Economics Vocabulary Quiz

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All major currencies today are in the form of this.

Fiat money

I need to cut back on my spending each month because I am planning to purchase a house, and I also need to think about how I will pay for my child's college tuition in a few years.

Life-cycle savings

This form of fiscal policy has a greater impact per dollar than other fiscal policy measures.

Direct Fiscal Policy

AIG sold insurance policies on ______ which then put the company in a dangerous position when the housing bubble burst.

subprime mortgages Signup and view all the answers

If investment spending in a country were to exceed its national savings in a given year, we know that [blank] would be negative for that year.

Net capital inflow Signup and view all the answers

This measure reflects the amount of public savings in an economy.

Budget balance Signup and view all the answers

When aggregate prices increase, the purchasing power of certain assets (e.g. currency, funds held in time deposits, funds held in savings accounts, etc.) decreases. When this happens, autonomous consumption spending decreases.

Deflation Signup and view all the answers

Increases in this would lead to increases in productivity, increases in Yp and increases in SRAS.

Human capital Signup and view all the answers

The flour I purchase is for use in my bakery, rather than for personal use.

Intermediate good Signup and view all the answers

The decline in lending standards can be seen in part by the large number of ______ issued.

subprime mortgages Signup and view all the answers

This can be caused by things such as minimum wages, labor unions and efficiency wages.

Frictional unemployment Signup and view all the answers

These were created due to the "mainstreet" vs. "wallstreet" divide.

Regional Federal Reserve Banks Signup and view all the answers

This can be used to "deflate" nominal values so they are comparable from year to year.

CPI Signup and view all the answers

Suppose that the population of individuals aged 16 and over is 4 million, the number of individuals officially counted as unemployed is 0.3 million, and the labor-force participation rate is 75%. What is the unemployment rate?

7.5% Signup and view all the answers

Suppose the CPI in 2020 is 250 and the CPI in 2021 is 240. What is the inflation rate between 2020 and 2021? Based on this information, what is the economy experiencing over this time period?

Inflation rate = -4%. The economy is experiencing deflation. Signup and view all the answers

Suppose you are considering taking out a loan and the nominal interest rate is 5%. Assuming the inflation rate remains stable at the rate calculated in a), what is the real interest rate on the loan?

9% Signup and view all the answers

Suppose the average price of a medium pizza in 2020 is $10, and the average price of a pizza in 2021 is $9.75. Compare these prices in real terms. Are pizza lovers better or worse off in 2021?

Pizza lovers are better off in 2021. The real price of pizza is lower in 2021. The real price is found by dividing the nominal price by the CPI and multiplying by 100. The real price of pizza in 2020 is (10/250)* 100 = $4, while the real price of pizza in 2021 is (9.75/240)* 100 = $4.06. Therefore, pizza is cheaper in real terms, making pizza lovers happier. Signup and view all the answers

A logging company (owned and operated in the U.S. harvested 2 million MBF of timber in 2020. That same year, the logging company sold 1 million MBF to a saw mill located in the U.S. at the market price of $300 per MBF. The rest of the timber went unsold that year. Suppose the saw mill used all of the timber purchased in 2020 to produce lumber. It sold half of the lumber to the government and half to a construction company for use in various projects that were not completed in 2020. The total market value of the timber sold was $400 Million. Using the expenditure approach, calculate the total impact on 2020 U.S. GDP that resulted from these specific events. Explicitly show the effect on each expenditure category: C, I, G, NX

The total impact on 2020 U.S. GDP is $400 million. C: $0, I: $100 million, G: $200 million, NX: $0. Signup and view all the answers

Suppose the current level of real GDP in the economy is $25 trillion, however experts estimate that potential output is $20 trillion. Is this a long-run or a short-run situation?

True Signup and view all the answers

Calculate the output gap (calculate this as a percentage of potential real GDP, as shown in class). Is this an expansionary or recessionary gap?

The output gap is 25%. This is an expansionary gap. Signup and view all the answers

Suppose the marginal propensity to consume is 0.8. Further suppose the SRAS is perfectly elastic, there are no transfer payments, and income taxes are collected at a tax rate of 25%. By how much would the government need to change its spending to close the output gap using direct methods?

$2.5 trillion Signup and view all the answers

An influential group of individuals opposes the idea of closing the output gap. Instead, the group is advocating that the government should do everything it can to maintain this high level of GDP through fiscal policy. What fiscal policy tools could be used to support this high level of GDP? Provide a complete list, and be specific about whether each would increase or decrease.

Decrease taxes Signup and view all the answers

What arguments could you provide for why this would be a bad idea? (Be sure to give at least two sound arguments.)

<ol> <li>Maintaining a high level of GDP through expansionary fiscal policy, even when the economy is operating beyond its potential output, can lead to inflation. As resources become scarce, businesses may bid up prices to attract workers and materials, leading to inflation. 2. Expansionary fiscal policy can also lead to the accumulation of government debt. Continued spending without sufficient tax revenue can lead to a growing national debt, which may ultimately impose a burden on future generations.</li> </ol> Signup and view all the answers

Suppose that the government has decided that fiscal policy action in any form is not appropriate. Instead, the Federal Reserve has decided to take monetary action to close the output gap. How should the Fed adjust its target Federal Funds rate to accomplish this? (Should the target be higher or lower than the current rate?)

The Fed should lower the target Federal Funds rate. Signup and view all the answers

Explain how a change in interest rates would affect the economy and would help close the output gap.

Lower interest rates lead to greater investment and increased household spending, which in turn stimulate the economy. Conversely, higher interest rates can reduce borrowing, dampen investment, and slow economic growth. Signup and view all the answers

Consider the following actions and categorize them as one of the following: A. Appropriate for the Fed to take under the old (scarce reserve) framework B. Appropriate for the Fed to take under the new (ample reserve) framework C. Inappropriate for the Fed to take given the current economic conditions D. Impossible for the Fed to take i. Increase monetary base ii. Decrease monetary base iii. Increase IORB iv. Decrease IORB v. Increase taxes iv. Decrease taxes

Increase monetary base = A Decrease monetary base = B Increase IORB = C Decrease IORB = D Increase taxes = C Decrease taxes = A Signup and view all the answers

Suppose the reserve requirement for banks is 10%, banks maintain zero excess reserves, and individuals put all of their funds into checkable deposits. By how much will the Fed need to change the monetary base if it wants to change the money supply by $200 billion? (Either + or - depending on what would move the economy in the correct direction.)

$200 billion Signup and view all the answers

Assume the Fed conducts all of its open-market operations with the bank shown below. On both balance sheets, write the debits and credits that would result from the open-market operation required to accomplish the desired change specified in h).

The Fed would buy government bonds to increase the monetary base. The bank's balance sheet would have an increase of $20 billion in assets (Treasury Bills) and an increase of $20 billion in liabilities (Deposits). The Fed's balance sheet would have an increase of $20 billion in assets (Treasury Bills) and an increase of $20 billion in liabilities (Monetary Base). Signup and view all the answers

Study Notes

Vocabulary Section

Autonomous Consumption: Consumer spending independent of income changes.
Base Year: Year used as a reference point for comparing prices.
Bequest Savings: Savings for future generations or as an inheritance.
Budget Balance: Difference between government revenue and spending.
Business Cycle: Fluctuations in macroeconomic activity.
Commercial Paper Market: Market for short-term debt instruments.
Commodity Money: Money with intrinsic value.
Commodity-Backed Money: Money representing a claim on a commodity.
Commodity Substitution Bias: Changes in the purchasing power of money.
Consumption Function: Relationship between consumption and income.
CPI: Consumer Price Index, measures inflation.
Credit Default Swap: Financial contract transferring credit risk.
Crowding Out: Reduction in private sector borrowing due to government borrowing.
Cyclical Unemployment: Joblessness due to business cycle fluctuations.
Deflation: Decrease in the general price level.
Direct Fiscal Policy: Government spending and taxation intended for direct effect.
Discount Rate: Rate the Federal Reserve charges member banks for loans.
Discount Window: Facility offered by the Federal Reserve for banks to borrow cash.
Disinflation: Decrease in inflation rate.
Divine Coincidence: Desired monetary and fiscal policies coincide.
Dual Mandate: Federal Reserve's objective of maximum employment and price stability.
Expansionary Gap: Difference between actual and potential output during expansion.
Excess Reserves: Reserves banks hold beyond the required amount.
Federal Funds Rate: Interest rate banks charge each other for overnight loans.
Fiat Money: Money without intrinsic value, authorized by a government.
Final Good: Goods and services purchased by the ultimate consumer.
Fisher Effect: Relationship between nominal and real interest rates.
Frictional Unemployment: Voluntary job changes or time between jobs.
Human Capital: Skills and knowledge of workers.
Income-Expenditure Multiplier: Ratio of change in equilibrium output to a change in spending.
Indirect Fiscal Policy: Government policies influencing market forces toward a goal.
Inflation: General increase in the price level.
Interest Rate Effect: Impact of interest rate changes on aggregate demand.
Intermediate Good: Used in the production of other goods.
Lender of Last Resort: Institution that provides liquidity to banks in financial crises.
Life-Cycle Savings: Individual savings based on expected income over lifetime.
Long Run: Period where all factors of production adjust.
Market Basket: Selection of goods and services used to measure inflation.
Marketplace Costs: Costs associated with exchanges in the marketplace.
Monetary Base: Total amount of currency in the economy.
Money Market Funds: Mutual funds investing in short-term debt.
Money Multiplier: Ratio of money supply to money base.
Mortgage-Backed Securities: Securities backed by a pool of mortgages.
National Savings: Savings by households and government in a country.
Net Capital Inflow: Amount of foreign investment flowing into a country.
Net Exports: Difference between exports and imports.
Net Present Value: Present value of future cash flows.
Open-Market Operations: Buying and selling government securities by the Fed.
Potential Output: Level of output in an economy under normal conditions.
Precautionary Savings: Savings for unplanned expenditures.
Private Savings: Savings by individuals or firms.
Quality Adjustment Bias: Problem in adjusting market prices for product quality improvements.
Rate of Return: Ratio of total return to initial investment.
Recessionary Gap: Difference in actual output from output at potential during contraction.
Regional Federal Reserve Banks: Banks that regulate and oversee members in their region.
Reserve Ratio: Ratio of reserves to deposits of commercial banks.
Reserve Requirement: Percentage of deposits that banks must keep as reserves.
Securitization: Process of transforming illiquid financial assets into marketable securities.
Short Run: Period where many factors of production are fixed.
Shoe-Leather Costs: Costs of time and effort to search for lower prices when inflation is high.
Stagflation: Combination of inflation and stagnation in an economy.
Sticky Wages: Wages that do not adjust quickly to changes in the labor market.
Structural Unemployment: Joblessness due to structural changes in the economy.
Subprime Mortgages: Mortgages granted to borrowers with poor credit ratings.
Tight Monetary Policy: Policy that reduces the money supply.
Treasury Bills: Short-term debt obligations issued by the U.S. Treasury.
Unit-of-Account Costs: Costs of using money as a unit of account during inflation.
Unplanned Investment: Investment that did not correspond to the plans of firms.
Wealth Effect: Increased spending as consumer wealth increases.
Wealth Redistribution: Shifting of wealth amongst groups in society.

Calculation Section

Unemployment Rate: Ratio of unemployed to total labor force, expressed as a percentage.
Inflation Rate: Percentage change in the price level over a period.
Real Interest Rate: Interest rate adjusted for inflation.
GDP: Gross Domestic Product, the total value of goods and services produced within a country's borders.
Expenditure Approach: Measures GDP by summing all spending in the economy.

Short Answer Section

Long-Run Economic Growth: Sustained increases in a country's potential output over time.
Productivity Factors: Examples include technological advancements, capital investments, and human capital development.
Measurement Issues in Economic Growth: Problems include overlooking environmental impact or distribution of income.
Natural Capital Accounting: Measure economic activity that takes environmental concerns into account.

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Description

Test your knowledge of key economic terms and concepts with this quiz. From understanding the business cycle to grasping the nuances of consumer price indices, this quiz covers essential vocabulary that every economics student should know.