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45 Cards in this Set

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  • Back
WHat is a quintile? How are quintiles used to measure income?
Rank the population (households, individuals) according to income from the lowest to the highest.

The divide it into five equal group of equal size (quintiles)

The first quintile represents the 20% of the population with the lowest income and the fifth quintile represents the 20% of the population with the highest income.
How has distribution of income changes in the last 25 years?
There is unequal distribution
Since the early 1980s ther has been growth in dispertion, especially at the highest quintile
Mobility is common ( in both directions according to Cox and Alm)
What does a Lorenz curve measure? What does a perfect-equality Lorenz curve show? A Perfect inequality Lorenz curve? How does the actual U.S Lorenz curve compare to the other two curves?
A Lorenz curve illustrates the cumlative share of income accruing to the various quintiles of households.
Perfect- equality Lorenz Curve- each quintile controls 20% of the income

Perfect inequality Lorenz curve- represents a scenerio where all of the income is held by the 5th quintile
Actual US Curve- sort of a boat shape
What does the Gini coefficient measure and how is it calculated? What is the Gini coefficient currently in the US? How has the Gini Coefficient changed (for males and Females) in the last 25 years?
Gini Coefficient= area between perfect-equality Lorenz curve and actual Lorenz curve divided by area under perfect equality Lorenz curve.
Perfect equality LC- Gini=1
Perfect inequality LC Gini=0
GC un US currently= .43
Income inequality has increase since 1980- Gini coefficient has increased for both genders
What does the 90-10 wage gap measure? Descirbe the trend in the 90-10 wage gap since 1980.
90-10 wage gap- percentage wage differential between worker at 90th percentile and at the 10th percentile. Then this percentage is divided into tenths or deiles-this allows you to look closer at income distribution. The y axis represents the average wage of a worker at the 90th decile/ divided by the average wage of a worker at the 10th decile. After 1980 it has increased and this helps us to se the labr amrket phenomenon
Why do college graduates typically earn more than highschool graduates? How has the wage differential between these two groups changed in the last 25 years?
Education is an investment in human capital and the differences in the level of education lead to wage differences. In 1979 a college graduate earned about 47% more than high school graduates. By 2001 colleg graduates earned about 90% more on average.
Describe the results of the two reports that COx and Alm respond to in their article. They claim Inequality is not Inequality, Why not? What reasons do they give fore income and weath disparities across states? "America isn't a caste society"- given this statement why shoud caution be used in cosidering reports of rising inequality?
Cox and Alm responded to twp reports. One by the Center on Budget Priorities & Econ Policy Institute - which involved the rising disparity household income. And another one by the FED which delt with wealth and the growing disparity between high income and low income. SO what? Cox and Alm claim that just because there is inequality does not mean that this is unfair. There are resons behind some income disparities that we would want ( Immigration, education, declining in manufacturing and increas in service sector, more disparity in urban areas). Feel Americans have a remarkable ability to propel themselves upward and so should not worry abotu people being stuck where they begin.
According to Michael Weinstein, Cox and Alm's claim of income mobility in the U.S. is misleading Why? What specific step does Weithstien advocate taking to reduce inequality
The cox and Alm studies included adults 18 and over and some students. only 5% of those in the lowest quintile remained there 20 years later. Gottschalk and Danzinger-sampled children 5years old or less then 10 years later looked at how their income had changed compares to family income. There was very little mobility most stayed in the lowest 2 quintiles. Wiestien wishes to combat poverty in order to deal with this issue. Maybe both studies are flawed
Describe the organizational structure of the Fed.
Structure- there are 12 district banks, a board of governors and a federal open market committe
Describe some of the services performed by the 12 district banks
the operating arms of the Fed. The provide financial services- they are the Banker's bank: hold reserves of commercial banks. Also collect and process checks, handle electronic tranfers, make loans to commercial banks, issue and recieve government security. Lastly the supervise and oversee actions of commercial banks and they conduct research and assist in setting monetary policy
What is the board of Govenors? Describe the apointment process and terms of the members of the BOG. How is the chair appoitned and how long may he serve as a chair?
Top Management body. There are 7 members apointed by the President with approval by the Senate. Serve 14 year terms with no reappointment. Can complete an unfinished term and then be appointed t a full term. Chair and Vice chair are appointed by President and approved by senate.
What is the Federal Open Market Committee and who are its members How are the chair and vice-chair of the FOMC determined? What special duties are done by the NY district bank?
There are 12 members on this comittee and they include 7 members of the BOG., the President of the NY fed district bank and the president of four other district banks(rotate 1 year terms). The comittee elects its own chair but traditional it has been the chair of the BOG. VP- President of the NY district bank
What is the overall purpose of the Fed and what are the Fed's three main goals? Why is it difficult to achieve all of these goals simultaneously? In addition to monetary policy what other duties does the Fed perform?
Created to provide more secure , stable and flexible monetary system.

Today duties include: Economic growth, full employment and stable prices. It is hard to achieve these all at once because the first two usually result in inflation.

Other duties: regulation and oversight of commercial banks, Providing certain financial services-fiscal agent for federal govt, electronic payments, distributing and recieving cash/coin.
Fractional reserve system
banks don't have to hold 100% of their liabilities as reserves
What is Monetray policy and how does it differ from fiscal policy
Monetary policy are changes in the money supply with the intent of effecting interest rates. Fiscal policy is government spending and taxes to achieve goals.
Tools the Fed uses to impliment monetary policy
Open Market operations
The discount rate
Reserve requirements
Open Market Operations
Tool used most frequently
Buying/selling treasury securities- increase bank reserves (buy bonds)- increase bank reserves- increases loans-increase money supply decreases interest rates (expantionary monetary policy)

Selling- decreases bank reserves- decreases loans decreases money supplu increase interest rates ( contractionary monetary policy)
IMpact on federal funds rate
rate that commercial banks charge each other for short term loans- other rates tend to follow the fed funds rate
Fed buys bonds
decrease the FFR
Fed sells bonds
Increases the FFR
The discount rate
1st policy tool used by Fed- interest rate that the fed charges banks for commercial loans( Short term loans). If Dr increases this creates an incentive for banks to increasse reserves which decreases loans decreases money supply and increases interest rates
reserve requirements
Fed sets the % of liabilities that commerical banks must hold ass reserves. If the RR increase bank reserves go up loans decreasse MS decreases Ir rises and vise versa
Difference between the FFR and the DR
The federal funds rate is the interest rate that banks charge each other for short term loans

The discount rate is the rate charged by the fed to commercial banks for shsort term loans

Both of these can be effected by Open market operations
When was Greenspan first appointed to the board of Govenors and by whom? When did his term end? What other position does he hold within the Fed's organizational structure?
Was appointed in 1987 to finishe the term of another member who could not finish. He was apointed by Ronald Reagan. His term was longer than anyone elses becausse after finishing this four year term he was appointed to serve a full 14 year term. He is also the President of the FOMC
Describe Greenspan's educational background and his career prio to joining the fed
Degrees from NYU: BS Economics, MA Economiccs, PHD in Economics Numerous honorary degrees.
TOwnsend-Greenspan & co.-private sector consulting firm

Chair of President Ford's Counsil of economic advisors
Chair of national commission on social security

Econ advisor to : President Reagan, Time Magazine, Congressional budget office
FOrmula for the nominal interest rate
real rate + Inflation
In 1970s what target did the Fed set for excercising monetary policy? What problem did this creat? Why?
Maintaing a fairly constant nominal interest rates.

Arhtur Burns became chair of fed, He said he was targeting rate of growth in money supply but whenever nominal rate got too high the Fed took action to lower it.

Problems- If real GDP increase- the nominal rate increasse the fed would respond by increase money supply (buying bonds) which in the short run caused the nominal rate to drop but in the long run increase ms and inflation and caused the nominal rate to increas (without change in output)
Describe the procyclical nature of the Fed policy during this period. Who was responsible for ending this era and setting a new Target?
Inflation contuned to risse due to actions byt the fed to deal with the rise nominal interest rates. Thus a constant nominal rate was not achieved

Paul Volcker ended this era
Describe the Volcker era and its impact
Target: Fighting inflation thru conservative money growth policy

1979-1982- US continues to experiene serious levels of inflation b/c of the deregulation of banking led to new types of interest bearing accounts. V continued to excercise tight control of ms- leads to 81-82 recession but ultimately ends inflation problem

New Target: price level stability- use of monetary policy to create a predictable and stable rate of inflation
In excercising monetary policy what has been the primary goal of the Greenspan fed? What does the transparency of the Fed mean and how does it relate to Greenspan's primary goals
Primary goal- price level stability

Fed transparency- what the fed is following/targeting and what their actions will be. The fed has been more transparent during the greenspan era and thus their actions have been more clear.
What Credit does Greenspan deserve for:
The 1990s boom
only in part- Fed policy encourages the growth but also resulted from low unemployment, low inflation, high GDP growth rate, Clinton congress decreased the deficit, technological boom, invention and innovation
ending inflation in the US
None-Credit for ending inflation goes to Volcker Much of tenure Greenspan manages to keep inflation rate within 3% but has dangerous flirtation with outright deflation-b/c of G's willingness to push ir to low leveles during period of rapid economic growth
Forseeing the productivity revolution? how did greenspan's beliefs about productivity affect his excercise of monetary policy and was he correct in his assessment?
Yes- In the early 1990s Greenspan was allon in beleieving that an important shift was at hand. Greenspan boldly let the economy fly withoug rassing interest rates. he was correct in his assumtion.
What is a speculative bubble? What Us market was characterized by a bubble in the 1990s and when did this bubble burst?
Speculative bubble- price of an assest increases then rapidly decreases based on peoples expectations that prices will doo just that

Greenspan described 90's stock price increase as "irrational exuberance"- stocks overvalued, irrational behavior pushed prices up- 2000 the bubble burst causing a recession
What actions did the fed take to alleviate the impact of the bubble? Was it sucessful? According to Roach what long-run problemws may have been caused by the feds actions
Fed bought bonds which increased the MS and lowered interest rates- people consumed more thus creating more debt
What more serious global problems does Roach claim may be on the horizon?
Asian economies are dependent on United states imports because of Greenspans actions regarding the 1990 Asian financial crisis- Thus this caused the United States trade deficit to grow to extraordinary high levels. Deficit was 665 billion by mid 2004. Much of foreign production is for UNited states consumption this causes dollars to flow into foreign countries who then invest doellars in Treasury securities-If the united states falls into a recession other countries would too-cash their bonds and increase our debt
What solution does roach offer to this problem
Devalue the dollar- which would make foreign goods more expensive and United states goods less expensive

Buy bonds which would increase the money supply (increase the price of imports)

Purchase foreign currencies

The value of hte dollar has been fairly stable during Greenspan's tenure- recient devaluation of the dollar
Why was Ben Bernake an unusual person for President Bush to have selected as Greenspan's successor?
He is an independent thinker. He may not always agree with Republican party/ President

He is not a controversial choicce

Has not had a long line of experience in Washington- Chosen over economists who have supported and worked more closely with the President
Describe Bernake's education and political experience. Why would supply siders have preferred a different nominnee?

Editor of American economic review, in 2002 joined the BOG, 2005 chair of the President's council of Economic advisors

Supply siders- Glenn Hubbard was ss choice because he was instrimental in designing the Bush tax cuts (supply siders want low taxes and low level of government involvement)
Major challenges facing Bernake
How to deal with looming inflation
Potential housing bubble
federal debt and deficit
consumer debt ( low household savings)
How is the Bernake Fed likely to differ from the Greenspan era?
Believes strongly in the transparency of the Fed ( wants it to be more transparent

More focus on data and statistics (less on hunches) in determining monetary policy. Not going to be a huge change
when r increases
p decreases ( employers will want to hire more unskilled workers because of the high cost of wages for skilled workers)
Why is supply peprfectly inelastitc in the the short run
acquiring human capital take time, therefore, relative proportion of skilled and unskilled labor force is fixed in the short run
reason for increase in demand
Increased trade with LDC
Us tends to export high tech goods, import low tech goods
Skilled workers are__________ for technology

Unskilled workers are__________ for technology