question
What is the Price Level?
answer
The average level of prices of goods and services in the economy.
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What is inflation and how is it measured?
answer
An increase in the price level, decrease in power of money and is measured by the percent change in the price level.
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What is deflation and how is it measured?
answer
A decrease in the price level, that is, a general decrease in the average of all prices.
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What is disinflation and how is it measured?
answer
This occurs when the rate of inflation declines.
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How is a price index created?
answer
You start with an initial base period for prices then gather the different prices of those same items over time
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What are some problems with the CPI as a measure of the price level?
answer
It does not accurately reflect what happens to the price of any particular good.
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What is real output and how is it measured?
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The actual amount an economy produces and it is measured by the GDP.
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How is real GDP measured?
answer
In dollars and in relation to aggregate or total output.
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What are some problems with real GDP as a measure of real output?
answer
1). It may change because of price changes even if the rate of production doesn't change in an economy
2). Only measures activities in markets, ignoring non-markets or illegal market transactions
3). Does not include the value of leisure
4). Does not include financial and second-hand transactions
5). Does not include intermediate goods
6). Does not account for the size of a population nor do changes account for population growth
7). Not a measure of individual well-being
2). Only measures activities in markets, ignoring non-markets or illegal market transactions
3). Does not include the value of leisure
4). Does not include financial and second-hand transactions
5). Does not include intermediate goods
6). Does not account for the size of a population nor do changes account for population growth
7). Not a measure of individual well-being
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What is potential real output?
answer
If all the products that an economy can produced are employed fully and efficiently, then it is the maximum amount of goods an economy can produced.
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What determines changes in potential real output?
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Changes in resources, advances in technology, advances in labor etc...
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What is the role of the labor market in determining potential real output?
answer
The labor market is a measure of how many people are working or looking for work. So if all of those people had jobs then that would be the potential real output.
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what is real wage?
answer
Real wage= (nominal wage)/(price level) --> how much your wage is actually worth in the economy, takes inflation, deflation, and disinflation into account.
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What is the difference between nominal or money wages vs. real wages?
answer
nominal wages are measured in terms of money and not their buying power like real wages
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What is unemployment and how is it measured?
answer
A person that is apart of the labor force (so looking for a job), but out of work. It is measured by the unemployment rate.
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What is frictional unemployment?
answer
the time period between jobs when a worker is searching for, or transitioning from one job to another.
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What is cyclical unemployment?
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as the result of businesses not having enough demand for labor to employ all those who are looking for work.
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What is structural unemployment?
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When people do not have the necessary skills to fill available job openings.
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What is the labor force?
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all people employed or actively seeking employment
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How does the labor force differ from the population?
answer
The population includes people who do not have a job and are not looking for a job.
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How is there "full employment" even though there is measured unemployment?
answer
Because full employment means that everyone has a job or that there are job openings for everyone who is looking for work. acceptable level of unemployment.
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What does full employment in the labor market correspond to in terms of real output?
answer
higher prices
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What does cyclical unemployment in the labor market correspond to in the terms of real output?
answer
High cyclical unemployment means low real output and vice versa.
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What is aggregate supply?
answer
goods and services that firms in a national economy plan on selling during a specific time period. It is the total amount of goods and services that firms are willing and able to sell at a given price level in an economy.
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What is aggregate demand?
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is the total demand for final goods and services in an economy at a given time. It specifies the amounts of goods and services that will be purchased at all possible price levels.
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What is consumption?
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The sum of all uses of resources across all individuals within an economy.
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What is investment?
answer
When part of the economy's output is used to produce
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What is government?
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Another cause of demand shocks; what the government uses/spends (military, social security, etc.)
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What is net exports?
answer
(x(exports) - m(imports)); what a country sends away minus what the country brings in
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What is the marginal propensity to consume?
answer
The change in consumption per dollar change in income.
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What is the income multiplier?
answer
1/(1-MPC)
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What is the tax multiplier?
answer
MPC/(1-MPC)
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What is the balanced budget multiplier?
answer
(1-MPC)/(1-MPC)
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What is saving?
answer
Forgone consumption that allows individuals to transfer income from today to the future
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What is money?
answer
something used in transactions to trade for goods, services, or resources. Also known as the median of exchange.
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What is an asset?
answer
Something held through time for the purpose of transferring current or past income into future consumption.
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What is the open market?
answer
An open market is characterized by the absence of tariffs, taxes, licensing requirements, subsidies, unionization and any other regulations or practices that interfere with the natural functioning of the free market. Anyone can participate in an open market. There may be competitive barriers to entry, but there are no regulatory barriers to entry.
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What is a T-Bill?
answer
Bonds printed by the treasury that are sold to the public in order for the government to pay the bills. The government pays interest on these bonds.
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What is an interest rate?
answer
The interest rate charged on loans made to banks in order for them to be legally allowed to continue business overnight.
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What is the FED?
answer
The Federal Reserve is in charge of the money supply in the economy and is who prints off money.
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What is the money multiplier?
answer
1/RRR
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What is the reserve ratio?
answer
The percentage of a bank's demand deposits they actually have to keep on hand.
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What is the discount rate?
answer
This is set by the federal reserve for the interest on an overnight loan to banks.
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What is the federal funds rate?
answer
The rate at which banks loan to each other.
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What is an open market operation?
answer
The buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Purchases inject money into the banking system and stimulate growth while sales of securities do the opposite.
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What is economic growth?
answer
Economic growth is the sustainable increase in GDP over time.
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What is the domestic deficit?
answer
An economic measure of a negative balance of trade in which a country's imports exceeds its exports. A trade deficit represents an outflow of domestic currency to foreign markets.
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Why does real output fluctuate?
answer
In the short run, output fluctuates with shifts in either aggregate supply or aggregate demand; in the long run, only aggregate supply affects output
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What is an aggregate demand shock?
answer
A sudden surprise event that temporarily increases or decreases demand for goods or services.
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What causes aggregate demand shocks?
answer
For example, a tax cut reduces the amount of money that taxpayers owe the government and frees up money for personal spending. This money is then used by taxpayers to consume certain products and services, which bids up their prices.
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What are sticky wages?
answer
Describe the slow rate at which some prices and wages adjust to supply and demand.
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What are the consequences of real output fluctuations on real wages?
answer
They either increase or decrease depending on inflations
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What would happen if there were no aggregate demand shocks?
answer
...
question
If there were no sticky wages, what would happen during an aggregate demand shock?
answer
Wages would dramatically change with the price levels.
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In what sense is an economy "stable" in the long run? What does it imply about counter cyclical policy?
answer
An economy will adjust to fully employ all productive resources.
question
Why is some spending (most notably investment) sensitive to the interest rate?
answer
As the interest rate changes, so does the opportunity cost for holding cash (or interest-rate affected) assets. If I can get a a 15% interest return in a bank account and the stock market or capital investment returns are performing at 10%, I'm going to stick my money in the bank and investment falls. The opposite is also true (If I will get nothing for holding cash, then I will stick it in more "risky" investments with higher returns)
question
Why is some spending (most notably consumption) "smooth" relative to changes in income?
answer
because individuals save in order to smooth consumption relative to possible future income changes
question
Why is money demand sensitive to the interest rate? (Why is the demand for money inversely related to the interest rate?)
answer
The interest rate is the opportunity cost of holding money vs. other assets. When r is higher, the quantity of money demanded is lower, ceteris paribus.
question
What is counter-cyclical (or compensatory) policy?
answer
Government policy aimed at reducing or neutralizing anti-social effects of economic cycles. Such policies encourage spending during downturns, and tighten credit during inflationary periods.
question
What is fiscal policy?
answer
government power to tax and spend
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FP: effects of changes in g
answer
g (income tax) changes
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FP: effects of changes in t
answer
...
question
What is monetary policy?
answer
Policies that control the supply of money, the price of money, and the availability of credit.
question
MP: effects of open market operations
answer
The government sells bonds, lower money supply. Buy bonds, higher money supply
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MP: effects of changes in discount rate
answer
Lower discount rates mean its cheaper to borrow money and the money supply increases and vice versa.
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MP: effects of changes in reserve requirements
answer
Increasing the requirement lowers money supply.
question
What is the appropriate policy during a deflationary (adverse) aggregate demand shock?
answer
...
question
What is the appropriate policy during a inflationary aggregate demand shock?
answer
...
question
What is the difference between short term (adjustment) inflation and long term sustained inflation?
answer
...
question
What causes short term inflation?
answer
The business cycle, exchange rates, price changes
question
What causes long term sustained inflation?
answer
increase in money supply
question
What is the effect of aggregate demand shocks in an environment of sustained inflation?
answer
...
question
What are the pratical problems fo counter cyclical policy?
answer
...
question
When will counter cyclical policies make things worse, rather than better?
answer
when they are implemented late in the cycle
question
What is the government deficit? What causes it? What are alternative policies?
answer
A status of financial health in which expenditures exceed revenue.
question
What are the possible effects of countercyclical policies on economic growth?
answer
...
question
Opportunity Cost
answer
the value to you of the best foregone alternative.
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Marginal Benefit
answer
The additional benefit to a consumer from consuming one more unit of a good or service.
question
Marginal Cost
answer
Extra cost of producing one additional unit of production.
question
If demand is elastic:
answer
An increase in price will cause consumers to substitute and will lower total expenditure for that firm
question
If demand is inelastic:
answer
An increase in price will increase total expenditures because there are not very many substitutes
question
what is the role of profits?
answer
Provide incentives to move or reallocate resources for more valuable users
question
What does efficiency means?
answer
Commodities are allocated to the highest valued users and resources are used in the most productive ways (MWTP=MC)
question
How does a competitive market work?
answer
By allocating goods and services to the highest-valued users and it allocates resources to their most productive use
question
What happens in a domestic market when there is international trade?
answer
Nations specialize according to their comparative advantage. They are able to consume beyond their PPF.
question
Imports:
answer
When commodities outside the domestic market are lower priced than their domestic competitors
question
Exports:
answer
When commodities outside the domestic market are higher priced than their domestic competitors
question
Deprecation
answer
A fall in the value of the dollar compared to another currency
question
Appreciation
answer
A rise in the value of the dollar compared to another currency
question
Trade surplus
answer
When a country exports more than they import
question
Trade deficit
answer
When a country imports more than they export
question
Price Ceiling
answer
Price is set below market price and firms are forbidden by law to sell product at a price higher than the set price. This results in a shortage.
question
Price Floors
answer
Price is set above market price and firms are forbidden by law to sell product at a price lower than the set price. this results in a surplus.
question
Solutions to the rationing problem
answer
1). first come, first serve
2). lottery
3). Coupon
4). Bureaucratic process
5). historical use
2). lottery
3). Coupon
4). Bureaucratic process
5). historical use
question
Solutions to the disposal problem
answer
10. Allow surplus to be wasted
2). Government purchases the surplus, but cant re-sell it
3). Government purchases all of the surplus and then resells it at a certain price
4). Limit Production
2). Government purchases the surplus, but cant re-sell it
3). Government purchases all of the surplus and then resells it at a certain price
4). Limit Production
question
Who pays taxes?
answer
It depends on the elasticity of demand:
More inelastic: Consumers pay
More elastic: Producers pay
More inelastic: Consumers pay
More elastic: Producers pay
question
Subsidies
answer
A payment that the government hands out to producers for producing more of a good or consumers for consuming more of a good.
question
tariffs
answer
Puts a tax on imported goods which then make the domestic price of that same good cheaper. This increases domestic revenue for that good. The government receives this revenue. Loss in consumer surplus exceeds any gain in producer surplus.
question
Quota
answer
It limits the number of people who can import and sell foreign goods so it persuades consumers to buy more domestic goods. The government does not receive revenue, holders of the import license do.
question
Monoploy
answer
the exclusive possession or control of the supply or trade in a commodity or service
question
Negative externality
answer
a cost that is suffered by a third party as a result of an economic transaction
question
Positive externality
answer
a benefit is received by a third party as a result of an economic transaction
question
Public Good
answer
a commodity or service that is provided without profit to all members of a society, either by the government or a private individual or organization.
question
What happens when producers are subsidized?
answer
The market price decreases
question
What happens when consumers are subsidized?
answer
The market price increases
question
What are the technical problems of counter cyclical policy?
answer
...
question
What is the aggregate demand multiplier?
answer
The government invests money in order to create more jobs, which in turn will generate more spending to stimulate the economy.
question
What is the relevance of the interest elasticity of demand for money?
answer
...
question
What is the relevance of the interest elasticity of demand for investment?
answer
...
question
What is the quantity theory of money?
answer
there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold
question
What is the effect on aggregate income on the demand for money?
answer
...
question
What is the national debt? What are its causes? What are the alternative policies?
answer
...
question
What policies promote growth?
answer
...
question
What are the problems with the government's UE measures?
answer
...
question
In what sense is it possible to employ "too much" labor?
answer
...
question
What determines a companies potential real output?
answer
...
question
What determines changes in an economy's potential real output?
answer
...
question
What factors determine an economy's growth rate?
answer
...
question
What is the basic macroeconomic model?
answer
...
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