MacroEcon 1.09

Question 1

GDP Income approach

Answer 1

sums all income earned in the production of final goods

Question 2

GDP expenditure approach

Answer 2

sums all expenditures to purchase final product

Question 3

3 common measures of price inflation

Answer 3

Consumer price index (CPI)
Producer price index (PPI)
GDP deflator

Question 4

Demand pull inflation

Answer 4

Demand curve is shifted up
lower interest rates
increase unemployment benefits
Consumers have more money to spend

Question 5

Cost-push inflation

Answer 5

supply curve shifted inward
production costs go up
prices go up
supply goes down

Question 6

Increase in output (equilibrium GDP)

Answer 6

Marginal propensity to save MPS

Question 7

Real interest rates

Answer 7

adjusted for inflation

Question 8

Risk free interest rates

Answer 8

Rates that would be charged if lenders had 100% chance of being repaid.
US Treasury securities are indicators of risk free interest rates

Question 9

Federal Funds rate (Discount rate)

Answer 9

rate the federal reserve charge for loan to bank

Question 10

Prime rate

Answer 10

the rate banks charge their most creditworthy businesses on short term loans. Typically set at 3% over federal funds rate

Question 11

Nominal interest rates

Answer 11

rate quoted by financial institutions. Includes premiums to protect from default, inflation

Question 12

fiscal policy

Answer 12

governments actions to effect economy. tax rates, government spending

Question 13

Monetary policy

Answer 13

Involves efforts by the central bank or Fed to manage credit conditions, interest rates, and money supply

Question 14

Fed has several tools to carry out expansion monetary policy and contraction monetary policy

Answer 14

Reserve Requirments (ratio)
Discount rate
Open market operations

Question 15

Reserve requirements ratio

Answer 15

how much money the fed makes available to loan out. how much they need to hold in reserve.
Not adjusted often

Question 16

Discount rate

Answer 16

adjustment of interest rate the fed charges banks for short term emergency loans

Question 17

Open market operations

Answer 17

Used most frequently

Either buying or selling short term treasury bills to effect the amount of money the banks have to lend.

Question 18

Frictional unemployment

Answer 18

normal turnover. worker between jobs

Question 19

Structural unemployment

Answer 19

affects workers who lose jobs do to changes in demand for goods. VHS, horses and buggies

Question 20

Cyclical unemployment

Answer 20

results in job losses due to fluctuations in the business cycle. recessions and expansions

Question 21

regulatory policy

Answer 21

immigration laws, minimum wage laws, energy policy

Question 22

Classical economic theory

Answer 22

argues that in the absence of government intervention economies can be self stabalilizing

Question 23

keynesian theory

Answer 23

fiscal policy, lower taxes more government spending. argues that prices and wages do not adjust quickly enough on their own. must use fiscal policy

Question 24

monetarist theory

Answer 24

monetary policy-open market

Question 25

supply side theory

Answer 25

reduce taxes. money lost from tax reduction will be balanced out by taxes from increased spending

Question 26

laffer curve

Answer 26

if tax rates are high enough increases tax rates will not increase tax revenue. people don’t want to work if being taxed 80%

Question 27

new keynesian theory

Answer 27

combination of fiscal and monetary policy

Question 28

austrian theory

Answer 28

if interest rates drop too low company will over buy and outpace demand.

Question 29

Absolute trade advantage

Answer 29

a country being able to produce a good at a lower cost than another

Question 30

Stagflation

Answer 30

persistent high inflation combined with high unemployment and stagnant demand in a country’s economy.

Question 31

NAIRU

Answer 31

Non accelerating inflation rate of unemployment

is the specific level of unemployment that is evident in an economy that does not cause inflation to rise up.

Question 32

Phillips Curve

Answer 32

The theory states that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment. However, the original concept has been somewhat disproven empirically due to the occurrence of stagflation in the 1970s, when there were high levels of both inflation and unemployment.

Question 33

GDP

Answer 33

GDP = Consumption by households + Investment + Government spending + Net exports