2013 Final Flashcards
What is Macroeconomics?
the study of aggregate economic behavior of the economy as a whole
The ‘big picture’, things such as full employment, control of inflation, and economic growth
Doesn’t worry about the well-being or behavior of specific individuals or groups
What is business cycle?
Alternating periods of economic growth
and contraction with recoveries in between.
What is laissez faire?
the doctrine of “leave it alone”, nonintervention by government in the market mechanism?
What is Say’s Law?
Supply creates its own demand.
What is Real GDP?
The value of final output produced in a given period, adjusted for changing prices.
Formula: Nominal GDP x [GDP Deflator # base year(2009)/GDP Deflator year x #]
What is a Recession?
A decline in total output (real GDP) for two or
more consecutive quarters.
The National Buerau of Economic Research(NBER) however defines a recession by the period between a peak and a trough in a business cycle.
What is a Growth Recession?
a period during which real GDP grows,
but at a rate below the long-term trend of 3 percent(0-2%). Can include jobless recovery.
What is Aggregate Demand?
The total quantity of output (real GDP) demanded at alternative price levels in a given time period, ceteris paribus.
What is Aggregate Supply?
The total quantity of output (real GDP) producers are willing and able to supply at alternative price levels in a given time period, ceteris paribus.
What is (Macro) Equilibrium?
The combination of price level and real output that is compatible with both aggregate demand and aggregate supply.
Name the 4 government policies outside of Laissez-faire Government can use to alter end a recession.
- Fiscal Policy 2. Monetary Policy 3. Trade Policy 4. Supply-Side Policy
What is Fiscal Policy?
The use of government spending and cutting taxes to help macroeconomic outcomes.
What is Monetary Policy?
The use of money and credit controls such as lowering interest rates to help macroeconomic outcomes.
What is Trade Policy?
A reduction in trade barriers makes imports cheaper and more available to help macroeconomic outcomes.
What is Supply-Side Policy?
The use of tax incentives, (de)regulation,
and other mechanisms to increase the ability and willingness to produce goods and services.
How BAD was the Great Depression in America during the 1930s?
$40 billion of wealth had vanished in the Great Crash, By 1933 over one-fourth of the labor force was unable to find work.
What are the three questions that Economists have tried to answer since the Great Depression?
- How stable is a market-driven economy? 2. What forces cause instability? 3. What, if anything, can the government do to promote steady economic growth?
Describe economic conditions in America during the 1980s.
1980s started with two recessions, the second lasting 16 months (July 1981–November 1982). Despite that real GDP actually increased by 1.8 in 1981. In Nov. 1982 the U.S. economy began an economic expansion that lasted over seven years. During that period, real GDP increased by over $1 trillion, and nearly 20 million new jobs were created.
What are the five basic macro outcomes(measures of macroeconomic performance)?
- Output: total value of goods and services produced (real GDP).
- Jobs: levels of employment and unemployment.
- Prices: average price of goods and services (inflation).
- Growth: year-to-year expansion in production capacity.
- International balances: international value of the dollar; trade and payment balances with other countries.
What are the three determinants of macro performance?
- Internal market forces: population growth, spending behavior, invention and innovation, and the like.
- External shocks: wars, natural disasters, terrorist attacks, trade disruptions, etc.
- Policy levers: tax policy, government spending, changes in the availability of money, and regulation for example.
What is the crucial macro controversy in America today
The crucial macro controversy is whether pure, market-driven economies are inherently stable or unstable.
What are the 3 Aggregate Demand reasons that explain the downward slope of the aggregate demand curve?
- The real balances effect. 2. The foreign trade effect. 3. The interest rate effect.
The AD Real Balances Effect claims that when average prices rise, buyers choose to purchase a smaller quantity of domestic-produced output. Explain.
Cheaper prices make dollars more valuable. if the price level rose then your $1,000 won’t stretch as far. The real value of money is measured by how many goods and services each dollar will buy.
The AD Foreign-Trade Effect claims that when average prices rise, buyers choose to purchase a smaller quantity of domestic-produced output. Explain .
If the average price of U.S.-produced goods is rising, Americans may buy more imported goods and fewer domestically produced products. International consumers are also swayed by relative price levels. When U.S. price levels decline, overseas tourists flock to Disney World. Global consumers also buy more U.S. wheat, airplanes, and computers when our price levels decline.
The AD Interest Rate Effect claims that when average prices fall, buyers choose to purchase a larger quantity of domestic-produced output. Explain .
At lower price levels, consumer borrowing needs are smaller and vice versa.
What are the 2 Aggregate Supply reasons that explain the upward slope of the aggregate supply curve?
- Profit Effect 2. Cost Effect
What are the 3 general strategy options for macro policy and what are the 4 policies that can be used to end a recession.
- Shift the aggregate demand curve to the right. 2. Shift the aggregate supply curve to the right. 3. Laissez faire
- Fiscal Policy 2. Monetary Policy 3. Trade Policy 4. Supply-Side Policy
Compare the spending on different things during recession and expansion.
Consumer spending for non-durable goods and services change very little during recessions and expanstion. Consumer spending for durable goods, housing, and capital goods change a lot during recession and expansion.
What is Consumption?
Expenditure by consumers on final goods and services.
accounts for over two-thirds of total
spending.
What is Disposable Income?
After-tax income of consumers; personal income less personal taxes.
All disposable income is either consumed (spent) or saved (not spent)
What is saving?
That part of disposable income not spent on current consumption; disposable income less consumption.
What is Marginal Propensity to Consume (MPC)?
The fraction of each additional (marginal) dollar of disposable income spent on consumption; the change in consumption divided by the change in disposable income.
Need to Practice ch10 set
Formula: MPC= %▲Consumption / %▲Disposable Income
What is wealth effect?
A change in consumer spending caused by a change in the value of owned as sets.
What is Dissaving?
Consumption expenditure in excess of disposable income; a negative saving flow.
What is pro-cyclical?
Any aspect of economic policy that could magnify economic or financial fluctuations.
What is counter-cyclical?
Any aspect of economic policy flips the cycle, it cools down the economy when it is in an upswing, and stimulate the economy when it is in a downturn.
What is investment?
Expenditures on (production of) new plants, equipment, and structures (capital) in a given time period, plus changes in business inventories.
What is Recessionary GDP Gap?
The amount by which equilibrium GDP falls short of full-employment GDP.
What is Inflationary GDP Gap?
The amount by which equilibrium GDP exceeds full-employment GDP.
What is Demand-Pull Inflation?
An increase in the price level initiated by excessive aggregate demand.
Name the four components of Aggregate Demand.
1 (C) Consumption (consumers). 2. (I) Investment (businesses). 3. (G) Government spending . 4. Net exports (X − M).
What are the five factors that SHIFT the Aggregate Demand curve through the Consumption Spending component?
- Changes in income. 2. Changes in consumer confidence 3. Changes in wealth holdings 4. Changes in credit conditions(availability and interest) 5. Changes in tax policy
What are the determinants of Investment?
- Expectations. 2. Changes in credit conditions(availability and interest) 3. Technology and Innovation.
Under what conditions will MACRO Failure occur?
If aggregate demand is too little, too great, or too unstable, the economy will not reach and maintain the goals of full employment and price stability.
What is the Index of Leading Economic Indicators?
10 gauges(“crystal balls”) that are supposed to indicate in what direction the economy(AD) is moving.
What is Leakage?
Income not spent directly on domestic output but instead diverted from the circular flow—for example, saving, imports, taxes.
What is Injection?
An addition of spending to the circular flow of income
What is Multiplier (EM:Expenditure Multiplier?
The multiple by which an initial change in spending will alter total expenditure after an infinite number of spending cycles.
Formula: 1 / 1 - MPC
What are the three key features of the Keynesian adjustment process?
- Producers cut output and employment when output exceeds aggregate demand at the current price level (leakage exceeds injections).
- The resulting loss of income causes a decline in consumer spending.
- Declines in consumer spending lead to further production cutbacks, more lost income, and still less consumption.
What are Income Transfers?
Payments to individuals for no current goods or services are exchanged, such as Social Security, Welfare, and unemployment benefits
What is Fiscal Stimulus?
Tax cuts or spending hikes intended to increase (Shift) Aggregate Demand.
What is Fiscal Restraint?
Tax hikes or spending cuts intended to reduce (shift) Aggregate Demand.
What is Crowding Out?
A reduction in private sector (and spending) caused by increased government borrowing.
Which US Constitutional Amendment gave Congress the power to tax our incomes?
The Sixteenth Amendment
List the three ways that government can alter Aggregate Demand.
1.Purchasing more or fewer goods and services. 2. Raising or lowering taxes. 3. Changing the level of income transfers.
List the two steps required to formulate fiscal policy.
Specify the amount of desired AD shift and Select the tools needed to induce the desired shift.
List the 2 main economic goals and the 3 other secondary goals that can be considered economic goals for our country.
a) full employment and price stability.
b) Desirable mix of output, an equitable distribution of income, and adequate economic growth.
Does Keynesian Economic Policy have a “big government” bias?
No Keynes never said government spending was the only lever of fiscal policy. Even in 1934 he advised President Roosevelt to pursue only temporary increases in government spending.
What is the Long Run Aggregate Supply?
Shows up as a vertical line in an AD/AS graph. It is the potential level GDP and full employment. Shows Physical limit to economy’s production.
***Name the four determinants of Aggregate Supply
- Changes in resources 2. Changes in labor productivity 3. Supply Shocks(positive:good weather negative:war, natural disasters) 4.Laws and regulations
***What are the formulas for computing the change in Economic activity due to increase additional income and government spending?
income change X EM = Change in AD
government expenditure X EM = Change in AD
Name the 2 types of recessions and the tools to fix each.
Demand Driven Recession: 1. Increase in Gov. spending 2. Decrease in personal income taxes 3. Increase in TPP Transfer Programs
Demand-Pull Recession: 1. Decrease in Gov. spending 2.Increase in personal income taxes 3. Decrease in TPP Transfer Programs
What are the formulas for the 3 Recession Tool changes in Total AD?
- Change in Gov. spending X EM = Total Change in AD
- change in personal income taxes X MPC X EM = Total Change in AD
- Change in TPP Transfer Programs X MPC X EM
What is Budget Deficit?
The amount by which government spending exceeds government revenue in a given period of time
What is Budget Surplus?
An excess in government revenues over government expenditures in a given period of time.
What is Fiscal Year?
The 12 month period used for accounting purposes (October 1-September 30)
What is Discretionary Fiscal Spending?
Those elements of the federal budget not determined by past legislative or executive commitments
What is Automatic Stabilizer?
Federal expenditure or revenue that automatically responds counter cyclically to changes in national income, like unemployment benefits and income taxes.
What is Cyclical Deficit?
That portion of the budget deficit attributable to unemployment or inflation
What is Structural Deficit?
Federal revenues at full employment minus expenditures at full employment under prevailing fiscal policy.
What is Crowding In?
An increase in private sector borrowing (and spending) caused by increased government spending.
What is National Debt?
Accumulated debt of the federal government
What is Treasury Bonds?
Promissory notes (IOUs) issued by the US Treasury
What is Liability?
An obligation to make future payment; debt
What is an Asset?
Anything having exchange value in the market place, wealth
What is Internal Debt?
US government debt (treasury bonds) held by US households and institutions.
What is External Debt?
US government debt (Treasury bonds) held by foreign households and institutions.
What is Refinancing?
The issuance of new debt in payment of debt issued earlier
What is Debt Service?
The interest required to be paid each year on outstanding debt
What is Deficit Ceiling?
An explicit, legislated limit on the size of the budget deficit
What is Debt Ceiling?
An explicit, legislated limit on the amount of outstanding national debt.
Complete this sentence: “Use of the budget to stabilize the economy implies that . . .
Federal expenditures and receipts won’t always be equal
Identify the FOUR potential uses of a budget surplus.
Spend on goods and services. Cut taxes. Increase Income Trransfers. Pay off old debt (save it)
When did the United States FIRST incur a national debt? To whom did we owe this money? When (if ever) has the US government been debt-free?
In 1777 the US government first went into debt. The Debt is owed to the owners of US Treasury Bonds
Debt Free: 1835-1836
“Who” is the US Treasury’s largest creditor? Approximately how much money does the US Treasury owe to this creditor?
China, 1.144 trillion
In 1950, how many active (tax-paying) workers per retiree existed? Today, how many active (tax-paying) workers per retiree exist?
16.5 in 1950 versus 2.7 in 2015
What is Barter?
The direct exchange of one good for another without the use of money
What is Money?
Anything generally excepted as a medium of exchange
What are Transactions Account?
A bank account that permits direct payment to a third party, for example with a check or debit card
What is Deposit Creation?
The creation of transactions deposits by bank lending
What is Reserve Ratio?
The ratio of a banks reserves to its total transaction deposits
What are Required Reserves?
The minimum amount of reserves a bank is required to hold onto
Formula:
Required Reserve ratio X Total deposits = Required reserve
What are Excess Reserves?
Bank reserves in excess of the required reserves. Can be used to buy treasury bonds or give loans.
Formula:
Total Reserve - Required Reserve = Excess Reserve
What is Money Multiplier?
The number of deposit dollars a banking system can create from 1$ of excess reserves
1 / required reserve ratio = Money Multiplier
What are the three basic purposes that money must serve?
Medium of exchange, Store of value, standard of value
When (year) and why (reason) did the US government first print paper money?
Printed in 1861 to finance the Civil War.
What piece of legislation that gave the US federal government the permanent authority to issue paper money
The National Banking Act of 1863
Identify the three components of the M1 money supply
Currency in Circulation, Transaction account balances, and Traveler’s checks.
Identify the four components of the M2 money supply
M1, Savings Accounts, Money Market Accounts, Small Denomination Time Deposit Balances(CDs).
Why do we care about the specific nature of money?
The nature of money helps us understand how it is defined in terms of value and where it is created.
Identify the TWO basic principles that we must recognize in order to understand the origins of our money supply.
Transaction accounts are a large portion of the money supply, and banks create transactions account balances by making loans.
What is the maximum amount of money that a single bank can lend?
A bank can lend an amount equal to its excess reserve, but no more.
What is the maximum amount by which the entire banking system can increase the volume of loans?
The entire banking system can increase the volume of loans by the amount of excess reserves multiplied by the money multiplier.
Identify the two essential functions performed by banks for the macro economy.
Banks transfer money from savers to spenders by lending funds held on deposit and the Banking system creates additional money by making loans in excess of total reserves.
Explain each of the four constraints on deposit creation.
Deposits- The willingness to continue using and accepting checks in the market place. If they weren’t accepted then deposits would be so little that banks would have enough reserves to function.
Willingness to lend- Banks must be willing to make new loans once reserves are sufficient enough to create more reserves.
Willingness to Borrow- The willingness to borrow is important because if nobody borrowed then deposit creation would never begin.
Regulation- The Federal Reserve may regulate the banking system by limiting deposit creation through the adjustment of required reserve banks have to hold onto.
How do you determine how much “new money” an initial deposit creates?
Formula: (Deposit - Reserve amount) X Money Multiplier
What is Federal Funds Rate?
The interest rate for interbank reserve loans
What is Discounting?
Federal reserve lending of reserves to private banks
What is Discount Rate?
The rate of interest the Federal reserve charges for lending reserves to private banks
What is Open Market Operations
Federal Reserve purchases and sales of government bonds for the purpose of altering bank reserves.
*It is the most frequently used tool.
In what year was the Federal Reserve System (the FED) created? In response to what event was the FED created?
A series of bank failures and panic in 1907 led to the creation of the FED in 1913.
List the four basic functions of Federal Reserve 12 District Banks
Clearing checks between private bonds, Holding bank reserves, Providing currency, and Providing loans
Within the structure of the FED, “who” is responsible for setting monetary policy
The Board of Governors consisting of 7 members and 1 chairman
List the three policy tools used by the Federal Reserve to control the money supply
Reserve requirements(8-14%), Discount rates, and Open Market Operations*.
Identify the three things that change in response to a change in the reserve requirement
Excess reserve, The money multiplier, and The lending capacity of the banking system.
Describe the activity that takes place in the Federal Funds Market.
Reserves borrowed by one bank from another are known as federal funds. These federal funds are then lent for short periods of time usually overnight. The bank lending the federal fund will charge interest on the interbank known, which is called the federal funds rate.
Explain how the FED’s open market purchase can increase or decrease bank reserves as needed
When the FED buys Gov. bongs Private banks have more excess reserves = more loans to customers.
When the FED sells Gov. bongs Private banks have less excess reserves = less loans to customers.
What is a central bank?
A government institution that a) regulates the private banking system b) controls the supply of a countries money.
America’s central bank is the Federal Reserve created on 12/13/1913
What is the Federal Open Market Committee (FOMC)?
Committee consisting of 12 members(7 board of Gov. + 5 of 12 district bank presidents) who meet 8 times a year to decide if the economy is moving at the right speed and adjusts accordingly.
What would the FED want to do during a demand-driven recession?
Shift AD curve up by:
a) Reduce the value of reserve ratio => more money created
b) Reduce the value of discount rate => incentivizes banks
c) Conduct Open Market Operations => money given for Bonds
What would the FED want to do during a demand-pull recession?
Shift AD curve down by:
a) Raising the value of reserve ratio => less money created
b) Raising the value of discount rate => banks don’t loan
c) Conduct Open Market Operations => sell Bonds
