Revision

Question 1

How is the demand curve for FFR determined?

Answer 1

Economic expansion, change in required reserve ration (RRR) or change in interest payments on reserves

Question 2

How is the (vertical) supply curve of FFR determined?

Answer 2

open-market operation (OMO) -> purchasing (increase supply) or selling (decrease supply) of government bonds from banks

Question 3

Role of banks?

Answer 3

Identify profitable lending opportunities, maturity transformation, managing risk through diversification of assets

Question 4

What is a bank run?

Answer 4

Liquidity crisis -> when too many depositors want to take out their funds at once

Question 5

Three functions of money:

Answer 5

Medium of exchange, stores value, and a unit of account

Question 6

Central banks

Answer 6

monitor financial institutions, control certain key interest rates, indirectly control monetary policy

Question 7

Recession

Answer 7

episodes of negative growth in real GDP

Question 8

Expansion

Answer 8

periods between recessions, when real GDP is rising

Question 9

Economic fluctuations are..

Answer 9

hard to predict (shocks), defined by co-movement of variables (pro- and countercyclical) and persistent

Question 10

Why can economic fluctuations occur?

Answer 10

Demand and supply shocks

Question 11

Theories of explainingn efs?

Answer 11

Real-buisness cycle theory, Keynesian theory, financial and monetary theory

Question 12

Countercyclical macroeconomic policy

Answer 12

Acting against the cycle to keep output stable (expansionary and contractionary policy)

Question 13

Monetary policy

Answer 13

by central banks to influence reserve and interest rates

Question 14

Fiscal policy

Answer 14

by governments through gov. expenditure and taxing (expansionary and contractionary)

Question 15

Comparative advantage

Answer 15

The ability to produce a good or service at a lower opportunity cost than another producer.

Question 16

Absolute advantage

Answer 16

The ability of a producer to make more of a good or service with the same resources—or to produce one unit of it with fewer inputs—than another producer.

Question 17

Benefits of trade

Answer 17

Reduced costs through outsourcing, more efficiency through specialisation, consumers get more variety at a cheaper price

Question 18

Current account

Answer 18

Flow from foreign to domestic: net exports, net factor payments (from assets domestically owned but abroad) and net non-market transfer

Question 19

Financial account

Answer 19

How current account transactions are financed

Question 20

Types of exchange rates

Answer 20

Flexible, fixed and managed exchange rates

Question 21

“pegged” exchange rates

Answer 21

In fixed and managed economies, govt. sells currency to keep equilibrium exchange rate at the pegged rate