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Econ 1012 > Midterm 2 > Flashcards

Midterm 2 Flashcards

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
Q

How does free trade affect productivity and growth and living standards

Also: what types of policies are involved with this

A

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

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26
Q

How do research and development affect productivity

A

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

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27
Q

How does population growth affect productivity

A

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

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28
Q

What trade offs do household face in relation to saving

A

Households consider trade off betweeen current consumption and saving for future consumption

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29
Q

What trade off do firms face in relation to saving

A

Forms need to consider trade offs between investment spending today for improvements in future productivity or in production of consumption goods

30
Q

Gdp in a closed economy

A

Y= C+I+G

31
Q

National savings

S

A

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
Q

In a closed economy: savings (s) =

A

Investment (I)

33
Q

T=

A

Taxes minus transfer payments

An expense for household but an income for the government

34
Q

Disposable income

A

Disposable income = Y-T

35
Q

Prívate savings

A

Sp= Y-T-C

Income households have left after paying for taxes and consumption

36
Q

Government savings

A

Sg= T-G

Tax revenue the government has left after paying for its spending

37
Q

Budget surplus

A

T-G > 0

Excess of tax revenue over spending = positive public saving

38
Q

Budget deficit:

A

T-G < 0

Shortfall of tax revenue from government spending= negative public saving= G-T

39
Q

What do household do with saving

A

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
Q

What is investment

A

The purchase of new capital

Does not include the purchase of stocks of bonds

41
Q

Where does the supply of Liana le funds come from

A

Saving: private saving and government saving

42
Q

Where does the demand for loanable funds come from

A

Investment
Firms borrow the fund they need to pay for new capital
Households borrow the funds they need to purchase new houses

43
Q

The equilibrium quantity of loanable funds equals..

A

Equilibrium investment and saving

Where national savings = investment

44
Q

Types of policies that can affect the market

A

Saving incentives
Investment incentives
Government budgets deficits or surpluses

45
Q

Crowding out

A

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
Q

Fiat money vs commodity money

A

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
Q

Money ( a stock concept)

A

An asset that is generally accepted as payment for goods and services or repayment of debt

48
Q

Wealth(astock conept)

A

Value of assets minus liabilities, these assets are the total collection of pieces of property that serve to store value

49
Q

Income (a flow concept)

A

A flow or earnings over time

50
Q

Functions of money

A

Medium of exchange
Unit of account
Store of value

51
Q

What is the federal reserve system (the fed)

A

The central bank of the United States

An institution that oversees the banking system and regulates the money supply

52
Q

What is monetary policy

A

Setting of the money supply by policy makers in the central bank

53
Q

Money supply equation

A

M= C+ D
C is currency
D is demand deposits

Or

M= 1/R x initial deposit

54
Q

Money multiplier

A

1/R

55
Q

Reserve ratio

A

Reserves/deposits

The portion of total deposits that the bank decides to hold onto

56
Q

100% banking system

A

A system in which banks hold all the deposits as reserves

57
Q

Fractional reserve banking:

A

A system in which banks hold a fraction of their deposits as reserves and loan the rest of it out

58
Q

Liabilities

A

Includes deposits and discount loans (from government)

59
Q

Assets

A

Include loans, reserves, and other things (such as bonds)

60
Q

The fed can change the money supply by

A

Changing the money multiplier

Or changing bank reserves

61
Q

Open market operations:

A

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
Q

Fed lending to banks

A

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
Q

Using the reserve requirement to change money supply

A

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
Q

Interest reserves and money supply

A

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
Q

Federal funds rate

A

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
Q

Do fed funds have an impact on bank reserves?

A

Fed funds transfers simply redistribute bank reserves and enable otherwise idle funds to yield a return, no impact on total bank reserves

67
Q

How do OMO’s raise the fed fund rate?

A

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
Q

What does the federal reserve system include:

A 
Federal reserve banks
Board of governors
Federal open market committee
Federal advisory council 
3,000 member commercial banks
69
Q

Name two regional federal reserve banks

A

Richmond and Atlanta

70
Q

What are some policies that may boost growth and living standards and productivity

A

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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