Midterm #2

Question 1

Section

Answer 1

Details

Question 2

Unit II: Income Inequality

Answer 2

Macroeconomics Comprehensive Study Guide

Question 3

Lorenz Curves

Answer 3

Lorenz Curve: A graphical representation of income inequality. Gini Coefficient: A measure of inequality (0 = perfect equality, 1 = perfect inequality). Quintiles divide the population into five equal groups by income.

Question 4

Empirical Evidence: Income Inequality

Answer 4

Gini Coefficients (OECD countries, mid-2000s): U.S. Gini coefficient rose from 0.338 (1980s) to 0.381 (2000s). Income gap has widened between quintiles in recent decades.

Question 5

Economic Explanations for Income Inequality

Answer 5

Globalization and Skill-Biased Technological Change favor high-skill workers. The ‘superstar effect,’ immigration, and weaker unions also contribute.

Question 6

Policy Implications

Answer 6

Solutions: Early childhood education, improved high school quality, and financial aid for higher education.

Question 7

Unit VI: U.S. Tax System

Answer 7

Overview of Federal and State Revenue Sources

Question 8

Financial Overview of U.S. Government

Answer 8

Federal Revenue (2018): Income taxes - $1,684B (51%), Payroll - $1,171B (35%), Corporate - $205B (6%). State/Local (2016): Sales - $550B (35%), Property - $466B (30%).

Question 9

Tax Rates

Answer 9

Average Tax Rate (ATR) = T/I. Marginal Tax Rate (MTR) = ΔT/ΔI. For salary $50K, ATR = 13.2%, MTR = 22%.

Question 10

Taxes and Equity

Answer 10

Benefits Principle: Pay taxes based on benefits received (e.g., gas tax). Ability-to-Pay Principle: Higher earners pay more.

Question 11

Types of Tax Systems

Answer 11

Progressive: Higher income pays more % of income. Regressive: Lower income pays more %.

Question 12

U.S. Debt Ceiling

Answer 12

Debt ceiling limits how much the U.S. can borrow. When reached, payments may be prioritized or borrowing halted.

Question 13

Unit III: Monetary System

Answer 13

Overview of the U.S. Monetary System

Question 14

Functions of Money

Answer 14

Money as Medium of Exchange, Unit of Account, Store of Value. Fiat (USD) vs. Commodity Money (e.g., gold).

Question 15

Money Supply (M0, M1, M2)

Answer 15

M1: Currency + demand deposits. M2: M1 + savings deposits.

Question 16

Money Multiplier

Answer 16

Money Multiplier (MM) = 1/R. Example: If R = 10%, MM = 10. ΔTot Dep = Original Deposit × MM.

Question 17

Federal Reserve System

Answer 17

Main tools: Open Market Operations, Discount Rate, Reserve Requirements, Quantitative Easing (QE).

Question 18

Unit III: Money Growth and Inflation

Answer 18

Overview of Money Growth and Inflation

Question 19

Classical Theory of Inflation

Answer 19

Inflation (π) = % ΔP. Quantity Theory: M × V = P × Y. Inflation results from increased money supply.

Question 20

Fisher Effect

Answer 20

Fisher Equation: i = r + π. Where i = nominal, r = real, π = inflation rate.

Question 21

Costs of Inflation

Answer 21

Inflation Tax reduces purchasing power. Shoeleather, Menu Costs, Relative Price Variability, and Tax Distortions from inflation.

Question 22

Unit IV: Open Economy

Answer 22

Open Economy Basics

Question 23

Exchange Rates

Answer 23

Nominal Rate (e): Currency exchange rate. Real Rate (E): Goods/services exchange rate. E = (e × P_domestic) / P_foreign.

Question 24

Net Exports (NX) and Net Capital Outflow (NCO)

Answer 24

NX = NCO: Trade balance connects with capital flow. U.S. residents buying German bonds increases NCO.

Question 25

Savings (S), Investment (I), and NCO

Answer 25

National Income Accounting: S = I + NCO. Savings used for domestic investment or foreign assets.

Question 26

Market for Loanable Funds (LF)

Answer 26

Loanable Funds Market Supply: Savings. Demand: Investment and NCO. Equilibrium real interest rate (r) balances them.

Question 27

Unit IV: Open Economy – Foreign Exchange and Capital Flow

Answer 27

FX and Capital Flow in Open Economy

Question 28

Foreign-Currency Exchange Market (FX)

Answer 28

If a U.S. resident buys German bonds, they supply USD in FX market. High E = expensive U.S. goods, reducing exports (X).

Question 29

Government Budget Deficits and Capital Flight

Answer 29

Deficits increase r, reduce private I, and appreciate USD, decreasing NX. Capital flight increases NCO, depreciates E, increases NX.

Question 30

Three-Panel Diagram for Macroeconomics: Open Economy

Answer 30

Three-panel Diagram: Loanable Funds (LF), Net Capital Outflow (NCO), and Foreign Exchange (FX) markets.

Question 31

Loanable Funds (LF) Market

Answer 31

Axes: Real Interest Rate (r) and Quantity of Loanable Funds (Q_LF). Budget deficits decrease savings, raise r, reduce Q_LF.

Question 32

Net Capital Outflow (NCO) Market

Answer 32

Axes: Real Interest Rate (r) and Net Capital Outflow (NCO). High r attracts foreign capital, reducing NCO.

Question 33

Foreign Exchange (FX) Market

Answer 33

Axes: Exchange Rate (E) and Quantity of Dollars (Q_USD). Low NCO decreases USD in FX, raises E, reduces exports.