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Macroeconomics > macroeconomics midterm 2 > Flashcards

macroeconomics midterm 2 Flashcards

1
Q

name two roles of the federal reserve bank

A

to be lender as a last resort and do open market operations

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2
Q

what is medium of exchange?

A

items that buyers give to sellers

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3
Q

what is the unit of account?

A

yardstick people use to post prices and record debts

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4
Q

what is liquidity?

A

the ease at which an asset can be converted to the medium of exchange

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5
Q

what is commodity money?

A

money that takes the form of a commodity with intrinsic value(an item that has value even if not used as money; gold/salt)

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6
Q

what is fiat money?

A

money without intrinsic value… used as money because of government decree (paper money and coins)

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7
Q

what are three ways of measuring money in the economy?

A

money stock
currency
demand deposits

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8
Q

what is money stock?

A

quantity of money circulating in the economy

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9
Q

what is the equation for calculating money stock?

A

money stock= currency + demand deposits

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10
Q

what is currency?

A

paper bills and coins in the hands of the public

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11
Q

what are demand deposits?

A

balances in bank accounts

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12
Q

what are two measurements of money stock?

A

m1

m2

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13
Q

which measurement of money stock is the most liquid version?

A

currency + demand deposits

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14
Q

what is M1 (measurement of money stock)?

A

currency + demand deposits

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15
Q

what is M2 (measurement of money stock)?

A

M1 (currency+demand deposits) +long term deposits

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16
Q

what is the Fed’s job?

A

to control the money supply; the amount of money available in the economy

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17
Q

purchasing bonds does what to the money supply?

A

increases the money supply

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18
Q

what does selling bonds do to the money supply?

A

decreases the money supply

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19
Q

what is fractional reserve banking?

A

when the bank only holds a fraction of deposits as reserves

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20
Q

what is the money multiplier?

A

the amount of money the banking system generates with each dollar of reserves

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21
Q

what is the equation for the money multiplier?

A

1/R (R is the reserve ratio)

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22
Q

what is the discount rate?

A

the interest rate on the loans that the fed makes to the banks

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23
Q

the feds control of the money supply is…?

A

not concise

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24
Q

3 reasons that the money supply would increase…

A

purchase of bonds
decreases in the reserve ratio
decreases in the discount rate

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25
Q

3 reasons that the money supply would decrease…

A

selling bonds
increases in the reserve ratio
increases in the discount rate

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26
Q

in the money market graph what are the x and y axis labels

A

x-m/p(real money holdings)

y-i(nominal interest rate)

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27
Q

in the money market; as nominal interest rates rise the real money holdings….

A

decrease

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28
Q

in the money market; what happens to real money holdings as the nominal interest rate decreases?

A

real money holdings increase

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29
Q

in the money market; what affect does the purchase of bonds have on the equilibrium interest rate?

A

decreases the equilibrium interest rate

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30
Q

in the money market, what affect does the purchase of bonds have on the discount rate and the reserve requirement

A

decreases the discount rate

lowers the reserve requirement

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31
Q

in the money market, what affect does selling bonds have on the interest rate equilibrium?

A

increases the equilibrium interest rate

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32
Q

what does the aggregate demand curve tell us?

A

the quantity of all goods and services demanded in the economy at any given price level

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33
Q

in the aggregate demand curve graph what are the x and y axis labels?

A

x- quantity of output

y- price level

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34
Q

in the aggregate demand curve, an decrease in price level does what to quantity demanded?

A

increases quantity demanded

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35
Q

in the aggregate demand curve, an increase in price level does what to the quantity demanded?

A

decreases the quantity demanded

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36
Q

in the aggregate demand curve, as the price level decreases what happens the real wealth, interest rates, and the exchange rate?

A

real wealth rises
interest rates fall
the exchange rate depreciates

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37
Q

What part of the GDP contributes the the aggregate demand?

A

consumption
investments
gov purchases
net exports

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38
Q

In the aggregate demand curve, what is the wealth effect?

A

when the price level falls, the dollars you are holding(currency) rises in value, which increases your real wealth and your ability to buy

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39
Q

in the aggregate demand curve, what is the interest rate effect?

A

a lower price level reduces the interest rate, encouraging greater spending on investments, thus increasing the quantity of goods and services demanded

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40
Q

in the aggregate demand curve, what is the exchange rate effect?

A

fall in US price levels causes interest rates to fall, the real value of the dollar declines in foreign markets. the depreciation stimulates net exports and increases quantity of goods and services demanded

41
Q

3 variables that cause shifts in the aggregate demand curve?

A

changes in consumption, investment, and gov purchases

42
Q

what changes in consumption cause the aggregate demand curve to shift?

A

increase in consumption shifts the curve to the right

decrease in consumption shifts the curve to the left

43
Q

what changes in investment causes the aggregate demand curve to shift?

A

increase in investing shifts the curve to the right

decrease in investing shifts the curve to the left

44
Q

what changes in government purchases causes the aggregate demand curve to shift?

A

increase in gov spending shifts the curve to the right

decrease in gov spending shifts curve to the left

45
Q

what does the aggregate supply curve tell us?

A

tells us the total quantity of goods and services that firms produce and sell at any given price level

46
Q

in the long run, a change in the price level has what effect on the quantity supplied?

A

the price level does not affect the quantity supplied in the long run

47
Q

what are three factors that can shift the aggregate supply curve?

A

labor
capital
natural resources

48
Q

how does changes in labor affect the aggregate supply curve?

A

increases in labor shifts curve to right

decreases in labor shifts curve to left

49
Q

how does changes in capital affect the aggregate supply curve?

A

increase in capital shifts curve to right

decrease in capital shifts curve to left

50
Q

how does changes in natural resources affect the aggregate supply curve?

A

increase in natural resources shifts curve to the right

decrease in natural resources shifts curve to the left

51
Q

an increase in money supply has what affect on the interest rate in the money market?

A

interest rate goes down

52
Q

what are monetary policies?

A

changes in money supply

53
Q

an expansionary monetary policy will have what affect on the interest rate, investments, output, and the aggregate demand curve?

A

decrease the interest rate of the economy
boost investments and outputs
the demand curve will shift to the right

54
Q

buying bonds does what to the money supply and aggregate demand?

A

increases money supply and increases aggregate demand

55
Q

selling bonds does what to the money supply and aggregate demand?

A

decreases the money supply and decreases aggregate demand

56
Q

what is the multiplier effect?

A

implies that an increase in gov spending will have an immediate response on the aggregate curve and a greater response on the curve in the long run

57
Q

what is marginal propensity to consume?

A

the fraction of extra income that a household consumes rather than saves

58
Q

what is the crowding-out effect?

A

increase in gov purchases causes the interest rate to rise which reduces investment spending and decreases aggregate demand

59
Q

what affect does tax cuts have on the aggregate demand?

A

increases consumer spending which shifts the curve to the right

60
Q

what affect does tax increases have on aggregate demand?

A

decreases consumer spending which shifts curve to the left

61
Q

what are automatic stabilizers?

A

changes in the fiscal policy that stimulate aggregate demand when the economy is in a recession without policy makers having to take and actions

62
Q

what is an example of an automatic stabilizer?

A

the tax system

government spending

63
Q

what is the quantity theory of money?

A

quantity of money available determines the value of money, and the increase in the quantity of money is the primary cause of inflation

64
Q

what is the velocity of money?

A

the speed at which the typical dollar bill travels around the economy from wallet to wallet

65
Q

what is the equation to calculate the velocity of money?

A

V=PY/M

velocity=(price level * value of output)/quantity of money

66
Q

in the graph for velocity of money what are the labels for the x and y axis?

A

x-quantity of money(M)

y-price level(P)

67
Q

in the graph for the velocity of money the demand curve is sloping in which direction?

A

upward

68
Q

with a shortage of money in the economy what will happen to prices?

A

prices will decrease

69
Q

with an excess of money in the economy, what will happen to the prices?

A

prices will increase, the value of money decreases

70
Q

to avoid deflation you would do what to the money supply?

A

increase the money supply

71
Q

to avoid inflation you would do what to the money supply?

A

decrease money supply

72
Q

what is the quantity equation?

A

MV=PY

quantity of money(m)velocity of money(v)= price level(p)the amount of output(y)

73
Q

what is the fisher effect?

A

when the fed increases the rate of money growth, the long run results is both a higher inflation rate and higher nominal interest rate

74
Q

what is the shoeleather cost?

A

the cost of reducing your money holdings

75
Q

what is net capital outflow?

A

purchase of foreign assets by domestic residents- purchase of domestic assets by foreigners

76
Q

what is the equation for net capital outflows?

A

NCO=NX

77
Q

what is the nominal exchange rate (E)?

A

the rate at which a person can trade the currency of one country for the currency of another

78
Q

what is appreciation of the dollar?

A

the exchange rate changes so that a dollar buys more foreign currency

79
Q

what is depreciation of the dollar?

A

the exchange rate changes so that a dollar buys less foreign currency

80
Q

what is the real exchange rate(RER)?

A

rate at which a person can trade the goods and services of one country for another country’s

81
Q

what is the equation for the real exchange rate?

A

RER=EP/P*

RER=(nominal exchange rate*domestic price)/foreign price

82
Q

what is the purchasing power parity theory?

A

a unit of any given currency should be able to buy the same quantity of goods in all countries in the long run

83
Q

what is the equation for calculating savings?

A

S=I+NCO

savings=domestic investment+net capital outflow

84
Q

what does net capital outflow (NCO) equal to?

A

NCO=NX(net exports)

85
Q

the equilibrium of the market of loanable funds depends on what?

A

the real interest rate

86
Q

to equilibrium of the trade graph depends on what?

A

the real exchange rate

87
Q

what is the equation for the market of loanable funds?

A

S-(I+NCO)=0

savings- (investments+net capital outflows)=0

88
Q

in the market of loanable funds what represents the supply curve?

A

savings

89
Q

in the market of loanable funds what represents the demand curve?

A

investments+net capital outflows

90
Q

lower the exchange rate means what?

A

real depreciation

91
Q

higher the exchange rate means what?

A

real appreciation

92
Q

in the market of loanable funds what does a positive shock in the economy’s investment do?

A

increases the equilibrium interest rate(r), increases the net capital inflow(NCI), generates real appreciation and the balance of trade worsens(X-M decreases)

93
Q

in the market of loanable funds, a positive shock to the economy’s savings has what effect?

A

decreases the equilibrium interest rate(r), decreases the net capital inflow(NCI), generates a real depreciation and the balance of trade improves(X-M increases)

94
Q

a positive shock to the net capital outflow has what affects?

A

increases the equilibrium of he real interest rate(r), increases the NCO,generates real appreciation, and the balance of trade improves

95
Q

does US currency have intrinsic value?

A

no

96
Q

is using US currency to pay for a meal an example of barter?

A

no

97
Q

if reserve requiremens are decreased what happens to the reserve ratio, money multiplier, and the money supply?

A

reserve ratio decreases
money multiplier increases
money supply increases

98
Q

when inflation rises what happens with the nominal interest rate?

A

nominal interest rate rises and people desire to hold less money

99
Q

purchasing power parity describes the forces that determine what?

A

exchange rates in the long run

Macroeconomics (2 decks)

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