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Macro Econ > Exam 2 > Flashcards

Exam 2 Flashcards

1
Q

Financial system

A

The group of institutions that helps match the saving of one person with investments of others

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2
Q

Bond

A

Certificate of indebtedness

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3
Q

Bond maturity

A

Finite time period at the end of which the bond will end and the principle is repaid with interest

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4
Q

Bond principle

A

Face value of the bond

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5
Q

Bond risk

A

That interest rates will change

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6
Q

Financial intermediaries

A

Institutions through which savers can indirectly provide funds to borrows

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7
Q

Example of financial intermediaries

A

Banks and mutual funds

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8
Q

Mutal funds

A

Sell shares to the public and use the proceeds to buy portfolios of stocks and bonds

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9
Q

Crowding out effect

A

The government borrows to finance its deficits leaving less funds avalible for investment

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10
Q

Natural rate of unemployment

A

Normal rate around which actual fluctuates

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11
Q

Cyclical unemployment

A

The deviation of unemployment from its natural rate

(Natural-average)xamount of years

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12
Q

Frictional unemployment

A

When workers spend time searching for the jobs that best suit there skills and taste

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13
Q

Structural unemployment

A

When there are fewer jobs than there are workers

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14
Q

Unemployment insurance

A

A government program that partially protects workers incomes when they become unemployed

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15
Q

Efficency wages

A

Firms voluntary pay above equil wages to boost productivity. Worker health, worker turnover, worker quality, work effort

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16
Q

Unions

A

Higher wages but higher unemploy, outsiders worse off

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17
Q

Min-wage law

A

May exceed equil wage causing structural unemployment

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18
Q

Barter

A

The exchange of one good and service for another

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19
Q

Double coincidence of wants

A

Two people have what the other wants. Need for barter

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20
Q

Commodity money

A

Takes form of commodity with intrinstic value

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21
Q

Fiat money

A

Money without intrinsic value. Value because of gov decree

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22
Q

Demand deposits

A

Balances in bank accounts that depositors can access on demand by writing a check

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23
Q

Fractional reserve banking system

A

Banks keep a fraction of deposits as reserves and use the rest to make loans

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24
Q

Money multiplier

A

The amount of money the banking system generates with each dollar of revenue (1/R)

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25
Q

Leverage

A

The use of borrowed funds to supplement exisiting funds for investment purposes

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26
Q

Open market operations

A

Purchase and sell of us gov bonds

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27
Q

Discount rate

A

Interst rate on loans the fed makes to banks

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28
Q

Federal funds rate

A

Interest rates on loans from other banks

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29
Q

Value of money

A

1/P

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30
Q

Relative price

A

The price of one good relative to another. Relative price of CD=price CD/price of pizza=1.5 pizza/CD

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31
Q

Classical dichotomy

A

Separation of real and nominal variables. Nominal variables change but real dont

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32
Q

Monetary neutality

A

Changes in money supply do not effect real variables

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33
Q

Volicity of money

A

(PxY)/M

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34
Q

Hyperinflation

A

Inflation exceeding 50% each month

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35
Q

Inflation tax

A

The revenue from printing money

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36
Q

Fisher effect

A

Nominal interest rate adjust one for one with changes in the inflation rate

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37
Q

Trade deficit

A

Imports>exports

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38
Q

Trade surplus

A

Exports> imports

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39
Q

Net capital outflow

A

Domestic residents purchases of foreign minus foreign purchasr of domestic

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40
Q

Nominal exchange rate

A

The rate at which one countries currecy trades for anothers

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41
Q

Appreciation

A

Increase value of a currency as measured by the amount of foreign it cam buy

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42
Q

Depreciation

A

Decrease in the amount of foreign it can buy

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43
Q

Real exchange rate

A

(Nominalx domestic price)/ foreign price

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44
Q

Natural rate of output

A

Amount of output when unemp is at its natural rate

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45
Q

Full employment output

A

The sames as natural rate of output

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46
Q

Short run aggregate supply

A

Upward sloping, total quanity firms sell at given price level

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47
Q

Long run aggregate supply

A

Vertical

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48
Q

Stagflation

A

Period of falling output and rising prices

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49
Q

Liqudity trap

A

When interest rate is zero

50
Q

Expansionary

A

Increase G and decrease T to shift AD left

51
Q

Contrationary

A

Decrease G and increase T to shift AD left

52
Q

Multiplier effect

A

Additional shifts in AF that results when fiscal policy increases consumer spending

53
Q

Monetary policy

A

Changing MS

54
Q

Fiscal ploicy

A

Changing G and Taxes

55
Q

Marginal propensity to consume

A

The fraction of extra incomr that households consume rather than save (c/rise income)

56
Q

Automatic stablizers

A

Taxes auto go down increase AD, gov spends more on assistances increase AD

57
Q

Phillps curve

A

Shows trade off between inflation and unemployment

58
Q

Disinflation

A

A reduction in inflation rate

59
Q

Sacrifice ratio

A

Percentage points of annual output lost per 1 percentage point reduction in inflatiob

60
Q

Short run phillps curve

A

Downward sloping

61
Q

Long run phillips curve

A

Vertical line

62
Q

Private savings

A

Household income not used for consumption or paying taxes

Y-T-C

63
Q

Public saving

A

Taxes-Government spending

64
Q

National saving

A

Private plus public saving

Y-C-G

65
Q

Investment

A

The purchase of new capital

66
Q

Saving incentives

A

Tax incentives for saving increase supply of loanable funds which reduces the equil interest rate and increases equal quanity

67
Q

Investment incentives

A

Investment tax credit increases the demand for LF which raises interst rate and increases quanity

68
Q

What happens when a budget deficit crowds out investment

A

Reduces the growth and productivity and GDP

69
Q

Unemployment rate

A

100x (#of unemployed/labor force)

70
Q

Labor force participation rate

A

100x (labor force/adult population)

71
Q

U-rate not perfect

A

Excludes discouraged worker, no distingishtion between full and part time, misreporting

72
Q

Medium of exchange

A

Function of money that is an item buyers give to sellers when they want to purchase goods and service

73
Q

Unit of account

A

Function of money that is the yardstick people use to post prices and record debts

74
Q

Store of value

A

A function of money that is an item people can use to transfer purchasing power from the present to the future

75
Q

M1

A

Currency, demand deposits, travelers check, and other checkable deposits

76
Q

M2

A

Everything in M1 plus savings deposits, small time deposits, mutual funds, and a few minor categories

77
Q

Reserve ratio (R)

A

Reserves/deposits

78
Q

Money supply with reserves

A

Money multiplier x bank reserves

79
Q

Leverage ratio equation

A

Assets/capital

80
Q

What happens when fed increases money supply

A

Value of money falls and P rises

81
Q

Real wage

A

The price of labor relative to the price of output. W/P

82
Q

The quanity equation

A

MV=PY

83
Q

Shoeleather cost

A

Cost of inflation that are the resources wasted when inflation encourages people to reduce their money holding

84
Q

Menu cost

A

Cost of inflation that is the cost of changing prices

85
Q

Misallocation of resources from relative price variability

A

Firms dont all raise prices at same time, relative prices can vary, which distorts the allocation of resources

86
Q

Confusion and inconveniences

A

Complicates long range plannkng and the comparison of dollar amounts over time

87
Q

Tax distortions

A

Cost of inflation that causes people to pay more taxes even when their real incomes dont increase

88
Q

After tax real interest rate

A

Nominal (1-tax rate x interest rate) minues inflation rate

89
Q

Real interest rate

A

Nominal-inflation rate

90
Q

Foreign direct investment

A

Domestic residents activly manage the foreign investment

91
Q

Foreign portfolio investment

A

Domestic residents purchase foreign stocks or bonds supplying Lf to a foreign firm

92
Q

NCO is greater than zero

A

Domestic purchases of foreign assets exceed foreign purchases of domestic

93
Q

NCO is less than zero

A

Foreign purchases of domestic assets exceeds domestic purchases of foreign assets

94
Q

Law of one price

A

The notion that a good should sell for the same price in all markets

95
Q

Purchasing power parity

A

A theory of exchange rates whereby a unit of any currency should be able to buy the same quantity of goods in all countries

96
Q

Limitations of PPP

A

Many goods cannot be easily traded: prices cannot be arbitraged. Foreign and domestic goods not perfect subs, price differences reflect different taste

97
Q

How do we measure economic fluctuations?

A

With aggregate demand and supply

98
Q

AD curve shifts because of C

A

Stock market, preferences, and taxes

99
Q

AD shifts because of I

A

Firms buy new equiptment, expectations, interest rate, monetary policy, tax incentives

100
Q

AD shifts because of G

A

Federal spending and state and local spending

101
Q

AD shifts because of NX

A

Booms/recessions in countries that buy exports, appreciation/depreciation in foreign exchange market

102
Q

Long run supply curve is

A

The natural rate of output

103
Q

LRAS shift because of changes in labor

A

Immigration, baby boomers, gov policy reduce urate

104
Q

LRAS shift because of capital

A

Invest in factories and equiptment, more college degrees, weather damage

105
Q

LRAS shift because of natural resources

A

New mineral deposit, reduced oil supply, changing weather

106
Q

LRAS shift because of technology

A

Increase improvement in technology

107
Q

Sticky wage theory

A

Nominal wages are sluggish to adjust because firms set wages in advance based on Pe
Revenue is higher but labor isnt so increase output

108
Q

The sticky price theory

A

Firms set sticky prices in advance based on Pe. Menu prices make prices low and demand high so increase output

109
Q

Misperceptions theory

A

Firms believe realitive price is rising and may increase output

110
Q

AS equation

A

Output=natural output rate+a(P-Pe)

111
Q

Long run equil

A

Pe=p and Y=Yn and unemp is at its natural rate

112
Q

What causes stagflation

A

Shift left of SRAS

113
Q

Interest rate effect

A

A fall in P reduces money demand which lowers r which increasss I and the quanity of g and s demanded moving down AD curve

114
Q

A fall in P

A

Reduces money demand

115
Q

Money demand is determined by

A

How much wealth people want to hold in liquid form. Output, rate, and price influence

116
Q

Fed uses what to reduce AD

A

Reduce MS which raises R which then reduces quanity of g and s demanded

117
Q

Does monetary policy work in liquity trap

A

No because interest rates cannot be reduced farther than zero

118
Q

Fiscal policy crowding put effect

A

The size of AD shift may be smaller than inital fiscal expansion
G increase and AD increase by same but then higher Y increases MD and R which reduces AD

119
Q

Phillips curve equations

A

Urate= natural urate- a(actual inflation-expected)

120
Q

Supply shock

A

An event that directly alters firms cost and prices shifting AS and phillips curve

121
Q

Supply shock shifts phillips curve

A

SRAS shifts left, prices rise and output and emp fall. Inflation and urste increse as phillps shifts upward

Macro Econ (3 decks)

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