ECON Final EXAM Study Guide PDF

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Econ Final Exam Study Guide ...

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Chapter 14 Project Questions 1. In Economics, money is defined as any asset people generally accept in exchange for goods and services. 2. The major shortcoming of a barter economy is the requirement of a double coincidence of wants. 3. Commodity money has value independent of its use as money. 4. The M1 measure of the money supply equals currency plus checking account balances plus traveler’s checks. 5. The M2 measure of the money supply equals M1 plus savings account balances plus small denomination time deposits plus non institutional money market fund shares. 6. A bank will consider a car loan to a customer an asset and a customer’s checking account to be a liability. 7. As a result of Kristy’s deposit, Bank A’s required reserves increase by $2000. 8. As a result of Kristy’s deposit, Bank A’s excess reserves increase by $8000. 9. If the required reserve ratio (RR) is 20 percent, the simple deposit multiplier is 5. 10. According to the quantity theory of money, if the money supply grows at 20 percent and real GDP grows at 5 percent, then the inflation rate will be 15 percent. 11. The velocity of money is defined as the average number of times each dollar is used to purchase goods and services. Chapter 15 Project Questions 1. Monetary policy refers to the actions the federal reserve takes to manage the money supply and interest rates to pursue its macroeconomic policy objectives. 2. The Federal Reserve System’s four monetary policy goals are price stability, high employment, economic growth, and stability of financial markets and institutions. 3. When the Federal Reserve System was established in 1913, its main policy goal was preventing bank panics. 4. The Federal Reserve’s two main monetary policy targets are the money supply and the interest rate. 5. The money demand curve has a negative slope because an increase in the interest rate decreases the quantity of money demanded. 6. An increase in the interest rate increases the opportunity cost of holding money. 7. An increase in the price level causes the money demand curve to shift to the right. 8. An increase in interest rates decreases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exports. 9. In the figure above, if the economy is at point A, the appropriate monetary policy by the Federal Reserve would be to lower interest rates. 10. Contractionary monetary policy on the part of the Fed results in a decrease in the money supply, an increase in interest rates, and a decrease in GDP. 11. Most economists believe that the best monetary policy target is an interest rate. 12. The Federal Reserve cannot target both the money supply and the interest rate because it does not control money demand.

Chapter 16 Project Questions 1. Fiscal policy refers to changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. 2. A change in consumption spending caused by income changes is an induced change in spending, and a change in government spending that occurs to improve roads and bridges is an autonomous change in spending. 3. Which of the following would be classified as fiscal policy? The federal government cut taxes to stimulate the economy. 4. Crowding out refers to a decline in private expenditures as a result of an increase in government purchases. 5. Government deficits tend to increase during periods of war and recession. 6. The cyclically adjusted budget deficit or surplus measures what the deficit or surplus would be if the economy was at potential GDP. 7. An increase in individual income taxes decreases disposable income, which decreases consumption spending. 8. The tax wedge is the difference between the pretax and post tax returns to an economic activity. 9. The multiplier effect refers to the series of induced increases in consumption spending that result from an initial increase in autonomous expenditures. 10. The government purchases multiplier is defined as change in equilibrium real GDP divided by change in government purchases.

The Federal Funds Rate is the rate that banks charge each other for short-term loans of excess reserves The Fed uses monetary policy to offset the effects of a recession (high unemployment and falling prices when actual real GDP falls short of potential GDP) and the effects of a rapid expansion (high prices and wages). Can the Fed, therefore, eliminate recessions? The Fed can only soften the magnitude of recessions, not eliminate them. What are the Fed’s main monetary policy targets? The money supply and interest rates The interest rate that banks charge each other for overnight loans is called the Federal Funds Rate When the Federal Reserve increases the required reserve ratio as part of a contractionary monetary policy, there is a decrease in the money supply and an increase in the interest rate The long run aggregate supply curve is VERTICAL because in the long run, changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force capital stock and technology.

In a market system, how does society decide who will receive the goods and services produced? Who receives the goods and services produced depends largely on how income is distributed. Scarcity implies that every society and every individual face trade offs because scarcity means that human wants are greater than what available resources can produce. Which of the following factors brought on the recession of 2007-2009? A rapid increase in the price of oil, the end of the housing bubble, and the financial crisis. What is the effect of an increase in the price level on the short run aggregate supply curve? A movement up along a stationary curve. The difference between the price the firm sells a good for and the price the firm paid other firms for intermediate goods is called Value Added. If the price level increases, there will be a movement up along a stationary aggregate demand curve. One major component of GDP that can be negative is Net Exports. THE BASIS FOR TRADE IS COMPARATIVE ADVANTAGE NOT ABSOLUTE ADVANTAGE. Equity is the fair distribution of economic benefits. The dynamic AD-AS model assumes potential GDP increases continually, while the AD-AS model assumes the LRAS (long run aggregate supply) does not change When the demand curve shifts to the right, the equilibrium price and quantity will both increase How does the dynamic model of aggregate supply and aggregate demand explain inflation? By showing that if total spending in the economy grows faster than total production, prices will rise Why is GDP an imperfect measurement of total production in the economy? GDP does not include household production or production from the underground economy Aggregate Demand (AD) is comprised of expenditure components that include: government spending, consumption, investment, and net exports. The circular flow diagram shows that total expenditure should equal total income

The circular flow diagram shows that all sources of income are owned by households What are the 4 major categories of expenditure? Consumption, Investment, Government Purchases, and Net Exports

“When there is a shortage of a good consumers compete against one another by bidding the price upward. The process continues until the market is finally in equilibrium Market price is determined by both supply and demand If country ABC can produce a unit of good 1 by sacrificing fewer units of good 2 than can country XYZ, it is correct to say that country ABC has a comparative advantage in producing good 1 What type of economic analysis is concerned with the way things ought to be? Normative Analysis A recession occurs when an economy experiences a period in which there is a decrease in total production The business cycle exists because total production experiences periods of increases and periods of decreases Whether carried out by an individual or a country, production beyond the production possibilities frontier is not physically possible With respect to consumption, individuals and countries can, through trade, consume beyond their production possibilities frontier If the Fed believes the economy is about to fall into a recession, it should use an expansionary monetary policy to lower the interest rate and shift AD to the right If the Fed believes the inflation rate is about to increase, it should use a contractionary monetary policy to increase the interest rate and shift AD to the left The short run aggregate supply curve slopes upward because of all of the following reasons except in the short run, an unexpected change in the price of an important resource can change the cost to firms

Chapter 14: Money and the Fed 1. What is money? Flat money vs Commodity money? Money is any asset that people are generally willing to accept in exchange for goods and services or for payment

of debts. Commodity Money is goods used as money that also have value independent of their use as money and Fiat Money is any money such as paper currency that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money. 2. What is M1 and M2? M1 is the sum of currency in circulation, checking account deposits in banks, and holdings of traveler's checks. M2 is M1 plus savings account balances, small denomination time deposits, balances in money market deposit accounts, and non-institutional money market fund shares. 3. What is the Fed? How many governors? What is FOMC? The FOMC, or Federal Open Market Committee, conduct’s America’s Monetary Policy. 4. How many channels for the Fed to change money supply? 5. What is federal funds rate? Discount rate? The Federal Funds Rate is 6. What is Security? Securitization? Security is a financial asset that can be bought and sold in a financial market. Securitization is the process of transforming loans or other financial assets into securities. 7. What is simply deposit multiplier? How is money created in banking system? 8. What is velocity of money? Velocity of money is the average number of times each dollar in the money supply is used to purchase goods and services included in GDP. 9. What is the quantity theory of money? The quantity theory of money is a theory about the connection between money and prices that assumes that the velocity of money is constant. 10. What is hyperinflation? Hyperinflation is inflation occurring at a very high rate. Chapter 15: Monetary Policy 1. What is monetary policy? Monetary Policy is the actions the Federal Reserve takes to manage the money supply and interest rates to pursue macroeconomic policy goals. 2. Three monetary policy tools? Four goals of monetary policy? Two targets? The 4 monetary policy goals are price stability, high employment, stability of financial markets and institutions, and economic growth. The 3 monetary policy tools are open market operations, discount policy, and reserve requirements. The 2 targets are money supply and interest rates. 3. What is the difference between fiscal policy and monetary policy? 4. How does money supply affect the interest rate? 5. Two factors shift money demand curve? 6. How interest rates affect aggregate demand? 7. What is expansionary and contractionary monetary policy? 8. How to use AD-AS model to analyze the effect of monetary policy? 9. What is the Taylor rule for federal funds target rate? 10. What is bubble? Chapter 16: Fiscal Policy

1. What is fiscal policy? Fiscal Policy refers to changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. 2. How do government purchases and tax affect the economy? 3. How to use AD-AS model to analyze the effect of fiscal policy? 4. What is expansionary and contractionary fiscal policy? Expansionary Fiscal Policy involves increasing government purchases or decreasing taxes. Contractionary Fiscal Policy involves decreasing government purchases or increasing taxes. 5. What is the multiplier effect? How to compute the multiplier of government purchase/tax? The multiplier effect is the series of induced increases in consumption spending that results from the initial increase in autonomous expenditures. 6. What is the cause for the limit of fiscal policy? 7. What is the crowding out effect? Crowding Out is a decline in private expenditures as a result of an increase in government purchases. 8. What is automatic stabilizer? How does it work to stabilize the economy? 9. What is budget deficit? National debt? Budget Deficit is when the government’s expenditures are greater than its tax revenue. National Debt is the total value of those securities outstanding. 10. What is cyclically adjusted budget deficit or surplus? The deficit or surplus in the federal government’s budget if the economy were at potential GDP. 11. What is tax wedge? Tax wedge is the difference between the pretax and post tax return to an economic activity....