question

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

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