Flashcards on Macroeconomics Final
Unlock all answers in this set
Unlock answersquestion
Economics is
answer
the science of scarcity
question
A PPF is more likely to be a downward-sloping curve that is bowed outward than a downward-sloping straight line because most resources are
answer
better suited for the production of some goods than others
question
An increase in the number of sellers of a product will _________ the product's market equilibrium price and ______________ the product's market equilibrium quantity
answer
decrease, increase
question
Scarcity
answer
Wants are greater than the limited resource available to satisfy these wants
question
Points inside (or below) the PPF are
answer
attainable but inefficient
question
Ceteris Paribus
answer
All other things held constant
question
A decrease in the wages paid to the workers producing good X will tend to __________ good X's equilibrium price and ______________ good X's equilibrium quantity
answer
decrease, increase
question
If the minimum wage law sets a wage floor above the equilibrium wage in the unskilled labor market
answer
The minimum wage will create a surplus of labor
question
The point where the PPF intersects the horizontal axis (the horizontal intercept) represents a combination of goods that is
answer
attainable and productive efficient
question
Oil producers expect that oil prices next year will be lower than oil prices this year. As a result, oil producers are most likely to
answer
place more oil on the market this year, thus shifting the present supply curve of oil rightward
question
In pure capitalism, economic decisions are determined by the __________. In pure socialism, economic decisions are determined by the _______________.
answer
market, government
question
The PPF between goods X and Y will be a downward-sloping
answer
straight line if constant opportunity costs exist, curve that is bowed outward if increasing opportunity costs exist
question
The opportunity cost of attending college is
answer
the highest valued alternative one forfeits to attend college
question
The synonym economists use for \"additional\" is
answer
marginal
question
Suppose the real exchange rate of 10 Mexican pesos to the dollar changes to 11 pesos to the dollar. The dollar has _________ , making American goods _____________ expensive for Mexicans
answer
appreciate, more
question
Expectation of lower future income by households is a ________ the AD curve.
answer
leftward shifter of
question
Business optimism about future sales tends to _______ investment expenditures, shifting the AD curve to the __________.
answer
increase, right
question
An economy is producing its Natural Real GDP when the rate of unemployment is equal to the ____________ unemployment rate.
answer
sum of the frictional unemployment rate and the structural
question
Juan lost his job as a nuclear physicist working for a defense contractor. He can not find a job because no firms in the defense industry or any other industry are hiring people with his skills. Juan is ____________ unemployed.
answer
structurally
question
In a self-regulating economy, inflationary and recessionary gaps produce shifts of the __________.
answer
SRAS curve that move the economy to a long-run equilibrium point.
question
If the natural unemployment rate is 5% and the current unemployment rate is 6%, then the economy is
answer
producing less Real GDP than it does at full employment
question
A laissez-faire macroeconomic policy, based on a _________ in self regulating properties of the economy, implies _________ by the government.
answer
belief, noninterference
question
Classical economics refers to an era in the history of economic thought that stretched from about
answer
1750 to the early 1900s
question
suppose a drop in stock prices makes people feel less wealthy. This would cause _________ the economy's AD curve
answer
a leftward shift
question
Expansionary fiscal policy actions include ___________ government spending and/or ____________ taxes, while contractionary fiscal policy actions include ___________ government spending and/or ___________ taxes.
answer
increasing, decreasing; decreasing, increasing
question
If there is complete crowding out as a result of an increase in government purchase, there will be
answer
no resulting change in Real GDP
question
A budget deficit occurs when
answer
government expenditures > tax revenues
question
How is the multiplier expressed in terms of the MPC
answer
1/(1-MPC)
question
Fiscal policy refers to
answer
changes in government expenditures and taxation to achieve particular economic goals
question
In the United States, income taxes are a ___________ tax and Medicare taxes are a ______ tax. Sales taxes are a ________ tax and property taxes are a ________ tax.
answer
Progressive, proportional, regressive, regressive
question
Supply-side economists believe reductions in marginal tax rates can
answer
increase output and lower prices
question
The period that elapses between the passage of legislation reducing taxes and the tax cut is put into effect is called the _______ lag.
answer
transmission
question
The AD curve shifts to the right with a _________ in government purchases (G) or a ________ in taxes.
answer
rise, fall
question
Suppose Congress increase income taxes. This is an example of
answer
contractionary fiscal policy
question
In April 2014, the public debt in the US is approximately
answer
17 trillion
question
Suppose the economy's current AD and SRAS curves intersect to the right of Natural Real GDP. Keynesians might advise a policy of tax ________ to shift ________.
answer
increase, AD to the left
question
If the bottom half of all U.S. income tax payers were allowed to stop paying the income tax entirely and the top 50% continued to pay as they do now, tax revenues to the government would drop by about
answer
3%
question
John Maynard Keynes drew many economists ________ the classical view. The classical view held that a market economy ________ regulate itself to avoid periods of excessive unemployment.
answer
away from, can
question
Each of the governors of the Federal Reserve System is appointed for a term of ________ years. The board of governors is comprised of ___________ members and the FOMC is comprised of ________ members.
answer
14, 7, 12
question
Suppose that the current federal funds rate is below the federal funds target rate. In order to lower the federal funds rate the Fed will __________ securities on the open market which will ________ the supply of reserves in the market for reserves pushing the rate close to the target rate
answer
sell, decrease
question
M2
answer
M1 + time deposits + savings deposits + money market mutual funds
question
The demand-for-money curve illustrates the ________ relationship between the quality demanded of money and _________.
answer
inverse, the interest rate
question
Reserves held beyond the required amount are called
answer
Excess reserves
question
According to the Keynesian transmission mechanism, a rise in the money supply will _____ the interest rate, causing a _______ in investment demand, which then ______ Real GDP.
answer
lower, rise, raises
question
The Federal Reserve System began operations is
answer
1914
question
suppose the money market is in the liquidity trap and that the economy is experiencing a recessionary gap. A Keynesian economist would advocate
answer
contractionary fiscal policy
question
Total bank reserves =
answer
bank deposits at the Federal Reserve + vault cash
question
If the Fed purchases government securities from banks, the reserves of the banking system will immediately
answer
increase by the amount of the purchase
question
The requirement of a \"double coincidence of wants\" is the chief _____ of the _______ exchange system.
answer
disadvantage, barter
question
Open Market Operations are conducted by
answer
The Federal Reserve Bank of New York
question
In March 2014, M1 in the United States was ________ trillion
answer
2.7
question
Fractional reserve banking is a term used to describe a banking system whereby
answer
banks are required to maintain a certain fraction of their deposits in the form of checkable deposits, a a certain fraction of their deposits in the form of savings deposits, etc
question
Three major macroeconomic goals
answer
Price stability, low unemployment, high and sustained economic growth
question
What is the most common measure of changes in prices in the US?
answer
CPI
question
CPI
answer
Consumer price index, a measure of the changes in prices of a market basket of goods and services purchased by the typical US consumer
question
Base year
answer
An arbitrary year that serves as a reference point
question
Inflation
answer
Increase in the average price level (CPI has risen)
question
Deflation
answer
Decrease in the average price level (CPI has fallen)
question
When was the highest recorded inflation in the US?
answer
1946
question
What was the highest recorded inflation in the US?
answer
18.1%
question
When was the lowest recorded inflation in the US?
answer
1932
question
What was the lowest recorded inflation in the US?
answer
-10.3%
question
What is the primary measure of inflation/deflation in the US based upon?
answer
The percent change in the CPI
question
Normal
answer
Indicates that a variable has not been adjusted for inflation
question
Hyperinflation
answer
Occurs when a country is experiencing an inflation rate of more than 50% per month
question
Counted as unemployed if
answer
A person is not working and actively looking for work
question
Unemployment measured
answer
Population minus non-participants in the labor force divided by the labor force
question
Non-participants in the labor force
answer
Under 16, retired, full time students, military, institutionalized, voluntary idle, homemakers, discouraged workers
question
Year of the highest recorded unemployment rate in the US?
answer
1933
question
Highest recorded unemployment rate in the US
answer
25%
question
Year of the lowest recorded unemployment rate in the US
answer
1944
question
Lowest recorded unemployment rate in the US?
answer
1.2%
question
Frictional unemployment
answer
Uf, type of unemployment that results from the lag time between losing one job and finding another
question
Structural unemployment
answer
Us, results when there is no match between the unemployed persons skills and the available jobs
question
Cyclical unemployment
answer
Uc, results from a downturn in the economy (recession)
question
Actual unemployment
answer
Ua=Uf+Us+Uc
question
Full employment
answer
When Ua=Un, when Uc=0% at full employment
question
Gross domestic product (GDP)
answer
The total market value of all final goods and services produced within a nations borders in a given time period
question
GDP omits
answer
Certain non-market transactions, underground captivity, sales of used goods, purely financial transactions, government transfer payments
question
GDP per capita
answer
GDP divided by population
question
Consumption (households)
answer
Durable goods (last over 3 years), non-durable goods, services
question
Investment (businesses)
answer
Newly produced capital goods, all new construction, changes in business inventory
question
Government spending
answer
Federal, state and local spending on goods and services
question
Net export
answer
Exports-imports
question
GDP equation
answer
National income-+ some adjustments
question
GDP can increase as a result of
answer
An increase in output and/or an increase in price level
question
Aggregate demand
answer
AD, curve that represents the aggregate quantity demanded of all goods and services in the US at various price levels
question
Aggregate
answer
Total supply and demand of all things produced in a country
question
Shifts the AD curve
answer
Change in spending (C,I,G or Xnet) due to some factor other than a change in price level
question
Changes in consumption (C) result from
answer
Wealth, interest rates, taxes and expectations of households
question
C wealth increases
answer
C increases and AD shifts to the right
question
C interest rates increase
answer
C decreases and AD shifts to the left
question
C taxes increase
answer
C decreases and AD shifts to the left
question
C expectations of household increase
answer
C increases and AD shifts to the right
question
Changes in investment (I) result from
answer
Interest rates, taxes and expectations of businesses
question
I interest rates increase
answer
I decreases and AD shifts to the left
question
I taxes increase
answer
I decreases and AD shifts to the left
question
I expectations of businesses increase
answer
I increases and AD shifts to the right
question
Changes in government spending result from
answer
Government spending on goods and services, increases and AD shifts to the right
question
Changes in xnet result from
answer
Foreign real national income (FRNI) and appreciation/depreciation of the dollar
question
Xnet FRNI increases
answer
Xnet increases and AD shifts to the right
question
When Xnet dollar depreciates
answer
Xnet increases and AD shifts to the right
question
Xnet dollar appreciation
answer
Xnet decreases and AD shifts to the left
question
Short run aggregate supply
answer
SRAS
question
Long run aggregate supply
answer
LRAS
question
Macroequalibrium is determined by
answer
The intersect of the AD curve and the SRAS curve
question
When AD shifts to the right
answer
Price level increases, real GDP increases, unemployment decreases (WW2-1940s)
question
When AD shifts to the left
answer
Price level decreases, real GDP decreases, unemployment increases (Depression-1930s)
question
When SRAS shifts to the right
answer
Price level decreases, real GDP increases, unemployment decreases (late 1990s)
question
When SRAS shifts to the left
answer
Price level increases, real GDP decreases, unemployment increases (mid 1970s-early 1980s)
question
The classical view
answer
An era in the history of economic thought that stretched from about 1750 to the early 1900s
question
Say's law
answer
Supply creates its own demand, production creates demand sufficient to purchase all goods and services produced
question
Macroequalibrium naturally gravitates toward
answer
Full employment
question
Classical view says that flexible wages, prices, and interest rates will adjust to
answer
Clear any persistent shortages or surpluses in the economy
question
Recessionary gap
answer
Q1<Qn
question
When there is a recessionary gap we have a _____ problem, and there is a ____ of workers in the market
answer
Unemployment (Un<Ua), surplus
question
Surplus makes prices ____, so the price of labor (wages) would ______
answer
Fall, fall
question
A decrease in wages shifts the SRAS curve to the
answer
Right
question
The new macroequalibrium occurs on the _____ curve and the ______ is gone
answer
LRAS, recessionary/inflationary gap
question
Inflationary gap
answer
Q1>Qn
question
When there is an inflationary gap we have an ______ problem
answer
Inflation
question
When there is an inflationary gap there is a ______ of workers in the labor market
answer
Shortage
question
Shortages make prices ______ so the price of labor (wages) would ____
answer
Rise, rise
question
An increase in wages shifts the SRAS curve to the
answer
Left
question
Physical PPF constraints
answer
Limited recourses, current state of technology
question
Institutional PPF constraints
answer
Limited recourses, current state of technology and social constraints
question
GDP equals
answer
Consumption+Investments+Government purchases+Foreign sector
question
Real GDP equation
answer
Nominal GDP divided by price index multiplied by 100
question
John Maynard Keynes
answer
Challenged all 4 of the classical beliefs
question
The four classical beliefs
answer
1. Say's law holds, so that insufficient demand in the economy is unlikely 2. Wages, prices and interest rates are flexible 3. The economy is self-regulating 4. Laissez-faire is the right economic policy
question
Consumption function (definition)
answer
The relationship between consumption and disposable income
question
Consumption is directly related to
answer
Disposable income, is positive even at zero disposable income
question
Consumption function
answer
C=Co+(MPC)(Yd)
question
Co
answer
Autonomous consumption, the part of consumption that is independent of disposable income
question
MPC
answer
Marginal propensity to consume, MPC= change in C/change in Yd
question
Yd
answer
Disposable income
question
Saving =
answer
Disposable income-consumption
question
MPS
answer
Marginal Propensity to save, the portion of a change in income that is not spent
question
MPS =
answer
1-MPC
question
Two ways to compute change in macroequlibrium real GDP
answer
1. Slow way: round of spending 2. Quicker way: spending multiplier
question
Spending multiplier
answer
M=1/1-MPC or 1/MPS
question
Change in real GDP =
answer
M x initial change in spending
question
The initial change in spending could be initiated by a change in
answer
C, I, G or Xnet
question
Policy Implications
answer
When the economy does not remove itself from a recessionary or inflationary gap (in a timely manner) government intervention in the economy is necessary to push macroequalibrium toward full employment
question
Keynes advocated the use of government intervention to
answer
Help improve the economy
question
The federal budget is made up of
answer
Revenue and expenses
question
Revenue
answer
Taxes
question
Expenses
answer
Government expenditures
question
Progressive tax
answer
A tax where the tax rate paid increases as income increases
question
Proportional tax
answer
A tax where the tax rate paid remains constant as income increases, also known as flat tax
question
Regressive tax
answer
Tax where the tax rate paid decreases as income increases
question
Social Security tax
answer
Employer pays 6.2% of income up to 117K Employee pays 6.2% of income up to 117K
question
Medicare tax
answer
Employer and employee pay 1.45% of all income earned, is a proportional tax
question
Social Security tax is proportional for
answer
Income up to 117K and regressive for higher income
question
Sales tax
answer
Regressive tax, state of CA charges a 7.25% sales tax, San Diego a .50% sales tax
question
Property tax
answer
Regressive tax, in San Diego it averages around 1.25% of the property value
question
Budget deficit
answer
Government spending > tax revenue
question
Budget surplus
answer
Tax revenue > government spending
question
Balanced budget
answer
Government spending = tax revenue
question
Cyclical deficit
answer
Results form a downturn (contrition) in the business cycle
question
Structural deficit
answer
Results from political decisions and would exist even if the economy were operating at full employment
question
Public debt
answer
The total amount the federal government owes its creditors (total amount of outstanding federal government securities)
question
Fiscal policy
answer
Changes in government spending and taxes in an attempt to improve the economy (responsibility of the president and congress)
question
Monetary policy
answer
Changes in the money supply and interest rates in an attempt to improve the economy (responsibility of the Federal Reserve)
question
Expansionary fiscal policy
answer
Used to close a recessionary gap, involves government spending going up and/or taxes going down
question
Contractionary fiscal policy
answer
Used to close an inflationary gap, involves taxes going up and/or government spending going down
question
Supply-side fiscal policy (Reaganomics)
answer
A cut in marginal tax rates, motivates people to work more, save more and take financial risks, SRAS curve shifts to the right
question
The Laffer curve
answer
When the tax rate is either 0 or 100% tax revenues are zero
question
Crowding out
answer
Occurs when an increase in government spending causes the financing needs of the federal budget deficit to rise (indirect effect), can be complete or incomplete
question
With complete crowding out, real GDP
answer
Is not impacted
question
With incomplete crowding out, real GDP
answer
Somewhat increases
question
With zero crowding out, real GDP
answer
Increases
question
Data lag
answer
It takes time to collect and publish economic data to recognize an economic problem
question
Wait and see lag
answer
Time needed to be sure that the perceived economic problem needs government intervention
question
Legislative lag
answer
After policy makers decide that some type of fiscal policy measure is required, congress or the president will have to propose the measure, build political support for it and get it passed
question
Transmission lag
answer
After enacted, a fiscal policy measure takes time to be put into effect
question
Effectiveness lag
answer
After a policy measure is actually implemented it takes time to affect the economy
question
Disadvantages of barter
answer
1) No standard of value 2) Requires a double-coincidence of wants 3) Higher transaction costs
question
Functions of money
answer
1) Medium of exchange 2) Unit of account 3) Store of value
question
Medium of exchange
answer
Money is the medium through which transactions take place
question
Unit of account
answer
We use dollars as a standard unit of value
question
Store of value
answer
The ability of an item to hold value over time
question
What gives money its value
answer
General acceptability
question
Credit cards
answer
Represent loans which must be repaid, they represent the use of someone else's money
question
Debit cards
answer
Give access to checkable deposits which are already part of the money supply
question
M1 =
answer
Currency outside banks + checkable deposits + travelers checks (2.7 trillion)
question
How banks create money
answer
Through the fractional reserve banking system. Banks are only required to set aside a small portion of each deposit and they are free to loan or invest the remainder
question
The fractional reserve banking system enables banks
answer
to create new money
question
Required reserve ratio (R)
answer
A percent of each dollar deposited that must be held on reserve (at the Fed or in the banks' vault)
question
Required reserve
answer
This is the minimum amount of reserves a bank must hold as mandated by the Fed (R x checking deposits)
question
Total reserves =
answer
Required reserves + excess reserves
question
The bank's capital can be viewed as a cushion against
answer
insolvency
question
Insolvency =
answer
liabilities > assets
question
An insolvent bank has
answer
failed and can be shut down
question
The larger the bank capital, the bigger the
answer
Cushion against bank failures or insolvency
question
The governors are appointed by the ________ and approved by _________
answer
President, senate
question
Who is the current chairman of the federal board of governors
answer
Janet Yellin, has served four years as chair
question
The governors are responsible for formulating
answer
Monetary policy
question
The federal open market committee (FOMC) has how many members
answer
12 voting members: 7 federal board members, 1 New York district president and 4 other district presidents
question
How often does the FOMC meet
answer
Every 6 weeks at Federal headquarters
question
What are the functions of the federal district banks
answer
Supply the economy with paper money, provide a check clearing service, hold bank reserves, supervise banks, serve as a lender of last resort for banks, serve as a fiscal agent for treasury and serve as governments banker
question
3 monetary policy tools of the Fed
answer
1) Changing the required-reserve ratio (r) 2) Changing discount rate 3) Open market operations
question
To close a recessionary gap by changing the required-reserve ratio
answer
R goes down
question
To close an inflationary gap by changing the required-reserve ratio
answer
R goes up
question
To close a recessionary gap by changing the discount rate
answer
Discount rate goes down
question
To close an inflationary gap by changing the discount rate
answer
Discount rate goes up
question
Open market operations
answer
Refers to the Fed buying and selling US government securities
question
To close an inflationary gap with open market operations
answer
The Fed sells government securities
question
To close a recessionary gap with open market operations
answer
The Fed buys government securities
question
To close a recessionary gap the fed can
answer
Decrease R, decrease discount rate or buy government securities on open market (money supply goes up)
question
To close an inflationary gap the fed can
answer
Increase R, increase discount rate or sell government securities on open market (money supply goes down)
question
Simple Deposit Multiplier
answer
(SDM) = 1/r
question
Maximum change in checkable deposits =
answer
SDM x Deposit amount, 1/r x deposit amount
question
In order for the money supply to grow, the deposit must be money ____ to the banking system
answer
new, from the Fed or drawn on a foreign bank
question
Money is destroyed when
answer
the Fed sells government securities
question
When a bank is reserve deficient it can do the following:
answer
1) try to get a loan from another bank 2) try and get a loan from the Fed 3) apply some of its loan repayments to the reserve deficiency position
question
When a bank borrows reserves from the Fed, the interest rate paid is called the
answer
Discount rate (directly controlled by the Fed)
question
When a bank borrows reserves from another bank, the interest rate paid is called
answer
the federal funds rate (indirectly controlled by the Fed)
question
If the Fed wants to change the money supply it takes 2 measures:
answer
1) it sets a federal funds rate target and then 2) uses open market operations to change the federal funds rate so as to \"hit\" the target
question
If the Fed sets a federal funds rate target above the current funds rate it will need to
answer
Sell government securities in the open market (which makes reserves more scarce)
question
Bond
answer
a form of debt issued by a corporation or by the government
question
Three things that are predetermined before a bond is issued:
answer
1) Maturity date: The date on it the bondholder receives the face value 2) Face (par) valure: the amount of money the bondholder receives on the maturity date 3) Coupon rate: determines the amount of annual interest the bond pays
question
Actual interest =
answer
coupon rate x face value
question
Yield =
answer
Annual interest + Pbond (price of bond), yield is the interest rate earned on the bond
question
Bond prices and interest rates are ______ related
answer
inversely, bond prices rise interest rate falls, bond prices fall interest rates rise
question
the demand for money curve represents the
answer
inverse relationship between the quantity demanded of money balances and the interest rate (the opportunity cost of holding money)
question
The supply curve of money is a
answer
vertical line since it is primarily set by the Fed
question
the Keynesian view on how change in money supply affects the economy:
answer
-Fed increase the money supply -interset rates fall -investment rises -AD shifts to the right -Real GDP grows
question
Bank Capital
answer
Assets - Liabilities
question
Slope
answer
change in price/change in quantity demanded
question
Percent change formula
answer
new-old/old
question
4 participants that make up an economy
answer
households, businesses, government, foreign sector
question
4 categories of recourses
answer
Land, labor, capital, entrepreneurship
question
increasing slope =
answer
increasing opportunity cost
question
PPF will shift outward when there is
answer
-increase in recourses -advance in tech -increase in quality of recourses
question
Determinants of demand
answer
-price of substitutes (increases, demand increases) -price of complements (increases, demand decreases) -income normal good (increases, demand increases) -income inferior good (increases, demand decreases) -# of buyers (increases, demand increases) -tastes (increase, demand increases) -expectations of buyers
question
Law of supply
answer
direct relationship between price and quantity supplied
question
Law of demand
answer
inverse relationship between price and quantity demanded
question
Determinants of Supply
answer
-subsidies (increase, supply increases) -taxes (increase, supply decreases) -technology (increases, supply increases) -other goods prices (increases, supply decreases) -recourse costs (increase, supply decreases) -# of sellers (increase, supply increases) -expectations of sellers
question
price ceiling
answer
highest price at which a product can be legally sold, only impact if below equilibrium
question
price floor
answer
the lowest price at which a product can legally be sold, will only impact if above equilibrium
question
CPI =
answer
(total $ expend on market basket in current year)/(total $ expend on market basket ) x 100
question
Formula for real income
answer
nominal income/CPI x 100
question
Price in current $'s
answer
Price earlier year x (CPI current year)/(CPI earlier year)
question
Unemployment measured
answer
population - non-participants in the Labor force/Labor force
question
Unemployment rate (Ua)
answer
(unemployed)/(Labor force) x100
question
national income =
answer
wages + proprietor's income + corporation profits + rental income + net interest
question
Real GDP =
answer
(nominal GDP)/(price index) x 100