Prelim 2

Question 1

M1

Answer 1

highly liquid: currency, checkable deposits, saving deposits

Question 2

M2

Answer 2

broader measure of money in economy, contains M1, credit cards aren’t considered

Question 3

working age population

Answer 3

individuals over 16 who aren’t in the military, retired, or institutionalized

Question 4

labor force

Answer 4

employed + unemployed

Question 5

frictional unemployment

Answer 5

unemployment due to the time it takes for employers to search for workers and workers to search for jobs

Question 6

structural unemployment

Answer 6

occurs because labor supply and demand aren’t in equilibrium

Question 7

cyclical unemployment

Answer 7

unemployment linked to downturns in the economy

Question 8

efficiency wages

Answer 8

higher wages to encourage productivity, lowers total labor costs

Question 9

U6 unemployment

Answer 9

(official unemployment +MA+PT)/(labor force +MA)

Question 10

consumption function

Answer 10

C=C0 + MPC x Y

Question 11

saving function

Answer 11

S=-C0 + MPS x Y

Question 12

flow variables

Answer 12

represent values in a specific period (eg: new savings in a given year)

Question 13

stock variables

Answer 13

represent levels that have been reached over time (eg: all savings)

Question 14

consumption smoothing

Answer 14

maintaining a steady/smooth path of consumption spending and borrowing over time

Question 15

permanent income hypothesis

Answer 15

consumption is driven by permanent income rather than current income

Question 16

hand to mouth consumption

Answer 16

individuals who are forced by economic conditions to spend all their current income

Question 17

Consumption shifters

Answer 17

real interest rates, confidence/expectations, taxes

Question 18

drivers of saving

Answer 18

changing income over life cycle, changing needs over life cycle, bequests, precautionary saving

Question 19

macroeconomic investment

Answer 19

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

Question 20

present value

Answer 20

= (future value in t)/(1+r)^t

Question 21

valuation formula

Answer 21

present value of payment streams = (next years profit) / (interest + depreciation)

Question 22

user cost of capital

Answer 22

(r+d)(cost of capital)

Question 23

investment line

Answer 23

lower interest rates lead to a higher level of investment

Question 24

market for loanable funds

Answer 24

x axis: q loanable funds
y axis: interest rate
supply(savings)
demand(investment)

Question 25

shifts in supply of loanable funds

Answer 25

change in personal saving, gov saving, foreign savings

Question 26

crowding out

Answer 26

decline in private spending/investment that follows from a rise in government borrowing

Question 27

shifts in demand of loanable funds

Answer 27

technological advancements, expectations for stronger future profits, taxes, lending standards

Question 28

bonds

Answer 28

promise to pay back loan with interest

Question 29

default risk

Answer 29

risk of not getting paid (issuer)

Question 30

term risk

Answer 30

arises from uncertainty about future interest rates

Question 31

liquidity risk

Answer 31

risk of not being able to sell quickly and receive a good price

Question 32

price to book ratio

Answer 32

firms stock price relative to book value per share
(price per share) / ((total assets -total liabilities) / shares)

Question 33

price to earnings

Answer 33

earnings per share
(price per share) / (last year’s earnings per share)

Question 34

random walk

Answer 34

when stock prices follow an unpredictable path

Question 35

speculative bubble

Answer 35

when the price of an asset rises above what appears to be fundamental value

Question 36

greater fool theory

Answer 36

people buy an investment when they expect other people to buy it from them at a higher value

Question 37

trade balance

Answer 37

spending on exports - spending on imports

Question 38

financial inflows

Answer 38

investment by foreigners in the U.S

Question 39

financial outflows

Answer 39

investment by Americans in foreign countries

Question 40

foreign direct investment

Answer 40

foreigners invest in domestic physical assets

Question 41

portfolio investment

Answer 41

foreigners purchase U.S stocks/bonds

Question 42

causes of financial globalization

Answer 42

fewer capital controls, deregulation, institutional investors looking to diversify, better technology

Question 43

exchange rates

Answer 43

nominal exchange rate = (# of foreign currency) / (# of dollars)

Question 44

currency appreciation

Answer 44

imports become cheaper, exports are more expensive

Question 45

currency depreciation

Answer 45

imports become more expensive, exports are cheaper

Question 46

foreign exchange market

Answer 46

x axis: quantity $
y axis: exchange rate
supply dollars (U.S. imports)
demand dollars (U.S exports)

Question 47

shifts in demand (Exports)

Answer 47

strength of global economy, barriers to trade, domestic innovation, foreign prices, domestic prices

Question 48

shifts in demand (financial inflows)

Answer 48

interest rate differentials,
business profitability, political risk, expected exchange rate movements

Question 49

shifts in supply (imports)

Answer 49

strength of economy, trade barriers, foreign innovation, prices

Question 50

shifts in supply (financial outflows)

Answer 50

interest rate differentials, business profitability, political risk, expected exchange rate movement

Question 51

real exchange rate

Answer 51

(domestic price) / (foreign price / nominal interest rate)

Question 52

current account

Answer 52

tallies income flows into and out of a country

Question 53

current account balance

Answer 53

income from exports - income spent on imports

Question 54

financial account

Answer 54

tallies changes in ownership of assets