Econ Exam #3 (Macro pt1) Flashcards
Money is an upgrade to what system that proved inefficient due to instances of double coincidence of wants?
The Barter system
What is double coincidence of wants?
When two people have what the other person wants and wish to trade.
Money is an _____ good that people use to ____ g&s from other people?
intermediate; buy
Medium of exchange: an item buyers give to sellers when they want to _____.
purchase g&s
Unit of account: the _____ people use to post prices and record debts.
yardstick
Store of value: an item people can use to transfer ____________ from the present to the future.
purchasing power
Standard of deferred payment: an item used not only as a medium of exchange today, but also to purchase today and pay for items when?
in the future
What is commodity money? Give examples
“money” is a commodity with intrinsic value such as gold
Reprsentative commodity money represents a commodity from a specific time such as____.
US$ from WWII
What if Fiat money? Give examples.
Money without intrinsic value, used as money because it has government decree. Ex: current US$
What is the money supply?
The quantity of money available in the economy.
What is considered part of the money supply?
currency (paper bills/coins in circulation), demand deposits (checkable deposits), and savings deposits.
What is included in M1?
currency, checkable and savings deposits. M1 is approximately 18 trillion.
What is in M2?
Everything in M1 plus certificates of deposit, small time deposits, money market funds. M2 is approximately 20.8 trillion.
True or False: M1 is smaller than M2 but more liquid.
True (M1 is easier to access)
Banks are _____ as they do what?
intermediaries; create money
In fractional reserve banking systems, banks keep a fraction of deposits as _____ and use the rest to make loans.
reserves
Reserves are typically in the form of what two things?
Vault cash & deposits with the FED.
A T-account is a _______ that shows a bank’s assets & liabilities.
simplified accounting statement
What are assets? Liabilities?
Assets are what the bank owns (reserves, loans, securities, etc.)
Liabilities are what the bank owes (deposits, capital, debt, etc.)
_______ : the resources a bank obtains by issuing equity to its owners. (bank’s assets minus liabilities)
Bank capital
______: the use of borrowed funds to supplement existing funds for investment purposes.
Leverage
Leverage Ratio is the ratio of _____ to bank capital?
assets
Ex:
(Assets)
Reserves: $200
Loans $700
Securities $100
(Liabilities)
Deposits $800
Debt $150
Capital $50
Lev.Ratio = ($200+$700+$100)/$50 = 20
So, for every $20 in assets, $1 is from the bank’s owners, and $19 is financed with borrowed money.
To ______ assets means to increase bank capital and owner’s equity.
appreciate
If a bank’s assets decrease below 5%, the capital is _____ and the bank is insolvenet.
negative; this is what happened in the 08/09 recession.
Many banks became insolvent during the 08/09 recessions due to credit crunch where banks with too little ____ reduce lending.
capital. The Fed & Treasury injected money in an attempt to solve this.
The Stress Test by Tim Geithner did what?
Required big federations to pass a stress test on their capital that proved they had enough capital to handle a possible crash like 08/09.
What is a capital requirement?
A government regulation that specifies a minimum amount of capital. It is intended to ensure banks will be able to pay off depositors and debts. It acts as a buffer.
True or False: Inflation is the increase in the total level of prices.
False; inflation affects the general level.
The Consumer Price Index (CPI) is the ____ measure of inflation used in the U.S.
primary
What does the CPI measure?
The “typical” consumer’s cost of living.
What are COLAs
the basis of cost of living allowances/adjustments.
How is the CPI calculated?
- Fix the basket.
- Find the prices.
- Compute the basket cost.
- Choose a base yr and compute the index.
- Compute the inflation rate.
What is the CPI formula?
100(cost of basket current yr/cost of basket in base yr)
What is the inflation rate definition/formula?
The % change in the CPI from the previous year.
Inflation rate = (CPI this yr - CPI last yr)/CPI last yr
All multiplied by 100%
True or False: the base yr index is always 100.
True!
What MUST remain the same when conducting CPI and inflation rates?
The basket quantity!
What is included in the CPI basket?
Housing, Food/Beverage, Transportation, Medical care, Education/Communication, Recreation, Other g&s, and Apparel.
What can the CPI be used for?
indexation, comparing prices over time, & finding real vs. nominal interest rates.
indexation means something is automatically ______ for inflation by law or contract. Examples include COLA and the adjustments in Social Security payments/federal income tax brackets.
corrected
The CPI can adjust figures so they can be compared over time. What is the formula?
Amount in “today’s $” =
(Amount in unknown yr$) times (price level “today”/price level in unknown yr)
What is the nominal interest rate?
Interest rate NOT corrected for inflation. This is the rate of growth in the dollar (face) value of a deposit or debt.
What is the real interest rate?
Corrected for inflation, this rate of growth shows the purchasing power of a deposit or debt.
How to find the real interest rate? Give an example.
Nominal interest rate - inflation rate
Deposit $1,000 for one year. Nominal interest rate is 9% ($90). During that year, inflation is 3.5%. The real interest rate is 9.0%-3.5% = 5.5%. The purchasing power of the original $1000 deposit has grown 5.5% or $55.
There are many problems that overstate inflation when finding CPI. What are some complications with the CPI?
Substitution bias
introduction of new goods
unmeasured quality changes
The inflation fallacy: inflation erodes _____ incomes.
real; inflation is a general increase in prices of the things people buy and sell (ex. their labor).
True or False: Wages abruptly go up in relation to inflation rates.
True.
True or False: inflation causes the CPI and nominal wages to rise together in the long run.
True.
There are many costs of inflation. Describe some:
Menu costs (these must be reprinted when inflation occurs).
Misallocation of resources from relative price variability (since not all prices rise at the same time, there are often “blurred” price signals that affect the markets.)
Confusion & inconvenience (inflation changes the “yardstick” which complicates long-range planning and comparison of dollar amounts over time.)
Tax distortions
Expected Inflation can be ______ planned while unexpected inflation ______.
easily; is not as easy.
Hyperinflation is generally defined as inflation exceeding ____ per month?
50%
Ex: Germany post WWI.
True or False: Excessive growth in the money supply never causes hyperinflation.
False; this ALWAYS causes hyperinflation.
Large government budget deficits lead to the creation of ____ quantities of money and ____ inflation rates.
large; high
What are some measure of inflation?
PPI (producer price index)
international price index
employment cost index
GDP deflator
Core inflation index
Not all downward pressure on prices is ____. However, deflation in the context of ____ economic growth (output) and ____ employment affects buyers and slows purchasing.
bad; lower; lower.
Deflation increases the value or burden of what?
debts. Public and private debts as well as slows lending.
When consumers see prices go down due to deflation, how will they more than likely react?
They will hold off on making purchases in the hopes of cheaper deals in the future.
Historically, the thought was that the lowest an interest rate can be is zero. What are they now?
negative
GDP is ______
Gross domestic product
GDP is the total _____ and total _______ of an economy.
income; expenditure (spendings)
True or false: For the economy as a whole, income equals expenditure, because every $ a buyer spends is a $ of income for the seller.
true
GDP definition is
the market value of all final goods produced within a country in a given period of time.
Market value:
Uses same units ex: $US
If there is no market value, the good/service is NOT included in GDP.
Final goods are for the ___ user. While intermediate goods are used in the production of ______. What does this avoid?
final; other goods; double counting
Goods & Services in GDP include _____ goods (lattes, DVDS) as well as _____ services (concert, cell phone service.)
tangible; intangible
Goods included in GDP must be _______ produced, not goods produced in the past.
currently; additionally these goods counted are “produced” not consumed!
What does GDP mean by “within a country?”
within a country’s borders - by citizens OR foreigners.
Bri buys a pack of paper clips at Home Goods. What is included in the GDP count for the paper clip?
The paper clip itself is included, but the metal used to make it is not included in the count.
What are the four components of GDP?
Consumption (C) –> by households
Investment (I) by firms
Government purchases (G) -> productive payments only
Net Exports (NX) –> what’s coming in and out production wise.
True or False: Y = C + I + G + NX
true
Consumption (C) is the total _____ by households on G&S.
spending
Durables (washing machine, dishwasher, etc.)
Non-durables (paper towels)
Services (haircut, med services, etc.)
Investment (I) is the total spending on _____ and _____.
capital equipment; structures.
Inventories (goods produced but not yet sold).
Investment is NOT the purchase of financial assets.
Government purchases (G) is spending on g&S ______ by govt at all levels.
purchased.
G exlcudes transfer payments like social security. No labor/non-productive payment’s aren’t included either. Like unemployment insurance.
Net Exports (NX) = exports - imports
They show a trade balance, surplus, or deficit. NX is the only component that can be ______.
negative
Sarah spends $1800 on a new laptop to use in her publishing business. The laptop was built in China. What about GDP changed?
NX goes down by $1800 because the laptop was imported. Investments goes up by $1800 because the laptop is used at her business. Therefore, GDP remains unchanged.
Debbie spends $200 to buy her husband a nice dinner in Boston. What happens to GDP?
Consumption goes up by $200, so GDP does as well.
Nominal GDP value output using current prices. It is ____ corrected for inflation. While Real GDP values output using the prices of the base year. It _____ corrected for inflation.
not; is
The GDP deflator is a _____, and can be used to calculate inflation rate.
Price index; the formula is
100 (nominal gdp/real gdp).
Real GDP per capita is the ______ of the average person’s standard of living. What is the formula?
main indicator;
(real gdp)/population
What does GDP not value?
The quality of the environment, leisure time, non-market activity, and an equitable distribution of income.
What does having a large GDP enable a country to do?
Afford better schools, cleaner environments, health care, etc. Many indicators of the quality of life are positively correlated with GDP.
Over the long run, real GDP grows about ___% per year on average-growth trend.
3%
The business cycle is a short-run economic fluctuation around the long run trend. What is the order of the phases?
peak, recession, trough, recovery
A recession is a period of _____ real incomes and ____ unemployment?
falling; rising
Depressions are severe recessions. An example is the _____.
Great Depression
True of False: Vast differences in living standards exist.
True
What does a country’s standard of living depend on in terms of production of G&S?
productivity levels
Productivity is the value of output produced per ____.
unit of labor input;
Y = real GDP = quantity of output produced
L = quantity of labor
Productivity = Y/L (output per worker). What does a worker use to produce output?
factors of production (land, labor, and capital).
Physical Capital (K) = ____ and ____ used to produce g&s.
equipment & structures.
K/L = capital per worker.T
True or False: Productivity is lower when the average worker has more capital.
False. The more K/L the more Y/L.
Human Capital (H) = ____ and ____ workers acquire like training and experience.
skills and knowledge. Productivity is higher when the average worker has more H.
Natural resources (N) = ______ provided inputs (land, minerals, etc).
Nature; all other things equal, more N allows a country to produce more Y.
True or False: Countries need not have much N to be rich.
True; Japan imports 90% of its oil, but they capitalize on other things.
Technological knowledge acts as society’s understanding of the ____ to produce g&s.
Best ways; any advance in knowledge that boosts productivity (allows society to get more output from its resources). Ex: Henry Ford’s assembly line.
Technological Change is the advancement of knowledge when “applied.”
What would increasing domestic investment do to physical capital?
More capital = fewer consumption goods. Decreased consumption = increased savings to fund K.
Foreign direct investment is a ____ investment owned and operated by a _____.
capital; foreign entity.
Foreign portfolio investments are capital investments financed with ____ money but operated by ____ residents.
foreign, domestic.
Policy can increase investment in human capital (H) such as public schools and subsidized loans for college. There are positive externalities of education such as each year of education raises worker’s wage by 10%. However, there is also an opp cost involved:
Present vs. future income and the thought of “I could be earning money rn, but I an spending it on school instead.”
Why is respect for property rights and the ability of people to exercise authority of their own resources important for the market?
This establishes political stability and security.
To enforce property rights, the justice systems needs to enforce contracts, address fraud/corruption, and have effective courts. Without this, there could be major political instability. What would this mean?
Uncertainty over whether property rights will be protected in the future.
inward oriented policies like tariffs and limits on investment from abroad ____ interaction with other countries?
avoid
Outward oriented policies like the elimination of restrictions on trade/foreign investment ____ integration with the world economy.
promote
True or False: healthier workers are more productive than unhealthy workers and force an investment in H.
True.
How might population growth affect the living standards?
- Stretching natural resources (Malthus thought this would cause standards to fall, but they’ve risen instead due to technological progress and productivity growth.)
What does diluting the capital stock do?
More population = higher L = lower K/L = lower productivity and living standards.
This applies to H as well as K: fast pop. growth = more children - greater strain on the educational systesm.
Population growth also promotes technological progress by introducing more scientists, inventors, and engineers. What is evidence of this from history?
Growth rates increased with population growth.
More populated regions grew faster than less populated ones.
What is the current trend for population growth?
The population is currently increasing at a decreasing speed.
