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