Unit 1
Identify the term: Limited resources but unlimited wants & needs
What is Scarcity
Write out the equation for calculating the CPI
Market basket in current year/M.Basket in Base Year x 100
What are the components of AD?
A: C + I + G + Xn
Three functions of money
Medium of exchange, store of value, unit of account
Equation for the Quantity Theory of Money
MxV=PxY
What happens to exports when a currency appreciates?
Appreciate= Exports decrease
This is defined as two consecutive quarters of declining GDP.
What is a recession?
If interest rates climb, what happens to the price of bonds?
The state of the economy that exists when aggregate output is below potential output.
What is a recessionary gap or negative output gap
What does the "crowding out" effect do to real interest rates?
Increases the real interest rate!
The short run Phillips Curve shows the trade-off between ___________ & _____________.
What is Inflation & Unemployment
If the US has an increase in interest rates, what kind of capital flow will they experience from other countries?
Capital inflow (other countries want to invest there!)
The value of the next best alternative not chosen.
What is opportunity cost?
Calculate the spending multiplier if the MPC is .75 and also the tax multiplier
What 4 for spending multi and -3 for tax multiplier
Draw an economy at full long run employment.
In an ample reserves system, what expansionary monetary policy tool would the Fed. implement in a recessionary gap?
Lower the Interest on Reserves (IOR) *Could say lower the administered rates*
List three things that can lead to long run economic growth (increased potential output).
Improved technology, improved human capital, business investments (I), and increased resources through trade. *Government spending can also if it focuses on these items listed (human cap, I, innovation etc)
Econland has a trade surplus with Farmville. What would Econland's CA & CFA balance of payments look like?
*Hint (Remember CA + CFA = 0)
Econland has a surplus in CA, deficit in CFA.
Where does a production point have to be in order to be efficient on the PPC?
What are points that are ON THE LINE/CURVE?
Calculate the unemployment rate & labor force participation rate:
Full-time employment = 600; Part-time = 120 #unemployed = 80; Discouraged Workers = 20 Population = 1600
Labor Force Part. Rate = 50%
If there is no government intervention how does the actual gdp output return to the long run potential output?
The SRAS curve will shift back to the LRAS curve
Assets Liabilities
Total Res=$5,000 / Demand Deposits = $20,000
Loans = $15,000
Q: If the req. res is 10%, how much is in the current req. reserves & in the excess reserves for Bank X?
Req. Res = $2,000 Excess Res. = $3,000
Draw and correctly label the loanable funds market showing crowding out.
See Graph
Japanese fruits become more popular in America. What happens to the exchange rate of the Japanese Yen compared to the American dollar?
Japanese Yen will increase in demand and will cause the currency to appreciate
American dollar will increase in supply and will cause the currency to depreciate
Draw a PPC model showing constant opportunity cost between Corn and Wheat. Put Corn on the Y and Wheat on the X. Also label an efficient point as A.
The natural rate of unemployment is a sum of these unemployment types.
Draw out the "cheat sheet" graph for how to calculate Nominal GDP, Real GDP, and GDP Deflator.
Draw out Model on Answer Doc.
The Fed buys $100 of bonds at City Bank. The current reserve requirement is 10%. What is the change to the money supply based on the Fed's open market operation?
What is $1,000 increase in the MS.
If the money supply is $40 and it buys 10 products with a price of $20 each, what is the velocity of that money?
Velocity = 5 ($40 x V = $20 x 10)
The US economy experiences rapid growth causing incomes to increase. What will happen to the exchange rate between the US dollar and the British Pound?
Us dollar depreciates. British Pound will appreciate (Americans have more money and will demand more foreign goods...they must supply their own dollars to get foreign goods)
In Fallsemester for every 1 chocolate pie being produced they could have made 2 apple pies. In Springsemester for every 1 chocolate pie being made they could have made 4 apple pies. Who has the comparative advantage in apple pies?
What is Spring Semester?
Calculate the inflation rate from 2012 to 2013.
Year CPI
2012 229.6
2013 233.0
What is 1.5%?
(233.0 − 229.6)/229.6 × 100 = 1.5%
If the MPC is .9. How much government spending is required to close a $150 billion dollar recessionary gap?
$15 billion dollar increase in gov't spending.
The United States GDP fell short by $60 billion. The current MPS is 20%. The government isn't sure which policy to go with to ...How much would Taxes AND Government spending have to change to correct this negative output gap?
Decrease taxes by $15 Billion
Increase spending by $12 Billion
This happens (shift in what direction) to all of these models, LRAS, PPC, and LRPC, if there is a major increase in technology and business investment that lead to economic growth?
What is the LRAS and PPC will shift RIGHT showing an increase in potential output and the Long Run Phillips Curve will shift Left showing a decrease in the natural rate of unemployment.
Draw the foreign exchange market for the US dollar relative to the Euro if real interest rates increase in the US.
(Supply shifts L, Demand shift's R) Double shift causing the USD to appreciate!