy to correct recession is
Cut taxes to less wealthy
Interest rate effect on aggregate demand
Changes in interest rates affect aggregate demand, which is the total level of spending in the economy. Aggregate demand has four components: consumption, investment, government purchases, and net exports. Changes in interest rates will not affect government purchases, but they will affect the other three components of aggregate demand in the following ways: **page 496 for descriptions**
Shifts of demand in lfm
Changes in perceived business opportunities, changes in government borrowing
Shifts of supply in lfm
Changes in private savings behaivor, changes in capital inflows
Define monetary policy.
Changes in the money supply to achieve macroeconomic goals.
Monetary Policy
Changes in the money supply to achieve macroeconomic goals.
Why does "The Acummen Fund" focus on "social entrepreneurship" rather than traditional methods of charity and foreign aid?
Charity and foreign aid alone will not eliminate poverty because: 1) There is some corruption involved 2) Doesn't address the root cause of the problem 3) If you just give money to the poor, they will always want more of it
Unemployment
Civilians that are over the age of 16, that are NOT working, but can work and have actively sought work in the past 4 weeks
Counterfeit
Columbia has had a bad rep of being the circulator or printer of forged $100 bills in S. America.
Which of the following best illustrates the use of discretionary countercyclical fiscal policy?
Congress passes a bill authorizing $100 billion in additional spending when it receives news of a deepening recession.
Three ways households spend income
Consume Save Pay taxes
What are the four things the government gets it revenue from?
Corporate taxes Other taxes Social taxes Individual taxes
Real exchange rate
Corrects the nominal exchange rate for changes in prices of goods and services.
Higher-than-expected inflation transfers purchasing power from ____ to ____.
Creditors to debtors.
d. Interest rates to fall and so private consumption and investment rise
Crowding in occurs when changes in government spending or taxes cause a. Interest rates to rise and so private consumption and investment fall b. Interest rates to fall and so private consumption and investment fall c. Interest rates to rise and so private consumption and investment rise d. Interest rates to fall and so private consumption and investment rise
Financial Assets
Currency, stocks, bonds, loans
Responsibility of Fed Lender of Last Resort -Why didn't banks borrow from the Fed?
Fed wouldn't make loans because they thought that the bank runs were due to poor investments and they didn't want to encourage risky behavior
FDCI
Federal Deposit Insurance Corporatoi
Government Consumption
Federal Expenditures on final goods+ state and local expenditures on final goods
How are four tools used under expansionary monetary policy?
Decrease RRR, DR, FFR, buy more bonds
Under expansionary fiscal policy what would the government do with these two tools?
Decrease taxes& Increase government spending
How are tools used under expansionary fiscal policy?
Decrease taxes, Increase government spending
Which of the following best expresses the central idea of countercyclical fiscal policy?
Deficits are planned during economic recessions, and surpluses are utilized to restrain inflationary booms.
TARP, created in 2008, relates to
Federal Government bailout loans to General Motors, AIG, and many banks
Which of the following is true regarding government expenditures in the United States?
Government expenditures as a share of GDP grew rapidly between 1930 and 1980.
Supply and demand shifters in money market
Demand: changes in variables other than the interest rate cause the demand curve to shift. The two most important variables that cause the money demand curve to shift are real GDP and the price level; And increase in real GDP means that the amount of buying and selling of goods and services will increase. This additional buying and selling increases the demand for money as a medium of exchange, so the quantity of money households and firms want to hold increases at each interest rate, shifting the money demand curve to the right (and visa-versa); A higher price level increases the quantity of money required for a given amount of buying and selling; An increase in the price level increases the quantity of money demanded at each interest rate, shifting the money demand curve to the right. Supply: For simplicity, we assume that the Fed is able to completely control the money supply. With this assumption, the money supply curve is a vertical line, and changes in the interest rate have no effect on the quantity of money supplied. Just as with other markets, equilibrium in the money market occurs where the money demand curve crosses the money supply curve.
Effects on net exports
Depreciation in the domestic currency will increase exports and decrease imports, thereby increasing net exports. If real GDP is currently below potential GDP--a depreciation in the domestic currency should increase net exports, aggregate demand, and real GDP. An appreciation in the domestic currency should have the opposite effect: Exports should fall, and imports should rise, which will reduce net exports, aggregate demand, and real GDP.
Which of the following best describes the economic conditions of the 1930s?
Depressed economic conditions and prolonged high rates of unemployment.
Explain the "New Growth Theory"
Developed by Paul Romer in the 1990s. Technological advances and new ideas are unlimited. Do not have diminishing marginal returns because new ideas can be shared by everyone. Technological advances are not random because people are always searching for new and better ideas.
Explain the "Neoclassical Growth Theory"
Developed by Robert Solow in the 1950s. Higher standard of living is possible but it cannot increase indefinitely. Due to the diminishing marginal return of capital eventually the added output of capital will fall. Advances in technology are random.
Explain the "Classical Growth Theory"
Developed by Thomas Robert Malthus in 1798. Amount of land on earth is fixed. Worlds population is increasing every year. Eventually we will not be able to feed everyone and some people will starve to death.
Net capital flows
Difference btw. capital inflows and capital outflows.
What did the "Classical Theory of Money" say about the relationship between the money supply and prices?
Direct and proportional relationship between money supply and prices.
YES
Does a reduction in the marginal tax rate tend to increase supply and productivity?
Problems with GDP
Doesn't measure leisure Doesn't capture the underground economy Doesn't include household production Doesn't include the impact of externalities
(18)Compared to the no-trade situation, when a country imports a good, which of the following will occur?
Domestic consumers gain, domestic producers lose, and the gains outweigh the losses.
Consumption
Durable Goods+ Nondurable goods+ Services
the Beige Book
Each Fed bank gathers anecdotal information on current economic conditions, published 2 weeks before an FOMC meeting.
Liquidity
Ease with which the type of money can be turned into g+s, M1 most liquid
What are the two groups that make up the labor force?
Employed and unemployed.
Run on bank
Everyone wants to cash out their checking deposits
In order to increase the money supply, the banking system must have which of the following?
Excess reserves.
Supply of money up, rates down, investment up, AD up would be
Expansonary monetary policy to correct recession
Budget deficit
Expenditures exceed revenues during a fiscal year
Net exports
Exports minus imports; Technically, net exports is not equal to the current account balance because this account also includes net income on investments and net transfers. Because these other two items are relatively small, it is often a convenient simplification to think of net exports as being equal to the current account balance
Net Exports
Exports- Imports
The Keynesian monetary policy to correct recession is
Fed buys bonds in open market to lower fed funds rate
Constraints of Fiscal Policy Fed controls monetary policy -how is this a constraint?
Fed can change policy at any time
Shows the predicted relationship between tax rates and revenues
Laffer curve
The group that sets the Federal Reserve Systems policy on buying and selling government securities (bills, notes, and bonds) is the:
Federal Open Market Committee (FOMC).
As it relates to Federal Reserve activities, the acronym FOMC describes the:
Federal Open Market Committee.
A $20 bill is a:
Federal Reserve Note.
The paper money used in the United States is:
Federal Reserve Notes.
Discounting
Federal Reserve lending of reserves to private banks
Open Market Operations
Federal Reserve purchases and sales of government bonds for the purpose of altering bank reserves
In recent years the Fed has communicated changes in its monetary policy by announcing changes in its policy targets for the:
Federal funds rate.
Income Tax
Federal gov't's biggest form of income...
Monetary Policy
Federal or central bank
What are the two kinds of money?
Fiat and commodity.
What are the two types of policy the government can use when the self-correcting mechanism isn't working fast enough?
Fiscal & monetary
Investment
Fixed investments(house or factory)+ changes in Inventory
Floating vs. fixed exchange rates
Fixed: do not change over long periods; Floating: assumed that exchange rates are determined in the market-good assumption for most currencies
Stagflation
Fixing one problem makes the other worse (^) Unemployment (^) Inflation
48. Which type of unemployment is most likely to help the economy become more efficient?
Frictional
In 2002, the demand for construction workers increased and the demand for textile and steelworkers diminished. This is an example of ___.
Frictional unemployment caused by sectoral shifts.
Real GDP
GDP adjusted for inflation/currency value.
Because of transactions which take place in the underground economy, the
GDP calculation tends to understate the actual value of goods sold in the economy
What is the velocity of money?
GDP divided by the money supply.
Nominal GDP
GDP measured in the market value and currently value of the year the goods and services were produced.
GDP Formula (Expenditure)
GDP(Y)= C+I+G+NX C- Consumption I- Investments G- Government Consumption NX- Net Exports
d. AS decreases causing inflation to increase while unemployment increases
If no policy is enacted in an inflationary gap, then a. none of the below correctly describe what happens if no policy is used b. AS increases causing inflation to increase while unemployment falls c. AS decreases causing inflation to decrease while unemployment increases d. AS decreases causing inflation to increase while unemployment increases e. AS increases causing inflation to decrease while unemployment falls
Increase
If the Fed wants to decrease the money supply, it will _______ discount rates
d. -4
If the MPC = .8, what is the tax multiplier? a. 4 b. 5 c. -5 d. -4 e. none of the above
c. increase taxes
If the economy is experiencing an AD excess due to an increase in consumer confidence, then what fiscal policy will liberals generally propose? a. increase government spending b. cut government spending c. increase taxes d. decrease taxes
a. increase gov't spending
If the economy is experiencing an AD shortfall due to a decrease in exports, then what fiscal policy will liberals generally propose? a. increase gov't spending b. decrease gov't spending c. increase taxes d. decrease taxes
Increase; Decrease
If the fed lends to member banks, reserves will _________ and money supply will ______
a. -$720 million
If the federal gov't lowered gov't spending by $72 million and the MPC is .9, what would be the total change in AD? a. -$720 million b. $72 million c. -$7.2 million d. $8 million e. -$80 million
d. all of the above will occur
If the federal gov't uses expansionary fiscal policy in the case of stagflation, which of the following would occur as a result? a. RGDP will rise b. the national debt will rise c. price levels will rise d. all of the above will occur e. none of the above will occur
d. $800 million
If the federal government increased spending by $80 million and the MPC is .9, what would be the total change in AD? a. $80 million b. $72 million c. $720 million d. $800 million e. $560 million
d. both b & c
If the government increases spending in the case of stagflation then its effect will be to a. increase unemployment b. decrease unemployment c. increase inflation d. both b & c e. both a and c
d. the price level to increase while unemployment decreases
If the government lowers taxes then we would expect a. the price level to decrease while unemployment increases b. both the price level and unemployment to increase c. both the price level and unemployment to decrease d. the price level to increase while unemployment decreases
b. decrease aggregate demand
In fiscal policy, Government spending decreases are used to a. stimulate aggregate demand. b. decrease aggregate demand. c. stimulate aggregate supply. d. decrease aggregate supply.
(18) Which of the following about international trade is true?
In recent decades, the volume of U.S. international trade has been increasing as a share of the economy.
a. wages will fall and AS will increase
In the event of a stagflation when no fiscal policy is used, a. wages will fall and AS will increase b. wages will fall and AS will decrease c. wages will rise and AS will increase d. wages will rise and AS will decrease e. none of the above correctly describe the adjustment process with no fiscal policy because it is AD that adjusts.
Inflation; Output
In the long run, unanticipated and anticipated expansionary monetary policy leads to ______; there is no real impact on _____.
M1
Includes currency in circulation (cash), traveler's checks, checkable bank deposits
How are the four tools used under contractionary monetary policy?
Increase RRR, DR, FFR, and sell bonds
43. If an improvement in the quality of education in the United States increases the productivity of labor, this will
Increase both long-run and short-run aggregate supply.
How are tools used under contractionary fiscal policy?
Increase taxes, Decrease government spending
What happens to the u-rate if a worker loses their job and begins looking for a new one?
Increases
Contractionary fiscal policy
Involves decreasing government purchases or increasing taxes. Policymakers use contractionary fiscal policy to reduce increase in aggregate demand that seem likely to lead to inflation; With some firms producing beyond their normal capacity and the unemployment rate very low, wages and prices will be increasing; Real GPD falls and price level falls; In practice it is extremely difficult for Congress and the president to use fiscal policy to eliminate the effects of the business cycle and keep real GDP always equal to potential GDP.
Expansionary fiscal policy
Involves increasing government purchases or decreasing taxes; A cut in taxes has an indirect effect on aggregate demand; Cutting the individual income tax will increase household disposable income and consumption spending. Cutting taxes on business income can increase aggregate demand by increasing business investment; The goal of both expansionary monetary policy and expansionary fiscal policy is to increase aggregate demand relative to what it would have been without the policy; To bring real GDP back to potential GDP, Congress an the president increase government purchases or cut taxes, which will shift the aggregate demand curve to the right; Real GDP increases and price level rises; The policy has successfully returned real GDP to its potential level. Rising production will lead to increasing employment reducing the unemployment rate.
During 2001-2011, what happened to the federal budget deficit?
It expanded and real government spending increased rapidly, indicating that fiscal policy was expansionary.
Measured as a share of GDP, what happened to the net federal debt between 1990 and 2011?
It fell during most of the 1990s, but rose sharply during 2001-2011.
Measured as a share of GDP, what happened to federal spending during 2001-2010?
It increased more rapidly than during the 1990s
Which one of the following is an area of agreement among modern macroeconomists with regard to the use of fiscal policy?
It is difficult to time changes in discretionary fiscal policy in a manner that will promote stability.
The Theory of Efficiency Wages explains why ___.
It may be in the best interest of the firms to pay wages above equilibrium level.
29. Which of the following is a positive effect of job search and the unemployment that often accompanies it?
It permits individuals to better match their skills and preferences with the requirements of a job
When the Federal Reserve System wants to increase the money supply, what does it typically do?
It purchases U.S. government securities
What is the demand curve for money?
It shows the amount of money that households and businesses wish to hold at various rates of interest.
Why is the multiplier principle important?
It shows why small shifts in investment have a powerful influence on national income.
Which of the following is true if the federal government is running a budget surplus?
It will be able to reduce its outstanding debt.
If the Fed buys a T-bill from a commercial bank, how will it pay for the T-bill?
It will give the bank new reserves.
83. How will increased usage of the Internet by employers and employees influence the job search process?
It will make job-related information less costly and, therefore, tend to reduce the rate of unemployment.
Non-Durables
Items which last less than three years. Ex: Most Clothing, Pens, Food
Durables
Items which last more than three years. Ex:Autos, Washing Machines
Which one of the following economists has played a central role in the development of the "economics of collective decision making," better known as public choice analysis?
James Buchanan
The current head of the Federal Reserve is
Janet Yellen
What does the term pork-barrel legislation refer to?
Legislation that bundles together a number of projects, each benefiting local interests at the expense of general taxpayers.
Specific taxes
Let the firm pollute, however; make them pay a heavy tax. Government takes the money and cleans up the pollution.
Structural Unemployment
Long run skills not matching problems. When people don't have the skills to perform a skill
M2
M1 + savings deposits + time deposits + money market mutual funds
What are the two types of measurements to calculate money supply in the US?
M1 and M2
Time deposits are included in
M2 only.
What if real GDP increases, what happens to the MD line?
MD line moves right
potential increase in MS formula
MS= MM x initial excess reserves
Equation of exchange
MV=PQ
Which of the following lists two things that both decrease the money supply?
Make open market sales and raise the reserve requirements.
Which of the following does supply-side economics stress?
Marginal tax rates exert important incentive effects that influence real output.
Classic Economics
Market will fix itself
Financial Markets
Markets which deal with the exchange of financial assets.
Horizontal Combination of Plants
Means each plant is at the same stage of production Ex: JC Penny's , Safeway, Footlockers
Conglomerates of Plants
Means they are plants which operate across many different markets and industries. Ex: Plants in communications, hotels, baking proudcts, educational materials..
Government Non-exhaustive expenditures
Means they contribute nothing to domestic production. Recipients make no contribution to output in return for these payments
Consumer Price Index
Measure of GPD, when many good's costs are added up and average to find what the cost of living is
Frictional Unemplyment
Measurement of time it gets to get a job. Short - run
Money Supply
Measures of money in the economy, the most narrow M1 counts only currency, traveler's checks, and most checking accounts.
"Every major contraction in the U.S. economy has either been created or greatly exacerbated by monetary instability. Every major inflation has been caused by monetary expansion." Which of the following economists made this statement?
Milton Friedman
What are three reasons for structural unemployment?
Minimum wage laws, unions, and efficiency wages.
Decisions by policy makers concerning the money supply constitute ___.
Monetary policy.
Taylor rule
Monetary rule that determines how much the fed should raise real interest rates given inflation and unemployment.
Which of the following provides the best explanation of why money is valuable?
Money is valuable because it is scarce relative to the demand for the services it provides
Why is there a market (demand) for a household solar light in India?
Over 500 Million houses in India do not have electricity. They use kerosene lanterns for light. Kerosene is dangerous and not an effective source of light. Solar lights are not expensive and are much brighter and safer.
Coase Theorem
Parties can bargain or negotiate terms that are more beneficial to both parties than the outcome of any assigned property rights
The Fed acquired the authority to do which of the following during the economic crisis of 2008?
Pay interest to commercial banks on their reserves.
Stagflation
Persistent high inflation combined with high unemployment and stagnant demand in a country's economy.
Shows the expected relationship between inflation and unemployment when aggregate demand shifts
Phillip's curve
Which of the following most accurately indicates the political incentive to spend and/or tax?
Politicians are rewarded for providing programs that benefit their constituents and punished for raising taxes
Positive Externality
Positive impact on a third party as a result of a transaction. EX: Education provided by taxes
Suppose the dollar value of GDP increased approximately 2 percent between October 2007 and August 2008, but real GDP fell 1 percent during the period. Which of the following best explains these data?
Prices increased approximately 3 percent during period
3. Suppose, in dollar terms, nominal GDP increased approximately 4 percent during a given year, and real GDP decreased 1 percent. Which of the following best explains these events?
Prices increased approximately 5 percent
Why do producers tend to be better represented in lobbying efforts and other elements of the political process than consumers?
Producers are generally better organized than consumers
Security
Provide a nest for retirement
Speculation
Purchase securities speculating they will increase in value.
Value of money
Purchasing power & Influence by price level
Labor
Quantity Productivity
Results of EFP
RGDP increases, unemployment falls - GOOD PL increases, inflation - BAD (Trade off between lower unemployment&Inflation)
What are the four tools of monetary policy?
RRR, Discount rate, federal funds rate, Open Market Operations
What is the primary cause of inflation?
Rapid expansion of the money supply
b. taxes will increase and so will decrease spending
Rational expectations states that if the government borrows money to finance increased spending, then consumers will expect that a. taxes will increase and so will increase spending now b. taxes will increase and so will decrease spending c. taxes will decrease and so will decrease spending d. taxes will decrease and so will increase spending now
Per Capita GDP
Real GDP divided by population. Used to measure the average output per person.
41. Within the AD/AS model, how does an economy adjust to an output beyond its long-run capacity as a result of an unanticipated increase in aggregate demand?
Resource prices and real interest rates will rise causing output to fall back to its long-run sustainable rate
Supply of money down, interest rates up, investment down, AD down is
Restrictive monetary policy to correct demand pull inflation
Which of the following is an example of an automatic stabilizer?
Revenues from the corporate income tax increase sharply during a business boom but decline substantially during a recession, even though no new tax legislation has been enacted
Reserve Requirements
Rules set by the Federal Reserve that determine the required reserve ratio for banks
M2
Savings accounts, mutual funds, time deposits, money market accounts (M1)
Two reasons for spending
Security Speculation
If Oil prices increase AS
Shifts LEFT
Which of the following would cause prices to fall and output to rise in the short run?
Short-run aggregate supply shifts right.
Money Supply Curve
Shows how the quantity of money supplied varies with the interest rate
Supply Shock
Significant events that directly affect production and the AS (Aggregate Supply) curve in the short run.
Natural Resources
Soil Weather Terrain Clean Water Rainfall Access to an ocean or sea Distance from the equator
bills
Sold to banks, corporations, some foreigners, and American citizens
Free-Rider
Someone who receives the benefit of a G/S without contributing to its cost Ex: Citizens who don't pay taxes but enjoy public goods. Illegal Immigrants
Legislation
Specific laws designed to make firms responsible. Ex: polluters, make firms install species equipment to stop the pollution.
As both the budget and regulatory powers of government grow, public choice analysis indicates that individuals and groups will find it in their interest to do which of the following?
Spend more time rent seeking
Discretionary spending
Spending set by the govt through appropriations bills, including operation expenses &salaries of govt employees (defense, environment, education, space exploration); A spending category through which governments can spend through an appropriations bill. This spending is optional as part of fiscal policy, in contrast to entitlement programs for which funding is mandatory. Refers to spending set on a yearly basis by decision of Congress. Congress usually authorizes such spending in another act.
c. earmark spending
Spending that directs approved funds to be spent on specific projects in politician's districts but is not in the best interest of the nation as a whole is called? a. logrolling b. entitlement spending c. earmark spending d. discretionary spending e. flagrant spending
Static model vs. dynamic model
Static: Ignores two important facts about the economy: 1) The economy experiences long-run growth, with the LRAS curve shifting to the right every year, and 2) the economy experiences long-run growth, with the LRAS curve shifting to the right every year. Dynamic: We use the dynamic model to gain more complete understanding of fiscal policy; Over time, potential GDP increases which we show by shifting the LRAS curve to the right; The gators that cause the LRAS curve to shift also cause firms to supply more goods and services at any given price level in the short run, which we show by shifting the SRAS curve to the right. Finally, during most years, the aggregate demand curve also shifts to the right, indicating that aggregate expenditure is higher at every price level.
People who are unemployed because wages are for some reason set above the level that brings labor supply and demand into equilibrium are best classified as ___.
Structurally unemployed.
Which of the following is true with regard to the use of countercyclical fiscal policy as a stabilization tool?
Successful fiscal policy is difficult to achieve because Congress acts slowly and our ability to predict the future is limited.
Debt
Sum of all surpluses and deficits over a specific time period.
b. raise G by 3.2 million
Suppose an AD shortfall of $32 million exists due to a decrease in consumer confidence and the MPC=.9. Which of the following policies would be appropriate if the federal government wishes to change Government spending? a. lower G by 28.8 million b. raise G by 3.2 million c. raise G by 32 million d. raise G by 8 million e. none of the above is the appropriate policy using a Government spending change
Tax cut: -1.6*(-9)= $14.4 trillion total change G cut: -1.6*10=-$16 trillion total change Thus, net effect is $14.4-$16=-1.6 Thus spending will fall $1.6 trillion Thus, a restraint is created
Suppose taxes are cut by $1.6 trillion and at the same time G is decreased by 1.6 trillion. The MPC is .9. What is the cumulative effect on spending? Would these two actions create a fiscal stimulus or restraint?
c. 5
Suppose that Government spending increases by $5 million and this causes aggregate demand to increase by $25 million.What is the spending multiplier? (Caution, solve for the spending multiplier, not the MPC) a. .25 b. .8 c. 5 d. 4 e. none of the above
Liberals will raise taxes. From above we know -150=-15*spending mult. So, Spending Mult=10 Tax mult=-9. -150=-9*tax change thus, liberals will raise taxes 150/9=$16.67 million
Suppose that an Aggregate Demand excess exists of $150 million. Furthermore, the appropriate fiscal policy proposed by conservatives is to cut Government spending by $15 million. What is the appropriate fiscal policy for the liberals to propose?
b. 5
Suppose that gov't spending decreases by $10 million and this causes aggregate demand to decrease by $50 million. What is the spending multiplier? a. -5 b. 5 c. 500 d. 10 e. none of the above
d. AD will increase by $2 billion
Suppose that taxes are increased by 2 billion at the same time that government spending is increased by 2 billion. If the MPC=.9, then what is the total effect on AD? a. AD will decrease by $4 billion b. AD will increase by $4 billion c. AD will decrease by $1 billion d. AD will increase by $2 billion e. none of the above would happen
In a recessionary gap, unemployment is high so wages will fall causing AS to increase which lowers unemployment and lowers the price level. But, this takes a long time.
Suppose that we have an Aggregate demand shortfall of $300 million due to a recessionary gap. Answer the following questions, assuming the MPC=.75 What would be the adjustment process if neither fiscal nor monetary policy is implemented?
total change=initial change *mult. Spending mult=1/(1-.75)=4 Tax mult=1-spendmult=1-4=-3 conservatives: change taxes 300=-3*taxchange 300/(-3)=-100 so, lower taxes $100 liberals: change G 300=4*G change 300/4=75 so, raise G $75
Suppose that we have an Aggregate demand shortfall of $300 million due to a recessionary gap. Answer the following questions, assuming the MPC=.75 a. What is the appropriate fiscal policy proposed by liberals and conservatives respectively
See graphs in book or notes .Using policy works more quickly but causes inflation to rise whereas doing nothing takes a long time but lowers the price level. Fiscal policy has a longer policy lag while monetary policy has a longer implementation lag. Fiscal policy could cause crowding out. All options will eventually solve the problem (lower unemployment) as long as the Government or Fed doesn't mess up.
Suppose that we have an Aggregate demand shortfall of $300 million due to a recessionary gap. Answer the following questions, assuming the MPC=.75 b. Graph how this fiscal policy affects the macroeconomic equilibrium. What are the pros and cons of using fiscal policy in this situation?
Decrease Government spending by 12
Suppose the economy is currently experiencing an AD excess of $48 billion and the MPC=.75 . Suppose that congress decides to change government spending instead to return the economy back to full employment. What is the appropriate change in G?
Increase taxes by 16
Suppose the economy is currently experiencing an AD excess of $48 billion and the MPC=.75 . Suppose that congress decides to change taxes to return the economy back to full employment. What is the appropriate tax change?
4
Suppose the economy is currently experiencing an AD excess of $48 billion and the MPC=.75 . What is the spending multiplier?
-3
Suppose the economy is currently experiencing an AD excess of $48 billion and the MPC=.75 . What is the tax multiplier?
a. decrease gov't spending by $6 million
Suppose the economy is experiencing an AD excess of $24 million and the MPC is .75, and congress decides to change gov't spending. What is the appropriate amount of government spending change cause? a. decrease gov't spending by $6 million b. decrease gov't spending by $8 million c. increase gov't spending by $18 million d. increase gov't spending by $3 million e. none of the above
c. increase taxes by $8 million
Suppose the economy is experiencing an AD excess of $24 million and the MPC is .75, and congress decides to change taxes. What is the appropriate amount of tax? a. increase taxes by $6 million b. decrease taxes by $8 million c. increase taxes by $8 million d. increase taxes by $18 million e. decrease taxes by $3 million
Balance of trade
The difference between the value of the goods a country exports and the value of the goods a country imports.
Targets
The Fed tries to keep both the unemployment and inflation rates low, but it can't affect either of these economic variable directly; monetary policy targets, that it can affect directly and that, in turn, affect variables, such as real GDP, employment, and the price level, that are closely related to the Fed's policy goals. The two main monetary policy targets are the money supply and the interest rate.
Expansionary monetary policy
The Fed's policy of decreasing interest rates to increase real GDP
Contractionary monetary policy
The Fed's policy of increasing interest rates to reduce inflation
The money supply is controlled by
The Federal Reserve
Which of the following statements is true?
The Federal Reserve does not set the Federal funds rate, but it influences it through the use of open market operations.
5. If Honda (a Japan-based firm) produces a car in Ohio and exports it to Japan, in which country's GDP will the car be counted?
The GDP of the United States because that is where it was built
if honda (a japan-based firm) produces a car in Ohio and exports it to Japan, in which country's GDP will the car be counted?
The GDP of the United States because that's where it was built
The amount of unemployment that an economy normally experiences is called the ___.
The Natural Rate of Unemployment
Inflation
The OVERALL rise in price level. As time goes on your dollar is worth less
Monetary policy
The actions the Federal Reserve takes to manage the money supply and interest rates to achieve macroeconomic policy goals.
34. Which of the following is necessarily true when an economy is in long-run equilibrium?
The actual rate of unemployment equals the natural rate of unemployment.
37. Suppose business decision makers become more optimistic about future economic conditions and desire additional funds to expand their plant capacity. What is the likely effect on the loanable funds market?
The demand for loanable funds will increase, and the interest rate will rise.
AD Shortfall
The amount of additional AD needed to achieve full employment after allowing for price changes
Reserve requirements are regulations concerning ___.
The amount of reserves banks must hold against deposits.
Define excess burden.
The amount that the burden imposed by a tax exceed the funding provided by the tax.
Excess Burden
The amount that the burden imposed by a tax exceeds the funding provided by the tax.
Which of the following best defines the velocity of money?
The average number of times a dollar is used to buy goods and services included in GDP.
Managed float
The currency exchange rate system, under which the value of most currencies is determined by demand and supply, with occasional government intervention
Fiscal Policy
The deliberate changes in taxes and government spending by the government to change the level of RGDP in the economy.
Monetarism
The macroeconomic view that the main cause of change in aggregate output and price level is fluctuations in the money supply; espoused by advocates of the monetary rule. -focus' on money supply -holds the market as highly competitive -says that a competitive market system gives the economy a high degree of macroeconomic stability.
Velocity of money
The number of times per year that the average dollar in money supply is spent for final goods and services; nominal gross domestic product (GDP) divided by money supply.
Financial account
The part if the balance of payments that records purchases of assets a country has made abroad and foreign purchases of assets in the country.
Current account
The part of the balance of payments that records a country's net exports, net income on investments, and net transfers.
Capital account
The part of the balance of payments that records relatively minor transactions, such as migrants' transfers and sales and purchases of non produced nonfinacial assets.
Define the Required Reserved Ratio
The percentage of checking deposits the banks must hold as reserves. (Cant lend this money out)
Labor Force Participation Rate
The percentage of working-age (16-64 typically) persons in an economy who are employed or are unemployed but are looking for a job.
Money demand depends on ___.
The price level and interest rate.
Money demand depends on ___.
The price level and the interest rate.
The Keynesian model provided an explanation for which of the following?
The prolonged unemployment of the 1930s.
Vicious Cycle (Poverty Trap)
The richer you are, the more able you are to pay for things that will help you be even richer in the future. The poorer you are, the less able you are to pay for the things that can make you richer.
Multiplier effect
The series of inducing increases in consumption spending that results from an initial increase in autonomous expenditures
Budget deficit
The situation in which the government's expenditures are greater than its tax revenue.
Budget surplus
The situation in which the government's expenditures are less than its tax revenue.
Static model vs. dynamic model
The static model ignores two important facts about the economy: 1)The economy experiences continuing inflation, with the price level rising every year, and 2) the economy experiences long-run growth, with the LRAS curve shifting to the right every year **further description on page 503**
Aggregate Supply
The sum total of the production of all the firms economy.
If the Federal Reserve unexpectedly decides to sell bonds, which of the following will most likely happen in the short run?
The supply of loanable funds will decrease, which will exert upward pressure on the interest rate.
Classical Growth Theory
The theory that the clash between an exploding population and limited resources will eventually bring economic growth to an end
Why will it difficult for the Fed to use monetary policy to direct the economy back to full employment and price stability from the recession of 2008-2009?
The time lags between changes in monetary policy and when the changes exert an impact on output and prices are long and variable.
What are open market operations?
The tool most often used by the Fed to alter the money supply.
Lending Capacity
The total amount a bank can loan out. (Excess reserves x money multiplier)
National Debt
The total amount the federal government owes its creditors.
Personal Distribution Income
The total income is distributed among households Poorest 3% Second 9% Middle 14.8% Fourth 19.1% Highest 54.2%
Gross Domestic Product
The total value of FINAL goods and services produced within a country over a time period
c. logrolling
The trading of votes to get spending passed in one congressman's district is referred to as a. Cardsharking b. earmarking c. logrolling d. progressive politicking e. rational expectations
Natural rate of unemployment
The unemployment rate that exists when the economy is at potential GDP.
Fiscal policy
The use of GOVERNMENT spending and taxes to alter macroeconomic conditions (govt increases, AD increases)
Nominal exchange rate
The value of one country's currency in terms of another country's currency
Classical Theory of Money
Theory holding that workers are motivated solely by money
Shifters of long run and short run Philips curves
There is a short-run Philips curve for every level of expected inflation. Each short-run Philips curve intersects the long-run Philips curve at the expected rate of inflation **more description on page 578-579**
You withdraw $100 from your checking account. How does this affect the money supply and the reserves of your bank?
There is no change in the money supply, and the reserves of your bank decline
Suppose you withdraw $1,000 from your checking account. If the reserve requirement is 20 percent, how does this transaction affect the supply of money and the excess reserves of your bank?
There is no change in the supply of money; your bank's excess reserves are reduced by $800
Free- Rider
When someone receives benefits for which they didn't pay
31. Which of the following is true of high and variable rates of inflation?
When such rates are present, it will be difficult for people to accurately forecast next year's rate of inflation
Increase; buying; lower; increase; higher
When the fed uses expansionary monetary policy, it ______ the money supply by ______ bonds. This will lead to _____ interest rates, an ______ in aggregate demand, and ________ inflation.
Asset Bubble
When the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely-at which point the _____ "bursts"
Asymmetric Information
When there is not equal sharing of information A) Adverse Selection and B) Moral Hazard
Externalities or Spillover Effects
When two parties make a transaction it effects a third party. Ex: Paint producer/ Building contractor
Samuelson's Theory
When you vertically add the demand curves for a public good, then compare the cost of suppling it
a. decrease gov't spending or increase taxes
Which of the following fiscal policies would help to get us out of an inflationary gap? a. decrease gov't spending or increase taxes b. increase gov't spending or decrease taxes c. increase gov't spending or increase taxes d. decrease taxes or decrease gov't spending e. any of the above would be appropriate
c. decrease G or increase taxes
Which of the following fiscal policies would help to get us out of an inflationary gap? a. increase G or decrease taxes b. increase G or increase taxes c. decrease G or increase taxes d. decrease G or decrease taxes e. any of the above would be appropriate
a. libertarians
Which of the following groups is LEAST likely to advocate the use of fiscal policy to solve macroeconomic problems a. libertarians b. liberals c. conservatives d. all of the above are equally likely to desire the use of fiscal policy
a. The federal income tax
Which of the following is an example of a progressive tax a. The federal income tax b. A sales tax c. The KY state income tax of 6% of income earned d. None of the above is a regressive tax.
b. Fiscal policy used in a recessionary gap
Which of the following is most likely to increase the national debt and slow economic growth a. Fiscal policy used in an inflationary gap b. Fiscal policy used in a recessionary gap c. Using no policy in the event of stagflation d. All of the above are equally likely to cause an increase in debt and slowed growth e. Both a and b are equally likely to cause an increase in debt and slowed growth
b. Government run deficits lead to increases in the national debt
Which of the following is true regarding the national debt? a. The current debt/GDP ration is 90% b. Government run deficits lead to increases in the national debt c. Increases in the the national debt contributes to faster economic growth if taxes are reduced d. Our national debt has fallen over the last few decades e. All of the above are NOT true.
d. inflation falls
Which of the following is/are NOT an advantage of using fiscal policy to solve a recessionary gap a. Neither d nor e are advantages of using fiscal policy to solve a recessionary gap b. None of the below are pros of using fiscal policy c. unemployment is decreased d. inflation falls e. fiscal policy fixes the problem quicker than doing nothing
Services
Work done by Accountants, Lawyers, Financial advisers, Teachers, etc..
Frictional Unemployment
Workers who are changing location, job, or career.
Which one of the following events will leave GDP unchanged
You lose $500 playing blackjack with friends
money multiplier
^ER (1/r.r. %) = ^ in deposit liabilities or Ms (money supply)
the multiplier on investment
^I (1/1-b) = ^Y
C+Ig+Xn
adds in the net export (exports minus imports)
Laffer curve
a curve relating government tax rates and tax revenues and on which a particular tax rate (between 0 and 100 percent) maximizes tax revenues.
If the government owes $10.0 trillion and then borrows $700 billion more this year, this leads to:
a debt of $10.7 trillion and a deficit of $700 billion
for an oil-importing country such as the US, the immediate effect of a supply shock caused by an increase in the price of imported oil would tend to be
a decrease in real output and increase in the general level of prices
Which of the following would cause the money supply in the United States to expand?
a decrease in reserve requirements
61. Which of the following shifts both short-run and long-run aggregate supply to the left?
a decrease in the capital stock
Target Federal Funds Rate
a desired level for the federal funds rate
Balance Sheet
a financial statement that shows assets, liabilities, and net worth at a given point in time; all these are stock measures
When commercial banks extend loans, they are able to expand the supply of money in the United States because the U.S. has...
a fractional reserve banking system.
nonexcludable
a good or service for which there is no way to prevent those who do not pay for it from consuming it.
Commodity Money
a good used as a medium of exchange that has value outside of money.
Which of the following is most important for long-run growth and a healthy economy?
a high rate of both savings and consumption
the crowding out effect stresses that increased government borrowing to cover a budget deficit will cause
a higher interest rate and appreciation of the US dollar
Money holds value because it's...
a legal tender, it's acceptability, and it's scarce
If you have a checking account at a local bank, your bank account there is
a liability of the bank and an asset to you
The stability of consumption over the business cycle and the ability of changes in the real interest rate to redirect aggregate demand indicate that?
a market economy has a self-correcting mechanism that will help guide it toward full employment.
Federal Funds Market
a market for overnight lending and borrowing of reserves among banks; the market for reserves on account at the Fed
When economists say that money serves as a medium of exchange, they mean that it is:
a means of payment.
M1
a measure in money supply that includes cash and checking deposits, or "near money"
Liquidity
a measure of the ease with which an asset can be converted into money without a significant loss of value
Commodity-backed Money
a medium of exchange with no intrinsic value whose ultimate value is guaranteed by a promise that it can be converted into valuable goods
The three basic functions of money are....
a medium of exchange, a store of value, and a unit of account.
If firms in a competitive price-searcher market are earning economic profits, which of the following scenarios would best describe the change existing firms would face as the market adjusts to long-run equilibrium? a. A decrease in demand for each firm and lower prices. b. An increase in demand for each firm and higher prices. c. An increase in demand for each firm and lower prices. d. A decrease in demand for each firm and higher prices.
a. A decrease in demand for each firm and lower prices.
If marginal revenue exceeds marginal cost, what will a profit-maximizing monopolist do to maximize profit? a. Lower price and increase output. b. Raise price and decrease output. c. Reduce both output and price. d. Hold output constant and raise price.
a. Lower price and increase output.
If profit-seeking entrepreneurs are going to be successful, what must they do? a. Produce a product that the consumers value more than the resources required for its production. b. Charge a higher price than their competitors so they can make economic profits in the long run. c. Maximize the salaries of high-level management so they will be able to attract people who will work hard. d. Produce the product more cheaply than their rivals regardless of quality.
a. Produce a product that the consumers value more than the resources required for its production.
If marginal cost exceeds marginal revenue, what will a profit-maximizing monopolist do to maximize profit? a. Restrict output to increase the price even higher. b. Attempt to maintain this position because it is consistent with profit maximization. c. Lower price and expand output to increase profit. d. Raise price and expand output to increase profit.
a. Restrict output to increase the price even higher.
What role do losses play in a competitive price-searcher market? a. They send a message that more value would be created if the resources were used to produce other goods. b. They signal that more resources are needed in a particular market. c. They show firms that barriers to entry are high. d. They penalize a firm for producing a differentiated product.
a. They send a message that more value would be created if the resources were used to produce other goods.
If a price searcher is producing at a level of output such that its marginal cost is $5 and its marginal revenue is $3, the firm should a. increase price and reduce its rate of output. b. increase output in order to reduce per-unit costs. c. decrease the price of its product and expand output. d. reduce both price and output.
a. increase price and reduce its rate of output.
When members of an oligopolistic industry agree to collude, raising their product price substantially above average cost, the passage of time (months and years): a. is likely to erode the agreement, as ways to cheat are developed by some participants and new entry is encouraged by the high price. b. is usually needed for the members to solidify their cooperation. c. seldom has any impact on the agreement, as long as the participants maintain high profit levels as a result of the agreement. d. usually results in finer control of prices and markets by the group and larger profit margins.
a. is likely to erode the agreement, as ways to cheat are developed by some participants and new entry is encouraged by the high price.
If an amusement park that is highly profitable during the summer months is unable to cover its variable costs during the winter months, it should: a. operate during the summer but shut down during the winter months. b. raise its prices during the winter months. c. operate during all months of the year as long as its profits during the summer exceed its losses during the winter. d. lower its prices during the summer months.
a. operate during the summer but shut down during the winter months.
Competition as a dynamic process implies that individual firms in a market a. use price competition as well as other forms of competition to gain the dollar votes of consumers. b. seek to utilize a variety of techniques, such as product, style, and convenience of location, to win the dollar vote of consumers, but they never use price to compete. c. produce a homogeneous product. d. cooperate, attempting to establish a price and output structure so each firm can survive and continue to serve the consumer.
a. use price competition as well as other forms of competition to gain the dollar votes of consumers.
keynesian view of fiscal policy
a.they believed in the use of counter cyclical policy, rather than balancing the budget
Of all government spending in the United States, what amount occurs at the federal level?
about three-fifths
other things constant, if both the benefits and costs of a public-sector activity are widespread among voters, the political process will generally result in the
acceptance of productive activities and rejection of unproductive activities.
national debt
accumulated debt of the federal government G-T= new aditions to national debt
What is monetary policy?
actions taken by the Fed to pursue a macroeconomic goal
Types of Fiscal Policy Discretionary: what is it?
actions taken by the gov that need the approval of president and congress. Requires effort and is INTENTIONAL
What is fiscal policy?
actions taken by the president AND congress to achieve economic goals
When the economy is operating at an output rate below its full-employment level, the
actual level of unemployment will exceed the natural rate of unemployment
Excess reserves are
actual reserves held by banks that exceed the legal requirement.
Excess reserves of banks equal
actual reserves minus required reserves.
how banks create money: excess reserves
actual reserves that exceed the legal requirement
High
additional gov spending will have a bigger impact on output when the unemployment rate is
C+Ig+Xn+G
adds in government sector
Historically, Keynesian economists have argued that government spending will stimulate aggregate demand more than tax cuts because?
all of the spending will add to aggregate demand, but a portion of the tax cut will be saved
historically, Keynesian economists have argued that government spending will stimulate aggregate demand more than tax cuts because
all of the spending will add to aggregate demand, but a portion of the tax cut will be saved
Ceteris Paribus
all other things are equal
The model assumes
all prices are stuck and inflexible, which is a major limitation
Federal Funds Market
allows banks that fall short of the reserve requirement to borrow funds from banks with excess reserves
Nondiscretionary spending
also called uncontrollable spending, the portion of the federal budget that is spent on preciously enacted programs, such as Social Security, that the president and Congress are unwilling to cut; federal spending on programs that are not controlled through the regular budget process (Mandatory Spending)
The level of money that is in an economy or the Money Supply is....
always the same no matter what the interest rate is
Budget deficit
amount by which governmetn expenditures exceed revenue
total factor productivity
amount of output that can be produced with a given amount of factor inputs
Operational lag
amount of time it takes for fiscal policy taken by congress to affect output, employment, and the price level
Recessionary expenditures gap
amount that the aggregate expenditures fall short of full employment GDP
Inflationary expenditures gap
amount the aggregate expenditures schedule would have to shift downward to realize full employment equilibrium
Who among the following is most likely to favor an appreciation of the U.S. dollar?
an American professor on a tour of Austrian universities
Deduction
an amount by which your taxable income is reduced due to behaviors such as mortgage or charitable giving.
Discount Window
an arrangement in which the Federal Reserve stands ready to lend money to banks
Medium Of Exchange
an asset that individuals acquire for the purpose of trading goods and services rather than for their own consumption
A decrease in the required reserve ratio would be
an expansionary policy because it raises the amount of excess reserves in the banking system.
The Fed's purchase of U.S. government securities constitutes
an expansionary policy because it raises the amount of total reserves in the banking system.
24. Which of the following will most likely cause an increase in the long-run aggregate supply curve?
an improvement in technology that substantially reduces the cost of generating energy
which of the following will most likely occur in the united states as the result of an unexpected rapid growth in Canada and Mexico?
an increase in aggregate demand and output in the short run
(14) in the short run, which of the following is the most likely effect of an unanticipated move to a more expansionary monetary policy?
an increase in employment
In the short run, which of the following is the most likely effect of an unanticipated move to a more expansionary monetary policy?
an increase in employment
Crowding Out Effect
an increase in government borrowing to finance a larger deficit will increase the demand for loanable funds, causing real interest rates to rise; less investment by firms
Government regulation causes
an increase in per-unit production costs, shifts the AS curve to the left
crowding in
an increase in private sector borrowing caused by decreased government borrowingdecrease in borrowing should increase private sector
Which of the following will most likely accompany an unanticipated increase in short-run aggregate supply?
an increase in real GDP
what you own
assets
If a customer deposits $1,000 cash into her checking account, the bank's
assets and liabilities both rise by $1,000.
bank reserves
assets held by bank to fulfill their deposit obligations
Net Worth
assets minus liabilities
T-Account
assets on the left and liabilities on the right
why are supply costs high at higher GDP level?
at full employment, labor is more expensive
the equilibrium interest rate is determined...
at the intersection of total demand of money curve and total supply of money curve
If the firms in a competitive price-searcher market are suffering short-run losses, which of the following will occur in the long run? a. Firms will continue to incur losses. b. Customers of firms that leave the industry will switch to remaining firms. c. New firms will enter the industry. d. Firms that remain in the industry will face reduced demand.
b. Customers of firms that leave the industry will switch to remaining firms.
Why will a competitive price-taker firm be willing to remain in the industry in the long run at zero economic profit? a. It would find it too difficult to exit from the industry in the long run. b. It is covering all costs, including the opportunity cost of capital and labor. c. Its sunk costs would prevent it from leaving the industry. d. Its accounting profit would be negative.
b. It is covering all costs, including the opportunity cost of capital and labor.
Which of the following is true about the dynamic process of competition? a. It will permit business decision makers to earn long-run economic profit unless they are regulated by government. b. It puts the profit motive of sellers to work for buyers. c. It is hindered by the self-interest of business decision makers. d. It conflicts with the interest of consumers when businesses pursue profit rather than the public interest.
b. It puts the profit motive of sellers to work for buyers.
As firms exit a competitive price-searcher market, what happens to the profits of remaining firms and the diversity of products in the market? a. Profits rise and product diversity in the market increases. b. Profits rise and product diversity in the market decreases. c. Profits decline and product diversity in the market decreases. d. Profits decline and product diversity in the market increases.
b. Profits rise and product diversity in the market decreases.
the self correcting economy
b. changes in real resource prices will help redirect economic fluctuations recession: low demand- resource prices decrease, SRAS increases expansion: high demand- resource prices increase, SRAS decreases
As a group, oligopolists would always earn the highest profit if they would a. produce more than the competitive quantity of output. b. charge the same price that a monopolist would charge if the market were a monopoly. c. operate according to their own individual self-interests. d. produce the competitive quantity of output.
b. charge the same price that a monopolist would charge if the market were a monopoly.
When profits occur in a competitive market, this indicates that a. consumers value the goods less than the resources used to produce them. b. consumers value the goods more than the resources used to produce them. c. producers value the goods more than the resources used to produce them. d. producers value the goods more than consumers value the goods.
b. consumers value the goods more than the resources used to produce them.
If a firm in a competitive price-searcher market finds that its marginal revenue exceeds its marginal cost at the current production level, it should a. raise the price of the product and reduce its production. b. lower the price of the product and expand its production. c. raise the price of the product and expand its production. d. lower the price of the product and reduce its production.
b. lower the price of the product and expand its production.
When the conditions in a competitive price-taker market are such that the firms are consistently unable to cover their production costs, a. the firms will suffer short-run economic losses that will be exactly offset by long-run economic profits. b. some firms will exit from the industry, and market price will rise until the remaining firms can earn the normal rate of return. c. resource prices will increase, competition will decline, and eventually the firms in the industry will earn monopoly profit. d. all firms will go out of business since consumers will not pay prices that enable firms to cover their production costs.
b. some firms will exit from the industry, and market price will rise until the remaining firms can earn the normal rate of return.
Balanced Budget formula
balanced budget = bad eocnomic times (-cyclical) + fiscal restraint (+structural)
Checkable Bank Deposits
bank accounts on which people can write checks
Bank Run
bank depositors try to withdraw their funds due to fears of bank failure
Excess Reserves
bank reserves exceeding required reserves
reserve ratio
bank reserves/ total deposits (how much money the bank keeps)
Rent Seeking
banks and car manufacturers spent millions of dollars lobbying politicians in order to receive bailout money
Financial Intermediaries
banks and other institutions that are a link b/w those who have money to lend and those who want to borrow money ex: 1. commercial banks 2. savings and loans institutions 3. life insurance companies 4. pension funds
The Federal funds market is the market in which:
banks borrow reserves from one another on an overnight basis.
In a fractional reserve banking system:
banks can create money through the lending process.
How did the housing bubble idea begin? and what did it develop?
banks created a secondary market. They would sell mortgages to private investors so the banks could use the money they received from the investor when they bought the loan to make more loans. This developed the Shadow Banking System
Excess Reserves
banks reserves over and above its required reserves (total reserves-required reserves)
OPO
basically the buying and selling of bonds; increase money suppy you buy bonds; decrease supply then sell
If changes in monetary policy are going to help stabilize the economy, they must
be properly timed.
When the unemployment rate is low, the impact of additional spending on real output will:
be smaller than when the unemployment rate is high
Mainstream economists feel that discretionary fiscal policy should
be used in long run situations of recession or inflation
why has the gap between the ratio of people collecting SS, to workers providing that SS money, decreased so much in the last couple of years?
because baby boomers are beginning to retire, more people retiring
Attractive to Voters
because of politics, fiscal policy fails to stabalize the economy because budget deficits (low taxes, high gov spending) are....
why do consumers buy less of a good as its price increases?
because substitute goods are now relatively cheaper
Monetarists
believe that failure to control the money supply appropriately would lead to fluctuations in real GDP
classical economics
believes that market and resource prices are flexible and allow the economy to self correct fairly quickly
What are alt A borrowers?
borrowers who didn't have to prove their income
what are sub-prime borrowers?
borrowers who had poor credit history
Crowding out refers to the situation in which
borrowing by the federal government raises interest rates and causes firms to invest less.
Currency in circulation is part of:
both M1 and M2.
if the fed lends to member banks, what happens to reserves and the money supply?
both increase
Net exports affect real GDP
directly
according to the invisible hand principle, competitive markets generally
bring the self-interest of individuals into harmony with the efficient allocation of resources, even though centralized planning of economic activities is absent
exogenous variables on G (1)
budget
it will be difficult to institute fiscal policy in a stabilizing manner because politicians will find
budget deficits attractive during a recessions, but they will be reluctant to run budget surpluses during an expansion
The crowding-out effect suggests that
budget deficits that lead to higher interest rates reduce private investment spending
Mandatory spending (70% of gov't outlays)
budget items for which a previously passed law requires money to be spent Ex: Medicare, debt interest, welfare, SS, Medicaid
automatic stabilizers
built in features that automatically promote a budget deficit during a recession and a budget surplus during an expansion 1. unemployment compensation 2. the corporate profit tax 3. the progressive income tax
exogenous variables on I (3)
business confidence, expectations, r
Which of the following would be most appropriate if the Federal Reserve wanted to increase the money supply in order to stimulate the economy?
buy U.S. securities
If the Fed wanted to expand the money supply as part of an antirecession strategy, it could:
buy U.S. securities on the open market.
If the Fed wants to lower the Federal funds rate, it should:
buy government securities in the open market.
open market operations
buying and selling of United States Government Securities (USGS) in the open market
If the Federal Reserve is engaging in open market operations designed to expand the money supply, it is probably:
buying government securities from the public
if the Federal Reserve is engaging in open market operations designed to expand the money supply, it is probably,
buying government securities from the public
diminishing return
by having two of the three economic productivity human and technology fixed: an increase in physical capital will lead to a smaller increase in productivity ***increase all factors to discard diminishing returns
The money supply is backed:
by the government's ability to control the supply of money and therefore to keep its value relatively stable.
Long lags make discretionary policy less effective because:
by the time the impact of a policy is felt, the problem may have been corrected by market forces
If marginal cost exceeds marginal revenue, what would be the best strategy for a profit-maximizing firm? a. Increase quantity until marginal revenue equals price. b. Decrease quantity until price equals average total cost. c. Decrease quantity until marginal cost equals marginal revenue. d. Increase quantity until marginal cost equals marginal revenue.
c. Decrease quantity until marginal cost equals marginal revenue.
Which of the following is true when entry barriers into a market are high? a. Rival firms will enter and drive price down to the level of per-unit costs if the firms in the market are making economic profit. b. A monopolist will always be able to make an economic profit. c. Entry into the market will not take place, at least not quickly, even if the firms currently in the market are making economic profits. d. The producers in the market will have little or no incentive to produce efficiently (at a low cost).
c. Entry into the market will not take place, at least not quickly, even if the firms currently in the market are making economic profits.
Which of the following best describes the dynamic process of competition? a. It was shown by Adam Smith to be a major source of economic inefficiency. b. It provides profit-seeking sellers with little incentive to heed consumer preferences. c. It provides consumers with alternative suppliers and thus a mechanism with which they can discipline sellers. d. It will permit business decision makers to earn long-run economic profit unless they are regulated by government officials.
c. It provides consumers with alternative suppliers and thus a mechanism with which they can discipline sellers.
In the short run, how will a profit-maximizing monopolist react if its marginal cost suddenly increases? a. It will decrease the size of its production facility to lower marginal cost. b. It will increase plant size to lower marginal cost. c. It will reduce output and raise price. d. It will lower price to expand revenue possibilities. e. It will maintain the current price if profit is still positive.
c. It will reduce output and raise price.
Why do airlines generally charge travelers willing to stay over Saturday night lower fares than other customers? a. The demand of Saturday night travelers is inelastic, and therefore, the lower fares generate more revenue for the airlines. b. It cost less to transport travelers willing to stay over a Saturday night. c. The demand of Saturday night travelers is elastic, and therefore, the lower fares generate more revenue. d. The Saturday night travelers have lower incomes, and therefore, the airlines would like to help them.
c. The demand of Saturday night travelers is elastic, and therefore, the lower fares generate more revenue.
A firm that uses price discrimination to enhance its net revenues will a. expand output as long as average total costs are declining. b. charge a higher price to consumers with a more elastic demand for the firm's product. c. charge a lower price to consumers with a more elastic demand for the firm's product. d. expand output as long as price exceeds average total costs.
c. charge a lower price to consumers with a more elastic demand for the firm's product.
The two conflicting tendencies that a firm has in an oligopolistic industry are the incentive to Selected Answer: a. increase output in order to minimize per-unit costs and the incentive to reduce price in order to maximize joint profit. b. cheat to maximize joint profits and the incentive to raise prices. c. cooperate to maximize joint profits and the incentive to cheat on the agreement in order to increase the firm's share of the profit. d. cheat and avoid collusion and the incentive to raise price to maximize the firm's share of profits.
c. cooperate to maximize joint profits and the incentive to cheat on the agreement in order to increase the firm's share of the profit.
The fact that barriers to entry are low in competitive price-searcher markets means that if current firms are making economic losses, a. new firms will enter the market, causing no change in the demand curves that face the existing firms in the market. b. these losses will remain in the long run because no firms can exit the market. c. current firms will exit the market, causing the demand curves that face the remaining firms to increase. d. new firms will enter the market, causing the demand curves that face the existing firms to decrease.
c. current firms will exit the market, causing the demand curves that face the remaining firms to increase.
In an oligopolistic market, if rival sellers act independently, each will have a strong incentive to a. restrict output and raise price in order to achieve higher profits. b. increase price in order to get a larger share of the market and make larger profits. c. reduce price in order to increase sales and gain a larger share of the total market. d. maintain agreements to lower price and decrease product quality in order to earn higher profits.
c. reduce price in order to increase sales and gain a larger share of the total market.
When barriers to entry are high, a monopolist (or cartel) will often be able to increase their profits by Selected Answer: a. expanding their output so they can increase their price. b. expanding their output so they can lower their price. c. reducing their output so they can raise their price. d. reducing their output so they can lower their price.
c. reducing their output so they can raise their price.
why isn't fiscal policy called consumer or investment policy?
can't rely on consumers or firms to spend during recession
Debit Card
cards that tap directly into the depositor's bank account to fund purchases; also called a check card, and usually doubles as an ATM card
Other things constant, an increase in the real interest rate will?
cause consumers to reduce their purchases of durable items like appliances and automobiles.
The multiplier effect refers to the fact that a change in spending (aggregate demand) will
cause nominal output to rise by some multiple of the initial increase in spending.
Who is Janet Yeller?
chair woman of federal reserve bank
MPC (marginal propensity to consume)
change in consumption/change in income
what is discretionary fiscal policy?
change in government spending or taxes discretionary=the overall umbrella under which expansionary and contractionary FP fall
MPS (marginal propensity to save)
change in savings/change in income
anticipated changes
changes foreseen by individuals, giving them time to adjust before the changes occur
Types of Fiscal Policy Automatic Stabilizer: what is it?
changes in gov spending and taxes to automatically stabilize economy, no effort required
the expenditure multiplier indicates that
changes in investment, government, or consumption spending can trigger much larger changes in output
Supply-side economics stresses that
changes in marginal tax rates exert important effects on real output and employment.
within the framework of the Keynesian model,
changes in output rather than changes in prices direct the economy to equilibrium
Which of the following provides the best information about the direction of the government's fiscal policy?
changes in the size of the federal government's budget deficit or surplus
unanticipated changes
changes that are not forseen
The owners of a firm are earning economic profit if: a. return on their capital is lower than the opportunity cost of employing that capital in their industry. b. their total revenues exceed the monetary payments to labor and other resources in the long run after all plant size adjustments are made. c. price exceeds average variable costs at the shutdown point. d. they are earning a return on their capital that is higher than what can generally be earned in other markets.
d. they are earning a return on their capital that is higher than what can generally be earned in other markets.
if money supply increases, what happens to interest rates?
decrease
increase in output means ____ unemployment
decrease
contractionary fiscal policy
decrease G &/or increase T --used during times of inflation --shifts AD left
If the public decides to hold more currency and fewer deposits in banks, bank reserves
decrease and the money supply eventually decreases.
Crowding In
decrease gov't borrowing leads to increased private investment and consumption.
if the economy is in too big of an expansion, what should the president and congress do to solve the problem? what is this called?
decrease government spending and increase taxes called contraction of fiscal policy
If policy makers believe that an inflationary boom is about to begin, the Keynesian view indicates that they should
decrease government spending and or raise taxes.
If policy makers believe that an inflationary boom is about to begin, the Keynesian view indicates that they should
decrease government spending and/or raise taxes
If policy makers believe that an inflationary boom is about to begin, the Keynesian view indicates that they should
decrease government spending and/or raise taxes.
If policy makers believe that an inflationary boom is about to begin, the Keynesian view indicates that they should:
decrease government spending and/or raise taxes.
Contractionary fiscal policy
decrease government spending, increase taxes
Contractionary Policy
decrease in the money supply aimed at decreasing aggregate output (Y)
If the economy expanded too much, what should the Fed do to resolve this problem?
decrease money supply, which would increase interest rates
if the fed wanted to expand the money supply as part of an antirecession strategy, it could
decrease the interest rate paid on excess reserves encouraging banks to extend more loans
the Fed wanted to expand the money supply as part of an antirecession strategy, it could :
decrease the interest rate paid on excess reserves encouraging banks to extend more loans.
When the Fed sells Treasury Bonds on the open market, it will tend to
decrease the money supply and raise interest rates
Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to _______, which will ___________ investment spending.
decrease; increase
An increase in the legal reserve ratio:
decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.
32. The recessionary phase of the business cycle is characterized by
decreasing real output and increasing unemployment.
two groups that federal government expenditures can be divided into -examples of government purchases
defense, president salary, FBI salary, research
fiscal policy
deliberate changes in tax policy and or government expenditures designed to affect the budget deficit or surplus
Which one of the following is the largest component of the money supply (M1) in the United States?
demand and other checking deposits
why are supply costs low at lower GDP level?
demand is low wage costs are low because people are unemployed so they can't insist on high wages
results when aggregate demand expands so much that Equilibrium output exceeds full employment output and the price level rises
demand-pull inflation
the value of a good
depends on many factors, including who uses it and under what circumstances
Which one of the following is presently a major deterrent to bank panics in the United States?
deposit insurance
Checkable Deposits
deposits in financial institutions against which checks can be written and ATM or debit cards can be applied
Demand deposits are
deposits of individuals that can either be withdrawn or made payable on demand to a third party by a check
Time Deposits
deposits that earn a fixed rate of interest if held for the specified period, which can range from several months to several years' also called certificates of deposits
Savings Deposits
deposits that earn interest but have no specific maturity date
Aggregate demand is inversely related to
deprecation of the dollar
36. If the dollar price of the English pound goes from $1.50 to $2.00, the dollar has
depreciated, and the English will find U.S. goods cheaper.
federal open market committee
determines the feds policy with respect to the purchase and sale of government bonds
Fed
determines the supply of money
Excess reserves refer to the:
difference between actual reserves and required reserves.
budget balance
difference between government spending and tax revenue
the part of the budget that works its way through the appropriations process of congress each year and includes such programs as national defense, transportation, science, environment, and income security
discretionary federal spending
Time Implementation
discretionary fiscal policy fails to be effective since it is difficult to _______
Changes in government spending and/or taxes as the result of legislation, is called
discretionary fiscal policy.
APC is indirectly related to
disposable income
APS is directly related to
disposable income
Consumption and savings are directly related to
disposable income
Savings
disposable income-consumption
10. High and variable rates of inflation will?
distort the information delivered by market prices.
NO
do interest rates affect money supply?
If you deposit $100 of currency into a demand deposit at a bank, this action by itself
does not change the money supply.
What does the Fed NOT control? who controls it then?
does not control money demand, we control it
In order for barter trades to occur, there must be a
double coincidence of wants.
In order for barter trades to occur, there must be a...
double coincidence of wants.
Responsibility of Fed Lender of Last Resort -Why did 5,000 banks fail in the Great Depression?
due to bank runs
49. Actual GDP will be below potential GDP
during a recession
Expansionary is used..
during a recessionary gap
Contractionary is used...
during expansionary gap
Unemployment Compensation
during recessions, people don't have jobs then it will kick in, helps get the economy back on track
A monopolist earning short-run economic profit determines that at its present level of output, marginal revenue is $23 and marginal cost is $30. Which of the following should the firm do to increase profit? a. Lower output but leave price unchanged. b. Raise price and raise output. c. Lower price and lower output. d. Lower price and raise output. e. Raise price and lower output.
e. Raise price and lower output.
Exemption
earned income that is not taxable (ex. Interest on gov't bonds) also amount not taxable based on the size of your family
economics indicates that government funding of special interest projects and favoritism of some business firms relative to other will lead to
economic inefficiency because the funding will be driven by political rather than economic considerations
Supply Side
economic view that stresses changes in marginal tax rates exert important effects on real output and employment
human capital
education and knowledge embodied by the workforce
The primary benefit of a monetary system of exchange compared to a barter system is the increased...
efficiency in arranging transactions.
The political incentive structure tends to?
encourage budget deficits during both recessions and expansions.
Rent Seeking
engaging in costly non-productive actions in search of profit Ex: lobbying and political campaigns
66. After a particular loan has been paid off, neither the borrower nor the lender has lost purchasing power. Therefore, it must be true that actual inflation was
equal to expected inflation
suppose demand decreases and supply increases. which of the following will happen?
equilibrium quantity will rise, fall, or stay the same while equilibrium price will decrease
Reserve Requirements
establish revenue requirements ratio, which is the percent of deposit liabilities a bank must keep as reserves ex) a bank has $200 billion in deposits; a r.r% of 10% = $20 billion in reserves
Responsibility of Fed Lender of Last Resort -How did congress try and prevent bank runs?
established FDIC which ensures deposits up to 250K
growth accounting
estimates the contribution of each factor of the aggregated production function to economic growth
compared to a permanent reduction in tax rates, a temporary tax cut will generally
exert a smaller impact on output and employment because the temporary cut will not exert impact on long-term income or the incentive to earn
budget surplus
exists when government spending is less than government revenues in a given year.
how do we increase autonomous consumer spending?
exogenous variables --change consumer *confidence* and *expectations* --decrease *interest* rates --get ball rolling with *government* -usually the only willing and able entity that can borrow during recession
involves increasing government spending, increasing transfer payments, or decreasing taxes to increase aggregate demand to expand output in the economy
expansionary fiscal policy
keynesian view of fiscal policy
expansionary fiscal policy 1. increasing government expenditure 2. reducing tax rates - designed to bring the economy out of recession by increasing aggregate demand - expansionary policy will increase the size of the budget deficit
keynesian economist
expansionary fiscal policy during a recession will stimulate aggregate demand and pull us out of a recession
increases money supply, decreases interest rate, increases investment spending which increases AD
expansionary monetary policy
lowering taxes and increasing government spending
expansionary policies
The potential output of an economy is the level of output produced when the
expected price level equals the actual price level
deficit ceiling
explicit legislation hat puts a limit int he size of deficit
debt ceiling
explicit legislation that puts alimit onthe size of outstanding national debt
what interest rates increase, bond prices ____
fall
Given the strict quantity theory of money, if the quantity of money were decreased by 50 percent, prices would
fall by 50 percent.
(14) given the strict quantity theory of money, if the quantity of money were decreased by 50%, prices would
fall by 50%
The money rate of interest will be less than the real rate of interest when decision makers anticipate
falling prices in the future
A balanced budget is present when
government revenues equal government expenditures.
inside lags for monetary policy is ____
fast
outside lags for fiscal policy is ____
fast
unanticipated changes in short run aggregate supply only shifts the SRAS curve and it shifts back to its original position
favorable weather, temporary increase in oil prices
who implements monetary policy
fed
Automatic stabilizer
federal expenditure or revenue item that automatically responds counter cyclically to change in natural income Ex: unemployment benefits and income taxes
Keynes' autmoatic stablizers
federal expenditures or reveues that automatically respond counter-cyclically to changes in National Income ("uncontrollables"
Overnight loans from one bank to another for reserve purposes entail an interest rate called the:
federal funds rate
the interest rate financial institution charge each other for overnight loans used as reserves
federal funds rate
monetary policy
federal reserve bank's role
Near Moneys
financial assets that can't be directly used as a medium of exchange but can be readily converted into cash or checkable bank deposits
expansionary
fiscal policy is the name given to all forms of fiscal policy that are designed to increase aggregate demand
Adding short-run aggregate supply
for a given shift of the aggregate demand curve, the steeper the short-run aggregate supply curve, the smaller the increase in real GDP and the larger the increase in the price level
Goals of monetary policy and Fed
four main monetary policy goals: 1) Price stability 2) High employment 3) Stability of financial markets and institutions 4) economic growth **See page 488-489 for descriptions**
What is the length of the term of the members of the Board of Governors of the Federal Reserve System?
fourteen years
Reserve Ratio
fraction of bank deposits that a bank holds (require reserves/total checking deposit)
A system that permits banks to hold less than 100 percent of their deposits as reserves is called a...
fractional reserve banking system.
Most modern banking systems are based on:
fractional reserves
Functions of Money 4. Standard of Deferred Payment What does this mean?
given an invoice as a promise to pay back within 30 days. Efficient way of making transactions
One difficulty of computer the value of GDP is that there are no market prices for
government goods and services
Multiplier Effect
government purchases increase aggregate demand which stimulates the other factors such as consumption; magnifies small changes in gov spending into larger changes in output and employment
crowding out effect
government raises interest rates, which causes less investment spending
budget surplus
government revenue is greater than government spending
21. If an unanticipated increase in aggregate demand results in an output beyond the economy's long-run capacity, long-run equilibrium will eventually be restored by?
higher resource prices, a decrease in SRAS, and an increase in the general level of prices
If an unanticipated increase in aggregate demand results in an output beyond the economy's long-run capacity, long-run equilibrium will eventually be restored by
higher resource prices, a decrease in SRAS, and an increase in the general level of prices
Higher interest charges on the public debt leads to
higher taxes and dampen incentives to work, invest, and innovate
According to the Keynesian view, if real GDP is slowing and the economy appears to be headed for a recession, a reduction in tax rates is?
highly appropriate because it will stimulate aggregate demand and, thereby, help to strengthen the economy
Modern bankers :
hold only a fraction of their assets in the form of reserves against their deposits.
Modern bankers...
hold only a fraction of their assets in the form of reserves against their deposits.
endogenous variables on AS/AD model
horizontal: GDP, output/production/income vertical: inflation
liquidity
how easily an asset can be converted to money
Lower Taxes; Increase gov spending
how government implements expansionary fiscal policy
Raise Taxes; Decrease gov spending
how government implements restrictive fiscal policy
marginal propensity to consume
how much we spend of each dollar
Flow
how much you earn per period
Stock of money
how much you have right now
Liquidity
how quickly a good can be converted into a generally accepted medium of exchange at face value
physical capital
human-made resources (buildings and machines
Loanable Funds Market
hypothetical market that shows the market outcome of the demand for funds generated by borrowers and supply of funds provided by lenders
Crowding Out
if gov't borrows to finance increased expenditures, demand for loans increases and interest rates will rise -> less private C and I
Increase
if prices fall, the value of the dollar (purchasing power) will ______
the fallacy of composition is the incorrect view that
if something is true for an individual, then it must also be true for the group.
when would you not want spending to increase?
if the economy is growing too quickly--inflation
Decrease
if the fed wants to increase the money supply it will _______ interest rates paid on excess reserves
The Quantity Theory of Money
if the velocity of money is stable, or at least predictable, changes in the money supply have predictable effects on nominal GDP
individual views on fiscal policy
if you are liberal, you want government spending if you are conservative, you don't
Decrease $90
if you withdraw $100 from your checking account and reserve requirement is 10%, what happens to excess reserves
Liabilities
in a bank, this includes checking and savings deposits and whatever they borrow
Assets
in a bank, this includes vault cash, reserves at the Fed, loans outstanding to customers and bonds/securities
Buy
in order to increase the money supply, the fed will _____ securities/bonds
Fractional
in the US, banks are able to increase the money supply by extending the loans becuase of this reserve banking system
which one of the following is a major difference between market and collective action through government?
in the market sector, there is generally a one-to-one link between payment and consumption; this link is often absent in the government sector
Reserves
include vault cash and deposits with the Fed
U.S. exports are
included in U.S. GDP because they are produced domestically
synonyms for GDP
income, output, production
real income
income/ price level
if money supply decreases, interest rates..?
increase
increase in price level means ___ inflation
increase
expansionary fiscal policy
increase G &/or decrease T --used during recession --shifts AD right
If the economy is in a recession, what should the president and congress do to solve the problem? what is this called?
increase government spending or decrease taxes called expansionary fiscal policy
Depreciation of the dollar causes
increase in GDP and employment
Ricardian equivalence
increase in debt has same effect on economy as increase in current taxes
Fisher Effect
increase in expected future inflation drives up the nominal interest rate, leaving the expected real interest rate unchanged
42. If Europe and Japan experience rapid growth in their incomes, other things constant, this will cause a(n)
increase in the exports of the United States
Expansionary Policy
increase in the money supply aimed at increasing aggregate output (Y)
If the economy is in a recession, what should the Fed do to resolve this problem?
increase money supply, which would decrease interest rates
25. An increase in capital formation that expands long-run aggregate supply will?
increase output and decrease prices
(9)other things constant, an increase in resource prices will do which of the following
increase the cost of producing goods and services, which will lead to a higher price level.
If the Fed wanted to shift to a restrictive monetary policy and reduce the money supply, it could:
increase the interest rate paid on excess reserves encouraging banks to hold excess reserves rather than extend more loans
13. In the short run, an unexpected increase in prices will?
increase the profits of firms, thereby leading them to expand output
Within the framework of the AD-AS model, an increase in savings by households will
increase the supply of loanable funds and reduce interest rates.
(9)other things constant, a decrease in resource prices will lead to
increased profits and increase in the short-run aggregate supply
Tax cut
increases AD
The government is pursuing an expansionary fiscal policy if it
increases government spending and/or reduces taxes.
Increases in aggregate supply causes
increases in both price levels and real domestic output
Expansionary fiscal policy
increases in government spending, decrease in taxes
79. When output is greater than the economy's long-run capacity, which of the following is most likely to occur?
increases in real interest rates and real resource prices
Which of the following assets can a commercial bank count as reserves?
its vault cash and deposits with the Fed.
Cost- push inflation
increases in the price level (inflation) resulting from an increase in resource costs (for example raw material prices) and hence in per unit production costs; inflation caused by reductions in aggregate supply.
Demand-pull inflation
increases in the price level (inflation) resulting from increases in aggregate demand.
Higher business taxes
increases per-unit production costs, decrease in AS
Deficit
increases the government's debt; the difference between spending and taxes; a yearly amount
When a banker accepts a deposit of $1,000 in cash and puts $200 aside as required reserves and then makes a loan of $800 to a new borrower, this set of transactions
increases the money supply by $800
When a banker accepts a deposit of $1,000 in cash and puts $200 aside as required reserves and then makes a loan of $800 to a new borrower, this set of transactions...
increases the money supply by $800.
Anna has just finished high school and started looking for her first job, but has not yet found one. As a result, the unemployment rate
increases, and the labor-force participation rate increases
Anna has just finished high school and started looking for her first job, but has not yet found one. as a result, the unemployment rate
increases, and the labor-force participation rate increases
Tom loses his job and immediately begins looking for another. Other things the same, the unemployment rate
increases, and the labor-force participation rate is unaffected
If the prices of goods and services fall, the value of money (its purchasing power)
increases.
A recession abroad would
reduce U.S. net exports and reduce aggregate demand
The amount of money reported as M2:
is larger than the amount reported as M1.
discretionary spending
is money authorized to be spent with the passage of an appropriations act
The Fed is institutionally independent. A major advantage of this is that monetary policy..
is not controlled by politicians.
$18.2 Trillion
is the current amount of US federal national debt (give your answer in millions, billions, trillions, etc).
Saving Deposits
is the only thing only included in M2 along with time deposits and money market mutual funds
Pareto improvement
is when no one made worse while someone made better
Discretionary Fiscal Policy involves
issuing bonds government spending Taxation borrowing policies
refinancing
issuing new debt to pay for debt when it comes due
why is government spending the only type not affected by interest rate?
it HAS to continue...the cost of borrowing money doesn't matter that much
what is flat money
it has no value outside of its use as money
Though many assets can be used as a store of value, money is a particularly attractive method to store value because
it is the most liquid of all assets.
Though many assets can be used as a store of value, money is a particularly attractive method to store value because:
it is the most liquid of all assets.
which of the following is true about public choice analysis?
it is the study of the decision making of individual actors (such as voters, politicians, and bureaucrats) in the public sector
which of the following is a positive effect of a job search and the unemployment that often accompanies it?
it permits individuals to better match their skills and preferences with the requirements of a job
When the Federal Reserve System wants to increase the money supply, what does it typically do?
it purchases U.S. government securities
what gave money printed in 1928 its meaning?
it was backed by gold, you could go into the bank and exchange gold for dollar bills
in the short run, what effect will an unexpected increase in product prices have?
it will increase the profits of firms, thereby leading them to expand output.
whats a major advantage of monetary policy?
its speed and flexibility
The greater the required reserve ratio, the:
lower is the monetary multiplier.
within the AD/AS model, if an unanticipated reduction in aggregate demand results in less than the full employment rate of output,
lower resource prices and declining interest rates will direct the economy back to full employment
Within the AD/AS model, if an unanticipated reduction in aggregate demand results in less than the full-employment rate of output
lower resource prices and declining interest rates will direct the economy back to full employment.
m2
m1, savings account, money market, mutual funs, small deposits,
The main purpose of the Fed is to
maintain the proper functioning of our money system
Rational Expectations Theory
make decisions based on expectations about future
What are the functions of a bank?
make profit, protect wealth, pool risk, bring together borrowers&savers
Price wars, menu costs, and wage contracts
makes prices inflexible downward
How do banks create money?
making loans
spending authorized by permeant laws that does not go through the same appropriation process as discretionary spending. Includes social security, medicare, and interest on the national debt
mandatory federal spending
In computing GDP, market prices are used to value final goods and services because
market prices reflect the values of goods and services to the buyer
Vertical combination of Plants
means the firm owns plants at the various stages of the production process. Ex:Exxon/Mobil 1)Oil recovery 2)Refining 3)Transport 4)Selling (Retail at a Gas Station)
Unit Of Account
measure used to set prices and make economic decisions
Money Aggregates (Totals)
measures of the economy's money supply
Whats the different between medicare and medicaid?
medicare- elderly medicaid- poor
money eliminates the need for trade
medium of exchange
What are the functions of money?
medium of exchange, store of value, unit of account
3 functions of money
medium of exchange: used to buy goods and services 1. it is more efficient to use money than to barter goods 2. fiat money: money that has no intrinsic value
(13) who owns the fed?
member banks
Who owns the Fed?
member banks
chained dollars
method of calculating changes in real GDP using the average between the growth rate calculated on an early base year & the growth rate calculated on a late base year
changing the money supply to affect interest rates and therefore aggregate demand
monetary policy
what solves the bartering problem
money
To increase the Federal funds rate, the Fed can:
sell government bonds to commercial banks.
If the government cuts the tax rate, workers get to keep:
more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right
If the government cuts the tax rate, workers get to keep
more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.
Increase in the money supply=
more spending (long run) which leads to a higher nominal GDP
$20 bill
most forged bill in the U.S.
$100 bill
most forged bill in the world
if the bank lowers interest rates, on a graph, do you move down along the line of money demand (MD) or move the MD line left?
move down along the line
shifter of aggregate demand: changes in real interest rates
move in opposite direction
shifter of aggregate demand: changes in real wealth
move in same direction
1/(1-MPC)
multiplier
Change in real GDP/initial change in spending
multiplier
k
multiplier 1/ 1 - MPC
Total change in spending Formula
multiplier x intiation change in spending (AD shortfall) = (1/(1-MPC)) x (fiscal stimulas)
Non-rival
my consumption does not limit your construction.
actual rate of unemployment
natural + cyclical
is relationship between interest rate and spending positive or negative?
negative/inverse spending goes down when interest is up cost of borrowing money is greater
If net exports are positive, then?
net capital outflow is positive, so foreign assets bought by Americans are greater than American assets bought by foreigners.
as U.S price levels fall relative to the world, we export more
net export effect
ricardian equivalence
new classical economist - belief that a tax reduction financed with government debt will stimulate additional consumption and aggregate demand
new classical view of fiscal policy
new classical economists do not believe that budget deficits will stimulate additional consumption and aggregate demand why not? because people will save for the expected future tax increase
actual deposit multiplier
new currency reserves will not expand money supply by as much as the potential multiplier
is this fiscal policy... -cutting taxes for people buying an energy efficient car?
no
is this fiscal policy... -gov of delaware increasing spending to replenish the eroding delaware beaches
no
is this fiscal policy... -increase in spending on aid and national guard salaries to help Haiti
no
is this fiscal policy... -president increasing govt spending on defense to fight the war on terror
no
bartering economy
no money, just trading goods
Non-excludable
no way to exclude those who don't pay
(13) are outstanding credit card balances counted as part of the money supply?
no, money is an asset, while the credit card balances are a liability. thus they are not included in the money supply figures
In an economy with persistent inflation
nominal GDP will grow faster than real GDP
In the short run it is assumed that
nominal wages are not affected by changes in the price level
Public good
non excludable and non-rival
U.S. imports are?
not added to U.S. GDP because they are produced abroad
Crowding Out
occurs when a government deficit drives up the interest rate and leads to reduced investment spending
Inflation Targeting
occurs when the central banks sets an explicit target for the inflation rate and set monetary policy in order to hit that target
The power of seculation
on person speculates the bank low on cash, everyone takes out money self fulfilling prphecy no bank would be able to pay all his clients if they all withdraw at the same time
A large grain crop resulting from favorable weather conditions would shift which of the following curves?
only short-run aggregate supply
a large grain crop resulting from favorable weather conditions would shift which of the following curves?
only short-run aggregate supply
Which of the following is a tool of monetary policy?
open market operations
Which of the following is the primary tool the Fed uses to control the supply of money?
open market operations
16. When the actual rate of unemployment is less than the natural rate of unemployment, the economy?
operates at an output greater than its long-run potential
when the actual rate of unemployment is less than the natural rate of unemployment, the economy
operates at an output greater than its long-run potential
shifter of aggregate demand: changes in exchange rates
opposite direction
shifter of aggregate demand: changes in expectations of businesses and households
optimistic: AD increases pessimistic: AD decreases
Shortage happens when
output from producers is less than output desired by buyers, increase in price level
once decision makers fully adjust to an increase in the general price level,
output will return to full-employment level
35. When prices in the goods and services market are below the level anticipated
output will temporarily fall short of the economy's long-run potential
how quickly citizens respond to policy
outside lags
Which of the following is not a component of the M1 money supply?
outstanding balances on credit cards
Monetary Aggregate
overall measure of the money supply
If an unanticipated reduction in aggregate demand throws a market economy into a recession
ower real resource prices and interest rates will act as a stabilizing force and direct the economy back to its full employment potential.
when the tax to fund a government project is allocated among voters in proportion to the benefits they receive from the project,
projects that are product (efficient) will tend to be favored by an overwhelming majority of voters
Treasury bonds
promissary notes (IOU's) issued by the US treasury
Gov
protect individuals property rights provide goods
The primary purpose of the legal reserve requirement is to:
provide a means by which the monetary authorities can influence the lending ability of commercial banks.
Real GDP per person
provides more meaningful comparisons across time and countries than real GDP
the economic analysis of public and political decision making, looking at issues such as voting, the impact of election incentives on politicians, the influence of special interest groups, and rent-seeking behaviors
public choice theory
Open-Market Operation
purchase or sale of governement debt by the Fed
what will happen if the demand for bicycles increases?
quantity supplied will increase
If the monetary authorities want to reduce the monetary multiplier, they should:
raise the required reserve ratio.
Money Multiplier
ratio of the money supplied to the monetary base (1/reserve ratio)
Economists refer to the lack of incentive that voters have to search for and obtain information to help make better political choices as the
rational-ignorance effect.
Why is AD curve downward sloping? (3)
real balance effect real interest effect net export effect
The downward slope is caused by
real balance effect, interest-rate effect, and foreign purchase effect
82. The amount of U.S. exports purchased by the rest of the world is primarily determined by
real disposable income in other nations
Cost-push inflation causes
real domestic output to decrease and the price level to rise
which of the following is the most accurate statement about real and nominal interest rates?
real interest rates can be either positive or negative, but nominal interest rates must be positive
51. If the nominal interest rate was 12 percent and the inflation rate was 10 percent in 1980, while the nominal interest rate was 7 percent and the inflation rate was 2 percent in 2009, then
real rates were higher in 2009
keynesian economics
reason for sticky wages and prices 1. trade unions and large corporations enter into long term contracts 2. menu costs: the costs of changing prices as a result of sticky prices, businesses produce the amount demanded
Retirement of internally held public debt would result in
redistribution of the nations wealth among citizens
In 2006, the American Association of Retired Persons (AARP) spent over $70 million on lobbying-related expenses in an attempt to get policies enacted that would benefit retirees. In economics, the term used to describe such activity is
rent seeking.
The fraction that banks must, by law, hold as reserves against the checking deposits of their customers is called the
required reserve ratio.
The funds that banks are required by law to hold in the form of either vault cash or deposits with the Fed are called
required reserves
The funds that banks are required by law to hold in the form of either vault cash or deposits with the Fed are called
required reserves.
which responsibility of the fed in manager of money supply has not been used in many many years?
reserve ratio
the amount of money banks must hold in case customers want to take their money out of the bank
reserve requirement
if an economy operates a short-run equilibrium output that exceeds its long run capacity, which of the following will be most likely to direct the economy toward full employment?
resource prices will increase, causing the SRAS curve to shift to the left
shifter of SRAS only
resource prices: opposite direction expected inflation: opposite direction supply shocks: positive, increase negative, decrease
keynesian view of fiscal policy
restrictive fiscal policy 1. decreasing government expenditures 2. raising tax rates - designed to bring the economy down from an expansion by decreasing aggregate demand - restrictive policy will reduce the size of the budget deficit
Balanced budget
revenue exactly equals exenditures
Taylor Rule for Monetary Policy
rule for setting the federal funds rate that takes into account both the inflation rate and the output gap
shifter of aggregate demand: changes in income abroad
same direction
shifter of aggregate demand: expected inflation
same direction
Counter-cyclical fiscal policy
save when times are good and spending when times are bad
what is the limiting factor on the snowball effect?
savings --we don't spend every dollar of income
saving-investment
savings = investment always equal for the economy as a whole
M2
savings deposits, money market mutual funds, and other time deposits. They are less liquid and cannot as quickly be converted into cash as M1.
APS (average propensity to save)
savings/income
price must increase more as you have more and more production in order to increase production by same amount—why?
scarcity of resources --during recession, a lot of people are unemployed so it is easier to get more resources --as economy picks up, fewer resources are idle so it costs more to get more
If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to:
sell government securities, raise reserve requirements, raise the discount rate, and reduce the amount of reserves available through the term auction facility.
Which of the following actions would the Fed undertake if it wants to follow a more restrictive monetary policy?
sell some of its holdings of government bonds
Most spells of unemployment are
short term
treasury bills
shorter time horizons (6 months)
Money Demand Curve
shows the relationship between the quantity of money demanded and interest rate
Keynesian
since prices, wages, and interest rates were sticky, the government needed to step in to boost output during recession and reduce output during a boom; countercyclical balances a budget
inside lags for fiscal policy is ____
slow
outside lags for monetary policy is ____
slow
if prices are increasing, the multiplier effect gets.... why?
smaller and smaller because goods cost more
Required Reserve Ratio
smallest fraction of deposits that the Federal Reserves allow banks to hold
7. In a dynamic economy under ideal conditions?
some unemployment would be present due to workers temporarily being out of work while changing jobs
Function Def of Money
something is considered to be money if it performs these 3 functions 1. generally excepted medium of exchange 2. unit of account 3. store of value
Liability
something of value they owe
Asset
something of value they own
What is a Financial Security?
something that can be sold on an open/secondary market. Stocks bonds mutual funds
as interest rates fall, people wish to hold more money
speculative demand for money
tax brackets
taxes decrease along with income--gives us a little more money to spend --raises debt --*no guarantee* because people are trying to save --better for times of *inflation* (easier to make people stop spending) --only helps those who are *already working* --*passed by congress much faster*
What factors shift aggregate supply curve? (3)
technology, productivity, cost of production (rent, wages, interest, profit)
Fiat money is money
that has little intrinsic value and is not backed by a commodity
Restrictions that limit sugar imports, subsidies for the construction of sports stadiums, and federal spending on programs like the construction of an indoor rain forest in Iowa all provide examples of government programs
that reflect the political attractiveness of special-interest issues.
Equilibrium GDP happens when
the 45 degree line intersects the aggregate expenditures curve
Which of the following is responsible for decision making regarding the purchase and sale of bonds by the Fed?
the Federal Open Market Operations Committee
The conduct of monetary policy is the responsibility of
the Federal Reserve System.
Logrolling
the act of trading votes on legislation to get the desired legislation passed
15. When an economy is in long run equilibrium,?
the actual and natural rates of unemployment will be equal
when an economy is in long run equilibrium
the actual and natural rates of unemployment will be equal
14. The actual rate of unemployment will be greater than the natural rate of unemployment when?
the actual output is less than the economy's potential output.
which of the following is necessarily true when an economy is in long-run equilibrium?
the actual rate of unemployment equals the natural rate of unemployment
9. When full employment is present?
the actual rate of unemployment will equal the natural rate.
54. If the actual price level is lower than the expected price level reflected in long-term contracts,
the actual rate of unemployment will exceed the natural rate of unemployment
Within the framework of the AD/AS model, when the current price level in the goods and services market is above the level anticipated at the time decision makers agreed to long-term resource contracts
the actual rate of unemployment will fall below the natural rate of unemployment
The crowding-out effect refers to the tendency of:
the additional borrowing accompanying larger budget deficits to increase interest rates and reduce private spending
If the U.S. price level increased relative to price levels in foreign countries, what would be the impact on domestic aggregate supply and aggregate demand curves?
the aggregate demand curve would shift inward and the aggregate supply curve would remain unchanged
If the U.S. price level decreased relative to price levels in foreign countries, what would be the impact on domestic aggregate supply and aggregate demand curves?
the aggregate demand curve would shift outward and the aggregate supply curve would remain unchanged
Budget surplus
the amount by which governmet revenues exceed government exenditure
marginal propensity to consume
the amount of addition income that is consumed additional consumption/ additional income
unemployment
the amount of people in the labor force without a job unemployed/ labor force
Velocity of money
the average number of times per year each dollar is used to purchase final goods and services
Progressive tax
the average tax rate (^) as incomes (^) Ex: federal income tax since 1913
Proportional tax
the average tax rate stays = as incomes (^) Ex: sales tax
If a customer deposits $1,000 cash into her checking account, the bank's:
the banks assets and liabilities rise by 1000$
supply side economics
the belief that changes in the marginal tax rate will exert important effects on aggregate supply
Bank Run
the concerted action of depositors who try to withdraw their money from a bank because the think it will fail
Wealth effect shifts
the consumption schedule up, saving schedule down
Government spending programs that create jobs are often popular because :
the created jobs are highly visible, while the secondary effects of lost jobs in other areas, higher interest rates, and higher future taxes are less visible.
Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change smaller than would otherwise be the case?
the crowding-out effect
increase; decrease
the crowding-out effect refers to the tendancy of the additional borrowing accompanying larger budget deficits _______ interest rates and ________ private spending
Budget Deficit
the crowing-out effect states that this leads to higher interest rates which decrease private spending
Bank Reserves
the currency banks hold in their vaults plus their deposits at the Federal Reserve
The main source of profit for financial institutions is
the difference between interest paid on deposits and interest received on loans.
net exports
the difference between value of exports and value of imports
Both Keynesians and non-Keynesians now recognize
the difficulties involved in timing discretionary changes in fiscal policy in a stabilizing manner.
Required Reserves
the dollar amount of reserves a bank is obligated by regulation to hold
If a budget surplus leads to a decrease in U.S. real interest rates, the lower rates will tend to cause?
the dollar to depreciate.
(18) who would most likely be helped by an increase in tariff on foreign- produced automobiles?
the domestic producers of automobiles
The natural rate of unemployment is not zero because
the economy is characterized by dynamic change and imperfect information
if there is an increase in both the supply and demand for a good, which of the following will definitely occur?
the equilibrium quantity will increase
(18) he primary source of purchasing power used to buy imported goods is
the exports of a nation.
The Keynesian analysis of fiscal policy implies that:
the federal budget should be used to maintain aggregate demand at a level consistent with full employment.
The primary tool of fiscal policy is
the federal budget.
A bank finds itself short of required reserves and therefore borrows from another commercial bank. The interest rate on this loan is
the federal funds rate
according to the Keynesian view, if purchasers buy more goods and services than businesses expect
the inventories of firms would decline, and the firms would expand output in order to restore their inventories to desired levels
Crony Capitalism
the lack of the market process present when politicians give favors to businesses in return for political contributions
The larger the marginal propensity to consume,
the larger the multiplier.
Full employment
the level of employment reached when there is no cyclical unemployment
An individual should continue to spend time searching for a job as long as
the marginal benefit expected from additional search exceeds the marginal cost
money multiplier
the maximum amount of money the banking system can create from $1 of excess rserves MM=1/RRR
potential deposit expansion multiplier
the maximum potential increase in the money supply as a ratio of new reserves injected into the banking system
required reserves
the minimum amount of reserves that a bank is required by law to keep on hand to back up its deposits
Monetary policy works through...
the money market
M1 (money supply)
the most liquid currency in circulation (majority) checking account blanace traveler's checks
Money Multiplier
the multiple by which the money supply increases as a result of an increase in fresh reserves by which the money supply can increase
M1
the narrowest measure of the money supply, consisting of currency and coins held by the non-banking public, checkable deposits, and traveler's checks
What is meant by stockholders equity?
the net worth of the bank
Higher Taxes
the new classical theory suggests that when gov increases spending this will inevitably occur
real interest rate
the nominal interest rate-rate of inflation
11. Suppose that a large number of men who used to work or seek work now no longer do either. Other things the same, this makes the?
the number of people unemployed and the labor force both falls
53. Suppose that a large number of men who used to work or seek work now no longer do either. Other things the same, this makes the
the number of people unemployed and the labor force both falls
During an economic boom
the output of the economy will exceed its long-run potential output
What is Money Demand
the potion of your assets you want to hold as money rather than as investment bearing asset
1. If this year the CPI is 110 and last year it was 100, then?
the price level as measured by the CPI has increased by 10 percent
Aggregate supply
the sum total of all goods and services firms and governments are willing and able to produce at any given price level
When Consumers Choose to Save Rather than Spend
the problem with the multiplier effect
Open Market Purchases
the purchase of U.S. government bonds by the Fed to increase the money supply
(9)which of the following is true if there is a shortage of loanable funds?
the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and the interest rate is below equilibrium
(9) which of the following is true if there is a surplus of loanable funds?
the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium
Yield
the rate of return on a bond; the annual interest payment divided by the bond's price
Require Reserve Ratio
the ratio of reserves to deposits that banks are obligated by regulation to hold
why is it important to use real rather than nominal GDP figures when making comparisons of output across time periods?
the real figures will reflect changes in the quantity of output and not changes in the general level of prices
unanticipated aggregate demand causes both the AD and the SRAS curve to shift in opposite directions
the real interest rate declines, Canada experiences a depression
Demand for Money
the relationship between how much money people want to hold and the interest rate; the higher the economy's price level, the greater the demand for money
The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of:
the reserve ratio
Which of the following most clearly limits the ability of the commercial banking industry to expand the money supply?
the reserve requirements mandated by the Fed
(14) an analysis of countries experiencing rapid inflation indicates that inflation is generally
the result of rapid growth in the money supply
An analysis of countries experiencing rapid inflation indicates that inflation is generally
the result of rapid growth in the money supply.
Open Market Sale
the sale of U.S. government bonds by the Fed to reduce the money supply
Which of the following will increase interest rates in the short run?
the sale of bonds by the Federal Reserve in the open market
Which of the following explains why elected representatives will find borrowing to be an attractive method of financing current government programs?
the shortsightedness effect
if required reserve ratio was lowered, what would happen?
the size of the monetary multiplier would increase
Aggregate demand
the sum total of all domestic goods and services that consumers, businesses, the government, and foreign actors want to buy at any given price level
crowding out
the tendency fro increases in Government spending to cause reductions in private investments -as G increases --> Y up --> Md up --> r up --> I down
(14) why will it be difficult for the fed to use monetary policy to direct the economy back to full employment and price stability from the recession of 2008-2009?
the time lags between changes in monetary policy and when the changes exert an impact on output and prices are long and variable
(13) what are open market operations?
the tool most often used by the fed to alter the money supply
Debt
the total amount of outstanding government bonds; a cumulative amount
Money Supply
the total value of financial assets in the economy that are considered money
real GDP
the total value of that final g/s produced in the economy during a given year **calculated with BASE YEAR PRICES
57. When an economy is in a recession
the unemployment rate will rise above its natural rate
(13) the primary source of earnings of commercial banks is income derived from
the use of deposits to extend loans and undertake investments
The primary source of earnings of commercial banks is income derived from
the use of deposits to extend loans and undertake investments.
which of the following statements about trade is true?
the value of a good generally depends on who uses it and circumstances such as when and where it is used
nominal GDP
the value of all final g/s produced in the economy during a given year **calculated with CURRENT YEAR
value of money
the value of money is determined by demand relative to supply
Supply-side economics
the view of macroeconomics that emphasizes the role of costs and aggregate supply in explaining inflation, unemployment and economic growth.
Public debt should be based on
the wealth and productive capacity of the economy as related to GDP
(9)it the dollar appreciates relative to the yen, it can be said that
the yen depreciates relative to the dollar
FED
their primary purpose is to control the money supply
-how many district banks are there across the nation? -are they publicly or privately owned? -are they publicly or privately controlled? -What is their main goal? -where is the Board of Governors, which heads the district banks, located?
there are 12 districts banks -privately owned -publicly controlled -main goal is control MS and interest rates to promote general economic welfare Washington DC
Both the crowding-out and new classical models indicate that:
there are side effects of budget deficits that will substantially, if not entirely, offset their expansionary impact on aggregate demand
AD-AS model and business cycles
there are two causes of a recession: 1) an unanticipated fall in aggregate demand 2) an unanticipated fall in short run aggregate supply there are two causes of expansion: 1) an unanticipated rise in aggregate demand 2) an unanticipated rise in short run aggregate supply
Checking account deposits are counted as part of the M1 money supply because
they are widely used as a means of making payment.
Because banks were only receiving profits from making house loans and not interest, what did this cause them to do?
they began making loans to non-credible people
which of the following a primary action of modern banks?
they hold only a fraction of their assets in the form of required reserves relative to their deposits.
When the bubble burst, what was the feds response?
they lowered interest rates to near 0 but this still wasn't enough.
how do markets coordinate output decisions?
they push the price up when there is a shortage
what will people do because information is costly to acquire?
they will rationally choose not to become fully informed when making decisions
(14) when the fed decreases the money supply, what will happen to nominal interest rates?
they will rise
if the fed wants to shift toward a more expansionary policy, it often announces that it is going to change the federal funds interest rate. the fed controls the federal funds interest rate
through its policy of open market operations
For activities in which the benefits are concentrated and the costs widespread, governments are likely to undertake
too much of these activities relative to what would be efficient.
Open market operations is the
tool most often used by the Fed to alter the money supply.
National Debt
total amount of money owed by the federal gov't
Total budget formula
total budget= cyclical balance + structural balance
based off income, as income increases, money demand increases.
transactions demand for money
6. GDP is not a perfect measure of welfare because it?
treats a dollar spent on candy bars the same as a dollar spent on education
Inflation
triggered by expansionary policies
price conveys information, we know what $100 buys
unit of account
A $70 price tag on a sweater in a department store window is an example of money functioning as a:
unit of account.
Accounting Unit
units of money measure the value of goods, services, assets and resources
Lack of Profit Motive
unlike private firms, the public sector lacks the incentive to produce efficiently becasue they don't have fear of bankruptcy and little competition
Functions of Money 1. medium of exchange what does this mean?
use money to buy what you want. Money acts as a middle man
Payments that users (consumers) are required to make if they want to receive certain services provided by the government are called
user charges.
Ordinary commercial banks can expand the supply of money by
using a portion of their deposits to extend additional loans.
Ordinary commercial banks can expand the supply of money by...
using a portion of their deposits to extend additional loans.
Pork Barrel Legislation
usually passed by congress because benefits are concentrated to a few constituents while consts are spread out over millions of taxpayers
Functions of Money 3. store of value what does this mean?
value can be easily stored with money. Money doesn't go bad.
Which of the following compose the reserves of a commercial bank?
vault cash and deposits of the bank with the Federal Reserve
bank reserves
vault cash+ the deposits of banks with the fed
The equation of exchange states that
velocity multiplied by money supply equals real output times the price level.
what does full employment look like on AS/AD model?
vertical line
real wage
wage rate/ price level
families usually hold some of their wealth in financial assets such as savings accounts,bonds and cash, and a rising aggregate price level means that the purchasing power of this money wealth declines, reducing output demanded
wealth affect
three basic decisions must be made by all economies. what are they?
what goods will be produced; how will goods be produced; for whom will goods be produced?
Inverse
what kind of relationship do the interest rate and the demand for money have
Direct
what kind of relationship does money supply and the price level have numerically
Money is
whatever is generally accepted in exchange for goods and services.
what is the snowball effect?
when a person or the gov't spends, it becomes income to someone else --the next person spends it and it becomes someone else's income, etc.
when does a stock bubble end?
when enough investors realize stock is overpriced and begin selling
AD=AS
when equilibrium is achieved
multiplier effect
•Strength depends on level of economic activity/GDP ---Not as strong during a recession because people are reluctant to start spending •On average, we say the multiplier is 2 ---In a recession, mpc is low, so the multiplier is lower
Simple Deposit Multiplier
∆CheckingDeposits ___________________ ∆ Initital Deposit