ECON 2020 Midterm 1 - Assignment Essays

question

trade

answer

the voluntary exchange of goods and services between two or more parties

question

Rotunda Principles

answer

trade creates value. incentives affect behavior.

question

properties of trade

answer

helps both sides, trade creates value, trade is a positive sum game, encourages diverse interactions

question

scarcity

answer

limited nature of society's resources

question

economics

answer

study of how people and societies allocate scarce resources to satiate unlimited desires

question

five foundations of economics

answer

incentives, tradeoffs, opportunity cost, marginal thinking, trade creates value

question

incentives

answer

factors that motivate you to do something

question

types of incentives

answer

positive and negative, direct and indirect

question

diret incentives

answer

if you do this, you get that

question

indirect incentives

answer

external incentive effects (lower gas prices could increase the number of gas consumers)

question

opportunity cost

answer

highest valued alternative forgone

question

problem with accounting profit

answer

compares to bottom line, not possibly more profitable opportunities

question

marginal thinking

answer

analyzing the cost and benefit of an additional unit (why people don't sweep behind the fridge)

question

economic thinking

answer

evaluating available opportunities to make the best possible decision

question

markets

answer

bring buyers and sellers together to trade

question

comparative advantage

answer

when a party can produce something at a lower opportunity cost than their competitors

question

ceteris paribus

answer

examining change in one variable while holding all else constant

question

endogenous factors

answer

factors accounted for in the model

question

exogenous factors

answer

factors beyond our control/outside the model

question

law of increasing opportunity cost

answer

opportunity cost of a good increases as society produces more of it (why PPF if bowed out)

question

absolute advantage

answer

ability to produce more with the same amount of resources

question

specialization

answer

limiting of one's work to a particular area (leads to greater output in trade

question

when will trade be beneficial

answer

when terms of trade fall between the opportunity costs of involved parties

question

short run

answer

making decisions that reflect short term wants and limits, consumers can only partially adjust

question

long run

answer

making decisions reflecting long term wants and limits, consumers have time to fully adjust

question

consumer good

answer

goods produced for present consumption

question

capital goods

answer

goods that aid in the production of other goods

question

investment

answer

using resources to create/buy new capital

question

two economic visions

answer

unconstrained and constrained

question

unconstrained vision

answer

we have the resources to satisfy everyone

question

constrained (economic) visions

answer

we have limited resources and unlimited desires

question

types of resources

answer

land, labor, capital

question

economic way of thinking (flow chart)

answer

scarcity -> choices -> tradeoffs -> incentives

question

fundamental questions of economics

answer

what to produce, how to produce, for whom to produce

question

why questions of economics are relelvant

answer

scarcity

question

two major ways to answer fundamental economic questions

answer

markets, socialism

question

demand

answer

buying and consuming

question

influencing factors of demand

answer

price (-), consumer income (+), tastes and preferences (+-), taxes, exogenous factors(+-)

question

factors influencing supply

answer

price (+), cost of inputs (-), technology (+), taxes (-), exogenous factors (+-)

question

supply

answer

selling/producing side of the market

question

law of demand

answer

as the price decreased, quantity demanded increases

question

law of supply

answer

when price increases, quantity supplied increases

question

market system

answer

economy based on voluntary exchange via markets for goods and services

question

gross domestic product (GDP)

answer

the market value of final goods and services produced in a country in a year

question

two ways to increase GDP in market system

answer

produce more output, produce a more valuable output

question

market value

answer

price * quantity

question

services

answer

output that provides benefits without a tangible product (most of what the US produces)

question

intermediate good

answer

goods that go into another good

question

final good

answer

goods sold to final user

question

what counts in produced in a year

answer

inventory counts

question

uses for GDP

answer

living standards (requires GDP/capita), economic growth (needs to be adjusted for population), business cycles

question

four pieces of gdp

answer

consumption, investment, government spending, net exports

question

consumption (C)

answer

private spending on goods/services not intended for future production (Cooper buying chicken nuggets)

question

investment (I)

answer

private spending by firms to produce future output (tools, equipment)

question

government spending (G)

answer

spending by all levels of government on final goods and services

question

net exports (X)

answer

exports - imports

question

why imports get washed out

answer

imports enter the equations with consumption and are subtracted in net exports

question

gdp equation

answer

C + I + G + NX

question

growth rate

answer

(x1-x)/x

question

real gdp

answer

gdp adjusted for price changes

question

nominal gdp

answer

gdp unadjusted for price changes

question

recession

answer

short run economic downturn

question

shortcomings with gdp

answer

omission of non-market productions, underground activity, leisure time, environmental impact

question

stephenson and wolfers study

answer

within nations - wealthier report greater life satisfaction

across nations - wealthier nations report greater life satisfaction

easterin paradox is false when you consider % change in income

question

inflation

answer

growth of the overall levels of prices in an economy

question

business cycle

answer

a short-run fluctuation in economic activity

question

economic expansion

answer

increasing economic activity

question

economic contraction

answer

decreasing economic activity

question

gross national product (GNP)

answer

output produced by workers and resources owned by residents of the nation

question

two types of consumption goods

answer

nondurable and durable

question

nondurable goods

answer

consumed over short time period

question

durable

answer

consumed over long time period

question

unemployment

answer

when a worker is searching for employment who doesn't have a job

question

three types of unemployment

answer

structural, frictional, cyclical

question

natural unemployment types

answer

frictional, structural

question

structural unemployment

answer

unemployment caused by changes in economy's makeup

question

creative destruction

answer

new technologies lead to the end of other jobs and industries

question

frictional unemployment

answer

unemployment caused by delay in matching available jobs and employees

question

factors of frictional unemployment

answer

information availability, government policies (hiring and firing regulations)

question

cyclical unemployment

answer

unemployment caused by recessions

question

natural rate of unemployment (u*)

answer

typical unemployment rate when economy is growing naturally

question

full employment output (Y*)

answer

when unemployment = natural rate

question

Y and u in healthy economy

answer

u=u, Y=Y, uc=0

question

Y and u in recession

answer

u>u, Y<Y, uc>0

question

Y and u in exceptional expansion

answer

u<u, Y>Y, uc<0

question

unemployment rate (u)

answer

u= # unemployed/labor force *100

question

marginally attached workers

answer

unemployed who have looked for a job but havent sought one in the last four weeks (no longer counted in workforce)

question

underemployed workers

answer

people with part time jobs who want full time jobs (not counted in workforce)

question

labor force participation rate

answer

percentage of eligible population in workforce

question

unemployment for 2021 Q4

answer

question

labor force

answer

people employed or looking for work

question

groups not in the labor force

answer

retirees, stay-at-home workers, full-time students, marginally attached workers

question

u-3

answer

normal unemployment

question

u-6

answer

unemployment plus marginally attached workers

question

deflation

answer

when overall prices fall

question

consumer price index (CPI)

answer

measure of price level based on typical consumer's consumption (basket of typical goods/services purchased)

question

consumer price index equation

answer

CPI = basket price/basket price in base year *100

question

steps to finding CPI

answer

1. define basket of goods and appropriate weights

2. determine prices of goods across periods

3. convert to index #

question

uses of cpi

answer

measure inflation

question

why CPi may overstate inflation

answer

substitution (when prices rise, consumers substitute and may cause upward bias), changes in quality (better things are more expensive and could look like inflation), new goods services and locations (innovation created by new buying options)

question

chained CPI

answer

reduces upward bias of CPI by updating basket of goods monthly (this accounts for lower price when good is first introduced)

question

billion prices project

answer

independent index that tracks prices across internet sales

question

challenges inflation brings

answer

shoe-leather costs, money illusion, menu costs, future price level uncertainty, wealth redistribution, price confusion, tax distortions

question

shoe-leather costs

answer

resources wasted when people change their behavior to avoid holding money

question

money illusion

answer

when people interpret nominal changes in wages or prices as real changes

question

nominal wage

answer

wage in current $

question

real wage

answer

wage adjusted for change in price total

question

menu costs

answer

expense to change prices (this discouraged firms from quickly change prices)

question

future price level uncertainty

answer

when workers/firms are uncertain about future, they sign contracts/lend less

question

wealth redistribution

answer

inflation can redistribute wealth between borrowers and lenders (deflation does the opposite)

question

price confusion

answer

when firms cannot determine what price changes are caused by inflation, they may make misguided decisions with resource allocation

question

tax distortions

answer

Inflation makes capital gains appear larger and thus increases tax burdens

question

cause of inflation

answer

when money supply grows relative to quantify of goods/services — those goods will cost more

question

equation of exchange

answer

long run relationship between money supply, price level, real GDP and velocity of money; MV=PY

question

velocity of money

answer

# of times a unit of money has been exchanged in a year

question

P*Y

answer

nominal GDP

question

equation of exchange in growth rates

answer

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

question

when % change Y = % change V = 0

answer

% change M = % change P (inflation)

question

reasons government inflates money supply

answer

large government debts, surprise increase in money supply can stimulate an economy

question

every dollar borrowed

answer

needs a dollar saved

question

factors influencing supply of loanable funds

answer

interest rate (+), income and wealth (+), time preferences (-), consumption smoothing

question

factors influencing demand of loanable funds

answer

interest rate (-), capital productivity (+), investor confidence (+), government borrowing

question

GDP deflator

answer

Nominal GDP/Real GDP x 100

question

loanable funds market

answer

savers supply funds for loans to borrowers

question

LFM flow chart

answer

savers (households, foreign entities) -> lfm (banks, stocks, bonds) -> borrowers (firms, government)

question

interest rate

answer

price of loanable funds expressed as % of original loan

question

interest rate for savers

answer

reward for saving

question

interest rate for borrowers

answer

cost of loan

question

expected return

answer

anticipated rate of return (this should be > than loan + interest)

question

real interest rate

answer

interest corrected for inflation

question

nominal interest rate

answer

stated interest rate (what you see on contracts)

question

fisher equation

answer

real interest (r) = nominal interest (R) - inflation (i)

question

dissaving

answer

when people withdraw from their savings

question

what happens when significant # leave work force

answer

overall savings decrease

question

financial intermediaries

answer

firms that channel savings into funds for borrowers

question

banks

answer

private firms that accept deposits and extend loans

question

two kinds of financing

answer

indirect and direct

question

indirect finance

answer

when savers loan their funds to an intermediary who then loans to funds to borrowers

question

direct finance

answer

when borrowers go directly to savers of funds

question

securities

answer

tradable contract entitling owner to certain rights

question

bonds

answer

type of security representing debt to be paid

question

what banks consider when extending loans

answer

how much is asked for, time period, default risk, opportunity cost

question

maturity date

answer

date loan repayment is due

question

face/par value

answer

bond's value at maturity

question

interest rate on bond

answer

R = face value - initial/initial = pm-p/p

question

default risk

answer

risk that borrower won't pay face value on maturity date

question

increase default risk...

answer

reduces price for bond and increases interest rate

question

stock

answer

ownership in a firm, fluctuates with value of company

question

why firms like stocks

answer

bond financing results in debt, with stocks there is no outstanding debt

question

secondary markets

answer

markets that trade securities after their initial sale

question

new stock exchange

answer

NYSE

question

National Association of Securities Dealers Automated Quotations

answer

NASDAQ

question

treasury securities

answer

bonds sold by US government to pay for national debt

question

Mortages

answer

borrowing tool used to pay for homes

question

securization

answer

creating new security by combining existing loans (these are then bought and sold)

question

macroeconomic financial tools

answer

bonds, stocks, secondary markets, treasury securities, mortgages, securitization

question

Initial Public Offering (IPO)

answer

when you buy stock directly from the company

question

largest IPO

answer

alibaba

1 of 158

question

trade

answer

the voluntary exchange of goods and services between two or more parties

question

Rotunda Principles

answer

trade creates value. incentives affect behavior.

question

properties of trade

answer

helps both sides, trade creates value, trade is a positive sum game, encourages diverse interactions

question

scarcity

answer

limited nature of society's resources

question

economics

answer

study of how people and societies allocate scarce resources to satiate unlimited desires

question

five foundations of economics

answer

incentives, tradeoffs, opportunity cost, marginal thinking, trade creates value

question

incentives

answer

factors that motivate you to do something

question

types of incentives

answer

positive and negative, direct and indirect

question

diret incentives

answer

if you do this, you get that

question

indirect incentives

answer

external incentive effects (lower gas prices could increase the number of gas consumers)

question

opportunity cost

answer

highest valued alternative forgone

question

problem with accounting profit

answer

compares to bottom line, not possibly more profitable opportunities

question

marginal thinking

answer

analyzing the cost and benefit of an additional unit (why people don't sweep behind the fridge)

question

economic thinking

answer

evaluating available opportunities to make the best possible decision

question

markets

answer

bring buyers and sellers together to trade

question

comparative advantage

answer

when a party can produce something at a lower opportunity cost than their competitors

question

ceteris paribus

answer

examining change in one variable while holding all else constant

question

endogenous factors

answer

factors accounted for in the model

question

exogenous factors

answer

factors beyond our control/outside the model

question

law of increasing opportunity cost

answer

opportunity cost of a good increases as society produces more of it (why PPF if bowed out)

question

absolute advantage

answer

ability to produce more with the same amount of resources

question

specialization

answer

limiting of one's work to a particular area (leads to greater output in trade

question

when will trade be beneficial

answer

when terms of trade fall between the opportunity costs of involved parties

question

short run

answer

making decisions that reflect short term wants and limits, consumers can only partially adjust

question

long run

answer

making decisions reflecting long term wants and limits, consumers have time to fully adjust

question

consumer good

answer

goods produced for present consumption

question

capital goods

answer

goods that aid in the production of other goods

question

investment

answer

using resources to create/buy new capital

question

two economic visions

answer

unconstrained and constrained

question

unconstrained vision

answer

we have the resources to satisfy everyone

question

constrained (economic) visions

answer

we have limited resources and unlimited desires

question

types of resources

answer

land, labor, capital

question

economic way of thinking (flow chart)

answer

scarcity -> choices -> tradeoffs -> incentives

question

fundamental questions of economics

answer

what to produce, how to produce, for whom to produce

question

why questions of economics are relelvant

answer

scarcity

question

two major ways to answer fundamental economic questions

answer

markets, socialism

question

demand

answer

buying and consuming

question

influencing factors of demand

answer

price (-), consumer income (+), tastes and preferences (+-), taxes, exogenous factors(+-)

question

factors influencing supply

answer

price (+), cost of inputs (-), technology (+), taxes (-), exogenous factors (+-)

question

supply

answer

selling/producing side of the market

question

law of demand

answer

as the price decreased, quantity demanded increases

question

law of supply

answer

when price increases, quantity supplied increases

question

market system

answer

economy based on voluntary exchange via markets for goods and services

question

gross domestic product (GDP)

answer

the market value of final goods and services produced in a country in a year

question

two ways to increase GDP in market system

answer

produce more output, produce a more valuable output

question

market value

answer

price * quantity

question

services

answer

output that provides benefits without a tangible product (most of what the US produces)

question

intermediate good

answer

goods that go into another good

question

final good

answer

goods sold to final user

question

what counts in produced in a year

answer

inventory counts

question

uses for GDP

answer

living standards (requires GDP/capita), economic growth (needs to be adjusted for population), business cycles

question

four pieces of gdp

answer

consumption, investment, government spending, net exports

question

consumption (C)

answer

private spending on goods/services not intended for future production (Cooper buying chicken nuggets)

question

investment (I)

answer

private spending by firms to produce future output (tools, equipment)

question

government spending (G)

answer

spending by all levels of government on final goods and services

question

net exports (X)

answer

exports - imports

question

why imports get washed out

answer

imports enter the equations with consumption and are subtracted in net exports

question

gdp equation

answer

C + I + G + NX

question

growth rate

answer

(x1-x)/x

question

real gdp

answer

gdp adjusted for price changes

question

nominal gdp

answer

gdp unadjusted for price changes

question

recession

answer

short run economic downturn

question

shortcomings with gdp

answer

omission of non-market productions, underground activity, leisure time, environmental impact

question

stephenson and wolfers study

answer

within nations - wealthier report greater life satisfaction

across nations - wealthier nations report greater life satisfaction

easterin paradox is false when you consider % change in income

question

inflation

answer

growth of the overall levels of prices in an economy

question

business cycle

answer

a short-run fluctuation in economic activity

question

economic expansion

answer

increasing economic activity

question

economic contraction

answer

decreasing economic activity

question

gross national product (GNP)

answer

output produced by workers and resources owned by residents of the nation

question

two types of consumption goods

answer

nondurable and durable

question

nondurable goods

answer

consumed over short time period

question

durable

answer

consumed over long time period

question

unemployment

answer

when a worker is searching for employment who doesn't have a job

question

three types of unemployment

answer

structural, frictional, cyclical

question

natural unemployment types

answer

frictional, structural

question

structural unemployment

answer

unemployment caused by changes in economy's makeup

question

creative destruction

answer

new technologies lead to the end of other jobs and industries

question

frictional unemployment

answer

unemployment caused by delay in matching available jobs and employees

question

factors of frictional unemployment

answer

information availability, government policies (hiring and firing regulations)

question

cyclical unemployment

answer

unemployment caused by recessions

question

natural rate of unemployment (u*)

answer

typical unemployment rate when economy is growing naturally

question

full employment output (Y*)

answer

when unemployment = natural rate

question

Y and u in healthy economy

answer

u=u, Y=Y, uc=0

question

Y and u in recession

answer

u>u, Y<Y, uc>0

question

Y and u in exceptional expansion

answer

u<u, Y>Y, uc<0

question

unemployment rate (u)

answer

u= # unemployed/labor force *100

question

marginally attached workers

answer

unemployed who have looked for a job but havent sought one in the last four weeks (no longer counted in workforce)

question

underemployed workers

answer

people with part time jobs who want full time jobs (not counted in workforce)

question

labor force participation rate

answer

percentage of eligible population in workforce

question

unemployment for 2021 Q4

answer

question

labor force

answer

people employed or looking for work

question

groups not in the labor force

answer

retirees, stay-at-home workers, full-time students, marginally attached workers

question

u-3

answer

normal unemployment

question

u-6

answer

unemployment plus marginally attached workers

question

deflation

answer

when overall prices fall

question

consumer price index (CPI)

answer

measure of price level based on typical consumer's consumption (basket of typical goods/services purchased)

question

consumer price index equation

answer

CPI = basket price/basket price in base year *100

question

steps to finding CPI

answer

1. define basket of goods and appropriate weights

2. determine prices of goods across periods

3. convert to index #

question

uses of cpi

answer

measure inflation

question

why CPi may overstate inflation

answer

question

chained CPI

answer

reduces upward bias of CPI by updating basket of goods monthly (this accounts for lower price when good is first introduced)

question

billion prices project

answer

independent index that tracks prices across internet sales

question

challenges inflation brings

answer

shoe-leather costs, money illusion, menu costs, future price level uncertainty, wealth redistribution, price confusion, tax distortions

question

shoe-leather costs

answer

resources wasted when people change their behavior to avoid holding money

question

money illusion

answer

when people interpret nominal changes in wages or prices as real changes

question

nominal wage

answer

wage in current $

question

real wage

answer

wage adjusted for change in price total

question

menu costs

answer

expense to change prices (this discouraged firms from quickly change prices)

question

future price level uncertainty

answer

when workers/firms are uncertain about future, they sign contracts/lend less

question

wealth redistribution

answer

inflation can redistribute wealth between borrowers and lenders (deflation does the opposite)

question

price confusion

answer

when firms cannot determine what price changes are caused by inflation, they may make misguided decisions with resource allocation

question

tax distortions

answer

Inflation makes capital gains appear larger and thus increases tax burdens

question

cause of inflation

answer

when money supply grows relative to quantify of goods/services — those goods will cost more

question

equation of exchange

answer

long run relationship between money supply, price level, real GDP and velocity of money; MV=PY

question

velocity of money

answer

# of times a unit of money has been exchanged in a year

question

P*Y

answer

nominal GDP

question

equation of exchange in growth rates

answer

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

question

when % change Y = % change V = 0

answer

% change M = % change P (inflation)

question

reasons government inflates money supply

answer

large government debts, surprise increase in money supply can stimulate an economy

question

every dollar borrowed

answer

needs a dollar saved

question

factors influencing supply of loanable funds

answer

interest rate (+), income and wealth (+), time preferences (-), consumption smoothing

question

factors influencing demand of loanable funds

answer

interest rate (-), capital productivity (+), investor confidence (+), government borrowing

question

GDP deflator

answer

Nominal GDP/Real GDP x 100

question

loanable funds market

answer

savers supply funds for loans to borrowers

question

LFM flow chart

answer

savers (households, foreign entities) -> lfm (banks, stocks, bonds) -> borrowers (firms, government)

question

interest rate

answer

price of loanable funds expressed as % of original loan

question

interest rate for savers

answer

reward for saving

question

interest rate for borrowers

answer

cost of loan

question

expected return

answer

anticipated rate of return (this should be > than loan + interest)

question

real interest rate

answer

interest corrected for inflation

question

nominal interest rate

answer

stated interest rate (what you see on contracts)

question

fisher equation

answer

real interest (r) = nominal interest (R) - inflation (i)

question

dissaving

answer

when people withdraw from their savings

question

what happens when significant # leave work force

answer

overall savings decrease

question

financial intermediaries

answer

firms that channel savings into funds for borrowers

question

banks

answer

private firms that accept deposits and extend loans

question

two kinds of financing

answer

indirect and direct

question

indirect finance

answer

when savers loan their funds to an intermediary who then loans to funds to borrowers

question

direct finance

answer

when borrowers go directly to savers of funds

question

securities

answer

tradable contract entitling owner to certain rights

question

bonds

answer

type of security representing debt to be paid

question

what banks consider when extending loans

answer

how much is asked for, time period, default risk, opportunity cost

question

maturity date

answer

date loan repayment is due

question

face/par value

answer

bond's value at maturity

question

interest rate on bond

answer

R = face value - initial/initial = pm-p/p

question

default risk

answer

risk that borrower won't pay face value on maturity date

question

increase default risk...

answer

reduces price for bond and increases interest rate

question

stock

answer

ownership in a firm, fluctuates with value of company

question

why firms like stocks

answer

bond financing results in debt, with stocks there is no outstanding debt

question

secondary markets

answer

markets that trade securities after their initial sale

question

new stock exchange

answer

NYSE

question

National Association of Securities Dealers Automated Quotations

answer

NASDAQ

question

treasury securities

answer

bonds sold by US government to pay for national debt

question

Mortages

answer

borrowing tool used to pay for homes

question

securization

answer

creating new security by combining existing loans (these are then bought and sold)

question

macroeconomic financial tools

answer

bonds, stocks, secondary markets, treasury securities, mortgages, securitization

question

Initial Public Offering (IPO)

answer

when you buy stock directly from the company

question

largest IPO

answer

alibaba

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