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Macroeconomics > Exam #3 Review > Flashcards

Exam #3 Review Flashcards

1
Q

When did the concept of economic growth start?

A

Industrial Revolution, 1750 in England

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2
Q

why did the Industrial Revolution begin in England?

A
  • it occured there because people had property rights over what they produced
  • they had the ability and incentive to produce more and more and more
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3
Q

Economic Growth Model

A

a model that explians the growth rates in real GDP per capita over the long run

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4
Q

labor productivity

A

the quantity of goods and servies that can be produced by one worker or by one hour of work

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5
Q

what does the Economic Growth Model focus on in explaining changes in real GDP per capita?

A

Technological change

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6
Q

technological change

A

a change in the quantity of output a firm can produced using a given quantity of inputs

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7
Q

what are the three main sources of technological change?

A
  • better machinery and equipment
  • increases in human capital
  • better means of organizing and managing production
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8
Q

human capital

A

the accumulated knowledge and skills that workers acquire from education and training or from their life experiences

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9
Q

Diminishing Marginal Productivity

A

adding more of 1 input to a fixed amount of another input will increase your output but by smaller and smaller increments

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10
Q

Thomas Malthus

A
  • came up with “The Dismal Science”
  • predicted people would starve to death because the earth is a fixed input and population keeps growing
  • -however, he did not account for technology changes
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11
Q

Standard Growth Theory

A
  • Says CAPITAL was the key to long term economic growth

- Robert Solow of MIT came up with this

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12
Q

New Growth Theory

A
  • says that technological change, not strictly capital, is the key to growth
  • Paul Romer
  • technological change is influenced by economic incentives
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13
Q

4 barriers to long-run economic growth

A
  1. Corruption
    - failure to enforce laws, including property rights
  2. political instability
    - environment not conducive to economic risk-taking
  3. poor public education and health
    - key driver of human capital and knowledge capital
  4. low rates of savings and investments
    - money must often be borrowed to undertake capital investment
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14
Q

aggregate expenditure

A

total spending in the economy: the sum of consumption, planned investment, government purchases, and net exports

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15
Q

Macroeconomic Equilibrium

A

Aggregate expenditure = GDP

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16
Q

Where does the difference between GDP and AE show up?

A

The difference shows up in the Investment of CIG(NX)

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17
Q

Inventories

A

goods that have been produced but not yet sold

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18
Q

Actual investment will equal planned investment only when…

A

there is no unplanned change in inventories

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19
Q

EX: In 2010, America bought a little less than everything we produced

A

next year, we don’t need to produce as much

  • what we produce the follow year will therefore decrease
  • employment may decrease with this loss of production
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20
Q

If AE = GDP, then inventories are ____________ AND the economy is in ____________

A

inventories are unchanged and economy is in macroeconomic equilibrium

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21
Q

If AE < GDP, then inventories ___________ AND both GDP and employment will ___________

A

If AE < GDP, inventories rise, GDP and employment will decrease the following year

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22
Q

If AE > GDP, then inventories will _________ and both GDP and employment will _________ the following year

A

If AE > GDP, then inventories will fall and both GDP and employment will increase the following year

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23
Q

what five things drive AE in regards to consumption?

A
  1. Current disposable income
    - as income goes up, consumption goes up
  2. Household wealth
    - as wealth increases, consumption increases
  3. Expected future income
    - as expected income rises, consumption increases
  4. The Price Level
    - as price level rises, consumption goes down
  5. The Interest Rate
    - as interest rate rises, consumption decreases
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24
Q

consumption function

A

the relationship between consumption spending and disposable income

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25
Q

Marginal Propensity to Consume

A

how much of each additional dollar of income you spend on consumption
-if MPC = 80%, you will spend .80 of every dollar you earn

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26
Q

The Multiplier

A

(1) / (1-MPC)

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27
Q

What four things drive AE in regard to Investments?

A
  1. expectation of future profitability
    - more future profitability, more investment
  2. interest rate
    - as interest rate increases, investment decreases
  3. taxes
    - as taxes rise, investment decreases
  4. cash flow
    - as cash flow increases, likeliness of investment increases
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28
Q

What 3 things drive AE in regards to NET Exports

A
  • price level in US compared to other countries
  • if things are more expensive in the US, imports go up, net exports go down
  1. Growth rates of US compared to other countries
    - IF growth in US increases, net exports go down
  2. Exchange Rate
    - if value of the dollar gets stronger, then we buy more imports and net exports go down
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29
Q

aggregate demand and aggregate supply model

A

a model that explains short-run fluctuations in real GDP and the price level

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30
Q

AD curve

A

a curve that shows the relationship between the price level and the quantity of real GDP demanded by households, firms, and the government

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31
Q

short-run aggregate supply curve

A

a curve that shows the relationship in the short run between the price level and the quantity of real GDP supplied by firms

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32
Q

LRAS curve(?)

A

what determines how much a country can produce?

  • access to capital, technology, labor, natural resources, human capital
  • none of this has anything to do with prices, so LRAS is straight up and down
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33
Q

what is indicated by the left side of the LRAS?

A

output levels are below full employment (high unemployment)

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34
Q

what is indicated by the right side of the LRAS?

A

output levels are above full employment

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35
Q

monetary policy

A

the actions the Federal Reserves takes to manage the money supply and interest rates to pursue economic policy objectives

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36
Q

fiscal policy

A

changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives

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37
Q

what percent of unemployment would be on the left side of the LRAS?

A

6.4% or greater

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38
Q

what percent of unemployment would be on the right side of the LRAS?

A

4%-6.4%

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39
Q

does the LRAS shift? if so, how?

A

YES! labor supply and technology changes can shift LRAS

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40
Q

what are 3 things that make the SRAS upward sloping?

A
  1. contracts make some wages and prices sticky
  2. firms are often slow to adjust wages
  3. menu costs make some prices sticky
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41
Q

what are 3 things that make the AD curve downward sloping?

A

a fall in the price level increases the quantity of real GDP demanded

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42
Q

the wealth effect

A

when the price level rises, the real value of household wealth declines, and so will consumption, thereby reducing the demand for goods and services

43
Q

the interest-rate effect

A

a lower price level will decrease the interest rate and increase investment spending, thereby increasing the quantity of goods and services demanded

44
Q

the international trade effect

A

a lower price level in the US relative to other countries causes net exports to rise, increasing the quantity of goods and services demanded

45
Q

AD curve shifters (FEG)

A
  1. changes in consumers expectations
  2. changes in government policies
  3. a change in foreign variables
46
Q

if consumers start feeling good about economy, AD shifts ………..

A

as consumer confidence increases, AD increases

47
Q

Change in fiscal policy

A
  • as taxes rise, AD shifts to the left
  • as taxes decline, AD shifts to the right

as government spending increases, AD shifts right
-as government spending decreases, AD shifts left

48
Q

Change in monetary policy

A

as interest rates increase, AD shifts left
as interest rates decrease, AD shifts right

as money supply increases, AD shifts right
as money supply decreases, AD shifts left

49
Q

Foreign Income change

A

as foreign income rises, AD shifts right

as foreign income falls, AD shifts left

50
Q

Exchange rates

A

as US dollar gets weaker, AD shifts right
-more countries demand our goods
as US dollar gets stronger, AD shifts left
-less countries demand our goods

51
Q

SRAS curve shifters (RTL)

A
  1. unexpected change in the price of important natural resources
  2. significant change in technology
  3. labor costs
52
Q

change in the price of important natural resource

A

if price of oil rises, SRAS shifts left

if price of oil falls, SRAS shifts right

53
Q

Technology shock

A
  • a negative technology shock shifts SRAS left

- a positive technology shock shifts SRAS right

54
Q

what are the 3 options for policy?

A
  1. shift the AD curve
  2. shift the SRAS curve
  3. DO NOTHING
55
Q

how does the automatic mechanism work?

A
  1. during recession, costs of labor drastically decreases

- this will shift the SRAS until it reaches the right side of the LRAS

56
Q

liquidity

A

availability of liquid assets to a market or company

57
Q

4 functions of money

A
  1. medium of exchange
  2. a store of value
  3. a unit of account
  4. a standard of deferred payment
58
Q

commodity money

A

money that has value outside of being used for money

-if you didn’t use gold as money, you can use it to make jewelry

59
Q

fiat money

A

money that has NO value outside of being used for money

-every major currency is fiat money

60
Q

M1

A

the narrowest definition of the money supply

-the sumof currency in circulation, checking account deposits in banks, and holdings of traveler’s checks

61
Q

M2

A
  • broader definition of the money supply
  • it includes the M1 plus savings account balances, small denomination time deposits, balances in money market deposit accounts in banks, and non institutional money market fund shares
62
Q

what is the current measure of M1?

A

$2.46 trillion

63
Q

what is the current measure of M2?

A

$10.44 trillion

64
Q

two key points to keep in mind about the money supply

A
  1. the money supply consists of BOTh currency and checking account deposits
  2. becauses balances in checking account deposits are included in the money supply, banks play an important role in the way the money supply increases and decreases
65
Q

do credit cards count as a part of money supply?

A

No, a credit card essentially is a pre-arranged loan…someone else’s money.

66
Q

how does the bank increase/decrease the money supply?

A
  • the smaller the required reserve ratio, the more the bank can loan out
  • the more the bank can loan out, the more it can increase the money supply
67
Q

reserves

A

deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve

68
Q

required reserves

A

reserves that a bank is legally required to hold, based on its checking account deposits

69
Q

required reserve ratio

A

the minimum fraction of deposits banks are required to keep as reserves

70
Q

excess reserves

A

reserves that banks hold over and above the legal requirement

71
Q

Simple Money Multiplier

A

the ratio of the amount of deposits created by banks to the amount of new reserves

72
Q

how to calculate simply money multiplier

A

whatever the reserve requirement is, take 1 divided by that

  • multiply that by the original amount deposited to determine total potential deposits
  • multiply that by excess reserves to determine total amount of deposits created
73
Q

Assume $10,000 is deposited, requirement is 5%…do simply money multiplier

A

1/.05 = 20
20 * 10,000 = $200,000
$10,000 initial deposit plus $190,000 created

74
Q

can banks make money out of thin air?

A

YES

75
Q

can banks change the money supply

A

YES, when they create money using the multiplier, they are increasing the money supply

76
Q

money multiplier WITH currency

A

just add percent people keep as currency to top and bottom of simply money multiplier

77
Q

MONEY MULTIPLIER WITH CURRENCY:

reserve requirement is 5%, people keep 10% as currency

A

(1 + .1) / (.5 + .1) = 7.3
7.3 * $10,000 = $73,000
$10,000 initial deposit, $63,000 created

78
Q

constraints on money creation

A
  1. deposits
  2. willing borrowers
  3. willing lenders
79
Q

4 jobs of the Federal Reserve

A
  1. be the government’s bank
  2. regulate and oversee commercial banks
  3. control the money supply
  4. keep prices controlled and the economy strong
80
Q

when was the Federal Reserve created?

A

established in 1913 to create confidence in our currency and banking system

81
Q

what are the 3 parts of the Federal Reserve?

A
  1. Board of Governors (hotshots)
  2. Federal Open Market Committee (makes policy)
  3. 12 regional banks
82
Q

who controls the Fed?

A

President appoints the 7 members of Board of Governors

  • Chairman has to be approved by senate
  • After this, the Feds need NO authority to act
83
Q

3 methods the Federal Reserve uses to control the money supply

A
  1. Setting the Reserve Requirement
  2. Buying and Selling Government Bonds
  3. Adjusting Certain Interest Rates
84
Q

lower reserve requirement, _________ money creation

higher reserve requirement, _________ money creation

A

more money creation, less money creation

85
Q

Current Reserve Requirements

A

-if institution has < $12.4 M of transaction accounts: 0%
-if institution has > $12.4 M but < $79.5 M: 3%
If the institution has > $79.5 million: 10%

86
Q

where must commercial banks keep their reserves?

A

must have cash kept in a vault OR a federal bank account

87
Q

when the Fed buys bonds, it is ___________ the money supply

when the fed SELLS bonds, it’s is _____________ the money supply

A

increasing, decreasing

88
Q

Federal Funds Rate

A

if banks borrow from other banks to meet federal reserve requirements, the interest rate used is the Federal Funds Rate

89
Q

Discount Rate

A

if banks borrow from the Federal Reserve to meet reserve requirements, the interest rate they pay is the DISCOUNT RATE

90
Q

lowering the Fed Funds Rate _________ the money supply

Increasing the Fed Funds Rate _________ the money supply

A

increases, decreases

91
Q

Current Fed Funds Rate

A

between 0 and .25%

92
Q

Current Discount Rate

A

.75%

93
Q

Lower Fed Fund rates __________ bank lending, which ___________ money supply

A

lower rates increase bank lending, which increases the money supply

94
Q

higher Fed Funds Rate _________ bank lending, which ___________ money supply

A

higher rates decrease bank lending, which decreases money supply

95
Q

Open Market Operations

A

the buying and selling of Treasury securities by the Federal Reserve in order to control the money supply
-bought from and or sold to primary dealers like Citigroup, JP Morgan, Goldman Sachs, Morgan Stanley

96
Q

Operation Twist

A
  1. Fed sells a bunch of short-term bonds
  2. selling bonds lowers their prices, raising rates
  3. uses that money to buy longer term bonds
  4. buying bonds increases their prices, lowering long-term rates
  5. longer-term interest rate goes down
96
Q

Operation Twist

A
  1. Fed sells a bunch of short-term bonds
  2. selling bonds lowers their prices, raising rates
  3. uses that money to buy longer term bonds
  4. buying bonds increases their prices, lowering long-term rates
  5. longer-term interest rate goes down
97
Q

Quantitative Theory of Money formula

A

MP = PY

M = money supply
P = overall price level in the economy
Y = output of real goods (real GDP)
V = velocity = number of times a dollar changes hands
97
Q

Quantitative Theory of Money formula

A

MP = PY

M = money supply
P = overall price level in the economy
Y = output of real goods (real GDP)
V = velocity = number of times a dollar changes hands
98
Q

Quantitative Theory of Money

A

a theory about the connection between money and prices that assumes that the velocity of money is constant

98
Q

Quantitative Theory of Money

A

a theory about the connection between money and prices that assumes that the velocity of money is constant

99
Q

Assumptions of the Quantity Theory

A
  1. Velocity doesn’t change
    - it didn’t for a while, but that went to hell after 1980
  2. real GDP is completely independent of money supply
  3. so any change that is made to M will show up as a change in P
    - this theory basically claims that all the Feds are doing is increasing inflation
99
Q

Assumptions of the Quantity Theory

A
  1. Velocity doesn’t change
    - it didn’t for a while, but that went to hell after 1980
  2. real GDP is completely independent of money supply
  3. so any change that is made to M will show up as a change in P
    - this theory basically claims that all the Feds are doing is increasing inflation

Macroeconomics (11 decks)

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