WorksheetsMacro Final
Total questions: 296
Worksheet time: 49hrs 20mins
What impact does an increase in the money supply (expansionary monetary policy) have in the SHORT RUN?
Lowers interest rates, increases investment and aggregate demand and output and perhaps prices
Raises interest rates, lowers investment and aggregate demand and output and prices
Increases the price level, only
Lowers the price level, only
What impact does an increase in the money supply (expansionary monetary policy) have in the LONG-RUN?
Lowers interest rates, increases investment and aggregate demand and output and prices
Increases the price level, only
Raises interest rates, lowers investment and aggregate demand and output and prices
increases peoples income and spending
What macroeconomic impact would a tax cut have in a recession, most likely?
Increase prices
Reduce interest rates
Raise aggregate output
raise the unemployment
What are the components of aggregate demand?
(a)
2 things Wealth Effect consists of?
(a)
People (a) their consumption spending when the value of their financial and real assets rises. (increase/decrease)
when government borrowing and spending results in higher interest rates, which reduces business investment and household consumption
Wealth Effects
Crowding Out
In (a) , a decrease in investment that results from government borrowing.
In (a) , Rapid increase in assets price not justified by economic fundamentals
This bubble was in 1637 when the market collapsed after a few of the bigger players decided to sell out.
(a)
In this bubble, the first great financial disaster of modern times. Began as a scheme to pay off the English debt
(a)
In this bubble, 2008, borrowers were defaulting on subprime mortgages in high numbers, causing turmoil in the financial markets, the collapse of the stock market, and the ensuing global Great Recession.
(a)
In this bubble, a rapid rise in U.S. technology stock equity valuations fueled by investments in Internet-based companies in the late 1990s-2000s.
(a)
The (a) crisis was unique because it was natural shock rather than financial and Fiscal Policy/Relief Policy - support individuals and businesses –and increase aggregate demand.
During a crisis, (a) plays the role of the ratio of the stock of debt to GDP, approximating an economy's capacity to service its debt.
What policy actions were taken to deal with the 2007 financial crisis?
(a)
What do you imagine will be some of the major consequences of the covid-19 crisis?
Focuses on long run (LR) & aggregated SUPPLY
Classical
Keynesian
Money supply affects prices and inflation only
Classical
Keynesian
economy self-adjusting in LR & full employment (Say’s Law)
Classical
Keynesian
Full employment & there can't be 'under consumption' i.e., too little aggregate demand
Okun's Law
Say's Law
Interest rates determined by saving and investment (supply and demand for loanable funds)
Classical
Keynesian
Focuses on the short run (SR), aggregate demand & economy not self-adjusting
Classical
Keynesian
Periods of recession, unemployment, & increase aggregate demand to deal with this thru fiscal policy primarily
Classical
Keynesian
Money supply affects AD and everything else in the SR but may not be effective in recession/depression if in a liquidity trap
Classical
Keynesian
Tax cuts can shift aggregate SUPPLY and increase output, income, etc without inflation and without government spending
supply-side economics
demand-side economics
inflation occurs when too much money is chasing too few goods
Monetarism
Modern Monetary Theory
Money has the largest impact on aggregate demand and thus output, recession, etc. in LR, basically classical
Monetarism
modern Luddites
(a) was associated with monetarism.
fiscal expenditure and taxes determine output and price levels, while money is supplied or withheld merely in response to fiscal policy
marginal productivity theory
Modern Monetary Theory
uses FISCAL rather than monetary policy to deal with unemployment and have the Fed ‘print money” to expand the money supply to pay for the deficit spending
Modern Monetary Theory
marginal productivity theory
Fed can buy government bonds if no one else will and that U.S. can never been unable to repay loans/bonds
True
False
A lengthy period of negligible or no economic growth
secular stagnation
Solow growth model
lack of investment demand due to capital accumulation and diminishing marginal productivity and hence reduced returns to capital and thus excess of saving over investment and reduces natural interest rate
secular stagnation
marginal productivity theory
the excess of government spending over tax collections (G-T)
government budget deficit
national debt
entitlement programs
The sum of government deficits over time.
government budget deficit
national debt
entitlement programs
government programs providing benefits to qualified individuals regardless of need
government budget deficit
national debt
entitlement programs
Long Run ______ causes crowding out of possibly more productive private sector investment and thus slower growth.
Government Budget Deficits
Inflation
Increased foreign obligation one of the causes for ______.
Long-run Government Budget Deficits
Short-run Government Budget Deficits
crowding out of possibly more productive private sector investment and thus slower growth is apart is causes for ___.
Long-run Government Budget Deficits
Short-run Government Budget Deficits
crowding out of possibly more productive private sector investment and thus slower growth is apart is causes for ___.
Long-run Government Budget Deficits
Short-run Government Budget Deficits
How the Federal Reserve system takes actions to:
- increase the money supply
- lower interest rates
- expand real GDP
expansionary fiscal policy
expansionary monetary policy
Easy money policy is referred to as (a) .
People _____ their consumption spending when the value of those assets fall. (increase/decrease)
increasing
decreasing
Wealth Effect formula
W ↑ C ↑ -> D ↑-> y,p ↑
W ↑ D ↑ -> C ↑-> y,p ↑
W ↑ C ↑ -> D ↑-> p ↑
Speculative Asset Bubble
Rapid decrease in asset price not justified by economic fundamentals
Rapid increase in asset price not justified by economic fundamentals
In the LR, factors of ____ are aggregate supply, money supply affects prices and inflation only .
Classic Macroeconomics
Keynesian Macroeconomics
In the SR, _____ focuses on Aggregate demand & economy not self-adjusting
Classical
Keynesian
periods of recession, unemployment, & increase aggregate demand to deal with this thru fiscal policy primarily
Classical
Keynesian
money supply affects AD and everything else in the SR but may not be effective in recession/depression if in a liquidity trap
Classical
Keynesian
Tax cuts can ease output, income without inflation and without government spending shift aggregate SUPPLY
supply-side economics
Demand-side economics
Fed can buy government bonds if no one else will and that U.S. can never been unable to repay loans/bonds
Modern Monetary Theory
Floating exchange rates
suggest the government may be over spending even though the economy is at full employment, i.e. with no cyclical justification
Structural Deficit
cyclical deficit
Gov’t policies benefit the rich and the rest get ‘crumbs’ OR successful policies have to provide a good business
Globalization
trickle-down economics
Social Security, Medicare, and Medicaid, most Veterans' Administration programs, federal employee and military retirement plans, unemployment compensation, food stamps, and agricultural price support programs
(SR) Government entitlement programs
(LR) Government entitlement programs
what is the largest source of federal government revenue? largest spending item?
income taxes
interest rates
inflation
Why is international trade good?
Political reasons, retaliation, economic and military security, idea of helping domestic workers
comparative advantages
Why are some benefits of international trade?
opens new markets and exposes countries to goods and services unavailable in their domestic economies
Countries that export often develop companies that know how to achieve a competitive advantage in the world market.
the competition they bring is often damaging to small, domestic industries
Countries specializing in goods and services have a relative advantage in producing at a lower opportunity cost and trading for the rest, wind up with more of everything than if they tried to produce everything
productivity
long-run economic growth
comparative advantage
influencing a country's GDP, exchange rate, and its level of inflation and interest rates.
exports and imports affect the macroeconomy in the SR
exports and imports affect the macroeconomy in the LR
What impact does an open economy (trade) have on the effectiveness of monetary policy?
Strengthens monetary policies impact on aggregate demand by making it more effective due to the effect of interest rate changes on exports, imports, and aggregate demand
Strengthens fiscal policies impact on aggregate demand by making it more effective due to the effect of interest rate changes on exports, imports, and aggregate demand
Open economy trade on fiscal policy
increases the impact of fiscal policy on aggregate demand due to a form of crowding out
Reduces the impact of fiscal policy on aggregate supply due to a form of crowding out
Reduces the impact of fiscal policy on aggregate demand due to a form of crowding out
increases the impact of fiscal policy on aggregate supply due to a form of crowding out
supply and demand for currencies in the fx market
(SR) Determinants of exchange rates in the short-run
(LR) Determinants of exchange rates in the short-run
Purchasing Power Parity is a ______ for exchange rates.
(SR) determinants of exchange rates
(LR) determinants of exchange rates
exchange rates are thought to adjust to equalize prices of ‘tradeable’ commodities (steel, gold, not ice cream)
Current account deficit
Purchasing Power Parity
financial account surplus
imports greater than exports tends to weaken aggregate
This causes overvalued exchange rate in fx market
Current account deficit
Purchasing Power Parity
financial account surplus
Foreigners are buying more of our real and financial assets like companies, stock, & bonds than we are buying of theirs.
we are growing poorer – selling assets, incurring debt bonds
financial account surplus
Current account deficit
Purchasing Power Parity
During the 2007 financial crisis, Under President Bush and Treasury Secretary Paulson, the TARP ‘spending’ program which provided loans and other support to major banks and later to GM and others. Which policy was used?
Monetary Policy
Fiscal Policy
During a crisis, ______ plays the role of the use of borrowed funds, magnifies return and risk, shadow banks did lots of this.
funding mismatch
too big to fail/moral hazard
animal spirits
leverage
During a crisis, _______ is when people buy for no other reason than other people are buying it too
deleveraging
supply shock
over confidence/over optimism
leverage
borrow short and lend long
systemic risk
funding mismatch
over confidence (over optimism)
too big to fail/moral hazard
During a crisis, ______ is when Lehman and others borrowed weekly, invested longer term
too big to fail (moral hazard)
funding mismatch
belief that gov't would bail out large institutions hence encouraged them to take additional risks
deleveraging
systemic risk
too big to fail/moral hazard
debt deflation as uncertainty rose in the financial system, many institutions needed cash to meet short-term obligations and were forced to sell their Morgage Back Security at falling prices
animal spirits, deleveraging, fire sales
Supply shock
risk of breakdown in the financial system, particularly due to spillover effects from one market into others
Systematic Risk
Supply Shock
An unexpected event that causes the short-run aggregate supply curve to shift
Supply Shock
Systemic Risk
can only have two of the three: a fixed foreign exchange rate, capital mobility, or an independent monetary policy
advantages of floating exchange rates
Tri-lemma
automatic adjustment to economic shocks but involves more uncertainty for business.
advantages of floating exchange rates
advantages of fixed exchange rates
Providing greater certainty for importers and exporters, therefore encouraging more international trade and investment.
advantages of floating exchange rates
advantages of fixed exchange rates
Helping the government maintain low inflation, which can have positive long-term effects such as keeping down interest rates.
advantages of floating exchange rates
advantages of fixed exchange rates
How does a strong currency affect the domestic economy?
reduces exports, increases imports increases current account deficit (or reduces surplus)
increases exports, increases imports reduces current account deficit (or reduces surplus)
reduces exports, reduces imports increases current account defit (or reduces surplus)
Why did China undervalue the yuan in the past, when it fixed exchange rates?
stimulate exports, increase imports, reduce current account surplus and aggregate demand.
stimulate exports, reduce imports, increase current account surplus and aggregate demand.
post WWII international agreement establishing international financial system of fixed exchange rates, with gold backing u.s. $ and other currencies convertible to dollars. IMF, WTO, BIS, FSB
Bretton Woods
LR Phillip's curve
Representatives from 44 countries met in New Hampshire to design a new international monetary system; resulted in the establishment of the IMF and the World Bank.
Bretton Woods
CPI
How does a gold standard work?
Results in fixed exchange rates, basically gold
flows in response to current account deficits and self- adjusting balance of payments
Results in floating exchange rates, basically gold
flows in response to financial account deficits and self- adjusting balance of payments
What does it take to be counted as unemployed?
out of work, actively seeking work, but NOT available for work
out of work, actively seeking work, and available for work
out of work & actively seeking work
How do we define the unemployment rate (simple formula)?
# unemployed / labor force
labor force/ # unemployed
labor force/ population
What's labor force?
unemployed + employed
unemployed only
employed only
What is hidden unemployment, discouraged workers?
unemployed but haven't searched in last four weeks due to feeling that no jobs are available
uemployed but have been searching in last four weeks due to feeling that no jobs are available
employed
Causes or types of unemployment?
Cyclical
Structural
frictional
labor
unemployment that rises during economic downturns and falls when the economy improves
Cyclical
Structural
Frictional
unemployment that occurs when workers' skills do not match the jobs that are available
Cyclical
Structural
Frictional
A type of unemployment caused by workers voluntarily changing jobs and by temporary layoffs; unemployed workers between jobs.
cyclical
structural
frictional
inverse relation between changes in output (gdp) and the unemployment rate - output up, unemployment down
Okun's Law
Solow growth model
the long-run equilibrium unemployment rate at which inflation is stable and all available and willing workers are employed
Productivity
natural rate of unemployment (NAIRU)
secular stagnation
What’s the relation between wages, prices and productivity?
W/P=MP
W/P= PM
According to marginal productivity theory, what is a key determinant of the real wage (in theory)?
MP
W/P=MP
Modern Luddites
People who oppose technology/automation/robotics
People who benefit from technology/automation/robotics
Sustained increase in general level of prices
Inflation
Interest rates
What’s the difference between inflation and an increase in prices?
Inflation is ongoing, versus a one-time or short-term increase in prices
Inflation is ongoing, versus a one-time or short-term decrease in prices
using an average price index, most popular one being the CPI
How do we measure the level of prices
How do we measure the level of outout
What are some drawbacks or limitations of the traditional (fixed weight, base period) CPI?
Fails to account for substitution from goods whose prices are increasing to cheaper goods
Difficult to measure impact of new or improved goods or services.
hyperinflation often occurs while there is a significant increase in the money supply not supported by gross domestic product (GDP) growth, resulting in an imbalance in the supply and demand for the money.
a measure of the overall cost of the goods and services bought by a typical consumer
CPI (Consumer Price Index)
fixed-weight index
Base Period
All goods carry the same weight/importance from year to year
CPI (Consumer Price Index)
fixed-weight index
base period
A fixed period of time that most states use in an unemployment insurance formula to determine weekly benefits
CPI (Consumer Price Index)
fixed-weight index
base period
%change in a price index
measuring inflation
measuring interest rates
a measure of the overall cost of consumer goods and services excluding food and energy
chain-weighted index
Core CPI
a method for calculating changes in prices that uses an average of base years from neighboring years
Core CPI
chain-weighted index
What can cause inflation in the short-run?
Inappropriate growth in Money Supply (faster than growth in real output etc)
Aggregate demand or supply shocks (shifts)
What can cause inflation in the long-run?
Inappropriate growth in Money Supply (faster than growth in real output etc)
Aggregate demand or supply shocks (shifts)
What harm does anticipated inflation cause?
menu & shoe leather
Distortion of signaling function of prices, distortions in tax system, redistribution from lenders to borrowers (real rate falls with inflation) and thus reduced desire to lend
What harm does unanticipated inflation cause?
menu & shoe leather
Distortion of signaling function of prices, distortions in tax system, redistribution from lenders to borrowers (real rate falls with inflation) and thus reduced desire to lend
______ is worse than ______ because interest rates can only be lowered to zero
Inflation, Deflation
Deflation, inflation
Hyperinflation
A very rapid rise in the price level of goods & services
an extremely high rate of inflation.
an increase in the money supply and demand-pull inflation.
an decrease in the money supply and demand-pull inflation.
inverse relation between inflation and unemployment rate.
monetarism
short-run Phillip’s curve
Long-run Phillip’s curve
Implies gov’t can choose between the two to some extent – lower unemployment at the expense of increased inflation.
monetarism
short-run Phillip’s curve
long-run Phillip’s curve
What has happened to the SR Phillips curve in recent years?
flattened out – less of a tradeoff, if any
Expands out – more of a tradeoff, if any
What causes the short-run Phillip’s curve to shift up?
expectations of future inflation
short-term increase in prices
self- adjusting balance of payments.
If Fed is believable when it says it will act to curb inflation, inflation will likely fall Between inflation expectations and inflation? If public expects inflation in future, it will cuase inflation to increase today
relation between Fed credibility and inflation
relation between exchange rates and inflation
What’s the long-run Phillip’s curve? What’s the implication of the slope of the long-run Phillip’s curve?
no relation between them, output tends towards the natural (full employment) rate and attempts to lower it will just increase inflation
expectations of future inflation
What’s the relation between unemployment and inflation?
LR Phillips curve and tradeoff
SR Phillips curve and tradeoff
The SR Phillips curve ‘dead’ (flat) maybe because strong stimulus lowering unemployment rate dramatically won’t cause much inflation
True
False
What was the long-run average rate of growth in U.S. real GDP in the past?
2%
3%
7%
10%
Real GDP per capita?
2%
3%
7%
10%
What is it expected to be in the future?
2% real GDP, 1.5% per capita
1.5% real GDP, 2% per capita
3% real GDP
How has long-run U.S. growth generally compare with Europe? Asia? Africa?
Generally higher than Europe – they have more rigid labor markets and economic systems; Asia – Asian tigers etc – have been developing more rapidly; Sub-saharan Africa, much slower
Generally lower than Europe – they have more rigid labor markets and economic systems; Asia – Asian tigers etc – have been developing more rapidly; Sub-saharan Africa, much slower
roughly, output per worker or per man hour
productivity
labor force
the quantity of goods and services produced from each unit of labor input
productivity
labor force
What is the role of technology in economic growth?
appears to be a driver of SR growth
appears to be a driver of LR growth
What is the role of property rights in economic growth?
allow for increased work productivity
provides a foundation for development, the groundwork on which much of our economic and social well being is built.
eliminate destructive competition for control of economic resources
the intensity of its use raises output, but increases its depletion rate.
What is the role of technology in economic growth?
appears to be a driver of LR growth
the intensity of its use raises output, but increases its depletion rate.
produces new products, creates new jobs and new industries, cuts costs of production, and makes a large contribution to our economic growth and our over-all national welfare
What is the role of human capital in economic growth?
allow for increased work productivity
expanding the knowledge and skills of its people
What is the role of capital in economic growth?
expanding the knowledge and skills of its people
allow for increased work productivity
What is the role of savings in economic growth?
a higher saving rate will generally lead to higher levels of economic output
flattened out – less of a tradeoff, if aSR Phillips curve and tradeoffny
What is the role of education in economic growth?
provides a foundation for development, the groundwork on which much of our economic and social well being is built.
the intensity of its use raises output, but increases its depletion rate.
What is the role of natural resources in economic growth?
provides a foundation for development, the groundwork on which much of our economic and social well being is built.
the intensity of its use raises output, but increases its depletion rate.
allow for increased work productivity
What is the role of industrial policy in economic growth?
New technologies make jobs easier, faster and better, which can lead to an increase in a business' output and an increase in profits
an increase in the money supply and demand-pull inflation
What is the role of population growth in economic growth?
increase in total output
decrease in total output
What is the role of research and development in economic growth?
eliminate destructive competition for control of economic resources
produces new products, creates new jobs and new industries, cuts costs of production, and makes a large contribution to our economic growth and our over-all national welfare
What is the role of taxes in economic growth?
Countries that are open to international trade tend to grow faster, innovate, improve productivity and provide higher income and more opportunities to their people
High marginal tax rates can discourage work, saving, investment, and innovation
reduce the need for government-funded programs such as unemployment insurance and Head Start
What is the role of free trade in economic growth?
High marginal tax rates can discourage work, saving, investment, and innovation
reduce the need for government-funded programs such as unemployment insurance and Head Start
Countries that are open to international trade tend to grow faster, innovate, improve productivity and provide higher income and more opportunities to their people
What is the role of trickle down economics in economic growth?
the intensity of its use raises output, but increases its depletion rate.
income and capital gains tax breaks or other financial benefits to large businesses, investors, and entrepreneurs to stimulate economic growth
What is the role of government budget deficits in economic growth?
reduce the need for government-funded programs such as unemployment insurance and Head Start
increases the need for government-funded programs such as unemployment insurance and Head Start
How do you calculate growth rates?
by calculating productivity (P=Y/L)
by calculating inflation (P=Y/L)
Rule of 72
72/interest or growth rate = # of years to double
72/interest or growth time = # of years to double
How is the rule of 72 used?
Given interest or growth rate solve for years to double or given years to double, solve for annual interest or growth rate
CPI
How does an increase in saving affect the economy in the long run? Investment?
A rise in aggregate savings would yield larger investments associated with higher GDP growth
A rise in aggregate demand would yield larger investments associated with higher GDP growth
- little or no growth subsistence wages (just enough to live on)
- no improvement in standard of living all due to limited capital growth
- little technological progress,
- little human capital improvements and diminishing returns
Classical/Malthusian
Neo-Classical – Solow Model
in the long-run due to depreciation and diminishing returns, economy eventually hits a steady state with no growth UNLESS there is technological and human capital improvements
Classical/Malthusian
Neo-Classical – Solow Model
focus on determinants of and policies for technological improvements and gains in human capital
Classical/Malthusian
Neo-Classical – Solow Model
Endogenous or New Growth Theory
Creative Destruction
Schumpeterian idea that new ideas, procedures, technology destroy old industries (which is good) and create new ones
Classical/Malthusian
Creative Destruction
Endogenous or New Growth Theory
Malthus' Law is relevant because it does not explain the reasons for declining birth rate in developing counties, the relationship between birth and death rate, the effects of migration and urbanization etc.
true
false
Malthus' Law
population will outstrip resources
population will enhance resources
What role does capital play in the macroeconomy in the SR?
we increase capital by investment which impacts aggregate Demand
more capital contributes to economic growth
What role does capital play in the macroeconomy in the LR?
we increase capital by investment which impacts aggregate Demand
more capital contributes to economic growth
cost of borrowing or return for lending money
leverage
interest
exchanged rates
possibility that we may see much slower LR economic growth due to lower profitability of investment in plant and equipment and too much saving.
secular stagnation
loanable funds theory
How do you calculate compound growth rates?
Rule of 72, or FV=PV(2+g)t
Rule of 72, or FV=PV(1+g)t
How and why do we discount future $ values?
Rule of 72, or FV=PV(1+g)t
Interest; PV=FV/(1+g)t
What affects the present value of a future amount?
Interest, years till it is received
rule of 72, years till it is received
skills, abilities, knowledge possessed by workers
capital
human capital
roundabout production
capital
human capital
How does an increase in capital affect labor?
Raises marginal product of labor and thus wages but may substitute for labor and reduce employment in an industry
Reduces marginal product of labor and thus wages but may substitute for labor and reduce employment in an industry
Raise exchange rates of labor and thus wages but may substitute for labor and reduce employment in an industry
Reduces exchange rates of labor and thus wages but may substitute for labor and reduce employment in an industry
K,L, tech - i.e. factors of production which determine potential
output = S
determines output
determines Gross income
What determines output?
K,L, technology (factors of production which determine potential)
output=s
K,L, W, technology (factors of production which determine potential)
What determines prices and inflation?
C I G NX
W, D, S, Y
MS
What determines interest rates?
MS
Supply and Demand for loanable funds (Savings and Investment)
What is loanable funds theory?
Saving and Investment determine real interest rates in the LR (the Fed)
Saving and Investment determine real interest rates in the LR (not the Fed)
reduce the need for government-funded programs such as unemployment insurance and Head Start
output doesn't change, but when the money supply doubles, the price level also doubles.
Loanable Funds Theory
quantity theory of money
An increase in the money supply ( M) without an increase in output ( Y) causes the price level to change by the same change in the money supply
Loanable Funds Theory
quantity theory of money
the unemployment rate at which the inflation rate has no tendency to increase or decrease
natural rate of unemployment (NAIRU)
sticky wages and prices
What is the relation between the nominal and real interest rates and inflation?
Fisher’s equation int real = int nominal -inflation
PV=FV/(1+g)t
FV=PV(1+g)t
Too rapid growth in the Ms
Inflation in the SR
Inflation in the LR
Allows for increased investment
Saving Play in the SR
Saving Play in the LR
What role does investment play in the long-run?
increases economic growth
Lowers economic growth
unemployment in the LR
structural, frictional
structural, cyclical
structural, frictional, cyclical
Crowding out formula
Gup->i up ->I down
Gdown->i up ->I up
Gup->i up ->I up
How does fiscal policy affect the economy in the long-run?
Not needed since always at full employment output and bad since it crowds out productive investment
full employment output
How does monetary policy affect the economy in the long-run?
inflation, prices, output
Inflation impact only
inflation, prices
LR Phillips curve
there is no permanent trade-off between inflation and unemployment in the long run
there's permanent trade-off between inflation and unemployment in the long run
An increase in the SR Aggregate Supply is shown as a shift to the right
A reduce in the SR Aggregate Supply is shown as a shift to the right.
inflation depends on labor market tightness (unemployment rate, inversely) and expectations of inflation
inflationary expectations in inflation & phillip curve
inflationary expectations in investment
inflationary expectations in saving
Argument that economic agents make ‘optimal’ economic forecasts – not systematically too high or low.
quantity theory of money
rational expectations
Phillip's curve
Suggests that policy will be ineffective since people will correctly forecast its consequences and act to offset them.
natural rate of unemployment (NAIRU)
quantity theory of money
rational expectations
What determines aggregate prices and output?
AD
AS
AD & AS
What determines interest rates?
AS & AD
MS & MD
What are the components of aggregate demand?
consumption, investment, government spending, net exports
consumption, investment, government purchases, net exports
C+I+G+(X-M)
key determinants of Consumption
Y-T, Wealth, Animal Spirits
Y-T, Wealth, investment
key determinants of Saving
Y-T, Wealth, Animal Spirits
Y-T, Wealth, investment
interest rates and animal spirits
key determinants of Government Expenditures
interest rates and animal spirits
income per capita, dependency ratio, population, urbanisation, trade openness, foreign aid, and inflation
key determinants of investment
interest rates and animal spirits
saving and animal spirits
key determinants of exports
economic conditions in foreign countries
domestic economic conditions - income
key determinants of imports
economic conditions in foreign countries
domestic economic conditions - income
What are the condition(s) for short-run macro equilibrium?
Agg Demand = output or Aggregate Demand = Aggregate Supply or no unintended inventory accumulation
Agg Supply = output or Aggregate Demand = Aggregate Supply or no unintended inventory accumulation
The role of inventory is to provide operations with an ongoing supply of materials.
false
true
What factors shift the aggregate demand curve? The aggregate supply curve?
Factors that impact costs of production, especially wages
sticky wages & supply shock
How does the stock market affect the economy?
Wealth effect; role in financial savings & investments
Wealth effect; role in financial investment
What is inflation and what causes it in the short-run?
sustained increase in general level of prices – Demand Pull, Cost Push
rapid increase in general level of prices – Demand Pull, Cost Push
The short-run Phillips curve is a graph.
True
False
Business Shocks
Shifts/shocks in agg D/S; SR repeating, irregular fluctuations in economic conditions – output
Shifts/shocks in agg D; lR repeating, irregular fluctuations in economic conditions – output
How does monetary policy impact the economy in the short-run?
Increase real interest rates in the U.S. also tend to reduce the foreign exchange value of the dollar
lower real interest rates in the U.S. also tend to reduce the foreign exchange value of the dollar
Which is the shorter and which the longer lag in monetary policy?
Fiscal policy and its effects on output have a shorter time lag.
Monetary policy and its effects on output have a shorter time lag.
How does fiscal policy impact the economy?
G ↑ -> D ↑-> y ↑
T ↓-> (Y-T) ↑-> C ↑ -> D ↑-> y ↑
FV=PV(1+g)t
cause the Federal Reserve to release more money into the economy, which feeds inflation
government budget deficit in the SR
government budget deficit in the LR
government spending multiplier
1/(1-MPC)
G ↑ -> D ↑-> y ↑
Change in output resulting from change in government spending
What is the idea of the political business cycle?
some
fiscal/monetary policies may be undertaken for political rather than economic reasons
(to get reelected)
Voters are more likely to vote for the incumbent party if
economic conditions (unemployment and inflation) in the year leading up to the election
are good/improving (they have short memories
Raises marginal product of labor and thus wages but may substitute for labor and reduce employment in an industry
the relationship between consumption and income
consumption function
MPC
The Multiplier
change in consumption/change in disposable income
consumption function
MPC
1/(1-MPC); the increase in equilibrium real GDP divided by the increase in autonomous expenditure
consumption function
The Multiplier
Calculate the Government Expenditure multiplier
change Y/change G = 1/(1-mpc)
% change P =% change W - % change MP
which is larger, the government expenditure or the tax multiplier?
government expenditure
the tax multiplier
when many people drastically increase their savings and reduce consumption, total savings may decrease
shadow banking sector
paradox of thrift
What is the relation between saving and consumption?
S=Y-C
Y=S-C
What is the effect of an increase in saving in the short run?
S=Y-C
S up -> C down -> D down -> y down
What is the effect of an increase in investment in the short-run?
I up -> agg D up -> Y up
S up -> C down -> D down -> y down
anything that serves as a medium of exchange, a unit of account, and a store of value
Money
Wealth
Income
the value of assets owned
money
wealth
income
Earnings from work or investment
money
wealth
income
Currency in hands of public, Checking account balances, travelers checks
M1
M2
Savings accounts, Money Market Mutual funds, CDs Plus the ones from M__*
M1
M2
three functions of money
medium of exchange
unit of account
store of value
wealth
The advantage of an economy using money rather than barter is a person holding money can easily exchange it for any commodity or service that he or she might want
False
True
Exchange goods without involving money.
monetarism
barter
the Federal Reserve System created by Congress in 1913 as the nation's central banking organization
The Fed
FOMC (Federal Open Market Committee)
12 Member group that buys and sells US gov. securities to influence the money supply.
The Fed
FOMC (Federal Open Market Committee)
Fed buys bonds on the open market from bond dealers, it credits the reserves of the dealer’s bank who credits the dealers checking account, raising M1. Bank lends out some of the excess reserves, raising deposits and M1 further
How the fed open market purchase reduce the money supply
How the fed open market purchase increases the money supply
What is the central operating target of the Fed?
fed funds rate
paying IOU
What is the primary ‘traditional’ policy tool of the Fed?
open market operations
closed market operations (rely on govt't)
What are the ultimate goals of the Fed - The dual mandate?
price stability and maximum sustainable employment
change in consumption/change in disposable income
What are the new policy tools and approaches the Fed is employing as part of its ‘Exit Strategy’?
paying IOR – interest on reserves and setting the rate on ONRRP – overnight reverse repurchase agreements – temporary sale of bonds
the Fed to control and raise SR interest rates and avoid the banks overspending their huge excess reserves too quickly
Fed buys bonds on the open market from bond dealers, it credits the reserves of the dealer’s bank who credits the dealers checking account
Taylor Rule
Formula for determining fed funds rate. basically depends on gdp growth and inflation
income per capita, dependency ratio, population, urbanisation, trade openness, foreign aid, and inflation
inflation targeting
an increase in the money supply and demand-pull inflation.
a rule it has been suggested that Congress impose on the Fed, It would require the Fed to keep inflation at roughly 2% over time.
when SR interest rates fall to 0. Suggests that monetary policy may lose influence then
liquidity trap
liquidity
monetary policy is ineffective because nominal interest rates are up against the zero bound
liquidity trap
liquidity
Not owned or private-profit making institution
Fed Independence
inflation targeting
when the Fed buys longer-term government bonds or other securities
Taylor Rule
Creative destruction
quantitative easing
What were some elements of the unconventional monetary policy employed during the financial crisis?
quantitative easing
forward guidance
quantitative easing and forward guidance
Fed Credibility is important because Influence expectations of inflation which strongly influence actual inflation.
True
False
a type of digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.
Bitcoin
blocktrain
A digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly
Blockchain
digital transactions
electronic checking account hosted by the Central Bank which will replace/supplement existing accounts. It will be legal tender and allow electronic payments and receipts
Central Bank Digital Currency
Blockchain
Important points of the Circular flow model
spending generates income
focus on leakages (S) and Injections (I)
equivalence of $ and real flows
Influence expectations of inflation which strongly influence actual inflation
3 Ways to calculate GDP
expenditure approach
spending generates income
income approach
value added approach
What is the relation between Gross and Net Investment and Depreciation
Gross investment minus depreciation is net investment
Depreciation minus Gross investment is net investment
Real and Nominal GDP
real measures ‘quantity’ of output, nominal the $ spent on it.
the Federal Reserve to release more money into the economy, which feeds inflation
How do you calculate real GDP from nominal?
Real gdp = nominal gdp/(p/100)
Real gdp = nominal gdp/(y/100)
(Nominal GDP/GDP deflator) X 100 = real GDP
deflating nominal GDP into real measure
deflating nominal GDP
Nominal GDP
Why do economists prefer the chained CPI?
Doesn’t suffer from the substitution problem – accounts for changes in the market basket as prices change
Influence expectations of inflation which strongly influence actual inflation
GDP Deflector
Real gdp = nominal gdp/(p/100)
Nominal GDP/Real GDP x 100
chained ($2005) GDP is another way to calculate real GDP
true
false
Statistical adjustment to remove predictable, recurring within year fluctuations to allow one to observe underlying trends in the data.
Seasonally adjusted data
Blockchain
What is the economic role of the financial system – what useful purpose does it serve for the overall economy?
Channels resources from savers to investment in plant and equipment leading to a more efficient economy
Supply and Demand for loanable funds (Savings and Investment)
stocks (equity)
Ownership shares of corporations
spending generates income
focus on leakages (S) and Injections (I)
What is the major reason people buy stock?
- Hope of capital gains
- dividends
- corporate influence/control through voting rights
Statistical adjustment to remove predictable, recurring within year fluctuations to allow one to observe underlying trends in the data.
Firm issue stocks because they raise financial capital.
False
True
buying on margin
paying a small percentage of a stock's price as a down payment and borrowing the rest
the process of selling stock that an investor does not actually own but has borrowed from a brokerage firm and will repay at a later date
Selling short
the process of selling stock that an investor does not actually own but has borrowed from a brokerage firm and will repay at a later date
paying a small percentage of a stock's price as a down payment and borrowing the rest
What are the roles of dividends and the risk-adjusted discount rate in determining the fundamental price of a stock
Stock Price=Dividends / (risk adjusted discount rate-dividend growth rate?
A fixed period of time that most states use in an unemployment insurance formula to determine weekly benefits
How does stock compare to bonds as an investment?
Stock – low return, higher risk
Stock – higher return, higher risk
How and why should you invest in stocks?
Buy and hold for long-run; higher returns
than other financial assets [DIVERSIFY]
stimulate exports, reduce imports, increase current account surplus and aggregate demand.
the advantage of diversification is Reduced risk with the same return.
False
True
The efficient markets hypothesis is Information incorporated rapidly into securities prices and thus no unexploited profit opportunities (securities priced ‘correctly’) and since all information available today reflected in price, only new information will change price – that is prices change unpredictably (follow random walk What does it suggest for your personal investing? Don’t try to predict or beat the market, rather buy the market – index stock mutual fund
true
false
Bonds
IOUs = fixed income or debt instruments
A grade given to bonds that indicates their credit quality
A grade given to bonds that indicates their credit quality
Bonds
Bond Ratings
Treasury Bonds
Bonds issued by the federal government
IOUs = fixed income or debt instruments
Corporate Bonds
bonds issued by corporations
Bonds issued by the federal government
floated by local government (states, cities, counties) usually for infrastructure improvements exempt from federal taxation (investors from high tax brackets)
Muni/ S&L Bonds
Treasury Bonds
an institution that sells shares to the public and uses the proceeds to buy a portfolio of stocks and bonds
mutual fund
Money market mutual funds
hedge fund
a fund that pools money from small savers to purchase short-term government and corporate securities
mutual fund
Money market mutual funds
a limited partnership of investors that uses high risk methods, such as investing with borrowed money, in hopes of realizing large capital gains.
Hedge fund
NFT
token of ownership
bitcoin
NFT
Exchange-traded fund (ETF) are listed as individual securities in the equity markets and are used to replicate an index or a portfolio of stocks.
True
False
Mutual fund that passively invests in all stocks in a broad stock market index to match performance of the index. doesn’t attempt to beat the market ( a la efficient markets) rather matches the market with low cost, diversified portfolio. Stock, because stocks outperform other financial assets in the long-run.
stock index mutual fund
Housing index mutual fund
An IRA is an individual retirement account – like a 401k for individuals who don’t have a 401k.
true
false
a contract whose value is derived from another, underlying asset
derivatives
depreciation
What are derivatives used for?
hedging
speculation
arbitrage
taxes
Put Option
option to sell in the future at a price set today
option to buy in the future, at a price set today
Call Option
option to sell in the future at a price set today
option to buy in the future, at a price set today
Future's contract is a a derivative & contract that obligates the owner to buy (if it is a long option) a commodity, currency, interest rate or index at a specific time in the future at a price set today.
true
false
Black-Scholes formula
paying a small percentage of a stock's price as a down payment and borrowing the rest
Breakthrough approach/formula used to value options contracts 9derivative) – led to wide use of math in financial economics and explosion of financial engineering, quant finance, etc.
IPO (initial public offering)
the first sale of stock by a private company to the public
formed to raise money through an initial public offering (IPO) to buy another company
SPAC (Special purpose acquisition companies)
the first sale of stock by a private company to the public
formed to raise money through an initial public offering (IPO) to buy another company
primary financial markets
issues new securities on an exchange; sold directly from company
purchase securities/trade from other investors, not the issuing company
● (NYSE, NASDAQ, FOREX)
secondary financial market
issues new securities on an exchange; sold directly from company
purchase securities/trade from other investors, not the issuing company
● (NYSE, NASDAQ, FOREX)
financial intermediaries
firms, such as banks, mutual funds, pension funds, and insurance companies, that borrow funds from savers and lend them to borrowers
mutual fund that passively invests in all stocks in a broad stock market index to match performance of the index.
Which is more important in economic decisions? real interest rate or nominal rate
real interest rate
nominal rate
How do economists measure the value of anything?
market price, as explained by S&D
index price
What determines the price and quantity of any good or service?
Supply
Demand
Supply & Demand
With the invisible hand and laissez-fairre, in theory and under certain assumptions, competitive markets lead to the most efficient (if not the most fair) outcome.
true
false
What are the three questions answered by any economic system and how are they answered under a market-based system?
what, how, who
why, how, who
A theory or system of social organization based on the holding of all property in common, actual ownership being ascribed to the community as a whole or to the state.
Capitalism
Socialism
Communism
An economic system based on private ownership of capital
capitalism
socialism
communism
a political theory advocating state ownership of industry
capitalism
socialism
what, how ,who and role of markets and prices in answering
Microeconomics
Macroeconomics
scarcity and choice
Economics
Microeconomics
Macroeconomics
determinants of overall level of output, prices, growth, role of monetary and fiscal policy
economics
microecon
macroecon
government imposed limits on how low a price can be charged
price floors
Central Bank Digital Currency
