Macroeconomics Final Exam Study Guide – Flashcards
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DOW
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composite index of 30 of largest companies
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stagflation
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increase AD, increase price levels, increase unemployment, decrease RGDP
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How to fix stagflation
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increase taxes and lower government spending
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inflationary gap
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increase AD, decrease unemployment, increase RGDP, increase price levels
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how to fix inflationary gap
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increase taxes and lower government spending
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recessionary gap
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decrease AD, increase unemployment, decrease RGDP, decrease price levels
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how to fix recessionary gap
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increase government spending and lower taxes
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rent-seeking
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engaging in costly nonproductive actions in search of profit
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pareto improvement
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no one is made worse off while at least someone is made better off
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reserves
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cash banks keep in vaults or on deposits with Federal Reserve Bank
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RRR (required reserved ratio)
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% of total deposits that must be kept in required reserves
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money created by banks are oversimplified due to
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limited borrowers, limited deposits, and limited regulations
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responsibilities of FED
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conduct nations, supervising and regulating institutions, and to provide financial services for banks
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Ricardian equivalence
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increase in debt has the same effect on economy as an increase in current taxes
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non-excludable
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describes a good or service for which there is no way to prevent those who do not pay for it from consuming it
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growth rate
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% change in GDP
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non-rival
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describes a good where one person's consumption of the good or service does not prevent or limit another person's consumption
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3 functions of money
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unit of account, medium of exchange, and store of value
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barter economy
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an economy without money
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monetary economy
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an economy where goods and services are traded for money
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commodity money
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money with inherent or intrinsic value
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examples of commodity money
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Camels, Gold, Eggs, Diamonds, and tobacco
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qualities of good commodity money
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durable, uniform, easily divisible, high value to weight ratio, difficult for the average person to reproduce
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fiat money
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money with no inherent or intrinsic value
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M1
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a common measure of money supply (cash + checkable deposits)
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M2
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saving deposits, money market mutual funds, and other time deposits
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what is a credit card not money?
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because we do not have ready excess to it
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Federal Deposit Insurance Corporation (FDIC)
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ensures the deposit of money so that a bank run doesn't occur
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required reserves
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the minimum amount of reserves a bank is required to keep
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excess reserves
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actual reserves - required reserves
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money multiplier
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1/rrr
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what is a money multiplier?
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The money multiplier represents the multiplicative power of an initial change in loans on the money supply
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total change in supply of money
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initial change in excess reserves x money multiplier
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increase in the supply of money
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decreases interest rates, increases consumption and investment, and increases aggregate demand
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decrease in the supply of money
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increase interest rates, decrease consumption and investment, and decreases aggregate demand
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monetary policy
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using money and credit to fix macroeconomic problems
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board of governors
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7 individuals
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how long can you be on the board of governors
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14 years
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who is the current chair?
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Bernanke
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Who is likely to be the next chair?
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Yellen
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how long can you be a chair?
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4 years
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Federal Open Market Committee (FOMC)
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7 governors, 1 NY Fed, 4 rotating FED from other 11 banks
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What is determined at the FOMC meetings?
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if monetary policy needs to be changed
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how often do the FOMC meet?
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8 scheduled times a year
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expansionary monetary policy
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increase supply of money, decrease interest rates, increase consumption and investment, and increase aggregate demand
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contracting monetary policy
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decrease supply of money, increase interest rates, decrease consumption and investment, and decrease aggregate demand
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buy bonds
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increase supply of money, decrease interest rates, decrease unemployment, increase aggregate demand, increase RGDP, increase price levels
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sell bonds
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decrease supply of money, increase interest rates, increase unemployment, decrease aggregate demand, decrease RGDP, decrease price levels
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what are the twin deficit
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federal deficit and trade deficit
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factors of demand
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demand increase, value of $ increase demand decrease, value of $ decrease
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factors of supply
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supply increase, value of $ decrease supply decrease, value of $ increase
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what things lead to a change in demand and supply for $?
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Changes in the demand for exports/imports Changes in the demand for US financial assets and financial assets aboard Changes in the demand for US hard assets and hard assets aboard Changes in confidence in the US$ as a store of value Interest rates (about 1 year) increase interest rates = increase value of $ Aggregate demand changes (1-3 years) increase = decrease value of $
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consumer price index
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current price market basket/price of market basket in base year x 100
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problems with GDP as a measure of wellbeing
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government spending may be borrowed, does not include leisure time, does not report nonmarket activity, does not report environment activity, does not correlate perfectly with happiness
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rational expectations theory
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making decisions based off future expectations
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public good
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non-excludable and non-rival
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inflation rate
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CPI most recent year-CPI earlier year/CPI earlier year x 100
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full employment
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when cyclical unemployment is at zero
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cyclical unemployment
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caused by a limited amount of jobs
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structural unemployment
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caused by a worker lacking the necessary skills needed for a job
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seasonal unemployment
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caused by change of seasons
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frictional unemployment
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caused by a natural movement of people from one job to the next
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underemployed worker
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not working to your full capacity
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discouraged worker
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someone who wants to work, but have given up looking
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unemployment rate
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# of unemployed/# in labor force
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labor force participation rate
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# of labor force/# of population
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unemployed
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not employed, but actively seeking work
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labor force
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anyone 16 or over who is working or seeking employment
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property rights
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key to maintaing our resources
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renewable
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overtime, can replenish itself
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nonrenewable
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once depleted, are forever used up
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recession
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two consecutive quarters of negative growth rate
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net exports
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exports minus imports
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government spending
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payment of final goods and services
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investment
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the new purchase of capital, equipment, purchase of new homes, changes in inventory of unsold products
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consumption
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the purchase of final goods and services by consumers
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GDP
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16.7 trillion
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command economy
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government makes economic decisions
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mixed economies
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some economic decisions are made by individuals and some are made by government
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normative economics
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an opinion statement and cannot be tested
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positive economics
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fact based and can be tested
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capital
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long lasting tools for production
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opportunity cost
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the next best forgone alternative
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sunk cost
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cost incurred in the past that cannot be undone
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$20 1. Eat at Mariah's 2. 6 gallons of gas 3. Groceries 4. Movies 5. Drink What is the opportunity cost of getting Mariah's?
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not getting 6 gallons of gas
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GDP per capita
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GDP/population
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physical captial
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capital that is not human for example a desk, computer, building, or factory
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RGDP
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Nominal GDP/GDP deflator x 100
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Funnel Cakes A 0 B 1 C 2 D 3 E 4 Cheese Straws A 12 B 11 C 9 D 6 E 0 What is the opportunity cost of 1 funnel cake from D to E?
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6 Cheese straws
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law of increasing opportunity cost
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as more of one good is produce the opportunity cost increases
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labor
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time humans spend producing
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economic growth
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increases in GDP from one quarter to the next and is representing by a shift outward in the PPF
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inefficient
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points inside PPF
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unattainable
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points outside of PPF
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entrepreneurship
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risk taking or an innovation to produce a new and improved product
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scarcity
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not enough resources to satisfy our unlimited wants and needs
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3 major choices scarcity forces us to make
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how to produce, what to produce, and for whom to produce
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free market economy
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individuals make economic decisions
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technology
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new tools used for production or electronic form of capital
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PPF
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all possible combinations of goods that can be produced given resources and technology
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economics
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the social science that studies the allocation of scarce resources given our unlimited wants and needs
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macroeconomics
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the study of wealth creation and destruction of the population as a whole
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natural resources
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sources of wealth that exist in nature
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human capital
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the experience, education, skill set, and knowledge that humans possess
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current unemployment rate?
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7.3%
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absolute advantage
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more output per unit of input
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comparative advantage
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having the lowest opportunity cost for production
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tariff
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tax on imports
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quota
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limit on trading
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embargo
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complete restriction on trade
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convergence
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the suggestion that countries with lower per capita GDP grow faster than countries with higher per capita GDP
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industralized countries
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first world countries, high level of capital accumulation, highest level of capita per GDP
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industralizing countries
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second world countries, emerging markets, lower level of capita per GDP than industrialized countries
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non-industrializing countries
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third world countries, poorest countries
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inflation
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increase in average price levels
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deflation
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decrease in average price levels
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hyperinflation
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inflation of 200% within a year
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national debt
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when the government owes money
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debt level
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17 trillion
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budget surplus
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revenues exceed expenditures
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budget deficit
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expenditures exceed revenues
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crowding in
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decrease government spending leads to decrease interest rates and increase consumption and investment
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crowding out
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increase government spending leads to higher interest rates and decreases private consumption and investment
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an example of regressive tax
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sales tax
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regressive tax
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average tax rate paid decreases with income earned
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an example of proportional tax
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KY income tax - 6%
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proportional tax
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average tax rate paid stays the same as income increases
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progressive tax
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average tax rate paid increases with income earned
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an example of progressive tax
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federal income tax
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consumer
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purchases final goods and services via borrowing from financial institutions, earnings, and transfer payments
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credit score
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a measure of a persons credit worthiness
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financial institutions
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coordinates savings and investments
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examples of financial institutions
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banks, insurance companies, and credit card companies
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disposable income
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after tax income
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stock market
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firms use this method for expenditures so that they don't have to borrow
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NYSE
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largest stock market
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bulls
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optimistic
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NASDAQ
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second largest stock market
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bears
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pessimistic
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bond market
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an IOU that says you will pay the owner a certain amount of money over a fixed amount of time
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defined benefit
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a definite amount of money a a retiree with earn every year after retirement
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defined contribution
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an employer with contribute a fixed amount every pay period
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firm
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produces goods and services
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sole propriertorship
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one owner
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partnership
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two or more owners
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corporations
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limited liability
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natural adjustment
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self-corretion or doing nothing to fix the macroeconomic problems
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is the term used to describe the macroeconomic problem created when the economy shifts away from full employment due to an increase in AD
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inflationary gap
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You purchase a newly constructed house
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investment
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the federal government spends $1 million on salaries for staff at the White House
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government spending
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aunt clara buys a pair of candlesticks manufactured in Mexico
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consumption and import
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i purchased a used costume at a consignment store
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not counted
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fred purchases 1,000 shares of newly issued stock
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not counted
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the federal government spends $2 billion on military uniforms made in the US
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government spending
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pounds of butter pounds of cheese Topperville 8 4 Redburg 6 2 What is the opportunity cost of one pound of butter in Topperville? a. 6/8 pounds of cheese b 8/6 pounds of cheese c. 4 pounds of cheese d. 2 pounds of cheese e. 1/2 pounds of cheese
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e. 1/2 pound of cheese
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what is the most likely explanation for why growth rates in 3rd world countries are slower than in other countries?
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lack of property right protection
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what allows society to consume at a point past its current PPF?
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economic growth, trade, an increase in resources, new technology
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GDP in the country of Topper was $8,000 in 2012. The GDP deflator for 2012 (with 2000 as the base year) is 120 while the population of Topper is 100 persons. What is the RGDP in 2012?
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$6,666.67
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GDP in the country of Topper was $8,000 in 2012. The GDP deflator for 2012 (with 2000 as the base year) is 120 while the population of Topper is 100 persons. What is the Per Capita GDP in 2012?
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$80
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The following are the values for Consumption, Investment, Imports, Exports, and Government spending for the country of Strowsburg in the year 2020 given in billions of dollars: C = $12,000 I = $4,000 G = $3,000 M = $5,000 X = $3,000 . The GDP in billions in Strowsburg is
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$17,000
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If a government wishes to restrict trade, when what kind of trade barrier is the most beneficial?
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tariff
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$10 1. Go to the zoo 2. Order a pizza 3. Getting a manicure What is the opportunity cost of going to the zoo
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Not ordering a pizza
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intensive growth in labor would be encouraged by which of the following policies? a. higher child tax credits b. more immigration restrictions c. raising the minimum wage d. easier access to credit for education e. all of the above
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d. easier access to credit for education
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which of the following is not a resource as the term is defined by economics? a. a person b. oil c. a building d. money e. all of the above are resources
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d. money
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the individual who argued that the economy should be left aloe to self correct out of macroeconomic problems so that economic growth would be greater
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Hayek
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if aggregate supply increase, then we would expect:
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price levels and unemployment to fall
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what is the trend in the labor force participation rates for men and women over the lat few decades?
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the LFP has decreased for men, but increased for wome
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if we enter into an inflationary gap, what must have happened?
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AD rose
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100,000 non-institutionalized civilians over age 16. 75,000 individuals are currently working, while 20,000 are not working but are actively looking for a job. The remaining 5,000 individuals are neither working nor searching for work. What is the unemployment rate of Topper closest to?
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21.1%
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100,000 non-institutionalized civilians over age 16. 75,000 individuals are currently working, while 20,000 are not working but are actively looking for a job. The remaining 5,000 individuals are neither working nor searching for work. What is the Labor Force Participation rate of Topper
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95%
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100,000 non-institutionalized civilians over age 16. 75,000 individuals are currently working, while 20,000 are not working but are actively looking for a job. The remaining 5,000 individuals are neither working nor searching for work. How many individuals in topper are in the civilian labor force?
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95,000
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If the economy is experiencing an inflationary gap and no policy is enacted then eventually as we adjust back to full employment
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we would expect wages to rise and AS to decrease
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if the economy is experiencing stagflation and no policy is enacted, then eventually as we adjust back to fully employment
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we would expect RGDP to rise and price level to fall
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if the economy begins at full employment and then enters into a recessionary gap, what decreases from its level at full employment?
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price level and RGDP
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if production costs fall, this will lead to
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decreased price level and decreased unemployment
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if the economy initially begins at full employment and there is a decrease in interest rates, then we would expect
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aggregate demand to rise and the economy to enter into an inflationary gap
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if the MPC is .8 and consumers' incomes increase by 150 billion, what is the total change in spending?
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$120 billion
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if the price level increased while the unemployment rate decreased, which of the following must have happened
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aggregate demand increased
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which macroeconomic problems leads to a decrease in the average price level
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both inflationary gap and stagflation
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what is the approximate debt/GDP ratio for the US
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100%
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AD excess of $36 billion and thE MPC =.75, what is the spending multiplier?
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4
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AD excess of $36 billion and thE MPC =.75, what is the tax multiplier?
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-3
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AD excess of $36 billion and thE MPC =.75. Suppose the congress decides to change taxes to return the economy back to full employment. What is the appropriate tax change?
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increase of 12 billion
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AD excess of $36 billion and thE MPC =.75. Suppose the congress decides to change government spending instead to return the economy back to full employment. What is the appropriate change in G?
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decrease by 9 billion
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fiscal policy
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changing levels of government spending and taxes to fix macroeconomic problems
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liberals
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increase government spending and higher taxes
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conservatives
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decrease government spending and lower taxes
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libertarians
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advocate doing nothing
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spending multiplier
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1/(1-MPC)
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tax multiplier
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1-spending multiplier
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NASDAQ composite
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index of how companies list on the NASDAQ perform
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aggregate supply
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the sum total of all goods and service firms and governments are wiling and able to produce at any price level
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aggregate demand
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the sum total of all domestic goods and services that consumers want to buy at any given price levels
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if fiscal policy is used in a recessionary gap then
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unemployment will fall faster than when using no fiscal policy
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what is not an advantage of using fiscal policy to solve a recessionary gap?
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inflation falls
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which macroeconomic situation worsens by most standards if no fiscal policy is enacted?
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inflationary
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if the government lowers government spending then we would expect
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the price level to decrease while unemployment increases
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if fiscal policy is used in an inflationary gap then its immediate effect will be to
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decrease AD
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how has the increase in our GDP compared to our increase in the national debt over the last two decades?
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our national debt has increased faster than our GDP
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an increase in the mpc to consume will
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increase the spending multiplier
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in fiscal policy, tax cuts are used to
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stimulate AD
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assume $80 is deposited in the bank and the required reserve ratio is .2. How much does excess reserves increase by?
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$64
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assume $80 is deposited in the bank and the required reserve ratio is .2. What is the money multiplier?
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5
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assume $80 is deposited in the bank and the required reserve ratio is .2. By how much can the money supply increase?
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$320
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who determines monetary policy?
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FOMC
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if the federal reserve lowers RRR from .1 to .05, then
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the money supply will increase causing interest rates to decrease
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if the federal reserve decrease the supply of money then this will
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cause interest rates to rise and AD to increase
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if the federal reserve bank sells bond, then this will likely
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decrease the money supply and cause a decrease in RGDP
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if the economy is in an inflationary gap, then which of the following actions would help move the economy back towards full employment
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selling bonds
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if the federal reserve lowers the discount rate, then this will
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increase the money supply and increase AD
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