question
Financial System
answer
Comprised of Financial markets and financial intermediaries
question
Financial markets
answer
financial institutions through which savers can directly provide funds to borrowers
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bond
answer
a form of loan; an IOU from the government
question
stock
answer
a claim to partial ownership in a firm
question
The four characteristics of bonds
answer
1) Term to Maturity - length of time until the bond matures
2) Credit risk - probability that the issuer of the bond is unable or unwilling to make interest payments or pay off the face value
3) Liquidity - the relative ease with which an asset can be converted into cash
4) Tax treatment - way the lax laws treat the interest earned on the bond
2) Credit risk - probability that the issuer of the bond is unable or unwilling to make interest payments or pay off the face value
3) Liquidity - the relative ease with which an asset can be converted into cash
4) Tax treatment - way the lax laws treat the interest earned on the bond
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equity finance
answer
sale of stock to raise money
question
price of shares on stock exchanges
answer
determined by the supply of and demand for the stock in these companies
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the demand for stock
answer
reflects people's perception of the corporation's future profitability
question
financial intermediaries
answer
institutions through which savers can indirectly provide funds to borrowers
question
primary role for banks
answer
1) take in deposits from savers (small interest rate)
2) use these deposits to make loans to borrowers (charge a higher interest rate)
3) banks earn profit from interest rate margin
2) use these deposits to make loans to borrowers (charge a higher interest rate)
3) banks earn profit from interest rate margin
question
mutual funds
answer
sell shares to the public and use the proceeds to buy portfolios of stocks and bonds
question
GDP (gross domestic product)
answer
Total income = total expenditure
Y = C + I + G + NX
Y = C + I + G + NX
question
GDP in a closed economy
answer
Y = C + I + G
NX = 0
NX = 0
question
National Savings
answer
comprised of private savings and public savings
= Y - C - G = I
Savings = Investment
= Y - C - G = I
Savings = Investment
question
Private savings
answer
S(private) = Y - C - T
Households
Y = factors of production
TR = Transfer payments
C = consumption
T = taxes
Households
Y = factors of production
TR = Transfer payments
C = consumption
T = taxes
question
Public savings
answer
s(public) = T - G
T = taxes
G = government purchases
TR = Transfer payments
T = taxes
G = government purchases
TR = Transfer payments
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balanced budget
answer
when the government spends the same amount that it collects in taxes
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budget surplus
answer
T-G>0
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budget deficit
answer
T-G<0
question
market for loanable funds
answer
the interaction of borrowers and lenders that determines the market interest rate and the quantity of loanable funds exchanged
question
unemployed
answer
people who are jobless, looking for a job in the past four weeks, and available for work
those who are not working and are waiting to be called back to a job from which they had been laid off
those who are not working and are waiting to be called back to a job from which they had been laid off
question
labor force
answer
employed + unemployed
question
not in the labor force
answer
people who are neither employed nor unemployed
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working age population
answer
the number of people aged 16 years and older who are not in jail, hospital, or some other institution
question
employed
answer
those who worked: part-time and temporary work, full-time work, self-employed
Temporarily absent: vacation, illness, on maternity or paternity leave, etc.
Unpaid family workers: any person who worked without pay for 15 hours or more per week in a business or farm operated by a family member with whom they live
Temporarily absent: vacation, illness, on maternity or paternity leave, etc.
Unpaid family workers: any person who worked without pay for 15 hours or more per week in a business or farm operated by a family member with whom they live
question
unemployment rate formula
answer
(number of unemployed/labor force) x 100
question
labor force participation rate
answer
(labor force/working age population) x 100
question
different types of unemployment
answer
Frictional Unemployment
Seasonal Unemployment
Structural Unemployment
Cyclical Unemployment
Seasonal Unemployment
Structural Unemployment
Cyclical Unemployment
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frictional unemployment
answer
unemployment that occurs when people take time to find a job
question
sectoral shifts
answer
changes in the composition of demand across industries or regions of the country
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unemployment insurance
answer
a government program that partially protects workers' incomes when they become unemployed
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seasonal unemployment
answer
unemployment that occurs as a result of harvest schedules or vacations, or when industries slow or shut down for a season
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structural unemployment
answer
a persistent match between job skills or attributes of workers and the skills/requirements for the jobs
question
minimum wage laws
answer
laws specifying the lowest wage a firm can legally pay an employee
question
labor union
answer
worker association, a type of cartel
bargains with employers over wages, benefits, working conditions
exert their market power to negotiate higher wages for workers
bargains with employers over wages, benefits, working conditions
exert their market power to negotiate higher wages for workers
question
efficiency wages
answer
firms voluntarily pay above-equilibrium wages to boost worker productivity
question
efficiency wage theory
answer
the theory that the productivity of workers, either individually or as a group, will increase if they are paid more
question
efficiency wage theory - Worker health
answer
in less developed countries, poor nutrition is a common problem. Paying higher wages allows workers to eat better, and as a result they are healthier and more productive
question
efficiency wage theory - worker turnover
answer
hiring and training new workers is costly
paying higher wages gives workers more incentive to stay
paying higher wages gives workers more incentive to stay
question
efficiency wage theory - worker quality
answer
offering higher wages attracts better job applicants, increases quality of the firms workforce
question
efficiency wage theory - worker effort
answer
workers can work hard or shirk. Shirkers are fired if caught
question
cyclical unemployment
answer
unemployment that rises during economic downturns and falls when the economy improves
question
natural rate of unemployment
answer
the normal rate of unemployment around which the unemployment rate fluctuates
question
barter economies
answer
economies where goods and services are traded directly for other goods and services
question
double coincidence of wants
answer
unlikely occurrence that two people each have a good the other wants
question
three functions of money
answer
medium of exchange, unit of account, store of value
question
What can serve as money?
answer
1. The good must be acceptable to most people.
3. It should be durable so that value is not lost by storage.
4. It should be valuable relative to its weight, so that it can easily be transported even in large quantities.
5. It should be divisible because different goods are valued differently.
3. It should be durable so that value is not lost by storage.
4. It should be valuable relative to its weight, so that it can easily be transported even in large quantities.
5. It should be divisible because different goods are valued differently.
question
commodity money
answer
money that takes the form of a commodity with intrinsic value
question
intrinsic value
answer
value independent of any use as money
question
fiat money
answer
money without intrinsic value that is used as money because of government decree
question
money stock
answer
the quantity of money circulating in the economy
question
M1 Money Stock
answer
currency, demand deposits, traveler's checks, and other checkable deposits
question
M2 Money Stock
answer
saving deposits and money market accounts (MMDAs)
small time deposits (time deposits in amounts of less than $100,000)
money market mutual funds
(everything in M1 plus savings deposits, small time deposits, and money market mutual funds)
small time deposits (time deposits in amounts of less than $100,000)
money market mutual funds
(everything in M1 plus savings deposits, small time deposits, and money market mutual funds)
question
Federal Reserve System
answer
The country's central banking system, which is responsible for the nation's monetary policy by regulating the supply of money and interest rates
question
central bank
answer
an institution designed to oversee the banking system and regulate the quantity of money in the economy
question
the federal reserve system consists of ___ board of governors
answer
seven
question
Chair of the Federal Reserve
answer
Jerome Powell
question
the federal reserver consists of __ reserve banks around the U.S
answer
12
question
Federal Open Market Committee (FOMC)
answer
the 12 member group that determines the purchase and sale policies of the Federal Reserve Banks in the market for U.S. government securities
made up of all 7 members of the board of governors and 5 of the 12 regional bank presidents
made up of all 7 members of the board of governors and 5 of the 12 regional bank presidents
question
the feds jobs
answer
- Regulate banks & ensure the health of the banking
system
• Monitors each bank's financial condition
• Facilitates bank transactions - clearing checks
• Acts as a bank's bank
- Control the money supply: quantity of money available
system
• Monitors each bank's financial condition
• Facilitates bank transactions - clearing checks
• Acts as a bank's bank
- Control the money supply: quantity of money available
question
reserves
answer
deposits that a bank keeps as cash in its vault or on deposit with the Federal Reserve
question
the reserve ratio, R
answer
fraction of deposits that banks hold as reserves, total reserves as a percentage of total deposits
the current ratio is set at 10%
the current ratio is set at 10%
question
excess resrves
answer
reserves that banks hold over the legal requirement
question
total reserves
answer
required reserves + excess reserves
question
T account
answer
a stripped down version of a bank balance sheet showing only how a transaction changes a bank's balance sheet
question
money multiplier
answer
the amount of money the banking system generates with each dollar of reserves
= 1/R (reserve ratio)
= 1/R (reserve ratio)
question
debt financing
answer
funds raised through various forms of borrowing that must be repaid
question
residual claimant
answer
a stockholder's right to receive whatever remains after all other claims against a firm's assets have been satisfied
question
Economics
answer
Social science that studies the actions of individuals
question
Goods
answer
Tangible merchandise, such as computers, books, or clothes
question
Services
answer
Services are activities done for others, such as providing haircuts, investment advice, etc.
question
Household
answer
consists of all persons occupying a home
question
Firm
answer
an organization that produces a good or service
question
Revenue
answer
the total amount received for selling a good or service
question
Profits
answer
Difference between a firms revenues and costs
question
Ten Principles of Economics
answer
1. People face trade-offs
2. The cost of something is what you give up to get it
3. Rational people think at the margin
4. People respond to incentives
5. Trade can make everyone better off
6. Markets are usually a good way to organize economic activity
7. Governments can sometimes improve market outcomes
8. A country's standard of living depends on its ability to produce goods and services
9. Prices rise when the government prints too much money
10. Society faces a short-run trade-off between inflation and unemployment
2. The cost of something is what you give up to get it
3. Rational people think at the margin
4. People respond to incentives
5. Trade can make everyone better off
6. Markets are usually a good way to organize economic activity
7. Governments can sometimes improve market outcomes
8. A country's standard of living depends on its ability to produce goods and services
9. Prices rise when the government prints too much money
10. Society faces a short-run trade-off between inflation and unemployment
question
Scarcity
answer
the limited nature of society's resources
question
economics
answer
the study of how society manages its scarce resources
question
equality
answer
the property of distributing economic prosperity uniformly among the members of society
question
Inflation
answer
Steady increase in the overall level of prices in the economy over time
question
Marginal Change
answer
a small incremental adjustment to a plan of action
question
incentive
answer
something that induces a person to act
question
market economy
answer
an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services
question
property right
answer
the ability of an individual to own and exercise control over scarce resources
question
market failure
answer
a situation in which a market left on its own fails to allocate resources efficiently
question
externality
answer
the impact of one person's actions on the well-being of a bystander
question
market power
answer
the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices
question
prodcutivity
answer
the quantity of goods and services produced from each unit of labor unit
question
perfectly competitive market
answer
A market that meets the conditions of (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market.
question
demand schedule
answer
a table that shows the relationship between the price of a good and the quantity demanded
question
model
answer
simple and abstract description of reality
question
market
answer
a group of buyers and sellers of a particular good or service
question
productions possibilities frontier
answer
a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology
question
Macroeconomics
answer
the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth
question
positive statements
answer
descriptive statements
question
normative statements
answer
prescriptive, make a claim about how the world ought to be
question
quantity demanded
answer
the amount of a good that buyers are willing and able to purchase
question
demand curve
answer
a graph of the relationship between the price of a good and the quantity demanded
question
law of demand
answer
consumers buy more of a good when its price decreases and less when its price increases
question
shifts in the demand curve
answer
Caused by
1) income
2)prices of related goods
3)tastes
4)expectations of future prices
5)expectations f future income
6)number of buyers
1) income
2)prices of related goods
3)tastes
4)expectations of future prices
5)expectations f future income
6)number of buyers
question
normal goods
answer
Goods for which demand goes up when income is higher and for which demand goes down when income is lower.
question
inferior goods
answer
goods for which the demand increases as income falls and decreases as income rises
question
Ceteris Paribus
answer
all else equal
question
substitutes
answer
Goods and services that can be used for the same purpose.
question
complements
answer
goods and services that are used together
question
Demographics
answer
the characteristics of a population with respect to age, race, and gender.
question
change in quantity demanded
answer
1) a movement along the demand curve
2) occurs when price changes
2) occurs when price changes
question
change in demand
answer
1) a shift in the demand curve
2) quantity demanded changes at each price
3) occurs when a non-price determinant of demand changes
2) quantity demanded changes at each price
3) occurs when a non-price determinant of demand changes
question
market supply
answer
The decisions of firms about how much of a product to provide at various prices
question
quantity supplied
answer
the amount of a good or service that a firm is willing and able to supply at a given price
question
supply schedule
answer
a table that shows the relationship between the price of a good and the quantity supplied
question
supply curve
answer
a curve that shows the relationship between the price of a good and the quantity of product supplied
question
law of supply
answer
a rule that states that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied
question
factors that shift the supply curve
answer
1) Prices of inputs
2) Technological change
3) Numbers of firms in the market
4) expected future prices
2) Technological change
3) Numbers of firms in the market
4) expected future prices
question
inputs
answer
things used in the production of a good or service
question
increase in input prices
answer
1) Makes the production less profitable at each output price
2) Firms supply smaller quantity at each price: shift to the left
2) Firms supply smaller quantity at each price: shift to the left
question
decrease in input prices
answer
1) increased the profitability of selling the good, causing an increase in supply
question
technological change
answer
a positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs
question
change in supply
answer
1) a shift in the supply curve
2) occurs when a non-price determinant of supply changes
2) occurs when a non-price determinant of supply changes
question
changes in quantity supplied
answer
1) a movement along a fixed supply curve
2) occurs when price changes
2) occurs when price changes
question
market equilibrium
answer
a situation in which quantity demanded equals quantity supplied
question
Three steps to analyzing changes in equilibrium
answer
1. Decide whether the event shifts the
supply curve, the demand curve, or, in
some cases, both curves
2. Decide whether the curve shifts to the
right or to the left
3. Use the supply-and-demand diagram
• Compare the initial and the new equilibrium
• Effects on equilibrium price and quantity
supply curve, the demand curve, or, in
some cases, both curves
2. Decide whether the curve shifts to the
right or to the left
3. Use the supply-and-demand diagram
• Compare the initial and the new equilibrium
• Effects on equilibrium price and quantity
question
GDP (Gross Domestic Product)
answer
the market value of all the final goods and services produced in a country during a given period of time (a year)
question
final goods
answer
intended for the end user
question
intermediate goods
answer
used as components or ingredients in the production of other goods
question
the components of GDP
answer
consumption, investment, government purchases, and net exports
question
consumption (C)
answer
spending by households on goods and services, not including spending on new houses (those are counted in investment)
1) Services, such as medical care, education, etc.
2) Nondurable goods, such as food clothing, etc.
3) Durable goods, such as automobiles
1) Services, such as medical care, education, etc.
2) Nondurable goods, such as food clothing, etc.
3) Durable goods, such as automobiles
question
investment (I)
answer
spending by firms on new factories, office buildings, and additions to inventories, plus spending by households and firms on new houses
1) business investment, new factories, office buildings
2) residential investment, new single family home
3) changes in business inventories
1) business investment, new factories, office buildings
2) residential investment, new single family home
3) changes in business inventories
question
Government Purchases(G)
answer
all spending on the goods and services purchased by the government
excludes transfer payments
includes wages of public school teachers, spending on highways, military bases, and national defense
excludes transfer payments
includes wages of public school teachers, spending on highways, military bases, and national defense
question
Net Exports (NX)
answer
exports - imports
Exports: foreign spending on the economy's goods and services
Imports: are the portions of C, I, and G that are spent on goods and services produced abroad
Exports: foreign spending on the economy's goods and services
Imports: are the portions of C, I, and G that are spent on goods and services produced abroad
question
Nominal GDP
answer
values output using current prices, not corrected for inflation
question
Real GDP
answer
values output using the prices of a base year
is corrected for inflation
is corrected for inflation
question
GDP deflator equation
answer
100 x (nominal GDP/real GDP)
question
GDP deflator
answer
a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100; measures the current level of prices relative to the level of prices in the base year
question
Economy's inflation rate
answer
compute the percentage increase in the GDP deflator from one year to the next
Inflation Rate Year 2 =
(GDP deflator in year 2 - GDP deflator in year 1)/GDP deflator in year 1
Inflation Rate Year 2 =
(GDP deflator in year 2 - GDP deflator in year 1)/GDP deflator in year 1
question
GDP does not value
answer
1. the quality of the environment
2. leisure time
3. non-market activity, such as the child care a parent
provides his or her child at home
4. an equitable distribution of income
2. leisure time
3. non-market activity, such as the child care a parent
provides his or her child at home
4. an equitable distribution of income
question
GDP per capita equation
answer
GDP/population
Main indicator of the average persons standard of living are tied to this
Main indicator of the average persons standard of living are tied to this
question
GPI (Genuine Progress Indicator)
answer
attempt to measure whether a country's growth in production of goods/services actually increases the well-being of the population
question
Consumer Price Index (CPI)
answer
a measure of the overall cost of the goods and services bought by a typical consumer
question
How CPI is calculated
answer
1. Fix the basket
2. Find the prices
3. Compute the basket's cost
4. Choose a base year and compute the index
5. Compute the inflation rate
2. Find the prices
3. Compute the basket's cost
4. Choose a base year and compute the index
5. Compute the inflation rate
question
CPI formula
answer
100 x (cost of basket in current year/cost of basket in base year)
question
Inflation Rate Formula
answer
((Current year CPI ) - (Earlier Year CPI) )/ ((Earlier Year CPI)) x100
question
Current CPI
answer
CPI in base year is always 100
question
Why CPI might get it wrong
answer
quality bias, substitution bias, new product bias
question
Inflation Rate Formula GDP Deflator
answer
(GDP deflator this year - GDP deflator last year)/GDP deflator last year * 100
question
Inflation Rate Formula CPI
answer
(CPI this year - CPI last year)/CPI last year * 100
question
imported consumer goods
answer
included in CPI, excluded from GDP deflator
question
Capital goods
answer
excluded from CPI, included in GDP deflator (if produced domestically)
question
The basket
answer
CPI uses fixed basket, GDP deflator uses basket of currently produced goods and services
question
Comparing dollar figures from different times
answer
amount in today's dollars = amount in year T dollars x (price level today/price level in year T)
question
Indexation
answer
a dollar amount is indexed for inflation if it is automatically corrected for inflation by law or in a contract
question
nominal interest rate
answer
the stated interest rate on a loan
question
real interest rate
answer
nominal interest rate - inflation rate
question
Hyperinflation
answer
When inflation hits triple digits; >100% in one year
question
Deflation
answer
A situation in which prices are declining
question
Productivity
answer
(Y/L) where Y = real GDP and L= quantity of labor
question
How Productivity is Determined
answer
Physical Capital per worker
Human Capital per worker
Natural Resources
Technological Knowledge
Human Capital per worker
Natural Resources
Technological Knowledge
question
physical capital per worker
answer
(K/L) where K is physical capital and L is quantity of labor
question
Technical Knowledge
answer
society's understanding of the best ways to produce goods and services
question
human capital
answer
H/L
question
Production Function Equation
answer
Y = A x F (L, K, H, N) where "A" is the level of technology
question
production function
answer
the relationship between quantity of inputs used to make a good and the quantity of output of that good
question
diminishing returns to physical capital
answer
holding the amount of human capital per worker and the state of technology fixed, each successive increase in the amount of physical capital per worker leads to a smaller increase in productivity
question
The catch-up effect
answer
the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
question
Rule of Law
answer
the ability of a government to enforce the laws of the country, particularly with respect to protecting private property and enforcing contracts
question
property rights
answer
the rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it
question
Economists point to four key factors in explaining why many low-income countries are growing so slowly:
answer
Barrier 1: Failure to enforce the rule of laws
Barrier 2: Wars and revolutions
Barrier 3: Poor public education and health
Barrier 4: Low rates of saving and investment
Barrier 2: Wars and revolutions
Barrier 3: Poor public education and health
Barrier 4: Low rates of saving and investment
question
Foreign Direct Investment (FDI)
answer
a capital investment that is owned and operated by a foreign entity
question
foreign portfolio investment
answer
the entry of funds into a country where foreigners deposit money in a country's bank or make purchases in the country's stock and bond markets, sometimes for speculation.
question
Inward-oriented policies
answer
aim to raise living standards by avoiding interaction with other countries
question
Outward-oriented policies
answer
promote integration with the world economy
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