Econ 1B Midterm 3 – Flashcards

unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one

unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills

individuals who would like to work but have given up looking for a job. Don't show up in unemployment statistics

the deviation of unemployment from its natural rate

the normal rate of unemployment around which the unemployment rate fluctuates

labor force/adult population x 100

number of unemployed/labor force x100

number of unemployed + number of employed

a government program that partially protects workers' incomes when they become unemployed

a worker association that bargains with employers over wages, benefits, and working conditions

the process by which unions and firms agree on the terms of employment

the organized withdrawal of labor from a firm by a union

above-equilibrium wages paid by firms to increase worker productivity

worker health, worker turnover, worker quality, worker effort

the set of assets in an economy that people regularly use to buy goods and services from other people

an item that buyers give to sellers when they want to purchase goods and services

the yardstick people use to post prices and record debts

an item that people can use to transfer purchasing power from the present to the future

the ease with which an asset can be converted into the economy's medium of exchange. money is most liquid

money that takes the form of a commodity with intrinsic value

money without intrinsic value that is used as money because of government decree

the paper bills and coins in the hands of the public. Currency is clearly the most widely accepted medium of exchange in our economy.

balances in bank accounts that depositors can access on demand by writing a check or swiping a debit card

currency in circulation + checking deposits + traveler's checks+ other checking

M1+ Savings and Money Market Deposits+ time deposits + money market mutual funds

the central bank of the United States

an institution designed to oversee the banking system and regulate the quantity of money in the economy

7 board of Governors appointed by pres. confirmed by senate. 14 yr. term. The Federal Reserve System is made up of the Federal Reserve Board in Washington, D.C., and twelve regional Federal Reserve Banks located in major cities around the country.

The Fed has two related jobs. The first is to regulate banks and ensure the health of the banking system. The Fed's second and more important job is to control the quantity of money that is made available in the economy, called the money supply

the quantity of money available in the economy

the setting of the money supply by policymakers in the central bank

At the Fed, monetary policy is made by the Federal Open Market Committee (FOMC). Also announce a target rate for the federal funds rate. The FOMC meets about every 6 weeks in Washington, D.C., to discuss the condition of the economy and consider changes in monetary policy. 7 governors + president of NY Fed + 4 other rotating Fed district bank presidents.

interest rate banks charge each other for overnight loans

deposits that banks have received but have not loaned out

the fraction of deposits that banks hold as reserves

the Fed sets a minimum amount of reserves that banks must hold, called . regulations on the minimum amount of reserves that banks must hold against deposits

the amount of money the banking system generates with each dollar of reserves. = 1/R

Open Market Operations, Discount Rate,

Reserve Requirement, Paying Interest on Reserves

the resources a bank's owners have put into the institution

the use of borrowed money to supplement existing funds for purposes of investment

a government regulation specifying a minimum amount of bank capital

the purchase and sale of U.S. government bonds by the Fed

the interest rate on the loans that the Fed makes to banks

Fed does not control the amount of money that households choose to hold as deposits in banks, Fed does not control the amount that bankers choose to lend.

Economic Fluctuations Are Irregular and Unpredictable, Fact 2: Most Macroeconomic Quantities Fluctuate Together, Fact 3: As Output Falls, Unemployment Rises

the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend

a curve that shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level

a curve that shows the quantity of goods and services that firms choose to produce and sell at each price level

lower price level in the United States lowers the U.S. interest rate. some U.S. investors will seek higher returns by investing abroad.As the mutual fund tries to convert its dollars into euros to buy the German bonds, it increases the supply of dollars in the market for foreign-currency exchange. The increased supply of dollars to be turned into euros causes the dollar to depreciate relative to the euro. This leads to a change in the real exchange rate—the relative price of domestic and foreign goods. Because each dollar buys fewer units of foreign currencies, foreign goods become more expensive relative to domestic goods. Thus, the fall in the real exchange value of the dollar leads to an increase in the quantity of goods and services demanded. as price in US increases, interest in US increases, demand for money increases, foreign deposits into US banks increases, value of money increases/ appreciation, exports from US decrease, imports into US increase, next exports decreases, decreasing US output/y

In either case, as households try to convert some of their money into interest-bearing assets, they drive down interest rates. Because a lower interest rate makes borrowing less expensive, it encourages firms to borrow more to invest in new plants and equipment, and it encourages households to borrow more to invest in new housing. Thus, a lower interest rate increases the quantity of goods and services demanded. as price increases, money demanded increases, interest rate increases/price of money increases, investment decreases, cost of borrowing increases

when the price level falls, the dollars you are holding rise in value, which increases your real wealth and your ability to buy goods and services. This logic gives us the first reason the aggregate-demand curve slopes downward. A decrease in the price level raises the real value of money and makes consumers wealthier, which in turn encourages them to spend more. As price level increases, purchasing power of savings/assets decreases, wealth decreases, consumption decreases, savings increases, y/ output decreases

factors other than P that affect C, I, G, NX. Ex. C, taxes discourage spending, shifts curve to left. Ex. I- an increase in the money supply lowers the interest rate in the short run. This decrease in the interest rate makes borrowing less costly, which stimulates investment spending and thereby shifts the aggregate-demand curve to the right G- if state governments start building more highways, the result is a greater quantity of goods and services demanded at any price level, so the aggregate-demand curve shifts to the right. NX- Europe experiences a recession, it buys fewer goods from the United States. This reduces U.S. net exports at every price level and shifts the aggregate-demand curve for the U.S. economy to the left.

Tells us the total quantity of goods and services that firms produce and sell at any given price level.

In the long run, the aggregate-supply curve is vertical, whereas in the short run, the aggregate-supply curve slopes upward.in the long run, the economy's labor, capital, natural resources, and technology determine the total quantity of goods and services supplied, and this quantity supplied is the same regardless of what the price level happens to be.

the production of goods and services that an economy achieves in the long run when unemployment is at its normal rate

Changes in labor, capital, technology, natural resources,

Three theories: sticky price, sticky wage and misperceptions theory

the short-run aggregate-supply curve slopes upward because nominal wages are slow to adjust to changing economic conditions. In other words, wages are "sticky" in the short run. long-term contracts between workers and firms that fix nominal wages

The sticky-price theory emphasizes that the prices of some goods and services also adjust sluggishly in response to changing economic conditions. costs to adjusting prices, called menu costs

changes in the overall price level can temporarily mislead suppliers about what is happening in the individual markets in which they sell their output. As a result of these short-run misperceptions, suppliers respond to changes in the level of prices, and this response leads to an upward-sloping aggregate-supply curve. lower price level causes misperceptions about relative prices, and these misperceptions induce suppliers to respond to the lower price level by decreasing the quantity of goods and services supplied.

changes in labor, capital, natural resources, or technological knowledge. These same variables shift the short-run aggregate-supply curve.The important new variable that affects the position of the short-run aggregate-supply curve is the price level that people expected to prevail. wages, prices, and perceptions are set based on the expected price level. So when people change their expectations of the price level, the short-run aggregate-supply curve shifts. An increase in the expected price level reduces the quantity of goods and services supplied and shifts the short-run aggregate-supply curve to the left.

shifts in aggregate demand and shifts in aggregate supply

•In the short run, shifts in aggregate demand cause fluctuations in the economy's output of goods and services. •In the long run, shifts in aggregate demand affect the overall price level but do not affect output. •Because policymakers influence aggregate demand, they can potentially mitigate the severity of economic fluctuations.

a period of falling output and rising prices

•Shifts in aggregate supply can cause stagflation—a combination of recession (falling output) and inflation (rising prices). •Policymakers who can influence aggregate demand can potentially mitigate the adverse impact on output but only at the cost of exacerbating the problem of inflation.

1.A higher price level raises money demand. 2.Higher money demand leads to a higher interest rate. 3.A higher interest rate reduces the quantity of goods and services demanded.

changes in fiscal policy that stimulate aggregate demand when the economy goes into a recession without policymakers having to take any deliberate action

the offset in aggregate demand that results when expansionary fiscal policy raises the interest rate and thereby reduces investment spending

The Fed can effectively respond to excessive pessimism by expanding the money supply and lowering interest rates. CorrectShifts in aggregate demand are often the result of waves of pessimism or optimism among consumers and businesses.

corporate income taxes, unemployment insurance benefits

Advocates of active stabilization policy believe that the government can adjust monetary and fiscal policy to counteract waves of excessive optimism and pessimism among consumers and businesses. Opponents of active stabilization policy believe that significant time lags in both fiscal and monetary policy often exacerbate economic fluctuations.