ECO 2013 FSU Hammock Exam 2 - Assignment Essays

question

Stocks vs. Flows

answer

stocks are the amounts, flows are changes in the stock

question

Gross Domestic Product (GDP)

answer

the market values of all final goods and services produced within a country within a year (or other period)

question

Final Goods

answer

has reached its last consumer as a new good

question

Intermediate Goods

answer

will go on to be part of production

question

Circular Flow Diagram

answer

illustrates both the inflow and outflow to the loanable funds market. The net saving of households and net capital inflow from foreigners provide the inflow—the supply of funds—into the loanable funds market

question

Income Approach

answer

Income (wages, rent, interest, profits) + indirect business taxes + depreciation + net income of foreigners

question

Expenditure Approach

answer

Y = C + I + G + NX

question

Per Capita GDP

answer

GDP / population

question

nonmarket production

answer

some production that we do for ourselves doesn't show up in GDP

question

Black and Grey Market Production

answer

doesn't show up in GDP!
Black Market: illegal stuff is sold
Grey Market: legal but unreported

question

Leisure and Job Quality

answer

Jobs are more comfortable, more pleasant and safer than they used to be, but this is not fully reflected in GDP.

question

Product Quality and New Goods

answer

improvements in quality are not reflected in GDP

question

Economic "bads"

answer

(a thing that you would not want to consume, you would pay to avoid it) natural disasters and other harmful events don't make GDP go down, but fixing them can make it go up!

question

Income inequality and poverty

answer

GDP and GDP per capita do not tell us how goods and services are distributed

question

Price level

answer

the overall level of prices of goods and services. The price level in a stock, it's the level of prices.

question

Inflation

answer

an increase in the price level. Inflation is a flow, it's a change in the prices

question

Deflation

answer

a decrease in the price level ( when the overall price level goes down (a flow)

question

Disinflation

answer

a decrease in the rate of inflation (the price level goes up more slowly ( a flow of a flow))

question

Nominal GDP

answer

GDP measured using contemporaneous prices

question

Real GDP

answer

GPD measured using prices from a base year

question

GDP Deflator

answer

Nominal GDP/ Real GDP x 100

question

CPI
- Calculating the inflation rate: %DX = (X new - Xold) / Xold

answer

asks how much does it cost to buy that market basket today, compared to buying that same set of goods at some point in the past"?

question

CPI overstates inflation because of

answer

- Improvements in product quality
- It doesn't account for changes in consumption due to prices.

question

Calculating the inflation rate

answer

% change in X = (X new - Xold) / Xold

question

Categories important for thinking about labor and employment

answer

The entire population
- The adult (16+) civilization noninstitutionalized population
- the unemployed
- the employed
- the labor force (employed + unemployed)

question

Labor Force Participation Rate

answer

labor force / noninitialized adult civilian population

question

Unemployment Rate

answer

unemployed / labor force

question

Problems with the unemployment rate

answer

- Discouraged Workers
- Underemployment

question

Frictional unemployment

answer

"search" unemployment. It takes time to match workers with jobs

question

Structural unemployment

answer

some workers become unemployed because their skills do not match current needs. (and those workers need to be retrained or find new work)

question

Seasonal unemployment

answer

varies with seasonal events. We as economists, statistically remove this from the data

question

Cyclical unemployment

answer

caused by economic slowdowns

question

Natural Rate of Unemployment

answer

= Frictional + Structural

question

Full Employment

answer

The level of employment when unemployment is at the natural rate.

question

Potential GDP

answer

the value of output at full employment

question

Expected inflation

answer

inflation that is expected

question

Menu Costs

answer

the cost of updating price lists

question

Shoeleather Costs

answer

the costs of frequent trips to the bank to withdraw and deposit money, so that it earns as much as possible

question

Current U.S. capital gains taxes fall on nominal gains, deterring investment

answer

Are taxes on the sale and asset, based on nominal gains not real gains

question

Unexpected inflation

answer

- Causes people to use resources to shield themselves from inflation
- The costs of unexpected inflation are worse under very high inflation, because higher inflation tends to be more variable for reasons we do not understand

question

The Loanable Funds Market

answer

A general term used to describe the market that coordinates the borrowing and lending decisions of business firms and households

question

Fisher's Equation

answer

i = r + pie
r = real interest rates
i = nominal interest rates

question

The Foreign Exchange Market

answer

The market in which the currencies of different countries are bought and sold

question

Appreciation

answer

currency appreciates when it buys more of some other currency. It becomes stronger. (it increases in value)

question

Depreciation

answer

a currency depreciates when it buys less of some other currency. It becomes "weaker". (it decreases in value

question

Exports - Imports = Capital Outflow - Capital Inflow

answer

...

question

Trade Deficit

answer

negative Net exports

question

Trade Surplus

answer

positive net exports

question

Leakages

answer

= injections

question

Three uses of money:

answer

Medium of exchange
Unit of account
Store of Value

question

Medium of exchange

answer

avoids the "Double Coincidence of wants problem"

question

Unit of account

answer

Without unit of account you would not be able to do accounting

question

Store of Value

answer

Gold has been useful a money as it lasts - bananas haven't

question

Liquidity

answer

how close something is to cash

question

Fiat Money

answer

money issued by government. Not backed by a commodity

question

Commodity money

answer

backed by commodity (ie. Gold)

question

Money Supply

answer

M0
Monetary Base
M1
M2

question

answer

currency in circulation

question

Monetary Base

answer

currency in circulation in bank vaults + reserves held on deposit at the federal reserve (more about federal reserve later)

question

answer

m0 + demand deposits (checking account) + travelers check

question

answer

m1 + savings accounts + time deposits less than $100,000 (ie you cant access it for 30 days) + (retail) money mutual fund accounts (accounts for which the money is invested in "money market" (ie loaded out on a very short-term basis, usually less than a year)

question

The Federal Reserve (you don't need to know the bureaucratic details)

answer

It regulates banks,
Controls the supply of money

question

How Banks Create Money

answer

By lending it!

question

The Money Multiplier (or Potential Deposit Expansion Multiplier)

answer

= 1/Reserve Ratio

question

Fed tools to control money supply

answer

Reserve Requirement
Open Market Operations
Discount Rate
Interest on Reserves

question

Reserve Requirement

answer

Unit 2020, the Fed required banks to maintain a minimum level of reserves. By increasing the requirement, the Fed reduces money creation

question

Open Market Operations

answer

the Fed buys & sells government counties. Like Tredegar Bills (or bonds w/ interest, an IOU). In exchange, it gives or takes money. These changes increase or decrease money supply

question

Discount Rate

answer

The Fed can make loans to banks. It charges the discount rate. By lowering the rate, the Fed increases the money supply

question

Interest on Reserves

answer

as of 2008, the Fed can pay interests on deposits from other banks at the Fed

question

Stocks

answer

M x V = P x Y

question

Flows

answer

% change in M + % change in V = % change in P + % change in Y

question

Economic Growth

answer

"expands the productive capacity of an economy"
Technically it can be defined as an increase in GDP, but what we really care about is Real Per Capita GDP.

question

Rule of 70

answer

if something grows at X% per year it will double in 70 / Xyears

question

Why do economies grow?
Bad, Better and Best answer....

answer

Bad answer: Productivity growth
Better answers: Natural resources, physical and human capital, technological progress
Best answers: healthy economic Institutions

question

Secure and well-defined private property rights

answer

If people can securely own things, they have an incentive to use them wisely.

question

Rule of Law

answer

everyone knows what the law is and faces the same consequences for violating it.

question

Competitive markets

answer

Competition disciplines firms, discouraging them from wasting resources

question

Stable money/inflation

answer

allows us to avoid the cost of inflation, and allows people the plan better

question

Low trade barriers

answer

avoiding tariffs and quotas means a country focuses on producing what it does best.

question

Open capital markets

answer

countries that allow investments to flow in and out freely they grow faster.

question

Avoidance of high marginal tax rates

answer

High marginal tax rates can discourage productive activity.

question

Avoidance of harmful regulation

answer

some regulation can decrease productivity and discourage work.

question

Economic Freedom is

answer

highly correlated with healthy institutions and economic growth

question

Risk vs return

answer

Investments that have a higher rate of return have more risk, ceteris paribus. There is a trade off between risk and return. Riskier investment have a higher rate of return,

question

Stocks

answer

ownerships shares of a corporation. Corporations raise funds by issuing stock. Some shares give voting rights, and some companies pay dividends. Stock prices are determined by supply and demand, and depends entirely on current and expected future profits.

question

Bonds

answer

a promise to repay the principle amount borrowed plus interest at a specified time in the future

question

The Efficient Markets Hypothesis

answer

asset prices reflect fundamental values because everyone is trying to make money on them. The day to day or movement of stock prices is therefore random.

question

Index Funds and diversity

answer

index funds is basically, a list of stocks.
Diversity is buying a diverse portfolio of assets protects you from downside risk

question

Present and Future Value

answer

FV = PV (1 + r )^time

1 of 89

question

Stocks vs. Flows

answer

stocks are the amounts, flows are changes in the stock

question

Gross Domestic Product (GDP)

answer

the market values of all final goods and services produced within a country within a year (or other period)

question

Final Goods

answer

has reached its last consumer as a new good

question

Intermediate Goods

answer

will go on to be part of production

question

Circular Flow Diagram

answer

question

Income Approach

answer

Income (wages, rent, interest, profits) + indirect business taxes + depreciation + net income of foreigners

question

Expenditure Approach

answer

Y = C + I + G + NX

question

Per Capita GDP

answer

GDP / population

question

nonmarket production

answer

some production that we do for ourselves doesn't show up in GDP

question

Black and Grey Market Production

answer

doesn't show up in GDP!
Black Market: illegal stuff is sold
Grey Market: legal but unreported

question

Leisure and Job Quality

answer

Jobs are more comfortable, more pleasant and safer than they used to be, but this is not fully reflected in GDP.

question

Product Quality and New Goods

answer

improvements in quality are not reflected in GDP

question

Economic "bads"

answer

(a thing that you would not want to consume, you would pay to avoid it) natural disasters and other harmful events don't make GDP go down, but fixing them can make it go up!

question

Income inequality and poverty

answer

GDP and GDP per capita do not tell us how goods and services are distributed

question

Price level

answer

the overall level of prices of goods and services. The price level in a stock, it's the level of prices.

question

Inflation

answer

an increase in the price level. Inflation is a flow, it's a change in the prices

question

Deflation

answer

a decrease in the price level ( when the overall price level goes down (a flow)

question

Disinflation

answer

a decrease in the rate of inflation (the price level goes up more slowly ( a flow of a flow))

question

Nominal GDP

answer

GDP measured using contemporaneous prices

question

Real GDP

answer

GPD measured using prices from a base year

question

GDP Deflator

answer

Nominal GDP/ Real GDP x 100

question

CPI
- Calculating the inflation rate: %DX = (X new - Xold) / Xold

answer

asks how much does it cost to buy that market basket today, compared to buying that same set of goods at some point in the past"?

question

CPI overstates inflation because of

answer

- Improvements in product quality
- It doesn't account for changes in consumption due to prices.

question

Calculating the inflation rate

answer

% change in X = (X new - Xold) / Xold

question

Categories important for thinking about labor and employment

answer

The entire population
- The adult (16+) civilization noninstitutionalized population
- the unemployed
- the employed
- the labor force (employed + unemployed)

question

Labor Force Participation Rate

answer

labor force / noninitialized adult civilian population

question

Unemployment Rate

answer

unemployed / labor force

question

Problems with the unemployment rate

answer

- Discouraged Workers
- Underemployment

question

Frictional unemployment

answer

"search" unemployment. It takes time to match workers with jobs

question

Structural unemployment

answer

some workers become unemployed because their skills do not match current needs. (and those workers need to be retrained or find new work)

question

Seasonal unemployment

answer

varies with seasonal events. We as economists, statistically remove this from the data

question

Cyclical unemployment

answer

caused by economic slowdowns

question

Natural Rate of Unemployment

answer

= Frictional + Structural

question

Full Employment

answer

The level of employment when unemployment is at the natural rate.

question

Potential GDP

answer

the value of output at full employment

question

Expected inflation

answer

inflation that is expected

question

Menu Costs

answer

the cost of updating price lists

question

Shoeleather Costs

answer

the costs of frequent trips to the bank to withdraw and deposit money, so that it earns as much as possible

question

Current U.S. capital gains taxes fall on nominal gains, deterring investment

answer

Are taxes on the sale and asset, based on nominal gains not real gains

question

Unexpected inflation

answer

question

The Loanable Funds Market

answer

A general term used to describe the market that coordinates the borrowing and lending decisions of business firms and households

question

Fisher's Equation

answer

i = r + pie
r = real interest rates
i = nominal interest rates

question

The Foreign Exchange Market

answer

The market in which the currencies of different countries are bought and sold

question

Appreciation

answer

currency appreciates when it buys more of some other currency. It becomes stronger. (it increases in value)

question

Depreciation

answer

a currency depreciates when it buys less of some other currency. It becomes "weaker". (it decreases in value

question

Exports - Imports = Capital Outflow - Capital Inflow

answer

...

question

Trade Deficit

answer

negative Net exports

question

Trade Surplus

answer

positive net exports

question

Leakages

answer

= injections

question

Three uses of money:

answer

Medium of exchange
Unit of account
Store of Value

question

Medium of exchange

answer

avoids the "Double Coincidence of wants problem"

question

Unit of account

answer

Without unit of account you would not be able to do accounting

question

Store of Value

answer

Gold has been useful a money as it lasts - bananas haven't

question

Liquidity

answer

how close something is to cash

question

Fiat Money

answer

money issued by government. Not backed by a commodity

question

Commodity money

answer

backed by commodity (ie. Gold)

question

Money Supply

answer

M0
Monetary Base
M1
M2

question

answer

currency in circulation

question

Monetary Base

answer

currency in circulation in bank vaults + reserves held on deposit at the federal reserve (more about federal reserve later)

question

answer

m0 + demand deposits (checking account) + travelers check

question

answer

question

The Federal Reserve (you don't need to know the bureaucratic details)

answer

It regulates banks,
Controls the supply of money

question

How Banks Create Money

answer

By lending it!

question

The Money Multiplier (or Potential Deposit Expansion Multiplier)

answer

= 1/Reserve Ratio

question

Fed tools to control money supply

answer

Reserve Requirement
Open Market Operations
Discount Rate
Interest on Reserves

question

Reserve Requirement

answer

Unit 2020, the Fed required banks to maintain a minimum level of reserves. By increasing the requirement, the Fed reduces money creation

question

Open Market Operations

answer

the Fed buys & sells government counties. Like Tredegar Bills (or bonds w/ interest, an IOU). In exchange, it gives or takes money. These changes increase or decrease money supply

question

Discount Rate

answer

The Fed can make loans to banks. It charges the discount rate. By lowering the rate, the Fed increases the money supply

question

Interest on Reserves

answer

as of 2008, the Fed can pay interests on deposits from other banks at the Fed

question

Stocks

answer

M x V = P x Y

question

Flows

answer

% change in M + % change in V = % change in P + % change in Y

question

Economic Growth

answer

"expands the productive capacity of an economy"
Technically it can be defined as an increase in GDP, but what we really care about is Real Per Capita GDP.

question

Rule of 70

answer

if something grows at X% per year it will double in 70 / Xyears

question

Why do economies grow?
Bad, Better and Best answer....

answer

Bad answer: Productivity growth
Better answers: Natural resources, physical and human capital, technological progress
Best answers: healthy economic Institutions

question

Secure and well-defined private property rights

answer

If people can securely own things, they have an incentive to use them wisely.

question

Rule of Law

answer

everyone knows what the law is and faces the same consequences for violating it.

question

Competitive markets

answer

Competition disciplines firms, discouraging them from wasting resources

question

Stable money/inflation

answer

allows us to avoid the cost of inflation, and allows people the plan better

question

Low trade barriers

answer

avoiding tariffs and quotas means a country focuses on producing what it does best.

question

Open capital markets

answer

countries that allow investments to flow in and out freely they grow faster.

question

Avoidance of high marginal tax rates

answer

High marginal tax rates can discourage productive activity.

question

Avoidance of harmful regulation

answer

some regulation can decrease productivity and discourage work.

question

Economic Freedom is

answer

highly correlated with healthy institutions and economic growth

question

Risk vs return

answer

Investments that have a higher rate of return have more risk, ceteris paribus. There is a trade off between risk and return. Riskier investment have a higher rate of return,

question

Stocks

answer

question

Bonds

answer

a promise to repay the principle amount borrowed plus interest at a specified time in the future

question

The Efficient Markets Hypothesis

answer

asset prices reflect fundamental values because everyone is trying to make money on them. The day to day or movement of stock prices is therefore random.

question

Index Funds and diversity

answer

index funds is basically, a list of stocks.
Diversity is buying a diverse portfolio of assets protects you from downside risk

question

Present and Future Value

answer

FV = PV (1 + r )^time

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