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55 Cards in this Set
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- Back
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Define Nominal GDP, using the language from class
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Nominal GDP is the dollar value of all final goods and services
produced in the domestic economy in a given time period |
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(2 point, 2 minutes) What are the Aggregate Expenditure Categories of GDP? What component of GDP tends to be most volatile (move most) over the business cycle?
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GDP = C+ I + G + NX.
C = Personal Consumption (household spending, excluding construction) I = Investment G = government expenditures NX = Net Exports. x (exports) - m (imports) Business Fixed Investment is the largest component and is usually (!) the most volatile component of GDP |
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(2 point, 2 minutes) Why is durable-goods production more volatile production than that of nondurables or services?
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durable goods dont need to be replaced as often because they last longer
- Households can postpone purchases of new durable goods during a downturn (or can say that they can accumulate stocks of durable goods during an upturn, or that they over-compensate for repressed durables purchases during the downturn by over-spending during an upturn). - Because they can still use their old durable goods (or can say old durable goods still give them utility). - -- Services and nondurables have to be purchased each period they are consumed (needs to be some comparison indicating why durables are different from services and nondurables). - Nondurables include food. That means that durable goods production is more sensitive to changes in income than is services or nondurables production (must be something that ties the consumption story to a production story). |
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(2 point, 2 minutes) Why is residential construction not included with other household expenditures in the Aggregate-Expenditure Category “Consumption”?
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because a house in an asset. and therefore the construction of a house is included in investment
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(4 points, 4 minutes) How is chain-weighted GDP growth measured?
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first calculate GDP growth.
to do this, add up GDP in two adjacent periods using the same prices (that of a base year) to value production in each period. Average of two base-year GDP growth estimates. ½*(Current Year’s Price as Base) + ½*(Previous Year’s Price as Base). then, do (current - previous / previous) then, take that rate with current year price and that rate with previous year price and average it |
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7. (2 point, 2 minutes) Why do industrialized countries now use the chain-weighted GDP measure rather than one in base-year prices?
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inflation doesnt have as much as an impact on the number that you get, because your using an average. so if inflation goes up by a whole lot, so would GDP.
Prices in each year are “chained” to prices from the previous year, and the distortion from changes in relative prices is minimized. Holding prices constant means that the purchasing power of a dollar remains the same from one year to the next. Ordinarily, purchasing power falls every year, as price increases reduce the amount of goods and services that a dollar can buy. Based on more recent years, older years become inaccurate. Purchasing power falls every year. Minimize changes of base-year prices-reducing effect of inflation. Fixes quality bias and substitution bias. New economy forces this b/c too many new goods. |
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2 point, 2 minutes) What is the formula for the CPI?
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adding up the prices of different products. its a way of measuring inflation. how they find real growth vs nominal
expenditures in current year/expenditures in base year... x 100 |
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2 point, 2 minutes) How is aggregate inflation measured? How is core inflation measured?
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aggregate = CPI
Core = CPI less food and energy Aggregate inflation is found by taking the percent change in CPI. Core inflation is using the CPI without resources such as food and energy because those fluctuate a lot. |
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4 points, 4 minutes) Who is hurt by unexpected inflation? Explain why. Who is hurt by expected inflation? Explain why.
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unexpected hurts lenders (financial institutions) .. interests rates are lower than expected and thus real earnings are less.. borrowers pay less interest
expected hurts consumers who need to take out loans or who do not have fixed morgage rates, because those would go up. people who have to pay things, but those things are changing in price Unexpected inflation hurts: - - Lenders (real interest rate lower than expected at time of loan origination—their interest earnings aren’t going as far), - those on fixed incomes without COLA adjustment plans, i.e., retirees, pension fund holders (purchasing power eroded and their income remains the same). Expected inflation hurts: - Many incomes typically fall behind inflation rate and purchasing power is hurt, anyone holding paper money (firms, individuals) will experience lower PP, firms incur menu costs because they must frequently update rising prices. |
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5. (2 point, 2 minutes) How is the capital stock measured?
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All previous BFI inflows + All depreciation and discard outflows.
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11. (2 point, 2 minutes) What is substitution bias and why does it occur in the CPI?
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People tend to substitute out of (buy less of) goods whose prices have risen since the CPI base year xxxx
The CPI ignores that substitution and so it tends to overstate the importance of inflationary goods (effect of inflation) on the current cost of living It occurs in CPI because assumes basket share is the same Upward bias |
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12. (2 point, 2 minutes) What is hedonic adjustment and how is it used to improve the estimate of the CPI?
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The Bureau of Labor statistics must estimate how much of any price change is the result of differences in quality relative to the base year.
The adjustment may result in either over- or under-estimation of inflation Tries to adjust in quality so only factor inflationary rate To compensate for this “quality change”, a hedonic adjustment is made so that only pure inflation is taken into consideration in determining the CPI. -upward bias |
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13. (2 point, 2 minutes) What is outlet bias? Does it likely cause the CPI to over- or under-state inflation or does it likely do neither?
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Outlet bias: many consumers do not go to wholesale, traditional retail stores. The prices used in determining the CPI reflect those of the goods and services found in these stores. Now, consumers frequent outlet, or discount distributors to make purchases often. These prices are lower, and the CPI does not take this into consideration. Failure to adjust for the outlet bias results in an overestimation of the CPI.
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14. (2 point, 2 minutes) How are the monthly employment data measured? What is one weakness of the employment data?
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Employment Data:
-300,000 sample of businesses in payroll -advantage: verified answers Result of a monthly payroll survey of large firms Very closely watched piece of data Annual reporting by all firms Household survey of employment used as support data -has three drawbacks -does not provide info on the number of self-employed persons -fails to count some persons employed at newly opened firms -provides no info on unemployment Some people say they are actively looking for jobs but are only collecting government payments—overstates unemployment. |
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15. (2 point, 2 minutes) How are the monthly unemployment data measured? What is one weakness of the unemployment data?
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Unemployment:
Monthly household survey Also reports on labor force participation rate Weekly unemployment insurance claims used as support data -one setback is distinguishing b/t people not employed and not in labor force -not counting discouraged workers as unemployed and counting part-time workers as employed -survey does not verify responses of the people 60,000 households -drawbacks-who is unemployed?, part time workers who want to be full time workers, and understate unemployment -overstatement-no verified responses, liars who say they are looking for a job, illegal jobs -phone calls-upward bias-most people are unemployed |
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16. (4 points, 4 minutes) How do frictions contribute to structural unemployment? How do frictions contribute to cyclical unemployment?
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Structural unemployment occurs when an industry (or can say region) permanently cuts back on employment. Frictions cause it to take time for workers to re-educate (or re-locate) so that they can work in a different industry, and so those workers are unemployed until that time. Cyclical unemployment is temporary. But it is harder to find a job when there are few jobs available (or can say when there are many unemployed competing for jobs), so frictions rise and unemployment rises even more during recessions as a result. (Some students may argue that frictions make it too expensive to fire workers during downturns, so that frictions reduce unemployment; this is also logical and acceptable. Others may say unemployment benefits encourage search during downturns, which is full-credit if they also mention that benefits usually increase during downturns.)
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17. (4 points, 4 minutes) How might unemployment insurance cause GDP to decrease? How might unemployment insurance cause GDP to increase?
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GDP Decrease: Unemployment insurance discourages employment (or can say reduces the opportunity cost of working) and fewer inputs (lower employment) means less output (less GDP).
GDP Increase: Unemployment insurance encourages searching for the most- productive match between worker and firm which causes more output to be produced (higher GDP). |
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18. (4 points, 4 minutes) What determines trend GDP? Why is it hard to know if the economy is currently above or below trend?
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Trend GDP growth determined by
a. Productivity growth b. Population growth c. Capital stock growth It is difficult to know if the economy is above or below trend because of the volatility of the business cycle. GDP growth fluctuates depending on economic status: expansion, peak, trough, or recession. The “average” GDP growth measurement is the “trend”. Real GDP growth fluctuates about the average. Only after a business cycle does it really become clear what the average, or trend, really was. |
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21. (4 points, 4 minutes) How does government borrowing “crowd out” private investment spending? Explain without using a graph.
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Running a deficit has reduced the level of total saving in the economy, and by increasing the interest rate, has also reduced the level of investment spending by firms. Also, by borrowing to finance its budget deficit, the gov’t will have crowded out some firms that would otherwise have been able to borrow to finance investment. Crowding out refers to a decline in investment spending as a result of an increase in gov’t purchases. Supply moves to the left. Two reasons: when gov’t borrow, causing demand to shift, and end up increasing the interest rate, 2) banks don’t lend more
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22. (4 points, 4 minutes) What is the definition of recession? List four variables the NBER considers when trying to identify the stage of the business cycle.
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Recession if many pieces of data have been falling for two consecutive quarters
-if data is below trend-production down, employment down, income down The NBER semi-officially dates the peak (last period of expansion) and the trough (low-point of contraction) in every U.S. business cycle They look at the following data: GDP Employment Wholesale/Retail Trade Industrial Production Personal Income (ACRONYM-GEWIP) |
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23. (4 points, 4 minutes) What is the definition of recession? Name one piece of data that is a leading indicator. Is that piece of data pro- or counter-cyclical?
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Recession if many pieces of data have been falling for two consecutive quartersWholesale-retail trade is typically pro-cyclical, particularly the sale of durable goods. When GDP falls, wholesale-retail trade (durables, mainly) fall as well (this is the definition of pro-cyclical).
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24. (4 points, 4 minutes) Explain two reasons why U.S. business cycles may be getting smaller.
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U.S. business cycles have been getting smaller for several reasons: U.S. has seen a decline in the production of durable goods (very volatile over business cycle) and an increase in the importance of services (which are somewhat recession-proof). Additionally, unemployment insurance and other government transfer programs have made recessions milder: those who lose their jobs during recessions do not lose their entire income as they did before the institution of these programs. Stable income leads to stable consumption, which is a component of GDP according the AE approach of measurement.
shorter recession, longer expansion - new unemployment insurance and social security -make it easier for people w/o jobs to have an incomespend more money Active federal government policies to stabilize the economy -Employment Act of 1946-“foster and promote…employment” -monetary and fiscal policies |
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27. (6 points, 6 minutes) What things characterized the new economy? Why might the “new economy” impact have been stronger in the U.S. than elsewhere? Give two reasons.
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The “new economy” was an extended period of productivity growth that occurred in the U.S. starting in the mid-1990s and ending around 2006. Booms in information technology are largely responsible: fast data processing and communication improve labor productivity dramatically. Two explanations for impact on U.S. economy being stronger: flexible labor markets—low governmental regulation leads to an easier time finding a job, and a job that is better suited to the particular skill set, this corresponds to higher labor productivity; efficient, relatively deregulated financial markets provide liquidity—funding for emerging technologies is ample. Strong VC presence also promotes tech-startups.
Also because of efficiency in capital markets.. Venture capital -productivity growth faster in US than in other countries for 2 explanations: the greater flexibility of the US labor markets and the greater efficiency of the US financial system -high technological innovationexternalities from innovations (can post things on the internet)bigger productivity change |
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28. (6 points, 6 minutes) Why do rising oil prices cause productivity to fall? What impact do you expect this to have on U.S. Business-Fixed Investment? Explain. Draw the per—worker production function for the United States and show the impact of rising oil prices on U.S. output-per-worker.
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Higher oil prices mean higher production costs for many firms: oil is used for transportation, for energy and power, and as a direct input in the production of some materials, i.e., plastics. Added costs make it difficult for firms to invest in capital—BFI, or equipment and structures (no movement right on the per-worker prod. function) or new technology (no shift up in per-worker prod. function), and retain employees (overall product, let alone labor productivity).
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19. (10 points, 10 minutes) Show the (world) market for loans to firms. Graph the impact of a credit-crunch and explain what is going on in your graph (why there are shifts-in or movements-along curves and what the new equilibria are).
Explain the impact on business fixed investment, the capital stock, the business cycle, and trend GDP. |
The graph looks like a standard loan graph: - Quantity of loanable funds on X, and Interest Rates on Y.
Supply shifts left→investment goes down→capital stock goes down -savings down→investment down→interest rates up because pay more to borrow -investment down→capital stock down -less production→unemployment -trend GDP goes down -D=demand of firms to borrow -S=savings of households -the last two facts help to explain movements Supply decreases, because there is less supply for every interest (i). - supply decreases because banks are questioning the value of collateral held by those loans (from other banks). - Demand moves up because there is no change in demand, but a decrease in supply. It is now more costly to borrow |
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20. (10 points, 10 minutes) Show the (world) market for loans to firms. Assume that rising energy costs force firms to use their capital goods less efficiently. Graph the impact and explain what is going on in your graph (why there are shifts-in or movements-along curves and what the new equilibria are). Explain the impact on business fixed investment, the capital stock, the business cycle, and trend GDP.
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standard graph with quantity of loanable funds on bottom and Interest Rates on y.
-demand shifts less b/c firm less inclined to borrow when their costs are so great-don’t wanna get fucked more -BFI will decrease b/c less likely to invest and lay off workers, capital stock will too, business cycle goes towards recession, trend gdp decreases because investments down -D=demand of firms to borrow -S=savings of households D decreases because there is now less D at every i. the rising energy costs have made capital goods less productive. Supply - This movement along the curve occurs because fewer loans will be supplied at the lower interest rate—suppliers are not generating as much interest revenue from their loan extensions. |
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25. (6 points, 6 minutes) Draw the per-worker production function for a developing economy. List four policies that may be used to try to increase per-capita GDP in the developing country. Graphically show how any one of these policies might affect per-capita GDP.
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Intellectual property rights and the “rule of law”
Subsidize Research and Development Subsidize Health and Education Development of capital markets Improve allocation of household savings to firms Reduction of tax distortions -production function up and a movement along it as well -AD moves up if thinking about it in terms of loanable funds market Graph: x axis - capital per hour worked K/L y axis - Real GDP per hour worked Y/L |
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26. (6 points, 6 minutes) Draw the per-worker production function for the United States. Use your graph to show why there are diminishing returns to capital but not to technology.
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-diminishing returns to capital because the slope becomes smaller and smaller but equal increases in capital per worker
-continually increase output, increase GDP/hour worked -want more and more technology -shifts up by same amount of technology shift -diminishing returns to capital b/c each worker gets in each other’s way -leveling off-capital is having diminishing returns Show incremental, marginal changes. Change in x by 1 unit leads to progressively smaller corresponding changes in y. |
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a. (1 point, 1 minute) Show the goods market (AD-AS-LRAS graph) in long-run equilibrium.
b. (1 point, 1 minute) Many economists are now predicting deflation—a fall in the future price level. Explain why expected deflation might cause current AD to fall. c. (6 points, 6 minutes) Show the impact of falling AD in your goods market graph. Explain any shifts in and/or movements along the curves. Explain all the steps that will bring the economy back to a long-run equilibrium. d. (2 points, 2 minutes) What will be the long-run impact on prices? On wages? On employment? On GDP? |
a. Graph:
x axis - GDP y axis - P AS - increasing straight line AD - Decreasing straight line intersecting AS LRAS - vertical line intersecting at intersection point between AD and AS. label curves and axis b. Households and firms will postpone purchases until prices are lower, causing current AD to fall c. 1 point: AD shifts left 1 point: AD<AS so firms cut production, lay off workers (if GDP high-firms can raise prices because firms willing to buy more (opposite)) 1 point: Prices fall because marginal cost falls when GDP falls (or can say because of diminishing returns)-people less inclined to buy expensive things→prices fall 1 point: Move along AD as prices fall because NX up (or can say real wealth up so C up) 1 point: In LR wages fall as workers get COLA’s (cost of living adjustments) or can say unemployed offer to work for less wage 1 point: AS shifts down as costs fall at any level of GDP d. ½ point: P falls ½ point: wages fall ½ point: employment unchanged at L* ½ point: GDP unchanged at GDP* ending graph: AS shifts right AD shifts left LRAS stays new intersection is P3 P2 is intersections between AS1 and AD2 |
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a. (1 point, 1 minute) Show the goods market (AD-AS-LRAS graph) in long-run equilibrium.
1 point, 1 minute) Many economists are now predicting that the government will institute a middle-class tax cut. Explain why a tax cut might cause current AD to rise. c. (6 points, 6 minutes) Show the impact of rising AD in your goods market graph. Explain any shifts in and/or movements along the curves. Explain all the steps that will bring the economy back to a long-run equilibrium. d. (2 points, 2 minutes) What will be the long-run impact on prices? On wages? On employment? On GDP? |
a. a. Graph:
x axis - GDP y axis - P AS - increasing straight line AD - Decreasing straight line intersecting AS LRAS - vertical line intersecting at intersection point between AD and AS. label curves and axis b. Expectations of higher income in future means more spending and investment now. c. 1 point: AD shifts right 1 point: AD>AS so firms increase production, increase employment→GDP increases 1 point: Prices increase because marginal cost increase when GDP increases 1 point: Move along AD as prices increase because NX down (or can say real wealth down so C down) 1 point: In LR wages increase or can say workers demand higher wages 1 point: AS shifts up as costs increase at any level of GDP d. ½ point: P increases ½ point: wages increase ½ point: employment unchanged at L* ½ point: GDP unchanged at GDP* |
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a. (1 point, 1 minute) Show the goods market (AD-AS-LRAS graph) in long-run equilibrium.
1 point, 1 minute) Many economists are concerned that fears of deflation will cause firms to cut back on innovations, resulting in falling long-run productivity. Explain why expected deflation might cause firms to cut their Research and Development budgets. c. (6 points, 6 minutes) Show the impact of falling technology in your goods market graph. Explain any shifts in and/or movements along the curves. Explain all the steps that will bring the economy to long-run equilibrium. d. (2 points, 2 minutes) What will be the long-run impact on prices? On employment? On GDP? On real interest rates? (not shown in your graph) |
a. standard graph (see other questions)
b. Firms expect less profit in future, less willing to invest in new products (R&D). Furthermore, R&D is risky. c. AS shifts left because of technology decrease. So does LRAS. AD down because BFI is down because Tech is down. 1 point: LRAS shift in/left due to falling technology 1 point: SRAS shifts left for same reason as LRAS-technology decreases, productivity descreases, less workers 1 point: Prices increase due to higher wages demanded because of falling technology 1 point: Move along AS as prices increase (international trade effect) 1 point: In LR workers demand higher wages 1 point: AD shifts left as consumption/BFI decreases d. Prices are undetermined. Employment and GDP will decrease. Real interest rates drop because people are demanding less $. Also, because the GDP increases, the real interest rates are decreasing (rule). |
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a. (1 point, 1 minute) Show the goods market (AD-AS-LRAS graph) in long-run equilibrium.
b. (1 point, 1 minute) Many economists believe that trend productivity is currently very strong. Explain why technological progress has a more than one-for-one impact on total GDP. c. (6 points, 6 minutes) Show the impact of rising technology in your goods market graph. Explain any shifts in and/or movements along the curves. Explain all the steps that will bring the economy to long-run equilibrium. d. (2 points, 2 minutes) What will be the long-run impact on prices? On employment? On GDP? On real interest rates? (not shown in your graph) |
a. regular graph.
b. A facet of productivity and if productivity increases, then LRAS increases, then GDP increases. Secondly, it affects both AS and AD. Thirdly and most importantly, this increase in productivity leads to an increase in capital stock, which increases GDP. c. -During course of year, increases in technology causes LRAS to shift -Same factors that cause LRAS to shift also cause SRAS to shift -Rising income and population, increased I, and increased G cause AD curve to shift, and the economy ends at a new equilibrium 1 point: LRAS shift out/right due to rising technology 1 point: SRAS shifts right for same reason as LRAS 1 point: Prices decrease due to lower wages being accepted b.c of rising technology 1 point: Move along AS as prices increase because NX down (international trade effect) 1 point: In LR unemployed workers offer to work for lower wages 1 point: AD shifts right as consumption increases d. Prices remain undetermined. Employment and GDP is up. Also, real interest rates are up because people are demanding more $ and also because the GDP is up. |
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1. (2 points, 2 minutes) What are the three requirements for something to be considered “money”? (Just list them)
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Unit of account, store of value, medium of exchange.
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2. (3 points, 3 minutes) List the components of M2. How does it differ from M1?
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M1 (cash, traveler’s checks, checking deposits held by private individuals and businesses) + saving deposits, time deposits < $100k in value, money market mutual fund shares.
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3. (1 point, 1 minute) Why do economists prefer M2 over M1?
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Because in 1980 the law changed and banks were allowed to pay interest on checking account deposits. M2 predicts prices better. Also, it predicts lending better as it is a measure of lending by banks.
- savings accounts (and close alternatives, such as CDs, small time deposits, and MMMFs) were considered a better representative of the total money supply |
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4. (1 point, 1 minute) Why aren’t frequent flyer miles considered “money”?
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Do not function as a medium of exchange. Miles are not “acceptable” since many people do not use them. Also are not transportable (“durable”) unless everyone gets a mileage card.
Also, they don’t have liquidity. |
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5. (3 points, 3 minutes) Why do most economists agree that it makes more sense to “rescue” the banking sector than to rescue the auto sector? Explain.
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It makes more sense to rescue the banking sector because it has long-run impacts including capital stock and technology. This is based on the fact that banks act as financial intermediaries. However, if the auto sector was rescued, it would merely help jobs. Also, this won’t have an effect on consumption or investment, ppl would be equally likely to buy cars as before.
Banking is vital to many areas of our economy. - the banking system promotes savings, channels investment into the most productive activities, and provides an efficient, liquid payment system. - it also supplies loans for research and stuff which in turn help out the economy |
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6. (3 points, 3 minutes) Explain two ways that a banking collapse could cause a fall in trend GDP.
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1) Lending to firms down→capital stock down because investment down→GDP down
2) Technology down and wouldn’t improve because not enough loans for research and development - decrease in supply of loanable funds -> market interest rates will increase. ->firms will not invest and individuals will not borrow for expenditures -> investment is component of GDP, so therefore it wlll fall. 2) banking offers many jobs. a loss in jobs would be inevitable (220,000 already) -> personal consumption would decline significantly ->component of GDP |
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7. (3 points, 3 minutes) Explain why there is a “moral hazard” problem associated with federal deposit insurance.
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2 main misconceptions:
1. banks will go after more riskier investments because they know their customers accounts are guaranteed to be paid off even if they can not honor the payment. 2. individuals don't really pay attention to the behavior of the banks because they know their deposits are guaranteed, even though really only a portion of their deposits may be guaranteed. |
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8. (4 points, 4 minutes) What is the advantage of having the FOMC represent both government-sector and private banking interests? How do government and private-sector interests differ within the FOMC?
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- advantage - it allows the FOMC to serve as a quasi-government unit. people must benefit from the policy changes as well, which is another advantage. also, FOMC looks to short term AND long term.
- govt and private differ because people normally act to preserve their own wealth, while govt acts to guide the economy as a whole. The fed might increase interest rates to curtail inflation.. but average consumer will not like it because the cost of borrowing is increased. they sometimes clash. |
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9. (2 points, 2 minutes) List three ways the regional Federal Reserve Banks serve as “bankers’ banks”.
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1) Clears checks
2) Makes loans 3) Holds deposits for member banks of local region |
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10. (5 points, 5 minutes) Explain how an open market operation might be used by the Fed to bring about a decrease in interest rates.
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Fed will buy treasury securities (which is open market) to increase the money supply. This increase will lead to a decrease in the equilibrium interest rate. There will be a movement down the demand curve because cost of holding money will be lower, since its a lower rate of interest. people will not be losing as much by holding on to their money (opportunity cost).
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11. (2 points, 2 minutes) What interest rate does the Fed “target” when it conducts an open market operation? Why does the FOMC choose that particular interest rate to target?
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The Fed targets federal funds rate.
- this rate has an effect on interest rates in short term financial assets. -the FOMC is trying to influence GDP... and by attaching an interest rate that has an effect on short term consumption and investment, they are impacting AD, and influencing GDP. |
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12. *(2 points, 2 minutes) Although recent open market operations have caused inter-bank interest rates to fall, many other interest rates have remained high. How can it be that policy works to affect some interest rates and not others?
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changes in the velocity of money (if velocity moves in opposite direction of Fed’s interest rate objectives, the policy is meaningless
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13. (3 points, 3 minutes) The Fed has recently begun to use rather unorthodox policies—i.e. policies other than the traditional manipulation of the required reserve ratio, discount rate, or federal funds rate. Explain one of the recent policies. Do you think this policy will work? Why or why not?
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the Fed has created a TAF (Term Auction Facility). they auction off discount window credit to major banking dealers.
winning bidder always receives an interest rate lower than the typical discount rate. it was created to get credit flowing at lower rates of interest, and to provide banks with funding. this is a last resort for banks I think it will work in getting credit out there, interest rates are very attractive. but i do not think banks will start lending until other banks' balance sheets are properly analyzed |
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14. (3 points, 3 minutes) Use the equation for the deposit multiplier to explain how a credit crunch may affect equilibrium M2.
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formula: 1/Reserve Ratio.
- in credit crunch, banks are not lending and are holding deposits as reserves, thus the reserve ratio is high. M2, will decrease because the reserve ratio is high and the higher, the lower M2 is. |
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15. *(4 points, 4 minutes) Graph the market for money. Use the graph to explain how a credit crunch may affect equilibrium interest rates.
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Graph:
x axis - quantity of money y axis - interest rates one decreasing straight line one vertical line interestcing it (money) the money supply will decrease. shift left in money supply (vertical line) equilibrium interest rate will be higher. at this rate, the quantity demanded will be lower, because opportunity cost of holding money will be higher. |
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16. (4 points, 4 minutes) Graph the market for loans to firms. Use the graph to explain how a credit crunch may affect equilibrium interest rates.
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Graph
y axis - price level x axis - GDP increasing straight line decreasing straight line supply of loanable funds will decrease. (supply shifts left) banks do not want to issue loans because they have no faith in the borrowers. there is a movement up the demand curve because there will be higher interest rate and borrowers will not want to borrowr. interest equilibrium gets higher |
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a. (1 point, 1 minute) Show the equation for the Quantity Theory of Money.
b. *(3 points, 3 minutes) What assumptions are necessary for the Quantity Theory of Money to imply that long-run prices changes are always caused by money-supply changes? c. (2 points, 2 minutes) Use the Quantity Theory of Money to explain how a credit crunch may affect long-run inflation. |
a. M*V = P*Y, where M is money supply, V is velocity, P is price level, and Y is output of GDP.
b. Assume: -V unaffected by M, P, or GDP in the long run - Output of GDP unaffected by V, M or P in the long run -V and LRAS are assumed to be exogenous with respect to monetary policy - both velocity and GDP have to stay the same c. if money supply decreases (resulting from credit crunch), the price level will decrease in the long run. deflation. d. velocity of money will decrease. loans will not be extended to borrowers. - long run gdp will decrease (not stay constant) because there is no money to lend to consumers and interest rates are high |
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18. (2 points, 2 minutes) Why do recessions last longer than booms? Explain.
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pushing on string model.
during boom, cut interest rates may not make people spend, and lowering reserve ratios may not make banks lend. Increasing interest rates, WILL make everyone cut back. spending decreased, lending decreased. |
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19. (4 points, 4 minutes) Do you agree with Obama's fiscal policy agenda? Explain. Particularly address concerns about both ratcheting and crowding-out. [Hint: This refers to the podcast you listened to for the last week of recitation.]
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Obama plans to create 2.5 million new jobs by 2011. in infrastucture, alternative energy, education.
I disagree because i do not think government intervention of this level will bring economy back to potential level of GDP. Increasing gov't purchases will increase the demand for money because GDP will go up. interest rates will get higher and it will be very expensive to invest and spend, therefore crowding out will occur. IF gov't raised money supply to counter increase in demand for it, interest rates might not rise significantly, and crowding out wont occur. Ratcheting occurs when gov't does what it can to get out of recession and restore AD.. but then after, during Boom, they must cut back on spending. this will not work because they will not cut back, i don't think. |
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a. (1 point, 1 minute) Show the equation for the Quantity Theory of Money.
b. (2 points, 2 minutes) Assuming that the Theory is correct, what is the likely impact of a credit crunch on U.S. inflation? c. (2 points, 2 minutes) Who will be helped/hurt by the change in the aggregate price level implied by your answer to (b)? Explain. |
a.M*V = P*Y, where M is money supply, V is velocity, P is price level, and Y is output of GDP.
b. less lending. both sides of the equation will decrease. inflation will decrease. otherwise known as deflation. c. lenders and people on fixed incomes are helped - borrowers and people without fixed incomes are hurt |
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a. (1 point, 1 minute) Show the goods market (AD-AS-LRAS) in long-run equilibrium.
b. (1 point, 1 minute) Explain why reduced bank-lending might cause current AD to fall. c. (6 points, 6 minutes) Show the impact of falling AD in your goods market graph. Explain any shifts-in and/or movements-along the curves. Explain all the steps that will bring the economy back to long-run equilibrium. d. (2 points, 2 minutes) What will be the long-run impact on prices? On wages? On real wages? On employment? On GDP? a. (2 points, 2 minutes) Who will be helped and who will be hurt by the aggregate price change you describe in part d? Explain. |
goods market graph:
y axis - P x axis - GDP one straight vertical line (LRAS) decreasing straight line (AD) increasing straight line (SRAS) b. increase in supply of loanable funds -> increase in interest rates -> decrease in BFI = decrease in spending = decrease in C, I, and NX.. so AD will shift left c. 1 point: AD shifts left 1 point: AD<AS so firms cut production 1 point: Prices fall because marginal cost falls when GDP falls (or can say because of diminishing returns) 1 point: Move along AD as prices fall because NX up (or can say real wealth up so C up) 1 point: In LR wages fall as workers get COLA’s (cost of living adjustments) or can say unemployed offer to work for less wage 1 point: AS shifts down as costs fall at any level of GDP d. Prices fall, wages fall, Real wages indeterminate employment and GDP stay the same e. Anyone on a fixed income or pension plan will be helped by deflation (decrease in the price level) because their purchasing power will increase. Lenders are helped: real interest rate higher than expected at time of loan origination—their interest earnings are going farther. Borrowers are hurt: real interest rates higher than expected (real i = nominal i – inflation rate, so a negative is subtracted). Firms that entered long term labor contracts with expected inflation will be hurt because they will be paying higher wages in real terms. |
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a. (1 point, 1 minute) Graph the market for loans to firms.
b. (2 points, 2 minutes)What is the impact of education and health subsidies on the market for loans to firms? Show graphically. c. (1 point, 1 minute) Graph the per-worker production function. d. (3 points, 3 minutes) What is the impact of education and health subsidies on output-per-worker? Show graphically using the production function from part (C). |
a. Graph -
GDP on bottom Price on left one AD line one SRAS line b. government increases spending. supply of loanable funds shifts left. c. Graph- y axis - GDP per hour worked (Y/L) x axis - Capital per hour worked (K/L) d. health subsidies will increase knowledge capital. (knowledge capital is like technology). It is nonrival and nonexcludable. So, this increase will lead to an upward shift in the per-worker production function. |
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a. (1 point, 1 minute) Show the market for loans to firms.b. (2 points, 2 minutes) Use your graph from part (a) to explain how a rising government budget deficit may “crowd out” private investment spending.
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a. Graph -
x axis - GDP y axis - Price level One AD One SRAS b. government will cut back on savings. SO individuals have an incentive to not save either. Supply shifts left. There is a movement up the demand curve from E1 to E2, and there is now a higher interest rate. this is the "Crowding Out" caused by governemnt |
