Study Guide: Terms and Definitions
103 Cards in this Set
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when the market price lies above the market clearing price, there will be a
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Excess supply and then the price will fall.
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At the equilibrium price in a competitive market:
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The quantity demanded equals the quantity supplied.
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The law of demand states:
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The quantity demanded increases as price falls.
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Reservation price of demanders equals:
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The marginal benefit of the good.
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In the labor market the Suppliers & Demanders are:
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Suppliers: Households
Demanders: Firms/Businesses.
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The Real Interest Rate=
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The Nominal Rate - The Rate of Inflation
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The extra output produced by the last worker is call the:
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Marginial Product
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If the number of employed is 9 million, the number of unemployed is 1 million, and there are 5 million people out of the labor force, the unemployment rate is:
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1/10
people out of the labor force do not count.
1+9 = 10 1 of 10 are unemployed
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The demand price for labor is equal to the:
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Marginal Product of labor.
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The most important way in which the federal reserve controls the money supply is through:
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Buy and selling bonds
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Functions of money
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It serves as a store of value
It serves as a unit of account
It facilitates exchange
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When a country uses monetary policy to keep its exchange rate fixed:
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It cannot use monetary policy to stabilize the economy.
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A country that runs a trade surplus:
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exports capital to the rest of the world.
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In the capital market tax breaks for investment (such as investment tax credit) shift:
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Demand to the right, increase the real interest rate.
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When the world loses confidence in a country's ability to manage its fiscal policy, the effect in the capital market is to:
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Shift KI to the left
Increase the real interest rate
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The fraction of additional income spent on the purchase of goods from abroad is called the:
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Marginal propensity to import
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what can increase the multiplier:
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A higher marginal propensity to consume.
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Tighter monetary policy indirectly:
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Raises interest rates
Reduces private investment and purchases of durable goods
Reduces output
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When the economy is operating below its potential the appropriate discretionary fiscal policy is to:
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Increase government spending.
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Aggregate Demand slopes down because:
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As the inflation rate falls the Fed lowers interest rates, which increases spending and output.
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A reduction in private investment will shift:
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AD to the left.
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The interest rate charged by banks who lend in the market where banks trade reserves in the:
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Federal Funds Rate
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A bonds risk premium refers to:
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The additional return that compensates the bond-holders for possibility of default.
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When economists say that money serves as a store of value, they mean that money:
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Helps to facilitate exchange by preserving its value between the time when it is earned and the time when it is spent.
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Banks are subject to risk of run when depositors lose confidence because they:
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Provide long term loans and raise money with short term debt.
(Borrow Short, Lend Long)
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The market where banks trade reserves overnight is called:
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Federal Funds Market
Quantity Traded is: Bank Reserves
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The moral hazard problem as it relates to bank is that:
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Banks with deposits protected by deposit insurance tend to take excessive risks.
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Diversification refers to:
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Whether an account is insured by the government.
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Whether an account is insured by the government.
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1 + "r"
1 + 300% = 4
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Savings
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Future Income x (1+r) + saved $
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The real interest rate equals:
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The nominal rate minus the rate of inflation
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In the labor market the supply and demanders are:
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Firms are the demanders & households are the savers
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The reservation price of demanders equals:
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The marginal benefit of the good
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At the equilibrium in a competitive market:
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Any buyer can find a willing seller
Any seller can find a willing buyer
There is only one price
The quantity demanded equals the quantity supplied
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When the market price lies above the market clearing price, there will be an:
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Excess supply and then price will fall
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What is Marginal Product:
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The extra output produced by the last worker
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How do you calculate the unemployment rate?
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# of employed is 9 million, the number of unemployed is 1 million, and there are 5 million out of the labor force.
Unemployment rate = 1/10
1+9=10
1 out of the 9 are unemployed equalling 1/10
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According to the efficiency wage model, the equilibrium wage
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Is above the market clearing wage in order to motivate workers to work hard and be more efficient.
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Fractional reserve system:
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Banks keep a fraction of deposits on hand as desired reserves
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simple income-expenditure model w/ no tax, govern't spending or foreign trade, if the MPC = 2/3 the multiplier is?
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3
1/(1-MPC (2/3) = 3
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Fraction of additional income saved by private citizens is called:
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Marginal propensity to save
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In the currency market suppliers of the dollars include:
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US purchasers of foreign goods.
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In currency market demanders of dollars include:
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Foreign purchasers of US exports
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In market for foreign exchange a recession in Europe leads to (draw US dollar on horizontal axis)
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Leftward shift in demand and depreciation of the dollar.
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suppose interest rate on investment grade corporate bonds is 10% in the Us, and that the euro is expected to depreciate by 4% relative to the dollar. Speculators engaging in arbitrage will ensure that the interest rate on similar corporate bonds in Europe is:
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14%
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Suppose Japanese economy is in recession, the government does not change its fiscal or monetary policy. We would expect:
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The economy to return to capacity slowly as unemployment and excess capacity put downward pressure on prices and wages.
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Phillips curve shows relationship between:
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Unemployment rate & Inflation Rate
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Describe the relationship between unemployment and inflation in the LONG run:
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Unemployment remains at its natural rate regardless of the rate of inflation.
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Describe relationship between unemployment and inflation in the SHORT run:
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Demand shock tends to move the two variables in the opposite directions.
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When households & businesses expect higher inflation how is the phillips curve effected:
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The SHORT run phillips curve shifts to the RIGHT
SRAS shifts LEFT
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Causes of a supply shock recession?
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prices of important imported raw materials increase
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Causes of a demand shock recession
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Businesses lose confidence and reduce investment.
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Derivatives:
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Mutual funds
Credit default swaps
Collateralized debt obligations
Mortgage backed securities
NOT= corporate bonds
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A country that runs a trade surplus:
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Exports capital to the rest of the world.
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In the capital market tax breaks for investment (such as investment tax credit) shift:
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DEMAND to the RIGHT, increasing the real interest rate.
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When the world loses confidence in a country's ability to manage its fiscal policy, the effect in the capital market is to:
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Shift KI to the left &
Increase the real interest rate
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what decreases the multiplier?
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Higher tax rates
higher savings rates
higher marginal propensity to import
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If the Federal Reserves BUYS bonds what happens to the money supply:
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The money supply increases
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Automatic stabilizers include:
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Programs such as food stamps, unemployment insurance that raise spending when there is a downturn.
Unemployment insurance pays benefits to laid-off workers
During recession more people are eligible for food stamps
Corporate income tax collections fall as profits decline during a reces…
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Tighter Monetary policy indirectly:
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Raises interest rates,
Reduces private investment and purchases of durable goods
Reduces output
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When the economy is operating below its potential, the appropriate discretionary fiscal policy is to:
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Increase government spending.
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AD slopes downward because:
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As inflation rates fall the Fed lowers interest rates, which increases spending and output
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Suppose that the economy is in long run equilibrium and its unemployment rate equals its natural rate. A change in the monetary policy rule toward a more expansionary monetary policy will lead to:
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A temporary INCREASE in OUTPUT &&
temporary DECREASE in UNEMPLOYMENT
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A reduction in private investment will shift:
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AD to the left
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If the MPI increases, the multiplier:
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Decreases because leakages are larger.
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In the Keynesian model when Aggregate expenditures fall below output:
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Inventories rise and firms decrease their orders for new goods
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When the government sells Treasury bonds, the purpose is:
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Raise money in order to finance the deficit
meaning:
Tax Rev < government spending: Budget deficits
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Aggregate demand shows the relationship between:
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Demand for output and the Price Level
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When the government buys Treasury bonds what purpose does this hold?
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They are buying bonds to retire debt.
meaning
Tax Revenue > Government spending: Budget Surplus
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Feds overseeing the monetary system, what do they do while doing this?
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*Set interest rates, regulate AD*
Increase AD: Buy bonds, lower interest rates & stimulate investment
Decrease AD: Sell bonds, raise interest rates & reduce spending.
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Suppose output is below potential and the government commences a 40 billion dollar program with no change in the tax system, According to the Keynesian model, output:
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Will increase by more than 40 billion.
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The government is considering a fiscal stimulus. The output gap is 200 billion & multiplier is estimated around 4. According to Keynes model what will close the output gap?
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An increase in government spending of 50 billion.
200/4 = 50.
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Suppose the US gov runs a large budget deficit. According to the Theory of Ricardian equivalence:
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Private savings will rise to offset the anticipated future taxes needed to service the increase debt.
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Suppose Private investment rises. In the AD and AS model what will happen:
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AD shifts to the right
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In the Capital Market the demanders and the suppliers are:
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Demanders: Investors
Suppliers: Savers
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The value added approach to GDP:
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Adds the differences between the revenues & costs of intermediate goods.
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Measurements of GDP include:
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Expenditures on servies
Wages of foreign nationals working in the US
Sales of new houses.
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An increase in interest rates has what effect on the market for new houses for supply or demand?
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Demand shifts left.
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How does an increase in stock of physical capital affect the labor market?
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Demand shifts left
increasing employment and the real wage
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When the government enters the capital (loanable funds) market to finance its deficit, private investment:
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Falls bc the interest rate is increased.
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Income effect:
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higher wages mean higher real income
= buy more of everything, including leisure (working less)
Effecting Non-wage income
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Substitution Effect:
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Real wage is the "price" of leisure
Higher real wage makes leisure more expensive
= buy less leisure work more.
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According to the Efficiency wage model, the equilibrium wage:
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Is above the market clearing wage in order to motivate workers to work hard and be more efficient
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In the superstar model
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as the cost of delivering goods and services falls, wage inequality increases
Small differences in productivity lead to large differences in earnings.
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US relative to other rich nations, high____ low____
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High Inequality
Low intergenerational mobility
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Effect of a recession in Brazil on the exchange rate (measured (dollars / rial)
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Demand shifts right appreciating the rial
Supply shifts left appreciating the rial
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Effect of inflation in Europe on the exchange rate (measured euros/dollar)
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Demand Shifts Right
Supply shifts Left
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Inflation in UK expected 2% & US 3%. If no other effects, we would expect nominal exchange rate (pounds/dollar) to:
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Fall while the real exchange rate remains constant.
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Interest rates rise in Euro Zone. What is the effect in the currency market (Us dollar on horizontal axis)
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Demand shifts Left
Supply Shifts right
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No capital movements, suppose US government fixed the exchange rate above the level where supp & dem interect. Measure US dollar on horizontal. The US would:
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Run a current account deficit
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Suppose Argentina wants to strengthen its currency. Its central bank can:
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Decrease the supply of pesos, and raise interest rates.
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The Fed reserves begins major open market operations w/ purchase of 100 bill in bonds. (exchange rate measure foreign current per dollar) We would expect:
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Interest rates and exchange rates to fall.
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Speculative Attack:
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Speculators are betting that the currency will be devalued.
if successful, currency will depreciate and debt will be harder to pay.
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Suppose Private Savings > Investment this means:
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Current account Surplus and Capital Account Deficit.
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Current Account Deficit: (Trade Deficit)
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Capital Account Surplus.
Investment > Savings
Inflows of Capital
Imports > Exports
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When a country is experiencing a financial crisis:
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Interest rates spreads widen and capital flows out.
go to the International Monetary Funds for bailout.
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When the cost of a representative basket of traded good is = in two countries:
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That is a purchasing power parity
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When currency is undervalued what is the relationship between supply and demand?
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Demand > Supply
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What is the surest way to correct Current Account Deficit:
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Increase domestic savings.
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In the Keynesian model when aggregate spending equals output and output is below its potential, the government can use fiscal policy and increase output by:
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Cutting taxes to encourage more private spending, increasing purchases of public goods and increasing hiring.
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The Ricardian equivalence idea means that deficit spending by governments:
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Only increases private savings bc people expect higher taxes in the future.
With US runs a large deficit: Private savings will rise to offset the anticipated future taxes needed to service the increased debt.
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Suppose that world oil prices increase. In the AD and AS model what would happen?
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SRAS shifts to the left.
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Interest rates rise in the euro zone. What is the effect in the currency markets (US dollar on horizontal axis)
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Demand shifts left and supply shifts right.
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Study Guide: Terms and Definitions