Section 2 A Flashcards
Given the following data, what is the marginal propensity to consume?
Level of
Disposable Level of
Income Consumption
1. $40,000 $38,000
2. 48,000 44,000
.75
The marginal propensity to consume is the percentage of additional income that can be expected to be consumed. Disposable income increased ($48,000 - $40,000) or $8,000. Consumption increased ($44,000 - $38,000) or $6,000. This means that of the additional $8,000 of income, $6,000 will be consumed or 75% of the increase in income. Therefore the marginal propensity to consume equals .75.
____is a measure of the market value of all final goods and services produced in an economy during a year.
It is a ___measure to value the nation’s output.
It excludes ___, which are goods that are purchased for resale or for further processing or manufacturing.
When it excludes the ^^^^, what is it preventing?
Gross domestic product
monetary
intermediate goods
Double counting
Gross Domestic Product also excludes NONPRODUCTIVE TRANSACTIONS that have nothing to do w/ the production of final goods & services such as:
- ___payments such as Soc. Sec, Welfare, & Veteran payments
- inter-family gift and immigrant remittances T/F
- buy, but not sell stocks/bonds and other financial assets T/F
- Firsthand & Secondhand sales T/F
public transfer
True
False -Buy & SELL
False - Only Secondhand
Which of the following is a monetary tool available to the Federal Reserve?
Increasing government spending
Decreasing government spending
Requiring banks to hold a percentage of their deposits on reserve
Decreasing taxes
Requiring banks to hold a percentage of their deposits on reserve
Monetary tools are used by the Federal Reserve (the Fed) to control the money supply.
MONETARY POLICY FOR THE FED - RESERVE REQ
Monetary tools are used by the Federal Reserve (the Fed) to control the ___
All banks are required to hold a percentage of all their deposits on ___. The amount ranges from __ to __
A bank is limited to lending their excess reserves, that is, the difference between the bank's \_\_ and \_\_
The Fed can control the money supply by changing the reserve requirement percentage. This would impact the ___
FED SELDOM UTILIZIES THIS TOOL
money supply.
reserve , 3% to 10%.
total reserves and its required reserves.
money multiplier
MONETARY POLICY FOR THE FED - DISCOUNT RATE
The Fed serves as the “____” for commercial banks and thrifts, and the ___ is the rate the Fed charges when it lends reserves to member institution
FED OCCASIONALLY UTILIZES THIS TOOL
lender of last resort, discount rate
MONETARY POLICY FOR THE FED - OPEN MKT TRAN
___are transactions involving buying and selling of U.S. Treasury or federal agency securities by the Fed in the open market.
If the Fed wishes to ___bank reserves, they would sell securities in the open market, draining excess reserves from the system.
Can NOT buy from individuals, only financial institutions T/F
THIS IS THE MOST COMMON TOOL UTILIZED
Open market operations
decrease
False - Can buy from both individuals and finacial institutions
What are the three monetary policy tools the fed can use?
The ___ is a procedure for planning a project w/o including cost predictions
The ___ is a procedure for planning a project for including cost predictions
Open mkt transactions, Discount rate, reserve requirement
critical path method (CPM)
Program Evaluation & Review Technique (PERT)
To address the problem of a recession, the Federal Reserve Bank most likely would take which of the following actions?
Lower the discount rate it charges to banks for loans.
Sell U.S. government bonds in open-market transactions.
Increase the federal funds rate charged by banks when they borrow from one another.
Increase the level of funds a bank is legally required to hold in reserve.
Lower the discount rate it charges to banks for loans.
A recession is a period in time during which the gross domestic product (GDP) decreases. In order to increase the borrowing of money and stimulate purchases (and thus increasing the demand for goods and strengthening the economy), the Federal Reserve Bank would want to make it more attractive to borrow money. In order to do this, the Fed would lower the discount, or interest, rate it charges to banks for loans.
Due to the decrease in demand for U.S. products, the value of a dollar as compared to other currencies would also decrease. Therefore, the Fed would not sell U.S. government bonds in open-market transactions.
The Federal Reserve Bank would not increase the rate charged by banks when they borrow from one another. An increase in an interest rate would discourage, not encourage, borrowing.
___is one of the key policy tools that is available to attempt to influence the real GDP and the price level.
Monetary policy works through the following process: (3)
Monetary policy
Money Market
Biz investment
Equilibrium GDP
Monetary policy to Control Inflation
- ) The Fed would have a __monetary policy and sell bonds.
- ) Excess reserves would __, and the money supply would ___.
- ) Interest rates would __, and business investment would __.
- ) Aggregate demand would __, and the inflation rate would ___.
restrictive
fall, fall
rise, decline
fall, decline
MONETARY POLICY TO DEAL W/ UNEMPLOYMENT
The Fed would have an expansionary monetary policy and would buy __ & lower ___
Excess reserves would __, and the money supply would ___
Interest rates would __and business investment would __
Aggregate demand would __, and real GDP would __by some multiple of the increase in investment.
bonds, lower discount rates
increase, increase
fall, increase.
increase, increase
MONETARY POLICY TO LOWER INFLATION
With interest rates near 0, fed cant use traditional ___ to deal w/ deflation
Fed should act more aggressively to cut ___
Fed would need to reduce the value of hte ___
Fed would need to expand __purchases (mortgage-backed securities, foreign gov. debt)
Fed would act to lower ___
monetary policy interest rates value of the dollar asset interest rates
In addition to increasing the demand for lendable funds, government borrowing to finance large deficits has which of the following effects?
It decreases the rate of inflation.
It puts upward pressure on interest rates.
It increases the supply of lendable funds.
It exerts downward pressure on interest rates.
It puts upward pressure on interest rates.
Monetary policy is one of the government’s key policy tools that is available to attempt to influence the real GDP and the price level. A restrictive monetary policy by the Federal Reserve would see the sale of bonds, which reduces excess reserves and the money supply, resulting in interest rates rising and business investment declining. Aggregate demand would fall, and the inflation rate would decline.
The consumer price index (CPI) calculation includes all the following biases except:
new goods bias.
quality change bias.
commodity substitution bias.
poverty bias.
Poverty Bias
Poverty Bias is NOT an economic term
____is a sustained increase in the average level of prices and is measured by using a fixed-weight price index.
The ____ __ is determined by comparing the prices paid for the market basket of goods in one period to that paid in another.
Biases in the CPI calculation include the following:
(4)
OTHER WAYS TO MEASURE INFLATION
Other commonly reported measures of inflation include the ____(PPI) that measures the rate of increase in wholesale prices.
The ___ measures the price changes for all goods and serviced included in GDP. It is used when calculating real GDP.
Inflation
inflation rate
New goods bias
Quality change Bias
Commodity Substitution Bias
Outlet Substitution Bias
producer price index
GDP deflator
Define the 4 biases to calculate CPI
New goods bias
Quality Change Bias
Commodity Substitution Bias
Outlet Substitution Bias
New goods bias- New goods constantly replace old goods, and the index does not compare both the price and quality between the old and new good
Quality Change Bias - The quality of many items improves each year and the improvement must be compared to the increase in price of the good.
Commodity Substitution Bias - Consumers have a tendency to cut back on the consumption of relatively more expensive goods and substitute relatively cheaper goods as prices rise.
Outlet Substitution Bias - As prices increase, there is a tendency for more people to shop at discount stores and search for lower priced substitutions.
hich of the following changes would most effectively halt a period of inflation?
Decreasing interest rates by a large amount
Decreasing savings by a small amount
Increasing interest rates by a large amount
Increasing savings by a small amount
Increasing interest rates by a large amount
To contain inflation, the Federal Reserve would have a restrictive monetary policy and sell bonds. Excess reserves would fall, and the money supply would fall. Interest rates would rise, and business investment would decline. Aggregate demand would fall, and the inflation rate would decline.
The discount rate set by the Federal Reserve System is the:
required percentage of reserves deposited at the central bank.
rate that commercial banks charge for loans to each other.
rate that commercial banks charge for loans to the general public.
rate that the central bank charges for loans to commercial banks.
rate that the central bank charges for loans to commercial banks.
The discount rate set by the Federal Reserve System is the rate that the central bank charges for loans to commercial banks.
NOTE: CENTRAL BANK IS THE FED BANK
The ____is the rate paid by commercial banks when borrowing excess reserves from other institutions in the Fed Funds market.
The ___is the base rate that banks use in pricing short maturity loans to their best, or most creditworthy, customers.
The___that commercial banks charge for loans to the general public is determined by conditions in the money market.
federal funds rate
prime rate
interest rate
BIZ CYCLE PHASES - 4 PHASES
- __Phase - more resources deployed & actual output approaches ideal output
- __ Phase – Highest point of output during cycle. Operating above real GDP
- ___ phase – Resources become unemployed and actual output falls below ideal output
- ___ Phase – Lowest point of output in the cyle. High unemployment rate/decline in annual income/overproduction. Real GDP stops decliningA business cycle is measured as the period of time from the peak of one cycle through the four phases to the peak of the next cycle. T/F
Expansion
Peak
Contraction (OR RECESSION)
Trough
True
The business cycle refers to the continual ebb and flow of economic activity. No two cycles are exactly the same, but most are characterized by changes in the price level and the rate of employment and can be identified by common factors.
The trough of a business cycle is generally characterized by:
shortages of essential raw materials and rising costs.
rising costs and an unwillingness to risk new investments.
unused productive capacity and an unwillingness to risk new investments.
declining purchasing power and unused productive capacity.
Unused productive capacity and an unwillingenss to risk new investments.
The Steelworkers Union argued that the standard-of-living for union members had declined through the life of the recently expired contract. The management negotiating team replied that this was not true since workers had received a 3% wage increase in each year of the 3-year contract. Could the union assertion be true?
Yes, because the workers’ real income might fall if price increases had been proportionally smaller that the wage increases received by the workers
No, because the workers’ real income might rise if price increases are proportionally greater than the wage increases received by the workers
No, because the workers’ real income might rise if price increases are proportionally greater than the decline in worker income
Yes, because the workers’ real income might fall if price increases are proportionally greater than the wage increases received by the workers
Yes, because the workers’ real income might fall if price increases are proportionally greater than the wage increases received by the workers
Even though the workers received a 3% annual increase in their nominal wages, their real income (standard-of-living) could have declined if inflation had averaged more than 3% annually during the contract period.
4 Types of Inflation
- ___ is caused by an excess in total spending relative to the economy’s current capacity to produce goods and services. It is an excess of demand relative to output at the current price level.
- ____occurs when rising prices result from an increase in resource costs and thus a rise in per-unit costs of production. Rising per-unit production costs squeeze profits and reduce a firm’s willingness and ability to produce goods and service
- __is an extremely rapid rate of inflation that usually has a devastating impact on real output and employment. Creditors avoid debtors to prevent being repaid with cheap money,
- ___is a sustained decline in the general price level. Creditors gain at the expense of debtors
Demand-pull inflation
Cost-push inflation
Hyperinflation
Deflation
The full-employment gross domestic product is $1.3 trillion, and the actual gross domestic product is $1.2 trillion. The marginal propensity to consume is 0.8. When inflation is ignored, what increase in government expenditures is necessary to produce full employment?
$20Billion
The marginal propensity to save (MPS) is 1 - MPC.
The multiplier is the combined effect of the additional spending once it ripples through the economy (if the MPC is 0.8, then each person is assumed to spend 80% of additional income received and save the other 20%). The multiplier equals 1/MPS; in this question, 1/0.2 = 5. Increasing government expenditures by $20 billion, when multiplied by the multiplier of 5, equals the desired increase in GDP of $100 billion ($0.1 trillion).
___is defined as the level of employment where the actual unemployment rate is equal to the natural rate of unemployment (NRU).
At this point the economy would be producing its “potential output” with the economy operating at full capacity. T/F
___ and ___ unemployment would cause the unemployment rate to exceed the NRU.
Full employment is measured by 3 rates
Full employment
True
Cyclical and structural unemployment
- Rate of imprisonment
- Demographic
- Temporary Labor
During the recessionary phase of a business cycle:
costs generally rise dramatically forcing consumers to delay spending.
the natural rate of unemployment will begin to climb.
there will be a decline in the number of hours worked in an average week for production workers in the manufacturing sector.
the utilization rate for plant and equipment exceeds normal levels, increasing costs, and reducing profits.
there will be a decline in the number of hours worked in an average week for production workers in the manufacturing sector.
The recessionary phase (also called the contraction phase) is a period in which more resources become unemployed and actual output falls below potential output. There will be a decline in the number of hours in the average workweek since output falls.
You have received the following information:
Year Nominal GDP Price Index 1 $7,456 100 2 $7,634 103.5 3 $8,021 107.4 4 $8,256 111.6 All dollars are in billions. In this instance, real GDP in Year 4 was approximately:
$7,398 billion.
Real GDP is calculated by dividing the nominal GDP by the price index for the year and multiplying the result by 100 (the price index in the base year). In this case, real GDP = ($8,256 ÷ 111.6) × 100 = $7,398 billion.
A hospital is comparing last year’s emergency rescue services expenditures to those from 10 years ago. Last year’s expenditures were $100,500. Ten years ago, the expenditures were $72,800. The CPI for last year is 168.5 as compared to 121.3 10 years ago. After adjusting for inflation, what percentage change occurred in expenditures for emergency rescue services?
.6% decrease
To convert a dollar amount from one price level to another, multiply it by the ratio of the price level you are converting to divided by the price level you are going from. So, the 10-year-old expenses of $72,800 are multiplied by the fraction 168.5/121.3, which gives expenses converted to current dollars of $101,128.
Subtracting last year’s expenditures of $100,500 from the previous period price-level adjusted prior expenditures of $101,128 gives a reduction in expenditures of $628. Dividing this $628 reduction by the previous period price-level expenditures of $101,128 gives a decrease of 0.6%.
Information related to the financial transactions for a country is given as follows with values stated in billions of dollars.
-- Gross domestic product (GDP) $4,000 -- Transfer payments 500 -- Corporate income taxes 50 -- Social Security contributions 200 -- Indirect business taxes 210 -- Personal income taxes 250 -- Undistributed corporate profits 25 -- Depreciation 500 -- Net income earned abroad for the country 0 Net domestic product is:
$3,500
Net domestic product is a measure of the net output of the domestic economy that is sufficient to maintain the existing stock of capital. NDP is computed as the total output, at factor cost, produced within a country (i.e., gross domestic product or GDP) reduced by the capital consumption allowance or depreciation.
NDP = GDP - Depreciation = $4,000 - 500 = $3,500
In measuring the ___, consumers are assumed to buy a specified group of goods and services—a “market basket of goods.” The items in the market basket are “weighted” based on their relative importance in terms of consumer spending.
The CPI is reported by the government ___and is used to adjust Social Security benefits annually and to adjust income tax brackets for inflation.
consumer price index (CPI)
monthly
Effective ways to dampen the economy and prevent inflation include the following: (GOVERNMENT GETS MORE MONEY)
The government can increase interest rates, thus increasing the cost of borrowing. This will decrease spending.
The government can increase taxes, resulting in fewer dollars being available for spending.
The government can decrease its own spending, thus reducing aggregate demand.
The government can reduce the money supply, thus causing an increase in interest rates, resulting in a decrease in spending.
Prevent Inflation & Damp econ - Gov gets more money overall
The real business cycle model is based on the premise that fluctuations in output and employment result from real supply shocks that periodically hit the economy, and that markets adjust rapidly to the shock and always remain in equilibrium. T/F
___is the amount of goods and services—the amount of real national income—that will be purchased at each possible price level
The ____model explains the business cycle as resulting from interactions between economic policy decisions and political decisions designed to influence voter behavior.
The\_\_\_\_model is based on the premise that a business cycle is caused by inadequate spending
The ___ model assumes that the business cycle is caused by the volatility of investment spending. Small changes in consumer spending can cause big percentage changes in investment
True
aggregate demand
political business cycle
insufficient aggregate expenditure
accelerator model
CAUSES OF DEFLATION
Deflation is almost always the side effect of a significant decline in ___that is so large as to force producers to cut prices on current output to attract buyers.
\_\_\_has been one of the drivers of deflationary pressure
Deflation often follows a period of rising productive efficiency generally caused by ____at a time when credit markets and consumer demand
support business investment, which often results in ___capacity when demand ___
Deflation, or negative inflation, occurs when prices rise because the supply of goods is higher than the demand for those goods. T/F
aggregate demand
Globalization
technological innovation , excess capacity , demand recedes
False – When prices FALL
