question
What is meant by the standard of living?
answer
the degree to which people have access to goods and services that make their lives easier, healthier, and more enjoyable
question
What is the expenditure equation for GDP?
answer
GDP = consumption(C) + Investment(I) + government purchases(G) + net exports(NX)
question
What is the relationship between real and nominal GDP?
answer
real GDP is nominal GDP adjusted for inflation
question
What is included in capital income?
answer
includes interest, dividends, rent, royalties
question
How is the inflation rate related to the average price level?
answer
the rate of inflation is just the percent change in the price level
question
What is the relationship between nominal and real interest rates and what is the Fisher effect?
answer
nominal interest rates tend to be higher when inflation is higher
question
What interest rate (nominal or real) is the interest rate we read in the Wall Street Journal?
answer
nominal
question
What is the formula for calculating the average annual rate of growth over T years?
answer
Y(1 + a)^t
question
If a variable is the product of other variables or the ratio of other variables, how does its growth rate relate to the growth rates of the other variables?
answer
A is the product of other variables - Growth rate of A = growth rate of B + growth rate of C + growth rate of D
A is the ratio of other variables - Growth rate of A = growth rate of B - growth rate of C
A is the ratio of other variables - Growth rate of A = growth rate of B - growth rate of C
question
Why do we often talk about real GDP per capita (i.e. divided by the population) rather than just nominal GDP?
answer
GDP measures the quantity of goods and services produced but GDP per capita is a measure of economic welfare or standard of living in a nation.
question
Did real GDP per capita grow in a sustained way before the 1800s?
answer
no
question
Following the Hans Rosling video, if you plot life expectancy on the vertical axis and real GDP per capita on the horizontal axis, and indicate each country with a ball, describe the movement of most of the balls since 1810.
answer
it would bounce up and down to represent a temporary decrease in life expectancy due to flu or famine
question
What did Malthus predict and why did his prediction turn out to be wrong?
answer
He did not foresee the rise of other factors that could rise ALP. These factors shift up the relationship between labor & output.
question
Use a production function graph (with output on the vertical axis and # of workers on the horizontal axis) to show diminishing marginal production of labor (MPL).
answer
As labor input rises, output also rise but the rise in output becomes less and less.
question
Use a production function graph to show the average labor product (ALP) at two points.
answer
ALP falls as more workers are added.
question
Use a production function graph to show the effects of technological progress.
answer
Production function will shift up
question
Why do small differences in growth rates matter in the long run?
answer
small differences in average annual growth rates lead to large differences in GDP per capita
question
What is a simple formula for approximating how many years it will take for a geometrically growth variable to double?
answer
Rule of 72 - 72 divided by the annual percentage growth rate of the variable
question
In which country has real GDP per capita doubled every 10 years on average since 1980?
answer
China
question
What is the equation that relates output per capita to average labor productivity?
answer
(Y/Pop) = (Y/N)x(N/Pop) - this is real GDP per capita = ALP x employed rate
question
What is an approximate equation that relates growth in output per capita to the growth in average labor productivity?
answer
growth rate of real GDP per capita = growth rate of ALP + growth rate of share of pop that works
question
What are the key determinants of average labor productivity?
answer
1. Human Capital
2. Physical Capital
3. Land and other Natural Resources
4. Technology
5. Entrepreneurship and Management
6. Political and Legal Environment
2. Physical Capital
3. Land and other Natural Resources
4. Technology
5. Entrepreneurship and Management
6. Political and Legal Environment
question
In the long-run, which countries tend to grow faster, capitalist countries that use markets and allow private ownership of businesses or socialist countries in which the government owns all of the means of production? Give two examples of countries that were split with one going capitalist and the other going communist.
answer
Capitalist countries that use markets and allow private ownership of businesses - North vs South Korea, East vs West Germany, Mao vs Deng China.
question
Give examples where the key technological progress was invention of new goods, not just reducing the cost of existing goods.
answer
Internet, Cell phones, Automobiles, Jet airplanes
question
What government policies help raise the average product of labor?
answer
1. Policies to increase human capital - free and subsidized public education
2. Policies that promote saving and investment - we need savings and investment to build up capital stock
3. Policies that support research and development - National Science Foundation (NSF), etc.
4. Legal and political framework - Protect property rights, enforce contracts
2. Policies that promote saving and investment - we need savings and investment to build up capital stock
3. Policies that support research and development - National Science Foundation (NSF), etc.
4. Legal and political framework - Protect property rights, enforce contracts
question
Describe how the growth rate of average labor productivity during recent decades in the U.S. compares to the growth rate from 1920 to 1970.
answer
Productivity growth during the recent decades is lower compares to the growth rate from 1920 to 1970 leading people to think there is a limit to growth
question
What is the definition of saving at the household level?
answer
Saving = current income - spending on current needs
question
How is a household's wealth related to the assets and liabilities on its balance sheet?
answer
Wealth = Net Worth = Assets - Liabilities
question
If a household pays off some debt, does its net worth rise or fall?
answer
Net worth will rise because you have less liabilities.
question
If I use $500 of my income to pay off my credit card debt, is that saving or consumption?
answer
Consumption b/c you are using assets to pay for liabilities, it would cancel out to 0.
question
Are capital gains counted as income or saving?
answer
Saving b/c Change in Wealth = Saving + Capital Gains - Capital Losses.
question
What factors can change a household's wealth?
answer
1. Higher labor income
2. A higher average saving rate
3. A higher yield on your assets
4. Saving that occurs earlier rather than later
2. A higher average saving rate
3. A higher yield on your assets
4. Saving that occurs earlier rather than later
question
What factors determine how much wealth a household can accumulate for their retirement?
answer
How early they start and how much do they invest.
question
Define national saving. How is it related to private and public saving?
answer
National Saving is the aggregate saving of the economy. We can split national saving up between private and public saving - national saving S = (Y - T - C) + (T - G) = Y - C - G
question
What equation shows how the government budget deficit relates to public saving?
answer
Government budget deficit = - budget surplus = - public saving
question
Currently the government is running a budget deficit. What does that imply about public saving?
answer
public saving is negative and therefore savings is lower
question
How does the primary deficit differ from the overall government budget deficit?
answer
the primary deficit excludes interest payments on debt, while the overall government budget deficit includes them
question
What are the three main motives for household saving?
answer
1. Life-cycle saving
2. Precautionary saving
3. Bequest Saving
2. Precautionary saving
3. Bequest Saving
question
What are the main assumptions of the Permanent Income/Life Cycle Model?
answer
1. People prefer to smooth their consumption over time
2. People are forward looking when making choices
3. People are impatient
2. People are forward looking when making choices
3. People are impatient
question
If a person hears that their income will rise permanently next year, what will happen to (i) their consumption and (ii) saving this year?
answer
i. consumption will rise
ii. saving will decrease
ii. saving will decrease
question
Should consumption and saving respond the same to a temporary increase in income as to a permanent increase in income?
answer
No b/c people want to smooth their consumption. If permanent, people will raise their consumption more.
question
Is it unwise for economics majors to borrow to finance their education?
answer
No b/c in early years you achieve smoothing of consumption by borrowing and lending.
question
If an increase in home prices raises households' wealth, what is the predicted effect on household consumption and saving rates?
answer
No effect b/c consumption and saving rates depends on income
question
How do income and substitution effects impact the relationship between household saving and real interest rates?
answer
Income effect: If interest rate rise, saving will decrease b/c consumption increase
Substitution effect: You want to save more and consume less today b/c the returns to saving are greater so increase in interest rate will increase savings.
Substitution effect: You want to save more and consume less today b/c the returns to saving are greater so increase in interest rate will increase savings.
question
Why does the saving supply curve slope up?
answer
We assume that substitution effect is stronger, so higher r leads to higher saving.
question
Does the effect of the real interest rate on national saving come through its effect on private saving or public saving?
answer
Private saving
question
What is the user cost of capital? What factors affect it?
answer
User cost of capital = Price of capital good(real interest rate + depreciation rate)
question
What is the benefit side of buying capital?
answer
More profit
question
List the key factors that affect the benefits to buying capital.
answer
1. A decrease in the price of new capital goods
2. A decrease in the real interest rate.
3. Technological improvement that raises the marginal product of capital
4. Higher prices of the output produced with the capital
5. More labor to work with the capital
6. Lower taxes on the revenue generated by capital
2. A decrease in the real interest rate.
3. Technological improvement that raises the marginal product of capital
4. Higher prices of the output produced with the capital
5. More labor to work with the capital
6. Lower taxes on the revenue generated by capital
question
Can government policy, such as corporate tax rates, influence investment?
answer
Yes, it could shift investment curve left or right. For example, tax rates on profits increases will lead the investment curve to shift in.
question
How does the real interest rate affect investment?
answer
real interest rate guides desired investment
question
What is the rule of thumb for deciding whether to represent a change as a movement along a curve or a shift in the curve?
answer
1. If the variable appears on one of the axes, its effect is represented as a movement along the curve.
2. If a variable does not appear on one of the axes, its effect is represented as a shift in a curve.
2. If a variable does not appear on one of the axes, its effect is represented as a shift in a curve.
question
In the model of investment and saving equilibrium, what variable is on the vertical axis and what variable is on the horizontal axis?
answer
Vertical axis: interest rate
Horizontal axis: quantity of investment or saving
Horizontal axis: quantity of investment or saving
question
Which curve represents the demand for saving?
answer
Investment is the demand for saving
question
What price adjusts to make desired investment equal to desired saving?
answer
real interest rate
question
What factors shift the investment curve?
answer
1. Changes in expected profitability
2. Changes in technology
3. Changes in business confidence
4. Changes in government policies
5. Changes in the availability of credit
2. Changes in technology
3. Changes in business confidence
4. Changes in government policies
5. Changes in the availability of credit
question
What factors shift the saving supply curve?
answer
1. Changes in income
2. Changes in demographics
3. Changes in government policies
4. Changes in expectations
5. Changes in economic conditions
6. Changes in credit conditions
2. Changes in demographics
3. Changes in government policies
4. Changes in expectations
5. Changes in economic conditions
6. Changes in credit conditions
question
How do government budget deficits caused by rises in G affect real interest rates and investment?
answer
It may lead to an increase in real interest rates and a decrease in investment due to the crowding out effect and the expectation of future taxes effect.
question
What are the three principal uses of money?
answer
1. Medium of Exchange
2. Unit of Account
3. Store of Value
2. Unit of Account
3. Store of Value
question
What is barter?
answer
Exchange of goods and services directly
question
What are some advantages and disadvantages to storing one's wealth in currency?
answer
Advantages: Cash is anonymous & difficult to trace for illegal activities
Disadvantages: Currency doesn't pay interest, Risk of destruction or theft
Disadvantages: Currency doesn't pay interest, Risk of destruction or theft
question
What was the Indian "demonetization?" Why was it enacted?
answer
Demonetization in India refers to the sudden and unexpected announcement made by the Indian government on November 8, 2016, to withdraw the circulation of all ₹500 and ₹1,000 banknotes, which accounted for 86% of the cash in circulation by value.
The primary objective of the demonetization move was to curb corruption, black money, fake currency, and terrorism funding by flushing out unaccounted cash or black money from the Indian economy.
The primary objective of the demonetization move was to curb corruption, black money, fake currency, and terrorism funding by flushing out unaccounted cash or black money from the Indian economy.
question
What does Kenneth Rogoff mean by "The Curse of Cash?"
answer
Rogoff's book argues that cash is not necessarily a good thing for society and that reducing its usage can have significant benefits.
question
Define the two leading measures of money in the U.S.
answer
M1: currency in the hands of the public and traveler's checks and checking deposits owned by individuals and businesses.
M2: M1 plus time deposits, saving deposits, money market mutual funds, and other deposits.
M2: M1 plus time deposits, saving deposits, money market mutual funds, and other deposits.
question
What is the reserve-deposit ratio?
answer
ratio of reserves to deposits that a bank wants to hold
question
Explain how fractional reserve accounting leads to a money multiplier.
answer
Fractional reserve banking is a system in which banks keep only a fraction of their deposits as reserves, while lending out the rest to borrowers. This system creates a "money multiplier" effect, where an initial deposit can create more money in the economy.
question
Considering reserves, deposits, and loans, which are assets and which are liabilities of banks?
answer
Assets: Reserves and Loans
Liabilities: Deposits
Liabilities: Deposits
question
Is cash in a bank vault considered to be currency or reserves?
answer
Reserves
question
Suppose that the Fed buys $1 million of bonds from the public. Does the public's decision of how much to hold in currency versus in checking accounts influence the change in the money supply (M1)?
answer
Yes b/c checking accounts aka reserves are worth more than currency in M1 b/c of the fractional banking system
question
What is the relationship between money, currency, reserves, and the reserve-deposit ratio?
answer
M1 = Currency held by the public + (Bank reserves/rd)
question
What is the Federal Reserve? When was it established?
answer
The Federal Reserve System is the central bank of the United States established by the Federal Reserve Act of 1913, came into being in 1914.
question
What are the main roles of the Federal Reserve ("Fed")?
answer
They study regional economies and provide check-clearing services to banks & other depository institutions, hold the reserve accounts of banks, lend reserves to banks, issue currency
question
What is the dual mandate?
answer
The Federal Reserve's two responsibilities to ensure price stability and to maintain full employment.
question
Who is the current chair of the Federal Reserve?
answer
Jerome Powell
question
How does the Fed typically raise the money supply? How does it typically lower the money supply?
answer
Raise the money supply by open market purchase.
Lower the money supply by open market sale.
Lower the money supply by open market sale.
question
What institutional feature makes banking panics more likely? How does deposit insurance help prevent banking panics?
answer
Fractional reserve banking makes banking panics more likely. The Federal deposit insurance helped stop bank runs b/c the fed will refund the amount had in deposits if your bank goes bankrupt.
question
What is velocity?
answer
The velocity of money is the average number of times a dollar is used annually to buy the goods and services of GDP.
question
What is the quantity equation?
answer
MV=PY
question
How are money growth and inflation related in the long-run?
answer
Assuming that the velocity of money and real output are relatively stable over the long-run, an increase in the money supply (M) will lead to a proportional increase in the price level (P). This means that if the money supply grows faster than the rate of growth in real output, then the result will be inflation.
question
What happened to prices when a tornado hit Scrooge McDuck's money bin? What economic theory predicts this?
answer
The scenario illustrates the basic principles of the Quantity Theory of Money and how changes in the money supply can affect the price level.
question
What are financial intermediaries?
answer
Privately owned firms that accept deposits and make loans like commercial banks, savings and loans, and credit unions.
question
How do banks help allocate saving to productive uses?
answer
1. Provides information to savers
2. Share risks of investment projects
2. Share risks of investment projects
question
What are the key terms that describe a bond?
answer
Principle amount: amount originally lent
Coupon rate: promised interest rate when a bond is first issued
Coupon payment: coupon rate x principle amount
Term to maturity: length of time before the debt is fully repaid
Credit Risk: risk that borrower will go bankrupt and can't repay
Tax treatment: interest paid on municipal bonds
Price: the market value of a particular bond at a point in time
Coupon rate: promised interest rate when a bond is first issued
Coupon payment: coupon rate x principle amount
Term to maturity: length of time before the debt is fully repaid
Credit Risk: risk that borrower will go bankrupt and can't repay
Tax treatment: interest paid on municipal bonds
Price: the market value of a particular bond at a point in time
question
Why does a fall in market interest rates raise current bond prices?
answer
When a bond is first issued, it has a coupon rate that remains constant over the life of the bond.
question
What does the financial press call the rate of return on bonds?
answer
bond yield
question
How is the yield on bonds different from the coupon rate?
answer
The main difference between the coupon rate and the yield on a bond is that the coupon rate is a fixed rate of interest that remains constant throughout the life of the bond, while the yield is the effective rate of return that changes as the price of the bond changes in response to market conditions
question
What is the equation relating bond prices and interest rates?
answer
Bond price x (1 + i) = Principal amount x (1 + coupon rate)
question
Why do most bonds have higher interest rates than U.S. government bonds?
answer
Most bonds have higher interest rates than U.S. government bonds because they are generally considered to be riskier investments.
question
How does a stock differ from a bond?
answer
Stocks compete with bonds when the public is allocating its portfolio. If bond yields increase, stock yields must also increase so stock price will increase.
question
What is the equation relating stock prices to interest rates?
answer
Stock price now x (1 + risk-free interest rate + risk premium) = Stock price tomorrow + dividend
question
What is the impact of an increase in expected profits and dividends on current stock prices?
answer
Stock prices are based on the expected future earnings and cash flows of the company, and higher expected profits and dividends can increase the present value of these future cash flows.
question
Explain how diversification can lower risk without lowering expected return.
answer
Diversification can help you reduce your risk without giving up much expected return. In general, you want to invest in a broad array of assets, some of whose returns move in opposite directions.
question
What was the U.S. unemployment rate in January?
answer
3.4%
question
Is the labor market currently tight or loose?
answer
Tight
question
What was the inflation rate over the past year?
answer
6% - 9%, right now is 6.4%
question
What is the general situation with government deficits and debt?
answer
The government has been running persistent deficits and accumulating significant levels of debt for many years.
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