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BEC I and II > 5-3. Macroeconomics > Flashcards

5-3. Macroeconomics Flashcards

1
Q

What does changing prices by themselves create?

A

Changes in measures of economic activity and outcomes.

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2
Q

What does price index do?

A

Neutralize the effects of changing prices for economic purposes.
will convert the prices in multiple periods to what they would have been on a single base period.

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3
Q

What is the percentage of base period?

A

100%. Each period measured as percent of base period.

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4
Q

Who prepares most US indexes?

A

Bureau of Labor Statistics (BLS).

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5
Q

What is CPI and what does it do?

A

Consumer Price Index.
Relates price of a basket of goods and services during a period to price of the basket of consumer goods and services in a prior base period.

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6
Q

What is the most common CPI?

A

CPI-U = consumer price index for all urban (U) consumers.

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7
Q

What is the base period for CPI-U?

A

Average prices for 36-month period 1982 through 1984.

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8
Q

CPI-U example:

1982-84 base = 100%. 2013 = 233.049%. 2014 = 234.812%. What does it mean?

A

2013 prices were 133.049% higher than the average price in the base period.
2013 prices were 134.812% higher than….

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9
Q

What can the rate of change in CPI-U measure?
Ex:
2013 CPI-U = 233.049%. 2014 = 234.812.

A

Rate of inflation/deflation.
2013-2014 change = 234.812-233.049=1.763
1.763 / 233.049 (base year) = 0.756% (rate of change) = 2014 inflation rate.

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10
Q

What is Producer Price Index (PPI)?

A

Measures the average change over time in the selling prices received (revenue received) by domestic products for their output.
(Measured by the revenue/selling price received by the first commercial transaction of producers for their domestically produced goods, services, and construction output)

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11
Q

What is the difference between CPI-U and PPI?

A

PPI includes a greater set of goods and services than the CPI-U, spanning the entire range of output by US producers.

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12
Q

PPI: how is computed? What does result measure? Where is the change in PPI trickle down to?

A

The same as CPI-U.
Measures inflation/deflation at the producer level rather than consumer level.
To consumer level.

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13
Q

What is PPI primarily used for?

A

To deflate revenue streams in order to measure real growth in output.

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14
Q

What is GDP deflator?

A 
Gross domestic product deflator. 
Relates nominal GDP to real GDP.
*Attempts to include all spending in GDP
*More comprehensive than CPI-U or PPI
*Composition of "basket" changes more frequently than CPI or PPI
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15
Q

How is GDP deflator computed?

A

(Nominal GDP / Real GDP) x 100

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16
Q

What is inflation? Deflation?

A

Inflation: Rate of increase in the price level
Deflation: Rate of decrease in the price level

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17
Q

What are 2 fundamental causes of inflation?

A
  • Demand induced (demand-pull) inflation: Aggregate spending for goods/services exceeds productive capacity of the economy at full employment.
  • Supply induced (cost-push) inflation: Increases in the cost of inputs result in higher prices passed on to end user.
18
Q

What are consequences of inflation?

A
  • Lower current wealth and real income, resulting in reduced aggregate demand
  • Higher interest rates as lender seek to keep up with inflation, resulting in reduced investment in capital goods
  • Generally leads to uncertainty in the economy, resulting in postponed economic commitment
19
Q

What is the primary target of fiscal/monetary target?

A

Inflation.

20
Q

Inflation example:
Lender borrowed $1,000 with interest rate of 3%. Inflation occurred and prices rose by 2%. Lender paid back $1,030 (principal + interest). What is the amount worth in real terms (after inflation)?

A

1,030 - (1030x2%) = 1,009.80

21
Q

How is GDP in terms of base period dollars computed?

A

Nominal GDP / Price index increase amount

22
Q

What are 3 functions of money?

A
  1. Medium of exchange: Common means of pmt in exchange for goods/services
  2. Measure of value: Common denominator for assigning value and measuring economic activity
  3. Store of value: Retains value over time to be used in the future
23
Q

Who controls the money supply in US?

A

Federal Reserve System (Fed)

24
Q

What are 3 measures of money Fed provide?

A

M1, M2, M3

25
Q

What is M1? What is based on? Examples?

A

Narrowest definition (measure) of money.
Based on instruments used for transactions.
*Paper and coin currency held outside banks
*Check-writing deposits in banks - funds that can be accessed using checks

26
Q

What is M2?

A

Includes all items in M1 plus;

  • Saving deposits
  • Money-market deposits
  • Certificates of deposit less than $100,000
  • Individual-owned money-market mutual funds
27
Q

What is M3?

A

Includes all items in M2 plus;

  • Certificates of deposits greater than $100,000
  • Instituional-owned money-market mutual funds
28
Q

Federal Reserve System: What is Board of Governors?

A

7 member policy making body, including a chairman.

29
Q

Federal Reserve System: What is Fed-open-market committee?

A

12 member body responsible for implementing monetary policy to effect money supply through open-market operations.

30
Q

Federal Reserve System: What is Federal Reserve Banks?

A 
12 district banks each responsible for a geographical area.
Owned by member institutions, including;
*Commercial banks
*Savings and loan associations
*Mutual saving banks
*Credit unions
31
Q

Federal Reserve System: Who do individuals and businesses deal with?

A

With member institutions, not directly with the Federal Reserve Banks

32
Q

What is Monetary Policy?

A

Managing the money supply to achieve national economic objectives, including;

  • Economic growth
  • Price level stability
33
Q

Who exercises monetary policy? How?

A

Fed through;

  • Reserve requirement
  • Open market operations
  • Discount rate
34
Q

What is Fed reserve requirement? Ex: if 10% reserve requirement and $100 loan?

A

Percent of loans made by banks that must be held in reserve.

$10 must be held in reserve for every $100 in loans

35
Q

What happens when reserve requirement is increased?

A

Decreases loans and money supply.

36
Q

What is Fed open market operations?

A

Fed buying and selling US Treasury debt with member banks.

37
Q

Fed open market operations: What happens when Fed buys US treasury debt from member banks? If it sells?

A

Increases funds available to banks for loans (money supply).

Decreases funds.

38
Q

What is Fed Discount rate? What is the impact on borrowing and money supply?

A

Interest rate member banks pay when borrowing from Fed.

  • Increase discount rate = Reduce borrowing and money supply (banks charges more to customers - reduce borrowing).
  • Decrease = opposite.
39
Q

Money supply and interest rate: what is Y and X-axis? What does demand curve look like?

A

Y: Interest rate
X: Money supply
Negative slope.

40
Q

What are 2 types of policy? Which one is primarily used to impact economy by government? Why?

A

Fiscal and monetary.

Monetary: quick, less political influence

41
Q

What are government action for fiscal and monetary action?

A

Fiscal: Increase/decrease government spending.
Fiscal: Increase/decrease tax
Monetary: Increase/decrease money supply

42
Q

What is the velocity of money? How is it computed?

A

A measure of the average frequency with which a dollar is exchanged for goods and services during a period.
Nominal GDP / Money supply

BEC I and II (12 decks)

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