Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

econ 101 > midterm 2 > Flashcards

midterm 2 Flashcards

You may prefer our related Brainscape-certified flashcards:
Physics 101 flashcards Psychology 101 flashcards Chemistry 101 flashcards Biology 101 flashcards Organic Chemistry 101 flashcards Sociology 101 flashcards
1
Q

circular flow diagram

A

model of economy that shows how households and businesses are linked

total output, income, spending, are all equal

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

on the circular flow diagram: total output must be equal to …..

and total spending must be equal to…..

A

total spending, total income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

gdp per capita (per person)

A

total gdp/population

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

gdp

A

market value of all final goods and services produced within a country in a year

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

gdp is total spending on

A

final goods, including new inventories

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

gdp (y) = (categories of spending)

A

consumption + investment + government spending + net exports

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

gdp only counts…. goods and does not account for …… goods

input costs are not included in gdp

A

final, intermediate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

consumption

A

ex) household purchases

household spending on final goods and services

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

investment

A

spending on new capital assets that increase economy’s productive capacity

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

transfer payments

A

transfer income from one entity to the next

government to individual

not counted in gdp

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

exports

A

goods or services produced domestically and purchased by foreign buyers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

imports

A

goods or services produced in a foreign country and purchased by domestic buyers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

net exports

A

spending on exports- spending on imports

also called trade balance

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

value added

A

amount by which value of an item is increased at each stage of production

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

value added =

A

total sales - cost of intermediate inputs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

gdp is the total income which is the sum of

A

total wages and total profits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

capital gains and losses are counted as

A

new income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

labor’s share of total income is

A

declining

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

3 ways to measure gdp: gdp is

A

total spending, total output, total income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

3 ways to measure gdp: it can be measured by

A

y=c+i+g+nx

sum of total value added

total wages + total profits

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

3 ways to measure gdp: measurement is called

A

gdp, value added, gross domestic income

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

6 limitations of gdp:

A

1) prices are not values
2) non market activities are not included
3) misses the shadow economy
4) doesnt count environmental degradation
5) leisure does not count
6) gdp ignores distribution

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

nominal gdp

A

gdp measured in today’s prices

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

real gdp

A

gdp measured in constant price

can we account for price changes to see if economy has grown over time in value

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

nominal gdp =

A

p*q

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

real gdp =

A

avg p *q

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

calculate nominal gdp using …. prices

A

current

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
28
Q

calculate real gdp using …… prices

A

constant

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
29
Q

% change in nominal gdp=

A

% change in real gdp + % change in prices

only works when the years are close together

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
30
Q

how to scale big numbers

A

1) evaluate what it means per person
2) compare big numbers to size of their own history
3) use rule of 70 to evaluate long run growth rates
4) compare big numbers to size of economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
31
Q

rule of 70

doubling time (years) =

A

70/ annual growth rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
32
Q

economic growth

A

ability of society to produce more over time

making the economic pie bigger

how can we increase circular flow model?

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
33
Q

flow of real resources

A

wood, labor, electricity, groceries, services

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
34
Q

flow of money

A

spending to acquire inputs, spending to buy outputs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
35
Q

market value

A

value everything goes into gdp at its market price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
36
Q

e^10 , e^9

A

ten bil, bill

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
37
Q

calculate gdp by

A

asking people how much they spent, asking people how much they produced, asking people how much they earned

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
38
Q

imports do not factor into gdp because

A

they already count into consumption and investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
39
Q

production functions

A

methods by which inouts are transformed into output

determines total production possible with a set of ingredients

how inputs turn into outputs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
40
Q

aggregate production function

A

links gdp to labor, human capital, and physical capital

how much of everything a country can produce

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
41
Q

human capital

A

accumulated knowledge and skills that make a worker more productive

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
42
Q

physical capital

A

tools/machinery/structures that are inputs in production process

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
43
Q

production function:

Y= f…

A

(L,H,K)

output is a function of labor, human capital, and physical capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
44
Q

a country will produce more if

A

it employs more labor

workers become highly skilled, accumulating human capital

accumulates more physical capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
45
Q

output depends on

A

L,H,K and recipe for inputs/outputs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
46
Q

population growth boosts total gdp but not

A

gdp per capita

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
47
Q

dependency ratio

A

number of people too old or too young to work per 100 people of working age

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
48
Q

labor productivity

A

quantity of goods and services that each person produces per hour of work

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
49
Q

capital stock:

A

total quantity of physical capital that can be used in production of goods and services

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
50
Q

technological progress

A

new methods for using existing resources

new recipe for combining ingredients

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
51
Q

constant returns to scale

A

increasing all inputs by same proportion will cause output to rise by the same proportion

doubling inputs means outputs will double

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
52
Q

diminishing returns to capital

A

law of diminishing returns

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
53
Q

catch up growth

A

enjoyed by poor countries, rapid growth that occurs when a relatively poor country invests in physical capital

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
54
Q

capital stock will grow as long as

A

investment outpaces depreciation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
55
Q

depreciation

A

decline in capital due to wear and tear, obsolescence, accidental damage, aging, when price of a currency falls

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
56
Q

physical capital per worker will eventually start

A

declining

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
57
Q

capital accumulation cant sustain

A

long term economic growth

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
58
Q

what shifts the production function

A

technological progress

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
59
Q

technology allows us to break the cycle of poverty. it has 3 good features

A

ideas can be freely shared, ideas do not depreciate with use, ideas may promote other ideas

however, ideas are nonexcludable

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
60
Q

why do institutions matter for public growth?

A

property rights
government stability
efficiency of regulation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
61
Q

property rights

A

control over tangible or intangible resources

provide incentive to invest in capital, maintain resources, develop a new tech

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
62
Q

government stability

A

instability discourages investment and innovation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
63
Q

efficiency of regulation

A

make it no harder than necessary for people to start businesses and invest

ex) not hard to start a business in the US

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
64
Q

encouraging innovation: government policy

A

create incentives through intellectual property laws

subsidize r and d

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
65
Q

institutions that promote economic growth

A

property rights

gov stability

efficient regulation

gov policy that encourages innovation

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
66
Q

imports dont make gdp smaller because

A

they cancel out

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
67
Q

profits

A

share of money we spend going to businesses

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
68
Q

wages

A

share of money we spend going to workers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
69
Q

gdp is a good proxy for economic well-being

A

decreases infant mortality, increases life expectancy, education, life satisfaction

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
70
Q

how to calculate real gdp

A

1) find y1 and y2 average
2) compute GDP for both years using avg price
3) calculate growth if necessary

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
71
Q

growth = (using real gdp)

A

(real gdp (this)- real gdp (last))/ real gdp (last)

gives gdp as a growth rate

to get as a percent, multiply by 100

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
72
Q

growth = (as a percent change in real gdp)

A

% change in real gdp= % change in nominal gdp - % change in prices

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
73
Q

even as world population grows,

A

growth grows at the same pace but is unevenly distributed

use real gdp

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
74
Q

small growth rates build up

A

dispartity and inequality we see across the world emerged over time, not all at once

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
75
Q

working age population

A

16 and older who are not in military or institutionalized

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
76
Q

employed

A

working age population who are working

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
77
Q

unemployed

A

working age population without jobs who are trying to get jobs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
78
Q

4 requirements to be considered unemployed

A

part of working age population
not currently working
actively searching for work
able to accept a job if it were offered

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
79
Q

labor force

A

unemployed + employed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
80
Q

not in the labor force

A

working age population who are neither unemployed or employed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
81
Q

labor force participation rate =

A

(employed + unemployed)/ working age population

*100

differs for men and women

shows how many potential workers are working

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
82
Q

unemployment rate

A

unemployed/labor force

  • 100

percent of labor force that is unemployed

varies across groups, fluctuates over time but is never 0

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
83
Q

equilibrium unemployment rate

A

long run unemployment rate to which economy tends to return

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
84
Q

dynamic labor market makes it

A

easier for people to find new jobs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
85
Q

most job seekers are …..
most unemployment spells are …..

A

employed, short

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
86
Q

long term unemployment

A

people who have been unemployed for 6 months or longer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
87
Q

….. and ….. make it hard for the long term unemployed to find work

A

discrimination and skill loss

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
88
Q

marginally attached

A

someone who wants a job who hasnt looked for a job within the past year, but who isnt counted as unemployed because they are not currently searching for work

type of discouraged worker

closest discouraged worker to being back in labor force

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
89
Q

underemployed

A

someone who has some work but wants more hours or someone whose job isnt adequately using their skills

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
90
Q

involuntarily part time

A

someone who wants full time work and is working part time because they have not found a full time job

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
91
Q

alternative measures of unemployment tend to follow

A

movements in unemployment

ex) if unemployment goes up, involuntary part time work will go up

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
92
Q

on a graph of labor demand and labor supply

A

equilibrium occurs where everyone who wants to work is hired

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
93
Q

frictional unemployment

A

due to the time it takes for employees to search for workers and workers to search for jobs

when there are efficient methods for job searches, frictional unemployment is lower

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
94
Q

structural unemployment

A

unemployment that occurs because wages do not fall do bring L(s) and L (d) into equilibrium

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
95
Q

cyclical unemployment

A

due to temporary down turns in the economy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
96
Q

frictional and structural unemployment explain why

A

equilibrium rate is never below zero

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
97
Q

3 factors of frictional unemployment

A

1) efficiency of resources employers and workers use to find eachother
2) alignment of skills workers have and skills employers desire
3) employment insurance and other income support during unemployment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
98
Q

structural unemployment occurs when

A

prevailing market wage is stuck above equilibrium wage

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
99
Q

efficiency wage (cause of structural unemployment)

A

higher wage paid to encourage greater worker productivity

makes it unprofitable for employers to lower wages

can lower total labor costs

create unemployment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
100
Q

institutions (cause of structural unemployment)

A

unions keep wages high for some workers

job protection regulations make it hard to fire workers

min wage keeps wages from following below set wage

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
101
Q

economic costs of unemployment

A

unemployed often end up with less opportunities and lower wages

permanent unemployment can arise from periods of high unemployment

high unemployment means less gov tax revenue but more spending

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
102
Q

hysteresis

A

period of high unemployment leads to higher equilibrium unemployment rate

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
103
Q

social costs of unemployment

A

isolating and painful

long term unemployment causes worse outcomes

children whose parents experience unemployment suffer

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
104
Q

2 ways to build capital stock

A

1) saving and investment
2) foreign investment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
105
Q

capital by itself has diminishing returns. if you add more and more capital growth in output will get

A

smaller and smaller

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
106
Q

solow model

A

preserving/growing capital stock seems to be key component of economic growth

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
107
Q

how societies create economic growth

A

1) accumulate physical capital/develop human capital
2) develop new ideas and tech

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
108
Q

retired people are not

A

unemployed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
109
Q

discouraged workers

A

could work if offered a job, but not actively searching for a job due to discouragement with labor market

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
110
Q

what two surveys are used in unemployment situation

A

household and establishment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
111
Q

there is always a …… in the labor market

A

surplus

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
112
Q

high unemployment =

A

loose labor market

benefits businesses, not workers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
113
Q

low unemployment =

A

tight labor market

benefits workers

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
114
Q

unemployment insurance

A

makes frictional unemployment last longer, but for good reason. we want people to find the right job, not the first one

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
115
Q

skill mismatch

A

skills become less valuable to firms, employees cant agree on right wage

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
116
Q

idea behind efficiency wages

A

you pay a worker a little more and they make you a lot more money

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
117
Q

efficiency wages cause

A

price floor effect

increased price of labor and increased quantity of labor supplied

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
118
Q

minimum wage creates

A

price floor setting a min price for selling labor

persistent surplus is created, creating persistent unemployment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
119
Q

economists are skeptical of the idea that min wage causes

A

structural unemployment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
120
Q

natural rate of unemployment

A

typical rate of unemployment when economy is growing normally

comprised of structural and frictional unemployment

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
121
Q

inflation

A

generalized rise in overall level of price

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
122
Q

inflation rate definition

A

annual percent increase in average price level

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
123
Q

inflation rate equation

A

100* p(this)-p(last)/ p(last)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
124
Q

consumer price index

A

average price consumers pay over time for a representative basket of goods

how much of budget the average person spends on all goods and services they buy

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
125
Q

cpi formula

A

CPI= (cost of basket in given year / cost of basket in base year)*100

then, to calculate inflation, use 100 as the base year and calculate inflation using growth formula

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
126
Q

use cpi to think about how

A

value of a dollar has changed

127
Q

deflation

A

generalized fall in overall price level

128
Q

what does the cpi not tell us?

A

1) only measures price changes for existing goods
2) quality improvements hide price increases
3) people change their basket when price rises

129
Q

indexing

A

adjusting wage, ss, taxes, ect, to compensate for inflation

130
Q

gdp deflator

A

price index that includes everything economy produces

can be used to calculate real gdp between years

131
Q

how to calculate gdp deflator:

A

1) pick base year
2) use prices from base year to calculate real gdp in a year
3) take nominal gdp in that other year, divide by real gdp from step 2
4) multiply by 100

132
Q

gdp deflator =

A

(nGDP/rGDP)*100

133
Q

money illusion

A

mistaken tendency to focus on nominal dollar amounts instead of inflation adjusted amounts

134
Q

money

A

asset regularly used in transactions

135
Q

money functions (3)

A

medium of exchange
unit of account (relative value)
store of value (savings/retirement)

136
Q

when inflation is high

A

money’s ability to complete its three functions decreases

137
Q

menu cost

A

marginal cost of adjusting prices

reprinting menus for price adjustments

138
Q

shoe leather cost

A

costs incurred to avoid holding cash

139
Q

hyperinflation

A

excess inflation, no trust in money

140
Q

business cycle

A

short term fluctuation in economic activity

141
Q

peak

A

high point in economic activity

142
Q

recession

A

a period of falling economic activity

decrease in RGDP and rise in unemployment

143
Q

trough

A

low point in economic activity

144
Q

expansion

A

a period of rising economic activity

145
Q

potential output

A

level of output that occurs when all resources are fully employed

unemployment at natural rate

economy at healthy limit

no inputs/ raw resources wasted

capital and labor being used productively

146
Q

output gap (formula)

A

actual output-potential output / potential output

*100

147
Q

positive output gap

A

producing more than potential

some resources over used

148
Q

negative output gap

A

economy producing less than potential

resources being under used

149
Q

boom

A

economy operating above sustainable potential

150
Q

bust

A

economy operating below sustainable potential

150
Q

recessions happen when

A

boom turns into bust

151
Q

recessions are ….

expansions are…

A

short and sharp

long and gradual

152
Q

persistence

A

economic conditions today are closely related to economic conditions in near future

153
Q

economic variables …..

A

rise and fall together

ex) gdp falls, employment also falls

154
Q

leading indicator

A

predicts future path of economy

155
Q

lagging indicator

A

variables that tend to follow business cycle with a delay

156
Q

example of leading indicator

A

confidence indicators, stocks

157
Q

example of lagging indicators

A

gdp, cpi, unemployment

158
Q

financial sector

A

creates liquidity, reallocates resources and spreads risk

159
Q

banks

A

take deposits and turn them into loans

turn money in the future into money in the present

160
Q

interest rate

A

price bank is charging for this service

161
Q

deposit =

A

paid interest

162
Q

borrow

A

charged interest

163
Q

5 functions of banks

A

1) pool savings
2) spread risk
3) solve info problems
4) provide payment services
5) banks create long term loans with short term deposits

164
Q

bank run

A

many people try to withdraw savings at the same time

165
Q

consequences of bank runs

A

threatens stability of financial system, very contagious

166
Q

bond

A

an IOU, promising to pay back a loan or debt with interests over time to whoever holds the bond

usually tradable

get loan payment + interest payment

167
Q

bond market (4 functions)

A

1)creates liquidity
2)moves funds from savers to borrowers
3) spreads risk
4) funds gov debt

168
Q

stocks

A

partial ownership of a business, entitling the owner to a share of the companies future profits as well as a say in how the company is run

169
Q

dividends

A

share of companies profits paid directly to shareholders

170
Q

functions of stock market

A

1) channel money from savers to investors
2) spread risk by bringing in more investors
3) reallocates control of a company

171
Q

one big risk of financial sector

A

creates interdependence and negative outcomes can spread outside of sector

172
Q

fundamental value of an asset

A

present value of future profits, payments, or other cash flows that a financial asset entitles you to earn

173
Q

efficient markets hypothesis

A

at any point in time, prices reflect publicly available information about the fundamental value of an asset

says anything predictable is already incorporated into price

reason why it is tough to predict how stocks will move better than the overall market itself

174
Q

x axis of AD AS model

A

quantity of output (real gdp)

175
Q

y axis of AD AS model

A

price level (gdp deflator)

176
Q

aggregate demand curve

A

summarizes purchasing plans of all buyers throughout the economy. shows relationship between average price level and quantity of output that all buyers plan to purchase.

177
Q

why is the AD curve down sloping?

A

because higher prices cause the Fed to raise interest rates, raising the opportunity cost of spending money now instead of saving it

a lower average price level means buyers will demand a larger quantity of output

178
Q

aggregate supply curve

A

summarizes production plans of all suppliers throughout the economy. shows the relationship between average price level and quantity of output that suppliers collectively produce.

179
Q

why is the AS curve upward sloping?

A

Some prices and wages are “sticky,” meaning they adjust slowly, so higher demand leads firms to produce more at higher prices in the short run.

180
Q

Aggregate expenditure

A

total amount of goods and services that people want to buy across the whole economy

181
Q

aggregate expenditure is the sum of

A

consumption, planned investment, gov purchases, net exports

182
Q

planned investment excludes

A

unplanned changes in inventories

183
Q

a higher price level leads to

A

a higher inflation rate

184
Q

higher inflation causes the fed to

A

raise real interest rate

185
Q

higher real interest rate leads to ……. aggregate expenditure

A

lower

186
Q

changes in price level lead to ……. the AD curve

A

movements along

187
Q

what shifts the AD curve?

A

1) consumption increases when people feel more prosperous
2) investment increases when it is profitable for business to expand
3) government purchases increase when policymakers decide to spend more on goods and services
4) net exports increase due to global factos

188
Q

anything that shifts ……. shifts the AD curve

A

Aggregate expenditure

189
Q

higher output leads to ….. prices

A

higher

190
Q

what shifts the AS curve?

A

1) higher input prices raise production costs
2) higher import prices reflect international shocks
3) weaker productivity raises production costs
4) depreciating US dollar raises production costs and reduces competition from abroad

191
Q

AS shifts in response to changes in production costs, caused by shifts in:

A

1) input prices
2) import prices
3) productivity
4) exchange rate

192
Q

the fed cuts interest rates in response to (2 things)

A

low inflation and weak output

193
Q

what type of change in interest rates does not shift the AD curve

A

inflation induced (only a movement along the curve)

194
Q

lower real interest rates are

A

expansionary

195
Q

higher real interest rates are

A

contractionary

196
Q

fiscal policy

A

governments use of spending and tax polices to attempt to stabilize the economy

197
Q

monetary policy

A

setting interest rates in an effort to influence economic conditions

198
Q

increase in spending has a …… effect on aggregate expenditure

A

multiplied

199
Q

multiplier

A

measure of how much GDP changes as a result of both the direct and indirect effects flowing from each extra dollar of spending

200
Q

if output and prices move in the same direction what shifted?

A

aggregate demand

201
Q

if output and prices move in opposite directions what shifted?

A

aggregate supply

202
Q

in the long run a change in average price level has

A

no effect on real variables

203
Q

classical dichotomy

A

a purely nominal change, like a change in the average price level, wont have any effect on real variables in the long run

204
Q

LRAS curve

A

AS curve that applies to the long run when prices have fully adjusted. the economy will return to producing its potential output, so the curve is vertical

205
Q

VSRAS curve

A

AS curve that applies to the very short run in which no prices have changed. because prices are basically fixed, this curve is horizontal

206
Q

sticky prices

A

prices that adjust sluggishly to changes in market conditions

207
Q

SRAS curve

A

AS curve that applies over a period when prices are neither fully fixed nor fully flexible. upward sloping

208
Q

AS curve is steeper in the

A

medium run

209
Q

crowding out effect

A

government spending that leads to decrease in private sector spending

210
Q

what shift occurs during stagflation

A

AS shifts left

211
Q

what shift occurs when a recession is announced in a week

A

AD shifts left

212
Q

AD reflects decision to

A

buy today instead of tomorrow

213
Q

fed’s dual mandate

A

1) promote max sustainable employment (output induced response, shifts AD)
2) maintain stable prices (controlling inflation, movement along AD curve)

214
Q

if the fed lowers interest rates when price level isnt changing

A

AD shifts right, expansionary monetary policy

215
Q

if the fed raises interest rates when price isnt changing

A

AD shifts left, contractionary monetary policy

leads to less inflationz

216
Q

zero lower bound

A

nominal interest rates cannot go below zero

217
Q

government purchases increase

A

AD

218
Q

if the government wants to increase consumption it can

A

lower taxes or give stimulus

219
Q

why does the multiplier effect happen?

A

circular flow model, more payment in one place will spread to another

220
Q

neutral real interest rate

A

rate at which real GDP is = to potential GDP so output gap is 0

221
Q

real interest rate =

A

nominal interest rate- inflation

222
Q

federal funds rate (FFR)

A

nominal interest rate that the fed uses as its primary policy tool. rate banks pay to borrow from one another over night

223
Q

when inflation is higher the fed makes

A

interest rates higher

224
Q

when the economy is above potential the fed

A

raises interest rates

225
Q

why 2 % inflation?

A

1) a little inflation keeps labor market moving
2) 0% inflation runs risk of deflation
3) 2% gives the fed some room. we know the fed cant push nominal interest rate below 0, but with some inflation fed can make real interest rates negative
4) measured inflation might be overstated

226
Q

taylor rule (fed rule of thumb)

A

describes how fed sets the interest rate in order to manage its dual mandate

227
Q

FFR-inflation=

A

real interest rate

228
Q

when the output gap is positive, or inflation is too high

A

the fed raises interest rates

229
Q

inflation and FFR

A

when inflation rate is above or below the feds target, it raises the FFF half the difference

230
Q

reserves

A

the cash banks need to keep on hand to make payments

231
Q

fed controls interest rates by influencing banks and their reserves

A

1) banks earn profit by lending money
2) banks need to avoid bank runs

232
Q

discount rate

A

interest rate on loans that the fed offers banks through discount window

if a bank cant get a loan from another bank it can get it from the fed

means that banks will never charge each other more than the discount rate

233
Q

interest rate on reserves

A

the interest paid by the Federal Reserve to banks on funds held in reserves

234
Q

overnight reverse repurchase agreements

A

the fed sells government bonds overnight and buys them back at a higher price the next day

basically borrowing money overnight and paying it back with interest tomorrow

235
Q

changing the FFR makes it more or less valuable for banks to make loans

A

ex) fed raises interest on reserves rate

banks make more money by keeping it in the vault

236
Q

forward guidance

A

providing info about future course of monetary policy in order to influence expectations about interest rates

can help lower longer term interest rates

237
Q

quantitative easing

A

purchasing large quantities of longer term bonds, in order to lower long term interest rates

makes long term investment easier

238
Q

lender of last resort

A

fed will give loans to banks that are about to collapse

can prevent a financial crisis

239
Q

discretionary spending

A

spending that the federal government decides on annually

240
Q

mandatory spending

A

spending on programs that are set in law

241
Q

fed wants to set interest rates to keep

A

GDP as close to potential output as possible

242
Q

recession

A

a sustained period of economic decline, characterized by a decrease in real GDP (output) and an increase in unemployment

243
Q

2 causes of structural unemployment

A

1) wages increase, and labor supply increases, which causes businesses to not be able to hire everyone who wants to work
2) minimum wage

244
Q

real interest rate

A

the interest rate in terms of changes in your purchasing power

245
Q

the cpi tends to ………state inflation because

A

over

households change their buying patterns in response to price changes

246
Q

is the buying and selling of stocks or bonds counted in GDP?

are exports counted in GDP

A

no

yes

247
Q

if the two years are right next to eachother and you are looking for growth in RGDP

A

use average prices

avg p*q

248
Q

buying a newly build house increases which component of GDP

A

investment

249
Q

what shifts LRAS

A

LRAS is only affected by economic shocks that influence real factors like labor and capital. Potential output has to change for LRAS to shift.

ex) cutting some tax expenditures to fund research at universities increases GDP because of the potential created by the research

ex) tech/ai, human capital, physical capital changes (anything that shocks total productivity)

250
Q

changes to tarriffs, tax cuts, interest rates alone do not shift

A

LRAS

251
Q

if the FFR is below the sum of inflation and neutral real interest rate this means the economy is in a

A

bust

the interest rate is lower, indicating an attempt to stimulate economy

252
Q

if the FFR is above the sum of the inflation and neutral real interest rate, this means the economy is in a

A

boom

interest rate is higher, indicating an attempt to slow the economy

253
Q

an improvement of the world economy (neighboring gdp increase) shifts what curve

A

AD

254
Q

change in currency rates will shift

A

both AD and AS

they will shift in opposite directions

ex) if the dollar depreciates relative to the yen: AD shifts right and AS shifts left

255
Q

currency that it is “in”

A

numerator

256
Q

currency we’re in the market for

A

denominator

257
Q

what do you use to find RGDP when the years are right next to eachother!!!!!!!!!

A

average price *q

258
Q

when the dollar is down, exports are

A

up

259
Q

when the dollar is up, exports are

A

down

260
Q

what shift occurs?

tsunami wipes out US factories

A

LRAS and SRAS shift left

demand will not shift because a change at the factories doesn’t change how much you want the product, but a movement along the demand curve will happen because of the change in price level

261
Q

where does the business cycle start on a graph

A

the peak

262
Q

how does the fed actually set the FFR? (4 steps)

A

1) pays interest to banks on reserves
2) borrows money overnight from financial institutions
3) lends directly through discount window
4) buys and sells government bonds

263
Q

buying government bonds is what type of policy

A

expansionary monetary policy

increases liquidity and lowers interest rate, therefore encouraging borrowing

264
Q

risks associated with being lender of last resort

A

can lose money

can lead borrowers to take bigger risks

265
Q

what is the majority of government spending

A

mostly federal, mostly on social insurance programs

266
Q

how has government spending changed over time

A

has expanded overtime, spending has grown especially on social insurance programs

267
Q

where does the majority of gov revenue come from

A

payroll and income taxes

268
Q

income taxes

A

taxes collected on all income, regardless of source

269
Q

payroll taxes

A

taxes on earned income

270
Q

earned income

A

wages from an employer or net earnings from self employment

271
Q

progressive tax

A

tax where those with more income are paying a higher share of income in taxes

income taxes are progressive

272
Q

marginal tax rate

A

tax rate you pay if you earn another dollar

273
Q

taxable income

A

income you pay taxes on

274
Q

tax expenditure

A

special deductions, exemptions, or credits that lower your tax obligations to encourage certain behavior

hidden gov spending

275
Q

fiscal policy is most effective when it is

A

timely, targeted, temporary

1) gets ahead of problems and acts quickly
2) targets those who need the most help, unlike monetary policy
3) extra spending is no longer necessary after a certain point

276
Q

expansionary fiscal policy

A

increase in gov spending, decrease in taxes

277
Q

contractionary fiscal policy

A

decrease in gov spending, increase in taxes

278
Q

budget deficit

A

spending greater than revenue

279
Q

4 facts about gov spending

A

1) federal gov typically runs a deficit
2) persistent large budget deficits are a relatively recent thing
3) wars and pandemics require sudden surge of spending that results in budget deficits
4) business cycles create budget deficit cycles

280
Q

why should the gov run a deficit

A

1) creates long term benefits that we shouldnt have to pay for right away
2) prompts gdp growth that can be used to pay the debt off
3) necessary surge spending (like in a pandemic) means that it is an inefficient time to collect the necessary funds all at once. smooth taxes between years reduce possible economic distortions

281
Q

debt

A

total amount of money owed

running a deficit is a way to get into debt

282
Q

reasons to worry about gov debt

A

slow growth
constrains the future in terms of fiscal choices
risks crisis of confidence
debt crisis becomes more likely

283
Q

reasons not to worry about gov debt

A

most debt is owned by americans
future generations can help pay debt
wouldnt take a big adjustment to repay the debt
gov doesnt actually have to repay the debt
gov has options you dont

284
Q

nominal exchange rate

A

price of a currency in terms of another countries currency

285
Q

nominal exchange rate

price of x in y

A

y/x

in/for

can be rearranged to find other values

286
Q

appreciation

A

when price of a currency rises

287
Q

depreciation

A

price of a currency falls

288
Q

if the dollar depreciates, the other currency

A

appreciates

289
Q

if the dollar depreciates

imports:

exports:

A

decrease

increase

290
Q

if the dollar appreciates

imports:

exports:

A

increase

decrease

291
Q

if the (import/export) is increasing, it is

A

cheaper

292
Q

what goes on the x axis in the market for dollars in euros

A

q $

293
Q

what goes on the y axis in the market for dollars in euros

A

p $ in euros

294
Q

what does demand reflect in a currency market

A

foreigners buying exports or investing in the US

295
Q

why does demand slope down in a currency exchange market

A

when the price of a dollar is low, it take fewer euros to buy

296
Q

what does supply reflect in a currency exchange market

A

Americans buying imports and investing abroad

297
Q

why does supply slope up in a currency market

A

when the price of a dollar is high you get a lot of euros in exchange for your dollar

298
Q

what shifts demand in a currency market

A

exports

increased exports will means increased demand for the currency

financial inflows

increased inflow means increased demand for the currency

299
Q

what shifts supply in a currency market

A

imports

increased imports means increased supply

financial outflows

increased outflow means increased supply

300
Q

when demand for the currency increases, the currency exchange rate

A

increases

301
Q

when supply of the currency increases, the currency exchange rate

A

decreases

302
Q

real exchange rate

A

ratio of domestic to foreign prices, measured in the same currency

303
Q

formula for real exchange rate (expanded)

A

domestic price (in dollars) /
(foreign price (in foreign currency)/ nominal exchange rate)

304
Q

what does the real exchange rate measure

A

uncompetitiveness of US products

305
Q

high real exchange rate means

RER>1

A

uncompetitive

imports>exports

306
Q

low real exchange rate means

A

competitive

imports<exports

307
Q

who benefits from a higher than expected inflation rate

A

borrowers

308
Q

buying a bond

A

lending

309
Q

selling a bond

A

borrowing

310
Q

coupon payment

A

annual interest paid on a bond

311
Q

what shift occurs

sudden increase in oil prices

A

SRAS shifts left, but will eventually return to original LRAS output level as input prices eventually stabilize

312
Q

increasing interest rate on reserves pushes up the

A

FFR. increasing this rate means that banks want to keep their money in the reserve so they are going to charge more to lend it out

econ 101 (3 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions