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Economics 200 review
review for test three ECON 200 U of A
126
Economics
Undergraduate 1
04/26/2010
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Term
GDP
 Definition
(Gross Domestic Product) a measure of the TOTAL market value of all final goods and services produced in the; an accountants look at how a state is economically.
Term
Macroeconomics
 Definition
Branch of economics concerned with the OVERALL performance of the economy.
Term
CPI
 Definition
(consumer Price index) an attempt to measure the difference in average prices of goods in the market; becomes offset by new technologies etc.
Term
GDP components:
 Definition
GDP=C+I+G+(X-M)
C= personal consumption expenditures
I=gross private domestic investment
G=government spending
(X-M)= Net exports, or exports minus imports
Term
-A family buys a refridgerator
-Aunt Jane buys a new house
-Honda expands a factory
-Cali repaves its highways
 Definition
-C
-I
-I
-G
Term
Real GDP vs. Nominal GDP
 Definition
Nominal GDP is adjusted for inflation
Term
what GDP does not measure
 Definition
-non-market transactions
-underground economy
-Leisure
-quality/ price of goods and services
-Economic bads (costs of environmental damages)
-Distribution of GDP
Term
Tradeoff between work and leisure
 Definition
-Working more means less time for leisure
-GDP measures an increase in work but not the loss of leisure time
Term
A better measure of an economy's well-being...
 Definition
...would include leisure time, externalities of production, non-market transaction, etc.
Term
CPI
 Definition
(Consumer Price Index)A measure of the average change in price over time of a basket of consumer goods and services. tracks inflation (changes in prices).
Term
CPI equation
 Definition
measured off base year (1982-84=100)
-(cost of basket at current price/ cost of basket at base year price)X 100= CPI
Term
Problems with CPI
 Definition
-buying patterns change over time.
-assumes that you still buy the item even though the price is higher.
-Technology changes the quality of goods that you are getting.
Term
EX?: What does a CPI of 185 mean?
 Definition
-simply, there has been an 85% increase in prices since the base year. Again, CPI measures inflation.
Term
Who wins when inflation occurs?
 Definition
people who OWE MONEY(debtors) because the value of your debt has depreciated in REAL terms.
Term
Who loses when inflation occurs?
 Definition
People who ARE OWED MONEY (banks)because they will get repaid with currency that purchases less than before; also people on fixed incomes (welfare, SS)
Term
Real interest rate
 Definition
Nominal interest rate- inflation rate= Real interest rate. (Provides the actual interest rate in REAL terms, or adjusted for inflation.
Term
Labor Force
 Definition
consists of everyone above a certain age (around 16) who are actively seeking employment, or gainfully employed.
Term
Discouraged workers
 Definition
someone who has given up trying to find work after a long search.
Term
Participation Rate
 Definition
Labor Force/ Working-age Population
Term
Employment Rate
 Definition
(Number of People Employed)/ (Working-age Population)
Term
Unemployment Rate
 Definition
(Number of people Unemployed)/(Labor Force)
Term
Frictional Unemployment
 Definition
Brief unemployment caused by people voluntarily switching from one job to another.
Term
Structural Unemployment
 Definition
Unemployment resulting from technological change which eliminates old kinds of jobs.
Term
Cyclical Unemployment
 Definition
Unemployment caused by a downturn in the economy.
Term
EX?: If you do not have a job are you classified as being unemployed? why? why not?
 Definition
It depends! if you are unemployed and actively SEEKING employment then you are counted in this statistic. However, if you are a DISCOURAGED WORKER you are not included.
Term
EX?: Explain why the employment rate and the unemployment rate both increased during the early 1970s.
 Definition
-Both statistics increased in the 70's because a substantial # of women were joining the workforce. Consequently, the # of employed people increased AS WELL AS the # of unemployed because some did not LOOK FOR JOBS but were now counted as part of the labor force.
Term
Aggregate Demand
 Definition
the total demand for goods and services in the economy (Y) during a specific period.
Term
Aggregate Supply
 Definition
The total supply of goods and services by a national economy during a specific time period.
Term
If consumption spending goes up, AD shifts..
 Definition
RIGHT
Term
If investment spending (I) goes up, AD shifts...
 Definition
RIGHT
Term
If Government spending (G) goes up, then AD shifts...
 Definition
RIGHT
Term
If Import spending (M) goes up, then AD shifts...
 Definition
LEFT
Term
If Export spending (X) goes up, then AD shifts..
 Definition
RIGHT
Term
If Rate of savings (S) goes up, then AD shifts...
 Definition
LEFT
Term
If Rate of Taxation (T) goes up, then AD shifts...
 Definition
LEFT
Term
If amount of money (Ms) goes up, then AD shifts...
 Definition
RIGHT
Term
If Interest rate (i) goes up, then AD shifts...
 Definition
LEFT
Term
If velocity of money (V) goes up, then AD shifts...
 Definition
RIGHT
Term
If the level of productivity increases, then the AS shifts...
 Definition
RIGHT
Term
If there are major increases in cost conditions, the AS shifts...
 Definition
LEFT
Term
If there are changes in the expected rate of inflation by worker, the AS shifts...
 Definition
LEFT
Term
If the supply availability (supply shocks) increase, the AS shifts...
 Definition
RIGHT
Term
When the AD curve is moved RIGHT, CPI ____(_____ effect), and GDP _____(_____ effect).
 Definition
CPI INCREASES(BAD); GDP INCREASES(GOOD)
Term
When the AD curve is moved LEFT, CPI ____(_____ effect), and GDP _____(_____ effect).
 Definition
CPI DECREASES(GOOD); GDP DECREASES(BAD)
Term
When the AS shifts RIGHT(_____), CPI ____(_____ effect), and GDP _____(_____ effect).
 Definition
BEST OUTCOME: CPI DECREASES(GOOD); GDP INCREASES (GOOD)
Term
When the AS shifts LEFT, CPI ____(_____ effect), and GDP _____(_____ effect).
 Definition
WORST OUTCOME: CPI INCREASES(BAD); GDP DECREASES(BAD)
Term
Stagflation
 Definition
When prices (CPI) rise at the same time output (GDP) falls. Caused by AS shifting to the LEFT.
Term
Cost-Push Inflation
 Definition
When increasing costs shift AS LEFT, and INCREASE overall price level.
Term
Demand-Pull Inflation
 Definition
When INCREASING DEMAND outpaces supply and causes overall prices to RISE.
Term
What are the (three/3) Functions/ definitions of MONEY?
 Definition
1. A medium of exchange
2.A measure of value
3.A store of wealth
Term
A medium of Exchange
 Definition
-means you don't have to barter
-Eliminates problem of barter with wider range of goods.
Term
A measure of Value
 Definition
-means a way to compare different goods (apples to apples)
-Serves as a common denominator
Term
A store of wealth
 Definition
-Means A way for people to save money for future purchases
-Most liquid of all assets
Term
FIAT MONEY
 Definition
Money that is not backed by gold reserves
Term
Liquidity
 Definition
HOw easily something can be exchanged for cash
Term
Inflation...
 Definition
...is a tax on money.
Term
High Inflation...
 Definition
...prevents money from being an effective store of wealth ( it takes more today than yesterday to buy the same thing).
Term
Inflation destroys a country's money ,because...
 Definition
...it is no longer a MEASURE of value; no longer a STORE of wealth; and no longer acceptable in EXCHANGE=> no longer money.
Term
What is Monetary Policy??
 Definition
THe Financial Policy of managing the money supply to achieve specific goals.
Term
THe GOALS of the Monetary Policy include...
 Definition
Achieving or maintaining INFLATION and EMPLOYMENT targets.
Term
WHO conducts the MONETARY POLICY?
 Definition
The Federal Reserve System OR "FED"
Term
What Backs the U.S. Money Supply?
 Definition
"nothing," Faith and Trust back the money supply.
Term
mThe US DOLLAR is considered ______ money
 Definition
FIAT MONEY; since it is not back by gold or any other commodity.
Term
WHAT caused the US dollar to break down? Example?
 Definition
Individuals losing faith in the US economy, Inflation is and example of people losing faith in the economy.
Term
Why is Inflation considered a "tax" on money?
 Definition
-Inflation INCREASES the REAL price of goods in a market
-If goods are MORE expensive, then the purchasing power of money has DECREASED.
=a Tax does the same thing
=Once you pay taxes you have less purchasing power then you did before, they increase the price.
Term
The Federal Reserve's basic functions include (hint; theres 3):
 Definition
-Protect and Control the value of the US currency
-Control the Money Supply
-Conduct Monetary Policy
Term
HOW does the FED accomplish it's functions?
 Definition
BY Influencing the money Supply by setting the required reserves, Interest Rates, and Open Market Operations
Term
?VIP?
Required-Reserve Ratios
 Definition
-THe MINIMUM Percentage% of deposits that BANKS and other FINANCIAL INSTITUTES must HOLD in RESERVES.
Term
?VIP?
Excess Reserves
 Definition
-Banks' reserves that EXCEED those needed to meet the Required-Reserve Ratio.
Term
DEPOSIT MULTIPLIER (equation)
 Definition
-The Number# by which an INCREASE in Bank RESERVES is Multiplied* to find the resulting INCREASE in banking deposits.
-DEposit Multiplier= 1/ Required-Reserve Ratio
Term
?VIP?
Open Market Operations
 Definition
The Purchase and Sale of government Securities (US Treasury Bonds and Bills), by the FED in the Open Market.
Term
Discount Rate
 Definition
THe Interest Rate at which the FED stands ready to lend reserves to commercial banks.(Banks ONLY)
Term
Federal Funds Rate
 Definition
The rate on inter-bank loans. Basically, one bank will loan its excess reserves to another, So that Bank can Meet its Required-Reserve Ratio.
Term
Reserve Requirement:20%
Deposit of New Money:$10,000
 Definition
Money Multiplier: 1/.20(R.R.)= MM=5
[10,000]x{.5}= $50,000
Term
Reserve Requirement:15%
Deposit of New Money:$20,000
 Definition
1/.15= MM 6.6667
[20,000]x{6.6667}=$133,333.4 (max. amount by which the money Supply could be Increased
Term
Given, Reserve Requirement:20%
Deposit of New Money:$30,000, what is the Max. amount by which loans could be Increased as a result of the new Deposit?
 Definition
1/(.20)=MM 5
Max. Ms INC.-[30,000]x{5}=$150,000
Max. Loans.-[150,000]-{30,000(the 20% banks must keep)}= $120,000
Term
What gives Banks the Ability to Create Money?
 Definition
The Excess Reserves in banks are loaned to consumers, "creating" money in the system.
Term
Why does it make sense that the FED can manipulate the Reserve Requirement?
 Definition
Because it changed the amount of money banks have to hold and thus how much they can loan out, in order to reach a specific level of money creation.
Term
What limits Money Growth? (2)
 Definition
-Individuals and businesses only saving money and not borrowing. Thus, no new loans are made, and no new money is "created."
-Banks refuse to loan out money due to Increased Credit Risks
Term
Why do we have Required Reserves?
 Definition
So that people have assurance that their money is "backed up."
Term
What would happen if Required Reserves=100%?
 Definition
Banks would be required to hold all of their Money, no new loans, money supply would be unable to grow.
Term
What are the 3 major tools the FED has to control the Money Supply? Most important?
 Definition
-Discount Rate-Interest rate on reserves loaned
-Required-Reserves-Min. % of Deposits held
-Open Market Operations(Most Important)-Sale of securities
Term
Open Market Operations
If the FED buys bonds?
 Definition
There is an INCREASE in the money supply.
The FED is buying bonds in exchange for cash$. Thus, the more cash present in the system, the larger the monetary base. (B-UYING=B-IGGER)
Term
Open Market Operations
IF the FED sells bonds?
 Definition
There is a DECREASE in the money supply.
-The FED is selling bonds in exchange for cash. It is removing cash from the marketplace, thereby reducing the money supply. (S-ELLING=S-MALLER)
Term
What if the Discount Rate INCREASED?
 Definition
If the Interest Rate the FED charges comm. banks increases, then the FED aims to REDUCE INFLATION.
-By increasing the Discount rate it sends a signal to Comm. Banks that they must be more careful with their lending. Thus, the monetary supply tends to shrink, reducing the negative effects of inflation.
Term
What if the Discount Rate decreased?
 Definition
Then, the FED is focusing on BATTLING UNEMPLOYMENT.
-Banks can borrow at a cheaper rate, thereby increasing their # of loans to consumers, hopefully stimulating the economy.
Term
What 3 things will happen to fight Unemployment?
 Definition
-Federal Reserve Rate/Discount Rate: DECREASE
-Required-Reserves: DECREASE
-Open Market Operations: PURCHASING of Bonds
Term
What steps occur when the FED BUYS bonds to fight _______? (9)
 Definition
1.FED BUYS BONDs
2.Money Supply INCREASES
3.Demand Deposits INCREASE
4.Excess Bank Reserves INCREASE
5.Banks LOWER interest Rates(cheap to borrow)
6.# of loans INCREASES due to interest rat dec.
7.Consumption Spending INCREASEs, businesses and people have more borrowed money to spend.
8.Aggregate Demand (AD) shifts RIGHT, so...9.Unemployment DECREASES
Term
When does fighting Unemployment not work this way?
 Definition
-If Banks do not lend
-People do not borrow to INCREASE consumption expenditures
Term
To fight Inflation the Following will occur:
 Definition
-FED will INCREASE Reserve Rate/ Discount Rate
-Required-Reserves: INCREASE
-Open Market Operations: SELL Bonds
Term
Steps taken by FED to fight Inflation and effects? (8)
 Definition
1.The FED SELLS bonds in Open Market
2.Excess Reserves in Banks DECREASE
3.=>DECREASES lending ability of Banks
4.Banks INCREASE interest rates
5.Consumers borrow LESS-consumer and business loans DECREASE
6.The Rate of consumer spending and investment DECREASES
7.AD curve shifts LEFT...
8=>Inflation rate DECREASES!
Term
Fiscal Policy
 Definition
Government spending (G) and Taxation (T) policy to achieve macroeconomic goals of full employment without inflation
Term
Fiscal policy is designed to...
 Definition
stabilize the economy, which means counteracting the natural business cycles
Term
fiscal policy is set by the ________, and is done with two major tools:
 Definition
Government(Legislature, President, etc.);
1.Changes in Government Spending
2.Changes in Amount of taxes
Term
To reduce unemployment, the government can? Causing?
 Definition
-INCREASE Government Spending (G) or
-DECREASE Taxes (T)
-Causing...an INCREASE in AD (shifts RIGHT)which increases GDP
Term
To REDUCE INFLATION, the Government can? causing?
 Definition
-DECREASE Government Spending (G) or
-INCREASE taxes (T)
-Causes a DECREASE in AD (shifts LEFT), which DECreases CPI
Term
Fiscal Policy can be _________ or __________.
 Definition
Discretionary; Automatic
Term
Discretionary Fiscal Policy
 Definition
Policy such as the Gov. building new roads or schools, which requires the Gov. to take action, such as passing a spending bill
Term
Automatic Fiscal Policy
 Definition
Policies such as unemployment benefits that automatically kick in under certain economic conditions.
Term
Advantages of automatic stabilizers:
 Definition
-Auto stab. don't require any change and don't run into the 3 time lags
-Por exemplo: Progressive income taxes, because as incomes grow, people pay more taxes, but as their incomes shrink, they pay less.
Term
Another example of Advantages of Auto stabilizers
 Definition
Welfare-as more people are unemployed, government automatically pays more, which is in effect an INCREASE in G
Term
Politics
Increases in Gov. spending, and _______ in taxes (such as Medicare)
 Definition
are popular to the voting public.
Term
Because Government spending increases and Lower taxes are popular, politicians...
 Definition
...politicians often use these tools for political gain rather than what makes sense economically.
Term
What is the idea behind Supply-Side Economics and Say's Law:
 Definition
Say's Law: Supply creates its own demand.
The idea here is that a reduction in taxes will INCREASE productivity since individuals will work harder/longer, save more, and invest more (shifting AS, Right)
Term
Argument against Supply-Side Economics
 Definition
Too optimistic- just because the returns on work INCREASE due to LOWER taxes doesn't mean people will work harder or longer hours
Term
Deficit is?
 Definition
When the Gov. spends more (G) than it collects in taxes (T) for a given year.
Term
What does the Gov. have to do when it runs a Deficit?
 Definition
it has to Issue Treasury Bills to finance the deficit
Term
National Debt is?
 Definition
The cumulative total of all the deficits added together (what we owe)
Term
Are deficits bad?
 Definition
Yes and No
Term
When are Deficits good?
 Definition
When they are financed domestically (by US citizens), all that happens is some citizens save (buy bonds) in order to allow the government to spend more than it takes in. not bad.
Term
When are Deficit BAD?
 Definition
when they are financed externally (by foreigner), it creates a problem for future generations, who will have to pay back to foreigners
Term
What happens if the Debt gets too LARGE?
 Definition
-It becomes harder for people to borrow money, because the Gov. is taking all the money available for lending (Crowding out)
-investors lose confidence and stop buying bonds, interest rates rise, inflation rises
-the value of currency falls
Term
Why trade currency?
 Definition
Because there are benefits to both buyers and sellers
Term
Currency trading Example:
 Definition
Japanese Yen in exchange for U.S. dollars. In this market Americans seek to buy Yen (demand) and the Japanese are sellers of (supply)
-Demand-side: U.S. buyers of imported goods, and U.S. investors interested in Japanese stocks, bonds, etc
-Seller-Side: Same as above, but now from the Japanese perspective
Term
The following will cause an INCREASE in the demand for Dollars
 Definition
-US has higher interest rates than other countries
-Increased demand for US products abroad
-decreased inflation in the US
-Increased world tensions (not involving the US)
-Decrease stability in foreign currency markets
Term
The following will cause an INCREASE in the demand for Dollars
 Definition
-US has higher interest rates than other countries
-Increased demand for US products abroad
-decreased inflation in the US
-Increased world tensions (not involving the US)
-Decrease stability in foreign currency markets
Term
The following will cause an INCREASE in the demand for Dollars
 Definition
-US has higher interest rates than other countries
-Increased demand for US products abroad
-decreased inflation in the US
-Increased world tensions (not involving the US)
-Decrease stability in foreign currency markets
Term
Currency trading Example:
 Definition
Japanese Yen in exchange for U.S. dollars. In this market Americans seek to buy Yen (demand) and the Japanese are sellers of (supply)
-Demand-side: U.S. buyers of imported goods, and U.S. investors interested in Japanese stocks, bonds, etc
-Seller-Side: Same as above, but now from the Japanese perspective
Term
Currency trading Example:
 Definition
Japanese Yen in exchange for U.S. dollars. In this market Americans seek to buy Yen (demand) and the Japanese are sellers of (supply)
-Demand-side: U.S. buyers of imported goods, and U.S. investors interested in Japanese stocks, bonds, etc
-Seller-Side: Same as above, but now from the Japanese perspective
Term
The following will cause an INCREASE in the demand for Dollars
 Definition
-US has higher interest rates than other countries
-Increased demand for US products abroad
-decreased inflation in the US
-Increased world tensions (not involving the US)
-Decrease stability in foreign currency markets
Term
The following will cause an INCREASE in the demand for Dollars
 Definition
-US has higher interest rates than other countries
-Increased demand for US products abroad
-decreased inflation in the US
-Increased world tensions (not involving the US)
-Decrease stability in foreign currency markets
Term
The following will cause an DECREASE in the demand for Dollars:
 Definition
-US has lower interest rates than other countries
-DECREASED demand for US products abroad
-Increased inflation in the US
-Decreased World tensions
-Increased stability in foreign currency markets
Term
Advantages of "strong" Dollar:
 Definition
-U.S. dollar can purchase foreign goods more cheaply
-Keeps inflation low
-Easy to travel to foreign countries
Term
Disadvantages of "strong" Dollar:
 Definition
-Exporters suffer on foreign markets
-Domestic U.S. forms suffer due to cheaper foreign goods
-Foreign tourism falls
Term
Advantages of the "weak" Dollar:
 Definition
-Exporters prosper on foreign markets
-Domestic U.S. firms prosper due to more expensive foreign goods
-Foreign tourism rises
Term
Disadvantages of a "weak" Dollar:
 Definition
-U.S. dollar cannot purchase foreign goods as cheaply
-Allows for inflation
-Expensive to travel to foreign countries
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