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ECON 104 > Chapter 10 > Flashcards

Chapter 10 Flashcards

1
Q

economy to be “strong” vs “weak” - short term

A

refers to the business cycle
alternating periods of economic expansion and recession

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2
Q

economy to be “strong” vs “weak” - long term

A

refers to the process by which rising productivity increases average standard of living

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3
Q

the most commonly used measure of this average standard of living is

A

real GDP per capita

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4
Q

real GDP per capita

A

production in the economy, per person, adjusted for changes in price level

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5
Q

with the rise of real GDP per capita, he average american

A

can buy more than 8x as many goods and services now as in 1950

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6
Q

why is real GDP per capita higher?

A

life expectancy, wealth, democracy

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7
Q

economic prosperity and health go hand-in-hand because

A

the richer nations can devote more resources to improving the health of their citizens (more healthy the more productive)

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8
Q

while growth in real GDP per capita is an important measure of our improvement, another important measure is the increase in our ___ ; these have also increased markedly over the last century

A

lifespans

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9
Q

another good measure of our economic prosperity is the amount of time we can spend on

A

leisure
-as our lifespan grows, we can spend more time on leisure
-increased productivity also means less time needed working, and more time for leisure

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10
Q

the growth rate of an economic variable like real GDP or real GDP per capita is equal to

A

the percentage change from one year to the next

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11
Q

long periods formula for average annual growth rate

A

current real GDP = previous real GDP x ( I + G )^t

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12
Q

g=

A

annual growth rate

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13
Q

t=

A

of years

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14
Q

rule of 70

A

shortcut to help determine how long it will take for an economic variable to double

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15
Q

rule of 70 equation

A

of years to double = 70/g

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16
Q

if the growth rate is 5%, it will take about ___ for the variable to double

A

70/5 = 14 years

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17
Q

what causes increases in real GDP per capita?

A

increases in labor productivity

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18
Q

labor productivity

A

quantity of good/services that can be produced by one worker (or by one hour of work)

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19
Q

most of the answer to “what determines the rate of long-run growth” is the same answer to

A

“what determines labor productivity growth”

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20
Q

capital

A

manufactured goods that are used to produce other goods and services

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21
Q

the more capital a worker has available to use,

A

the more productive they will be (also true for human capital)

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22
Q

for technological improvements in capital, we can say

A

“more capital” and “better capital” cause growth

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23
Q

potential GDP

A

refers to the level of real GDP is attained when all firms are operating at capacity

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24
Q

capacity

A

refers to “normal” hours and a “normal” sized workforce

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25
Q

potential GDP rises when

A

the labor force expands, when a nation acquires more capital stock, or when new technologies are created

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26
Q

the growth in potential GDP in the US has been relatively steady at about ___ that is, the potential to produce final goods and services has been growing in the US at about this rate over time

A

2-3%

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27
Q

the recession of 2007-2009 resulted in a wider than usual gap between

A

potential and actual GDP

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28
Q

how can actual GDP > potential GDP

A

people, capital, working longer hours than normal
“overheated” economy, inflation may result

29
Q

microeconomics

A

firms want to grow, expand, get more market share, etc

30
Q

firms can finance some of their own expansion through

A

retained earnings

31
Q

firms often want to obtain more funds for expansion than are available in this way,

A

and get them in a more immediate time period

32
Q

financial system

A

the system of financial markets and financial intermediaries through which firms acquire funds from households

33
Q

financial markets

A

markets where financial securities, such as stocks and bonds, are bought and sold

34
Q

financial security

A

a document (often electronic) states the terms under which funds pass from the buyer of the security to the seller

35
Q

stock

A

a financial security representing partial ownership of a firm

36
Q

bond

A

is a financial security promising to repay a fixed amount of funds
-essentially a loan from a household to a firm

37
Q

financial intermediaries

A

firms, such as banks, mutual funds, pension funds, and insurance companies borrow funds from savers and lend them to borrowers

38
Q

mutual funds

A

sell shares to savers then use the funds to buy financial securities

39
Q

the financial system provides three key services

A

risk-sharing, liquidity, information

40
Q

risk-sharing: by allowing investors to spread their money over many different assets,

A

investors can reduce their risk while maintaining a high expected return on their investment

41
Q

liquidity

A

allows savers to quickly convert their investments into cash

42
Q

information

A

prices of securities, represent the beliefs of other investors and intermediaries about the future payoffs from holding those securities

43
Q

the total value of saving in the economy must equal

A

the total value of investment

44
Q

equation for closed economy

A

Y = C + I + G

45
Q

rearrange equation for investments

A

I = Y - C - G

46
Q

private savings

A

savings by households

47
Q

public savings

A

from the government

48
Q

Sprivate is equal to all household income that is not spent

A

Sprivate = Y + TR - C - T

49
Q

Spublic =

A

T - G - TR

50
Q

total savings is

A

S = Sprivate + Spublic

51
Q

Spublic is zero

A

balance budget
the government spends as much as it brings in

52
Q

total savings simplified

A

savings = investment

53
Q

Spublic is positive

A

budget surplus (very rare, last time 2001)

54
Q

Spublic is negative

A

budget deficit

55
Q

funding deficit

A

government borrows money by selling treasury security
- later: this may “crowd out” private investments

56
Q

market for loanable funds

A

(conceptual) interaction between borrowers and savers

57
Q

quality of funds traded

A

the price of money is the interest rate

58
Q

firms are the demanders of loanable funds

A

they have a higher quality demanded of funds at lower interest rates, ceteris paribus

59
Q

demand for funds has a

A

downward slope

60
Q

households will save (more/less) funds at

A

(higher/lower) interest rates, ceteris paribus

61
Q

if there is a technological advancements the demand shifts to the right because

A

firms will want to borrow and invest more funds at all interest rates

62
Q

suppose the government runs a budget deficit

A

government borrows money by selling treasury securities. this takes away money from households, decreasing supply of funds

63
Q

crowding out

A

decrease in investment spending due to an increase in government purchases spending

64
Q

government borrowing at an increase of 1% of GDP will lead to

A

increase interest by 0.003 points

65
Q

why is the effect so small?

A

interest rates are affected by many factors including global markets, a few billion dollars is pretty small

66
Q

if any non-interest rate factor changes to make consumers want to save (more/less)

A

supply shifts (right/left)

67
Q

if any non-interest rate factor changes so that firms want to borrow (more/less)

A

demand shift (right/less)

68
Q
A

ECON 104 (12 decks)

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