Exam 3

Question 1

Tom buys a bond issued by Budweiser, which uses the funds to buy new machinery for one of it’s breweries.

Answer 1

Tom is saving, while Budweiser is investing

Question 2

Other things the same, when interest rate rises

Answer 2

people would want to lend more, making the quantity of loanable funds supplied increase.

Question 3

Unemployment rate affected by unmotivated unemployment?

Answer 3

decreases employment rate and labor-force participation rate decreases

Question 4

medium of exchange function in money

Answer 4

purchase or exchange of goods between parties

Question 5

Reserve Ratio formula

Answer 5

(loans/ deposits) x 100

Question 6

Suppose congress were to institute an investment tax credit, what would happen to the market of loanable funds?

Answer 6

Demand for loanable funds would shift right

Question 7

Reserve Requirement

Answer 7

(reserves/ deposits) x 100
- remember that if there is a holding in excess reserves, you must subtract excess from total reserves

Question 8

Saving formula

Answer 8

Y-T-C —> (GDP - Consumption - GOV purchase)

Question 9

Unemployment formula

Answer 9

(unemployed/ total force) x 100

Question 10

Natural rate of unemployment?

Answer 10

is the amount of unemployment in the economy that we normally experience
- structural + frictional

Question 11

Liquidity

Answer 11

The ease at which an asset can be turned into the economy’s medium of exchange

Question 12

Labor force participation rate

Answer 12

(employed & unemployed/ total adult population) x 100

Question 13

Present value formula

Answer 13

FV x 1/(1+g)^n

Question 14

Future Value formula

Answer 14

PV x (1 + g)^n

Question 15

Federal funds rate

Answer 15

the interest rate that banks charge each other to borrow or lend excess reserves overnight; the process of how money is made out of thin air

Question 16

When the reserve requirement goes down, what happens to the money multiplier?

Answer 16

when the requirement goes down, the multiplier goes up (inverse relationship)

Question 17

Frictional unemployment

Answer 17

unemployment is when one person is temporarily unemployed in the process of moving one job to another

Question 18

Structural Unemployment

Answer 18

involuntary unemployment due to a mismatch of skills

Question 19

cyclical unemployment

Answer 19

not enough jobs for those who want them due to recession

Question 20

How to find public saving

Answer 20

T - G; total tax collected - total gov expenditures

Question 21

How to find private saving

Answer 21

Y - T - C

Question 22

Policy 1

Answer 22

FED buys bonds (rise in investment) which moves the money supply increase (equilibrium shifts right

Question 23

Policy 3 (a budget deficit):

Answer 23

interest rate rises and investment falls (inverse relationship)

Question 24

Duties of the FED

Answer 24

regulate banking system & act as a “banker’s bank” (ie making loans to banks)

Question 25

Efficiency wage

Answer 25

an employer paying higher than minimum wage in order to retain more skilled workers, increase productivity, and increase loyalty.

Question 26

Discouraged workers

Answer 26

unemployed persons who are not currently searching for a job

Question 27

List 3 tools the FED uses to change money

Answer 27

• change in the reserve requirement
• change in the discount rate
• open market operations (buying & selling US gov bonds) [MOST FREQUENT]

Question 28

Commodity money

Answer 28

Money in which it’s value is obtained from the resource it is made with

Question 29

Fiat Money

Answer 29

a government-issued currency which is not a commodity

Question 30

Demand Deposit

Answer 30

balanced in a bank account that people/ depositors can access on demand by writing a check/ debit card

Question 31

T Chart Equations

Answer 31

Reserves = deposits x required reserve ratio
Loans = reserves - deposits
Deposits = reserves - loans

Question 32

Money multiplier

Answer 32

amount of money the banking system generates with every dollar of reserves
- AS RESERVE REQUIREMENT INCREASES, MONEY MULTIPLIER DECREASES

Question 33

Change in checkable deposit

Answer 33

initial deposit x money multiplier

Question 34

Change in money supply

Answer 34

change in checkable deposit - initial deposit

Question 35

Required reserves

Answer 35

Deposits x Reserve requirement

Question 36

Excess reserves

Answer 36

reserves - required reserves