UCI ECON 20B Final - Assignment Essays

question

Financial System

answer

The group of institutions in the economy that help match savings with investments.

question

Bond Market

answer

Debt finance

question

Stock Market

answer

Equity finance

question

Bond

answer

Formal IOU; certificate of indebtedness.

question

Stock

answer

Represent ownership in a firm and hence a claim to the profits of the firm.

question

Market for loanable funds

answer

The market in which those who want to save supply funds and those who want to borrow to invest demand funds.

question

Loanable funds

answer

All income that people have chosen to save and lend out, rather than use for their own consumption, and to the amount that investors have chosen to borrow to fund their new investment projects.

question

Real interest rate

answer

(nominal interest rate) - (inflation rate)

question

Inflation rate

answer

{(CPI now - CPI old) / CPI old} X 100

question

cyclical unemployment

answer

deviation of unemployment from its natural rate

question

Natural Rate of unemployment

answer

The time it takes for one person to find a job.

question

actual unemployment

answer

natural unemployment + cyclical unemployment

question

frictional unemployment

answer

Short-term unemployment that occurs when people take time to find a job

question

structural unemployment

answer

unemployment caused by a fundamental change in the economy that reduces the demand for some workers

question

Sprivate =

answer

(Y + TR - C - T) or (Y - C - TNT)

question

Spublic

answer

(T-G-TR) or (TNT -G)

question

Employed

answer

Worked during the week before survey as:
- paid employee
- owner of business
- worked w/o pay at a family enterprise (15 hours/week).

question

Unemployed

answer

Not working, but available to work and actively seeking work.

question

Unemployment rate

answer

(Unemployed/labor force) X 100

question

Labor Force Participation Rate (LBPR)

answer

(Labor force/adult population) X 100

question

Labor force

answer

employed + unemployed

question

Sectoral shifts

answer

Change in the composition of demand among industries (frictional unemployment).

question

Money

answer

Any asset that people are generally willing to accept in exchange for goods and services.

question

Asset

answer

Anything of value owned by a person or firm.

question

Wealth

answer

All stores of value, including both money and non-monetary assets.

question

double coincidence of wants

answer

Is required when there is no item in an economy that is widely accepted in exchange for goods and services. Also relies on barter economics and is a hindrance to the allocation of resources when it is required for trade.

question

Commodity money

answer

A good used as money but also has intrinsic value.

question

FIAT money

answer

Money w/o intrinsic value; established by government decree/order

question

Functions of money

answer

1. Medium of exchange
2. Unit of account
3. Store of value

question

Medium of exchange

answer

An economy is more efficient when a single good is recognized as a medium of exchange

question

Unit of account

answer

A yardstick for posting prices & recording debts

question

Store of value

answer

Can be used in the future

question

answer

Currency, demand deposits, traveler's checks, and other checkable deposits.

question

answer

Consists of everything in M1 PLUS saving deposits.

question

Liquidity

answer

The ease with which a given asset can be converted into the medium of exchange.

question

Central Bank

answer

An institution that oversees the banking system and regulated the money supply

question

Monetary policy

answer

The setting of the money supply by policy makers in the central bank

question

Federal Reserve (FED)

answer

The central bank of the U.S.

question

The FED

answer

Monitors the regional banks' financial condition and also acts as a banks' bank.
(Serves as a lender as a last resort)

question

Fractional-Reserve-Banking

answer

Banks are required to hold a fraction of deposit as a reserve

question

Reserve

answer

Deposit banks have received but have not loaned out

question

Reserve ratio

answer

The minimum fraction that banks require to hold as a reserve

question

Excess reserves

answer

Reserves banks hold above the minimum reserve ratio

question

Open-Market Operations (OMOs)

answer

The purchase and sale of U.S. government bonds to the FED

question

Money supply =

answer

Deposit + Cash

question

Money Supply (formula)

answer

Money base X (1/1 - reverse ratio)

question

To increase money supply w OMOs

answer

FED buys government bonds w/ new dollars which are deposited in banks increasing reserves, which banks use to make loans, causing the money supply to expand

question

To reduce money supply w OMOs

answer

FED sells government bonds, taking dollars out of circulation, which decreases the amount in reserves, which decreases the amount which can be loaned out, thereby reducing the money supply.

question

Reserve requirements (RRs)

answer

Affect how much money banks can create by making loans

question

To increase money supply w RRs

answer

FED reduces RR. Banks make more loans from each dollar of reserves, which increases money multiplier and money supply.

question

To reduce money supply w RRs

answer

FED raises RRs. Banks make less loans from each dollar of reserves, which decreases money multiplier and money supply

question

Discount Rate (DRs)

answer

The interest rate on loans the FED makes to banks

question

To increase money supply using DRs

answer

FED lowers DR, which encourages banks to borrow more reserves from FED. Banks can then make more loans, which increases money supply.

question

To reduce the money supply using DRs

answer

FED can raise the discount rate, which discourages banks to borrow more reserves from FED, meaning banks make less loans, reducing the money supply.

question

Problems w controlling the money supply

answer

- Households holding more of their money as currency = creating less money
- Banks holding more reserves than required = creating less money

question

Problems w money

answer

Not a perfect store of value bc the value changes due to inflation

question

Run on Banks

answer

When people suspect their banks are in trouble, they may "run" to the bank to withdraw their funds, holding more currency and less deposits. Under fractional reserve banking, banks don't have enough reserves to pay off ALL depositors, hence banks may have to close. Banks may also make fewer loans and hold more reserves to satisfy depositors.
These events reverse the process of money creation, cause money supply to fall.

question

federal funds rate

answer

interest rate banks charge each other for loans

question

Inflation definition

answer

An increase in the level of prices

question

When the price level (P) rises

answer

The value of money (1/P) falls

question

Quantity Theory of Money

answer

Determines the value of money and is also the main cause of inflation

question

Real

answer

Measured in physical units

question

Nominal

answer

Measured in monetary units

question

Examples of "Real"

answer

- Real GDP
- Real wage
- Real interest rate

question

Examples of "Nominal"

answer

- Nominal GDP
- Nominal wage
- Nominal interest rate

question

Relative prices

answer

Real variable

question

Money neutrality

answer

The proposition that changes in money do not affect real variables

question

Quantity equation:

answer

M x V = P x Y

question

answer

Quantity of money

question

answer

Velocity (Rate at which money changes hands)

question

P x Y

answer

Nominal GDP

question

M ^ => P^

answer

Shows money supply controls price level

question

Fisher Effect

answer

The nominal rate adjusts one-for-one with changes in the inflation rate

question

When the FED increases the rate of money growth, the long run result is

answer

Both a higher inflation rate and a higher nominal interest rate

question

Shoeleather

answer

People don't want to have money in their wallets bc it loses value. People would have to go to the bank more often, which uses more resources.

question

Tax-Distortion due to inflation

answer

Inflation lowers the after-tax real interest rate

question

Open

answer

Interaction between international markets

question

NX < 0

answer

Trade Deficit

question

NX > 0

answer

Trade Surplus

question

NX = 0

answer

Balanced Trade

question

Net Capital outflow

answer

(Domestic purchase of foreign asset) - (foreign purchase of domestic asset)

question

NCO > 0

answer

Capital outflow

question

NCO < 0

answer

Capital inflow

question

NX = NCO

answer

Ex.
- You export a toy to Japan.
- You receive Yen.
- You invest Yen.
- You receive money.

question

Nominal exchange rate

answer

Rate the currencies are traded at.
Ex. 10 pesos/1 dollar

question

Appreciation

answer

Value of currency goes up

question

Depreciation

answer

Value of currency goes down

question

Real exchange rate

answer

Tells you purchasing power
- e X (P/P*)

question

answer

nominal exchange rate

question

P (in formula)

answer

Foreign (p x e)

question

answer

Domestic (p x e)

question

Foreign Domestic Investment (FDI)

answer

Ex. An American firm opens a factory in Mexico

question

Foreign Portfolio Investment (FPI)

answer

Ex. An American buys a stock in a Mexican cement company

question

In an open economy

answer

S = I + NX
S = I + NCO

question

S>I

answer

NCO > 0 (Trade Surplus)

question

S<I

answer

NCO < 0 (Trade deficit)

question

Real exchange rate (RER)

answer

e x (P/P*)

question

Nominal exchange rate

answer

The rate at which one country's currency trades for another
(Foreign currency/domestic currency)

question

Purchasing Power Parity (PPP)

answer

PPP = e = (P*/P)

question

Fisher Effect

answer

R Nominal = R Real + R Inflation

1 of 100

question

Financial System

answer

The group of institutions in the economy that help match savings with investments.

question

Bond Market

answer

Debt finance

question

Stock Market

answer

Equity finance

question

Bond

answer

Formal IOU; certificate of indebtedness.

question

Stock

answer

Represent ownership in a firm and hence a claim to the profits of the firm.

question

Market for loanable funds

answer

The market in which those who want to save supply funds and those who want to borrow to invest demand funds.

question

Loanable funds

answer

All income that people have chosen to save and lend out, rather than use for their own consumption, and to the amount that investors have chosen to borrow to fund their new investment projects.

question

Real interest rate

answer

(nominal interest rate) - (inflation rate)

question

Inflation rate

answer

{(CPI now - CPI old) / CPI old} X 100

question

cyclical unemployment

answer

deviation of unemployment from its natural rate

question

Natural Rate of unemployment

answer

The time it takes for one person to find a job.

question

actual unemployment

answer

natural unemployment + cyclical unemployment

question

frictional unemployment

answer

Short-term unemployment that occurs when people take time to find a job

question

structural unemployment

answer

unemployment caused by a fundamental change in the economy that reduces the demand for some workers

question

Sprivate =

answer

(Y + TR - C - T) or (Y - C - TNT)

question

Spublic

answer

(T-G-TR) or (TNT -G)

question

Employed

answer

Worked during the week before survey as:
- paid employee
- owner of business
- worked w/o pay at a family enterprise (15 hours/week).

question

Unemployed

answer

Not working, but available to work and actively seeking work.

question

Unemployment rate

answer

(Unemployed/labor force) X 100

question

Labor Force Participation Rate (LBPR)

answer

(Labor force/adult population) X 100

question

Labor force

answer

employed + unemployed

question

Sectoral shifts

answer

Change in the composition of demand among industries (frictional unemployment).

question

Money

answer

Any asset that people are generally willing to accept in exchange for goods and services.

question

Asset

answer

Anything of value owned by a person or firm.

question

Wealth

answer

All stores of value, including both money and non-monetary assets.

question

double coincidence of wants

answer

question

Commodity money

answer

A good used as money but also has intrinsic value.

question

FIAT money

answer

Money w/o intrinsic value; established by government decree/order

question

Functions of money

answer

1. Medium of exchange
2. Unit of account
3. Store of value

question

Medium of exchange

answer

An economy is more efficient when a single good is recognized as a medium of exchange

question

Unit of account

answer

A yardstick for posting prices & recording debts

question

Store of value

answer

Can be used in the future

question

answer

Currency, demand deposits, traveler's checks, and other checkable deposits.

question

answer

Consists of everything in M1 PLUS saving deposits.

question

Liquidity

answer

The ease with which a given asset can be converted into the medium of exchange.

question

Central Bank

answer

An institution that oversees the banking system and regulated the money supply

question

Monetary policy

answer

The setting of the money supply by policy makers in the central bank

question

Federal Reserve (FED)

answer

The central bank of the U.S.

question

The FED

answer

Monitors the regional banks' financial condition and also acts as a banks' bank.
(Serves as a lender as a last resort)

question

Fractional-Reserve-Banking

answer

Banks are required to hold a fraction of deposit as a reserve

question

Reserve

answer

Deposit banks have received but have not loaned out

question

Reserve ratio

answer

The minimum fraction that banks require to hold as a reserve

question

Excess reserves

answer

Reserves banks hold above the minimum reserve ratio

question

Open-Market Operations (OMOs)

answer

The purchase and sale of U.S. government bonds to the FED

question

Money supply =

answer

Deposit + Cash

question

Money Supply (formula)

answer

Money base X (1/1 - reverse ratio)

question

To increase money supply w OMOs

answer

FED buys government bonds w/ new dollars which are deposited in banks increasing reserves, which banks use to make loans, causing the money supply to expand

question

To reduce money supply w OMOs

answer

FED sells government bonds, taking dollars out of circulation, which decreases the amount in reserves, which decreases the amount which can be loaned out, thereby reducing the money supply.

question

Reserve requirements (RRs)

answer

Affect how much money banks can create by making loans

question

To increase money supply w RRs

answer

FED reduces RR. Banks make more loans from each dollar of reserves, which increases money multiplier and money supply.

question

To reduce money supply w RRs

answer

FED raises RRs. Banks make less loans from each dollar of reserves, which decreases money multiplier and money supply

question

Discount Rate (DRs)

answer

The interest rate on loans the FED makes to banks

question

To increase money supply using DRs

answer

FED lowers DR, which encourages banks to borrow more reserves from FED. Banks can then make more loans, which increases money supply.

question

To reduce the money supply using DRs

answer

FED can raise the discount rate, which discourages banks to borrow more reserves from FED, meaning banks make less loans, reducing the money supply.

question

Problems w controlling the money supply

answer

- Households holding more of their money as currency = creating less money
- Banks holding more reserves than required = creating less money

question

Problems w money

answer

Not a perfect store of value bc the value changes due to inflation

question

Run on Banks

answer

question

federal funds rate

answer

interest rate banks charge each other for loans

question

Inflation definition

answer

An increase in the level of prices

question

When the price level (P) rises

answer

The value of money (1/P) falls

question

Quantity Theory of Money

answer

Determines the value of money and is also the main cause of inflation

question

Real

answer

Measured in physical units

question

Nominal

answer

Measured in monetary units

question

Examples of "Real"

answer

- Real GDP
- Real wage
- Real interest rate

question

Examples of "Nominal"

answer

- Nominal GDP
- Nominal wage
- Nominal interest rate

question

Relative prices

answer

Real variable

question

Money neutrality

answer

The proposition that changes in money do not affect real variables

question

Quantity equation:

answer

M x V = P x Y

question

answer

Quantity of money

question

answer

Velocity (Rate at which money changes hands)

question

P x Y

answer

Nominal GDP

question

M ^ => P^

answer

Shows money supply controls price level

question

Fisher Effect

answer

The nominal rate adjusts one-for-one with changes in the inflation rate

question

When the FED increases the rate of money growth, the long run result is

answer

Both a higher inflation rate and a higher nominal interest rate

question

Shoeleather

answer

People don't want to have money in their wallets bc it loses value. People would have to go to the bank more often, which uses more resources.

question

Tax-Distortion due to inflation

answer

Inflation lowers the after-tax real interest rate

question

Open

answer

Interaction between international markets

question

NX < 0

answer

Trade Deficit

question

NX > 0

answer

Trade Surplus

question

NX = 0

answer

Balanced Trade

question

Net Capital outflow

answer

(Domestic purchase of foreign asset) - (foreign purchase of domestic asset)

question

NCO > 0

answer

Capital outflow

question

NCO < 0

answer

Capital inflow

question

NX = NCO

answer

Ex.
- You export a toy to Japan.
- You receive Yen.
- You invest Yen.
- You receive money.

question

Nominal exchange rate

answer

Rate the currencies are traded at.
Ex. 10 pesos/1 dollar

question

Appreciation

answer

Value of currency goes up

question

Depreciation

answer

Value of currency goes down

question

Real exchange rate

answer

Tells you purchasing power
- e X (P/P*)

question

answer

nominal exchange rate

question

P (in formula)

answer

Foreign (p x e)

question

answer

Domestic (p x e)

question

Foreign Domestic Investment (FDI)

answer

Ex. An American firm opens a factory in Mexico

question

Foreign Portfolio Investment (FPI)

answer

Ex. An American buys a stock in a Mexican cement company

question

In an open economy

answer

S = I + NX
S = I + NCO

question

S>I

answer

NCO > 0 (Trade Surplus)

question

S<I

answer

NCO < 0 (Trade deficit)

question

Real exchange rate (RER)

answer

e x (P/P*)

question

Nominal exchange rate

answer

The rate at which one country's currency trades for another
(Foreign currency/domestic currency)

question

Purchasing Power Parity (PPP)

answer

PPP = e = (P*/P)

question

Fisher Effect

answer

R Nominal = R Real + R Inflation

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