Chapter 6 Flashcards

Question

Individual costs of unemployment

Answer 1

Financial problems Living paycheck-to-paycheck

Answer 2

Market-clearing wage is a term used to indicate the wage at which the supply of labor equals the demand for labor. Efficiency wage theory is the idea that paying employees more than the market-clearing wage will benefit the company. Under this theory, companies benefit from this ''overpayment'' by retaining employees and motivating them to work harder. When employees get paid more, they may begin to feel like an important asset to the company and, therefore, develop loyalty.

Answer 3

Lower turnover: When employees get paid higher-than-industry rates, they are less likely to look for a new job. This is because they realize that it might be difficult to find a job that pays more. Reduced training costs: When new employees start, they often have to go through some sort of training. This training can be quite costly for a company, and when there is a high turnover rate, companies end up paying a great deal of money to train new employees. Retaining employees by offering higher wages helps minimize the costs of training. More applicants: If job seekers know that a company is offering pay that is higher than other companies, the company is likely to see an increase in the number of applicants for open positions. This increase in applicants gives the company a larger selection of potential employees, which makes the odds of finding higher-quality employees greater, as opposed to companies whose low pay attracts a smaller number of individuals.

Answer 4

Employees may not voluntarily leave due to high pay at company. That may make it hard to get rid of workers when economic downturns happen without terminating them. Also, when a company uses higher wages to reduce turnover rates and increase productivity, if and when an employee becomes less productive, a company may terminate him or her as a consequence. This means that employees may feel undue pressure to sustain high levels of productivity in order to avoid losing their jobs.

Answer 5

The theory of rational expectations in economics states that economic actors, such as consumers and businesses, make decisions based on the best information available to them, past experiences, and rational thinking. Ex: An investor deciding to invest in a developing country due to strong economic expansion.

Answer 6

The Lucas critique argues that it is naive to try to predict the effects of a change in economic policy entirely on the basis of relationships observed in historical data, especially highly aggregated historical data.

Answer 7

Muth demonstrated several scenarios in which people's or companies' expectations of future events could actually influence those very events. Ex: Workers expect inflation. Wage hikes. More inflation.

Answer 8

a theory that states that people's expectations of the future are based on their experience with the past. In comparison, rational expectations theory postulates that people's expectations for the future are not just based on their past experiences but also include rational thinking and analysis of all available info.

Answer 9

For instance, if a central bank expands the money supply, rational expectations theory suggests that participants in the economy are likely to anticipate increased inflation rates in the near future. Consequently, this leads to altered decisions and conducts.

Answer 10

First, it assumes that people have perfect information and can accurately predict the future. This assumption is considered by many to be unrealistic in most cases since economic data is often incomplete or subject to change. Second, the theory relies on the assumption of completely rational decision-making, which does not take into account irrational or emotional behavior. Finally, because economics is so complex, any one prediction model or theory is unlikely to predict future economic behavior perfectly.

Answer 11

Classical macroeconomic theory economists believe the economy is, in general, a self-correcting entity (without govt. intervention) (Best describes economy in the long run) Emphasize supply and demand.

Answer 12

Emphasize aggregate demand and aggregate supply Believe in government interventions during recessions. More accurately describes economy in short run.

Answer 13

Keynesian believes in more active government role in economy while classical economics does not. Keynesians are okay with deficit spending, especially in recessions, while classical economics prefers balanced budgets always. Keynesians like price controls while classical economists do not. Keynesians worry more about unemployment while classical economists worry about inflation. Fifth, when comparing Keynesian economics vs classical economics, the former tends to look at short-term issues, while the latter tends to focus on long-term issues.

Answer 14

Classical: In the long run, an economy's real GDP is fixed aside from supply-side changes like technological advances and what-not. Accordingly, the LRAS is a vertical line, indicating that inelasticity. Therefore, an increase in aggregate demand will not increase real GDP in the long run, only inflation. Keynesian: Upward-sloping AS Curve. This means an economy can increase in real GDP in the long run if aggregate demand increases. https://www.economicshelp.org/keynesian-vs-classical-models-and-policies/

Answer 15

Supply in long run. It equals the highest level of production an economy can sustain over a long period of time. Economy's natural level of output because in the long run an economy that is in a recession or overheated returns to its long-run aggregate supply. Prices and wages are fully adjusted to allow the economy to return to its natural level of output.

Answer 16

Aggregate supply in the short run. When a change in aggregate demand, the economy temporarily deviates from its natural output on the LRAS above or below it, but it will slowly adjust back to the LRAS output due to prices and wages being sticky. They are sticky because firms have long-term contracts to purchase inputs, "menu costs", wage inflexibility such as through union contracts and not wanting to decrease morale of employees. These make it difficult to adjust wages and prices to a significant degree in response to decreased overall demand in the economy, making it difficult to maintain profitability. So, in a recession, to maintain profitability, they may opt to reduce labor and produce less output until wages and price can slowly adjust to reach long run equilibrium of price level and Real GDP.

Answer 17

Preferences (Whether people prefer more or less leisure, Increases or decreases in peoples' incomes) Population increases or decreases Prices of complementary goods and services (ex: child care) Expectations for future (Ex: If people expect to be less healthy in the future or have less time to live, they will leave the labor force. If they expect to live a long time, they will stay in the labor force much longer)

Answer 18

Technology (If it replaces human, left shift. If it complements humans, right shift.) Demand for products (Ex: Less demand for products means less demand for labor) Costs of inputs (Increase in cost of inputs means decrease in supply and thus, decrease in labor demand)

Answer 19

Portion of additional income earned people will spend. If I spend $200 out of a $1,000 pay increase. MPC is 0.2

Answer 20

Portion of additional income earned people will save. If I save $400 out of a $1,000 pay increase. MPS is 0.4

Answer 21

Higher-income levels often result in a higher MPS and a lower MPC since most of their needs are already satisfied, so a lower percentage of income is spent on consumption. However, at lower income levels, MPS tends to be at or near 0 since most of the consumer's income needs to be devoted to spending in order to meet needs and wants.

Answer 22

Labor productivity, Input prices, Regulations, Taxes, Subsidies

Answer 23

Labor availability, Capital stock, Level of technology, Productivity

Answer 24

Amount of real GDP produced by an hour of labor

Answer 25

Changes in C, I, G, and NX.

Answer 26

argues that employee pay is resistant to decline even under deteriorating economic conditions. This is because workers will fight against a reduction in pay, and so a firm will seek to reduce costs elsewhere, including via layoffs, if profitability falls.

Answer 27

1. Minimum wage (Sticky down) 2. Labor Unions (Sticky down) 3. Contracts (Sticky up wage) 4. Efficiency Wage Theory (Sticky down wages because company is wary of productivity loss of reducing wages) 5. Hiring and firing employees Sticky up: Easy for wages to fall, but hard to rise. Sticky down: Easy for wages to rise, but hard to fall.

Answer 28

When wages rise dramatically, so do prices all across the economy in something called wage push inflation according to many economists.

Answer 29

1. Morale of employees 2. Bad press

Answer 30

To measure the degree of leakage in an economy.

Answer 31

1. Higher interest rates may encourage saving such as putting money in savings accounts 2. Inflation may decrease MPS as people prefer to buy goods now than at a higher price in the future. 3. Consumer confidence 4. Demographic factors such as age and culture

Answer 32

Prolonged recession that lasts for years.

Answer 33

Massive selloff of stocks

Answer 34

Used to calculate how much consumption will occur at a given income level (for an individual or an economy) C=c+bY Total Consumption (C) Basic Consumption (c): Consumption that occurs when income in zero. Consumption of basic necessities to survive. b: MPC Y: Income

Answer 35

The lower the income, the more lack of saving because you need to meet your basic needs. The higher the income, you have enough to meet your basic needs so you can save more of your money.

Answer 36

The consumption function has three main assumptions: Basic consumption (c in the formula) will always be greater than zero. MPC (b in the formula) will be between zero and one. Interest rate is not a determinant of consumption.

Answer 37

Trade-off between inflation and unemployment. There are caveats such as stagflation in the 1970s. https://study.com/cimages/multimages/16/image193751255533600017860.jpg

Answer 38

Unemployment is constant at natural unemployment with inflation being variable at this given unemployment rate.

Answer 39

It has flattened in the short run due to a weakening relationship between unemployment and inflation.

Answer 40

To left: positive supply shocks To right: negative supply shocks https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/ap-long-run-consequences-of-stabilization-policies/the-phillips-curve/a/the-phillips-curve

Answer 41

Movement upward along curve can be caused by expansionary fiscal policy. When a recession happens, there will be downward movement caused by layoffs by firms, leading to lower inflation. The Phillips Curve will then shift left or right depending on the movement. Ex: An expansionary fiscal policy can disturb the long-term equilibrium. There will be upward movement on the curve. As a result of the higher inflation, workers demand higher wages, causing unemployment to return to natural unemployment albeit at a higher inflation rate, leading to a rightward shifting curve intersecting with the long run Phillips Curve. https://study.com/cimages/multimages/16/phillips_curve_38296026401913222597.jpg

Answer 42

An expansionary fiscal policy can disturb the long-term equilibrium. There will be upward movement on the curve. Higher AD means more workers needed to produce above potential output temporarily. The AD increase will also mean price increases. As a result of the higher inflation, workers demand higher wages, causing unemployment to return to natural unemployment albeit at a higher inflation rate, leading to a rightward shifting curve intersecting with the long run Phillips Curve. https://study.com/cimages/multimages/16/phillips_curve_38296026401913222597.jpg

Answer 43

https://study.com/cimages/multimages/16/stagflation948765415532616625.png

Answer 44

1. Expansion: Economy grows at a healthy rate 2. Peak: Economy grows too fast; prices rise; At some point, economy cannot grow further due to extremely high growth and plunges into recession. 3. Recession 4. Trough: Economy cannot contract any further and indicators such as GDP growth and unemployment begin to recover.

Answer 45

LRAS shifting rightward

Answer 46

Savings (When people save, they put money in the bank for loans for entrepreneurs who can then buy capital and expand output) Population Growth (GDP growth must be faster than population growth for GDP per capita to rise) Productivity (Investing in capital like equipment makes workers more productive)

Answer 47

Availability of capital, technological advances, education and training (human capital), availability of natural resources

Answer 48

Increases wages

Answer 49

More skills and knowledge makes employees more productive workers and they produce more output per unit of labor (per hour etc.)

Answer 50

A healthier population means a more productive labor force.

Answer 51

Equipment makes workers more efficient and faster in production of goods and services

Answer 52

Encourage development of human capital (Ex: Education) Encourage development of technological advances Fiscal Policy

Answer 53

Physical currency and checkable deposits (Deposits against which checks can be written)

Answer 54

M1+time deposits less than $100,000.00, money market mutual funds; Key in Fed decision making

Answer 55

M2+large time deposit accounts

Answer 56

M3+relatively illiquid assets

Answer 57

Medium of exchange Unit of account (Used to value things like pricing goods and services) Makes it easy for payments to be deferred for goods and services. Store of value (Money largely maintains its value and purchasing power so exchanges of goods can be made in the future, even in spite of inflation)

Answer 58

Money backed by a certain commodity such as gold or silver.

Answer 59

Commodity money is money whose value comes from a commodity of which it is made. Ex: Gold coins and silver coins value depends on value of gold and silver respectively

Answer 60

1. Acceptable as a form of exchange 2. Durability (Materials in money do not easily decay and are longlasting) 3. Divisibility (Money can be used in part to make purchases, so people will get change if they give a bill greater than the price. It can be exchanged for smaller notes.) 4. It is portable. 5. Each bill of a specific value looks the same (Ex: All $1 US bills look exactly the same.) 6. Money is valuable because it is limited in supply

Answer 61

Percentage of bank's deposits that must be held in reserve (for no lending) in their vaults or in an account with the Federal Reserve.

Answer 62

Interest Fed pays to banks when they keep reserves in account with Fed

Answer 63

Bank reserves = Required reserves + Excess reserves Required reserves=Per reserve requirement, how much in reserves bank has Excess reserves=Reserves held by bank above the required reserves

Answer 64

Percentage of bank's deposits in bank reserves.

Answer 65

approach in a financial system where banks are required to reserve a portion of the money deposited by customers Ex: US banking system

Answer 66

So, banks can meet emergency withdrawals and other external shocks

Answer 67

It will lend money to banks if their reserves are in danger of running out so that they do not deplete their reserves when people withdraw their money. In this regard, the Fed acts as a lender of last resort for banks.

Answer 68

If there is a high expected interest rate, they will lend out. Otherwise, they will keep them for future opportunities like asset purchases and to account for undetermined payments or withdrawals

Answer 69

By paying interest on them

Chapter 6 Flashcards

(94 cards)