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Macro 2 > exam 2 > Flashcards

exam 2 Flashcards

1
Q

define recessions

A

short-term economic downturns, typically characterized by declines in real GDP growth and increases in the unemployment rate

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2
Q

what causes recessions (2)

A

declines in AD

declines in AS

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3
Q

why was the great recession so significant (3)

A

longer, more drastic, and more similar to the great depression than any other recession since WW2
AD and AS and LRAS all fell

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4
Q

what caused AD to fall during the great recession (2)

A

decrease in wealth

decrease in expected income

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5
Q

what caused AD to fall during the great depression (3)

A

decline in real wealth (stock market crash)
decline in consumer confidencce
flawed macroeconomic policy

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6
Q

what is the difference between fiscal and monetary policy

A

fiscal: comprises the use of the government’s budget tools to influence the macroeconomy
monetary: involves adjusting the money supply to influence the macroeconomy

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7
Q

what were three main mistakes by the Hoover/Roosevelt administrations that led to the great depression

A

reduced money supply - led to over 9000 failed banks

raised taxes

Smoot-Hawley Tariff Act
(set off a trade war

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8
Q

how high did unemployment get during the great depression

A

25 percent

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9
Q

define government budget

A

a plan for both raising and spending funds for government activities

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10
Q

define government outlays

A

the part of the government budget that includes both spending and transfer payments

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11
Q

define transfer payments

A

payments made to groups or individuals where good or service is received in return

(not part of government spending)

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12
Q

three categories of government outlays

A

mandatory outlays
- comprise government spending determined by ongoing government programs (e.g. social security and medicare)

discretionary outlays
- comprise spending that is adjustable during the annual budget process (bridges, roads, defense etc)

interest payments
- payments on government debt–including long-term bonds, long-term loans, and other debt instruments–to domestic and foreign residents.

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13
Q

why is funding for social security and medicare trending upwards

A

aging population and retiring baby boomers increases the amount of people who rely on these things

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14
Q

three reasons why government spending has increased over the last 20 years

A

increased defense spending after 9/11

aging population means more spending for social security and medicare

government responses to the great recession

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15
Q

where does the money for social security and medicare come from (1)

A

people’s paychecks

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16
Q

difference between deficit and debt

A

deficit: a shortfall in revenue for a particular year’s budge
debt: the total of all accumulated and unpaid budget deficits.

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17
Q

how much of US federal debt is held internationally

A

30% with the rest being domestic

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18
Q

how is the US income tax system described

A

progressive

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19
Q

define expansionary fiscal policy

A

government increases spending (leads to AD increase) or decreases taxes (raise disposable income and AD) to stimulate or expand the economy
leads to government deficits

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20
Q

define contractionary fiscal policy

A

government decreases spending or increases taxes to attempt the slow the economy
pay off government debt
keep economy from expanding beyond long-run capabilities

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21
Q

what was a fiscal response the Bush administration did for the great recession (5)

A 
economic stimulus act of 2008
typical family of 4 received $1800
included tax rebate
totalled $168B
goal was to stimulate the. economy again
22
Q

what was a fiscal response the Obama administration did for the great recession (3)

A

American Recovery and Reinvestment act of 2009

focused on government spending so AD would increase

$787B stimulus

23
Q

what is the point of contractionary fiscal policy

A

give the government more money to pay off debt and prevent inflation from an economy that is too active

24
Q

define countercyclical fiscal policy

A

fiscal policy that seeks to counteract business cycle fluctuations

25
Q

define automatic stabilizers

A

government programs that naturally implement countercyclical fiscal policy in response to economic conditions

26
Q

examples of automatic stabilizers (4)

A

progressive income tax rates
corporate profit taxes
unemployment compensation
welfare programs

27
Q

what is the new classical critique

A

increases in government spending and decreases in taxes are largely offset by increases in savings

28
Q

define medium of exchange

A

what people trade for goods and services

29
Q

three types of money

A

commodity money - the selling of an actual good for money

commodity-backed money - money you can exchange for a commodity at a fixed rate

fiat money - money with no value except as the medium of exchange
(today’s use of money)

30
Q

define liabilities

A

the financial obligations a firm owes to others

31
Q

define owner’s equity

A

the difference between a firm’s assets and its liabilities

32
Q

what is expansionary monetary policy

A

when a central bank acts to increase the money supply in an effort to stimulate the economy
(AD increases)

33
Q

why does expansionary monetary policy only work in the short run (2)

A

because prices rise eventually to adjust to the stimulated economy
the only change in the long run is a higher price level

34
Q

who is negatively affected by unexpected inflation (3)

A

input suppliers that have sticky prices
workers who signed wage contracts
resource suppliers who are contracted to sell goods at a given price

35
Q

what is contractionary monetary policy

A

when a central bank acts to decrease the money supply in an effort to slow down the economy

36
Q

what is the phillips curve

A

it indicates a short-run negative relationship between inflation and unemployment rates

less employment = higher inflation
and vice versa

37
Q

what is the adaptive expectations theory

and the rational expectations theory

A

adaptive: people’s expectations of future inflation are based on their most recent experience
rational: people’s expectations of future inflation are based on all available information

38
Q

what are the current trends of US trade

A

imports have exceeded exports since 1975, but both have increased since then

39
Q

define comparative advantage

A

the ability to produce a good at a lower opportunity cost than a competitor can

40
Q

define protectionism and two of its features

A

the idea that international trade is restricted to protect local businesses and jobs

tarrifs
import quotas

41
Q

factors that affect the demand for foreign currency (3)

A

the exchange rate of the currency (movement)
demand for foreign goods and services (shift)
demand for foreign financial assets (shift)

42
Q

what happens to the exchange rate when demand for foreign goods and services increases (1)

A

it also rises

43
Q

why would a country work to devalue its own currency (2)

A

exports become more attractive to other countries

boost production by increasing AD

44
Q

what’s the difference between flexible and pegged exchange rates

A

flexible (floating): determined by supply and demand for currency

pegged (fixed): exchange rates fixed at a certain level through the actions of a government

45
Q

what is the law of one price

A

after accounting for transportation costs and trade barriers, identical goods sold in different locations must sell for the same price

46
Q

what is purchasing power parity

A

the idea that a unit of currency should be able to buy the same quantity of goods and services in any country

47
Q

three types of lags in fiscal policy and their definitions

A

recognition: it is difficult to determine when the economy is turning up or down
implementation: it takes time to implement fiscal policy
impact: it takes time for effects of policy to materialize

48
Q

how do interest rates affect the supply and demand of foreign currency

A

countries with higher interest rates will receive more foreign investment, increasing demand for their currency.

E.g. if the US has a high interest rate and Canada has a low interest rate, Canadians will buy USD and invest in America to get more money back

This will therefore lead to an increase in supply of Canadian dollars

49
Q

what’s the difference between an appreciation and a depreciation of a foreign currency

A

Think of an SD graph. If the price goes up, it appreciated and vice versa

50
Q

three types of tax systems

A

progressive income tax system: people with higher incomes pay a larger portion of their income in taxes than people with lower incomes do

marginal tax rate: the tax rate paid on an individual’s next dollar of income

average: the total tax paid divided by the amount of taxable income

51
Q

two main categories of the money supply

A

M1
the money supply measure composed of currency and checkable deposits

M2
M1 plus savings deposits, money market mutual funds, and small-denomination time deposits (including checking and savings accounts)

52
Q

three responsibilities of the US Federal Reserve

A

monetary policy

central banking

bank regulations

Macro 2 (1 decks)

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