ECO Exam 2 – Flashcards

medium of exchange. Money in your wallet is a store of value - it represents purchasing power that you can hold onto. Prices of different MP3 players demonstrate money as a unit of account - the different prices show the costs of different MP3 players in a common accounting measure (dollars, yuan, pesos, etc.). When a purchase is made, money is serving as a medium of exchange - it facilitates the transaction and avoids the problem of barter, where two people need to have a double coincidence of wants (Jane wants to trade a bicycle for an MP3 playe, and Jim wants to trade an MP3 player for a bicycle.)

be out of work and be actively looking for a job. To be counted as unemployed, you must be out of work and be actively looking for a job. This means the commonly reported "unemployment rate" is underestimating the full amount of unemployment in the economy. Someone who is unemployed and has given up looking is considered a "discouraged worker" and not counted in the official unemployment rate. Similarly, someone who wants to work full time but only has part time work is considered "underemployed," but is not counted as unemployed for the calculation of the unemployment rate.

the Great Depression.

A local Domino's Pizza store has purchased a new pizza oven

The market for loanable funds

one

over their lifteime

For each of these two options, compute the net present value. If you start working today, you will receive a total sum of $35,000 + $35,000 / (1.10) + $35,000(1.21) = $95,743.80. If you go to college, you receive a total sum of: -$50,000 + $100,000 / (1.1) + $100,000 / (1.21) = $123,553.72. You should go to college.

aggregate demand curve to the right

aggregate demand curve to the left

inflationary gap

checking accounts deposits A credit card is a medium of exchange- it facilitates a transaction, but it is not money. Bonds and Google stocks are financial assets that have value, but they are less liquid than money. Money (M1) counts currency in circulation plus checking deposits. M2 includes M1, plus savings accounts, money markets, and time deposits (short- term certificates of deposit).

the loss of confidence at one bank quickly extended to other banks

A severe cycle of deleveraging and a credit crunch for the economy as a whole The financial crisis led to a sharp reduction in loans in the economy - people paid off loans, people defaulted on loans, and banks raised lending standards and loaned out less money. This is deleveraging - when banks make loans, they create money. When loans are reduced, so is the money supply. As a result, there was less investment and less consumption. The Fed lowered interest rates, but banks held onto excess reserves because of deleveraging, so the economy did not immediately recover, and the the lowered interest rates only produced a long, slow recovery. Inflation has remained well below the pre-recession level.

In the literal sense, the U.S. Treasury is the only agency that actually prints the new paper money, but all banks create money. When you deposit your $100, the bank is required to put a small fraction in reserve but can lend the remainder to other customers. This creates money because those borrowers can use their loan to buy goods and the sellers of those goods make deposits into other banks and the process repeats.

decrease the required reserve ratio, decrease the discount rate , and buy bonds on the open market When the Fed buy treasury bills, it puts more money into circulation. When the banks issue loans, they create moeny, so policies that encourage more lending increase the money supply. The discount rate is the price banks pay to borrow from the Fed. Lowering the discount rate lowers the cost of borrowing and therefore increases the quantity of loans. The reserve ration limits the amount of loans a bank can issue based on a a given amount of deposits. Lowering the reserve ratio allows banks to lend more, thus increasing the money supply.

increase the money supply by $25 million. The money multiplier is 1/rr, where rr is the reserve ratio. Here, rr=0.2, so the money multiplier is 1/0.2=5. When the Fed spends $5M to buy bonds, the money supply increases by $5M*5=$25M.

nominal wages to fall

perform an open market purchase

interest rates in the money market will fall

Households hold money to make a purchase. A recession is going to decrease real GDP and the number of purchases made by most households, thus shifting the money demand curve to the left

This would not shift the demand for money. A lower interest rate on short-term CDs would be a decrease in the opportunity cost of money, and so more

People try to smooth their consumption over the course of their lives

increases aggregate demand

increases disposable income and consumption; right

increase the aggregate consumption function

higher inflation rate

investment spending

increasing aggregate demand and decreasing taxes

a decrease in transfer payments

increasing government expenditures

planned investment spending is most likely to decrease The interest rate represents the cost of borrowing. If the interest rate rises, that makes borrowing for investment more expensive, and so firms plan to borrow and invest less.

the fraction of an additional dollar of disposable income that is saved

decreasing government expenditures

past disposable income Under the life-cycle income hypothesis, consumers spend according to their present incomes as well as their projected future lifetime incomes. More wealth implies greater future income, inducing consumers to spend more today. More current disposable income induces consumers to spend more today. Higher anticipated disposable income in the future induces consumers to spend more today. Lower levels of any of these would induce consumers to spend less. Past disposable income has no bearing on current spending. (Any savings from past income would add to wealth, and wealth does affect current spending, but the past income does not.)

The multiplier process relies upon spending at every step. If disposable income rises, consumers increase spending at every stage of the process, by an amount equal to the marginal propensity to consume multiplied by the increase in disposable income. If the MPC is large, the MPS is small, and more total spending is multiplied throughout the economy. However, if consumers decide to increase savings at each stage of the process, the MPS increases, and disposable income leaks out of the spending multiplier. The multiplier M = 1 / (1 - MPC). If the MPS increases, the MPC decreases, so (1 - MPC) increases. If (1 - MPC) increases, 1 / (1 - MPC) decreases and the multiplier, M, falls.

National savings is equal to private savings plus the budget balance plus capital inflow. If the budget is balanced, then the budget balance is actually zero, but with positive capital inflow, national savings is rising. Through the identity, if national savings is rising, investment spending must also be rising.

We might consider a healthier population to be an improvement in the nation's infrastructure and in human capital, both of which increase long-term productivity. If the nation's public health system is better equipped to prevent and cure illnesses, its population can be more productive. A working adult who is healthier misses fewer days of work and is thus more productive. A healthier child misses fewer days of school and thus acquires a better education and is a more productive adult.

investment spending

AD2 may shift to AD1 creating reces