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University Of Houston Macroeconomics Midterm 2

STUDY
PLAY
The consumer price index is used to
Turn dollar figures into meaningful measures of purchasing power
CPI (Consumer Price Index)
(Price # in basket) + (price # in basket)= total $$$
The largest category of goods and services in the CPI basket is
Housing
The introduction of the video cassette recorder in the 1970s exemplified a problem in measuring the cost of living, that problem is the problem is the problem of
Introduction of new goods
Real Interest Rate
Nominal Interest - Inflation Rate
Inflation Rate
(CPI in year 2 - CPI in year 1)/ CPI in year 1 X 100
Nominal Interest Rate
Interest rate as usually reported
The inputs into production of goods and services that are provided by nature, such as land, rivers, and mineral deposits are called
Natural resources
Stock of equipment and structures, used to produce goods and services
Physical capital
Knowledge and skills workers acquire through education, training, and experience
Human capital
What would increase productivity?
An increase in physical capital stock, human capital, or natural resources per worker
This declines as the quantity of the input increase. Input goes up, out goes down
Diminishing returns
When Chile experiences investment from abroad, it experiences, as a result
An increase in productivity
When a country saves a larger portion of its GDP than it did before, we will have
More capital and higher productivity
The primary economic function of the financial system is to
Match saving of one person with investment of another
The two most important financial intermediaries are
Banks and mutual funds
Other things the same, bonds are likely to have higher interest rates if they have
No tax exemptions and long terms
A mutual fund
Is an institution that sells shares to the public and uses the proceeds to buy a selection of various types of stocks, bonds, or both stocks and bonds
Income that households have left after paying for taxes and consumption
Private saving
Tax revenue that the government has left after paying for its spending
Public saving
Total income in the economy that remains after paying for consumption and government purchases
National saving
The sum of private saving and public saving must equal investment
For a closed economy
In the loanable funds model, an increase in an investment tax credit would create a
Shortage at the former equilibrium interest rate. This shortage would lead to a rise in the interest rate
In the first part of the decade that began in 2000, the US government went from a surplus to a deficit. Other things the same, this means the
Supply of loanable funds shifted to the left
Employed and unemployed are included in
The labor force
The labor force participation rate measures the percentage of
Total adult population that is in the labor force
Labor force participation rate formula
Labor force/ adult population X 100
Satchel loses his job and immediately begins looking for another. Other things the same, the unemployment rate
Increases and the labor force participation rate is unaffected
Unemployment rate formula
Number of unemployed/ labor force X 100
Frictional unemployment results from
Job searching, it is often thought to explain relatively short spells of unemployment
Structurally unemployed
Results from the number of job available in some labor markets, longer spells of unemployment, wages are for some reason set above the equilibrium level
Paying efficiency wages mean that wages are
Above equilibrium and profits are higher otherwise
Minimum wage laws and unions are similar to each other but different from efficiency wages in that minimum wage law and unions
Prevent firms from lowering wages in the presence of a surplus of workers
Efficiency wages
Above equilibrium wages paid by firms to increase worker productivity
Money
Set of assets in economy, people regularly use, used to buy goods and services from other peopl
Three functions of money
Medium of exchange, unit of account, store of value
Liquidity
Ease with which an asset can be converted into the economy's medium of exchange
Intrinsic value
Item would have value even if it were not used as money
Fiat money
Money without intrinsic value, used as money because of government decree
Fiat
Order or decree
Money stock
Amount of money circulating in the economy
Demand deposits
Balances in bank account
Currency
Paper bills or coins in the hands of the public
Federal reserve (FED)
The central bank of the US, purpose is to ensure the health of the nations banking system
Central bank
Institution designed to oversee the banking system, regulate the quantity of money in the economy
Money supply
Quantity of money available in the economy
Monetary policy
Setting of the money supply
Fractional reserve banking
Banks that hold only a fraction of deposits as reserves
Reserve requirement
Minimum amount of reserves that banks must hold, set by the fed
Increase in overall prices
Inflation
Decrease in overall prices
Deflation
Extraordinary high rate of inflation
Hyperinflation
Lowers the value of money
Inflation
He quantity of money available in the economy determines the price level (the value of money) and growth rate in quantity of money available determines the inflation rate
Quantity theory of money
Variables measured in monetary units (dollar prices)
Nominal variables
Variables measured in physical units (relative prices, real wages, real interest rate)
Real variables
Theoretical separation of nominal and real variables
Classical dichtomy
Velocity of money
V= (price X real GDP)/ quantity of money
V= (P X Y) / M
Rate at which money changes hands
Quantity equation
-Quantity of money X velocity of money= P X Y
-Dollar value of the economy's output of goods and services (PXY)
Inflation that exceeds more than 50% per month
Hyperinflation
Price level increases more than a hundred fold over the course of a year
Hyperinflation
Real interest rate
= nominal interest rate - inflation rate
Nominal interest rate
Real interest rate + inflation