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Senior Year > Economics - Unit 4 > Flashcards

Economics - Unit 4 Flashcards

0
Q

Transaction costs

A

The costs associated with the time and effort needed to search out, negotiate, and consummate an exchange

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1
Q

Barter economy (3)

A

An economy in which trades are made in goods and services instead of in money

Dependent on a “double coincidence of wants”

Barter economies are small, and commerce is slow

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2
Q

Money

A

A good that is widely accepted for purposes of exchange and in the repayment of debt

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3
Q

Medium of exchange

A

Anything that is generally acceptable in exchange for goods and services

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4
Q

Unit of account

A

A common measurement used to express values

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5
Q

Store of value

A

An item that maintains value over time

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6
Q

Fractional reserve banking

A

A banking arrangement in which banks hold only a fraction of their deposits and lend out the remainder

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7
Q

Money supply (3)

A

The total supply of money in circulation, composed of currency, checking accounts, and traveler’s checks

Economists believe that the change in the money supply causes economic contractions and expansions

Economists say the ups and downs of the business cycle are caused by the erratic behavior of the monetary authorities or the Fed

  • sometimes the monetary accelerator to the floor dramatically increases the money supply and causes expansion
  • other times it slams on the monetary brakes causing the money supply to decrease (fall) and the economy to dive into a contraction
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8
Q

Currency

A

Coins issued by the U.S.

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9
Q

Federal reserve note

A

Paper money issued by the federal reserve system

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10
Q

Demand deposit

A

An account from which deposited finds can be withdrawn in currency or transferred by a check to a third party at the initiative of the owner

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11
Q

Savings account

A

An interest-earning account

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12
Q

Near-money

A

Assets, such as nonchecking savings accounts, that can be easily and quickly turned into money

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13
Q

Loanable funds market (3)

A

The market for loans

Demand for loans - borrowers
Supply of loans - lenders

Interest rate is determined in the loanable funds market

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14
Q

Federal reserve system (the Fed)

4

A

Central bank of the U.S.

As population grows, the economy needs more money

Increasing the money supply more than needed will cause inflation

Hyperinflation only occurs when the money supply increases very rapidly

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15
Q

Board of governors of the federal reserve system

A

The governing body of the federal reserve system

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16
Q

Federal open market committee (FOMC)

A

The 12-member policy-making group within the Fed.

This committee has the authority to conduct open market operations

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17
Q

Reserve account

A

A bank’s checking account with its Federal Reserve district bank

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18
Q

Total reserves

A

The sum of a bank’s deposits in its reserve account at the Fed and its vault cash

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19
Q

Required reserves

A

The minimum amount of reserves a bank must hold against its deposits as mandated by the Fed.

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20
Q

Reserve requirement

A

The regulation that requires a bank to keep a certain percentage of its deposits in its reserve account with the Fed or in its vault as vault cash

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21
Q

Excess reserves

A

Any reserve held beyond the required amount

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22
Q

Open market operations

A

Buying and selling of government securities by the Fed

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23
Q

Federal funds rate

A

The interest rate one bank charges another for a loan

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24
Q

Discount rate

A

The interest rate the Fed charges a bank for a loan

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25
Q

Gross domestic product (GDP)

A

The total market value of all final goods and services produced annually in a country

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26
Q

Double counting

A

Counting a good more than once in computing GDP

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27
Q

Consumption

A

Funds spent from the household sector

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28
Q

Investment

A

Funds spent by the business sector

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29
Q

Export spending

A

The amount spent by the residents of other countries for goods produced in the U.S.

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30
Q

Import spending

A

Amount spent by Americans for foreign produced goods

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31
Q

Base year

A

“A benchmark year” - a year chosen for a point of reference for comparison

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32
Q

Real GDP (2)

A

Gross domestic product that has been adjusted for price changes

GDP measured in base-year, or constant, prices

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33
Q

Price index

A

A measure of the price level, or the average level of prices

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34
Q

Consumer price index (CPI)

5

A

The most widely cited price index

A measure of price level based on a ‘basket’ of goods

CPI is calculated by the bureau of labor statistics (BLS)

The BLS defines a market basket of household goods

The CPI is also used to determine the purchasing power of money

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35
Q

Aggregate demand curve

A

A curve that shows the quantity of goods and services that buyers are willing and able to buy at different price levels

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36
Q

Aggregate supply curve

A

A curve that shows the quantity of goods and services that producers are willing and able to supply at different price levels

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37
Q

Unemployment rate

A

The percentage of the civilian labor force that is unemployed

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38
Q

Employment rate

A

The percentage of the noninstitutional adult civilian population that is employed

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39
Q

Inflation (4)

A

An increase in the price level, or average level of prices

  • decreases purchasing power
  • doesn’t mean the price of everything changes
  • the percent of change in the consumer price index (CPI) is inflation
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40
Q

Demand-side inflation (3)

A

Demand increase = price increase

Demand increase for all goods (on average) will cause inflation

A growing population will cause inflation

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41
Q

Supply-side inflation (3)

A

Supply decrease = price increase

Supply decrease for all goods (on average) will cause inflation

A supply shock will cause inflation

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42
Q

Velocity

A

The average number of times a dollar is spent to buy final goods and services in a year

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43
Q

Simple quantity theory of money

A

A theory that predicts that changes in the price level will be strictly proportional to changes in the money supply

M x V = P x Q

M = money supply 
V = velocity 
P = price level or average price 
Q = quantity of output (quantity of goods and services)
44
Q

Hedge

A

To try to avoid or lessen a loss by taking some counterbalancing action

45
Q

Deflation

A

A decrease in the price level, or average level of prices

46
Q

Business cycle

A

Recurrent swings (up and down) in real GDP

47
Q

Recession

A

A slowdown in the economy marked by real GDP falling for two consecutive quarters

48
Q

Commodity money (3)

A

Money that has essential (intrinsic) value

Commodity money has utility beyond a simple medium of exchange

Ex. Gold and other precious metals
Anything that might be bartered

49
Q

Flat money

A

Money that has nonessential (extrinsic) value

Flat money has value by authoritative decree

Examples:
- most modern currencies including the U.S. dollar

50
Q

Characteristics of flat money (3)

A

Durable - won’t disintegrate or evaporate

Portable - can be carried from one place to another

Divisible - can be broken into smaller units

51
Q

Bank panic (2)

A

‘Bank run’

Occurs when too many depositors simultaneously attempt to withdraw their deposits from a bank, which depletes the bank’s reserves

52
Q

Panic of 1907 (2)

A

No mechanism for expanding the amount of money in circulation

Resulted in the creation of the federal reserve system

53
Q

Structure of the federal reserve system (2)

A

Decentralized central bank

The federal reserve is independent from the rest of the federal government

54
Q

Responsibilities of the FED (3 total but 7 with extra info)

A

Regulates bank’s to ensure they follow federal laws
- U.S. Banks are required to hold a percentage of their deposits in reserve

A bank for banks

  • holds required reserves of all banks
  • makes loans to banks as a lender of last resort

Conducts monetary policy by controlling the money supply
- in the U.S. The Fed is solely responsible for monetary policy

55
Q

Tools of the FED

What are they used for?

What are they?

A

Tools used to change the amount of money in the U.S. economy

  1. The reserve ratio - amount of $ banks are required to have in reserve (in percent)
  2. The discount rate - the interest rate the FED charges banks (lower than prime rate)
  3. Open market operations - buying or selling of Federal securities (treasury bonds)
56
Q

The reserve ratio (2)

A

Amount of money banks are required to have in reserve (in percent)

Reserve ratio: ^
Money supply: v

57
Q

The discount rate (2)

A

The interest rate the FED charges banks (lower than prime rate)

Discount rate: ^
Money supply: v

58
Q

Open market operations (2)

A

Buying or selling of federal securities

FED sells securities; money supply = v
FED buys securities; money supply = ^

59
Q

Deregulation of the financial industry (3)

A

Deregulation = process or removing or reducing regulations

Since 1980, Congress has consistently removed regulations on banks

Banks can earn more money, but depositors’ money is at risk

60
Q

The subprime mortgage debacle (2-3)

A

Unscrupulous lenders sell and irresponsible borrowers buy subprime loans (subprime = typically having unfavorable conditions)

Subprime loans = riskier because…

  • borrowers’ ability to pay back the loan is questionable
  • if a borrower cannot pay back the loan, home “goes into foreclosure”
    • foreclosure = process of taking possession of mortgaged property
61
Q

The credit-default scandal (2-3)

A

Banks that purchase subprime mortgage securities also bug credit-default swaps

Swaps = insurance (why use term swap instead of insurance?)

  • insurance must be regulated
  • ‘swaps’ are unregulated
62
Q

What are the components of the money supply ? (3)

A

Currency (federal reserve notes)

Checking accounts (demand deposits)

Travelers checks

63
Q

Travelers checks (3)

A

A check issued by a bank in any of several denominations ($10, $20, $59, etc.)

Sold to travelers or anyone who wants one

Buyers sign it at the time it’s issued by the bank and then again in the presence of the person cashing it

64
Q

Final goods

Example?

A

A good sold to its final user

Ex. The ice cream cone that Sam buys from Dairy Queen

Ex 2. The Big Mac that terry buys from McDonald’s

65
Q

Intermediate good

Example?

A

A good that has not reached its final user

Ex. The sugar come that dairy when buys for its inventories

Ex 2. The hamburger bun that McDonald’s buys for its inventories

66
Q

BRIC countries (2)

A

Countries with rapidly increasing GDP and vast resources that will be the economic leaders and competitors of the U.S. In the future

Brazil, Russia, India, China = BRIC

67
Q

What does GDP omit? (5)

A

Illegal goods and services

  • illegal drugs
  • Cuban cigars

Legal goods and services with no record of the transaction

  • mowing your neighbor’s lawn
  • making dinner for your family

Used goods

  • used goods have already been counted
  • garage sales

Stocked and bonds

  • nothing produced
  • stocks and bonds are traded

Government transfer payments

  • social security and welfare payments are entitlements
  • government received nothing in return
68
Q

Components of GDP

A

GDP = C + I + G + NX = y

Consumption
Investment
Government
Net exports

69
Q

Consumption (C)

Examples?

(3)

A

Anything that households purchase in the product market

NOT new housing

Ex. TV sets, telephones, clothes, lamps, cars

70
Q

Investment (I)

Examples?

(4)

A

Anything that firms purchase in the resource market

Inventories of finished goods

New housing

Ex. Tools, machines, factories

71
Q

Government (G)

Examples?

(4)

A

Government purchases in the product market

Military spending and road construction

NOT social security or welfare

Ex. Paper, pen, tanks, planes

72
Q

Net exports (NX)

Examples?

(5)

A

Exports - imports

Exports: products manufactured in the U.S. and sold to other countries

Imports: products manufactured in foreign countries and sold in the U.S.

Example of exports- cars, wheat, computers

Example of imports - cars, radios, computers

73
Q

GDP Calculation

A

Nominal GDP = current yr price x current yr quantity

74
Q

Real GDP and how to calculate (4)

A

GDP that has been adjusted for price changes

Allows economists to compare output from year to year

Real measured in base year prices

Real GDP = base yr price x current year quantity

75
Q

What are the two possibilities that can account for the doubling of GDP (2)

A
  1. The economy produced twice as much goods and services

2. The prices in the economy doubled

76
Q

The birth of fractional reserve banking (5)

A

Goldsmiths - first bankers due to gold coins in old days

  • took in ppls gold and stored it
  • issued “warehouse receipts” to acknowledge that they held deposited gold (receipts later became exchangeable)

Goldsmiths start charging interest

  • increase in supply of money was a result of the lending activity of the goldsmith
  • the process of fractional reserve banking: banks create $ by holding on reserve only a fraction of the $ deposited with them and lends them the remainder
77
Q

Are credit cards money? (2)

A

No because money had to be widely used for exchange and it also has to be used in repayment of debt

Credit cards don’t repay debts, rather they incur them. (Makes it easier to obtain a loan)

78
Q

If demand for loans increase (rise)?

A

*supply = constant

The price of a loan (interest rate) rises

79
Q

If demand for loans decreases (falls)?

A

Interest rate falls

80
Q

If supply of loans increases (rises)?

A

Interest rate falls

81
Q

If supply of loans decreases (falls)?

A

Interest rate increases

82
Q

Is every good that is produced also sold?

A

Yes because the government statisticians who measure GDP assume that everything that is produced is purchased by someone

83
Q

GDP vs. Quality of life

A

GDP = population
Quality of life = greater production of goods and services

  • being better off takes into account much more than simply how much output is produced
  • a bigger country GDP doesn’t necessarily mean a bigger per capita GDP
84
Q

Purchasing power

A

The quantity of goods money buys

85
Q

Supply shock

A

An unforeseen disruption in supply

86
Q

Effects of inflation on individuals on fixed income? (4)

A

Incomes don’t change, but the costs of goods increases, and inflation occurs

Lowers purchasing power

Material standard of living = reduced

Includes senior citizens and/or retirees

87
Q

Effects of inflation on savers (4)

A

Earned interest increases the purchasing power of money

Inflation decreases the purchasing power of money

If interest rate > inflation rate; purchasing power of savings increases

If interest rate < inflation rate; purchasing power of savings decrease

88
Q

Effects of inflation on borrowers (2)

A

Incomes eventually increase with inflation

Debts become easier to repay with inflation

89
Q

The market basket (3)

A

Contains goods that households typically purchase

Contains food, transportation, clothing, energy, and more

Most expensive good in the basket is housing

90
Q

Calculating CPI (4)

A

Each year, the BLS calculates the value of the basket

The BLS designates a ‘base year’

CPI Value = [(basket current yr value) / (basket base year value)] x 100

Base year CPI value always equals 100

91
Q

How to find “how much that would be today”?

A

Year 1 price x (CPI yr 2 / CPI yr 1) = equivalent year 2 price

92
Q

What are the 5 phases of a business cycle? (5)

A
  1. Peak
  2. Contraction
  3. Trough
  4. Recovery
  5. Expansion
93
Q

The peak (of a business cycle)

A

Real GDP is at a temporary high (Q₁)

94
Q

Contraction (in a business cycle) (4)

A

If real GDP decreases, the economy is said the be in a contraction

  • recession: a slowdown in the economy marked by real GDP falling for 2 consecutive quarters
  • usually when the economy contracts (real GDP falls), unemployment rate rises
    • hurts unemployed and whole world
    • more unemployment = fewer goods and services produced

Overall material standard of living declines

95
Q

Trough (in a business cycle)

A

Low point in real GDP, just before it begins to turn up

96
Q

Recovery (in a business cycle)

A

Period when real GDP is rising, begins at the trough, and ends at the initial peak

97
Q

Expansion (in a business cycle)

A

Refers to the increases in real GDP beyond the recovery

98
Q

Indicators used in forecasting business cycles (3)

A

Leading - leads economic upturns or downturns (in real GDP)

Coincident - coincides with economic upturns or downturns

Lagging - lags behind economic upturns or downturns

99
Q

Leading indicator

A

Expected to rise before an upturn in real GDP and to fall before a downturn in real GDP

  • tend to be more often cited in the news than either coincident or lagging indicators (maybe b/c of the ppl’s interest in predicting the future)

Ex. Stock prices, money supply (in inflation-adjusted dollars), consumer expectations, and average weekly hours worked in manufacturing

100
Q

Coincident indicator

A

Should reach its high point at the same time as a peak of a business cycle and each its low point either the trough of a business cycle

101
Q

Lagging indicator

A

Would be expected to reach its high sometime after the peak of a business cycle and to reach its low sometime after the trough

102
Q

Prediction when the stock market is up?

Down?

A

Up - good economic times

Down - bad economic times ahead

103
Q

What reflects good/bad times ahead? (2)

A

Increase in average weekly hours worked reflects good times ahead

Decrease in average weekly hours worked reflects bad times ahead

104
Q

What did some economists say about the up and down movement in the money supply? (3)

A

The up and down movement in the money supply is what causes the up and down economic activity (real GDP)

  • increasing the price of supply acts as a “stimulant” to the economy
  • reducing the price of supply acts as a “depressant” on the economy
105
Q

Some economists point to changes in… As to explain the cause of a business cycle

A

Economists point to changes in…

business investment (firms cut back on buying factories and machinery)

Residential construction (contractors stop building as many homes)

Government spending (gov. spending is cut substantially)

106
Q

Politics (7)

A

Some economists believe that at least some of the business cycles have been caused by politicians trying to get reelected to office

  • chances of reelection = great, if the economy is in good shape
  • greater aggregate demand = firms sell more goods and services and hire more workers –> more jobs, higher income
  • when times are good, voters are more likely to reward the people in office who (they believe) made this possible
  • a higher aggregate demand can cause inflation
    • congress can reverse strategy by trying to cut spending to lower aggregate demand to cool off the economy
    • if the congress cuts spending too much, though, the economy could slide into a contraction
107
Q

Innovation (3)

What happens in a hypothetical situation involving competition?

A

Some economists believe that major innovations are the seeds of business cycles

Ex. A company’s new product = skyrocketed with sales –> other companies try to mimic a similar idea –> copycat firms invest heavily to maintain market positions relative to the innovator (for a time)

  • in time, investment spending tends slow and the economy turns down
108
Q

Inflation rate =

A

[(CPI later yr - CPI earlier yr)/CPI earlier yr] x 100

Senior Year (31 decks)

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