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Econ 1012 > Midterm 2 > Flashcards

Midterm 2 Flashcards

(70 cards)

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1
Q

What do short run vs long run economics depend on?

A

Price flexibility:

Prices are fixed in the short run and flexible in the long run

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2
Q

Long run vs short run what do they tell us?

A

Long run tells us where economy is on average, short run tells us deviations from that average

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3
Q

A country’s standard of living depends on

A

Its abilities to produce goods and services

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4
Q

Productivity

A

Quantities of goods and services produced from each unit of labor input (typically measured as labor/hour)

Productivity = Y/L

(Output per worker)

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5
Q

Productivity is a key determinant of

A

Living standards

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6
Q

What are the determinants of productivity

A

K, H, N, A, L

K-physical Capital 
H-human capital
N-natural resources
A-technology
L-labor
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7
Q

Physical capital K and physical capital per worker

A

Stock of equipment and structures used to produce goods and services

Physical capital per worker: K/L

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8
Q

Human capital H and human capital per worker

A

Knowledge and skills workers acquire through education, training, and experience

Human capital per worker H/L

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9
Q

Natural resources and natural resources per worker

A

Inputs into production that nature provides

Natural resources per worker N/L

An increase in N/L causes an increase in Y/L

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10
Q

Technological knowledge (A)

A

An advance in knowledge boosts productivity and allows society to get more output from it resources

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11
Q

The production function

A

Y= A F(L,K,H, N)

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12
Q

How does affect the production function

A

A multiplies the function so improvements in technology allow more output to be produced from any given combination of inputs

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13
Q

What property does the production function have?

A

Constant returns to scale

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14
Q

What are constant returns to scale

A

Changing all inputs by the same percentage causes output to change by that percentage

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15
Q

Cobb-Douglas function

A

Y= AKaL(1-a)

Y is output 
A is level of technology 
K is capital stock
l is labor
a is share of capital
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16
Q

How does saving and investment affect productivity and living standards

A

Raises future productivity
Invest more current resource in the production of capital K
Requires producing fewer consumption goods
Reducing in consumption means increase in saving

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17
Q

Is fast growth of productivity by increasing K going to be constant

A

No, because of diminishing returns to capital

As k rises, the extra output from an additional unit of K falls

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18
Q

Catchup effect

A

If workers have little K, giving them more increases their productivity a lot, but if workers have a lot of K, giving them more increases productivity fairly litte.

The catchup effect: the property whereby poor countries tend to grow more rapidly than rich ones

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19
Q

How does investment from abroad affect productivity and living standard

A

It is another way for a country to invest in new capital

It increases the economy’s stock of capital
Higher productivity and higher wages

State of the art technologies developed in other countries

Especially good for poor countries that cannot generate enough saving to fund investment projects themselves

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20
Q

Foreign direct investment vs foreign portfolio investment

A

Foreign direct investment is capital investment that is owned and operated by a foreign entities

Foreign portfolio investment:
Investment financed with foreign money but operated by domestic residents
(Foreigners buying stocks or bonds)

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21
Q

How does education affect productivity and living standards

A

Education is investment in human capital

Opportunity cost: wages forgone

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22
Q

How do health and nutrition affect productivity

A

Health care expenditure is a type of investment in human capital (healthier workers are more productive)

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23
Q

Whats is the vicious cycle vs the virtuous cycle

A

Vicious cycle:
Poor countries are poor because their populations are not healthy, populations aren’t healthy because they are poor

Virtuous cycle:
Policies that lead to more rapid economic growth would naturally improve health outcomes, which in turn would further promote economic growth

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24
Q

How do property rights and political stability affect productivity

A

One must protect property rights in order to foster economic growth, property rights are a prerequisite for the price system to work

Political instability creates uncertainty over whether property rights will be protected in the future, when people are afraid there might not be property rights or they might be violated: less investmen, including from abroad, and the economy functions less efficiently …. lower living standards

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25
How does free trade affect productivity and growth and living standards Also: what types of policies are involved with this
Inward oriented policies: Tariffs, limits on investment from abroad Aims to raise living standard by avoiding interactions with other countries Outward oriented policies: Elimination of restrictions on trade or foreign investment Promotes integration with the world economy
26
How do research and development affect productivity
It improves technological process which is the main reason why living standards rise over the long run Policies that can promote technological process: patent laws, tax incentives for private sector, grants for basic research universities
27
How does population growth affect productivity
More workers to produce goods and services: larger total output of goods and services Can affect living standards in three ways: 1) stretching natural resources 2) diluting capital stock (lower k/L) 3) promoting technological process
28
What trade offs do household face in relation to saving
Households consider trade off betweeen current consumption and saving for future consumption
29
What trade off do firms face in relation to saving
Forms need to consider trade offs between investment spending today for improvements in future productivity or in production of consumption goods
30
Gdp in a closed economy
Y= C+I+G
31
National savings | S
Y-C-G=S ( note this is the same as Y-C-G = I) ``` S= Y-C-G S = prívate savings + government savings S = (Y-T-C) + (T-G) ```
32
In a closed economy: savings (s) =
Investment (I)
33
T=
Taxes minus transfer payments An expense for household but an income for the government
34
Disposable income
Disposable income = Y-T
35
Prívate savings
Sp= Y-T-C Income households have left after paying for taxes and consumption
36
Government savings
Sg= T-G Tax revenue the government has left after paying for its spending
37
Budget surplus
T-G > 0 Excess of tax revenue over spending = positive public saving
38
Budget deficit:
T-G < 0 Shortfall of tax revenue from government spending= negative public saving= G-T
39
What do household do with saving
Let saving accumulate in saving or checking accounts Purchase a certificate deposit at the bank Buy corporate bonds or equities Buy shares of a mutual fund
40
What is investment
The purchase of new capital | Does not include the purchase of stocks of bonds
41
Where does the supply of Liana le funds come from
Saving: private saving and government saving
42
Where does the demand for loanable funds come from
Investment Firms borrow the fund they need to pay for new capital Households borrow the funds they need to purchase new houses
43
The equilibrium quantity of loanable funds equals..
Equilibrium investment and saving Where national savings = investment
44
Types of policies that can affect the market
Saving incentives Investment incentives Government budgets deficits or surpluses
45
Crowding out
Happens when the government borrows to finance its deficit, leaving less funds available for investments Or When budget deficits push up interests, which reduce investment demand as well
46
Fiat money vs commodity money
Fiat money: Money without intrinsic value used as money because of government decree Commodity money Takes the form of a commodity with intrinsic value
47
Money ( a stock concept)
An asset that is generally accepted as payment for goods and services or repayment of debt
48
Wealth(astock conept)
Value of assets minus liabilities, these assets are the total collection of pieces of property that serve to store value
49
Income (a flow concept)
A flow or earnings over time
50
Functions of money
Medium of exchange Unit of account Store of value
51
What is the federal reserve system (the fed)
The central bank of the United States An institution that oversees the banking system and regulates the money supply
52
What is monetary policy
Setting of the money supply by policy makers in the central bank
53
Money supply equation
M= C+ D C is currency D is demand deposits Or M= 1/R x initial deposit
54
Money multiplier
1/R
55
Reserve ratio
Reserves/deposits The portion of total deposits that the bank decides to hold onto
56
100% banking system
A system in which banks hold all the deposits as reserves
57
Fractional reserve banking:
A system in which banks hold a fraction of their deposits as reserves and loan the rest of it out
58
Liabilities
Includes deposits and discount loans (from government)
59
Assets
Include loans, reserves, and other things (such as bonds)
60
The fed can change the money supply by
Changing the money multiplier | Or changing bank reserves
61
Open market operations:
The purchase and sale of US government bonds by the fed Fed buys a government bond from a bank to increase bank reserves and the money supply. It pays by depositing new reserves in that banks reserve account, and the bank makes more loans, increasing money supply Fed sells government bond to banks to reduce money supply— removes reserves form the banking system
62
Fed lending to banks
Fed can influence the amount of reserves banks borrow by adjusting the discount rate (the interest rate on discount loans the fed makes to banks)
63
Using the reserve requirement to change money supply
The fed can change the reserve requirement ratio to affect the money supply Reducing the reserve requirement lowers the reserve ratio and increases the money multiplier Bigger money multiplier = more money supply?
64
Interest reserves and money supply
The fed can raise interest on reserves kept at the fed to increase the reserve ratio and the money multiplier (the fed pays interests on reserves kept at the fed)
65
Federal funds rate
The federal funds rate refers to the interest rate that banks charge other banks for lending them money from their reserve balances on an overnight basis
66
Do fed funds have an impact on bank reserves?
Fed funds transfers simply redistribute bank reserves and enable otherwise idle funds to yield a return, no impact on total bank reserves
67
How do OMO’s raise the fed fund rate?
The fed sells government bonds, which reduces reserves from the banking system, reducing the supply of federal funds, causing the federal funds rate to rise
68
What does the federal reserve system include:
``` Federal reserve banks Board of governors Federal open market committee Federal advisory council 3,000 member commercial banks ```
69
Name two regional federal reserve banks
Richmond and Atlanta
70
What are some policies that may boost growth and living standards and productivity
Offering tax incentives for investment: k/L increases Offering tax incentive for investment by foreign firms K/L increases Give cash payments for good school attendance H/L Crack down on government corruption A increases Allow free trade A increases Give away condoms L decreases

Econ 1012 (3 decks)

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