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64 Cards in this Set
- Front
- Back
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what is the most important of the three effects that shifts the demand curve (considering monetary policy)? |
the interest rate effect |
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what is the theory of liquidity? |
Keynes's theory that interest rate adjusts to bring money supply and money demand into balance. |
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what are the pieces of the theory of liquidity? |
money supply money demand(interest rate) |
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explain the interest effect in 3 steps: |
1) higher price lvl raises money demand 2) higher money demand increases int. rate 3) higher int.rate reduces quantity of goods and services demanded |
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what happens to AD when the FED sells government bonds in open-market operations? |
it decreases the money supply and contracts AD.(moves left) |
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what happens to AD if you increase the money supply or lower the interest rate? |
you expand AD (moves right) |
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what is the "crowd out effect" when talking about fiscal policy? |
a change in government spending will be shown as less than the exact value in real GDP, due to an increase in the interest rate which again decreases investment spending |
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explain MPC (Marginal propensity to consume) |
how much of each dollar a consumer saves and spends, ex: if MPC=3/4 that means an average consumer spends $0.75 and saves $0.15 |
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what is the money multiplier when talking about fiscal policy? |
1/(1-mpc) |
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what happens if the crowd out effect of increased government spending is bigger than the multiplier effect? |
AD will shift to the left. |
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what is "rational expectations" considering taxation policy? |
if taxation is reduced by a certain amount people might save the money instead of spending because they expect to be taxed the same amount in the future. |
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what is the GDP deflator? |
(nominal GDP/real GDP)*100 |
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what is the difference between GDP deflator and CPI as measures of the overall price lvl? |
CPI overstates inflation rate while the GDP deflator understates the inflation rate. |
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what are the largest economies in the world based on GDP? |
(EU) USA China Japan Germany France |
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what counts for investment when calculating GPD? |
1) capital equipment (ex. machines for production) 2) structures (business structures but also residential fixed investment like buying a house) 3) inventories |
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if you buy a house in 2005 for $150,000 and sell it in 2008 for $300,000 how will this show up as in GDP? |
the 150,000 in 2005 will show up as residential fixed investment in 2005, however selling the house again will not show up as an extra 150,000 before it is used for consumption. |
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does stock sales count for GDP? |
no! but it might show up as consumption as you use the profit to consume. |
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what is "real GDP"? |
GPD measured in terms of actual goods and services not in prices. real GPD uses a base year and removes inflation as a variable. |
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what is the rule of 70? |
formula used to calculate how long it will take for a economy to double at a certain growth rate 70/(growth rate*100) |
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what are the 4 most important factors in economic growth? |
1) physical capital (machines, tools ETC used for production) 2) Human capital (knowledge, experience, ETC.) 3) natural resources (not as important in modern growth) 4) technology (most important of the 4 in modern times) |
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how do you calculate unemployment rate? |
number of unemployed/labor force |
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how does BLS (bureau of labor statistics) define unemployment? |
1) available for work 2) tried to find work in the last 4 weeks |
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who is not included in the labor force (by the BLS) |
1) children under 16 2) full time students 3) retirees 4) people not looking for jobs ( stay at home parents, discouraged workers) |
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how do you calculate the labor force participation rate? |
labor force/adult population |
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what is natural unemployment and how high is the natural unemployment percentage? |
natural unemployment include frictional (people between jobs, people leaving voluntarily, sectoral shifts) and structural unemployment( price floors, efficiency wages). the rate is about 5%. |
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what is monopsony? |
a market with only one demander |
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what is efficiency wages, and why would you use it? |
it's paying your workers above market price. a few reasons to do this is: reduce turnover better quality workers more effort from workers more healthy workers (affor better medical care and a healthier lifestyle) |
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what is cyclical unemployment? |
any deviation from the natural rate of unemployment. |
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what is employment insurance? |
40-50% of income for up to 26 weeks if you are laid off(not fired), its funded through employer taxes. The length might be extended during recessions. |
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what is a financial system? |
institution that matches one persons savings with another persons investment |
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what is a futures contract? |
agreeing to buy something in the future at a given price |
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what is the formula for compound interest? |
B=P(1+r)^t B=balance p= principle (starting amount) r=simple anual rate of interest t=time |
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what is present value? |
how much a future value would be worth to you at this moment = B/(1+r)^t where r= discount rate, the rate at which you discount money in the future. |
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what is adverse selection when considering insurance? |
people with higher risk ted to be more likely to get insurance. |
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what is "moral hazard" when considering insurance? |
people might take more risks when they have insurance. |
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what are the 3 criteria for money |
1) medium of exchange 2) a unit of account 3) a store of value |
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what are the two different kinds of money? |
fiat money: money that has no intrinsic value commodity money: an actual good that has its own intrinsic value |
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what is a banks assets and what is a banks liabilities? |
its assets is its resources (the money people owe the bank) the banks liabilities are the money the bank owe people (the money people have stored in the bank) |
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what is the federal reserve/the fed |
it's the central bank of the US which regulate the money supply and financial systems. The fed is built up by 12 districts where the NY is the most important as they conduct open market operations. |
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what is an open market operation? |
it's the way the fed directly change the money supply by either selling or buying bonds at the New York stock exchange. |
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what is the money multiplier? |
its the reciprocal of the reserve rate that banks hold. if the bank has a reserve rate of 1/10 (10%) the money multiplier would be 10/1 in other words a deposit of 100 would create 1000-100 aka 900 |
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what is inflation and deflation? |
inflation is an increase in the aggregate price lvl deflation is an decrease in aggregate price lvl |
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what is the quantity equation? |
M*V=P*Y M=money supply V=velocity of money P=price lvl y=GDP |
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what are the costs of inflation? |
1) shoe leather costs (transaction cost of getting and using money) 2) menu cost (cost of changing prices) 3) tax distortion (tax is mostly based on nominal income) 4) arbitrary distribution of wealth (from savers to debtors with unexpected inflation) 5) inflation tax (government increases money supply by printing money effectively taxing you buy depreciating the value of your money) |
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what are the two types of net capital outflow? |
foreign direct investment (FDI) foreign portfolio investment (stocks, bonds and savings) |
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what is net capital outflow (NCO) |
domestic purchases of foreign goods |
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what variables influence NCO? |
1) real interest rate paid on foreign assets 2) real interest rate paid on domestic assets 3) perceived risk of holding foreign assets 4) government policies affecting foreign ownership of domestic assets |
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what is real exchange rate? |
rate at which goods/services of one country trade for goods/services of another |
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how do you calculate the real exchange rate between two countries? |
Er=eP/p* p=domestic price P*=foreign price E=exchange rate Er=real exchange rate |
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what is arbitrage? |
when a good has a different price in two different economies including the transaction cost |
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what is Purchasing Power Parity(PPP)? |
unit of any currency should be able to buy the same quantity of goods in all countries (based on the law of one price) using nominal exchange rate. |
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how do you calculate the velocity of money? |
(GDP*GDP deflator)/money supply |
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what is the fisher effect? |
an increase in the rate of money growth raises the rate of inflation but does not change any "real variables" (NOTE: real interest rate= nominal int.rate-inflation rate.) |
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what is the exchange rate from US$ to canadian $? |
1 usd=1.25 candian dollars |
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what is the exchange rate from US$ to mexican pesos? |
1 usd=15 pesos |
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what is the exchange rate from US$ to UK Pounds? |
1 usd=0.7 punds |
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what is the exchange rate from US$ to Euro? |
1 usd=0.9 Euro |
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what is the exchange rate from US$ to chineese Yuan? |
1 usd=6 yuan |
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exchange rate for Japanese yen? |
1 usd=120 yen |
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what are some problems with PPP? |
1) many goods can't be traded over seas. 2) foreign and domestic goods are not perfect substitutes 3) currencies demand and saving instruments |
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what is the main difference between monetary policy and fiscal policy? |
monetary policy changes AD indirectly while fiscal policy changes AD directly by changing G (government spending (y=i+c+g+(x-m)) |
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if GDP goes down does investment and consumption decrease by the same amount, more or less?
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More |
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what was the US' most recent GDP and unemployment rate? |
17 trillion and 5,6% |
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which countries are considered the asian tigers? |
Hong Kong, Singapore, South Korea and Taiwan. |
