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Macroeconomics Part 3

Unemployment / Labor Force
Mathematically, how do you find the unemployment rate?
Natural Rate of Unemployment
The rate of unemployment when the economy is at its potential output is called the:
Structural Unemployment
You have lost your job in an automobile plant because of the use of robots for welding on the assembly line. What type of unemployment are you experiencing?
Expansionary Phase
In which phase of the business cycle will the economy most likely experience rising real output and falling unemployment?
Frictional Unemployment
A college graduate using the summer following graduation to search for a job would be what type of unemployment?
Marginal Propensity to Consume
What does MPC stand for?
The size of the MPC is assumed to be what?
A small change in spending can be a big change in GDP.
The multiplier effect means that:
An increase in business taxes would be what kind of effect on investment?
A real interest rate decrease would be what kind of effect on investment?
It is in determinant because one is positive and one is negative.
If business taxes are reduced, and the real interest rate increases, then
As disposable income decreases, consumption:
If the consumption function shifts downward, and the shift was not caused by a tax change, then the saving schedule:
1. Change in weath
2. Expectations
3. Interest Rate
Which would shift the consumption schedule upward?
Investment that is illustrated by the demand curve.
An inverse relationship between the rate of interest and the level of:
1. Expected Rate of Return
-Operating costs, business taxes
-Bad things shift it to the left
What could decrease the investment demand?
1. Small the multiplier
2. Smaller the MPC
The greater the MPS, the
households and consumers
A private closed economy includes:
Aggregate Expenditures = Aggregate Supply (GDP)
The equilibrium level of GDP in a private closed economy is where:
An increase in the investment demand curve will shift the curve to the:
Savings are considered:
Investments are considered:
there is more saving than investment.
If GDP (output) exceeds Aggregate Expenditures, then
increase exports and imports.
Over time, an increase in the real output and incomes of the trading partners of the U.S. will do what to international trade?
Inflationary Expenditure Gap
The amount by which an Aggregate Expenditures schedule must shift downward to eliminate demand-pull inflation and still achieve full-employment GDP is the:
Slightly increase output and inflation.
A rightward shift of the Aggregate Demand Curve in the very steep upper part of the up-sloping Aggregate Supply curve will:
Reduce prices when a decline in demand occurs.
The fears of unwanted price wars might explain why many firms are reluctant to:
Import more and export less.
The foreign purchases effect suggests that an increase in the US price level relative to other counties will:
A decrease in:
1. Consumption
2. Investment
3. Government spending
4. Exports
What decreases Aggregate Demand?
Aggregate Supply Curve to the right.
A decrease in the price of capital goods will shift the:
A increase in the price level.
A decrease in the quantity of real output demanded along the aggregate demand curve is caused by:
1. Higher productivity
2. Reduction of per unit production
Efficiency wages contributes to:
Inventories will rise.
If Aggregate Supply is greater than Aggregate Demand:
Changes in taxes and government spending without explicit action by the Federal Government is known as:
Built in stability.
As the economy declines, personal income tax revenue dramatically falls. This describes ow the progressive income tax system has what:
If the cyclically-adjusted budget a deficit of $100 billion and the actual budget shows a deficit of $150 billion. It can be concluded that the government is in what phase?
MPC/MPS=Tax Multiplier.
SOOO you take the TM x Change Desired = Answer
If the government wants to reduce consumption by $36 billion in order to reduce inflation. If the MPC is .75 by how much should the government raise taxes to achieve its objective?
If Congress cuts taxes to counter the effects of a severe recession, this would be in what phase:
The amount by which government expenditures exceed revenues during the YEAR is the:
The purchasing power of money and the price level vary:
Fiscal and Monetary policy.
Stabilizing a nation’s price level and the purchasing power of its money can be achieved by what kind of policies?
Board of Governors of the Federal Reserve.
The basic policy-making body in the U.S. banking system is the:
12 people.
The Federal Open Market Committee (FOMC) is made up of how many people?
M1 and M2.
Currency is circulation is a part of:
Banks know the Federal Reserve will lend money.
Moral hazard was created during the financial crisis occurred because:
Impossible, but not likely either.
Bank panics are not….
The Money Multiplier.
If the required reserve ration is lowered, then what goes up?
an asset.
On a bank’s balance sheet, its office building is:
It’s percentage of checking accounts.
What is one characteristic of fractional reserve banking?
Reserve Ratio (RR) x Checking Deposits = Required Reserves
Required Reserves – Actual Reserves = Excess Reserves
The excess reserves of a bank are the:
Checkable Deposits
When a check is cleared, the bank loses:
Excess Reserves x Money Multiplier
Maximum checkable deposit expansion is equal to:
15% x 5%
If the required reserve ration is 15% and banks hold addition excess reserves equal to 5% of any new deposit, then the money multiplier is:
Reserve Ratio x Checking account
If a bank has checkable deposits of $400,000 and reserves of $150,000 and a required reserve ration of 25%, then how much can the bank lend and how much can the banking system lend?
Capital Investment
Money invested in a business venture with an expectation of income, and recovered through earnings generated by the business over several years.
Financial System
The group of institutions in the economy that help to match one person’s saving with another person’s investment.
Credit Risk
The risk that a firm involved in an interest rate swap will not meet its payment obligations.
Term to Maturity
The term within a loan must be paid back. Longer term to maturity = greater interest rate
Interest Rate
Percentage of amount borrowed to be added to the amount loaned and paid back
Debt Financing
Funds raised through various forms of borrowing that must be repaid.
A certificate of indebtness
A claim to partial ownership in a firm
Equity Financing
Money raised from within the firm, from operations or through the sale of ownership in the firm (stock).
Time and Risk
Two elements of finance
Present Value
the amount of money today that would be needed, using prevailing interest, to produce a given future amount of money
Calculate Present Value
PV = FV / (1 + r)^n
Future Value
the amount of money in the future that an amount of money today will yield, given prevailing interest rates
Calculate Future Value
FV = PV (1 + r)^n
Bureau of Labour Statistics
The government agency responsible for calculating the CPI (Consumer Price Index)
Unemployment Data
Collected by the Bureau of Labour Statistics
Have a salaried, hourly, or part-time job, or self-employed
Not working and looking for work
Working at a job for which one is overqualified, or working part-time when full time work is desired
Not in the labour force
Those who do not have a job and are not looking for one. (Also known as discouraged workers.)
Labour Force
The total number of both employed and unemployed
Calculate the number of unemployed
# of people in the Labour Force – # of people employed =
Calculate the labour force
# of people employed + # of people unemployed =
Labour Force Participation Rate
(Labour Force/Adult Population) x 100 =
Unemployment Rate
The percentage of the labour force that is umemployed
Calculate the Unemployment Rate
(#of people unemployed/labour force) x 100 =
Calculate # of People Employed
# of people in the labour force – # of unemployed =
The set of assets in an economy that people regularly use to buy goods and services from other people
3 Functions of Money
1. Medium of Exchange
2. Unit of Account
3. Store of Value
Demand Deposits, Traveler Checks, Other checkable deposits, and Currency
Saving Deposits, Small Time Deposits, Money Market Mutual Funds, and everything in M1
Credit Cards
A card that allows a person to charge at the moment and pay later
Federal Reserve Bank
The central bank for the United States, charged with enforcing monetary policy; otherwise known as the “bankers’ bank”
Board of Governors of the Federal Bank
The 7 members appointed by the president and confirmed by the U.S. Senate who serve for one nonrenewable 14-year term. Their responsibility is to supervise and control the money supply and the banking system of the United States.
Charles D. Steffens
Chairman of the Board of Governors of the Federal Reserve Bank and Length of Term
Regional Federal Reserve Banks
12 Banks that are responsible for clearing checks, holding and lending reserves for depository institutions, issuing and distributing paper money
Reserve Ratio
The fraction of deposits that banks hold as reserves
Calculate the Size of a Bank’s (Required) Reserves
Total Reserves = Required Reserves + Excess Reserves
Required Reserves
Reserves that a bank is legally required to hold, based on its checking account deposits
Excess Reserves
The fraction of a customers deposits a bank is able to loan out to borrowers, so they can earn a profit
A Bank’s T-account (Balance Sheet)
A financial statement that reports assets, liabilities, and owner’s equity on a specific date.
Federal Reserve purchase of government bonds and its effect on the money supply
Open Market Operations
Discount Rate
The interest rate on the loans that the Fed makes to banks
The Cause of Inflation
The increase in the overall level of prices
A very rapid rise in the price level; an extremely high rate of inflation.
The effect of an increase in the price level
Causes an increase in average interest rates in an economy.
The quantity theory of money
A theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the rate of inflation
Examples of Real Variables
Variables measured in physical units, for example; the quantity of corn a farmer produces is a real variable, whereas the income he makes is the nominal variable.
The quantity equation
M x V = P x Y; this equation relates the quantity of money, the velocity of money, and the dollar value of the economy’s output of goods and services
The neutrality of money
The proposition that changes in the money supply fo not affect real variables
Velocity of Money
The rate at which money changes hands
The inflation tax
The revenue the government raises by creating money
The Fisher Effect
The one-for-one adjustment of the nominal interest rate to the inflation rate
The Real Rate of Interest
The money rate of interest minus the expected inflation rate.
The effect of higher than anticipated inflation
Hurts savers and creditors; and Helps borrowers and debtors
The Inflation Fallacy
Most people think inflation evodes real income but inflation is a general increase in prices of the things people buy and the things they sell

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