18
True or False
A Treasury bond represents lending by the US government.
False a bond is when you lend money to the government in which earns interest over time
What is frictional unemployment? Explain if it should be zero.
Unemployment is caused by job search (workers between jobs).
What is money? What functions does it have? How does it differ from income and wealth?
Money is an asset used to make transactions. It functions as a medium of exchange, a way to store value, a unit of account, and a form of liquidity.
Explain the slope of the LRAS curve and explain what shifts it. Provide an appropriate graph.
the slope is vertical. Shifts are caused by Human capital (changes in labor or its quality), physical capital (changes in capital or its quality), changes in natural resources, and changes in technological knowledge.
What are John Maynard Keynes’ contributions to economics?
John Maynard Keynes’ contribution to economics was the four sector division of the economy, creating the theory of liquidity preference.
True or False
The Treasury borrows when it runs a surplus.
False the lend money to help programs, taxes, or interest rates to help better the economy
Define Bond and Stock
Bond - certificates of indebtedness (IOUs) - claims on the cash flow of those who issued them
Stock - Certificates of partial ownership of a firm - claim on the net assets of the company
What is the underlying cause of inflation? See section 21-2b. As well as Principle 9 in Chapter 1.
If the government prints to much money there is inflation. growth rate of money supply.
What shifts the short-run AS curve?
Shifts are caused by Human capital (changes in labor or its quality), physical capital (changes in capital or its quality), changes in natural resources, changes in technological knowledge, and changes in expected price level
What is expansionary monetary policy? Contractionary monetary policy?
Expansionary monetary policy is when the increasing money supply and lowering the interest rate (buy bonds). Contractionary monetary policy is decreasing money supply and raising the interest rate (sell bonds).
Define Crowding out effect
Crowding out effect - when government involvement in a market is increased and substantially affects the remainder of the market
Does the unemployment rate measure what we want it to measure? Why could it either overestimate or underestimate the true state of joblessness? See Section 20-1b.
It underestimates the true state of joblessness because the rate counts of people in the labor force. Discouraged workers who have given up looking for a job are not counted in the labor force.
What is a fractional reserve banking system? Explain if it is inherently stable.
System where banks hold a fraction of the deposits as reserves
Who was John Maynard Keynes? Why does he appear in this chapter?
John Maynard Keynes was an Economist in the 1930s. AD-AS model is to explain fluctuations in GDP which started with his General Theory. Intended to explain the Great Depression, it divided the model into 4 sectors (C+I+G+NX).
What is the federal funds rate? Why is it important for monetary policy? See section 24-1d.
Federal fund rate is the interest rate banks charge one another (for short term loans). It is important for monetary policy because the feds can then adjust money supply.
True or False
A financial intermediary holds real assets and issues financial liabilities.
True they help savers lend indirectly to savors
1. Assume that there are 234 million adults in the US of which 150 million are employed workers and 8 million are unemployed workers. Find the Labor force participation rate
Labor force participation rate (Answer: 67.52%)
What is FDIC? Why do we have it, that is, what function does it serve? See Case Study: Bank Runs.
Inherent instability, no bank has ll the deposits on hand in cash.
Define AD and AS. What variables are on the vertical and horizontal axes? How do we measure them?
AD shows the quantity of goods and services that households, frims, and the government. and customers want to buy at each price level. AS shows the quantity of goods and services that firms choose to produce and sell at each price level
DAILY DOUBLE!!!!!
How many pubes does Griffin have on his ball sack
3
Define Financial system and Financial Markets
Financial system - institutions connecting savers to investors in real (physical) projects
Financial markets - markets for financial instruments (they help connect borrows/real investors and lenders/savers)
1. Assume that there are 234 million adults in the US of which 150 million are employed workers and 8 million are unemployed workers. Find the Unemployment rate
Unemployment rate (Answer: 5.06%--if you say 5%, it is not sufficient; 5.1% is acceptable)
If the Fed buys $1000 of Treasury securities and the reserve ratio is 0.25, how much can the money supply increase? (Answer: $4,000). If it sells $2000 of Treasury securities and the reserve ratio is 0.2, how much can the money supply fall? (Answer: $10,000).
1/R = 1/.25 = 4
4x1000 = 4,000
1/R = 1/.2 = 5
5x2000 = 10,000
What two great shifts in AD does the book present? What do these shifts explain?
The great depression and World War II were the two greatest shifts in AD. The Great depression caused a large drop in real GDP. Unemployment rose and price levels fell. decrease in AD caused decline in money supply and decreased C and I. World War II had a large increase in real GDP. Economic Boom, more resources for the military, government purchases increased, AD increased, doubled the economy's production, price level increased, and unemployment fell.
What is meant by Zero Lower Bound? Explain “forward guidance” and “quantitative easing.” See Section 21-1e.
Monetary policy works through interest rates. the target rate for the federal funds rate is currently zero. However could fall into a liquidity trap when interest rates are around zero monetary policy may no longer be effective (AD, productions, and Employment may be trapped at low levels). Forward Guidance: Fed raises inflation expectations by committing to low-interest rates. Quantitative easing: Fed buys a larger variety of financial instruments (mortgages, corporate debt, and longer-term government bonds).