question
Chapter 12
answer
Key terms for final
question
Inflation Rate Formula
answer
(New - Old / Old )* 100
question
Quantity Theory of Money
answer
the quantity of money available in an economy determines the value of money, and growth in the quantity of money is the primary cause of inflation
- explains how price level of money and why it might change over time
- explains how price level of money and why it might change over time
question
Quantity Equation
answer
M x V = P x Y
- Increase in $ supply or anything on one side would cause an increase on the other side
- It's like a teeter totter, if one side increases or decreases, the other side must do the same to keep it in balance
- Increase in $ supply or anything on one side would cause an increase on the other side
- It's like a teeter totter, if one side increases or decreases, the other side must do the same to keep it in balance
question
Nominal Variables
answer
Variables measured in monetary units ($)
question
Real Variables
answer
Variables measured in physical units (apples, oranges, donkeys)
question
Classical Dichotomy
answer
the separation of real & nominal variables
question
Monetary Policy
answer
influencing money supply through open market operations, altering discount rate, and altering reserve requirements
question
Who conducts monetary policy?
answer
The Federal government!
question
What does the Fed most commonly conduct for monetary policy?
answer
Open market operations
question
Velocity of Money
answer
The speed that money circulates through the economy
question
Velocity of Money Equation
answer
V = P x Y / M
question
What does each variable stand for in the Quantity Equation and the Velocity of Money equation?
- M is ?
- V is ?
- P is?
- Y is ?
- M is ?
- V is ?
- P is?
- Y is ?
answer
- M is quantity of money
- V is velocity
- P is price level
- Y is output
- V is velocity
- P is price level
- Y is output
question
Inflation Tax
answer
money that the government collects from you; the value you lost from $
- Ex. The price of a phone case is $20, the next year the government raises it to $40. The government makes $20 off of this price increase.
- Ex. The price of a phone case is $20, the next year the government raises it to $40. The government makes $20 off of this price increase.
question
Fisher Effect
answer
Think of nominal interest rate formula = real interest rate + inflation rate
- the one-for-one adjustment of the nominal interest rate to the inflation rate
Ex. 4% = 2% + 2%
or 5% = 2% to 3%
- the one-for-one adjustment of the nominal interest rate to the inflation rate
Ex. 4% = 2% + 2%
or 5% = 2% to 3%
question
Shoe Leather Cost
answer
Costs of opportunity such as foregone wages, leisure time, gas (official definition is the resources wasted when inflation encourages people to reduce their $ holdings)
Ex. Going to the bank takes an hour on your lunch break, you lose wages and gas
Ex. Going to the bank takes an hour on your lunch break, you lose wages and gas
question
Menu Cost
answer
the costs of changing prices for businesses
Ex. Printing new menus
Ex. Printing new menus
question
Nominal Interest Rate Formula
answer
Real Interest Rate + Inflation
question
Real Interest Rate Formula
answer
Nominal Interest Rate - Inflation Rate
question
Chapter 13
answer
Key terms for final
question
Closed Economy
answer
an economy w/o trade
Equation: Y = C + I + G
(NO NX)
Equation: Y = C + I + G
(NO NX)
question
Open Economy
answer
an economy w/ trade
Equation: Y = C + I + G + NX
Equation: Y = C + I + G + NX
question
Exports
answer
goods & services produced domestically and sold abroad
question
Imports
answer
goods & services produced abroad and sold domestically
question
Net Exports
answer
Exports - Imports; also called Trade Balance
question
Trade Balance
answer
Exports - Imports; also called Net Exports
question
Trade Surplus
answer
Exports < Imports
question
Trade Deficits
answer
Exports > Imports
question
Balanced Trade
answer
Exports = Imports
question
Net Capital Outflow
answer
the money exchanged for goods & services; $ that flows out when goods flow in
question
NCO = NX
answer
If NCO increases or decreases, then NX must do the same. It's like a teeter totter, just as the quantity theory of money equation is.
question
Net Capital Outflow Formula
answer
Purchase of foreign assets by domestic residents - purchase of domestic assets by foreigners
question
S = I + NCO
answer
Saving = Domestic Investment + Net Capital Outflow
question
S = I + NX
answer
Saving = Domestic Investment + Net Exports
question
Nominal Exchange Rate
answer
the rate at which a person can trade the currency of one country for the currency of another; exchange rate expressed in $
question
Appreciation
answer
an increase in the value of currency as measured by the amount of foreign currency it can buy (domestic currency can buy MORE of foreign currency)
question
Depreciation
answer
a decrease in the value of currency as measured by the amount of foreign currency it can buy (domestic currency can buy LESS of foreign currency)
question
Example of Appreciation/Depreciation
Start with $1 and end with $1
Start with .50 euro and end with .75
Which currency is appreciating and which is depreciating?
Start with $1 and end with $1
Start with .50 euro and end with .75
Which currency is appreciating and which is depreciating?
answer
Euro appreciates relative to $ (euro can buy more in $)
$ depreciates relative to euro (since euro can buy more of $, the U.S. currency has depreciated)
$ depreciates relative to euro (since euro can buy more of $, the U.S. currency has depreciated)
question
Real Exchange Rate
answer
the rate at which a person can trade the goods & services of one country for the goods and services of another; exchange rate expressed in real variables
question
Real Exchange Rate Formula
answer
(e x P) / P*
Nominal Exchange Rate x Domestic Price / Foreign Price
Nominal Exchange Rate x Domestic Price / Foreign Price
question
Exchange Rate Formula
answer
Foreign Price / Domestic Price
question
Purchasing Power Parity
answer
exchange rate ~ purchasing power is the same in both countries; a unit of any currency should be able to buy the same quantity of goods in all countries
- think of it as "$1 for 1 euro" etc.
- it makes everything equal
- think of it as "$1 for 1 euro" etc.
- it makes everything equal
question
Arbitrage
answer
buying something in 1 country & selling it for more money/profit in another
question
Trade Deficit Key Facts
answer
Exports < Imports
Net Exports < 0
Y < C + I + G
Saving < Investment
Net Capital Outflow < 0
Net Exports < 0
Y < C + I + G
Saving < Investment
Net Capital Outflow < 0
question
Balanced Trade Key Facts
answer
Exports = Imports
Net Exports = 0
Y = C + I + G
Saving = Investment
Net Capital Outflow = 0
Net Exports = 0
Y = C + I + G
Saving = Investment
Net Capital Outflow = 0
question
Trade Surplus Key Facts
answer
Exports > Imports
Net Exports > 0
Y > C + I + G
Saving > Investment
Net Capital Outflow > 0
Net Exports > 0
Y > C + I + G
Saving > Investment
Net Capital Outflow > 0
question
Chapter 14
answer
Key Terms for Final
question
Trade Policy
answer
a government policy that directly influences the quantity of goods & services that a country imports or exports
question
What is the source of supply in the market for loanable funds?
answer
Saving
question
What is the source of demand in the market for loanable funds?
answer
Investment
question
NX = NCO = S - I
answer
Identity to remember
question
National Savings Equation
answer
S = (Y - C - T) + (T - G)
question
Which part of the National Savings Equation - S = (Y - C -T) + (T - G) is private savings?
answer
Private Savings is Y - C - T
question
Which part of the National Savings Equation - S = (Y - C -T) + (T - G) is public savings?
answer
T - G
question
What do the variables of the National Savings equation mean?
S = ?
Y = ?
C = ?
T = ?
G = ?
S = ?
Y = ?
C = ?
T = ?
G = ?
answer
S = Saving
Y = Income/GDP
C = Consumption
T = Taxes/Revenue
G = Government spending
Y = Income/GDP
C = Consumption
T = Taxes/Revenue
G = Government spending
question
Outcomes of National Savings equation include (mainly for public savings)...
answer
T < G
T > G
T = G
T > G
T = G
question
T < G
answer
Budget Deficit
question
T > G
answer
Budget Surplus
question
Chapter 15
answer
Key Terms for Final
question
T = G
answer
Balanced Budget
question
Recession
answer
a period of declining real incomes (GDP) and rising unemployment
question
Depression
answer
extreme recession
question
Model of Aggregate Supply and Demand consists of which 2 curves?
answer
Aggregate Demand and Aggregate Supply Curve
question
Aggregate Demand Curve
answer
the quantity of goods & services that households, firms, the gvmt, and customers abroad want to buy at each price level
question
Aggregate demand curve's "equation" is similar to what other common equation?
answer
GDP!
AD = C + I + G + NX
AD = C + I + G + NX
question
Aggregate Supply Curve
answer
the quantity of goods & services that firms choose to produce & sell at each price level
question
Natural Level of Output
answer
where LRAS intersects x-axis ~ full employment that the economy can support; 4% unemployment
- textbook says it's the production of goods & services that an economy achieves in the long run when unemployment is at its natural rate
- textbook says it's the production of goods & services that an economy achieves in the long run when unemployment is at its natural rate
question
Stagflation
answer
high inflation, high unemployment, rising prices, and falling output
- when AD shifts left
- shifts in AS can cause this too
- when AD shifts left
- shifts in AS can cause this too
question
Stagnation
answer
period of slow economic growth; high unemployment
question
Aggregate Demand is shifted through what types of policy?
answer
Monetary or fiscal policy
question
The full aggregate demand/aggregate supply model shows aggregate demand and aggregate supply curve, SRAS, and LRAS curves.
answer
If it's a full AD/AS model, it shows SRAS and LRAS.
question
The short-run model shows aggregate supply and aggregate demand, but not the...
answer
LRAS Curve
question
The long-run model shows aggregate supply and aggregate demand, but not the...
answer
SRAS Curve
question
The slope of LRAS is...
answer
Vertical
question
Differences between SRAS & LRAS eq. is...
answer
The farther SRAS is from LRAS, the more unhealthy our economy is!
question
What is the point of the whole AD/AS curve - what are we looking in particular to do when analyzing the economy?
answer
Fight either inflation or unemployment. You can't decrease both of them, you have to pick one of them.
If you're going to fight inflation, shift AD RIGHT.
If you're going to fight unemployment, shift AD LEFT.
If you're going to fight inflation, shift AD RIGHT.
If you're going to fight unemployment, shift AD LEFT.
question
When graphing AD/AS curve, what is on the horizontal axis? What is on the vertical axis?
answer
The horizontal axis is real GDP/output. The vertical axis is the price level.
question
Factors that shift Aggregate Demand
answer
1. Change in consumer confidence
2. Change in government policy
2. Change in government policy
question
Mankiw says that factors that shift aggregate demand are...
answer
Changes in consumption, investment, government purchases, and net exports.
question
Why does Aggregate Demand shift down?
answer
1. Wealth Effect
2. Interest Rate Effect
3. Exchange Rate Effect (some call it the Foreign Price Effect)
2. Interest Rate Effect
3. Exchange Rate Effect (some call it the Foreign Price Effect)
question
Wealth Effect
answer
As price level INCREASES, buying power of wealth and consumption DECREASES
Ex. You have $100 to spend each month on food and you went to spend it all on food.
- In January of one year, you can buy 5 pizzas and each costs $20.
- The next year, prices rise. Now, you can only buy 4 pizzas and each costs $25.
Ex. You have $100 to spend each month on food and you went to spend it all on food.
- In January of one year, you can buy 5 pizzas and each costs $20.
- The next year, prices rise. Now, you can only buy 4 pizzas and each costs $25.
question
Interest Rate Effect
answer
As price level INCREASES, firm need/demand more money, so interest rates INCREASE and investment happens LESS (can think of as decrease, but really it just doesn't increase as much)
Ex. Fryers costs $70 for McDonald's to buy one year, the next year they cost $90. They have to pay $20 more, so they're going to raise interest rates and less people are going to want to invest.
Ex. Fryers costs $70 for McDonald's to buy one year, the next year they cost $90. They have to pay $20 more, so they're going to raise interest rates and less people are going to want to invest.
question
Exchange Rate Effect (Foreign Price Effect)
answer
As prices INCREASE domestically while remaining unchanged in foreign countries, imports INCREASE and exports DECREASE, net exports DECREASE
Ex. You can buy a brick in U.S. and Egypt.
Originally, a brick costs $20 in U.S. and Egypt.
Prices rise in U.S.; now a brick costs $30 in U.S.
Prices stay constant in the Egypt; a brick is still $20.
Egyptians and Americans are going to buy bricks from Egypt; nobody is going to buy bricks from America.
Ex. You can buy a brick in U.S. and Egypt.
Originally, a brick costs $20 in U.S. and Egypt.
Prices rise in U.S.; now a brick costs $30 in U.S.
Prices stay constant in the Egypt; a brick is still $20.
Egyptians and Americans are going to buy bricks from Egypt; nobody is going to buy bricks from America.
question
What factors shift Aggregate Supply?
answer
Changes in productivity growth, input prices, labor, capital, natural resources, technology, and expected price level
question
What factors shift Long Run Aggregate Supply?
answer
Changes in investment, size of labor force, capital, natural resources, and technological knowledge (increases in all of these would result in a shift of the LRAS right)
question
Why does Aggregate Supply shift up?
answer
Sticky Wage Theory (also Sticky Price Theory and Misperception Theory, but we didn't talk about those)
question
Sticky Wage Theory
answer
pay of workers is unlikely to go down even if economy is bad
question
Output Equation
answer
Quantity of Output Supplied =
Natural Level of Output = a (Actual Price Level - Expected Price Level)
- you will always be given a
Natural Level of Output = a (Actual Price Level - Expected Price Level)
- you will always be given a
question
Chapter 16
answer
Key Terms for Final
question
Automatic Stabilizers
answer
laws in place to balance business cycle; when GDP drops below a certain point, government starts spending money on things to stimulate economy
- stimulate AD during a recession
- happens AUTOMATICALLY as the phrase suggests; policymakers don't have to debate, it just happens
Ex. personal income tax (if you don't make anything, you don't pay income tax) or corporate income tax, unemployment benefits
- stimulate AD during a recession
- happens AUTOMATICALLY as the phrase suggests; policymakers don't have to debate, it just happens
Ex. personal income tax (if you don't make anything, you don't pay income tax) or corporate income tax, unemployment benefits
question
Fiscal Policy
answer
change in government policies of spending & taxes
- Look at national saving eq. for proof
- Look at national saving eq. for proof
question
Multiplier Effect
answer
total change in output due to spending; additional shifts in AD that occur when expansionary fiscal policy increases income and consumer spending
question
Multiplier Formula
answer
1 / (1 - MPC)
Ex.
1 / (1 - .25)
1 / .75 = 1/4 * 4 = 4
4 is the multiplier
- Look in notes for a more in-depth explanation of how to find multiplier
Ex.
1 / (1 - .25)
1 / .75 = 1/4 * 4 = 4
4 is the multiplier
- Look in notes for a more in-depth explanation of how to find multiplier
question
Is government spending affected by MPC?
answer
Yes, government spending is affected by the MPC!
question
Crowding Out Effect
answer
loss of investment due to government borrowing, GDP is hurt; offset in AD that results when expansionary fiscal policy raises the interest rate and reduces investment spending
question
Crowding Out Effect Example
answer
Case 1:
Savings are $10. Investments are $5, $2, $3. Investors can invest $10 to savers; boosts economy!
Case 2:
Savings are $10. Investments are $5 (government wants this $ to pay their debts), $5, $2, $3 ($2 and $3 make $5 of lost investment) - investors are pushed out (CROWDED OUT!) because government spent too much!
Savings are $10. Investments are $5, $2, $3. Investors can invest $10 to savers; boosts economy!
Case 2:
Savings are $10. Investments are $5 (government wants this $ to pay their debts), $5, $2, $3 ($2 and $3 make $5 of lost investment) - investors are pushed out (CROWDED OUT!) because government spent too much!
question
Phillips Curve
answer
derived from AD/AS curve; negative relationship between inflation & unemployment
- inflation doesn't go below 1%
- unemployment doesn't go below 4%
- inflation doesn't go below 1%
- unemployment doesn't go below 4%
question
Supply Shock
answer
dramatically decreases or increases supply, so prices decrease or increase with it depending on the situation; leads to increases in unemployment and prices
Ex. Rise in oil prices
Ex. Rise in oil prices
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