Econ Final

Front 1

A peak is:

Back 1

the beginning of a recession

Front 2

The great recession is the worst recession since the great depression if we judge it by

Back 2

its duration
the highest rate of unemployment
the change in real GDP

Front 3

Expansionary Gap

Back 3

Y>Y*

Positive output gap where actual output is higher that potential output

Front 4

According to the Okun’s Law, a 4 percentage point increase in the output gap corresponds to:

Back 4

A 2 percentage point increase in cyclical unemployment

Front 5

A main assumption of the keynesian theory is that, in the short run:

Back 5

producers meet demand at existing prices

Front 6

International Trade
Import and Export % to GDP

Back 6

Exports 12% GDP
Imports 17%

Front 7

Current Trade deficit:

Back 7

3.4% of the GDP

Front 8

US trade balance

Back 8

Since the 1960s imported more
-- 60s- exports >imports
-- 70s + imports>exports (trade deficit has been growing larger)

Front 9

Capital inflows

Back 9

are purchases of domestic assets by foreign households and firms

Front 10

Net Capital inflows

Back 10

capital inflows – capital outflows

Front 11

Okun's Law

Back 11

1% cyclical unemployment = 2% output gap
(all in relation to potential output)

Front 12

natural unemployment relates to

Back 12

structural and frictional
not cyclical

Front 13

menu costs

Back 13

Keynesian theory -- short run, producers meet demand at existing prices

Front 14

Planned Aggregate Expenditure

Back 14

total planned spending on final goods and services

Front 15

A firm's actual investment will exceed it's planned investment when

Back 15

it sells LESS than planned

Front 16

What is the largest component of Aggregate Expenditure?

Back 16

Consumption

Front 17

marginal propensity to consume definition

Back 17

the additional consumption when disposable income rises.
(between 0 and 1)

Front 18

Autonomous Consumption

Back 18

Consumption spending that is not related to the level of disposable income.

Front 19

Autonomous Expenditure

Back 19

Portion of PAE that's not related to output

Front 20

Stabilization Policies

Back 20

Government Policies that are used to affect PAE (eliminate output gaps)

Front 21

marginal propensity to consume equation

Back 21

∆C/(∆Y-∆T)

Front 22

Government Expenditure Multiplier Equation

Back 22

∆Gov.Expenditure/(1-mpc)

Front 23

The tax multiplier is _________ and equals______.

Back 23

Negative; -MPC/(1-MPC)

Front 24

How do you increase output without increasing the deficit?

Back 24

Also increase taxes and spending

Front 25

Planned Aggregate Expenditure Equation

Back 25

PAE= [C - mpc * T + I^p + G + NX] + mpc * Y

Front 26

Consumption Function

Back 26

C = Ĉ+ mpc(y-t)

Front 27

Following an expansionary fiscal policy, autonomous expenditure ______ and the planned aggregate expenditure line __________.

Back 27

increase; shifts up.

Front 28

To close a recessionary gap, the government conducts __________.

Back 28

an expansionary fiscal policy
an expansionary monetary policy

Front 29

An increase in planned aggregate expenditure can come from:

Back 29

an increase in autonomous consumption
an increase in output

Front 30

According to the Keynesian cross, when planned aggregate expenditure increase, output:

Back 30

output increases in the short run.

Front 31

A country that exhibits a trade deficit has at the same time:

Back 31

net capital inflows

Front 32

From the point of a US resident, purchasing a Japanese bond is equivalent to:

Back 32

lending to Japan

Front 33

A country that defaults on its debt is facing ________which results in _________

Back 33

an increase in its interest rate, less net capital inflows

Front 34

Investment Equation

Back 34

S+KI=I
Savings + Net Inflows = Investment

Front 35

Net Export Equation

Back 35

NX+KI=0
Net Exports + Net Inflow = 0

Front 36

Federal government deficits are:

Back 36

often correlated with trade deficits

Front 37

The supply of money is determined by

Back 37

The FED

Front 38

the demand for money is determined by

Back 38

economic agents who want to make transactions

Front 39

The demand for money is ___+/-___ related to real income and __+/-___ related to prices

Back 39

positively; positively

Front 40

The demand for money is ____+/-___ related to the NOMINAL interest rate

Back 40

Negatively

Front 41

The demand for money is ____+/-___ related to the REAL interest rate

Back 41

Not at all!

Front 42

Portfolio Allocation Decision

Back 42

Decisions about the forms in which to hold ones wealth

Front 43

the demand for money is __+/-__ related to the opportunity cost of holding money

Back 43

Negatively!!
(inverse)

Front 44

The money market equilibrium

Back 44

when the demand for money equals the supply of money.

Front 45

When the Fed conducts an _________, the ___________ decreases and __________.

Back 45

open market purchase; nominal interest rate; money supply and money demand increase.

Front 46

Fisher effect

Back 46

Nominal interest rates are high when inflation is high
low when inflation is low

Front 47

The FED deals with

Back 47

NOMINAL

Front 48

In the short run, according to the Keynesian theory, the Fed influences the real economy through:

Back 48

Investment

Front 49

The Fed fights a recession using ____________ and an expansion using _________ .

Back 49

Expansionary monetary policy; contractionary monetary policy.

Front 50

To fight an expansion, the Fed _____________ which results in __________ and __________

Back 50

Increases the interest rate; a decrease in investment; a decrease in PAE.

Front 51

To fight a recession, the Fed ___________ which results in ____________in the_________.

Back 51

increases the money supply; higher investment and output; short run.

Front 52

When the Fed fights a recession, the interest rate __________ and the PAE curve_______.

Back 52

Decreases; shifts down

Front 53

When the Fed fights an expansion, monetary policy aims at _____________ to __________ the PAE curve ________.

Back 53

Reducing investment; shift; down

Front 54

Which of the following was instituted to prevent depositors from rushing to withdraw their deposits from fear that their bank will go bankrupt?

Back 54

The Federal Deposit insurance

Front 55

The Federal Open Market Committee makes decisions about

Back 55

monetary policy

Front 56

Why International Capital Flows?

Back 56

1. Trade Imbalances
2. Efficient Allocation of Savings

Front 57

US trade deficit

Back 57

In 2004, the trade deficit was 5.2% of GDP
Record high trade deficit in 2006

Front 58

Inflation ______ during business cycles

Back 58

DECREASES

Front 59

Output gap

Back 59

WHEN NEGATIVE ECONOMY IN EXPANSION
WHEN POSITIVE ECONOMY IN RECESSION

Front 60

trough

Back 60

the end of a recession
Low point of the business cycle

Front 61

The Great Recession numbers (now)

Back 61

Dates (peak-through)
• Start: December 2007
• End: June 2009

Duration: 18 months
Highest Unemployment: 10.2% July 2010
Change in Real GDP: -4.1%

Front 62

wealth effect

Back 62

the tendency of changes in asset prices to affect household's wealth and this consumption spending

Front 63

Induced expenditure

Back 63

the part of spending that depends on output (Y)

Front 64

Fiscal Policy v. Monetary Policy

Back 64

Fiscal policy uses changes in government spending, transfers, or taxes
Monetary policy uses changes in the money supply

Front 65

Taxes and Transfers

Back 65

Planned aggregate expenditures are affected by taxes and transfers

The effect is indirect, channeled through the effects on disposable income
Lower taxes or higher transfers increase disposable income
Increases in disposable income lead to higher C

Front 66

LOW income earner tend to have HIGH MPC

Back 66

HIGH income earners have LOW MPC

Front 67

Government deficit

Back 67

the difference between government spending and net taxes, (G – T)

Front 68

Keynsian Theory tells us:

Back 68

better to use gov expenditure than taxes to lower the deficit

Front 69

Automatic stabilizers

Back 69

increase government spending or decrease taxes when real output declines

Built into laws so no decision is required

Front 70

primary objective of the Fed

Back 70

to maintain a low and stable inflation rate

Front 71

•When inflation increases, the Fed

Back 71

increases the nominal interest rate which, in turn, increases real interest rates

increases interest rate because there is a risk of inflation

Front 72

When output is ABOVE potential, actual inflation is

Back 72

above expected inflation

Front 73

Inflation Shock

Back 73

a sudden change in the normal behavior of inflation

Front 74

sudden rise in the price of oil increases prices of

Back 74

Gasoline, diesel fuel, jet fuel, heating oil
Goods made with oil (synthetic rubber, plastics, etc.)

Front 75

OPEC reduced supplies in 1973

Back 75

price of oil quadrupled
Food shortages occurred at the same time
Sharp increase in inflation in 1974

Front 76

Long-run equilibrium

Back 76

occurs at the intersection of
o Aggregate demand
o Aggregate supply and
o Long-run aggregate supply

Front 77

Short-run equilibrium

Back 77

occurs when there is either an expansionary or a recessionary gap
intersection of
o Aggregate demand
o Aggregate supply

NOT AT Long-run aggregate supply!

Front 78

• In the long-run the economy tends

Back 78

to be self-correcting

Front 79

Causes of inflation

Back 79

1. Expansionary gap
2. Price shock (short-term)

Front 80

Aggregate supply shock

Back 80

either an inflation shock or a shock to potential output

Front 81

Greenspan, 1996

Back 81

With low unemployment, price and wage inflation were lower than previously at full employment

Greenspan believed the economy could continue to grow without increasing inflation

Correct analysis AT THE TIME

Front 82

The main shortcoming of the basic Keynesian model is that it does not explain.

Back 82

inflation

Front 83

Which of the following will NOT shift the aggregate demand curve?

Back 83

an increase in aggregate supply

Front 84

Which of the following WILL shift the aggregate demand curve?

Back 84

an increase in autonomous consumption
an increase in taxes
an increase in net exports
a change in the Fed's monetary policy

Front 85

The tendency for inflation to change relatively slowly is sometimes called

Back 85

inflation inertia

Front 86

Which of the following is a potential source of inflation?

Back 86

excessive aggregate demand
inflation shock
aggregate supply shock
a shock to potential output

Front 87

An increase in government expenditure associated with military buildup will cause

Back 87

AD to shift right.

Front 88

An example of a shock to the SRAS curve is:

Back 88

An oil shock

Front 89

An example of a shock to the LRAS curve is:

Back 89

An earthquake

Front 90

Starting from a situation where the economy produces at its potential level, suppose that an increase in military spending causes an expansionary gap. What is true?

Back 90

Inflation increase in the short run
Government spending increase in the short run
Output increases in the short run
PAE increase in the short run

Front 91

Starting from a situation where the economy produces at its potential level, suppose that an increase in military spending causes an expansionary gap. What is true?

Back 91

Inflation increases in the long run

Front 92

Starting from a situation where the economy produces at its potential level, according to the AD-AS model, in the long run, deficits _________ investment.

Back 92

Crowd-out

Front 93

Starting from a situation where the economy produces at its potential level, according to the AD-AS model, in the long run, a change in the monetary policy reaction function is

Back 93

Neutral, meaning that it does not affect real variables.

Front 94

Starting from a situation where the economy produces at its potential level, according to the AD-AS model, in the short run, an oil shock (sudden increase in oil prices)

Back 94

Increases inflation and decreases output

Front 95

Starting from a situation where the economy produces at its potential level, according to the AD-AS model, in the long run, an oil shock (sudden increase in oil prices)

Back 95

Affects neither inflation nor output

Front 96

Starting from a situation where the economy produces at its potential level, according to the AD-AS model, in the short run, a hurricane which leads to large destruction

Back 96

Increases inflation and decreases potential output

Front 97

Starting from a situation where the economy produces at its potential level, according to the AD-AS model, in the long run, a hurricane which leads to large destruction

Back 97

Increases inflation and decreases potential output

Front 98

Stagflation refers to a situation that combines

Back 98

Inflation and recession

Front 99

Suppose the economy suffers stagflation due to an oil shock. The Fed decides to change its monetary policy reaction function to tighten monetary policy. In the short run, this:

Back 99

decreases inflation and decreases output

Front 100

Following the Japanese earthquake and tsunami of 2011, if the Japanese government decides to cut taxes to help businesses and households. In the long run, this:

Back 100

increases inflation and leaves output unchanged

Front 101

Following an expansionary fiscal policy, a government can prevent inflation from increasing by:

Back 101

increasing investments in projects that potentially increase the productive capacity of the economy