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FCP1 Flashcards

1
Q

scarcity def (ch1)

A

condition that arises because wants exceed the ability of resources to satisfy them

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2
Q

economics def (ch1)

A

social science that studies choices that we make to cope with scarcity, the incentives that influence those choices, and arrangements that coordinate them

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3
Q

2 parts of economics (ch1)

A

1 microeconomics - study of choices that individuals and businesses make and how choices interact and are influenced by governments
2 macroeconomics - study of total effects on national economy and global economy of choices that individuals, businesses, and govs make

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4
Q

2 Q’s provide a useful summary of scope of economies (ch1)

A

1 How do choices end up determining WHAT, HOW, and FOR WHOM goods and services get produced?
*What - determines quantity
*How - automation or not
*For whom - income driven
2 When do choices made in pursuit of SELF-INTEREST also promote the SOCIAL INTEREST?

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5
Q

goods and services def (ch1)

A

objects and actions that people value and produce to satisfy human wants

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6
Q

self interest vs social interest (ch1)

A
  • self - choices best for individual who makes them

* social - best for society, displays efficiency and equity

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7
Q

6 ideas that define the economic way of thinking (ch1)

A

1 a choice is a tradeoff (due to scarcity)
2 people make rational choices by comparing benefits and costs
3 benefit is what you gain from something (how much you are willing to give up for it)
4 cost is what you must give up to get something
5 most choices are “how much” choices made at the margin (comparing all relevant alternatives systematically and incrementally)
6 choices respond to incentives

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8
Q

marginal cost and benefit (ch1)

A

1 cost - opportunity cost that arises from a one-unit increase in the activity. What you must give up to get one additional unit of it.
2 benefit - benefit of same item, determined by personal preference
*benefit decreases with addition

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9
Q

normative and positive statements in disagreement (ch1)

A
  • norm - “ought to be” but can’t be tested or proven. Steer clear of these statements.
  • positive - can be settled by facts about “what is”
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10
Q

3 aspects of our lives that economists approach (ch1)

A

1 personal
2 business
3 government

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11
Q

4 large groups of goods and services (ch2)

A

1 consumption goods and services (consumers/personal use)
2 capital goods (business)
3 gov goods and services
4 export goods and services

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12
Q

def of factors of production and 4 categories (ch2)

A

*productive resources used to produce goods and services
1 land - “gifts of nature”/natural resources
2 labor
3 capital - tools and things, not money/financial capital
4 entrepreneurship

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13
Q

human capital def (element of labor value)

ch2

A

knowledge and skill people obtain from education and experience
*increases quality of labor, and therefore quality of goods or services produced

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14
Q

4 factors of the services people sell for income (ch2)

A

1 rent - use of land
2 wages - paid for services of labor
3 interest - use of capital
4 profit/loss - entrepreneurship

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15
Q

functional distribution of income - HOW

ch2

A

69% wages,

and 31% rent, interest, and profit

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16
Q

personal distribution of income - TO WHOM

ch2

A

20% of population has 51% of income (richest) and 20% has 3% of income (poorest)

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17
Q

2 types of economies in the world (ch2)

A

1 advanced

2 emerging market and developing economies (4 out of 5 people live in one of these economies)

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18
Q

household, firm, and market def (ch2)

A
  • household - group of people living together (choose how much to spend on goods and services)
  • firm - institution that organizes the production of goods and service
  • coordinated by market - arrangement that brings buyers and sellers together and get info and do business with each other (can be goods or factor market)
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19
Q

2 levels of government (ch2)

A

1 federal

2 state and local

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20
Q

3 things the federal gov’s major expenditures provide (ch2)

A

1 goods and services (legal system and national defense)
2 social security and welfare payments
3 transfers to state and local gov’s

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21
Q

3 main taxes paid into the federal gov (ch 2)

A

1 personal income tax
2 corporate/business tax
3 social security tax

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22
Q

2 of state/local gov’s major expenditures (ch2)

A

1 goods and services (state courts, police, city services)

2 welfare benefits

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23
Q

3 main taxes paid to state and local gov (ch20

A

1 sales taxes
2 property taxes
3 state income tax

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24
Q

largest expenditure by state and local gov (ch2)

A

education (34% of total)

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25
Q

2 main ways the households and firms in the US economy interact with the households and firms in other economies (ch2)

A

1 international trade

2 international finance

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26
Q

production possibilities frontier def (ch3)

A

boundary between the combinations of goods and services that can be produced and the combinations that cannot be produced, given the available factors of production and state of technology

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27
Q

3 features of production possibilities the production possibilities frontier (PPF) identifies (ch3)

A

1 attainable and unattainable combinations
2 efficient and inefficient productions
3 tradeoffs (different combinations of efficiency) and free lunches (utilizing efficiencies to increase out put up to efficiency line)

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28
Q

economic growth def (ch3)

A

sustained expansion of production possibilities

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29
Q

absolute advantage def (ch3)

A

when one person/nation is more productive than another - needs fewer inputs or takes less time to produce a good or perform a production task

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30
Q

comparative advantage def (ch3)

A

ability of a person to perform an activity or produce a good or service at a lower opportunity cost than anyone else

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31
Q

income inequality trend inside most countries and in entire world (ch2)

A
  • most countries - increased

* world - decreased

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32
Q

2 reasons for unequal distribution of global income (ch2)

A

unequal distribution of:
1 human capital
2physical capital

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33
Q

competitive market def (ch4)

A

has so many buyer and so many sellers that no single buyer or seller can influence the price

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34
Q

quantity demanded def (ch4)

A

of any good, service, or resource is the amount that people are willing and able to buy during a specified period at a specified price
*measured per unit of time

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35
Q

law of demand def (ch4)

A

other things remaining the same, if the price of a good rises, the quantity demanded of that good decreases; and if the price of a good falls, the quantity demanded of that good increases

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36
Q

demand def (ch4)

A

relationship between the quantity demanded and the price of a good when all other influences on buying plans remain the same
*ONE quantity at ONE price

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37
Q

demand schedule def (ch4)

A

a list of the quantities demanded at each different price when all other influences on buying plans remain the same

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38
Q

demand curve def (ch4)

A

a graph of the relationship between the quantity demanded of a good and its price when all the other influences on buying plans remain the same
*curve illustrates the law of demand

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39
Q

market demand def (ch4)

A

the sum of the demands of all the buyers in the market

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40
Q

change in demand def (ch4)

A

a change in the quantity that people plan to buy when any influence on buying plans other than the price of good changes

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41
Q

6 main influences on buying plans that change demand (ch4)

A

1 prices of related goods - move the same direction
2 expected future prices - increase/increase and decrease/decrease current demand
3 income - increase/normal good, decrease/inferior good
4 expected future income and credit - increase/increase and decrease/decrease
5 number of buyers - larger/higher
6 preferences

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42
Q

substitute and complement def (ch4)

A
  • substitute - good that can be consumed in place of another good
  • complement - good that is consumed with another good
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43
Q

change in quantity demand def (ch4)

A

a change in the quantity of a good that people plan to buy that results from a change in the price of the good with all other influences on buying plans remain the same.
*change in price only

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44
Q

quantity supplied def (ch4)

A

amount of any good, service, or resource that people are willing and able to sell during a specified period at a specified price

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45
Q

law of supply (ch4)

A

other things remaining the same, if the price of the good rises, the quantity supplied of that good increases; and if the price of the good falls, the quantity supplied of that good decreases

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46
Q

supply def (ch4)

A

the relationship between quantity supplied and the price of a good when all other influences on selling plans remain the same
*measured at ONE quantity at ONE price

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47
Q

supply curve def (ch4)

A

graph of relationship between quantity supplied of a good and its price when all other influences on selling plans remain the same

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48
Q

market supply def (ch4)

A

the sum of the supplies of all the sellers in the market

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49
Q

change in supply def (ch4)

A

change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes

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50
Q

5 main influences on selling plans that change supply (ch4)

A

1 price of related goods - substitutes move in opposite directions, complements move together
2 prices of resources and other inputs - increased price, reduced output
3 expected future prices - higher, decrease in current output
4 number of sellers - big/big, small/small
5 productivity - increase/increase, decrease/decrease

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51
Q

substitute and complement in production def (ch4)

A
  • substitute - good that can be produced in place of another good
  • complement - good that is produced along with another good
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52
Q

change in the quantity supplied def (ch4)

A

a change in the quantity of a good that suppliers plan to sell that results from a change in the price of the good
*change in price only

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53
Q

market equilibruim def (ch4)

A

when the quantity demanded equals the quantity supplied - buyers’ and sellers’ plans are in balance

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54
Q

equilibruim price def (ch4)

A

the price at which the quantity demanded equals the quantity supplied
*intersection of supply and demand curve on graph

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55
Q

equilibruim quantity def (ch4)

A

the quantity bought and sold at the equilibruim price

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56
Q

law of market forces (ch4)

A

when there is a surplus the price falls; and when there is a shortage, the price rises

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57
Q

how markets are normally in equilibruim (ch4)

A

price adjustments eliminate shortages and surplises

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58
Q

3 questions to ask to explain and predict changes in prices and quantities (ch4)

A

1 does the event influence demand or supply?
2 does the event increase or decrease demand or supply - shift the demand curve or the supply curve rightward or leftward?
3 what are the new equilibruim price and equilibruim quantity and how have they changed?

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59
Q

gross domestic product (GDP)

*4 parts(ch5)

A

the market value of all the final goods and services produced within a country in a given time
1 value produced - adding up total market value
2 what produced - final good or service (complete) ONLY, NOT intermediate good or service (component)
*also excludes used goods and financial assets
3 where produced - only produced within a country count toward that country’s GDP
4 when produced - measure is over a specific period of time

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60
Q

Exception to what GPD sets a value on (ch5)

A

only values items bought/sold (traded) on market, EXCEPT homes. It pretends that you are renting your home to yourself.

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61
Q

4 groups that buy the final goods and services produced and their corresponding expenditures (ch5)

A

1 households - consumption expenditure
2 firms - investment (purchase of capital goods)
3 government - expenditure on goods and services
4 the rest of the world - net exports of goods and services

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62
Q

Total expenditure formula (ch5)

A

Y = C + I + G + NX
total income = consumption expenditure+ investment + government expenditure + net exports of goods and services
*because firms pay out everything they receive as income to the factors of production

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63
Q

value of production explanation (ch5)

A

value of production equals income equals expenditure

  • firms - value is cost or production which equals income
  • purchasers of goods and services - value is cost of buying production, which equals expenditure
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64
Q

2 approaches to measuring US GDP (ch5)

A

1 expenditure approach - C+I+G+NX
2 income approach - adds categories of (1) wage income (labor) and (2) interest, rent, and profit income (net operating surplus)
*sum of wages, interest, rent, and profit is called net domestic product at factor cost

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65
Q

2 adjustments to make net domestic product at factor cost and find GDP (ch5)

A

1 from factor cost to market prices

2 from net product to gross product - depreciate the value of capital that results from its use and from obsolescence

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66
Q

statistical discrepancy def (ch5)

A

discrepancy between the expenditure approach and the income approach estimates of GDP, calculated as the GDP expenditure total minus the GDP income total
*since not all income is reported

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67
Q

gross national product (GNP) def (ch5)

A

market value of all the final goods and services produced anywhere in the world in a given time period by the factors of production supplied by the residents of the country
*GNP=GDP+net factor income received from or paid to other countries

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68
Q

real vs nominal GDP (ch5)

A

1 real - value of final goods and services produced in a given year expressed in terms of the prices in a base year
2 nominal - value of final goods and services produced in a given year expressed in terms of prices in the SAME YEAR
*nominal GDP is just s more precise name for GDP

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69
Q

method of calculating real GDP (ch5)

A

1 take base year and comparison year
2 multiply quantity in comparison year by cost in base year to find what expenditure would have been in comparison year if prices had remained the same
3 sum expenditures to find real GDP for comparison year

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70
Q

3 main purposes we use estimates of real GDP for (ch5)

A

1 to compare the standard of living over time
2 to track the course of the business cycle
3 to compare the standard of living among countries

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71
Q

standard of living vs real GDP per person def (ch5)

A

1 standard of living - level of consumption of goods and services that people enjoy, on average
2 real GDP per person - real GDP divided by the population

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72
Q

potential GDP def (ch5)

A

value of real GDP when all the economy’s factors of production (labor, capital, land and entrepreneurial ability) are fully employed
*potential GDP fluctuates less than real GDP over time because real GDP has variances in quantity of labor

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73
Q

business cycle def (ch5)

  • 2 phases that every cycle has
  • 2 turning points that every cycle has
A

periodic but irregular up-and-down movement of total production and other measures of economic activity
*phases
1 expansion - period in which GDP increases
2 recession - GDP is in decline
*turning points
1 peak - highest level of real GDP that has been attained up to that time (end of expansion/beginning of recession)
2 trough - real GDP reaches low point from which a new expansion begins

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74
Q

4 exclusions/limitations of using GDP to compare standard of living in other countries
*2 other influences on standard of living (ch5)

A

1 household production - household/family chores
2 underground production - stuff that is not reported
3 leisure time
4 environmental quality
*2 other influences:
1 health and live expectancy
2 political freedom and social justice

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75
Q

Consumer price index (CPI) def (ch7)

A

a measure of the average of the prices paid by urban consumers for a fixed market basket of consumption goods and services
*aka: cost of living index - amount of money people need to spend to achieve a given standard of living

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76
Q

reference based period def (CPI) (ch7)

A

period for which the CPI is defined to equal 100. Currently, the reference base period is 1982-1984.

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77
Q

3 stages of constructing the CPI (ch7)

A

1 selecting the CPI market basket
2 conducting the monthly price survey
3 calculating the CPI - (1) find the cost of the CPI market basket at base period prices, (2) find the cost of the CPI market basket at current period prices, (3) calculate the CPI for the base period and the current period
*current/base price * 100

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78
Q

inflation calculation (ch7)

A

(CPI in current year-CPI in prev year)/CPI in pref year
*100

*negative is falling price/deflation and positive is rising/inflation

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79
Q

2 reasons why CPI is not a perfect measure of cost of living (ch7)

A

1 does not measure all changes in cost of living

2 even components that are measured are not always accurate

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80
Q

4 possible CPI biases and ways to overcome them

*amount that CPI is overstated due to bias (ch7)

A

1 new goods bias - replacing comparable goods when others become obsolete
2 quality change bias - try to calculate cost of improved quality
3 commodity substitution bias - try to account for cost of substitutes
4 outlet substitution bias
*1.1%

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81
Q

2 consequences of the CPI bias (ch7)

A

1 distortion of private contracts - inflated cost of living adjustment
2 increase in gov outlays and decrease in taxes - inflated tax breaks

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82
Q

3 indexes that are less biased than CPI (ch7)

A

1 GDP price index/deflator - average of the current prices of all the goods and services included in GDP expressed as a percentage of base-year prices
2 personal consumption expenditures/PCE price index - average of the current prices of the goods and services included in the consumption expenditure component of GDP expressed as a percentage of base-year prices
3 PCE price index excluding food and energy/core inflation rate - annual percentage change in PCE price index excluding the prices of food and energy

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83
Q

nominal vs real value (money) (ch7)

A

nominal - expressed in current dollars

real - expressed in dollars of given year

84
Q

3 nominal and real variables occupy a central position in macroeconomics (ch7)

A

1 nominal GDP and real GDP
2 nominal wage rate and real wage rate
3 nominal interest rate an real interest rate

85
Q

3 types of data collected by the Current Population Survey (ch6)

A

1 working-age population - total number of people 16+ who are not in jail, hospital, or some other form of institutional care of in the US Armed Forces
2 divides working-age pop into two groups: those in and not in labor force (# of people employed plus # unemployed)
3 labor force divided into two groups: employed and unemployed

86
Q

2 main labor market indicators (ch6)

A

1 unemployment rate - % of people in labor force who are unemployed
(# unemployed/labor force) * 100
2 labor force participation rate - % of working-age pop who are members of labor force
(labor force/working-age pop) * 100

87
Q

2 types of underutilization of labor which are omitted by the unemployment rate (ch6)

A

1 marginally attached workers - person who does not have job, is available to work, has not made effort to find job in 4 weeks, but has looked in recent past ( a discouraged worker hasn’t looked due to being disappointed in search recently)
2 part-time workers - work 35 hours or less/week
*2 groups: part-time for economic reasons (looking for full time but working part time) and part-time for noneconomic reasons (don’t want full-time work)

88
Q

3 types of unemployment (ch6)

A

1 frictional unemployment - arises from people entering and leaving the labor force, to find better jobs, and from ongoing creation and destruction of jobs. It is a permanent and healthy things in a growing economy.
2 structural unemployment - arises when changes in technology or international competition change skill needed to perform or change locations of jobs. Can be painful.
3 cyclical unemployment - fluctuating unemployment over a business cycle that increases during a recession and decreases during expansion.

89
Q

natural vs full employment def (ch6)

A
  • natural unemployment rate - % of labor force unemployed due to frictions and structural change when there is no cyclical unemployment
  • full - when all unemployment is frictional or structural/there is no cyclical unemployment
90
Q

4 important factors that influence natural unemployment (ch6)

A

1 age distribution of population - young pop=high level of frictional employment and old=low lever
2 pace of structural change
3 real wage rate - real wage exceeding market equilibruim creates surplus of labor and rise in natural unemployment rate
4 unemployment benefits

91
Q

output gap def (GDP) (ch6)

A

real GDP minus potential GDP expressed as % of potential GDP

92
Q

3 main schools of though on macroeconomics (h8)

A

1 classical - view that the market economy works well, that aggregate fluctuations are natural in an expanding economy, and that gov intervention cannot improve the efficiency of the market economy
2 keynesian - view that the market economy is inherently unstable and needs active gov intervention to achieve full employment and sustained economic growth
3 monetarist - view that the market economy works well, that aggregate fluctuations are a natural consequence of expanding economy, but that fluctuations in the quantity of money generate the business cycle

93
Q

4 characteristics of today’s consensus on economics (ch8)

A
  • classical - performance at full employment, but doesn’t explain performance in spending slump
  • keynesian - increase in gov spending or tax cut can help restore full employment
  • monetarist - lower quantity of $ drives up interest rates, which cuts spending, increasing quantity of $ can help
  • long-term economic growth is more important than short-term
94
Q

production function def (ch8)

A

relationship that shows the max quantity of real GDP that can be produced as the quantity of labor employed changes and all other influences on production remain the same

95
Q

3 factors that drive the quantity of labor employed, and therefore drive the potential GDP (ch8)

A

1 demand for labor
2 supply of labor
*quantity of labor supplied increases as real wage rate increases due to (1) hours per person increase, (2) labor force participation increase
3 labor market equilibruim - equilibrium means full employment and real GDP=potential GDP

96
Q

2 fundamental causes of unemployment that cut across frictional-structural classifications (ch8)

A

1 job search - people looking for jobs are part of the unemployed
2 job rationing - when real wage rate is above full-employment equilibrium level

97
Q

3 factors that change over time and determine the amount of job search (ch8)

A

1 demographic change - age/birthrate, two income households, etc.
2 unemployment benefits - reduces opportunity cost
3 structural change - technology change eliminating or creating jobs

98
Q

3 reasons real wage may be set above full-employment level (causing job rationing) (ch8)

A

1 efficiency wage - wage set above equilibrium wage rate that is intended to induce greater work effort
2 minimum wage
3 union wage

99
Q

economic growth rate def and formula (ch9)

A

annual percentage change of real GDP

(real GDP this year-real GDP in prev year) / real GDP in prev year * 100

100
Q

real GDP per person/per capita def and formula (ch9)

A

real GDP divided by population
(real GDP PP curr yr-real GDP PP last yr) / real GDP last year * 100

*used as indicator of standard of living

101
Q

Rule of 70 def (ch9)

A

of years it takes for the level of any amount to double is approximately 70 divided by the APR

102
Q

labor productivity def and formula (ch9)

A

quantity of real GDP produced by one hour of labor

real GDP/aggregate hours

103
Q

to categories that influence the labor productivity growth (ch9)

A

1 saving and investment in physical capital - increase productivity (factories, machines, etc.) *law of diminishing returns
2 expansion of human capital and discovery of new technologies *human capital does NOT display law of diminishing returns

104
Q

3 sources of human capital (ch9

A

1 education/training - source of discovery of new technologies
2 job experience
3 health and diet

105
Q

role of quantity of labor growth and labor productivity growth in real GDP growth (ch9)

A 
*Quantity of labor growth is driven by:
1 population growth
2 labor force participation
3 average hours per worker
*labor productivity growth is driven by:
1 physical capital growth
2 human capital growth
3 technological advances
106
Q

Old and New economic growth theories (ch9)

A

1 - old/classical growth theory - clash between and exploding population and limited resources will eventually bring economic growth to an end (aka: malthusian/doomsday theory)
2 New growth theory - unlimited wants lead us to ever greater productivity and perpetual economic growth based on:
(1) human capital expanding because of choices, (2) discoveries resulting from choices, (3) discoveries bringing profit, and competition destroying profit
and that (1) many people can use discoveries at the same time, (2) physical activities can be replicated

107
Q

reason for economic growth to be in perpetual motion (and continuous cycle) (ch9)

A

our insatiable wants and needs lead to innovation, companies, but are continually not satisfied and start over

108
Q

3 preconditions of economic growth in a country (ch9)

A

1 economic freedom - condition in which people are able to make personal choices, their private property is protected by the rule of law, and they are free to buy and sell in markets
2 property rights - social arrangement that governs the protection of private property
3 free markets - allows specialization in trade, and greater real GDP

109
Q

5 main actions that govs can take to achieve faster economic growth (ch9)

A

1 create incentive mechanisms - primarily property rights and legal systems are missing
2 encourage saving - to accumulate capital. Tax incentives (like IRAs) help.
3 encourage research and development
4 encourage international trade - to gain from specialization
5 improve the quality of education - with tax incentives

110
Q

financial vs physical capital (ch10)

A

financial - the money used to buy physical capital

physical - the objects

111
Q

gross vs net investment (ch10)

A
  • gross - total amount spent on capital

* net - gross investment plus net change (investment/depreciation)

112
Q

wealth def (ch10)

A

the value of all things people own

113
Q

3 types of financial markets (ch10)

A

1 loan
2 bond
3 stock

114
Q

financial institution def

*5 key types of FIs (ch10)

A

firm that operates on both sides of the market for financial capital: borrows and lends
1 investment banks - help other FIs raise money
2 commercial banks - consumer use
3 gov-sponsored mortgage lenders - buy mortgages and sell as mortgage-backed securities
4 pension funds - use pension contributions to invest in stock
5 insurance companies - invest in bonds and stocks

115
Q

solvent vs insolvent net worth (ch10)

A

solvent - positive

insolvent - negative

116
Q

loanable funds market def (ch10)

A

aggregate of all the individual financial markets

  • aggregate of market for loans, bonds, and stocks
  • only has one average interest rate, known as THE interest rate
117
Q

3 uses for loanable funds and 3 sources of loanable funds (ch10)

A 
*uses:
1 business investment
2 gob budget deficit
3 international investment or lending
*sources:
1 private savings
2 gov budget surplus
3 international borrowing

*retained earnings (dividends earned by stockholders by reinvested by a firm) count as both business investment and private savings

118
Q

2 factors that influence the demand for loanable funds and rule about their relationship (ch10)

A

1 the real interest rate- opportunity cost of funds used to purchase capital
2 expected profit

*other things remaining the same, the higher the real interest rate, the smaller is the quantity of loanable funds demanded; the lower, the greater quantity of loanable funds demanded

119
Q

def of change in demand for loanable funds (ch_

A

change in expected profit from new capital - shifts demand curve right or left

120
Q

5 factors that influence the quantity of loanable funds supplied
*relationship (ch10)

A 
1 the real interest rate
2 disposable income*
3 wealth*
4 expected future income - will DECREASE savings now*
5 default risk*
*also change supply/shift supply curve

*higher real interest rate, greater quantity of loanable funds supplied; lower/less

121
Q

4 factors that change supply of loanable funds (ch10)

A 
1 disposable income
2 wealth
3 expected future income
4 default risk
*all same as factors that influence QUANTITY supplied, less the real interest rate since that is specific to quantity only
122
Q

equilibruim real interest rate def (ch10)

A

interest rate at which quantities of loanable funds demanded and supplied are equal

123
Q

force that drives the real interest rate and therefore the loanable funds market (ch10)

A

gov budget surplus or deficit and the factors that affect it

  • surplus increases SUPPLY of loanable funds (new curve)
  • deficit increases DEMAND of loanable funds (new curve there)
124
Q

crowding-out effect def (ch10)

A

tendency for a gov budget deficit to raise the real interest rate and decrease investment
*investment does not decrease by the full amount of the deficit because private savings increases

125
Q

3 functions of money (ch11)

A

1 medium of exchange - object generally accepted in return for goods and services
2 unit of account - agreed-upon measure for stating the price of goods and services
3 store of value - commodity or token that can be held and exchanged later for goods and services

126
Q

fiat money def and 2 examples (ch11)

A

objects that are money because the law decrees or orders them to be money
1 currency
2 deposits at banks and other FIs

127
Q

2 official measures of money (ch11)

A

M1 - currency held by individuals and businesses, traveler’s checks, and checkable deposits owned by individuals and businesses
M2 - M1 plus savings deposits, money market funds, and other deposits

128
Q

3 types of financial institutions that accept the deposits that are part of the nation’s money (ch11)

A

1 commercial banks
2 thrift institutions - savings and loan associations, savings banks, and credit unions
3 money market funds - FI that obtains funds by selling shares and using them to buy assets such as Treasury bills

129
Q

bank’s reserves def (ch11)

A

currency in the bank’s vaults plus the balance on its reserve account at the Federal Reserve Bank

130
Q

Federal funds rate def (ch11)

A

interest rate on interbank loans (loans made in the federal funds market)

131
Q

role of the Federal Reserve system/the Fed as a central bank (ch11)

A

has the public authority that provides banking services to banks and gov s and regulates FIs and markets
*main task is to regulate the interest rate and quantity of money to achieve low and predictable inflation and sustained economic expansion

132
Q

4 of the Fed’s policy tools

*how they work (ch11)

A

1 required reserve ratios
2 discount rate - rate at which Fed stands ready to lend reserves to commercial banks
3 open market operations - New York Fed selling bills and bonds
4 extraordinary crisis measures - (1) quantitative easing/QE- low or 0 fed funds rate, (2) credit easing - when Fed buys private securities or makes loans to FIs to stimulate lending, (3) operation twist - Fed buys long-term securities and sells short-term securities to lower long-term rates and stimulate long-term borrowing and investment expenditure

*work by changing either demand or supply for the monetary base, which in turn changes the interest rate

133
Q

monetary base def (ch11)

A

sum of coins, Federal Reserve notes, and bank reserves at the Fed
*Fed changes demand or supply

134
Q

money multiplier def (ch11)

A

number by which a change in the monetary base is multiplied to find the resulting change in the quantity of money
*is driven by the reserve ration and currency drain ratio, and is a dynamic number

135
Q

2 factors that influence the quantity of money demanded (ch12)

A

1 the value of money

2 the opportunity cost of holding money

136
Q

relationship between nominal interest rate and quantity of money demanded (ch12)

A

other things remaining the same, the higher the nominal interest rate, the smaller is the quantity of money demanded
*rate is only influence on money that fluctuates

137
Q

3 main influences on the demand for money (ch12)

A

1 the price level - inc/inc
2 rel GDP - inc/inc
3 financial technology
*all of these items are fixed

138
Q

How interest rate evens itself out to market equilibruim (ch12)

A

When rate increases above equilibruim, people invest in bonds. This decreases rate.
*rate and bond price move in opposite directions

139
Q

How Fed drives rate changes (12)

A

changing quantity of money supplied

  • inc money-decrease rate
  • dec rate - inc money
140
Q

def of money market in the log run (ch12)

A

refers to economy at full employment when real GDP equals potential GPD
*description of the economy ON AVERAGE over a business cycle

141
Q

What determines the value of money in the long run? (ch12)

A

market equilibruim

  • increased value = inc spending and inc prices, which lead to less spending
  • vice versa
142
Q

relationship between quantity of money and price of money (ch12)

A

in the long run and other things remaining the same, a give % change in the quantity of money brings an equal % change in the price level

143
Q

quantity theory of money def (ch12)

A

the proposition that when real GDP equals potential GDP, an increase in the quantity of money brings an equal % increase in the price level

144
Q

2 ways of seeing relationship between quantity of money and price level (ch12)

A

1 velocity of circulation - ave # times/year that each dollar gets used to buy final goods/services
2 equation of exchange - states that the quantity of money multiplied by the velocity of circulation equals the price level multiplied by real GDP

145
Q

relationship between growth rate of the quantity of money and inflation rate (ch12)

A

in the long run and other things remaining the same, a change in the growth rate of the quantity of money brings an equal change in the inflation rate

146
Q

hyperinflation rate def (ch12)

A

inflation at a rate that exceeds 50% a month (which if 12,875% a year)

147
Q

4 reasons that inflation decreases potential GDP, slows economic growth, and consumes leisure time (ch12)

A

1 tax costs - give rise to inflation and make pre tax money worth less over time
2 shoe-leather costs - cost of finding alternatives to keep money safe/valuable
3 confusion costs
4 uncertainty costs

148
Q

relationship between price level and quantity of real GDP supplied (ch13)

A

other things remaining the same, the higher the price level, the greater the quantity of real GDP supplied and the lower the price level the small the quantity supplied

149
Q

3 ways firms respond to a change in the real wage rate by changing the quantity of labor employed and quantity produced

A

1 change output rate
2 shut down temporarily or restart production
3 go out of business or start up a business

150
Q

3 reasons influences on production plans other than price level changes regarding aggregate supply changes (ch13)

A

1 potential GDP changes
2 money wage rate changes
3 money prices of other resources change

151
Q

relationship of real GDP demanded and price level (ch13)

A

other things remaining the same, the higher the price level, the smaller is the quantity of real GDP demanded; and the lower the price level, the higher quantity demanded

152
Q

3 things that are changed by the change in price level which cause the change in quantity demanded (ch13)

A

1 the buying power of money
2 the real interest rate
3 the real prices of exports and imports

153
Q

3 factors that may change aggregate demand (ch13)

A 
1 expectations about the future
2 fiscal (changing taxes, transfer payments, and gob expenditures  on goods and services) policy and monetary (changing the quantity of money and the interest rate) policy
3 the state of the world economy - exchange rate
154
Q

macroeconomic equilibruim def (ch13)

A

when the quantity of real GDP demanded equals the quantity of real GDP supplied at the point of intersection of the AD curve and the AS curve

155
Q

3 types of macroeconomic equilibruim (ch13)

A

1 full-employment - when equilibrium real GDP equals potential GDP
2 above - has inflationary GAP where real GDP is below potential and prices rise
3 below - has recessionary GAP when real GDP is above potential GDP and causes prices to fall

156
Q

2 sources of inflation (ch13)

A

1 demand-pull inflation - starts because aggregate demand increases
2 cost-push inflation - inflation that begins with an increase in cost. Leads to stagflation - combination of recession and inflation

157
Q

aggregate planned expenditure and its 2 parts (ch14)

A

*planned consumption expenditure, investment, gov expenditure, exports, minus imports
1 autonomous expenditure - does NOT respond to change in real GDP. This is a fixed amount people spend regardless of income level.
2 induces expenditure - DOES respond to change in real GDP

158
Q

consumption function def (ch14)

A

relationship between consumption expenditure and disposable income, other things remaining the same

159
Q

equilibruim expenditure def

*how equilibruim balances out (ch14)

A

the level of aggregate expenditure that occurs when aggregate PLANNED expenditure equals real GDP
*from below equilibruim, unplanned decreases in inventories induces firms to increase production; starting from above equilibruim, unplanned increases in inventories induce firms to decrease production

160
Q

short-run Phillips curve def (ch15)

A

a curve that shows the relationship between the inflation rate and the unemployment rate when the natural unemployment rate and the expected inflation rate remain constant

  • shows TRADEOFF between unemployment and rate
  • movement along this curve is the equivalent of movement along an aggregate supply curve
161
Q

Okun’s Law def (ch15)

A

for each % point that the unemployment rate is above/below the natural unemployment rate, real GDP is 2% points below/above potential GDP

162
Q

long-run Phillips curve def (ch15)

A

the vertical line that shows the relationship between inflation and unemployment when the economy is at full employment

163
Q

expected inflation rate def (ch15)

A

the inflation rate that people forecast and use to set the money wage rate and other money prices

164
Q

natural rate hypothesis def (ch15)

A

the proposition that when the inflation rate changes, the unemployment rate changes TEMPORARILY and eventually returns to the natural unemployment rate
*unemployment changes due to real wage changes balance out eventually on their own

165
Q

rational expectation def (ch15)

A

forecast that results from the use of all relevant data and economic science
*primary factor is forecasting Fed’s actions

166
Q

best way Fed can intervene to keep unemployment low (ch15)

A

by keeping inflation low and stable

167
Q

Federal budget def and 2 purposes (ch16)

A

an annual statement of tax revenues, outlays, and surplus or deficit of the gov
1 to finance the activities of the federal gov
2 to achieve macroeconomic objectives

168
Q

fiscal policy def (ch16)

A

the use of the federal budget to achieve macroeconomic objectives of high and sustained economic growth and full employment

169
Q

fiscal year def (ch16)

A

a year that begins Oct 1 and ends Sep 30. Fiscal 2013 BEGINS Oct 1, 2012

170
Q

balanced budget (ch16)

A

budget balance = tax revenues - outlays

  • balanced - when tax revenues equal outlays
  • deficit - outlays exceed revenues
  • surplus - revenues exceed outlays
171
Q

national debt def (ch16)

A

the amount of gov debt outstanding - debt that has arisen from past budget deficits

172
Q

4 alternatives for the gov to meet its Social Security and Medicare obligations (ch16)

A

1 raise income taxes
2 raise Social Security taxes
3 cut Social Security benefits
4 cut other federal gov spending

173
Q

2 schools of thought on macroeconomics (ch16)

A

1 Keynesian - fiscal stimulus will boost real GDP and create/save jobs. Increases demand and has a multiplier effect.
2 mainstream - Keynesians over-estimate multiplier effect and the effects are small and short-lived

174
Q

automatic vs discretionary fiscal policy (ch16)

A

*automatic - a fiscal policy that is triggered by the state of the economy. Have automatic stabilizers that work to stabilize real GDP without explicit action by gov. (ex: induced taxes, needs-tested spending)
2 discretionary - a policy that is initiated by an act of Congress.

175
Q

structural vs cyclical surplus/deficit (ch16)

A
  • structural - budget balance that would occur if the economy were at full employment
  • cyclical - budget balance that arises purely because tax revenues and outlays are not at their full-employment levels

*cyclical deficit will correct itself but structural takes an act of Congress

176
Q

gov expenditure multiplier def (ch16)

A

the effect of a change in gov expenditure on goods and services on aggregate demand
*multiplier = change in equilibruim expenditure/change in autonomous expenditure

177
Q

tax multiplier def (ch16)

A

the effect of a change in taxes on aggregate demand

*does not multiply at as great a speed as gov expenditure multiplier

178
Q

transfer payments multiplier def (ch16)

A

the effect of a change in transfer payments on aggregate demand

  • increase here increases disposable income/consumption expenditure
  • like tax multiplier, increases less than $1 of income per $1 changed
179
Q

balanced budget multiplier def (ch16)

A

the effect on aggregate demand of a SIMULTANEOUS change in gov expenditure and taxes that leaves the budget balance unchanged

180
Q

4 factors that hamper the ability to calculate discretionary fiscal stabilization policy (ch16)

A

1 law-making time lag
2 shrinking area of law-maker discretion (much is off limits due to being used for homeland security and Medicare)
3 estimating potential GDP (since it is not a guaranteed science)
4 economic forecasting (also not an exact science)

181
Q

does supply or demand have a greater impact at achieving full potential GDP? (ch16)

A

supply

182
Q

supply-side effect def (ch16)

A

the effects of fiscal policy on potential GDP and the economic growth rate

183
Q

2 ways in which the fiscal policy influences the economic growth rate (ch16)

A

1 interest rate tax wedge - between rate paid by borrowers and earned by lenders. Lowers amount of savings and slows economic growth.
2 crowding out lenders - raise in real interest rate crowds out private investors.

184
Q

The Fed’s “dual mandate” (ch17)

A

1 to achieve stable prices - keep inflation rate around 2%/year
2 to maximize employment - keep output gap close to 0 and real GDP close to potential GDP
*price stability is key goal

185
Q

financial stability def (ch17)

A

a situation in which financial markets and institutions function normally to allocate capital resources and risk
* this is a prerequisite of the Fed for any goal achievement

186
Q

monetary policy instrument def (ch17)

A

a variable that the Fed can directly control or closely target and that influences the economy in desirable ways
*Fed can target either the fed funds rate or monetary base (quantity of money), but not both

187
Q

2 alternative decision-making strategies which might be used by a central bank (ch16)

A

1 instrument rule - a decision rule for monetary policy that sets the policy instrument by a formula based on the current state of the economy (plug current inflation rate and output gap into formula to calculate new fed funds rate)
2 targeting rule - decision rule for monetary policy that sets the policy instrument at a level that makes the central bank’s forecast of the ultimate policy equal to their targets

188
Q

how the Fed manipulates reserves to hit target fed funds rate (ch17)

A

New York Fed conducts open market operations until the supply of reserves is at just the right quantity

189
Q

steps in transmission process when fed manipulates fed funds rate to hit target price or employment goals (ch17)

A

1 fed funds rate rises
2 Other interest rates rise (happens quickly) causing banks to borrow less and lend more.
3 exchange rate rises and dollar appreciates
4 Fed decreases quantity of money and consumers spend less
5 long-term real interest rate rises and decreases supply of bank loans which decreases supply of loanable funds and raises equilibruim real interest rate
6 these change consumption expenditure, investment, and net exports. Rate rise/rise in these areas.

190
Q

2 Fed actions if inflation is below target and real GDP below potential (ch17)

A

1 lowers fed funds rate
2 New York Fed buys securities in open market to increase reserves
*results in supply of money increasing (shift right), short-term rates fall, and quantity of money demanded increases (moves down curve)
*economy speeds up

191
Q

2 Fed actions if inflation is too high and real GDP is above potential GDP (ch17)

A

1 Fed raises target fed funds rate
2 New York Fed sells securities which decreases supply of reserves
*decreases supply of money (shifts left), rate increases, and quantity of money demanded decreases (moves up curve)
*economy slows

192
Q

lag time on inflation, GDP when fed rate changes (ch17)

A
  • real GDP - one year

* inflation - two years

193
Q

3 alternative rules the Fed might have chosen but uses rate changes instead to hit target goals (ch17)

A

1 inflation targeting rule - central bank makes public commitment to achieving an explicit inflation target and explains how it will do so (transparency is key)
2 money targeting rule - makes quantity of money grow at k% per year, where k equals growth rate of potential GDP (operates on stable demand for money and stable velocity of circulation)
3 nominal GDP targeting rule - adjusts the interest rate to achieve a target growth rate for nominal GDP (would push low inflation and real GDP growth in recession)

194
Q

balance of payments accounts def and 3 types (ch19)

A

the accounts in which a nation records its international trading, borrowing, and lending
1 current account - record of sales of exports, minus payments for imports, plus net amount of interest and transfers paid from other countries
2 capital account - record of foreign investment in the US minus US investments abroad
3 official settlement account - record of the change in US official reserves
*sum of balances in these 3 accounts is always 0

195
Q

US official reserves def (ch19)

A

the gov’s holdings of foreign currency

196
Q

net borrower vs net lender and what US is (ch19)

A
  • borrower - borrows more from rest of world than is lending
  • lender - lends more from rest of world than is borrowing

*US is a net borrower

197
Q

debtor vs creditor nation def and what US is (ch19)

A
  • debtor - during its entire history has borrowed more from rest of world than it has lent
  • creditor - has lent more than borrowed

*US has been debtor since 1989

198
Q

what the US debt is spent on (consumption vs capital) (ch19)

A

capital - private and public investments

199
Q

2 reasons why the exchange rate influences the quantity of US dollars demanded (ch19)

A

1 exports effect - larger value or US exports, larger quantity of dollars demanded
2 expected profit effect - larger the expected profit of holding dollars, greater quantity of dollars demanded

200
Q

2 other influences on demand for US dollars (ch19)

A

1 interest rate in the US and other countries - larger US interest rate differential means greater demand for US assets and US dollars.
2 expected future exchange rate - higher future exchange rate/higher demand for US dollars today

201
Q

US interest rate differential def (ch19)

A

The US interest rate minus the foreign interest rate

*higher means more demand for US assets/US dollars

202
Q

3 influences on SUPPLY of US dollars in foreign exchange market (ch19)

A

1 the exchange rate - moves up supply curve
2 interest rates in US and other countries - shifts supply curve
3 the expected future exchange rate - shifts supply curve
*factors are same as DEMAND for dollars, but work in the opposite direction
*other factors remaining the same, the higher the exchange rate, the greater is the quantity of dollars supplied in the foreign exchange market

203
Q

2 forces that drive a change in the exchange rate (ch19)

A

1 purchasing power parity - equal value of money; a situation in which money buys the same amount of goods and services in different currencies. *if currency is worth less/buys less, it is expected that the exchange rate will fall and demand decreases.
2 interest rate parity - equal interest rates when the exchange rate is taken into account

204
Q

China’s involvement in their currency exchange rate (ch19)

A

China targets the yuan compared to the US dollars and buys and holds US dollar reserves to maintain value of yuan

205
Q

best indicator that price stability is being achieved (ch17)

A

core inflation is 1-2% per year

MGC1 (6 decks)

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