MORE to DO II Flashcards
WHAT is a primary tool used by the Federal Reserve to control the money supply?
Conducting open market operations
i.e. Open market operations (buying and selling government securities) which the Fed can use to expand or contract the market based on;
- Fed Purchases; or
- Fed Sales
Fill in the Blanks:
If nominal income increases ___A___the price level, real income will __B___.
A. Faster than
B. Rise
WHY? - Because the % change in real income is the difference between the % change in nominal income and the % change in the price level
If nominal income increases more than the price level, real income also increases (rises)
The value of money varies
Inversely with the general level of prices
HOW: Part of the value of money comes from its usefulness as a store of value or wealth
Thus, as prices rise, purchasing power of a stock of money held diminishes (decreases)
HOW would a government stimulate the economy from a recession using only fiscal policy?
By lowering consumer taxes
i.e. Increases in government spending, decreases in taxation, or both have a stimulative effect on the economy
WHAT type of unemployment is caused by a mismatch between the composition of the labor force (in terms of skills, occupation, industries, or geographic location) and the makeup of the demand for labor?
Structural unemployment
WHAT policy can the Federal Reserve System use to increase the money supply?
Engaging in open-market purchases of government securities
WHY? - Because this puts more money into circulation (i.e. Amounts previously unavailable are placed into the hands of the public)
WHAT is the calculation for a country’s National income?
GDP – Depreciation – Indirect business taxes
Further Breakdown for National Income is: salaries and wages \+ rents \+ interest \+ proprietor and partnership incomes \+ corporate profits
WHAT is the calculation for a country’s Personal income?
National income - Social Security contributions - Corporate income taxes - Undistributed corporate profits \+ Plus Transfer Payments
WHAT is the classic expenditure model for calculating GDP?
GDP = C + I + G + NX C = Consumption I = Investment G = Government Spending NX = National Export
HOW does a Federal Reserve Board most directly influence a corporation’s decision whether or not to issue debt or equity financing?
BY revising the discount rate at which the Federal Reserve Bank lends money to member banks
For a given level of tax collections, prices, and interest rates, a decrease in governmental purchases will result in ____?
A decrease in aggregate demand
WHY? - Aggregate demand consists of consumption, investment, governmental spending, and net exports (C + I + G+ Nx)
Thus, a decrease in government purchases will decrease aggregate demand
WHAT is the primary purpose of the consumer price index (CPI)?
TO Compare relative price changes over time
Hence the price index is a measure of the price of a market basket of goods and services in one year compared with the price in a designated base year
NOTE: CPI is computed by the U.S. Department of Labor
How is Full Employment defined?
SOMETHING less than 100% employment because of the existence of Structural and Frictional Unemployment
NOTE: Full employment occurs when cyclical unemployment is zero
Thus, the natural rate of unemployment is the sum of structural and frictional unemployment
WHAT is the basic source of improvements in real wage rates and in the standard of living?
Productivity Growth
WHY? - Because Productivity is the ratio of real output per unit of input
NOTE: Much of the growth in the United States’ real GDP is attributable to increased labor productivity
HOW do you calculate GDP using the Expenditure Approach?
Consumer spending + Investment spending + government spending + net exports
