Midterm 2 Guo - Assignment Essays

question

because of differences in growth rates...

answer

Ranking of countries by income changes substantially over time

question

productivity (Y/L)

answer

A country's living standard depends on ability to produce goods and services

question

growth in productivity

answer

is key determinant in growth of living standards

question

how is productivity determined?

answer

physical capital per worker, human capital per worker, natural resources per worker, technological knowledge

question

technological knowledge

answer

Refers to society's understanding of how to produce goods and services

question

human capital

answer

results from the effort people expend to acquire this knowledge

question

Production function

answer

Y = A x F(L, K, H, N)

question

production function doubled

answer

2Y= A x F (2L, 2K, 2H, 2 N)

question

a society's standard oft living depends on

answer

its ability to produce goods and services

question

Raise future productivity

answer

Encourage saving and investment, Invest more current resources in the production of capital, K

question

trade-off

answer

sacrifice current consumption to increase future consumption

question

reducing consumption is

answer

increasing savings

question

diminishing returns

answer

policies that raise saving and investment

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

investment from abroad

answer

Another way for a country to invest in new capital

question

foreign direct investment

answer

a capital investment that is owned and operated by a foreign entity

question

foreign portfolio investment

answer

Investment financed with foreign money but operated by domestic residents

question

education is

answer

investment in human capital

question

brain drain

answer

problem for poor countries

question

health care expenditure

answer

Is a type of investment in human capital: healthier workers are more productive

question

in countries with significant malnourishment

answer

raising workers' caloric intake raises productivity

question

vicious circle

answer

-poor countries are poor because their populations are not healthy
-populations are not healthy because they are poor and cannot afford better healthcare and nutrition

question

virtuous circle

answer

Policies that lead to more rapid economic growth would naturally improve health outcomes, which in turn would further promote economic growth.

question

to foster economic growth

answer

protect property rights and promote political stability

question

lack of property rights

answer

major problem

question

political instability

answer

Creates uncertainty over whether property rights will be protected in the future

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

question

trade has similar effects as discovering new technologies:

answer

improves productivity and living standards

question

countries with inward oriented policies

answer

have generally failed to create growth

question

countries with outward oriented polices

answer

have generally succeeded

question

technological progress

answer

main reason why living standards rise over the long run

question

Policies to promote technological progress

answer

-patent laws
-tax incentives or direct support for private sector R&D
-grants for basic research at universities

question

large population

answer

More workers to produce goods and services
Larger total output of goods and services
More consumers

question

how population affects living standards

answer

stretching natural resources
diluting capital stock
promoting technological progress

question

financial system

answer

the group of institutions in the economy that help to match one person's saving with another person's investment

question

financial institutions

answer

institutions where which savers can directly provide funds to borrowers

question

financial markets

answer

Financial institutions through which savers can directly provide funds to borrowers

question

the bond market

answer

a bond is a certificate of indebtedness

question

the stock market

answer

A stock is a claim to partial ownership in a firm

question

bond is an IOU that specifies

answer

principal, date of maturity, rate of interest

question

debt finance

answer

sale of bonds to raise money

question

term

answer

the length of time until the bond matures (longer=riskier)

question

perpetuity

answer

never matures

question

credit risk

answer

probability of borrower default (higher probability=higher interest)

question

junk bonds

answer

pay high interest rates

question

tax treatment

answer

the way the tax laws treat the interest earned on the bond. Most bonds are taxable

question

Municipal bonds

answer

no tax, lower interest rates

question

nominal terms

answer

specific number of dollars

question

indexed to a measure of inflation

answer

when prices rise, the payments rise proportionately (lower interest rates)

question

share of stock

answer

ownership in firm (greater risk=greater return)

question

equity finance

answer

sale of stock to raise money

question

stock exchange

answer

trading stock shares among shareholders

question

prices of shares on stock exchanges

answer

Determined by the supply of and demand for the stock in these companies.

question

demand of stock

answer

reflects people's perception of the corporation's future profitability

question

stock index

answer

average index of stock prices

question

financial intermediaries

answer

firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers

question

primary role for banks

answer

Take in deposits from savers (small interest rate)
Use these deposits to make loans to borrowers (charge a higher interest rate)

question

secondary role for banks

answer

facilities purchases of goods and services

question

mutual funds

answer

Sell shares to the public and use the proceeds to buy portfolios of stocks and bonds

question

total income = total expenditure

answer

Y = C + I + G + NX

Y = gross domestic product, GDP•
C = consumption•
I = investment
•G = government purchases•
NX = net exports

question

closed economy

answer

I = Y - C - G

question

national saving

answer

S = Y - C - G

question

taxes minus transfer payments

answer

S = (Y - T - C) + (T - G)

question

private saving

answer

y - T - C

question

public saving

answer

T - G

question

national saving (NS)

answer

private saving + public saving

question

budget surplus

answer

T-G > 0

question

budget deficit

answer

T-G < 0

question

private saving

answer

Income remaining after households pay their taxes and pay for consumption.

question

investment

answer

purchase of new capital, not stocks and bonds
source and supply for loanable funds

question

loanable funds market

answer

A supply-demand model of the financial system

question

saving

answer

the source of the supply of loanable funds

question

If interest rate < equilibrium

answer

QS < QD, so shortage of loanable funds

question

If interest rate > equilibrium

answer

-Surplus of loanable funds
-Decrease interest rate

question

barter

answer

exchange one good/service for another

question

double coincidence of wants

answer

unlikely occurrence that two people each have a good the other wants

question

waste of resources

answer

people spend time searching for others to trade with

question

money

answer

the set of assets in an economy that people regularly use to buy goods and services from other people

question

functions of money

answer

1. medium of exchange
2. unit of account
3. store of value

question

Transfer purchasing power from the present to the future

answer

hold money or non-monetary assets

question

wealth

answer

The total of all stores of value, including both money and nonmonetary assets

question

Liquidity

answer

The ease with which an asset can be converted into the economy's medium of exchange

question

Commmodity money

answer

Money that takes the form of a commodity with intrinsic value

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

currency

answer

the paper bills and coins in the hands of the public

question

demand deposits

answer

Balances in bank accounts that depositors can access on demand by writing a check

question

fed

answer

the central bank of the US

question

central bank

answer

an institution designed to oversee the banking system and regulate the quantity of money in the economy

question

federal reserve system consists of

answer

board of governors,
12 regional fed banks,
federal open market committee

question

jobs of fed

answer

Regulate banks and ensure the health of the banking system
Monetary policy by FOMC

question

FOMC

answer

The Federal Open Market Committee is the most powerful committee of the FED, because it makes the decisions that affect the economy as a whole by manipulating the money supply.

question

Fractional reserve banking system:

answer

banks keep a fraction of deposits as reserves and use the rest to make loans

question

the fed establishes reserve requirements

answer

Regulations on the minimum amount of reserves that banks must hold against deposits.

question

reserve ratio, R

answer

=fraction of deposits that banks hold as reserves
=total reserves as a percentage of total deposits

question

t-account

answer

a simplified accounting statement that shows a bank's assets and liabilities

question

money multiplier (1/R)

answer

Amount of money the banking system generates with each dollar of reserves
Is the reciprocal of the reserve ratio

question

the higher the reserve ratio

answer

The smaller the money multiplier because the less of each deposit banks loan out

question

assets

answer

reserves, loans, and securities

question

liabilities

answer

deposits, debt, and equity

question

bank capital

answer

The resources a bank obtains by issuing equity to its owners
Equals bank assets minus bank liabilities

question

leverage

answer

the use of borrowed money to supplement existing funds for purposes of investment

question

capital requirement

answer

-A government regulation that specifies a minimum amount of capital,
-Intended to ensure banks will be able to pay off depositors and debts

question

credit crunch

answer

the shortage of capital induced the banks to reduce lending

question

fractional reserve banking

answer

-Banks create money
-The Fed's control of the money supply is indirect

question

money supply

answer

money multiplier × bank reserves

question

The Fed can change the money supply by

answer

-Changing quantity of reserves
-Changing the reserve ration and money multiplier

question

open market operations

answer

the purchase and sale of U.S. government bonds by the Fed

question

to increase bank reserves and money supply

answer

the fed buys gov bond from bank

question

reserve requriements

answer

amount of funds banks must hold in reserve

question

fed doesn't control

answer

-The amount of money that households choose to hold as deposits in banks
-The amount that bankers choose to lend

question

federal funds rate

answer

the interest rate at which banks make overnight loans to one another

question

decisions by FOMC

answer

To change the target for the federal funds rate are also decisions to change the money supply

question

decrease in target for federal funds rate means

answer

expansion in money supply

1 of 115

question

because of differences in growth rates...

answer

Ranking of countries by income changes substantially over time

question

productivity (Y/L)

answer

A country's living standard depends on ability to produce goods and services

question

growth in productivity

answer

is key determinant in growth of living standards

question

how is productivity determined?

answer

physical capital per worker, human capital per worker, natural resources per worker, technological knowledge

question

technological knowledge

answer

Refers to society's understanding of how to produce goods and services

question

human capital

answer

results from the effort people expend to acquire this knowledge

question

Production function

answer

Y = A x F(L, K, H, N)

question

production function doubled

answer

2Y= A x F (2L, 2K, 2H, 2 N)

question

a society's standard oft living depends on

answer

its ability to produce goods and services

question

Raise future productivity

answer

Encourage saving and investment, Invest more current resources in the production of capital, K

question

trade-off

answer

sacrifice current consumption to increase future consumption

question

reducing consumption is

answer

increasing savings

question

diminishing returns

answer

policies that raise saving and investment

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

investment from abroad

answer

Another way for a country to invest in new capital

question

foreign direct investment

answer

a capital investment that is owned and operated by a foreign entity

question

foreign portfolio investment

answer

Investment financed with foreign money but operated by domestic residents

question

education is

answer

investment in human capital

question

brain drain

answer

problem for poor countries

question

health care expenditure

answer

Is a type of investment in human capital: healthier workers are more productive

question

in countries with significant malnourishment

answer

raising workers' caloric intake raises productivity

question

vicious circle

answer

-poor countries are poor because their populations are not healthy
-populations are not healthy because they are poor and cannot afford better healthcare and nutrition

question

virtuous circle

answer

Policies that lead to more rapid economic growth would naturally improve health outcomes, which in turn would further promote economic growth.

question

to foster economic growth

answer

protect property rights and promote political stability

question

lack of property rights

answer

major problem

question

political instability

answer

Creates uncertainty over whether property rights will be protected in the future

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

question

trade has similar effects as discovering new technologies:

answer

improves productivity and living standards

question

countries with inward oriented policies

answer

have generally failed to create growth

question

countries with outward oriented polices

answer

have generally succeeded

question

technological progress

answer

main reason why living standards rise over the long run

question

Policies to promote technological progress

answer

-patent laws
-tax incentives or direct support for private sector R&D
-grants for basic research at universities

question

large population

answer

More workers to produce goods and services
Larger total output of goods and services
More consumers

question

how population affects living standards

answer

stretching natural resources
diluting capital stock
promoting technological progress

question

financial system

answer

the group of institutions in the economy that help to match one person's saving with another person's investment

question

financial institutions

answer

institutions where which savers can directly provide funds to borrowers

question

financial markets

answer

Financial institutions through which savers can directly provide funds to borrowers

question

the bond market

answer

a bond is a certificate of indebtedness

question

the stock market

answer

A stock is a claim to partial ownership in a firm

question

bond is an IOU that specifies

answer

principal, date of maturity, rate of interest

question

debt finance

answer

sale of bonds to raise money

question

term

answer

the length of time until the bond matures (longer=riskier)

question

perpetuity

answer

never matures

question

credit risk

answer

probability of borrower default (higher probability=higher interest)

question

junk bonds

answer

pay high interest rates

question

tax treatment

answer

the way the tax laws treat the interest earned on the bond. Most bonds are taxable

question

Municipal bonds

answer

no tax, lower interest rates

question

nominal terms

answer

specific number of dollars

question

indexed to a measure of inflation

answer

when prices rise, the payments rise proportionately (lower interest rates)

question

share of stock

answer

ownership in firm (greater risk=greater return)

question

equity finance

answer

sale of stock to raise money

question

stock exchange

answer

trading stock shares among shareholders

question

prices of shares on stock exchanges

answer

Determined by the supply of and demand for the stock in these companies.

question

demand of stock

answer

reflects people's perception of the corporation's future profitability

question

stock index

answer

average index of stock prices

question

financial intermediaries

answer

firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers

question

primary role for banks

answer

Take in deposits from savers (small interest rate)
Use these deposits to make loans to borrowers (charge a higher interest rate)

question

secondary role for banks

answer

facilities purchases of goods and services

question

mutual funds

answer

Sell shares to the public and use the proceeds to buy portfolios of stocks and bonds

question

total income = total expenditure

answer

Y = C + I + G + NX

Y = gross domestic product, GDP•
C = consumption•
I = investment
•G = government purchases•
NX = net exports

question

closed economy

answer

I = Y - C - G

question

national saving

answer

S = Y - C - G

question

taxes minus transfer payments

answer

S = (Y - T - C) + (T - G)

question

private saving

answer

y - T - C

question

public saving

answer

T - G

question

national saving (NS)

answer

private saving + public saving

question

budget surplus

answer

T-G > 0

question

budget deficit

answer

T-G < 0

question

private saving

answer

Income remaining after households pay their taxes and pay for consumption.

question

investment

answer

purchase of new capital, not stocks and bonds
source and supply for loanable funds

question

loanable funds market

answer

A supply-demand model of the financial system

question

saving

answer

the source of the supply of loanable funds

question

If interest rate < equilibrium

answer

QS < QD, so shortage of loanable funds

question

If interest rate > equilibrium

answer

-Surplus of loanable funds
-Decrease interest rate

question

barter

answer

exchange one good/service for another

question

double coincidence of wants

answer

unlikely occurrence that two people each have a good the other wants

question

waste of resources

answer

people spend time searching for others to trade with

question

money

answer

the set of assets in an economy that people regularly use to buy goods and services from other people

question

functions of money

answer

1. medium of exchange
2. unit of account
3. store of value

question

Transfer purchasing power from the present to the future

answer

hold money or non-monetary assets

question

wealth

answer

The total of all stores of value, including both money and nonmonetary assets

question

Liquidity

answer

The ease with which an asset can be converted into the economy's medium of exchange

question

Commmodity money

answer

Money that takes the form of a commodity with intrinsic value

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

currency

answer

the paper bills and coins in the hands of the public

question

demand deposits

answer

Balances in bank accounts that depositors can access on demand by writing a check

question

fed

answer

the central bank of the US

question

central bank

answer

an institution designed to oversee the banking system and regulate the quantity of money in the economy

question

federal reserve system consists of

answer

board of governors,
12 regional fed banks,
federal open market committee

question

jobs of fed

answer

Regulate banks and ensure the health of the banking system
Monetary policy by FOMC

question

FOMC

answer

The Federal Open Market Committee is the most powerful committee of the FED, because it makes the decisions that affect the economy as a whole by manipulating the money supply.

question

Fractional reserve banking system:

answer

banks keep a fraction of deposits as reserves and use the rest to make loans

question

the fed establishes reserve requirements

answer

Regulations on the minimum amount of reserves that banks must hold against deposits.

question

reserve ratio, R

answer

=fraction of deposits that banks hold as reserves
=total reserves as a percentage of total deposits

question

t-account

answer

a simplified accounting statement that shows a bank's assets and liabilities

question

money multiplier (1/R)

answer

Amount of money the banking system generates with each dollar of reserves
Is the reciprocal of the reserve ratio

question

the higher the reserve ratio

answer

The smaller the money multiplier because the less of each deposit banks loan out

question

assets

answer

reserves, loans, and securities

question

liabilities

answer

deposits, debt, and equity

question

bank capital

answer

The resources a bank obtains by issuing equity to its owners
Equals bank assets minus bank liabilities

question

leverage

answer

the use of borrowed money to supplement existing funds for purposes of investment

question

capital requirement

answer

-A government regulation that specifies a minimum amount of capital,
-Intended to ensure banks will be able to pay off depositors and debts

question

credit crunch

answer

the shortage of capital induced the banks to reduce lending

question

fractional reserve banking

answer

-Banks create money
-The Fed's control of the money supply is indirect

question

money supply

answer

money multiplier × bank reserves

question

The Fed can change the money supply by

answer

-Changing quantity of reserves
-Changing the reserve ration and money multiplier

question

open market operations

answer

the purchase and sale of U.S. government bonds by the Fed

question

to increase bank reserves and money supply

answer

the fed buys gov bond from bank

question

reserve requriements

answer

amount of funds banks must hold in reserve

question

fed doesn't control

answer

-The amount of money that households choose to hold as deposits in banks
-The amount that bankers choose to lend

question

federal funds rate

answer

the interest rate at which banks make overnight loans to one another

question

decisions by FOMC

answer

To change the target for the federal funds rate are also decisions to change the money supply

question

decrease in target for federal funds rate means

answer

expansion in money supply

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