Term
|
Definition
| Gross Domestic Product- defined as the market value of all final goods and services produced within a country in a year. |
|
|
Term
| What is the formula for GDP growth rate? |
|
Definition
| GDP( year 2) - GDP ( year 1)/ GDP year 1 x 100 |
|
|
Term
| What is nominal GDP? and why is it misleading? |
|
Definition
| Nominal GDP is calculated using prices at the time of the sale, it is misleading because inflation causes prices to rise, which some might mistake for an increase in production |
|
|
Term
| What is a real variable? How do you calculate real GDP. |
|
Definition
| variables that have been adjusted for inflation. If you want to find real GDP, multiply both quantities by the base year prices, and plug into the formula. |
|
|
Term
| What does GDP of 14 million tell you? what is a better way to measure economic success? |
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Definition
| GDP of 14 million doesnt tell you much if you have 14 million people in your country. GDP per capita is a better measure of the standard of living. |
|
|
Term
| What is the formula for calculating GDP via national spending approach? |
|
Definition
Y= C + I + G + NX
GDP= Consumption + Investment + Government Spending + ( Exports - Imports) |
|
|
Term
| What is the Factor Income approach to calculating GDP |
|
Definition
| Y = Wages + Rent + Interest + Profit |
|
|
Term
| What are some problems with GDP as a measure of output and Welfare? |
|
Definition
GDP doesnt count underground economy ( Drugs)
GDP doesnt count Non market production ( your son mowing your lawn)
GDP doesnt count Leisure
GDP doesnt count enviromental costs
GDP doesnt calculate distribution of income ( you can have very rich or poor outliers that throw off GDP.) |
|
|
Term
| What are some key facts about GDP, the wealth of nations, and Economic Growth |
|
Definition
GDP varies enormously among countries ( most the world is poor compared to U.S.)
Everyone used to be poor- it wasnt until industrial revolution till GDP grew a lot) |
|
|
Term
| What is the formula for calculating GDP growth rate? |
|
Definition
| Year 2 growth - Year 1 growth / Year 1 growth x 100. |
|
|
Term
| What is the rule of 70 and what does it tell you. |
|
Definition
| The rule of 70 is used to see how long it will take for your GDP to double given a certain growth rate. Ex: GDP of 2 percent growth will take ( 70/2)= 35 years to double |
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|
Term
| What is physical capital? |
|
Definition
| stock of tools including machines, structures, and equipment. |
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|
Term
|
Definition
| Tools of the mind- Productive knowledge and skills that workers acquire through education, training, and experience. |
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|
Term
| What is technological knowledge? |
|
Definition
| Knowledge of how the world works. It is increased through research and development |
|
|
Term
| What do economists mean by organization? |
|
Definition
| They mean how you organize human, physical, and technological capital to produce goods. |
|
|
Term
|
Definition
| the rules of the game that structure economic incentives. they include laws and regulations, customs, practices, etc, that shape human interaction and structure economic incentives. |
|
|
Term
| What are the 5 key institutions that influence economic growth? |
|
Definition
| Property rights, honest government, political stability, a dependable legal system, and competetive and open markets. |
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|
Term
| If a country has a lot of capital, but poor institutions, what will happen? |
|
Definition
| Money will be wasted and GDP will not grow. |
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|
Term
| What is the formula for the Solow growth curve and what does it tell you? |
|
Definition
| Solow growth curve is a production function that expresses the relationship between output and the factors of production. the formula is Y = F(A,K,eL) where A= ideas, K = physical captial, L = Labor, and e = natural resources. |
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|
Term
| If you only had K, what would your solow growth curve look like? |
|
Definition
| It would increase but at a decreasing rate, the formula is Y = K^1/2 |
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|
Term
| What is the marginal product of capital |
|
Definition
| It is the increase in output caused by the addition of one more unit of capital. THe marginal product of capital diminishes as more and more capital is added. |
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|
Term
| Why does bombing a country sometimes lead to higher growth rates? |
|
Definition
| Because the marginal product of capital is higher, there small investments go further. |
|
|
Term
| What is investment and depreciation? What is it called when they equal one another? |
|
Definition
| Investment are the goods that you do not consume, Depreciation is the goods that wear out. When they equal eachother it is called the steady state, where gdp does not grow. If I > d than GDP will grow, and vice versa. the formula for I is ( investment rate ) x K^1/2. Formula for deprecation is ( depreciation rate ) x K. |
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|
Term
| What does the curve for investment look like, and what does the curve for depreciation look like. How do you solve for steady state value? |
|
Definition
| Investment curve is curved, it increases at a decreasing rate, Depreciation is a straight line. To solve for steady state, set them equal to one another. |
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|
Term
| Why cant human or physical capital be the key to economic growth? |
|
Definition
| Because they are diminishing, after a certain point, GDP will not grow. |
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|
Term
| What is the key to economic growth? |
|
Definition
| A, or ideas aka technical knowledge |
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|
Term
| What is the Solow formula with A involved? |
|
Definition
|
|
Term
|
Definition
| they increase the amount of capital needed to hit the steady state value, and therefore increase GDP. |
|
|
Term
| When will a country grow the fastest? |
|
Definition
| when it is far below the steady state value. |
|
|
Term
| What is conditional convergence? |
|
Definition
| the tendency among countries with similar steady state levels of output for poorer countries to grow faster than richer countries. |
|
|
Term
| How is one classified as unemployed? |
|
Definition
| Workers who are adults who do not have a job but are looking for work. Additionally, they must be over 16, non institutionalized, a civilian, and looking for work. |
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|
Term
| What does it mean to be counted as employed? |
|
Definition
| to be an adult, non institutionalized with a job. |
|
|
Term
| What makes up the labor force? |
|
Definition
| All workers employed plus unemployed. |
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|
Term
| What is the unemployment rate formula? |
|
Definition
| Unemployed / Labor Force x 100 |
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|
Term
| What is the labor force participation rate? |
|
Definition
| the percentage of adults in the labor force. |
|
|
Term
| What are discouraged workers? |
|
Definition
| Workers who have given up looking for work, but who would still like a job. |
|
|
Term
| What is frictional unemployment? |
|
Definition
| short term unemployment caused by the diffuculty of matching employer to employee |
|
|
Term
| What is structural unemployment? |
|
Definition
| Long term unemployment caused by long lasting shcks or permanent features of an economy that make it more difficult for some workers to find jobs. |
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|
Term
| What are some reasons why stuctural unemployment is higher in other countries than in the U.S. |
|
Definition
| Unemployment benefits, higher minimum wages, unions, and employment protection doctrines. |
|
|
Term
| What are some ways to reduce structural unemployment? |
|
Definition
| Job retraining, Job- search assistance, Work tests, and early employment bonuses. |
|
|
Term
| What is cyclical unemployment? |
|
Definition
| Unemployment correlated with the ups and downs of the business cycle. |
|
|
Term
| What is the natural unemployment rate? |
|
Definition
| the rate of structural unemployment plus frictional unemployment. |
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|
Term
| What is the formula for the labor force participation rate? |
|
Definition
| Labor force / Adult Population x 100 |
|
|
Term
| What is inflation and how do we calculate it? |
|
Definition
| Inflation is an increase in the average level of prices. We measure it with an index, or the average price from a large basket of goods. |
|
|
Term
| What is the inflation rate? |
|
Definition
| percent change in the average level of prices over a period of time. the formula is P2-P1/P1 |
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|
Term
| What is the CPI, the GDP deflator, and the PPI |
|
Definition
CPI- measures average price for a basket of goods bought by the typical american.
GDP deflator- Includes goods that make up GDP, not ones just bought by consumers.
PPI- Measure average price recieved by producers. |
|
|
Term
|
Definition
| It is one that has been adjusted for inflation. Example: Gas price has doubled from 1.25, to 2.50. Was gas price twice as expensive? no since the CPI was 100, and now is 202. |
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|
Term
| What is the quanitity theory of money, and what is the formula? |
|
Definition
The QToM shows the relationship between inflation, money, real output, and prices. the formula is
Mv = PY |
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|
Term
| What do you hold fixed in the QToM? |
|
Definition
| Y ( real gdp because those are fixed by factors of production ) and v because people generally spend there money because this factor changes slowly over time. |
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|
Term
| According the the QToM, what will an increase in Money supply cause. |
|
Definition
| Since you hold Y and v fixed, increase in money supply shows up in inflation. |
|
|
Term
| According the the QToM, what will an increase in Money supply cause. |
|
Definition
| Since you hold Y and v fixed, increase in money supply shows up in inflation. |
|
|
Term
| In the long run, money is what? |
|
Definition
| Money is neutral, in the short term in might have an effect on GDP, but not in the long run. |
|
|
Term
| What does the fisher effect say? |
|
Definition
| the tendency of nominal interest rates to rise with expected inflation rates. |
|
|
Term
| What is the formula for the actual rate of return? |
|
Definition
r-actual = i - pi
i= nominal interest rate, pi = inflation rate |
|
|
Term
| Who benefits from unexpected inflation? |
|
Definition
| Borrowers benefit, harms lenders |
|
|
Term
| Who benefits from unexpected disinflation? |
|
Definition
| Benefits lenders, harms borrowers. |
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|
Term
| The dynamic AD - AS has what what curves, and what do they look like? |
|
Definition
| 3 curves, the solow, the Aggregate demand curve, and the short run aggregate supply. The solow curve is a vertical line, the AD curve is a straight, downward sloping line, and the SRAS is a curve that slopes, but not in a straight line. |
|
|
Term
| what do real shocks do, and what is an example of a real shock? |
|
Definition
| real shocks shift the solow curve. and example would be a technological advance or sudden changes in the supply of oil. |
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|
Term
| What does the AD curve tell you? |
|
Definition
| shows all the combinations of inflation and real growth that are consistent with a specified rate of spending growth. it is derived from the QToM. |
|
|
Term
| What are some of the reasons why AD curve might shift |
|
Definition
| Increasing money supply or velocity of money. |
|
|
Term
| What does a positive solow shock do to inflation and real GDP on the AD solow model? |
|
Definition
| it would decrease inflation and increase real GDP |
|
|
Term
| What would a positive AD shock do? |
|
Definition
| Increase inflation, but have no effect on real growth. |
|
|
Term
| What is the short run aggregate supply curve? |
|
Definition
| It shows the positive relationship between inflation and real growth during the period when prices are sticky |
|
|
Term
| What shifts the SRAS curve? |
|
Definition
| your expectation of inflation |
|
|
Term
| If you have UNexpected inflation what happens to real growth according the the SRAS curve? |
|
Definition
| you have higher real growth in the short run, then in the long run it goes back to normal as the expectation for inflation changes. |
|
|
Term
| IF the solow curve moves, what else has to move? |
|
Definition
| the SRAS curve moves with the solow curve, but if the SRAS curve moves, than the solow curve doesnt have to move. |
|
|
Term
| What happens if you have an increase in M in the short run, and what happens in the long run? |
|
Definition
| If you have an increase in M, your AD curve will shift increasing inflation and GDP. In the long run, wages become unstuck, and you go back to your normal rate of growth, but with higher inflation. |
|
|
Term
| What is the difference between the new business cycle, and the New keynesian model? |
|
Definition
| the real business cycle only has the AD and solow curve, it assumes that everything is perfectly flexible, the new keynesian model adds the SRAS curve because of sticky prices and wages. If prices are perfectly flexible, than the economy will always be growing at its potential |
|
|
Term
| What are sticky prices and sticky wages and why are they so important |
|
Definition
| Sticky prices and wages are when wages and prices do not respond very quickly to changes in economic conditions. They are important because since wages and prices are slow to move in the downward direction, it causes a lot of unemployment as wages are kept fixed. |
|
|
Term
| What are some factors that shift the AD curve? |
|
Definition
| A faster money growth rate, confidence, increased wealth, lower taxes, greater govt spending, increased export growth, decreased import growth. |
|
|
Term
| What are transmission mechanisms? |
|
Definition
| economic forces that can amplify shocks by transmitting them across time and sectors of the economy. |
|
|
Term
|
Definition
| rapid changes in economic conditions that have large effects on the productivity of capital and labor. |
|
|
Term
| What is the difference between expected and unexpected shocks? |
|
Definition
| unexpected shocks have a bigger effect on the economy since no one has time to prepare. If someone expects a shock to happen, it wont do nearly as much damage. |
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|
Term
| What is intertemporal subsitution, and how can it make a shock worse? |
|
Definition
| Intertemporal substitution is how people choose to allocate consumption of goods, work, and leisure over time to maximize well being. It can make a shock worse if in a depression, people are less likely to work because they dont get paid, so no one works at all. |
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|
Term
| What are irreversible investments and how do they make shocks worse? |
|
Definition
| they have high value only under specific conditions- they cannot be easily moved, adjusted, or reversed if conditions change. they make shocks worse because investors are unlikely to invest, and a lot of money is idle and not being put to good use. |
|
|
Term
| What are labor adjustment costs, and how do they make the economy worse? |
|
Definition
| they are the costs of shifting workers from declining sectors of the economy to growing sectors, they make shocks worse because it causes a lot of unemployment, and workers are slow to retrain or move to another job. |
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|
Term
| What is time bunching and how do they make shocks worse. |
|
Definition
| time bunching is the tendency for economic activities to be co ordinated at common points in time. they make shocks worse because if everyone is being unproductive, you are more likely to unproductive too. |
|
|
Term
| How are sticky wages and sticky prices transmission mechanisms? |
|
Definition
| they are transmission mechanisms because if a negative shock happens, workers do not respond well to a decrease in wages, so wages are kept the same and after a while the company cant afford it and has to unemploy a lot of people. |
|
|
Term
| what is the major point about transmission mechanisms? |
|
Definition
| a medium sized negative shock can be made much worse than it has to be. sort of like the great depression |
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|
Term
| In the market of loanable funds, who supplies and who demands? |
|
Definition
| suppliers are savers, demanders are investors. |
|
|
Term
| How are the interest rate and supply of savings correlated? |
|
Definition
| Higher interest rates calls forth more savings. |
|
|
Term
| How is the interest rate and the demand to borrow correlated? |
|
Definition
| the lower the interest rate, the more demand there is for borrowing. |
|
|
Term
| What is the difference between saving and investment? |
|
Definition
| saving is the income that is not spent on consumption goods, investment is the purchase of new capital goods. |
|
|
Term
| What is consumption smoothing? |
|
Definition
| The lifecycle theory of savings says that over time an individual wants to borrow and save equally throughout different stages in their life. you tend to borrow in college, save when you work, and spend when you retire. |
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|
Term
| What are financial institutions? |
|
Definition
| they are things like banks, bond markets, and stock markets that reduce the costs of moving savings from savers to borrowers and investors. |
|
|
Term
| How do financial insitutions generate revenue? |
|
Definition
| By the difference in the interest rate that they pay you, and the interest rate that they charge to loan. |
|
|
Term
| How do you determine the price of a bond. |
|
Definition
| Divide the amount of money you need to raise, by how many bonds you are issuing. |
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|
Term
| How do you determine face value of a bond? |
|
Definition
| divide the amount of money the bond will pay in the future, by how many bonds you are issuing. |
|
|
Term
| What is the formula to determine the rate of return on a bond? |
|
Definition
|
|
Term
| How are bond prices and interest rates correlated? |
|
Definition
| Bond prices and interest rates move in opposite directions, if bond prices go up, interest goes down, and vice versa. |
|
|
Term
| What is arbitrage and why does it matter? |
|
Definition
| arbitrage is the buying and selling of equally risky assets, ensures that equally risky assets earn equal returns. it matters because no one is gonna invest in something if it means they lose money. |
|
|
Term
| What are the functions of money? |
|
Definition
| Medium of exchange, standard of value, store of value |
|
|
Term
|
Definition
| to influence AD, loan out funds to banks when necessary, create money, store money, protect financial insitutions and consumers. |
|
|
Term
|
Definition
| It controls the money supply via open market operations, discount rate lending and the term auction facility, and changing the required reserves ratio. It helps keep the economy stable, helps bail out banks when they need it. Overall they try to make the economy as stable as possible. |
|
|
Term
| What is the reserve ratio, and what is it's formula? |
|
Definition
| the RR is the ratio of reserves to deposits. ex: if you deposit 10 dollars, and 1 dollar is saved in cash, the RR is 1/10 |
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|
Term
| What is the money multiplier, and what is the formula? |
|
Definition
| the MM is the amount the money supply expands with each dollar increase in reserves. MM = 1/RR |
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|
Term
| What are open market operations, and how do they control the money supply? |
|
Definition
| Open market operations are the buying and selling of U.S. govt bonds. They increase money supply through multiplier process. |
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|
Term
| When the fed buys bonds, what happens to the interest rates? |
|
Definition
| the demand for bonds increase, which pushes the price of bonds up, and lowers the interest rate. |
|
|
Term
| Why does the Fed only have influence on AD and interest rates in the short run? |
|
Definition
| Because in the long run, money is neutral, so an AD shock is only effective in short run. |
|
|
Term
| the Fed's operations are most effective at doing what? |
|
Definition
| stopping a negative AD shock. |
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|
Term
| If the fed is faced with a positive or negative solow shock, what should they do? |
|
Definition
| Nothing, an increase in money supply will show up in inflation |
|
|
Term
|
Definition
| No branches of the government, there is a seven member board, 12 different banks, and overall it is fairly independant. |
|
|
Term
| What does monetary policy relate to? |
|
Definition
| It relates to how the fed should use open market operations, lending to banks, and changing the reserve requirment to stimulate AD. |
|
|
Term
| What is the best case scenario for Monetary policy? |
|
Definition
| If there is a negative AD shock, or the money supply falls. |
|
|
Term
| What makes it hard for the Fed to shift the AD curve? |
|
Definition
| they must operate on real time data where signs and signal are unclear, and they are subject to certain lags. |
|
|
Term
| What do the terms rules and discretion mean? |
|
Definition
| the term rules means that people believe the Fed should set specific target for inflation or money, they also believe the Fed makes a lot of mistakes. Discretion means people believe that even though the Fed makes mistakes, they still push the economy in the right direction |
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|
Term
| A reduction in M, or a decrease in AD goes best when: |
|
Definition
| It is credible: the bank will stick with it's policy |
|
|
Term
| When is monetary policy not a good idea? |
|
Definition
| When there is a real shock, because a shift in the AD curve will show up mostly in inflation. |
|
|
Term
| What are the dynamics of monetary policy in the short run and the long run? |
|
Definition
| Monetary Policy is only effective in the short run, then the economy adjusts and the growth rate goes back to normal in the long run. |
|
|
Term
| What is the marginal tax rate? |
|
Definition
| the tax rate paid on an additional dollar of income. |
|
|
Term
| What is the average tax rate? |
|
Definition
| the total tax payment divided by total income. |
|
|
Term
| If your income was 50,000 dollars, and your tax payment was 6718 dollars, what would be your average tax rate? |
|
Definition
|
|
Term
| As your income rises what happens to the amount of tax you pay on a progressive tax rate? |
|
Definition
| Average tax rate increases smoothely, marginal tax rate increases in steps. |
|
|
Term
| What are progressive, flat, and regressive taxes? |
|
Definition
progressive: higher tax rates on people with higher incomes.
flat- constant tax rate
regressive- higher tax rate on people with lower incomes. |
|
|
Term
| Who pays most of the Social Security tax? |
|
Definition
| the employees, your wages would be higher if employers did not have to pay SS. |
|
|
Term
| Where does the money go when you pay Social Security taxes? |
|
Definition
| to beneficiaries, not to an account with your name on it |
|
|
Term
| Whats the difference between the deficit, and debt? |
|
Definition
| the deficit is a year by year difference between federal spending and revenues, debt is the total amount owed. |
|
|
Term
|
Definition
| federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations. |
|
|
Term
| What are the tools of fiscal policy? |
|
Definition
| taxes, government spending, and government borrowing. |
|
|
Term
| what does fiscal policy influence? |
|
Definition
|
|
Term
| What is the best case scenario for fiscal policy? |
|
Definition
| If consumers cut back on consumption, AD curve suffers a negative shock. The government can increase its spending to combat this, and return AD to normal. |
|
|
Term
| What does the Multiplier say about government spending? |
|
Definition
| That the increase in government spending does not have to be as big as the fall of consumer spending. |
|
|
Term
| What is the multiplier effect? |
|
Definition
| it is the increase in AD caused when expansionary fiscal policy increases income and thus consumer spending. |
|
|
Term
| What are four limits to fiscal policy? |
|
Definition
Crowding out- When govt spending causes less private spending, the increase in AD is neutralized.
A drop in the Bucket- the economy is so large, a govt can rarely increase spending enough to have an impact.
A matter of timing- it is difficult to time fiscal policy so that the AD curve shifts at the right moment.
real shocks- Shifting AD doesnt help |
|
|
Term
| What is the Ricardian equivalence? |
|
Definition
| when people see that lower taxes today means higher taxes in the future, so instead of spending money, they hold onto it. |
|
|
Term
| What are automatic stabilizers? |
|
Definition
| changes in fiscal policy that stimulate AD in a recession without the need for explicit action by policy makers. ex: proggressive tax system, welfare and transfer programs |
|
|
Term
| What are some lags fiscal policy has? |
|
Definition
| recognition, leglislative, implementation, effectivness, and evaluation and adjustment lags. |
|
|
Term
| When is fiscal policy a good idea? |
|
Definition
| when there is an emergency such as war, when there is an AD shock, or when there are many unemployed resources. |
|
|
Term
| How does fiscal policy differ from monetary policy |
|
Definition
| fiscal policy is based on the government spending, borrowing, and taxes. Monetary policy is implemented by the fed and uses the banks, lending, discount rates, etc to control AD. |
|
|
Term
| A producer has a comparative advantage over other producers if his production of the good involves: |
|
Definition
|
|
Term
|
Definition
|
|
Term
| Imposing a restrictive quota on the import of sugar will likely: |
|
Definition
| Increase the price of sugar and decrease the quantity consumed |
|
|
Term
| In terms of economics, international trade is very similiar to trade between two people in a small local neighborhood, except: |
|
Definition
| For political considerations, for example country country borders |
|
|
Term
| What is absolute advantage? |
|
Definition
| The ability of one producer to produce one good or service using fewer inputs than another producer. |
|
|
Term
| The benefits of trade include: |
|
Definition
Higher output due to specialization
Lower unit costs due to economies of scale
lower prices due to competition |
|
|
Term
| The real cost of producing a good is: |
|
Definition
| the opportunity cost of producing the good |
|
|
Term
| A decrease in the value of the domestic currency in terms of other currencies is called what? |
|
Definition
|
|
Term
| An exchange rate is the cost, or price, of: |
|
Definition
| one currency in terms of another |
|
|
Term
| What does knowing that 1.25 buys one euro tell you? |
|
Definition
|
|
Term
| when the exchange rate is written as dollars per yen, the exchange rate represents the: |
|
Definition
| price of 1 yen in dollars |
|
|
Term
| What do you tax in order to have the least amount of dead weight loss? |
|
Definition
| A good with a highly inelastic demand |
|
|
Term
| According to public choice theory, those who can do what are considered interest groups? |
|
Definition
| those who can organize for less than 1 dollar, in order to gain 1 dollar |
|
|
Term
| What best represents an optimal strategy in an all pay auction with many bidders? |
|
Definition
|
|
Term
| A decrease in consumption growth will cause the Solow growth curve to: |
|
Definition
|
|
Term
| As the government builds new schools, the construction workers and material vendors employed on the project spend more in the community where they work. What is the economic term for this effect? |
|
Definition
|
|
Term
| Consumers are more likely to spend tax rebated that they believe are: |
|
Definition
|
|
Term
| When the government spending increases, and private spending falls, what is it called? |
|
Definition
|
|
Term
| If the government experienced a federal budget surplus, what is true? |
|
Definition
| the national debt held by the public decreased |
|
|
Term
| Debt held outside the U.S. government is called the: |
|
Definition
| publically held national debt |
|
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Term
| If a worker gets a massive raise in salary, and works less hours than before, what does that mean? |
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Definition
| the income effect dominates the substitution effect |
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Term
| How can the Fed offset a positive shock to aggregate demand? |
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Definition
| decrease the growth rate of the money supply |
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Term
| if businesses react to a pessimistic outlook and decrease spending, the Fed can counteract this by: |
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Definition
| increasing money supply, which will lower real interest rates and encourage borrowing |
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Term
| When a negative shock to AD occurs, the inflation rate will: |
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Definition
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Term
| If the required reserve ratio is 4%, the money multiplier is? |
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Definition
|
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Term
| When the Fed buys bonds, the demand curve for bonds: |
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Definition
|
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Term
| Who is the chairman of the fed? |
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Definition
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Term
| A increase in government borrowing will cause what? |
|
Definition
| the demand for borrowing to shift outward |
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Term
| An increase in the supply of savings will cause the interest rate |
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Definition
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Term
| An investment tax credit will cause the interest rate to |
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Definition
| increase, and borrowing to increase |
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Term
| A temporary decrease in consumer spending causes: |
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Definition
| A decrease in growth rate of velocity of money |
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Term
| A negative solow shock causes what to happen to inflation and growth rate? |
|
Definition
| higher inflation, and lower real growth |
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Term
| An increase in the rate of expected inflation causes: |
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Definition
| a shift of the SRAS curve up and to the left |
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Term
| To experience an increase in growth along a short-run aggregate supply curve with expected inflation of 5%, the actual inflation rate would need to be: |
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Definition
|
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Term
|
Definition
| a tax that satifies vertical equity would be if it takes into account a persons ability to pay. ie: they dont fall onto a group of people with low income. |
|
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Term
| What is horizontal equity? |
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Definition
| refers to fairness at a given level. |
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Term
| If the fed wants to decrease the money supply, what will it do? |
|
Definition
|
|
Term
| if the fed wants to increase the money supply, what will it do? |
|
Definition
|
|
Term
| What is absolute convergence, and what is conditional convergence, what is the difference between the two? |
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Definition
| Absolute convergence predicts that poor countries will grow more quickly regardless of their eventual steady state level of output. Conditional convergence predicts this pattern only if the countries have similar steady state levels of output. |
|
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Term
| What are economies of scale? |
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Definition
| it means that costs per unit fall with increases in production. |
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Term
| If a country has an absolute advantage in producing two goods, does it mean that they have the comparative advantage? |
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Definition
|
|
Term
| How do you calculate tariff revenue? |
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Definition
| tariff x the quantity of imports. |
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Term
| What are some arguments against international trade? |
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Definition
trade reduces the number of jobs in the U.S.
Child labor
We need to keep jobs at home for national security
We can increase U.S. well being with strategic protectionism. |
|
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Term
|
Definition
| when the value of a country's imports exceeds the value of its exports. |
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Term
| Is a trade deficit always bad? |
|
Definition
| no, because it can be balanced with a trade surplus. |
|
|
Term
| what is a balance of payments? |
|
Definition
| yearly summary of all the economic transactions between residents of one country, and residents of the rest of the world. |
|
|
Term
| what is the formula to determine trade deficit or trade surplus? |
|
Definition
| Earning - Spending = Changes in debt + Changes in ownership + changes in your cash reserve. |
|
|
Term
| What is the current account? |
|
Definition
| the sum of the balance of trade, net income on capital held abroad, and net transfer payments. |
|
|
Term
| What is the formula for the current account? |
|
Definition
| current account = (-) Capital account + change in official reserves. |
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Term
| When you are analyzing the supply and demand for yen, what goes on the vertical and horizontal axis? what about dollars? |
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Definition
| the dollars per yen goes on the y axis, the quanitity of yen goes on the x axis. |
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Term
| An increase in the supply of a currency does what to the exchange rate? |
|
Definition
| it reduces the exchange rate |
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|
Term
| What is the difference between the nominal exchange rate, and the real exchange rate? |
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Definition
| the nominal exchange rate will tell you the rate you can exchange one currency for another, the real exchange rate is the rate you can exchange goods and services of one country for the goods and services of another. |
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|
Term
| What is the purchasing power parity theorum? |
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Definition
| it says that the real purchasing power of a money should be the same, whether it is spent at home or converted into another currency and spent abroad. |
|
|
Term
| what is the law of one price? |
|
Definition
| it says that if trade were free, then identical goods should sell for about the same price throughout the world. |
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Term
| Since money is neutral in the long run, what does that mean for exchange rates? |
|
Definition
| neither the supply of either currency can change the real exchange rate in the long run. |
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Term
| What are three constraints that prevent prices from being fully equalized across borders? |
|
Definition
transportation costs ( if it were cheaper to make cement in japan, it wouldnt be economical to ship it to the U.S.)
Some goods cant be shipped ( you cant ship the experience of drinking coffee under the eifel tower.)
Tariffs and quotas |
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Term
| How does monetary policy affect the exchange rate in the short run? |
|
Definition
| the increase in M shifts the supply curve for dollars down and to the right, which will result in a lower exchange rate ( a depreciation ) |
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|
Term
| What will a depreciation of the U.S. dollar do to AD? |
|
Definition
| it will increase U.S. exports, which will boost AD, and the economy in the short run. |
|
|
Term
| What happens in the long run to the real exchange rate when there is a reduction in M? |
|
Definition
| the exchange rate returns to its fundamental value determined by the PPP |
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|
Term
| What will expansionary fiscal policy do to domestic interest rates? |
|
Definition
| it will increase domestic interest rates, and the demand for loanable funds shifts outwards and the interest rate goes up. |
|
|
Term
| What will higher interest rates in the U.S., cause other countries to do? |
|
Definition
| More foreigners will invest in the U.S. to take advantage of those high interest rates. the greater demand to invest will cause an appreciation of the U.S. dollar. it makes exports more expensive, thus reducing U.S. exports. |
|
|
Term
| What is a floating exchange rate? |
|
Definition
| it is one determined primarily by market forces. |
|
|
Term
| what is a fixed or pegged exchange rate? |
|
Definition
| it means that the government or central bank has promised to convert its currency into another currency at a fixed rate. |
|
|
Term
|
Definition
| it occurs when a foreign country uses the dollar as its currency. |
|
|
Term
| What is a dirty or managed float? |
|
Definition
| it is a currency whose value is not pegged, but govts will intervene extensivley in the market to keep the value within a certain range. |
|
|
Term
| what is the IMF and what does it do? |
|
Definition
| the international monetary fund serves as an international lender of last resort. When countries experience financial trouble, the IMF steps int to organize a rescue package, lend money, etc. |
|
|
Term
| Where is the IMF located, and who runs it? |
|
Definition
| it is located in Washington D.C., and is independant of any single govt. |
|
|
Term
| What do defenders of the IMF say? |
|
Definition
| that tough fiscal reforms are sometimes needed, or that borrowing countries do not in fact follow the advice of the IMF regardless of whether or not it is good advice. |
|
|
Term
| What was the world bank designed to do? |
|
Definition
| it was designed to facilitate the flow of capital to poor countries, especially those parts of the world not being served by private capital markets. |
|
|
Term
| What do defenders of the world bank say? |
|
Definition
| some countries like china, still remain poor, and the chinese loans turn a profit and help the Bank carry out its mission in poorer places like africa. |
|
|
Term
| what do critics of the world bank say? |
|
Definition
| the bank does not pay enough attention to results. the bank benefits those with commercial interests in the countries that control the bank. |
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