question

Law of increasing opportunity costs

answer

Since resources are specialized, it is more difficult to make larger amounts of one good, which is why the PPC is convex.

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Law of demand

answer

As price increases, QUANTITY demanded decreases (movements along the curve)

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Determinants of market demand

answer

1. Income 2. Tastes or preferences 3. Prices of substitute/complement goods 4. Expected price changes 5. Consumer information

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Law of supply

answer

As price increases, QUANTITY supplied increases (movement along the curve)

question

Determinants of market supply

answer

1. Costs of production 2. Technology 3. Number of producers 4. Prices of alternative goods (using same resources) 5. Producers' price expectations 6. Periods of productionx

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GDP (expenditure method)=

answer

Consumption+Investment (inventories, depreciation, new capital goods)+Government spending+Net exports (exports-imports) ;all final goods and services produced within a country's boundaries

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GNP

answer

Gross National Product=all final goods/services produced with U.S. resources

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Procyclical

answer

Investment spending, consumption, stock prices (move in same direction as expanding GDP)

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Countercyclical

answer

Unemployment (falls as GDP increases)

question

PPI

answer

Producer Price Index (increases show that supply is decreasing because of higher costs of production, precede CPI increase)

question

Stagflation

answer

RGDP decreases while price levels rise; production stagnates, while prices/unemployment increase

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Higher inflation than expected benefits

answer

Debtors

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Lower inflation than expected benefits

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Creditors

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Real interest rate

answer

Nominal interest rate-inflation rate

question

Labor force participation rate

answer

(Labor force/Adult population)*100

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Discouraged workers

answer

Not counted in labor force, since they drop out and are therefore no longer "looking for a job">artificially low unemployment rate

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Types of unemployment

answer

Structural, Frictional, Cyclical

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Natural rate of unemployment

answer

Structural+Frictional

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Flaws in employment accounting

answer

Underemployment (workers are part-time or overqualified), discouraged workers

question

Reasons that AD slopes downward

answer

1. Wealth effect 2. Interest rate effect 3. Exchange rate effect

question

Wealth effect

answer

Saved money is worth less at higher price levels

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Interest rate effect

answer

People borrow less money when interest rates are higher

question

Exchange rate effect

answer

Net exports decrease as price levels of domestic goods rise

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Determinants of AD

answer

Government spending Taxes Money supply

question

Classical economic theory

answer

Economy will fix itself ("supply creates its own demand"

question

Keynesian economic theory

answer

Price levels are inflexible downward>government should intervene

question

Determinants of AS

answer

Positive/negative supply shock

question

AS shifts left

answer

Higher price level> aggregate spending is insufficient>unemployment>wages fall as unemployed workers compete for jobs>curve shifts right

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AS shifts right

answer

Lower price level>wages rise>price levels rise again, AS shifts back to ASLR

question

Inflationary gaps

answer

AD or AS shift right

question

Recessionary gaps

answer

AD or AS shift left

question

Government spending multiplier

answer

1/(1-MPC)

question

Tax multiplier

answer

-MPC/(1-MPC)

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1-MPC

answer

MPS (Marginal Propensity to Save)

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Fiscal policy

answer

Government spending and taxation to stabilize the business cycle

question

Disposable income

answer

National income-net taxes

question

Decrease in short-run AS

answer

Price levels rise, RGDP falls, unemployment rises

question

Commodity money

answer

Usable currency (corn, tobacco, salt)

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Token money

answer

Coins, paper money

question

Money serves as:

answer

1. Medium of exchange 2. Store of value 3. Unit of account or measurement

question

Liquidity

answer

Ease with which an asset can be converted into spending

question

Motives of demand for money

answer

1. Transactions motive 2. Speculative motive 3. Precautionary motive

question

Transactions motive

answer

Demand for physical cash as opposed to interest-bearing assets (inversely related with interest rates)

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Speculative motive

answer

People hold on to cash to be prepared for cash-based investment (inversely related with interest rates)

question

Precautionary motive

answer

Inclination to hold on to money for unexpected cash expenses (car repairs, medical expenses, etc.)

question

Determinants of money demand

answer

Level of output/RGDP, price level for a given interest rate (actual interest rates fall in comparison) (shifts right for increases, left for decreases).

question

Narrow money

answer

M1=coins, currency, checking accounts, travelers' checks, other checking deposits

question

Broad money

answer

M2=M1+savings deposits+money market funds ("near money," less liquid)

question

FDIC guarantee

answer

Deposits of up to $100,000 (have to be in bank's vaults or on deposit at local Federal Reserve Bank to work)

question

Federal Reserve's tools for monetary policy

answer

1. Required Reserve Ratio (RRR) 2. Discount rate 3. Open-market operations

question

Monetary base

answer

Currency and bank reserves (cash banks available or at district FR, on hand for withdrawal)

question

Required Reserve Ratio

answer

How much banks must keep in liquid, zero-interest assets

question

Money supply changes

answer

Short run: increases when banks increase excess reserves for loans Long run: increases through overall loan/deposit process until all possible currency/reserves are in required reserves

question

Simple money multiplier

answer

Amount of new demand deposits created from new excess reserves: 1/RR (simple because it assumes that no one is holding money unused)

question

RRR and money supply

answer

Inversely related (higher RRR;more money in required reserves, less being lent in excess reserves)

question

Discount rate

answer

Rate at which banks can borrow from Fed when they have a temporary shortfall (discount loans) (inversely related to money supply)

question

Open-market operations

answer

Buying and selling government securities (determined by Federal Open Market Committee/FOMC)

question

Government securities

answer

Inversely related to money supply (when Fed sells them, money goes to Fed from banks and checking accounts, so reserves decrease) (when Fed buys securities, money goes back to banks;reserves increase)

question

Federal Funds Rate

answer

Inter-bank lending rate (determined by all other rates in banking system)

question

Bond values vs interest rates

answer

Inverse relationship: no one wants to buy old (lower rate) bonds once interest rates rise; they buy new ones instead, so old bonds have to be sold at a discount (values decrease)

question

Monetary supply curve

answer

Vertical (Q), changes with Fed's changes in reserve amounts

question

Effects of money supply

answer

Increase in money supply> lower interest rates, cheaper borrowing, more consumption and investment>AD increase

question

Federal Reserve has no effect on

answer

money demand

question

Expansionary monetary policy

answer

Increase in money supply>lower interest rates

question

Contractionary monetary policy

answer

Decrease in money supply>higher interest rates

question

Investment multiplier

answer

1/(1-MPC) (same as spending multiplier)

question

Quantity theory of money

answer

Monetarist belief that nominal quantity of money determines nominal income level (MV=QP, where M=quantity of money, V=velocity, and QP=level of output) >velocity is predictable, economic problems are caused by Fed's failure to manage money supply

question

Interest rates and bond values

answer

Inversely related

question

Bank liabilities

answer

Depositors' accounts and any other sums the bank owes

question

Limits on bank system's increasing money supply

answer

Actual increase in MS will always be less than the money multiplier result because the simple multiplier assumes that new loans are redeposited at other banks in system. However, people may take out cash from their bank, or banks may not lend all of excess reserves.

question

Automatic stabilizers

answer

Policy features of economic system, such as unemployment compensation or progressive income tax ;Major benefit: do not require additional legislation

question

Gross private domestic investment

answer

Private investment+depreciation

question

Circular flow: spending leakages

answer

Saving and taxes

question

Crowding-out effect

answer

The government increases spending, financing it through selling bonds. However, as the supply of bonds increases, interest rates rise, "crowding out" business investment.

question

Counteract demand-pull inflation

answer

Reduce money supply (contractionary monetary policy)

question

Dollar appreciation

answer

AD decreases as net exports decrease (U.S. buys more foreign goods) ASSR increases as imported goods are cheaper

question

Government budget deficit

answer

Government spending-net tax revenue Expansionary policy creates deficit (G;T) Contractionary policy creates surplus (G;T)

question

Expansionary fiscal policy

answer

G+, T-. Increases AD a lot through multiplier effect, leading to demand-pull inflation (both P and RGDP increase).

question

Contractionary fiscal policy

answer

G-, T+. Decreases AD, through multiplier effect, inducing a recession. RGDP and P decrease.

question

Net export effect (general)

answer

When the government creates a deficit, it must borrow from the loan market, increasing competition and thus interest rates. The $ value rises abroad as U.S. investments become more profitable, making U.S. products more expensive and reducing net exports

question

Net export effect (expansionary fiscal policy)

answer

Price of $ rises on foreign market; net exports decrease, counterproductively

question

Net export effect (contractionary fiscal policy)

answer

Price of $ falls on foreign market;net exports increase, counterproductively

question

Monetary policy effects on fiscal policy

answer

Federal Reserve can *influence* nominal interest rate, but does not directly control it. Fed's monetary policy has no effect on real interest rates.

question

FOMC

answer

Federal Open Market Committee

question

Fed decreases AD by (contractionary)

answer

borrowing securities on open market, which increases competition and raises the interest rate (less borrowing/spending)

question

Fed increases AD by (expansionary)

answer

lending securities on the open market, which decreases competition and lowers the interest (more borrowing/spending)

question

Monetary policy net export effect

answer

Unlike fiscal Xn effect, agrees with monetary policy aims

question

Monetary policy Xn effect (contractionary)

answer

higher interest rate>Xn effect (dollar value increases)>net exports decrease

question

Monetary policy Xn effect (expansionary)

answer

lower interest rate>Xn effect (dollars are cheaper)>net exports increase

question

Determinants of real interest rate

answer

Supply of loanable funds Demand for investment and consumption

question

Loanable funds market vs money market

answer

Real interest rates (return on investments) in part DETERMINE demand and supply for loans, which in turn determine real interest rates

question

Monetary stablization policies- recession (expansionary)

answer

Fed increases money supply (decreased interest rates)>increased AD>prior level

question

Fiscal stabilization policies- recession (expansionary)

answer

Congress lowers taxes>increased AD Congress increases government spending>increased AD

question

Monetary stabilization policies- inflation (contractionary)

answer

Fed decreases money supply (increased interest rates)>decreased AD

question

Fiscal stabilization policies- inflation (contractionary)

answer

Congress raises taxes>decreased AD Congress reduces government spending>decreased AD

question

"crowding in"

answer

When economy is far below maximum output, higher national deficits stimulate GDP and investment demand

question

"crowding out"

answer

deficit uses up private sector's savings; demand for loanable funds increases, raising real interest rate and crowding out other buyers

question

Monetizing the deficit

answer

Increased money supply reduces crowding out effect by keeping down interest rate/reducing debt-- causes inflation and slower GDP growth >Fed buys some of government deficit

question

Sustained demand-pull inflation

answer

requires increases in money supply

question

Sustained cost-push inflation

answer

requires increases in money supply (increases AD)

question

Phillips Curve

answer

Short-run inverse relationship between inflation (wage growth) and unemployment;; long run is a straight line.

question

Four macroeconomic sectors

answer

Households, businesses, government, foreign

question

Monetary+fiscal policy effect on RGDP

answer

none

question

Increase in money supply causes a short run

answer

AD increase;output increase

question

Rule of 70

answer

Real GDP or other measure will double in (70/annual growth rate) years

question

Productive efficiency

answer

Using resources in least costly way

question

Allocative efficiency

answer

Allocating resources among production techniques in the best way

question

Labor input*labor productivity=

answer

Real GDP

question

Government encourages economic growth by encouraging

answer

Savings and investment (;supply side: increases real output growth)

question

Net investment accounts for depreciation because

answer

when new investment replaces old/worn out capital, there is no increase in capital stock

question

Increases in capital stock lead to

answer

increases in wages and GDP

question

Human capital

answer

Workers' education and skills

question

Rapid population increase leads to

answer

RGDP increase, but decreased GDP per capita

question

What determines whether government deficit will create output growth?

answer

If the deficit is caused by spending on current consumption, it will not increase RGDP; if it is caused by spending on infrastructure or human capital (public capital), it might offset the reduced private investment spending due to the crowding-out effect.

question

Comparative advantage

answer

Countries benefit from trading goods they produce at low opportunity cost for goods they produce at high opportunity cost.

question

Balance of Payments (BOP)

answer

record of a country's international transactions during a given time

question

Three BOP accounts

answer

1. Current account (reflecting trade balance) 2. Capital account (net capital inflows/purchases) 3. Official reserves account

question

Current account balance

answer

Balance of trade/net exports (exports=credit, imports=debit) Net foreign income (income earned by U.S. owned foreign assets, paid to foreign-owned U.S. assets) Foreign aid (debit)

question

Capital account

answer

Balance of capital ownership (U.S. investment in a foreign country is a debit; foreign investment in the U.S. is a credit)

question

Current account+capital account=

answer

0 (hopefully)

question

Official reserves account/statistical discrepancy account

answer

Fed accumulates excess foreign currency/debits the balance of payments or depletes its foreign currency reserves/credits the balance of payments;;zeroes out the BOP

question

Active vs. passive official reserves

answer

U.S. is passive; does not seek to influence exchange rate

question

Exchange rate

answer

Price of a domestic currency in terms of a foreign currency Intersection between Supply and Demand for $, shows P and Q

question

Demand for dollars

answer

Foreign demand for U.S. exports, investments, and speculation (some prefer payment in U.S. $ for stability)

question

Supply of dollars

answer

American demand for imports, investments, speculation

question

Fixed exchange rates

answer

Set by governments; exchange rates are normally flexible so governments can barely do it by continuous fine-tuning

question

Embargo

answer

Prohibition against trading particular goods (to damage other economies/improve U.S.'s)

question

Tariff

answer

Makes imported goods more expensive (tax on imports)

question

Import quotas

answer

Restrict amount of a good that can be imported

question

Imports represent

answer

a leakage from domestic circular flow and potential loss of jobs (but curtailing imports doesn't work)

question

Dumping

answer

Selling below cost in another country

question

Determinants of exchange rates

answer

Consumer tastes Relative income Relative price levels Speculation

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