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What is economics

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This is a behavioral science that studies how people make choices

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Why should you study economics

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To learn a way of thinking To understand Society To understand Global affairs To be an informed voter

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Post hoc fallacy

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"after this, therefore because of this; therefore, just because A precedes B does not mean A is the cause of B

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True or false: Ceteris paribus is a term that means all else equa

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True

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True or false: Occam's razor is a principle that says all details should be included regardless of their relevancy

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false

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Opportunity cost

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The second-best alternative (or the value of that alternative) that must be given up when scarce resources are used for one purpose instead of another.

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sunk cost

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Any cost that has already been incurred and that cannot be changed by any decision made now or in the future.

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Opportunity cost Keynes believed that the government should intervene in the economy and affect level of output and employment. What policy does not accomplish this

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Circular flow policy. He said we should mess with fiscal and monetary policy to control the economy

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What is the typical business cycle

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Through Expansion Peak Recession

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How many consecutive quarters of declining input does United State need to be in order for it to be a *depression*

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Three quarters of declining output

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How many consecutive quarters of declining input does United State need to be in order for it to be a *recession*

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Twoquarters of declining output

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The main subject of macroeconomics deals with

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The sum of individual decisions or aggregate behavior of consumers, firms, and the economy as a whole

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The programs period of unemployment that existed during the Great Depression gave rise to the following thinking in the economic discipline What Revolution was it

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Keynesian Revolution

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True or false: everybody's expenditures it's someone else's receipt

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True

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True or false: wages are shown to be flown into the household on the circular flow of payment chart

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True

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True or false: export represent an outflow of income

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False

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True or false: fiscal policy refers to the use of the money supply to influence the rate of economic activity

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False

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All of the following are debt instrument or promissory notes used by a borrower except one: Treasury bonds Treasury notes Treasury bills Corporate stocks Corporate bonds

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Corporate bonds

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To arrive at the GDP the Bureau of economic analysis counts

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The value of the final goods sold

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GDP vs GNP

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GDP= $ amount of all final goods and services in a year. GNP= $ value of all goods/services in a year with labor and property supplied by US residents. GDP->GNP= add payments from out of the US, and subtract payments to foreign resources

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Expenditure Approach

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GDP = CORPRATE GOODS +INVESTMENT + GOVERNMENT SPENDING + (EXPORT - IMPORT)

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True or false: GDP when Goods both when they are purchased as inputs and when they are sold as final goods

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False

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True or false GDP includes all transaction with money or Goods change hands regardless of weather or not a new good or service is produced

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False

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Surplus trade

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When the value of exports exceeds the value of imports

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What is counted in GDP

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all good and services produced in that countrys borders this can include foreign owned firms in the US for US GDP

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What can increase output

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1. An increase in resources land, labour and capital 2. An increase in the efficiency of these resources i.e. improved labour or capital productivity.

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Unemployed (

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To be considered unemployed , a person must be 16 years old or older, available for work, and have made specific efforts to find work during the previous 4 weeks.

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Not in the labor force.

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A person not looking for work because he or she does not want a job or has given up looking is classified as not in the labor force . People not in the labor force include full-time students, retirees, individuals in institutions, those staying home to take care of children, and discouraged job seekers.

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Consumption function

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The relationship between consumption and income

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The only two things that a household can do with income are

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Save and consume

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*C*= a + bY

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consumption

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C= *a* + bY

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money not tied to income

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C= a + *b*Y

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mpc or the slope of the consumption function

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C= a + b*Y*

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aggregate income

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mpc + mps is always

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1

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multiplier

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The ratio of the change in the equilibrium level of output to a change in some autonomous variable

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Will you ever get dollar for dollar worth when it comes to investment

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No because of the multiplier

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True or false : the higher your income is the higher your consumption is likely to be

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True

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Fiscal Policy

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Government policy that attempts to manage the economy by controlling *taxing and spending*

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Monetary Policy

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Government policy that attempts to manage the economy by controlling the *money supply and thus interest rates*.

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Government spending multiplier and planned investment multiplier

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1/MPS

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The consumption function when taxes create a difference between income and disposable income

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C = a+b (Y+T)

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Surplus

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The receipt is greater than expenditures

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Deficit

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The expenditures is greater than its receipt

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Characteristics of money

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Durability, portability, limited supply, divisibility, uniformity, acceptability

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the tax multiplier

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- (mpc/mps)

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Disposable income

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The total income minus net taxes Yd= Y-T

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What is true about money

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Money is unmatched by any other asset in terms of its liquidity

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M2

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M2, or broad money M1 plus savings accounts, money market accounts, and other near monies. M2 = M1 + Savings accounts + Money market accounts + Other near monies

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What is in the M1 definition in the money supply M1, or transactions money

answer

Money that can be directly used for transactions. M1 = currency held outside banks + demand deposits + traveler's checks + other checkable deposits

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How our modern banks got started

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In the fifteenth and sixteenth centuries, citizens of many lands used gold as money, particularly for large transactions. Because gold is both inconvenient to carry around and susceptible to theft, people began to place their gold with goldsmiths for safekeeping. On receiving the gold, a goldsmith would issue a receipt to the depositor, charging him a small fee for looking after his gold. After a time, these receipts themselves, rather than the gold that they represented, began to be traded for goods. The receipts became a form of paper money, making it unnecessary to go to the goldsmith to withdraw gold for a transaction. The receipts of the de Medici's, who were both art patrons and goldsmith-bankers in Italy in the Renaissance period, were reputedly accepted in wide areas of Europe as currency. At this point, all the receipts issued by goldsmiths were backed 100 percent by gold. If a goldsmith had 100 ounces of gold in his safe, he would issue receipts for 100 ounces of gold, and no more. Goldsmiths functioned as warehouses where people stored gold for safekeeping. The goldsmiths found, however, that people did not come often to withdraw gold. As a result, goldsmiths had a large stock of gold continuously on hand. As a result, goldsmiths had a large stock of gold continuously on hand.

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*SHORT ANSWER:* The Federal Reserve 3 ways of adjusting the money suppy

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The Required Reserve Ratio discount rate *open market operations* (favored)

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discount rate

answer

The interest rate that banks pay to the Fed to borrow from it.

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The Required Reserve Ratio

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The percentage of checkable deposits that banks and other financial intermediaries are required to keep in cash reserves

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open market operations

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The purchase and sale by the Fed of government securities in the open market; a tool used to expand or contract the amount of reserves in the system and thus the money supply.

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Moral Suasion

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the pressure that was exerted in the past by the Fed on member banks to discourage them from borrowing heavily

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commodity money

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Items used as money that also have intrinsic value in some other use.

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fiat (token) money

answer

Items designated as money that are intrinsically worthless

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legal tender

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Money that a government has required to be accepted in settlement of debts.

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The amount of money you wish to hold or your demand for money depends on

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How much your financial asset you wish to hold in the form of money

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True or false by buying back the bonds the federal reserve's can lower the amount of money in the money supply

answer

False

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Of which the methods to control the money supply is favored by the Federal Reserve

answer

Open market operation

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The relationship between land investment and interest is always

answer

A negative relationship

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Expansionary Fiscal (tax and spending) Policy Steps

answer

1. decrease of T or increase of G: 2. increased Y 3. increase MD 4. increased R 5. decreased I *The government is a recession*

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Contractionary Fiscal (tax and spending) Policy Steps

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1. increased of T or decrease of G: 2. decreased Y 3. decreased MD 4. decreased R 5. increased I *The government is at peak/inflation*

question

Monetary (Money Supply) Contractionary Policy Steps

answer

1. decrease of MS: 2. increased R 3. decrease I 4. decreased Y 5. decreased MD *The government is at peak/inflation*

question

Monetary (Money Supply) Expansionary Policy Steps

answer

1. increase of MS: 2. decreased R 3. increase I 4. increased Y 5. increased MD *The government is a recession*

question

Expansionary Fiscal (tax and spending) Policy

answer

An increase of money supply

question

Milton Friedman's assessment of how our country is using monetary and fiscal policy to stabilize the economy like a fool in the shower his conclusion is that we should

answer

Used neither of the policies and leave the economy alone

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Is the aggregate supply curve something we can control

answer

Yes

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Is the aggregate demand something we can control

answer

No

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True or false: there is no connection between the working of the money market and the workings of the good Market

answer

False

question

True or false: the level of output is determined in the Goods Market and the interest rate is determined by the money market

answer

True

question

True or false: for every value of interest rate there is a different level of planned investment and a different level of output

answer

True

question

True or false: A reduction in the net taxes is considered a contractionary fiscal policy

answer

False

question

True or false: to bring an economy out of a recession the FED can adopt a contractionary monetary policy

answer

False

question

The best way to describe the shape of the aggregate demand curve

answer

It is a positively sloped curve

question

The stagflation that we experienced in the 1970s can be attributed to the fact of

answer

The aggregate supply curve shifted drastically to the left

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Aggregate Supply: Lower input cost Economic growth Decreased regulation Good Weather Cause the chart to SHIFT __________

answer

SHIFT RIGHT

question

Aggregate Supply Higher input cost Stagnation Increased regulation Bad Weather Causes the chart to SHIFT __________

answer

SHIFT LEFT

question

Aggregate Demand Expansionary Fiscal Expansionary Monetary That causes the chart to SHIFT ______________

answer

SHIFT RIGHT

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When the economy is producing at its maximum level of output at its capacity the aggregate supply curve becomes

answer

Vertical

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True or false: an increase of the price level cause the demand for money to also increase

answer

True

question

Aggregate Demand

answer

Total demand of goods and services

question

Aggregate Supply

answer

Total supply of goods and services

question

Broken window fallacy

answer

an argument that disregards lost opportunity costs associated with destroying property of others, or other ways of externalizing costs onto others. For example, an argument that states breaking windows generates incomes for a window fitter, but disregards the fact that the money spent on the new window cannot now be spent on new shoes

question

Hyperinflation

answer

An extremely rapid, uncontrolled rise in prices, such as occurred in Germany in the 1920s and some third world countries more recently

question

According to classical economist and what they believe in

answer

A decline in demand for labor does not necessarily mean that the unemployment rate will rise There should be no persistent unemployment above the unemployment that occurs naturally At the equilibrium wage rate everyone who wants a job have one The wage rate address to equate the quantity of Labor Demand with quantity of Labor Supply thereby implying that the unemployment rate does not exist People who work for themselves if the wage rate in the labor force is too low The amount of Labor that a firm hires depend on the value of the output that workers produce

question

Philip Curve the relationship between

answer

unemployement and inflation

question

*SHORT ANSWER QUESTION*: unemployment calculation

answer

Unemployed/Labor Force (unemployed + employeemnt)

question

Unemployment formula and types

answer

Unemployed/Labor Force ● Frictional unemployment ● Structural unemployment ● Cyclic unemployment

question

Frictional unemployment

answer

Not as serious Natural rate of unemployment Temporary unemployment Shifting job

question

Structural unemployment

answer

Technology driven Adapting to a new skill Natural rate of unemployment

question

Cyclic unemployment

answer

Unemployment that is caused by a recession or downturn in the business activity; caused by a decrease in total spending

question

Cause of unemployment

answer

Sticky wages Efficiently wage theory Imperfect Information Minimum wage laws

question

Sticky wages

answer

Wage are different from the prices (downwards) Implied Contract = constant wage State of unemployment

question

Efficiently wage theory

answer

Business has a incentives to pay higher wages than have to offer Selective Turnover- rate of hiring

question

Imperfect Information

answer

Similar to efficiently wage By accident

question

Minimum wage laws

answer

Price floor Price ceiling

question

Time Lags in ___________

answer

Monetary policy and fiscal policy

question

There's no systematic relationship between inflation and unemployment if

answer

Both the aggregate demand and aggregate supply curve shift

question

True or false: cyclical unemployment is unemployment that rises during recession in the economy

answer

True

question

True or false: in general: employment tends to fall when aggregate output Falls and employment Rises when aggregate output Rises

answer

True

question

True or false: classical economists believe that there is always an amount of unemployment Beyond the structual and Frictional account that is unavoidable

answer

False

question

True or false: sometimes firms have the incentive to pay wages above wages which the quantity of Labor supplied is equal to the quantity of Labor demanded

answer

True

question

True or false: the purpose of a minimum wage law is to eliminate unemployment

answer

False

question

Implementation lag

answer

The time it takes for the economy to adjust to the new conditions after a new policy is implemented is known as which lag

question

The FED is more likely to increase the money supply during the times of

answer

Low output and low inflation

question

Response lag

answer

The time it takes to put the desired policy into effect once the economist recognize that the economy is in a boom or slump

question

True or false: When stock prices highest the household wealth decreases there for the household also decreases

answer

False

question

True or false: Stabilization policies maintain monetary policy actions but not fiscal policy actions

answer

False

question

True or false: oftentimes using monetary fiscal used to stabilize the economy has the opposite effect

answer

True

question

Which policy can be implemented more rapidly then the other

answer

Fiscal

question

True or false : the time it takes for policymakers to recognize the existence of a blue marlin is known as response time

answer

False

question

Consumption and saving decisions are based on not just the current income but the expectation of future income as well this is a part of what theory

answer

Life cycle theory of consumption

question

The relationship between nominal wage rate in the real wage rate is that

answer

To obtain the real wage rate we adjust the nominal wage rate by price level

question

What affects the household consumption and labor Supply decisions

answer

Current and expected future wage rate Initial value of wealth Current and future expected non labor income Interest rate

question

An unexpected increase in wealth or non-labor income often leads to a

answer

Decrease in labor Supply

question

Microeconomics

answer

Study of a single factor of an economy - such as individuals, households, businesses, & industries - rather than an economy as a whole.

question

Macroeconomics

answer

Study of a nation's overall economic issues, such as how an economy maintains and allocates resources and how a government's policies affect the standards of living of its citizens

question

Macroeconomics say that prices cannot adjust quickly a situation that Keynes referred to as

answer

Sticky wages

question

Fiscal policy

answer

Government policy that attempts to manage the economy by controlling taxing and spending.

question

Monetary policy

answer

Government policy that attempts to manage the economy by controlling the money supply and interest rates.

question

The path of consumption is likely to be more stable than the path of income this is a part of what theory

answer

Life cycle theory of consumption

question

True or false: The real wage rate is the wage rate in current dollars

answer

False

question

True or false: for most individuals income remains constant life

answer

False

question

life-cycle theory of consumption-

answer

A theory of household consumption: Households make lifetime consumption decisions based on their expectations of lifetime income

question

Many young households borrow in anticipation of

answer

higher income in the future.

question

negative wealth

answer

the value of their assets is less than the debts they owe. A household in its prime working years saves to pay off debts and to build up assets for its later years, when income typically goes down.

question

positive wealth

answer

Households whose assets are greater than the debts they owe

question

key difference between the Keynesian theory of consumption and the life-cycle theory is that

answer

The life-cycle theory suggests that consumption and saving decisions are likely to be based not only on current income but also on expectations of future income

question

nominal wage rate

answer

The wage rate in current dollars.

question

real wage rate

answer

The amount the nominal wage rate can buy in terms of goods and services.

question

nominal wage rate is the wage rate

answer

in current dollars.

question

When we adjust the nominal wage rate for changes in the price level, we obtain the

answer

real wage rate .

question

The real wage rate measures

answer

the amount that wages can buy in terms of goods and services

question

Sources of Economic Growth

answer

Increase in Labor Supply Increase in Physical Capital Increase in the Quality of the Labor Supply (Human Capital) Increase in the Quality of Capital (Embodied Technical Change) Disembodied Technical Change More on Technical Change

question

PBF curves

answer

The production possibility frontier shows all the combinations of output that can be produced if all society's scarce resources are fully and efficiently employed. Economic growth expands society's production possibilities, shifting the ppf up and to the right. it shifts by technological advancement and investment of capital

question

Invention is the

answer

idea

question

Innovation is the

answer

application

question

Keynesian Economics

answer

Keynesian is an active federal government. In one sense, it is the foundation of all of macroeconomics. Keynes was the first to emphasize aggregate demand and links between the money market and the goods market. Keynes also emphasized the possible problem of sticky wages. In recent years, the term Keynesian has been used more narrowly. Keynes believed in an activist federal government. He believed that the government had a role to play in fighting inflation and unemployment, and he believed that monetary and fiscal policies should be used to manage the macroeconomy. This is why Keynesian is sometimes used to refer to economists who advocate active government intervention in the macroeconomy.

question

A key variable in monetarism is the

answer

velocity of money .

question

velocity as the number of times

answer

a dollar bill changes hands, on average, during a year M * V = P * Y

question

Rational expectation hypothesis

answer

The hypothesis that people know the "true model" of the economy and that they use this model to form their expectations of the future.

question

Hayek

answer

Prices are information data points that consumers and markets react to; economy functions better when individuals act in their in their own behalf; market falls when people apply creativity and knowledge; people need a free economy and social Independence in an economy controlled by the government results in Tyranny. Believed that government should not interfere with the economy/gave freedom to individual by limiting power of government, believed government's involvement in economy to combat unemployment and cause inflation

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