Economics 201 exam 3 - Professor Bueckman. These are a set of questions that I created to help prepare PDF

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Professor Bueckman. These are a set of questions that I created to help prepare me for the exam. ...

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barter system

trading one good or service directly for another good or service

double coincidence a situation in which two people want some good or service which the of wants other person can provide

medium of exchange

an item buyers give to sellers when they want to purchase goods

unit of account

the yardstick people use to post prices and record debts

store of value

used to transfer purchasing power from present to future ex: savings accounts

standard of deferred payment

used as a medium of change today, you can purchase now and pay later

commodity moneymon

ey is a commodity with intrinsic value

representative money that represents a commodity commodity money

fiat money

money without intrinsic value, used as money because the government says so ex: current US dollars

money supply

quantity of money available in the economy

currency

bills and coins

demand deposits

balances in the bank account that depositors can access on demand by writing a check

M1

currency, demand deposits, checks

M2

savings deposits, money market funds, certificates of deposit, other deposits

liquidity

how easy it can be turned into cash

fractional reserve banking system

banks keep a fraction of deposits as reserves and use the rest to make loans

goldsmith's principle

banks need not maintain 100% of the deposits on hand as reserves

reserve requirement

-set up by the fed -regulations on the minimum amount of reserves a bank must hold against deposits. -tool of monetary policy

actual reserves

required reserves+ excess reserves

required reserves

what must be held

excess reserves

any amount beyond required reserves

reserve ratio

fraction of deposits that the bank holds as reserves

money multiplier

the amount of money the banking system generates with each dollar of reserves 1/R= money multiplier

T account

a simplified accounting statement that shows a banks assets and liabilities

assets

what the bank owns: reserves and loans

liabilities

what the bank owes: deposits

leverage

the use of borrowed funds to supplement existing funds for investment purposes

bank capital

the resources a bank obtains by issuing equity to its owners

leverage ratio

ratio of assets to bank capital

capital requirement

a government regulation specifying a minimum amount of bank capital. intended to ensure that banks can pay back depositors and debts

Consumer Price Index (CPI)

primary measure of inflation in the US. measures the typical consumers cost of living

BLS

Bureau of Labor Statistics. they calculate the CPI

COLAs

cost of living adjustments. based on CPI

how to calculate CPI

100 * (cost of basket in current year)/(cost of basket in base year)

how to calculate the inflation rate

(CPI this year- CPI last year)/CPI last year *100

The CPI basket "contents"

consumers surveyed to determine a typical shopping basket

problems with the 1. substitution bias- the fact that people can substitute items if one CPI price rises too much 2. introduction of new goods

3. unmeasured quality change- CPI doesn't account for the improvement of goods

substitution bias

we can substitute an item that we buy for something less expensive

indexation

automatically corrected for inflation by law or contract of a dollar amount, for the effect of inflation

nominal interest rate

-is NOT corrected for inflation -rate of growth in the dollar value of a deposit or debt

real interest rate

-IS corrected for inflation -rate of growth in the purchasing poser of a deposit of debt = nominal rate-inflation rate

inflation

a general increase in prices of the things people buy and sell

the inflation fallacy people think "inflation erodes real incomes"

costs of inflation (4 things)

1. menu costs- the costs of changing prices 2. misallocation of resources from relative price variability- not all prices rise at the same time--> blurred price signals 3. confusion and inconvenience- inflation changes the "yardstick" which complicated long range planning 4. tax distortions

-inflation exceeding 50% per month -excessive growth in the money supply causes hyperinflation hyperinflation -large gov budget deficits lead to the creation of lots of money at high inflation rates

PPI

producer price index. a measure of inflation

International price index

a measure of inflation based on the prices of merchandise that is exported or imported

employment cost a measure of inflation based on wage paid in the labor market index

GDP deflator

the GDP deflator for a given year is 100 times the ratio of nominal GDP to real GDP in that year

core inflation index

a measure of inflation excluding the effects of food and energy prices to better measure the underlying and persistent red in long-term prices

deflation

a sustained drop in price levels

consequences of deflation

-can lower economic growth and lower employment---> affects buyers and slows purchasing -increases the value of debts

negative interest real interest rates are negative when nominal rates are below inflation rates

income and expenditure

income equals expenditure because every dollar a buyer spends is a dollar for the seller

Gross Domestic Product (GDP)

the total market value of all final goods and services produced within a country in a given period of time

final goods

finished goods and services produced for the ultimate user

intermediate goods

goods used in the production of other goods

components of a GDP (Y) ((4 things))

1. consumption (C) 2. Investment (I) 3. Government purchases (G) 4. Net Exports (NX)

Consumption (C)

total spending by households on goods and services (durables, nondurables, and services)

Investment (I)

-total spending on: capital equipment, structures (factories, households), inventories (goods produced but not yet sold -it is not the purchase of financial assets (ie stocks and bonds)

government purchases (G)

spending on goods and services purchased on by the gov on all levels

transfer payments

benefits which are transfers of income (social security or UI)

Net Exports (NX)

NX= exports - imports

exports

produced domestically and sold abroad

imports

produced abroad and sold domestically

GPD per capita

the main indicator of the average person's standard of living

-the quality of the environment -leisure time GDP does not value:

-non market activity -an equitable distribution of income

why do we care about GDP?

-having a large GDP enables a country to afford better schools, cleaner environment, health care, etc -many indicators of the quality of life are positively correlated with GDP

business cycle

short run economic fluctuations around the long run trend

4 phases of business cycle

1. peak 2. recession

3. trough 4. recovery

recessions

periods of falling real incomes and rising unemployments

depression

severe recession

Nominal GDP

values output using current prices, is NOT corrected for inflation

Real GDP

values output using prices of a base year, is corrected for inflation

GDP deflator

is a price index measure of overall level of prices

factors of production

land, labor, capital

productivity

-the value of output produced per unit of labor input -y= real GDP= quantity of output produced -L= quantity of labor

physical capital (K)

equipment and structures used to produce goods and services

human capital (H) knowledge and skills

Natural Resources nature provided inputs (N)

technical knowledge

society's understanding of the best ways to produce goods and services

technical change

any advance in knowledge that boosts productivity allows society to get more output from its resources

foreign direct investment

a capital investment owned and operated by a foreign entity

foreign portfolio investment

a capital investment finance with foreign money but operated by domestic residents

education

policy can promote investment in H. It has positive externalities. Each year of school raises a worker's wage by 10%

health and nutrition

healthier workers are more productive, invests in H

property rights

the ability of people to exercise authority over the resources that they own

political stability

the justice system must be able to enforce contracts, address fraud and corruption, and have effective courts. if not then it is uncertain that pr

free trade

the idea of trading goods and services with no restrictions (like tariffs and quotas)

inward oriented policies

avoid interaction with other countries. ex: tariffs, limits on investments from abroad

outward oriented promote integration with the world economy policies ex: elimination of restrictions on trade/ foreign investment

policies to gpreastesn:t laws, tax incentive, direct support for private sector promote technological pro research and development, grants for research at universities

technological progress

the main reason why living conditions rise over the long run, because knowledge is a public good

a1n.dsatredtschinintghnreaetudraiffl ererseonutrwceasys: 2. diluting the capital stock- more population= higher L= lower K/L= population growth lower productivity and living standards may affect living st 3. promoting technological progress- more people= more knowledge= faster tech growth=economic growth...