Test 3

Question 1

participation rate

Answer 1

percentage of the labor force that is trying to work

Question 2

unemployment

Answer 2

frictional
structural
cyclical

Question 3

frictional unemployment

Answer 3

someone is between jobs

Question 4

structural unemployment

Answer 4

some kind of change in society (using robots instead of workers on an assembly line)

Question 5

cyclical unemployment

Answer 5

happens because of business cycle (economy slowing down)

Question 6

normal rate of employment

Answer 6

frictional + structural

Question 7

why is AD graph downward sloping

Answer 7

real balances, foreign purchases, interest rate effect

Question 8

why might AD change

Answer 8

change in C- income, taxes, wealth
change in I- belief about how much we can earn by buying real assets
change in X- other countries income, exchange rates

Question 9

exchange rate

Answer 9

price of one currency in another country

Question 10

how to get aggregate supply to change

Answer 10

change in resources
change in productivity
regulation
input pries
taxes

Question 11

what happens to economy equilibrium when gov’t increases money supply?

Answer 11

interest rate falls

Question 12

PT (precautionary transactions)

Answer 12

demand for money

Question 13

SP (speculative)

Answer 13

savings in the form of money

Question 14

objections of government economic policy

Answer 14

economic growth- the more growth the more peoples income (enhances quality of life)
stable price levels
less unemployment
exchange rates- if foreign countries buy too much of US goods price will rise
redistribution of income- “fair” “equitable”

Question 15

economic growth goals

Answer 15

stable prices
stable exchange rates
low unemployment

Question 16

economic growth tools

Answer 16

change taxes
change gov't spending
change rd
change discount rate
buy/sell securities

Question 17

good target

Answer 17

measurable- identify easily
controllable- gov’t policy has to affect target more than other things affect target
important- when changes actually affect the goal

Question 18

3 prominently mention targets

Answer 18

1) money supply problems- hard to measure
2) total credit- how much people are borrowing
3) interest rate

Question 19

discretionary policy

Answer 19

look at numbers and decide what you’re going to do then you do it
-should only work when you surprise people

Question 20

advantage of a money rule

Answer 20

1) lags avoided
by the time they do it their data will be old
2) avoid mistakes
changing things too early when it doesn’t happen
3) avoid politics
no political pressure because everyone knows you are going to change policy and for how long you will do it

Question 21

public goods

Answer 21

if we let market be in charge society will not produce enough (underproduce)

Question 22

what government can do to intervene

Answer 22

1) direct production- produce it themselves
(military, law enforcement, roads)
2) mandate- require that we have to buy
someone will sell because they already have an audience
(auto insurance, health insurance)
3) incentives- incentive for purchasing a public good
(FNMA, FHMLC, child care, education expenses)

Question 23

social engineering

Answer 23

government uses tax code to try to get you to change your behavior

Question 24

labor force

Answer 24

people who have jobs or want them

Question 25

business cycle

Answer 25

the short term movement of output and other variables around their long term trends
(recession, depression, peak, trough)

Question 26

aggregate demand

Answer 26

demand for all goods and services in the economy at a given time

Question 27

liquidity preference model

Answer 27

model where money demand and supply determine the nominal interest rate

Question 28

liquidity effect

Answer 28

the inverse relationship between the money supply and the nominal interest rate

Question 29

when money supply increases

Answer 29

leads to a short liquidity effect
decline in interest rate makes people spend more
income increases short term

Question 30

aggregate demand curve

Answer 30

shows price level and output that is necessary for goods and services to be at market equilibrium

Question 31

aggregate supply

Answer 31

economy total production of goods and services