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Econ 104 > Final Exam > Flashcards

Final Exam Flashcards

1
Q

Long Run Aggregate Supply (LRAS)

A

Indicates the level of potential full employment output in the economy

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2
Q

Y bar represents

A

potential output → when the US is on PPF

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3
Q

LRAS is determined by

A
  1. Number of workers

2. Capital stock (ie the number of factory buildings, technology that is available, machines, software, etc)

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4
Q

LRAS typically shifts every year (y bar increases) because:

A
  1. Number of laborers increases
  2. Technological chance or innovation occurs (increase output/hr= increase in productivity)
  3. Size of the capital stock increases every year
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5
Q

If all 3 of the factors are increasing…

A

LRAS shifts right to LRAS2

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6
Q

SRAS shows…

A

the effect of changes in the price on the quantity of goods and services firms are willing and able to produce

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7
Q

Why is SRAS positively sloped?

A
  1. Output prices rise faster than input prices

2. Some firms will not increase output prices as price level rises

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8
Q

Input prices rise slowly because…

A

of wage contracts, which are locked in wage rates for a year or more.

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9
Q

demand for goods with rise (cheaper) which will…

A

increase sales revenues and profits and produce an incentive to increase production (ie move up SRAS curve)

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10
Q

Some firms don’t increase their prices when prices are rising

A

because it is costly to change the prices in their catalog or menu

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11
Q

SRAS would be vertical if…

A

If firms and workers could accurately predict the price level in the future (future inflation)

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12
Q

What are reasons the SRAS would shift?

A

Supply sock: an unexpected increase or decrease in the price of an important natural resource (i.e.: oil)

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13
Q

Real GDP Gap

A

Actual GDP - Y Bar

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14
Q

Y Bar

A

Potential output

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15
Q

If the GDP gap > 0 it means

A

actual GDP > Y bar ⇒ inflationary boom

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16
Q

Dyamic AS/AD Model, empirically we know…

A
  1. Y bar (potential output) increases continually (LRAS shifting rightward)
  2. AD is also shifting rightward during most years
  3. SRAS is shifting rightward
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17
Q

LRAS and SRAS shift rightward because

A

Y bar increases due to
• Increase in US labor force
• Increase in capital stock
• Technological progress/innovation

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18
Q

Aggregate demand shifts rightward because

A

1) As the population grows and output grows, incomes increase so there is an increase in consumption expenditures
2) Firms expand capacity as the economy grows and new firms are formed so there is an increase in I
3) As economy grows more government services are required so there is an increase in government spending

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19
Q

Federal Reserve

A
  • After several bank panics in 19th century, Americans recognized the need for a lender of last resort to ensure the safety of the banking system
  • to lend money to banks
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20
Q

Unique structure of federal reserve

A
  • 12 Federal Reserve regional banks
  • a highly decentralized system designed to function as 12 separate cooperating central banks
  • Fed was mainly created to avoid banking crises/panics
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21
Q

Reserves

A

Deposits a bank has retained, ie: not loaned or invested
Reserves can either be:
• 1. Required reserves → banks are required to hold 10% of all their checkable deposits
• 2. Excess reserves → any reserves held over and above required reserves

22
Q

Loans

A

o To the public such as mortgage, auto, and education loans
o Banks earn money by making loans because the public pays interest
o Usually use excess reserves

23
Q

Securities

A

Holdings of bonds such as US treasury banks

24
Q

Cycle of money

A

Fed ⇒ change in Ms ⇒ change in i ⇒ economy’s output, PL, U, and Employment etc.

25
Q

Federal Reserve doesn’t not…

A

Control interest rates

Their objective is to shift AD to its original place by adjusting the Ms

26
Q

Bonds

A

o Financial securities sold by corporations and governments to help finance their operations
o Investors buy bonds because they earn interest annually

27
Q

Deficit equation

A

(tax revenues – government expenditures) < 0

28
Q

Discretionary

A

o The deliberate use of changes in federal taxes and purchases that are intended to stabilize economic growth
o Actions of federal government only
o Takes a vote from congress and agreement by the president

29
Q

Expansion/Stimulate policy

A

When we have a recession: decrease taxes and increase government

30
Q

Contractionary Policy

A

When inflation is rising: increase taxes and decrease government

31
Q

Nondiscretionary Fiscal Policy

A

Federal spending and tax policies that “automatically kick in” when an economy is in a contraction/recession or expansion/recovery to stabilize the economy

32
Q

Automatic stabilizers

A
  • Unemployment compensation
  • Medicaid
  • Welfare
33
Q

During a recession…

A

o Real GDP decreases
o National income decreases
o Unemployment increases

34
Q

Automatic Stabilizers that kick in

A 
1. Increase government expenditures on:
•	Unemployment compensation
•	Welfare
•	Medicaid
2. Decrease taxes, that is, total tax revenues decrease because real output and NI decrease
35
Q

How do automatic stabilizers affect the government’s budget?

A

Budget = Tax Revenues – Nondiscretionary government expenditures

if its > 0 = budget surplus
if its < 0 = budget deficit

if there is a deficit = Recession
if there is a surplus = expansion

36
Q

Recession with automatic stabilizers

A

tax revenue declines and nondiscretionary increases

• Budget makes a move in the deficit direction

37
Q

Expansion with automatic stabilizers

A

tax revenue increases and nondiscretionary decreases

• Budget makes a move in the positive direction towards surplus

38
Q

The Government Expenditure Multiplier

A

(Change in Equilibrium Real GDP/change in government expenditures)

39
Q

Tax multiplier

A

(Change in Equilibrium Real GDP/change in taxes)

40
Q

A decrease in taxes…

A

has a less stimulative effect

41
Q

Why is tax cut less expansionary?

A

Increase in G has direct impact on spending, income + AD
Decrease in taxes means HH’s pay less taxes on income already earned
• National Income doesn’t change

42
Q

Fiscal Policy when inflation is rising would involve…

A

Decrease in G and increase in T

43
Q

Decision Lag in Fiscal Policy

A

Majority of 535 members of congress and the president need to agree on changes in fiscal policy
• Federal Reserve: FOMC has only 12 members which implies that decisions are made at the conclusion of FOMC meetings

44
Q

Implementation Lag of Fiscal

A

o Suppose congress and the president agree to increase G to 30 billion to build bridges in several cities. But it could take months to prepare detailed plans for construction, hiring, etc.
o Implementation of OMO is very fast

45
Q

Sequester definition

A

Automatic spending cuts that take effect

46
Q

Sequester spending on entitlements

A

Essential to decrease debt and deficit

47
Q

Why are sequester spending on entitlements essential to decrease debt and deficit?

A
  1. Social Security
    - 1940: 35 million workers paid into SS; only 222,000 people collected SS benefits
    - Currently: 3 workers per retiree and this ratio is expected to decline to 2 as population growth in US declines
  2. Medicare
    - As Americans live longer and medical procedures become more expensive, the projected expenditures on Medicare will be greater than tax revenues
  3. Medicaid
48
Q

2010: Federal spending on SS, Medicare and Medicaid

A

10% of GDP

49
Q

If current trends continue…

A

The gap between (payroll tax revenues) – (Benefits like SS, Medicare, and Medicaid) = -72 Trillion over the coming decades

50
Q

Choices policymakers have:

A
  1. Increase payroll taxes, decrease spending on these programs
  2. Slow the growth in future benefits

Econ 104 (2 decks)

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