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  1. Business Cycle
    recurring increase and descreases in the level of economice activity periods
  2. Expansion cycle
    Increase in RGDP, income, employment
  3. Recession
    Decreases in RGDP, income, & employment
  4. Depression
    severe recession
  5. 4 causes of the recent recession
    • 1. cheap credit
    • 2. subprime lending
    • 3. low interest rates
    • 4. financial investments
  6. What causes recessions (4 group beliefs)
    • 1. Keynesian
    • 2. Monetarists
    • 3. Real Business Cycles
    • 4. Coordination Failure
  7. What causes a recession?
    Keynesian belief...
    • cause- sticky wages/prices
    • -investment swings are the largest source of instability
    • ie: sudden increase in oil prices (supply side shock)
  8. What causes a recession?
    Monetarists belief...
    • inappropriate government policy (ie minimum wage laws) 
    • conservative view
  9. What causes a recession?
    Real Business Cycles...
    • cause- shocks to real factors
    • -fluctuations occur due to changes to "real things" factors of production

    ie: unexpected oil shortage output (RGDP) falls
  10. What causes a recession?
    Coordination Failure....
    cause: self fulfilling expectations

    ie: oil price increases, consumers and firms expect rices will stay high
  11. Reason why policy makers should try to stabalize the economy
    • 1. econmies fluctuate
    • 2. why suffer through booms and busts?
  12. Reasons why policy makers should not try to stabalize the economy
    • 1.  Policy works with a long lag
    • 2. Hard to predict economic changes
    •      (if they are wrong they might make things worse)
  13. Economic Investment
    Payment for addition in nations capital stock
  14. financial investment
    buying or building an asset in expectation of earning financial gain
  15. Economic investment usually follows financial investment
    • Joe buys bond from apple revieces 10% gain. (financial)
    • apple uses the loan to build servers (economic)
  16. Present Value =

    Yt (future value)
  17. Formula for Return on risky assets
    investment * Sum of events [Pr(event)* (1+i)]
  18. Formula for National Savings
    Savings= Y-C-G
  19. Formula for government saving
    Government Saving=T-G
  20. Formula for private savings
    Y-C-T= private savings
  21. Crowding Out
    A decrease in investment that results from a decrease in public savings
  22. What is Money
    • -medium of exchange
    • -unit of account
    • -store value
  23. USA Medium of Exchange
    Federal Reserve Note
  24. Examples of things commonly mistaken for money
    • Gift Cards
    • Credit Cards
  25. Examples of Money
    Currency (coins bills) cigarettes, beads, and shells
  26. Liquidity
    • How easy it is to convert an asset into a medium of exchange
    • (cars and homes are least liquitible
  27. Fiat money
    money without intrinsic value but is money by government decree
  28. commodity money
    a commodity with intrinsic value (cigarretes, gold etc.)
  29. Pros and Cons of Commodity Money
    Pro: Money has some inherent value

    • Con:
    • -limits amount of money that can be printed
    • -value of resources may not be stable
  30. 2 reasons people hold money
    • 1. to make transactions
    • 2. store of assets
  31. Why is money demand downward sloping?
    Higher interest rates mean higher opportunity cost of holding money therefore the demand is low
  32. Name of USA central Bank
    Federal Reserve Bank
  33. 3 ways the Federal Reserve is Independent
    1. Board of governors make decisions and elected for 14 year terms, they are technically private.
  34. Feds function with money supply
    • 1. Supervising banks (lend money, check collection and cash)
    • 2. controlling the money supply
    • (issue currency, set reserve requirements, hold reserves, and conduct open market operations)
  35. Monetary Multiplier
    1/RR  (reserve requirement)

    ie RR=.2   MM=1/.2  = 5  

    initial deposit=1000*5=5000-1000=$4000 was created from $1000 Doesnt increase wealth
  36. Is money supply, perfectly elastic or inelastic?
    perfectly inelastic, money supply=money demand
  37. Fiscal Policy
    • Changes in govt purchases and/or tax collections designed to achieve a full-employment
    • 1.) change in govt expenditures in output mkt
    • 2) change in net transfer
  38. Fiscal Policy (expansionary)
    an increase in government purchases and or decrease in taxes for the purpose of increasing aggregate demand to full employment rate
  39. Fiscal Policy (contractionary)
    Decrease in government expenditure and/or increase in taxes for the purpose of decreasing aggregate demand to full employment rate
  40. GDP Gap
    GDP Gap= SR equilibrium-NRO (Natural rate of output)
  41. GDP Gap is -20 Billion gov wants to increase by 20 billion by either of what two policy choices.
    • 1) recovery act- spend way out
    • 2) "trickle down" cut taxes
  42. Automatic Stabilizer
    changes in fiscal policy that simulate AD when the economy goes into a recession w/o policy makers housing to take any deliberate action
  43. 3 types of delays in Fiscal Policy
    • 1) Recognition Lag- delay in recognizing the problem
    • 2) Administrative Lag- takes time to pass laws
    • 3) Operational Lag- takes time for the stimulus to happen
  44. Laffer Curve
    • An upside down U curve that determine what tax rate maximizes tax revenue.
    • -short run rate 70%
    • -long run rate 50%
  45. Money Supply=
    initial deposits * 1/reserve ratio
  46. 2 ways to change money supply
    • 1) change initial deposits
    • 2) Change reserve ratio
  47. 2 kinds of monetary policy
    • 1) expansionary
    • 2) contractionary
  48. Expansionary Monetary policy
    performs during recession
  49. Contractionary money supply
    perform during expansion
  50. Feds 3 tools to work with
    • 1) reserve ratio
    • 2) output market (purchases or sales of us gov bonds by the Fed)
    • 3)Discount Rate (the rate Fed charges bank for loans
  51. When banks look for loans they can look to... (2 Answers)
    • 1)Another bank and pay federal funds rate
    • 2)the Fed and pay discount rate
  52. What are 3 types of Securities
    • 1) treasury Bill
    • 2)Treasury Notes
    • 2)Treasury Bonds
  53. Treasury Bill
    matures in one year or less, does not pay interest
  54. Treasury Note
    Matures in 2-10 years, pay interest every 6 months
  55. Treasury Bond
    Matures in 10-30 years; pay interest every 6 months
  56. 2 Strengths of Monetary Policy
    • 1) Faster and more flexible
    • 2) less political
  57. 2 Problems with Monetary Policy
    • 1) recognition and operational lag
    • 2) cyclical asymmetry, works well to break inflation, but not to stimulate economy to get out of a recession
  58. Market Basket
    A good that a typical consumer buys
  59. Consumer Price Index
    a measure of the overall cost of goods and services
  60. Formula for Velocity of Money
    Velocity= Y*P/Money Supply ;

    MS=1/RR initial deposit; Y=total output
  61. Problems with CPI measurement
    • 1) substitution bias: multiple similar goods
    • 2) quality change: advancement in technology over time
    • 3)new goods: i.e.: kindle, iPad
  62. Unanticipated Inflation
    • 1) decrease ability to purchase goods
    • 2) decreases foreigners ability to purchase US goods (NX)
    • 3) make lenders more cautious and/or change higher interest rates (I)
  63. Who is affected by inflation?
    • 1) unaffected or benefits: debtors, flexible income receivers
    • 2) hurts: creditors, savors
  64. Anticipated Inflation
    1) People will place their money in the bank
  65. Real Interest Rate
    Nominal Interest Rate- Inflation
  66. Classic Dichotomy
    theoretical separation of nominal and real variables
  67. Monetary Neutrality
    The proposition that changes in the money supply do not affect real variables in the long run
  68. Difference between short run and Long Run
    • SR- prices are sticky which causes inflation
    • LR- relative prices adjust to normal value
  69. Fisher effect
    the one-for-one adjustment of the nominal interest rate to the inflation rate
Card Set:
2013-04-10 14:46:18

Macro test
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