Macroeconomics Test 3/FINAL

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  1. Recessionary Gap   
    (end of ch 14)
    • When aggregate output is below potential output.
    • Expansionary fiscal and monetary policy often used to counter recessionary gap.
  2. Inflationary gap
    (end of ch 14)
    When aggregate output is above potential output. This results in an output gap (the difference between actual aggregate output and potential output.)

    Often can be countered by contractionary fiscal and monetary policy.
  3. Output gap
    The percentage difference between actuall aggregate output and potential output.

    Output gap=((actual aggregate output-potential output)/potential output)x100
  4. An increase in government spending or decrease in taxes has what effect on the economy?
    (End of ch 14)
    Increases aggregate demand directly by government spending (etc) replacing lost consumer spending or indirectly by leaving more income in the hands of consumers enticing them to spend.
  5. A decrese in government spending or increase in taxes has what effect on the economy?
    (End of Ch 14)
    This would decrease consumers' ability to spend, decreasing aggregate demand.
  6. Fiscal Policy
    (Ch 15)
    Government tools.  The use of taxes, govt transfers, or govt purchase of goods and services to shift the aggregate demand curve.
  7. Expansionary fiscal policy
    (Ch 15)
    • Used to increase aggregate demand and eliminate a recessionary gap.
    • Implemented by:
    • *Increase in govt spending
    • *Cut in taxes
    • *Increase in govt transfers
  8. Contractionary fiscal policy
    (Ch 15)
    Used to reduce aggregate demand to eliminate an inflationary gap. Implemented by:

    • *Reduction in govt spending
    • *Increase in taxes
    • *Reduction in govt transfers
  9. Discreationary expenditures
    (Ch 15)
    Includes programs Congress authorizes on an annual basis, such as Defense Department, EPA, State Department, etc. Declining proportion of US budget

    It is from the discretionary portion of the budget that discretionary fiscal policy (spending) emanates.
  10. Personal income taxes and SS taxes comprise about how much of federal revenues?
  11. Give examples of stabilization policies.
    (Ch 15)
    Expansionary and contractionary policies.
  12. What are some limites to using stabilization policies?
    (Ch 15)
    • Inside lags
    • Outside lags
  13. Inside lags
    (Ch 15)
    The time it takes to recognize a problem and formulate a solution. The source of these delays rests with the information delays and action delays (time to formulate plan)

    re: Stabilization policy
  14. Outside lags
    (Ch 15)
    The delay associated with the time it takes for the policy solution to take effect or work. The success of stabilization policy depends heavily on ability to forcast what's ahead.
  15. Marginal Propensity to Consume
    (Ch 15)
    MPC=Change in consumer spending/Change in disposable income
  16. Fiscal Multiplier
    (For govt spending vs for transfer payment increases/decreases)
    (Ch 15)
    1/(1-MPC)  or   1/MPS  

    *For govt expenditures, multiply this by the amount of the original expenditure.

    *For increases/decreases in transfer payments, multiply this by the original expenditure minus the first round of savings. Essentially the first round effect doesn't get included in the increase/decrease to GDP
  17. MPS
    (Ch 15)
    Marginal propensity to save.  Leaks in the system. Higher MPS results in lower impact of fiscal policies.
  18. Cyclically Adjusted Budget Balance
    (Ch 15)
    An estimate of budget balance if the economy were at its potential output.

    *If this budget shows budget surplueses or increasing surplus when the economy is operating at potential, then the structure of spending and taxes tends to be contractionary.

    *If deficits occur or increase, then the budget tends to be expansionary.
  19. Consequences of large/persistant national debt
    (Ch 15)
    Govt securities crowd out private investment
  20. Implicit Liabilities
    (Ch 15)
    Spending promises made by govts that are essentially debt even though they are not included in usual debt statistics
  21. Money
    (Ch 16)
    • Anything that is regularly used in economic transactions or exchanges. People are willing to accept money as a medium of exchange because of it's recognizable value
    • *Medium of exchange
    • *Unit of Account
    • *Store of Value
  22. Unit of account
    (Ch 16)
    Money serves as a unit of account, and as such it provides a convenient mesuring rod when prices for all goods are quoted in money terms. Standard unit which can be used to compare the relative value of goods, making it easier to carry out economic transactions.
  23. Store of Value
    (Ch 16)
    • Money serves as a store of value, and doesn't have to be spent immediately. It can be held later to carry out transactions because it is a store of value.
    • *Money's store of value is imperfect because of inflation/deflation
  24. Commodity Money
    (Ch 16)
    This money is a good used as a medium of exchange that has other uses. Examples: Gold, silver.
  25. Commodity-backed money
    (Ch 16)
    This is a medium of exchange with no intrinsic value, but whose ultimate value is guaranteed by a promise that it can be converted into valuable goods (e.g. paper money backed by gold or silver.)
  26. Fiat money
    (Ch 16)
    • This is a medium of exchange whose value derives entirely from its official status as a means of payment. Example: US Dollar.
    • Its value comes from it's acceptance as a medium of exchange and other functions it servies, etc
  27. M1 (Measure of money)
    (Ch 16)
    • M1 is the most basic of the money measures. Includes:
    • *Currency held by public
    • *Checkable deposits/demand deposits
    • *other checkable deposits
    • *travelers checks
  28. M2 (measure of money)
    (Ch 16)
    M2 is a broader definition of money than M1.

    M2= M1 + other assets that are sometimes used in economic exchanges or that can be readily turned into M1. (Such as depositis in money market mutual funds and savings accounts. )
  29. A bank's balance sheet classifies what as assets and what as liabilities?
    (Ch 16)
    •      Assets                                            Liabilities     
    •      Loans   $1,000,000     |     Deposits    $1,000,000
    •      Reserves    100.000    |     
    •                                         |
    • Accounting note: This doesn't balance because Stockholders' equity isn't a liability really, and can't be added to balance the T account unless the right column name is change to L + SE?
  30. Reserves
    (Ch 16)
    The currency banks hold in their vaults plus their deposits at the Federal Reserve. (Note: These reserves are NOT included in M1)

    Banks are required by law to hold a fraction of their deposits as reserves and not make loans with them. This fraction is called required reserves.
  31. Reserve ratio
    (Ch 16)
    This is the fraction of bank transaction deposits that a bank must hold as reserve at minimum. The ratio is set by the Fed.
  32. Money Multiplier
    (Ch 16, multiplier re: the Fed and monetary policies)
    Similar to the Fiscal Multiplier that showed the effects of Govt fiscal policy on GDP. This Money Multiplier shows the effect of an increase in deposits can have on the money supply.

    • instead of using MPC or MPS in the fraction, we use the % of the reserve ratio. For class we assumed the reserve ratio was .10 set by fed.
    • Money deposited/0.10
    • Money depositied/reserve ratio
  33. What is the role of banks in the US financial system
    (Ch 16)
    • b/c of lending they're principal source of small business credit.
    • Principal operators of nation's payment mechanism
    • Hold the bulk of nation's liquid wealth-deposit accounts
    • Important channels for Fed policy to operate.
  34. With the (fed/bank deposit) money multiplier, when does the creation of money stop?
    (Ch 16)
    • Example: Deposit of 1000, reserve of .10. The money creation process doesn't stop until the bank reserves absorb the initial $1000 deposit.
    • (Once the reserve amount caused by the chain of deposits = the original deposit amount.)
  35. With the money multiplier, the increase in M1=
    (Ch 16)
    1/(reserve ratio x the increase in reserves aka initial deposit)
  36. Monetary base
    (ch 16)
    The sum of currency in circulation and bank reserves. 
  37. The money multiplier is the ratio between what?
    (Ch 16)
    the ratio of the money supply to the monetary base.
  38. As an institution, the Fed today consists of three distinct subgroups....
    (Ch 16)
    • The Board of Governors
    • Federal Reserve Banks
    • The Federal Open Market Committee
  39. What/who holds the true seat of power over the monetary system?
    (Ch 16)
    The Board of Governors of the Federal Reserve
  40. How many Federal Reserve districts is the US divided into?
    (Ch 16)
    12 districts. Each w/semi-autonomous regional banks. Purpose= to avoid monopoly and concentration of power in a single area or financial center.
  41. What are the (Fed's) tools of monetary policy?
    (Ch 16)
    • Reserve reqrmnts-% amounts banks req to hold on dep at fed
    • Discount rate - Borrowing rate at the fed
    • Open Market Operations
  42. Discount Rate
    (Ch 16)
    The borrowing rate at the Fed; banks can also borrow reserves from one another at the federal funds rate - the market for this interbank borrowing of reserves=federal fund market
  43. Federal Funds Market
    (Ch 16)
    The market for banks borrowing reserves from each other.
  44. Transaction demand for money
    (Ch 17)
    Wanting money to carry out transactions
  45. Liquidity Demand for Money
    (Ch 17)
    Where individuals hold assets, such as currency or checking accounts, so they can make transactions on quick notice or meet contingencies (car breakdown, broken hot water heater, etc)
  46. Speculative demand for money
    (Ch 17)
    Where individuals convert wealth into and out of money to avoid possible losses or to take advantage of high expected returns associated w/interest rate movements.
  47. Demand for money
    (Ch 17)
    Transaction demand+Liquidity demand+Speculative demand

    Together these equal the demand for money.
  48. Holding wealth as idle cash balances has an opportunity cost
    (Ch 17)
    Opportunity cost is lost interest income. As interest rate rises, so does the opportunity cost of holding cash.   -- demand curve for cash  is downward sloping. (cash demand on x axis and interest rate on y axis)
  49. When we generate a money demand curve, we hold everything constant except:
    (Ch 17)
    Interest rates
  50. Money supply is determined by the Fed, so we assume that the money supply is independent of the interest rate. Meaning the money supply curve is:
    (Ch 17)
    A vertical line.
  51. Lowering reserve requirements can result in:
    (Ch 17)
    Banks having excess reserves that now can be lent. Increasing money supply. Opposite is true for raising reserve requirements.
  52. Discount Rate
    (Ch 17)
    The interest rate the fed charges on loans to institutions.
  53. What is the relationship between a country's interest rates and its exchange rates?
    (Ch 17)
    There is a direct relationship between a countries interest and exchange rates. Higher interest rates=increased demand for dollars as foreign investors seek higher returns offered by us.
  54. Fed funds rate appears to follow this rule
    (Ch 17)
    • Taylor rule? 
    • Fed funds rate=1+(1.5*inflation rate)+(0.5*output gap)
  55. Monetary Neutrality
    (Ch 17)
    In the long run changes in the money supply have no real effect on the economy (only short term effects) If you double the money supply, eventually prices double.
  56. Sources of comparative advantage in international trade
    (Ch 18)
    • Differences in climate
    • Differences in technology
    • Economies of Scale
    • Factor endowments(relationhsip between comparative advantage and factor availability is found in model of international trade: Heckscher-Ohlin model)
  57. Factor Intensity
    (Ch 18)
    measures which factor is used in relatively greater quantities than other factors in production.

    Comparative advantage can arise from differences in factor endowments:goods differ in their facto intesity, and countries tend to export goods that are intensive in the factors they have in abundance.
  58. Domestic Demand Curve
    (Ch 18)
    Shoes how the quantity of a good demanded by domestic consumers depends on the price of that good.
  59. Domestic Supply Curve
    (Ch 18)
    Shows how the quantity of a good supplied by domestic producers depends on the price of that good.
  60. World Price
    (Ch 18)
    The world price of a good is the price at which that good cna be bought or sold abroad. The world price is lower than the domestic price. w/o any restrictions on trade, the domestic shrimp price falls to world price.Consumers benefit. take some of the domestic suppliers surplus.
  61. Free Trade
    (Ch 18)
    Free trade occurs when governments do not attempt either to reduce or increase the levels of exports and imjports that occur naturally as a result of supply and demand
  62. Policies that limit imports are called:
    (Ch 18)
    Trade protection or simply protection. Examples: Tariffs (a tax), and quotas. Result in lost domestic consumer and supplier surplus?
  63. Foreign exchange market
    (Ch 18)
    Where currencies are traded at prices known as exchange rates
  64. When a currency becomes more valuable it:
    (Ch 18)
  65. When a currency loses value it:
    (Ch 18)
  66. Real exchange rates
    (Ch 18)
    Exchange rates adjusted for international differences in aggregate price levels
  67. Purchasing Power Parity
    (Ch 18)
    The essence of PPP is that nominal exchange rates between currencies must reflect the relative price levels of those countries. Thus, the cost of the same market basket of goods purchased in country after country relative to one another reflect the price levels in each which inter reflect their respective exchange rates.
  68. Why should we care about exchange rates?
    (Ch 18)
    Exchange rates determine the competitiveness of a countries exports in world markets. This, in turn, means that jobs increase and employment increases.
  69. Balance of payments
    (Ch 18)
    A country's balance of payment accounts summarize its transactions with the rest of the world. Balance payments on current account (or current account) includes the balance of payments on goods and services together with balances of factor income and transfers. ??
  70. Balance of payments of financial account
    (Ch 18)
    or simply financial accounts. = the difference between its sales of assets to foreigners adn its purchases of assets from foreigners during a given period. Assets can include business investments, real assets, currency, and other assets.
  71. Consequences of the dollar appreciating
    As the dollar appreciates, US goods become more expensive on world markets. US exports decline. Meanwhile it becomes cheaper for US residents to buy foreign goods. 

    Lower exports+higher imports=lower GDP (due to the decrease in net exports)
Card Set:
Macroeconomics Test 3/FINAL
2012-12-04 06:13:08
Macroeconomics test Final 14 15 18

Final Macroeconomics test
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