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Info Systems Quiz 1 > Macro Midterm 2 > Flashcards

Macro Midterm 2 Flashcards

1
Q

Productivity

A

explains why living standards vary so much from country to country, quantity of goods and services produced from each unit of labor

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2
Q

Determinants of productivity

A

physical capital (K/L), human capital (H/L), natural resources (N/L), and technological knowledge (A)

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3
Q

Physical capital

A

stock of equipment and structures used to produce goods and services ex. saws, drill presses

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4
Q

Human capital

A

knowledge and skills that workers acquire through education, training, and experience

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5
Q

Natural resources

A

land, rivers, mineral deposits, and other resources provided by nature and used as inputs into production -> renewable and nonrenewable

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6
Q

Technological knowledge

A

understanding of the best ways to produce goods and services

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7
Q

What is one way to raise future productivity?

A

devote more current resources to the production of capital

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8
Q

Diminishing returns

A

as the stock of capital rises, the extra output produced from an additional unit of capital falls

capital’s diminishing returns called diminishing marginal product of capital

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9
Q

Statement on the economy is the long run

A

the higher saving rate leads to a higher level of productivity and income but not to higher growth in these variables

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10
Q

Catch-up effect

A

Property of diminishing returns to capital implication: other things being equal, it is easier for a country to grow quickly if it start out relatively poor

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11
Q

Foreign direct investment

A

capital investment that is owned and operated by a foreign entity

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12
Q

Foreign portfolio investment

A

an investment financed with foreign money but operated by domestic residents

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13
Q

Externality

A

effect of one person’s actions on the well-being of a bystander

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14
Q

Brain drain

A

emigration of highly educated workers to rich countries, where these workers can earn more

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14
Q

Other than education what does human capital refer to?

A

expenditures that lead to a healthier population -> increases productivity and raises living standards

nutrition is one key factor

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15
Q

Another way policymakers can foster economic growth?

A

protecting property rights and promoting political stability

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16
Q

Property rights

A

ability of people to exercise authority over the resources they own, need to be respected for this process to work

threat: political instability -> economic prosperity depends in part on favorable political institutions

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17
Q

Inward-oriented policies

A

aim to increase productivity and living standards by avoiding interaction with the rest of the world

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18
Q

Outward-oriented policies

A

integrate these countries into the world economy, international trade in goods and services can improve economic well-being of a country’s citizens

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19
Q

Public good

A

once one person discovers an idea, it enters society’s pool of knowledge, and other people can freely use it

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20
Q

Financial system

A

consists of institutions that help match one person’s saving with another person’s investment

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20
Q

Large population and it’s affect on economy

A

large population means more workers are available to produce goods and services

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21
Q

Two categories of the financial system

A

financial markets and financial intermediaries

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22
Q

Financial markets

A

institutions through which a person who wants to save can directly supply finds to a person who wants to borrow

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23
Q

Bond market terms

A

bond: certificate of indebtedness that specifies the obligations of the borrower to the buyer of the bond

dat of maturity: time at which the loan will be repaid

principal: promise of interest and eventual repayment of the amount borrowed

term: length of time until the bond matures

Perpetuities: bonds that never mature

credit risk: probability that the borrower will fail to pay some of the interest or principal

default: failure to pay

tax treatment: way the tax laws treat the interest earned on it

Municipal bonds: bond owners are not required to pay federal income tax on interest income (may not need to pay state and local taxes either)

inflation protection: Treasury inflation-protected securities (TIPS) generally pay lower interest rate than similar ones without this feature

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24
Q

Stock market

A

stock: represents partial ownership in a firm and is a claim to some of the profits firm makes

equity finance: sale of stock to raise money

debt finance: sale of bonds

stock index: computed as an average group of stock prices

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25
Q

Financial intermediaries

A

financial institutions through which savers can indirectly provide funds to borrowers

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26
Q

Banks

A

primary job: take in deposits from people who want to save and use these deposits to make loans to people who want to borrow

medium of exchange: checks, electronic payment, debit card

store of value: wealth that people have accumulated in past saving

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27
Q

Mutual funds

A

institution that sells shares to the public and uses the proceeds to buy a selection, to portfolio, of various types of stocks, bonds, or both stocks and bonds

allow people with small amounts of money to diversify their holdings

funds give ordinary people access to the skills of professional money managers

index funds: buy all stocks in a stock index, perform somewhat better on average than mutual funds

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28
Q

Identity

A

equation that must be true because of the way the variables in the equation are defined

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29
Q

closed vs. open economy

A

closed: one that does not interact with other economies

open: interact with other economies around the world

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30
Q

closed economy GDP equation

A

Y = C + I + G

total income: (Y - C - G)

S = I -> S = Y - C - G or S = (Y - T - C) + (T - G)

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31
Q

National saving

A

total income in the economy that remains after paying for consumption and government purchases

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32
Q

Private saving

A

amount of income that households have left after paying their taxes and paying for their consumption

Y - T - C

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33
Q

Public saving

A

amount of tax revenue that the government has left after paying for its spending

T - G -> positive: surplus negative: deficit

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34
Q

Investment

A

refers to the purchase of new capital, such as equipment or buildings

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35
Q

Saving

A

depositing unspent income in a bank or using it to buy some stock or a bond from a corporation

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36
Q

Market for loanable funds

A

all savers deposit their saving in this market, and all borrowers take out their loans there

income people have chosen to save and lend out rather than use for their own consumption and to the amount that investors have chosen to borrow to fund new investment projects

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37
Q

Supply of loanable funds

A

saving is the source of the supply of loanable funds

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38
Q

Demand for loanable funds

A

investment is the source of the demand for loanable funds

39
Q

Affect of higher interest rate

A

encourage saving (increasing the quantity of loanable funds supplied) and discourage borrowing for investment (decreasing the quantity demanded)

40
Q

Impact of tax laws

A

reform of the tax laws encourages great saving, the result is lower interest rates and greater investment

41
Q

Investment tax credit

A

tax reform aimed at making investment more attractive

gives tax advantage to any form building a new factory or buying a new piece of equipment

does not affect the supply of loanable funds
demand for loanable funds moves to the right

encourages greater investment, the result is higher interest rates and greater saving

42
Q

Government debt and balanced budget

A

debt: accumulation of past government borrowing

balanced: government spending exactly equals tax revenue

43
Q

Crowding out

A

government borrows to finance its budget deficit, crowds out private borrowers who are trying to finance investment

44
Q

Affect of reducing national saving

A

when government reduces national saving by running a budget deficit, interest rate rises, and investment falls

long-run growth: government budget deficits reduce economy’s growth rate

45
Q

Affect of budget surplus

A

increases the supply of loanable funds, reduces the interest rate, and stimulates investment

higher investment = greater capital accumulation and more rapid economic growth

46
Q

Money

A

set of assets in the economy that people regularly use to buy goods and services from each other

47
Q

Three functions of money

A

medium of exchange: item that buyers give to sellers when they purchase goods and services

unit of account: yardstick people use to post prices and record debts

store of value: item that people can use to transfer purchasing power from the present to the future

48
Q

Wealth

A

total of all stores of value, including both monetary and non monetary assets

49
Q

Liquidity

A

ease with which an assist can be converted into the economy’s medium of exchange

50
Q

Commodity money

A

money takes form of a commodity with intrinsic vale

intrinsic value: item would hav value even if it were not used as money

51
Q

Fiat money

A

money without intrinsic value

fiat: order of decree, and fiat money is established as money by government decree

52
Q

Money stock

A

quantity of money circulating in the economy

currency: paper bills and coins in public hands

demand deposits: balances in bank accounts that depositors can access on demand simply by writing a check or swiping a debit card

52
Q

Federal reserve

A

central bank designed to oversee the banking system and regulate the quantity of money

key determinants of inflation in the long run and employment and production in the short run

53
Q

Dual mandate of the fed

A

stable prices and maximum sustainable employment

54
Q

Lender of last resort

A

lender to those who cannot borrow anywhere else - to maintain stability in the overall banking system

55
Q

Money supply and monetary policy

A

supply: fed controls the quantity of money available in the economy, closely connected to the level of interest rates

policy: setting of the money supply by policymakers in the central bank

56
Q

Open-market operation

A

purchase and sale of US government bonds

57
Q

Reserves

A

deposits that banks have received but have not loaned out

if banks hold all deposits in reserve, banks do not influence the supply of money

58
Q

Fractional-reserve banking

A

banking system in which banks hold only a fraction of deposits as reserves

59
Q

Reserve ratio

A

fraction of deposits that banks hold as reserves

determined by a combo of government regulation and bank policy

when banks hold only a fraction of deposits in reserve, banking system creates money

60
Q

Reserve requirement

A

fraction of total deposits that a bank holds as reserves

61
Q

Excess reserves

A

hold reservers above the legal minimum

62
Q

Money multiplier

A

amount of money that results from each dollar of reserves

reciprocal of the reserve ratio

higher the reserve ratio, the less of each deposit banks loan out, and the smaller the money multiplier

63
Q

Bank capital

A

resources that a bank obtains from issuing equity to its owners

64
Q

Leverage and leverage ration

A

leverage: use of borrowed money to supplement existing funds for the purpose of investment

leverage ratio: ratio of the bank’s total assets to bank capital

65
Q

Capital requirement

A

ensure that banks will be able to pay off their depositors (without having to resort to government-provided deposit insurance funds)

66
Q

How the fed influences the quantity of reserves

A

open-market operations: buys or sells government bonds
fed lending to banks: banks borrow from the fed when they do not have enough reserves on hand either to satisfy bank regulators etc.

67
Q

Discount rate

A

interest rate on the loans that the fed makes to banks

higher discount rate discourages banks from borrowing from the fed, decreasing the quantity of reserves in the banking system and, in turn, the money supply

68
Q

How the fed influences the reserve ratio

A

reserve requirements: regulations on the minimum amount of reserves that banks must hold against deposits

interest on reserves: the interest rate paid to banks on the reserves held in deposit at the fed

69
Q

Problems in controlling the money supply

A

fed does not control the amount of money that households choose to hold as deposits in banks

monetary controls is that the fed doesn’t not control the amount that bankers choose to lend

70
Q

Federal funds rate

A

short-term interest rate that banks charge one another for leans

71
Q

Inflation

A

increase in the overall level of prices

measured through percentage change in CPI

hyperinflation: extraordinary high rate of inflation

72
Q

Deflation

A

where prices fall

73
Q

What happens are price level rises

A

value of money falls

determined by supply and demand

74
Q

Long-run: money supply and money demand

A

brought into equilibrium by the overall level of prices

75
Q

Quantity theory of money

A

quantity of money available in an economy determines the value of money, and growth in the quantity of money is the primary cause of inflation

76
Q

Effects of monetary injection

A

create an excess supply of money

increases demand for goods and services

77
Q

Nominal variables

A

variables measured in monetary units

78
Q

Real variables

A

variables measured in physical units

79
Q

Monetary neutrality

A

the proposition that changes in the money supply do not affect real variables and affects nominal variables

80
Q

Velocity of money

A

rate at which money changes hands

V = (P x Y) / M
P: price level
Y: quantity of output (real GDP)
M: quantity of money

81
Q

Quantity equation

A

M x V = P x Y

82
Q

Five points on the quantity theory of money

A

-The velocity of money is relatively stable over time.
-Because velocity is stable, when the central bank changes the quantity of money (M), it causes proportionate changes in the nominal value of output (P × Y).
-The economy’s output of goods and services (Y) is determined by factor supplies (labor, physical capital, human capital, and natural resources) and the available production technology. In particular, since money is neutral, money does not affect output.
-Because output (Y) is fixed by factor supplies and technology, when the central bank alters the money supply (M) and induces a proportional change in the nominal value of output (P × Y), this change is reflected in a change in the price level (P).
-Therefore, when the central bank increases the money supply rapidly, the result is a high rate of inflation.

83
Q

Inflation tax

A

the revenue the government raises by creating money

inflation tax is like a tax on everyone who holds money

84
Q

Real interest rate equation

A

real interest rate = nominal interest rate - inflation rate

85
Q

Effect of increase of rate of money growth

A

long-run result: equal increase in the inflation rate and the nominal interest rate

fisher effect: one-for-one adjustment of the nominal interest rate to the inflation rate

86
Q

Shoeleather cost

A

resources wasted when inflation encourages people to reduce their money holdings

87
Q

Menu costs

A

costs of changing prices

88
Q

Expected real interest rate equation

A

nominal interest rate - expected inflation rate

89
Q

Actual real interest rate equation

A

actual real interest rate = nominal interest rate - actual inflation rate

90
Q

Fisher effect equation

A

nominal interest rate = real interest rate + expected inflation rate

91
Q

Nominal interest rate equation

A

nominal interest rate = real interest rate + expected inflation rate

92
Q

After-tax nominal interest rate equation

A

after-tax nominal interest rate = nominal interest rate x (1- tax rate)

93
Q

After-tax real interest rate equation

A

after-tax real interest rate = after-tax nominal interest rate - inflation rate

94
Q

Price level equation

A

P = (M x V) / Y

95
Q

M1 vs M2

A

M1: currency + demand deposits, savings deposits, traveler’s check, and other checkable deposits

M2: M1 + retail money market mutual fund balances, money market deposit accounts, and small denomination time deposits

Info Systems Quiz 1 (17 decks)

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