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Econ 320 > Exam 1 > Flashcards

Exam 1 Flashcards

1
Q

What is CPI inflation?

A

The raise of the average price of a market basket over time

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2
Q

Why is it important to forecast inflation accurately?

A

You can properly gauge whether you should buy now or later

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3
Q

What does “Billions of chained dollars” mean?

A

Chain is the methodology used to calculate RGDP. It is calculated based upon the specified base year.

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4
Q

What are the four main components of RGDP?

A

Consumption, Investment, Government spending, Net Exports

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5
Q

What are the three main components or Personal Consumption Expenditures (PCE)?

A

Durable goods, Non-durable goods, Services

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6
Q

Why is that Consumer Confidence Index (CCI) an important indicator of future economic activity?

A

Manufacturers use CCI to help determine if consumers have a negative or positive outlook on the ability to secure their jobs, which could have a negative or positive impact on consumer purchasing

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7
Q

How do manufacturers respond to an unexpected increase in the CCI?

A

They will increase hiring and manufacturing

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8
Q

Why is it important to get an accurate measure of the money supply?

A

Without accurate money supply measures, the feds will not be able to produce accurate predictions of the effect that monetary policy has on the economy

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9
Q

What is a major problem with using the M2 monetary aggregate for policy or economic modeling?

A

Some of the assets in M2 are not good representations for what people use as money

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10
Q

How do you calculate the labor force?

A

employed + unemployed

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11
Q

What is the production function? What is the formula? What does the formula say?

A

It measures technology available to produce goods and services.
Y = F(K,L); F( ) = Technology
This says that as technology improves, more output (Y) can be produced with the given inputs

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12
Q

What is constant returns to scale?

A

The inputs proportionally increases outputs

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13
Q

What are factor prices?

A

Amount paid for factor inputs

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14
Q

What is a competitive firm?

A

A firm that can increase production without effecting the price. This firm can maximize profits.

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15
Q

What is the formula that a profit maximizing firm operates with?

A 
P f(K,L) - WL - RK
The firm must decide how much capital and labor to use b/c these factors are all that a firm can control
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16
Q

How does a firm decide on how much labor to use?

A

A firm uses the Marginal Productivity Labor (MPL) which says the change in output is the unit change in labor input

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17
Q

How does a firm decide to hire?

A

The firm hires workers up to point where MPL = W/P; where W/P = real wage rate and MPL the firms demand for labor

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18
Q

What is the Marginal Productivity of Capital (MPK)?

A

This is how much output changes (Y) for a unit change in capital (K)

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19
Q

How does a firm decide to rent capital?

A

Up to the point where MPK = R/P; where R/P is the real rental rate of capital

20
Q

What is the formula for the distribution of income?

A

Y = MPL x L + MPK x K + economic profit;
MPL x L = Labor share
MPK x K = Capital Share
Economic Profit = O

21
Q

What is the formula for disposable income (YD)?

A

= Income - Taxes; = Consumption + Savings

22
Q

What is the Keynesian consumption function?

A

C = C(Y-T)

23
Q

What is the Marginal Propensity to Consume (MPC)?

A

Change in consumption for a unit change in disposable income

24
Q

What is the formula for the real interest rate?

A

R = i - pie; where i = nominal interest rate and pie = inflation

25
Q

What happens to investment when real interest rate increases?

A

Investment decreases. The real interest rate and investment have an inverse relationship

26
Q

What is the formula for the government’s budget?

A

= T - G; taxes - government spending

27
Q

What is T=G, T>G, and T

A

T=G (balanced)
T>G (surplus)
T

28
Q

What is the interest rate?

A

The cost of borrowing and lending in financial markets

29
Q

What is the formula for National Savings?

A

= Y - C - G; savings = investment in a closed economy

30
Q

How does the fed increase the money supply?

A

They will buy government bonds

31
Q

What is the money supply?

A

The stock of assets used for transactions controlled by the central government

32
Q

What is the formula for M1 Monetary Aggregates?

A

= C + DD + other deposits + travelers checks (these are highly liquid assets)

33
Q

What is the formula for M2 Monetary Aggregates?

A

= M1 + savings deposits + small time deposits + money market mutual funds

34
Q

What is the formula for MZM Money (Zero Maturity)?

A

= M2 - small time deposits

35
Q

What is the formula for the Quantity Equation?

A 
MV = PY; where
M = Money supply
V = Income velocity of money
P = Price level
Y = RGDP, Income
36
Q

What happens to income as money supply increases?

A

Income increases in the short run

37
Q

What happens to the price level as money supply increases?

A

Price level increases in the long run

38
Q

What is the formula for Ex-Ante real interest rate?

A

R = i - e(pie), where e(pie) is expected inflation

39
Q

What is the formula for Ex-Post real interest rate?

A

R = i - pie

40
Q

What is the Opportunity Cost of holding money?

A

= (what you could earn) - (what you actually earn) = R + e(pie). The opportunity cost is the fisher effect.

41
Q

What are real variables?

A

w/p, r/p, Y, C, I

42
Q

What are nominal variables?

A

P, W, Pie

43
Q

What is classical dichotomy?

A

This is the separation between real and nominal

44
Q

What is money neutrality?

A

Changes in money supply cannot effect real variables in the long run

45
Q

What is the formula for finding the unemployment rate?

A 
U/L = S /(F + S); where
S = rate of job separation
F = Rate of job finding
46
Q

What is frictional unemployment?

A

Time taken to find a job

Econ 320 (1 decks)

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