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A set of institutional arrangements to determine how to distribute scarce resources to satisfy peoples wants.
4 Characteristics of the Market system
- Extensive Private Property rights
- Freedom of enterprise and choice
- Self interest as the primary motivating force
- existence of market and prices
- Active, but limited government
An increase in RGDP per Capita
Natural Rate Hypothesis
The claim that unemployment eventually returns to its normal, or natural, rate, regardless of the rate of inflation
What is the central bank of USA called
Federal Reserve Bank
Fractional Reserve Banking
Banking system in which banks are required to keep a percentage (fraction) of checkable deposits in cash or with the central bank.
What is Crowding out and how is it caused by expansionary fiscal policy?
the decrease in investment that results from decrease in public savings/ expansionary fiscal policy. With expansionary fiscal policy, the public savings decreases, therefor the supply of loanable funds decreases. This results in a higher interest rate and lower demand for loans in the new equilibrium in the loanable funds market.
Three tools of monetary Policy
Reserve Ratio (RR): Regulations on the minimum amount of reserves that banks must hold against deposits; Open-Market Operations: The purchase and sale of US government bonds by the Fed Discount Rate: The interest rate on the loans that the Fed makes to the banks
Four components of Aggregate Supply
Consumption, Investment, Government purchases, Net Export
4 different groups that have a theory for fluctuations in the economy
- -New Keynesians: unexpected shocks to either aggregate demand or supply interacting with sticky prices
- -Monetarists: Inappropriate Gov Policy
- -Real Business Cycle: Shocks to Real factors
- -Coordination Failure: People lack ta way to coordinate their actions, and therefor we have events that result from people's expectations, rather than anything fundamental to the economy.
Balanced government budget: Good or bad?
- -Pro: Places a burden on future taxpayer, Lower national savings
- -Con: Tax burden is not large compared to a person's lifetime income, budget deficit has to be seen in the picture.
Fixed Exchange rate
Gov determine exchange rates and make necessary adjustments in their economies to maintain those rates
Flexible Exchange Rate
Demand and supple determine exchange rates and no gov. intervention occurs
3 disadvantages of a flexible exchange rate system
Uncertainty and diminished trade; terms of trade changes; instability
Most common exchange rate system?
Managed exchange rate float
4 ways the government can control the exchange rate
- 1: trade policies
- 2: Exchange Rate controls and rationing
- 3: Domestic Macroeconomic Adjustment
- 4: Currency Intervention
The observation that people have unlimited wants but limited resources
type of unemployment caused by workers taking their time searching for a job that matches their skill tastes
The Wealth effect
If the money supply is fixed, increases in the price level tend to decrease the real value of financial assets, which lowers consumer spending.
Aggregate Demand Shifters
- 1: Change in consumer Wealth
- 2: household borrowing
- 3: Taxes
- 4: interest rates
- 5: expected returns
- 6: government spending
- 7: income or wealth in foreign countries
- 8: exchange rates
- 9: tarrifs
List the two roles of a Government in a market economy
Regulator and equalizer
Assumptions economists make about consumers
People are rational, people have unlimited wants, people have limited income.
Gross Domestic Product- The market value of final goods and services produced within the borders of a given country within a given period of time.
Reasons economists use RGDP per capita to study cross county welfare
- - Strong correlation between GDP and other quality of life factors
- - GDP data is available for many countries
- - Countries have a good incentive to collect accurate GDP data (tax purposes)
3 assumptions economists make about firms?
- -Firms act to maximize profits
- -Firms produce goods with a technology that requires resources
- -Resources are limited
What is meant by an expansion in the context of business cycles?
- The recurring increases and decreases in the level of economic activity over periods of years.
- An expansion is the phase in a business cycle in which the RGDP, income and employment increase.
expansionary Monetary policy
Monetary policy that increases money supply, lowers interest rates and increases aggregate demand.
The rate that the federal reserve bank charges on the loans it makes to commercial banks and thrift institutions
Consumer Price index
A measure of the overall cost of the goods and services used by a typical consumer
Changes in fiscal policy that stimulate AD when the economy goes into a recession (or slows AD when economy goes into a boom) without policy makers having to take any deliberate action.
Payments for new additions to the nations capital stock, whether public (new roads and bridges) or private (new factories, homes, and equipment)
What is money?
- Medium of exchange: an item that buyers give sellers when they want o purchase goods and services.
- Unit of Account: The measure people use to post prices and record debts.
- Store of Value: An item that people can use to transfer purchasing power from present to the future.
functions performed by the federal goverment
- lending money to banks
- set the reserve ratio
The one-for-one adjustment of the nominal interest rate to the inflation rate.
Costs of inflation
shoeleather costs, menu costs, relative price-variability and the misallocation of resources, confusion and inconvenience, inflation-induced tax distortions, unexpected inflation causes redistributions of wealth
cons of commodity money
- limited amount of money that can be printed
- resources could be put to better use
- value of resources need not be stable
A Bond is?
A loan from the saver to the borrower
Changes in government purchases and/or tax collections designed to achieve full-employment and noninflationary domestic output.
Official name for the paper currency used in the USA?
Is it a commodity of fiat currency?
- Federal Reserve notes
- It is an example of fiat currency, because it is not backed up by the value of an underlying asset.
What differentiates short run and long run aggregate supply?
- Short run input or output prices are sticky-
- They do not immediate respond to changes in economic conditions. In the long run all prices are fully flexible and accurate reflect the value of inputs and outputs.
Buying or building an asset in expectation of earning financial gain (new factories and homes, but also old buildings, plus stocks, bonds, and other financial assets)
The proposition that changes in the money supply do not affect real variables
The goods a typical consumer buys
Why might CPI do a bad job of measuring "cost of living"
- Substitution bias
- quality change
- intro of new goods
Small Country assumtions
- -Country is small enough so that whatever amount they demand can be supplied
- -Country's demand does not affect prices
- -Supply first comes from domestic firms and the remainder is met by foreign firms
A tax imposed by a nation on an imported good.
designed to produce income for the federal government
designed to shield domestic producers from the competition with foreign producers.
A limit imposed by a nation on the quantity of good that may be imported during some period of time.
Nominal Exchange Rate
The rate at which the currency of onenation can be exchanged for the currency of another nation.
A decrease in the value of a currency as measured bythe amount of foreign currency it can buy.
An increase in the value of a currency as measured by the amount of foreign currency it can buy.
Real Exchange Rate
The rate at which a person can trade the goods and services of one country for the goods and services of another country.
Purchasing Power Parity
A theory of nominal exchange rates whereby a unit of any given currency should be able to buy the same quantity of the same goods in all countries.
Two forms of capital outflow
- 1 Foreign direct investment: e.g. McDonald's opens up a fast-food restaurant in Russia. They actively manage the investment.
- 2 Foreign portfolio investment: e.g. an American buys stock in a Russian corporation. The American owner has a more passive role.
Net Capital Outflows (NCO)
Purchase of foreign assets by domestic residents - purchase of domestic assets by foreigners.