Macroeconomics Final Exam Study Guide
lower RRR
decrease interest rates, decrease unemployment, increase RGDP, increase price levels
raise RRR
increase interest rates, increase unemployment, decrease RGDP, decrease price levels
deduction
an amount that can deducted from taxable income
S&P 500
500 companies on the NYSE
DOW
composite index of 30 of largest companies
stagflation
increase AD, increase price levels, increase unemployment, decrease RGDP
How to fix stagflation
increase taxes and lower government spending
inflationary gap
increase AD, decrease unemployment, increase RGDP, increase price levels
how to fix inflationary gap
increase taxes and lower government spending
recessionary gap
decrease AD, increase unemployment, decrease RGDP, decrease price levels
how to fix recessionary gap
increase government spending and lower taxes
rent-seeking
engaging in costly nonproductive actions in search of profit
pareto improvement
no one is made worse off while at least someone is made better off
reserves
cash banks keep in vaults or on deposits with Federal Reserve Bank
RRR (required reserved ratio)
% of total deposits that must be kept in required reserves
money created by banks are oversimplified due to
limited borrowers, limited deposits, and limited regulations
responsibilities of FED
conduct nations, supervising and regulating institutions, and to provide financial services for banks
Ricardian equivalence
increase in debt has the same effect on economy as an increase in current taxes
non-excludable
describes a good or service for which there is no way to prevent those who do not pay for it from consuming it
growth rate
% change in GDP
non-rival
describes a good where one person’s consumption of the good or service does not prevent or limit another person’s consumption
3 functions of money
unit of account, medium of exchange, and store of value
barter economy
an economy without money
monetary economy
an economy where goods and services are traded for money
commodity money
money with inherent or intrinsic value
examples of commodity money
Camels, Gold, Eggs, Diamonds, and tobacco
qualities of good commodity money
durable, uniform, easily divisible, high value to weight ratio, difficult for the average person to reproduce
fiat money
money with no inherent or intrinsic value
M1
a common measure of money supply (cash + checkable deposits)
M2
saving deposits, money market mutual funds, and other time deposits
what is a credit card not money?
because we do not have ready excess to it
Federal Deposit Insurance Corporation (FDIC)
ensures the deposit of money so that a bank run doesn’t occur
required reserves
the minimum amount of reserves a bank is required to keep
excess reserves
actual reserves – required reserves
money multiplier
1/rrr
what is a money multiplier?
The money multiplier represents the multiplicative power of an initial change in loans on the money supply
total change in supply of money
initial change in excess reserves x money multiplier
increase in the supply of money
decreases interest rates, increases consumption and investment, and increases aggregate demand
decrease in the supply of money
increase interest rates, decrease consumption and investment, and decreases aggregate demand
monetary policy
using money and credit to fix macroeconomic problems
board of governors
7 individuals
how long can you be on the board of governors
14 years
who is the current chair?
Bernanke
Who is likely to be the next chair?
Yellen
how long can you be a chair?
4 years
Federal Open Market Committee (FOMC)
7 governors, 1 NY Fed, 4 rotating FED from other 11 banks
What is determined at the FOMC meetings?
if monetary policy needs to be changed
how often do the FOMC meet?
8 scheduled times a year
expansionary monetary policy
increase supply of money, decrease interest rates, increase consumption and investment, and increase aggregate demand
contracting monetary policy
decrease supply of money, increase interest rates, decrease consumption and investment, and decrease aggregate demand
buy bonds
increase supply of money, decrease interest rates, decrease unemployment, increase aggregate demand, increase RGDP, increase price levels
sell bonds
decrease supply of money, increase interest rates, increase unemployment, decrease aggregate demand, decrease RGDP, decrease price levels
what are the twin deficit
federal deficit and trade deficit
factors of demand
demand increase, value of $ increase
demand decrease, value of $ decrease
demand decrease, value of $ decrease
factors of supply
supply increase, value of $ decrease
supply decrease, value of $ increase
supply decrease, value of $ increase
what things lead to a change in demand and supply for $?
Changes in the demand for exports/imports
Changes in the demand for US financial assets and financial assets aboard
Changes in the demand for US hard assets and hard assets aboard
Changes in confidence in the US$ as a store of value
Interest rates (about 1 year) increase interest rates = increase value of $
Aggregate demand changes (1-3 years) increase = decrease value of $
Changes in the demand for US financial assets and financial assets aboard
Changes in the demand for US hard assets and hard assets aboard
Changes in confidence in the US$ as a store of value
Interest rates (about 1 year) increase interest rates = increase value of $
Aggregate demand changes (1-3 years) increase = decrease value of $
consumer price index
current price market basket/price of market basket in base year x 100
problems with GDP as a measure of wellbeing
government spending may be borrowed, does not include leisure time, does not report nonmarket activity, does not report environment activity, does not correlate perfectly with happiness
rational expectations theory
making decisions based off future expectations
public good
non-excludable and non-rival
inflation rate
CPI most recent year-CPI earlier year/CPI earlier year x 100
full employment
when cyclical unemployment is at zero
cyclical unemployment
caused by a limited amount of jobs
structural unemployment
caused by a worker lacking the necessary skills needed for a job
seasonal unemployment
caused by change of seasons
frictional unemployment
caused by a natural movement of people from one job to the next
underemployed worker
not working to your full capacity
discouraged worker
someone who wants to work, but have given up looking
unemployment rate
# of unemployed/# in labor force
labor force participation rate
# of labor force/# of population
unemployed
not employed, but actively seeking work
labor force
anyone 16 or over who is working or seeking employment
property rights
key to maintaing our resources
renewable
overtime, can replenish itself
nonrenewable
once depleted, are forever used up
recession
two consecutive quarters of negative growth rate
net exports
exports minus imports
government spending
payment of final goods and services
investment
the new purchase of capital, equipment, purchase of new homes, changes in inventory of unsold products
consumption
the purchase of final goods and services by consumers
GDP
16.7 trillion
command economy
government makes economic decisions
mixed economies
some economic decisions are made by individuals and some are made by government
normative economics
an opinion statement and cannot be tested
positive economics
fact based and can be tested
capital
long lasting tools for production
opportunity cost
the next best forgone alternative
sunk cost
cost incurred in the past that cannot be undone
$20
1. Eat at Mariah’s
2. 6 gallons of gas
3. Groceries
4. Movies
5. Drink
1. Eat at Mariah’s
2. 6 gallons of gas
3. Groceries
4. Movies
5. Drink
What is the opportunity cost of getting Mariah’s?
not getting 6 gallons of gas
GDP per capita
GDP/population
physical captial
capital that is not human for example a desk, computer, building, or factory
RGDP
Nominal GDP/GDP deflator x 100
Funnel Cakes
A 0
B 1
C 2
D 3
E 4
Cheese Straws
A 12
B 11
C 9
D 6
E 0
A 0
B 1
C 2
D 3
E 4
Cheese Straws
A 12
B 11
C 9
D 6
E 0
What is the opportunity cost of 1 funnel cake from D to E?
6 Cheese straws
law of increasing opportunity cost
as more of one good is produce the opportunity cost increases
labor
time humans spend producing
economic growth
increases in GDP from one quarter to the next and is representing by a shift outward in the PPF
inefficient
points inside PPF
unattainable
points outside of PPF
entrepreneurship
risk taking or an innovation to produce a new and improved product
scarcity
not enough resources to satisfy our unlimited wants and needs
3 major choices scarcity forces us to make
how to produce, what to produce, and for whom to produce
free market economy
individuals make economic decisions
technology
new tools used for production or electronic form of capital
PPF
all possible combinations of goods that can be produced given resources and technology
economics
the social science that studies the allocation of scarce resources given our unlimited wants and needs
macroeconomics
the study of wealth creation and destruction of the population as a whole
natural resources
sources of wealth that exist in nature
human capital
the experience, education, skill set, and knowledge that humans possess
current unemployment rate?
7.3%
absolute advantage
more output per unit of input
comparative advantage
having the lowest opportunity cost for production
tariff
tax on imports
quota
limit on trading
embargo
complete restriction on trade
convergence
the suggestion that countries with lower per capita GDP grow faster than countries with higher per capita GDP
industralized countries
first world countries, high level of capital accumulation, highest level of capita per GDP
industralizing countries
second world countries, emerging markets, lower level of capita per GDP than industrialized countries
non-industrializing countries
third world countries, poorest countries
inflation
increase in average price levels
deflation
decrease in average price levels
hyperinflation
inflation of 200% within a year
national debt
when the government owes money
debt level
17 trillion
budget surplus
revenues exceed expenditures
budget deficit
expenditures exceed revenues
crowding in
decrease government spending leads to decrease interest rates and increase consumption and investment
crowding out
increase government spending leads to higher interest rates and decreases private consumption and investment
an example of regressive tax
sales tax
regressive tax
average tax rate paid decreases with income earned
an example of proportional tax
KY income tax – 6%
proportional tax
average tax rate paid stays the same as income increases
progressive tax
average tax rate paid increases with income earned
an example of progressive tax
federal income tax
consumer
purchases final goods and services via borrowing from financial institutions, earnings, and transfer payments
credit score
a measure of a persons credit worthiness
financial institutions
coordinates savings and investments
examples of financial institutions
banks, insurance companies, and credit card companies
disposable income
after tax income
stock market
firms use this method for expenditures so that they don’t have to borrow
NYSE
largest stock market
bulls
optimistic
NASDAQ
second largest stock market
bears
pessimistic
bond market
an IOU that says you will pay the owner a certain amount of money over a fixed amount of time
defined benefit
a definite amount of money a a retiree with earn every year after retirement
defined contribution
an employer with contribute a fixed amount every pay period
firm
produces goods and services
sole propriertorship
one owner
partnership
two or more owners
corporations
limited liability
natural adjustment
self-corretion or doing nothing to fix the macroeconomic problems
is the term used to describe the macroeconomic problem created when the economy shifts away from full employment due to an increase in AD
inflationary gap
You purchase a newly constructed house
investment
the federal government spends $1 million on salaries for staff at the White House
government spending
aunt clara buys a pair of candlesticks manufactured in Mexico
consumption and import
i purchased a used costume at a consignment store
not counted
fred purchases 1,000 shares of newly issued stock
not counted
the federal government spends $2 billion on military uniforms made in the US
government spending
pounds of butter pounds of cheese
Topperville 8 4
Redburg 6 2
Topperville 8 4
Redburg 6 2
What is the opportunity cost of one pound of butter in Topperville?
a. 6/8 pounds of cheese
b 8/6 pounds of cheese
c. 4 pounds of cheese
d. 2 pounds of cheese
e. 1/2 pounds of cheese
e. 1/2 pound of cheese
what is the most likely explanation for why growth rates in 3rd world countries are slower than in other countries?
lack of property right protection
what allows society to consume at a point past its current PPF?
economic growth, trade, an increase in resources, new technology
GDP in the country of Topper was $8,000 in 2012. The GDP deflator for 2012 (with 2000 as the base year) is 120 while the population of Topper is 100 persons. What is the RGDP in 2012?
$6,666.67
GDP in the country of Topper was $8,000 in 2012. The GDP deflator for 2012 (with 2000 as the base year) is 120 while the population of Topper is 100 persons. What is the Per Capita GDP in 2012?
$80
The following are the values for Consumption, Investment, Imports, Exports, and Government spending for the country of Strowsburg in the year 2020 given in billions of dollars: C = $12,000 I = $4,000 G = $3,000 M = $5,000 X = $3,000 . The GDP in billions in Strowsburg is
$17,000
If a government wishes to restrict trade, when what kind of trade barrier is the most beneficial?
tariff
$10
1. Go to the zoo
2. Order a pizza
3. Getting a manicure
1. Go to the zoo
2. Order a pizza
3. Getting a manicure
What is the opportunity cost of going to the zoo
Not ordering a pizza
intensive growth in labor would be encouraged by which of the following policies?
a. higher child tax credits
b. more immigration restrictions
c. raising the minimum wage
d. easier access to credit for education
e. all of the above
a. higher child tax credits
b. more immigration restrictions
c. raising the minimum wage
d. easier access to credit for education
e. all of the above
d. easier access to credit for education
which of the following is not a resource as the term is defined by economics?
a. a person
b. oil
c. a building
d. money
e. all of the above are resources
a. a person
b. oil
c. a building
d. money
e. all of the above are resources
d. money
the individual who argued that the economy should be left aloe to self correct out of macroeconomic problems so that economic growth would be greater
Hayek
if aggregate supply increase, then we would expect:
price levels and unemployment to fall
what is the trend in the labor force participation rates for men and women over the lat few decades?
the LFP has decreased for men, but increased for wome
if we enter into an inflationary gap, what must have happened?
AD rose
100,000 non-institutionalized civilians over age 16. 75,000 individuals are currently working, while 20,000 are not working but are actively looking for a job. The remaining 5,000 individuals are neither working nor searching for work. What is the unemployment rate of Topper closest to?
21.1%
100,000 non-institutionalized civilians over age 16. 75,000 individuals are currently working, while 20,000 are not working but are actively looking for a job. The remaining 5,000 individuals are neither working nor searching for work. What is the Labor Force Participation rate of Topper
95%
100,000 non-institutionalized civilians over age 16. 75,000 individuals are currently working, while 20,000 are not working but are actively looking for a job. The remaining 5,000 individuals are neither working nor searching for work. How many individuals in topper are in the civilian labor force?
95,000
If the economy is experiencing an inflationary gap and no policy is enacted then eventually as we adjust back to full employment
we would expect wages to rise and AS to decrease
if the economy is experiencing stagflation and no policy is enacted, then eventually as we adjust back to fully employment
we would expect RGDP to rise and price level to fall
if the economy begins at full employment and then enters into a recessionary gap, what decreases from its level at full employment?
price level and RGDP
if production costs fall, this will lead to
decreased price level and decreased unemployment
if the economy initially begins at full employment and there is a decrease in interest rates, then we would expect
aggregate demand to rise and the economy to enter into an inflationary gap
if the MPC is .8 and consumers’ incomes increase by 150 billion, what is the total change in spending?
$120 billion
if the price level increased while the unemployment rate decreased, which of the following must have happened
aggregate demand increased
which macroeconomic problems leads to a decrease in the average price level
both inflationary gap and stagflation
what is the approximate debt/GDP ratio for the US
100%
AD excess of $36 billion and thE MPC =.75, what is the spending multiplier?
4
AD excess of $36 billion and thE MPC =.75, what is the tax multiplier?
-3
AD excess of $36 billion and thE MPC =.75. Suppose the congress decides to change taxes to return the economy back to full employment. What is the appropriate tax change?
increase of 12 billion
AD excess of $36 billion and thE MPC =.75. Suppose the congress decides to change government spending instead to return the economy back to full employment. What is the appropriate change in G?
decrease by 9 billion
fiscal policy
changing levels of government spending and taxes to fix macroeconomic problems
liberals
increase government spending and higher taxes
conservatives
decrease government spending and lower taxes
libertarians
advocate doing nothing
spending multiplier
1/(1-MPC)
tax multiplier
1-spending multiplier
NASDAQ composite
index of how companies list on the NASDAQ perform
aggregate supply
the sum total of all goods and service firms and governments are wiling and able to produce at any price level
aggregate demand
the sum total of all domestic goods and services that consumers want to buy at any given price levels
if fiscal policy is used in a recessionary gap then
unemployment will fall faster than when using no fiscal policy
what is not an advantage of using fiscal policy to solve a recessionary gap?
inflation falls
which macroeconomic situation worsens by most standards if no fiscal policy is enacted?
inflationary
if the government lowers government spending then we would expect
the price level to decrease while unemployment increases
if fiscal policy is used in an inflationary gap then its immediate effect will be to
decrease AD
how has the increase in our GDP compared to our increase in the national debt over the last two decades?
our national debt has increased faster than our GDP
an increase in the mpc to consume will
increase the spending multiplier
in fiscal policy, tax cuts are used to
stimulate AD
assume $80 is deposited in the bank and the required reserve ratio is .2. How much does excess reserves increase by?
$64
assume $80 is deposited in the bank and the required reserve ratio is .2. What is the money multiplier?
5
assume $80 is deposited in the bank and the required reserve ratio is .2. By how much can the money supply increase?
$320
who determines monetary policy?
FOMC
if the federal reserve lowers RRR from .1 to .05, then
the money supply will increase causing interest rates to decrease
if the federal reserve decrease the supply of money then this will
cause interest rates to rise and AD to increase
if the federal reserve bank sells bond, then this will likely
decrease the money supply and cause a decrease in RGDP
if the economy is in an inflationary gap, then which of the following actions would help move the economy back towards full employment
selling bonds
if the federal reserve lowers the discount rate, then this will
increase the money supply and increase AD