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Economics
Types of Inflation
demand Pull, cost put, phillips curve, growth in money supply
An increase in P reduces the quantity of goods and services demanded because..
C fall(welath effect), I falls (interest rate effect),NX (exchange rate effect)
Investment
Buying of new capital
Market-orientated supply side policies
Reduce gov expenditure, income tax cuts, tax cuts for businesses and other investment
incentives, policies to encourage competition
Demand deficient unemployment
not enough demand for jobs
CPI: Consumer Price Index
measures the change over time in the price of a representative basket of goods and services
bought by consumers
Broad Money
includes cash exchanged with financial instruments, non-liquid assets
What is Quantative Easing
when the central bank buys treasury bills or mortgage backed securities from the financial
market
Phillips Curve: Traditional Keynesian View
trade off between unemploymnet and inflation
Phillips Curve: New Classical view
expectations augmented vertical long run phillips curve
Why might the AD curve shift?
changes in consumption, investments, gov. spending, net exports
Components of Aggregate Supply
consumer goods and services, capital investment, public sector goods and services, goods
and services for export
The interest rate effect
Suppose P rises, buying things require more money resulting in I falling
The exchange rate effect
when price and i rise, foreign investors want more euro bonds
What is the money multiplier?
the total increase in money supply caused by cash injection
The wealth effect
suppose P rises, people feel poorer, results in C falling
Keynesian View of Business Cycle: The Accelerator effect
changes in income cause investments
Problems with monetary policy
doubt regarding effectiveness in boom or recession
Structured Unemployment
Mismatch between a persons skills and those in demand
Interventionist cure to structural unemployment?
grants to firms to improve training
Deflation
a fall in overall price levels
HICP
a common measure of CPI in the eurozone, goods are excluded
Neoclassical view of LRAs: Potential output of the economy depends on ____?
productivity
New Classical: Reason for Financial Crisis
not enough deregulation, too much gov involvement
GDP measures?
income and expenditures
Classical "real wage" unemployment
wages are too high
3 parts of the eurozone money supply
M1, M2, M3
The functions of money
medium of exchange, means of evaluation, means of storing wealth, means of establishing
value of future claims
Rule of 70: If inflation is 3% per year, how long will it take prices to double?
70/3 = 24 years
To inject money into the economy the gov ___ bonds
buys
Rule of 70: if inflations is 10% then prices double in...
70/10= 7 years
Monetarist + New Classical schools believe macroeconomics problems are a result of...
too much government intervention
T/F In a system of 100% reserve banking banks do not unfluence the money supply
True
Goodharts Law
as soon as the governemnt attempts to regulate any particular set of financial assets these
become unreliable indicators of economic trends
T/F Fed policy decisions influence employment but not inflation
False
Keynesian View: Reason for Financial crisis
caused by too much deregulation of the banking system ( not enough gov involvement)
Quantity Theory of Money: MV = PY
M: Money stock, V: Velocity circulation, P: Price Level, Y: National Income
Bond price = x/ interest rate. X=?
fixed payment
Keynesian View: Economic Growth
Needs a hand with demand
Neoclassical view of LRAS: argue that in the long run the economy will...
automatically shift to its long run equilibrium
Fiscal Policy
changes to gov. expenditures and income (taxation) to achieve objectives
Newclassical: Unemployment
voluntary
Problems with fiscal policy
not easy too change, takes time for effects to show, debt repayments
Narrow money
physical money,demand deposits and bank owned liquid assets
T/F Treasury bonds are a store of value, but not a medium of exchange
false
Effects of deflation
reduces incomes, consumers postpone spending, firms reduce investments
ideal attributes of money
durability, trans portability, divisibility, cannot be counterfeit
Role of the Central Bank
Lender to commercial banks, controls inflation, operates monetary policy, oversees banks
and other financial institutions
M3
M2 + Company bonds maturing in up to 2 years
Which statistic is usually regarded as the best single measure f a society's economic
well-being?
GDP
T/F In a system f 100% reserve banking currency is the only form of money.
false
T/F Treasury bonds are a medium of exchange, but not a store of value
false
New classical: government intervention in the economy
do not interfere, the free market will naturally correct itself
what is the reserve ratio?
the portion of deposits which have to be kept in cash in the banks
Money Multiplier equation
mm = 1/required reserve ratio
Monetary Policy
changes in interest rates and the money supply to achieve objectives
T/F in a system of 100% reserve banking deposits are the banks only asset
false
T/F real GDP is the variable commonly used to measure short-run economic fluctuations. It is
almost impossible to predict these fluctuations
true
"The value of all final goods and services produce within a country in any given period of time"
GDP
Keynesian View: Inflation
demand pull, high inflation is okay if unemployment is low
When the CB buys gov. bonds, what happens to the money supply?
Increases
To reduce the amount of money in the economy the gov. ___ bonds
sells
Neoclassical view of LRAS: workers realize prices are increasing and demand higher wages,
sras shifts...
upwards
AD Curve
shows the quantity of all goods and services demanded at any given price level
As the reserve ratio increases the money supply...
decreases
What is inflation?
the annual percentage increase in prices
Money path
gov>central bank>commerical bank>real economy
New classical: economic growth
growth will occur naturally, do not intervene
Keynesian View: government intervention in the economy
do it, economy is naturally bad and needs intervention
Monetary Policy cure for inflation?
raise interest rates, reduce money supply
T/F In a system of 100% reserve banking banks do not accept deposits
false
T/F Fed policy decisions influence inflation but not employment
false
Government can raise money from...
raising taxes, selling bonds
Keynesian View: Unemployment
involuntary
When the gov sells bonds interest rates...
increase
M2
M1+ bank bonds maturing up to two years, + deposits requiring up to 3 months
T/F Real GDP is the variable most commonly used to measure short term economic fluctuations
can be predicted with some accuracy
false
Fiscal Policy cure for inflation?
reduce goverment expenditure, raise taxes, move AD to the left
When the gov. buys bonds interest rates...
lower
T/F In a system of 100% reserve banking banks do not make loans
true
T/F Treasury bonds are both a store of value and a medium of exchange
true
M1
cash in circulation + overnight deposits
Market orientated cure to structured unemployment?
encourage people to look for work in other areas
New Classical: Inflation
The worst believed to be caused by too much government inervention
Over the long run, GDP grows about ___% per year?
3
Frictional unemployment
people changing jobs, university graduates
T/F Fed policy decisions influence inflation and employment
true
interest rate= fixed payment/ x, X=?
Bond price
Which of the following topics are more likely to be studied by a macroeconomist than by a
microeconomist?
The percentage of the labour force that is out of work, and differences in average incomefrom
country to country
The basic tools of supply and demand are….?
d. Central to macroeconomic analysis as well as to microeconomic analysis
What is GDP used for?
it is used to monitor the performance of the overall economy and it is the single best measure of
a societys economic well-being
Expenditures on a nation's domestic production...?
are equal to its domestic production
Long-term bonds are...?
risker than short-term bonds, and so interest rates on long-term bonds are usually higher
than interest rates on short-term bonds
The government's expenditures exceed its receipts, what is it likely to do?
sell bonds directly to the public
To what does the term 'Liquidity' refer in economics?
the ease with which an asset is converted into money
Which of the following does the EU Central Bank not do?
make loans to businesses
What is meant by the term real interest rate?
interest rate corrected for inflation
When conducting an open-market sale, a Central Bank...?
sells government bonds, and in so doing decreases the money supply
An open-market purchase by a Central Bank...?
increases the number of euros in the hands of the public and decreases the number of bonds in the
hands of the public
If a bank has a reserve ratio of 8 percent, then...?
the bank keeps 8% of its deposits as reserves and loans out the rest
A banks reserve ratio is 5 percent and the bank has 1,000 euros in deposits. Its reserve amount
to...?
50 euros
If the central bank in some country lowered the reserve requirement, then the money
multiplier in that country...?
would increase
When we assume that the supply of money is a variable that the central bank controls, then
we...?
are ignorin the complications introduced by the role of the banking system
Which of the following lists correctly, identifies the four expenditure categories of GDP?
consumption,government urchases, investment, net-exports
Kathleen is considering expanding her consultancy firm, if interest rates rise she is..?
less likely to expand. This illustrates why the demand for loanable funds slopes downward
By which of the following is correct?
real GDP is the variable most commonly used to measure short-run economic fluctuations. It is
almost impossible to predict these fluctuation
The investment component of GDP measures spending on...?
office and factory construction, business equipment, and changes in inventory.During
recessions it declines by a relatively large amount
Which of the following shifts aggregate demand to the right?
increase in investment, increase in net-exports due to something other than change in
domestic prices, increase money supply
Which of the following shifts aggregate demand to the left?
a decrease in the money supply
Fluctuations in employment and output result from changes in which of the following?
aggregate demand and aggregate supply
Suppose a government cuts taxes and raises govt. expenditure.What would happen according to
the aggregate supply and aggregate demand model?
both the tax and the increase in government expenditure would tend to increase output
What is fiscal policy?
the attemot to control aggregate demand by altering the balance between government spending
and taxation
The marginal propensity to consume (MPC) is defined as the factor of...
extra income that a household consumes rather than saves
Assuming a 2 sector economy, with no govt. or international trade. If the multiplier is 5, then
what is MPC?
0,80
What is Monetary Policy?
the attempt to control aggregate demand by means of altering interest rates and the money
supply
The central bank will tend to tighten monetary policy in which of the following situations?
it thinks inflation is too high today, or will become too high in the future
What happens if the central bank increases the money supply?
the interest rate decreases, which tends to raise stock prices
Suppose that the adult population is 6 million,the number of employed is 3.8 million, & the
laborforce participation rate is 70%.unemploymen
9.5
What is structural unemployment?
unemployment that occurs because the numberof jobs available in some industries has fallen,
these workers either lack skills or country
Frictional Unemployent is thought to explain
relatively short spells of unemployment, while structural unemployment is thought to
explain relatively long spells of unemployment
During a recession what does the economy experience in terms of employment and incomes?
falling employment and income
What is the economy's inflation rate?
the percentage change in the price level from previous period
Which of the following is true about deflation?
decreases incomes and reduces the ability of debtors to pay off their debts
A reason for the slope of the short-run phillips curve is that when unemployment is high there
are...?
downward pressures on prices and wages