Midterm #2 Flashcards
Explain cyclical unemployment
A global, overall shortage of jobs. It is at zero when an economy hits max employment
Explain frictional unemployment
This consists of workers between jobs who are searching for either a new job or have just entered the labor force. It is expected to be short-term.
Explain structural unemployment
This consists of a mismatch between the skills and the geographic regions of unemployed workers and the skills and the geographic regions that are involved in the pool of vacant jobs. There are barriers to either geographic or occupational mobility. The textbook says “unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one” It can be long-term and is often difficult to remedy
What is the labor market supply and demand market axis? What are on the x and y axes?
It is a graph featuring the supply and demand for labor. On the x axis is the minimum wage, and on the y is the amount of labor
Explain fiat money
This is money that supposedly has value because the government has declared that it has value. It took over from commodity money, like gold, that has intrinsic value. It is only given value because people have confidence that it will hold that value in the near and long term future.
Explain the natural rate of unemployment
It is also called the non-accelerating inflation rate of unemployment. If the actual rate of unemployment falls below the natural rate, inflation will worsen. If the actual rate of unemployment rises above the natural rate, inflation will not worsen, and it might fall. The textbook says “the rate of unemployment to which the economy tends to return in the long run”. I did say in class that the natural rate = frictional rate + structural rate, and that cyclical unemployment = 0 at the natural rate.
Explain the overnight rate for the Bank of Canada
The overnight rate for the Bank of Canada is the rate charged by the Bank of Canada when they loan money short term to other banks.
Explain liquidity (hint: why is it important for the banking sector?)
Liquidity is the ease of which assets can be converted into the economy’s median of exchange. It is important for the banking sector as they must keep a chunk of their assets in liquid form so that when individuals want to take their money out of the banks they are able to withdraw with little to no wait
Explain open market purchasing of government bonds and quantitative easing
Open market purchases of government bonds are carried out by the central bank. It buys bonds and by so doing injects liquidity into the commercial banking system. This gives them excess reserves, which allows for the money creation process to be triggered. The money supply will expand.
Quantitative easing is the same phenomenon writ large (bigtime) on a much larger magnitude. The bonds that are bought by the central bank also include bonds issued by private sector firms.
Explain public saving versus private saving. What are the equations? What is their sum called?
Public saving refers to the government’s balance.
It equals tax revenues minus government purchases of goods and services: T – G.
Private saving is carried out by households (and firms). It equals aggregate income minus taxes minus consumption spending: Y – T – G.
Their sum is national saving
Explain money functioning as a store of value and money functioning as a medium of exchange
money functioning as a store of value is analogous to savings that will be drawn upon in the future. People hope that it will maintain much of its value in the future, such that it is not a case of ‘use it or lose it’.
Money functioning as a medium of exchange is the function of which we are the most familiar. In our transactions in either input or output markets, we part with our money in the here and now in exchange for goods and services.
What was the major point that the bank run movie shown in class was trying to illustrate? You should mention the fractional reserve banking system in your response.
This is what occurs when the depositors lose faith or confidence in the safety of their own accounts.
This is dangerous as most of the depositors money has been loaned out to borrowers and only a fraction are kept as reserves. Once these reserves are drained the banks must have waits on the money being taken out, making things worse again.
Does the professor believe in crypto currency as a form of exchange? Why or why not? What was his arguments?
No, he instead appealed to the three criteria for the functions of money.
Does it function well as a medium of exchange? No, because it is not widely accepted as a means of payment for transactions.
Does it function well as a store of value? No, because its value in terms of established currencies like the US $ is very volatile, and it has plummeted recently (like an 80 % loss).
Does it function well as a unit of account? No
What are the three primary functions of banks?
Financial intermediation; the act as intermediates between us and other consumers or firms
Providing liquidity; ensures investors and consumers can quickly liquify their assets if needed or wanted. This encourages saving and is critical to maintain the financial system.
Allows for diversification of risk; dont put all your eggs in one basket. With banks we can have diversified portfolios that allow for a loss given that gains in other sectors will make up for it.
What are the three distinct functions of money?
Medium of exchange; acts as a medium of exchange and removes the need to barter for goods and services.
Unit of account; used as a common denominator for the value and relative value of goods and services or credits and debits.
Store of value; brings in the dimension of time by allowing a claim to goods that will be created in the future. Because it holds most of its value over time goods can be purchased in advance knowing that the currency will still be aprox worth the same.
