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MacroEconomics Exam 3
Terms in this set (49)
Be able to distinguish between assets, liabilities, wealth/net worth, income, etc.
Assets are things that people own or control. Liabilities are obligations. Wealth/net worth (a stock variable) is the amount by which assets exceed liabilities. Income (a flow variable) is the rate at which a person earns money.
What does it mean to save?
Saving is current income minus spending on current needs.
Shelly has a house valued at $150,000 with a $90,000 mortgage. She owns a car valued at $7,500 and she has $40,000 of credit card debt. Construct a balance sheet for Shelly. What is Shelly's wealth (also called net worth or equity)?
Shelly's assets are the house ($150,000) and the car ($7,500). Assets = $157,500. Shelly's liabilities are the mortgage ($90,000) and the credit card debt ($40,000). Liabilities = $130,000. Wealth is assets minus liabilities or $157,500 - $130,000 = $27,500.
What are the two ways to save?
Either increasing one's assets or reducing one's liabilities; both actions will increase a person's wealth.
What can cause wealth to change?
A person's wealth changes if her saving habit changes or if her assets change in value.
What contributed to the large increase in household wealth in the 1990s? What contributed to the large increase in household wealth in the 2000s?
Stocks experienced large capital gains in the 1990s, increasing household wealth. The increase in household wealth in the 2000s was driven mainly by the increase in home prices.
What are the three reasons for saving?
Life-cycle saving, precautionary saving, and bequest saving
What are net taxes? Suppose the government collects $65,000 in tax revenues, spends $40,000 on transfer payments, and pays $12,000 for interest on the national debt. Calculate net taxes.
Net taxes (T) are total collections minus transfers minus interest on debt.
T = collections - transfers - interest = $65,000 - $40,000 - $12,000 = $13,000
Know the difference between private saving and public saving. When is public saving positive? When is it negative? Historically, when has public saving been positive?
Private saving is saving done by the private sector (businesses and households). Public savings is saving by public sector (the government). Public saving is positive when the government has a budget surplus. Public saving is negative when the government has a budget deficit. Public saving was positive during the last few years of the 1990s.
Between 1960 and 2010, what was the largest, positive contribution to national saving?
What is the cost (for a business) of investing in capital? What is the reward to saving?
The real interest rate is the cost of investing. The real interest rate is the reward to saving.
What happens to the amount of investment undertaken when the real interest rate increases? What about when it decreases?
At higher real interest rates, less investment will occur (QD of savings ↓). At lower real interest rates, more investment will occur (QD of savings ↑).
What happens to the amount of saving when the real interest rate increases? What about when it decreases?
At higher real interest rates, more saving will occur (QS of savings ↑). At lower real interest rates, less saving will occur (QS of savings ↓).
What is crowding out?
Crowding out is the tendency of increased government budget deficits to reduce the amount of investment spending.
What is meant by the term double coincidence of wants?
With a barter system, each trading party has to want what the other person is offering. So their wants have to coincide for an exchange to happen.
What are the functions of money?
The three functions of money are (1) medium of exchange, (2) a store of value, and (3) a unit of account.
Based on the following information, calculate the size of M1 and M2:
see google doc
Know the assets and liabilities of banks.
Assets of commercial banks include reserves, loans issued to customers, and other investments (like Treasury securities). The main liability of a commercial bank are its customers' deposits.
How do commercial banks create money?
Through multiple rounds of lending
What is the body which leads the Federal Reserve System? How many people comprise it?
Federal Reserve Board of Governors (7 members)
What is the Fed's most important monetary policy tool?
What is a banking panic?
When depositors, afraid that banks will lose their deposits (usually due to news of a possible bank bankruptcy), rush to the bank to withdraw their funds, causing the money supply to collapse
What is a bond and what are the main features of a bond?
A bond is a legal promise to repay a debt. Bonds have a principal amount (amount borrowed that must be repaid, usually in $1,000 increments); a maturity date when the principal must be repaid; a coupon payment (interest payments paid to the bondholder, note that not all bonds pay coupons); and a coupon rate (the interest rate applied to principal to get the coupon payments).
What main factors affect a bond's coupon rate?
A bond's coupon rate is affected by  the bond's time to maturity (other factors equal, longer bonds have higher coupon rates);  issuer credit risk (the riskier a company is, the higher the higher the coupon rate); and  what kind of taxes investors have to pay on the coupon payments (the coupons for some bonds, like municipal bonds, aren't subject to federal income taxes so these bonds will have lower coupon rates than bonds whose coupons are taxable, and therefore need to have a higher coupon rate to compensate investors for the taxes they'll have to pay).
How are bond prices and interest rates related?
Bond prices and interest rates are inversely related. When interest rates increase, previously-issued bonds fall in price. When interest rates fall, previously-issued bonds increase in price.
Bond Z has two years left to maturity. It was issued as a 4.5% coupon bond based on $1,000 principal. New bonds are being issued as 3% coupon bonds based on $1,000 principal. What is the current price of Bond Z?
See Google Doc
What is a trade deficit? What is a trade surplus?
A trade deficit is when imports exceed exports; a trade surplus is when exports exceed imports
What are international capital flows? What are capital inflows? What are capital outflows?
The purchase/sale of real or financial assets across international borders; capital inflows are purchases of domestic assets by a foreigner; capital outflows are purchases of foreign assets by a domestic individual or company
Tiger Woods purchases a bunch of government bonds issued by Brazil. For which country does this represent a capital outflow? For which country is this a capital inflow?
This is a capital outflow for the U.S. (funds are flowing out of the U.S.); this is a capital inflow for Brazil (funds flowing into Brazil)
Country A has a trade surplus of $50 billion. Will the country have net capital inflows or net capital outflows? What amount?
If a country has a trade surplus, it has to have net capital outflows; so country A has net capital outflows of $50 billion
What are the benefits of net capital inflows?
Benefits include a larger pool of total savings, a higher rate of new capital investment, and possibly a higher economic growth rate
How long has the United States' longest expansion lasted? When did it start?
The longest expansion in modern economic history (128 months) started in June 2009. According to the NBER's Business Cycle Dating Committee, the expansion ended in February 2020. Previously, the longest expansion was 120 months and started in mid-1991.
On the figure below, identify the peaks, troughs, recessions, expansions, and business cycles:
See google doc
The official dates of the peaks and troughs of the business cycle are determined by whom?
The National Bureau of Economic Research (NBER), specifically the Business Cycle Dating Committee within the NBER
What are leading, lagging, and coincident indicators?
Leading indicators are economic variables that change before changes in economic output; Lagging indicators are economic variables that change after changes in economic output; and coincident indicators are economic variables that change at the same time as changes in economic output
During a recession, who is more likely to be laid off first: a worker in a durable good industry or a worker in a non-durable good or service industry?
Workers in durable good industries are more likely to be laid off as purchases of durable goods are more sensitive to changes in economic activity than spending on non-durable goods and services
When there is a recessionary gap, what is true about the utilization of labor and capital resources?
These resources are not being fully utilized
Suppose potential output (Y*) for an economy is $60 million and actual output (Y) is $58 million. What type of output gap exists? What if actual output (Y) was $64 million?
In the first case, the output gap would be recessionary since actual output is less than potential output ($2 million recessionary gap); if, instead, actual output was $64 million, then we would have an expansionary gap of $4 million
What do economists believe are possible causes of the decline in the natural rate of unemployment between the 1970s and the 2000s?
Changing age structure of the population and more efficient labor markets
According to John Keynes, what causes output gap?
Too much or too little spending
Firms do not change prices frequently. Why not?
Because it's costly to do so (menu costs)
What happens to consumption as disposable income increases? As disposable income decreases?
Consumption increases as disposable income increases; consumption decreases and disposable income decreases
Know the definition of marginal propensity to consume (mpc).
The mpc is the amount by which consumption will change due to a $1 change in disposable income
If the mpc = 0.9, calculate the expenditure multiplier. By how much will output change if spending changes by $100,000?
See google doc
Know the definition of expansionary policy and contractionary policy.
Expansionary policies are intended to boost aggregate spending and output; contractionary policies are intended to reduce aggregate spending and output
Will changes in government spending affect aggregate spending directly or indirectly? What about changes in taxes and transfers?
Changes in government spending (G) affect spending directly; changes in taxes and transfers (T) affect spending indirectly
What is a potential problem with using fiscal policy to close recessionary output gaps?
If a government runs a budget deficit for an extended period of time, it can be harmful to long-run economic growth
-Americans are doing a lot more saving
-Poorer americans are spending more
-Spending went up when business's starting opening up again
-People are spending less $ and saving it
-although large by historical standards, the savings accumulated by US households during the pandemic do not appear to be 'excessive' when set against the extraordinary need of many American families and the unprecedented government intervention to support them.
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