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Test 2 Flashcards

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1
Q

What can cause Consumption to change? (4 items)

A
  1. Wealth
  2. Expectations about future prices
  3. Interest rates
  4. Income taxes
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2
Q

What can cause Investments to change? (3 items)

A
  1. Interest rates
  2. Expectations about future sales
  3. Business taxes
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3
Q

What can cause Net Exports to change?

A
  1. Foreign real national income

2. Exchange Rate

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4
Q

Why does the aggregate supply curve slope upward? (2 explanations)

A
  1. Sticky wages

2. Worker misconceptions

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5
Q

Real wage =

A

Nominal wage/ Price level

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6
Q

If PRICE LEVEL goes up then what happens to REAL WAGE

A

Real wage goes down.

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7
Q

If REAL WAGE goes up then QUANTITY OF LABOR SUPPLIED goes up or down?

A

Up

Labor supplied refers to how many people WANT to work.

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8
Q

If REAL WAGE goes up then QUANTITY OF LABOR DEMANDED goes up or down?

A

Down

Labor demanded is how many workers firms will hire.

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9
Q

Sticky wages

A

If wages are sticky, an increase in the price level (which pushes real wages down) will result in an increase in output. This is what an upward-sloping SRAS curve represents: As the price level rises, the quantity supplied of goods and services rises. The opposite occurs if price level falls.

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10
Q

Changes is SRAS curve may be caused by… (4 items)

A
  1. Wage rates
  2. Prices of non-labor inputs
  3. Productivity
  4. Supply shocks (adverse and beneficial)
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11
Q

Suppose the real exchange rate of 10 Mexican Pesos to the dollar changes to 9 pesos to the dollar. In this situation the dollar has __________, making Mexican goods __________ expensive for Americans.

A

Depreciated

More

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12
Q

Which of the following statements represents a correct and sequentially accurate economic explanation?

A

A and C

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13
Q

The nominal wage is $40 an hour and the price level as measured by a price index is 2. If the nominal wage falls to $30 and the price index declines to 1.5, according to the worker misperception explained of the upward-sloping SRAS curve, workers will initially perceive the…

A

Real wage as something less than $20.

We find 20 by taking 40/2 and 30/1.5. The worker misconception tells us that workers don’t know where the real wage is at all the time so when their nominal wage falls, they perceive that their real wage is going down even though it isn’t.

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14
Q

Refer to Exhibit 8-3. A movement from point A to point B on AD1 would have been the result of…

A

a. A decrease in the price level.

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15
Q

Refer to exhibit 8-3. A shift in aggregate demand from AD1 to AD2 could have been the result of…

A

c. An increase in foreign real national income.

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16
Q

If Real GDP is less than Natural Real GDP, the economy is in…

A

b. A recessionary gap.

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17
Q

Refer to Exhibit 12-4. How much bank capital does Bank XYZ have (i.e. what dollar amount belongs in blank(A))?

A

c. $245

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18
Q

Refer to Exhibit 12-4. What is the required reserve ratio?

A

a. 12 percent

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19
Q

The potential buyer of a house has less information about the house than the seller of the house. This is a case of…

A

c. asymmetric information

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20
Q

When one commercial bank borrows from another commercial bank, it pays the __________ rate.

A

c. Federal funds rate

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21
Q

The Fed can change the money supply by changing….

A

a. The required reserve ratio

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22
Q

Which of the following is NOT a monetary policy tool of the fed?

A

c. Setting the marginal tax rate

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23
Q

To decrease the money supply, the Fed may…

A

c. Increase the required reserve ratio

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24
Q

When the Fed DECREASES the discount rate, will they be EXPANDING or CONTRACTING the money supply?

A

They would be expanding the money supply.

The discount rate and the money supply are INVERSELY related.

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25
When the Fed is acting as fiscal agent for the Treasury, it will...
a. Buy securities from the Treasury, thereby providing the Treasury with money to pay the government's bills
26
Which of the following illustrates the DATA LAG?
a. The economy turns down on January 8, 2019, but policymakers do not figure this out until April 19, 2019.
27
John Maynard Keynes believed that wages may be inflexible in the downward direction. Consequently, an economy...
b. Could get stuck in a recessionary gap.
28
Here is a consumption function: C=C0 + MPC(Yd). If MPC is 0.80 then we know that...
b. As Yd rises by $1, C rises by $0.80. MPC is Marginal Propensity to Consume
29
Which of the following is FALSE?
c. Keynes believed that interest rate flexibility will ensure that saving is equal to investment.
30
Keynes believed that investment is...
a. Dependent on a number of factors, including business expectations.
31
Keynes believed that saving is...
a. More responsive to changes in income than to changes in interest rates.
32
Keynes's major work, "The General Theory of Employment, Interest and Money," was published during the...
c. 1930's
33
Two economists, Smith and Jones, are discussing the currently high unemployment rate.. Smith says that something ought to be done quickly because the economy may not be able to restore itself to full employment. Jones says that it is better to take a "hands-off" approach. Which of the following is most likely to be true?
d. Smith is likely to be a Keynsian economist and Jones is likely to be a classical economist.
34
Efficiency wage models imply that workers are more productive when they are paid a higher wage, as compared to when they are paid a lower wage. (True/ False)
True
35
In a barter economy, Say's law implies there...
c. Cannot be a general overproduction or underproduction of goods.
36
Which of the following is NOT consistent with a self-regulating economy?
e. None of the above (all are consistent with a self-regulating economy)
37
If the economy is self-regulating and in an inflationary gap,
c. Wages and prices will falls.
38
If the natural unemployment rate is 5.5 percent, then the economy is at long-run equilibrium when the actual unemployment rate is...
d. 5.5 percent
39
CLASSICAL ECONOMICS refers to an era in the history of economic thought that stretched from about...
a. 1750 to the early 1900's.
40
In a self-regulating economy, inflationary and recessionary gaps...
b. Are eliminated by forces internal to the economy, without government intervention.
41
The long-run aggregate supply (LRAS) curve is...
b. vertical
42
What time period is attributed to CLASSICAL ECONOMICS?
1750 - early 1900's
43
What is Say's Law? What are the 2 things Say's Law says there cannot be?
"Supply creates its own demand. Production creates demand sufficient to purchase all goods and services produced." 1. Cannot be general over or under production of goods (where supply or demand in the economy is greater than demand or supply in the economy).
44
If Real GDP is less than Natural Real GDP then the economy is in...
1. A Recessionary gap LRAS bar (vertical bar) on right side of equilibrium
45
If Real GDP is greater than Natural Real GDP then the economy is in...
An Inflationary gap LRAS bar (vertical bar) on left side of equillibrium
46
If Real GDP is equal to Natural Real GDP then the economy is in...
Long-Run Equilibrium
47
What happens to wages in a recessionary gap?
Wages fall and SRAS curve shifts right until Real GDP = Natural Real GDP
48
What happens to wages in an inflationary gap?
Wages rise and SRAS curve shifts left until Real GDP = Natural Real GDP
49
What is Laissez-faire?
"Hands off" | A public policy of not interfering with market activities in the economy..
50
What 5 major points hold for Classical Macroeconomics?
1. Say's Law holds 2. Interest rates change so that savings equals investment. 3. The economy is self-regulating making full employment and an economy producing Natural Real GDP the norm. 4. Prices and wages are completely flexible (no sticky wages). 5. Laissez-faire is policy perscription.
51
What did Keynes have to say about Say's Law?
He said that a decrease in consumption does not correlate 1:1 like the Law states that it does. Keynes says that when there is a decrease in consumption, a decrease in total expenditures is possible (contrary to Say's Law).
52
Sticky wages can cause...
A prolonged recession - As the demand for work goes down, wages don't follow it down which leads to less production which leads to longer recessions.
53
If Keynes is right about wages, prices and investment then... Which means...
Wages and Prices are sticky downward If expectations are pessimistic, lower interest rates may not stimulate the economy Which means the economy is not self regulating.
54
Total consumption = ...
Autonomous consumption (consumption independent of disposable income) plus MPC x Yd (disposable income minus taxes)
55
What is the "multiplier"?
The number that is multiplied by the change in autonomous spending to obtain the overall change in total spending. multiplier (m) = 1/(1-MPC)
56
Example of Multiplier at work: Initial rise in autonomous spending = $40 MPC = 0.80 What is the change in total spending?
Change in total spending = $200 multiplier = 1/(1 - .80) = 1/.2 = 5 Change in total spending = 5x40 = $200
57
Can the private sector remove the economy from a recessionary gap? (According to Keynes)
Sometimes it can not. No matter how low interest rates fell, investment spending would not rise because of pessimistic business expectations with respect to future sales.
58
What are the three single largest sources of government tax income? (Most to least)
1. Income taxes 2. Payroll taxes 3. Corporate taxes
59
Progressive Income Tax
An income tax system in which one's tax rate rises as taxable income rises (up to some point).
60
Proportional Income Tax
An income tax system in which a person's tax rate is the same regardless of taxable income.
61
Regressive Income Tax
An income tax system in which a person's tax rate declines as his or her income rises.
62
Marginal Tax Rate
The change in a person's tax payment divided by the change in his or her taxable income. Change in Tax Payment/ Change in Taxable Income
63
Fiscal Policy Economic goals (3)
Changes in gov't expenditures and/ or taxes. 1. Low Unemployment 2. Stable Prices 3. Economic Growth
64
Expansionary Fiscal Policy
Increases in gov't spending and/or decreases in taxes.
65
Contractionary Fiscal Policy
Decreases in gov't spending and/or increases in taxes
66
Discretionary Fiscal Policy
Deliberate changes of gov't spending and/or taxes (to expand or shrink the economy as needed)
67
Automatic Fiscal Policy
Changes in gov't spending and/or taxes that occur automatically without (additional) congressional action.
68
Crowding Out
Decrease in private expenditures that occurs as a consequence of increased government spending (direct effect) Influencing interest rates (indirect effect)
69
Data Lag
Policymakers are not aware of changes in the economy as soon as they happen.
70
Wait-and-see Lag
After policymakers are aware of a downturn in economic activity they rarely enact counteractive measures immediately. They want to be sure that the observed events are not just short run phenomena.
71
The Legislative Lag
The lag that comes from the bureaucracy of politics. It takes a long time for bills and laws to be passed.
72
The Transmission Lag
After enacted, it takes time for the measure to be put into effect.
73
The Effectiveness Lag
After enacted (and after it is put in effect), it takes time to actually effect the economy.
74
1. What is the Federal Reserve System | 2. What is its chief function
1. Central bank of the U.S. | 2. Control money supply
75
What is monetary Policy
Changes in the money supply or in the rate of change of the money supply to achieve particular macro economic goals.
76
1. How many Federal Reserve Districts are there? | 2. What are they?
1. 12 2. Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, San Francisco
77
What is the difference between the Fed and the Treasury?
The Fed is a monetary agency The Treasury is a budgetary agency The treasury has obligation to manage financial affairs of gov't. Fed has the responsibility to provide stable monetary framework for the economy,
78
Discount Loan
Loan the Fed makes to a commercial bank.
79
Discount Rate
The interest rate the Fed charges depository institutions that borrow reserves from it.
80
Federal Funds Market
A market where banks lend reserves to one another, usually for short periods.
81
Federal Funds Rate
Interest rate in the federal funds market; the interest rate banks charge one another to borrow reserves.
82
What 3 tools can the Fed use to change the money supply?
1. Open Market (purchases and sales) - Purchase = money supply rises 2. Changing the required reserve ratio (raise or lower) - Raise = money supply falls 3. Discount Rate (raise or lower) - Raise = money supply falls
83
1. What does the Laffer Curve look like | 2. What is the Laffer Curve
1. It is a hill 2. The Laffer curve shows us how as tax rates rise, tax revenue reaches a peak, then at a certain point, tax revenues decline as a result in a reduced desire for people to work and therefore a reduced GDP and tax rate.
84
What are the 3 functions of money?
1. A medium of exchange 2. A unit of account 3. A store of value
85
M1 = _____
Currency held outside of banks + checkable deposits +Traveler's checks
86
M2 = _____
M1 + Savings deposits + Small denomination time deposits +Money market mutual funds
87
Are credit cards money?
No. They represent the use of someone else's money.
88
Fractional Banking
A banking arrangement that allows banks to hold reserves equal to only a fraction of their deposits.
89
Direct Finance
Borrowers and lenders come together in a market setting
90
Indirect Finance
Funds are loaned and borrowed through a financial intermediary
91
Financial Intermediary
A financial intermediary transfers funds from those who want to lend funds to those who want to borrow them.
92
Adverse Selection
When parties on one side of the market have information not known to others and they self-select in a way that adversely affects the parties on the other side of the market.
93
Board of Governors
The governing body of the Federal Reserve System
94
Federal Open Market Committee (FOMC)
The 12-member policy making group within the Fed. | The committee has the authority to conduct open market operations.
95
Open Market Opterations
The buying and selling of government securities by the Fed.
96
1. How long do Board of Governor member terms? | 2. How do they get on the board (who is responsible)?
1. 14-year terms | 2. Appointed by the president with senate approval.
97
Why do banks borrow reserves?
1. To increase loan making ability | 2. To meet required reserve requirements

Economics (2 decks)

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