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ECON Test 2 Study Guide
Terms in this set (49)
What is aggregate demand?
the total demand for goods and services within a particular market.
What is the shape of an AD curve
A downward slope
What are factors that shift AD?
real wealth, expected income, expected price level, foreign income, value of the dollar
What is aggregate supply?
the total supply of goods and services available to a particular market from producers.
What is the difference between the shape of SRAS and the shape of LRAS?
SRAS curve is upward sloping, while LRAS curve is vertical
What are factors that shift LRAS and SRAS?
SRAS is affected by a change in the cost of production, while LRAS is affected by a change in productivity
What is the relationship between RGDP & unemployment?
As long as growth in real gross domestic product (GDP) exceeds growth in labor productivity, employment will rise, and if employment growth is more rapid than labor force growth, the unemployment rate will fall.
What is long run equilibrium?
When marginal revenue equals marginal costs
What is the output gap?
The difference between actual and potential output
What is contractionary (recessionary) gap vs. expansionary gap?
Contractionary is when a country's real gross domestic product (GDP) is lower than its GDP at full employment, while Expansionary is when actual GDP is higher than potential GDP.
What is the difference between demand pull inflation and cost push inflation/ stagflation?
Demand-Pull Inflation is when the overall demand for goods and services in an economy increases more rapidly than the economy's production capacity, while Cost-Push Inflation is a result of an increase in the prices of production process inputs.
What is the difference in assumption about prices in the Keynesian and Neoclassical perspectives?
Keynesian view inflation as a price that might sometimes be paid for lower-unemployment, while the Neoclassical view sees inflation as a cost that offers no offsetting gains in terms of lower-unemployment
What are MPC and MPS?
Marginal Property to Consume and Marginal Property to Save
What is the Keynesian Simple Spending Multiplier
A Keynesian multiplier is a theory that states the economy will flourish the more the government spends
How and how much will AD change if there is an initial change consumption/ investment/ government spending?
Government spending causes the AD to shift right if there is an increase and shift left with a decrease, and investment spending can increase AD
What is included in the federal budget
Mandatory expenditures, Discretionary spending, and Interest payments
What is the difference between progressive, proportional and regressive income tax structures?
Regressive taxes have a greater impact on lower-income individuals than the wealthy, Progressive taxes have a greater financial impact on higher income individuals than on low income earners, and Proportional taxes affects low, middle and high income earners equally
How is a budget deficit financed?
Taxing, borrowing, or printing money
What is the difference between public debt and federal debt?
Public Debt is the total amount of debt owed at a point in time by a government or state to lenders, while Federal Debt, is the amount of money that the federal government has borrowed and not yet paid back.
What is fiscal policy?
the means by which a government adjusts its spending levels and tax rates to monitor and influence a nation's economy
What is discretionary fiscal policy vs automatic stabilizer?
Discretionary Fiscal Policy are actions taken in response to changes in the economy, while Automatic Stabilizer is a budget policy that automatically changes to stabilize fluctuations in GDP.
What is expansionary fiscal policy?
means an increase in government spending and a decrease in taxes, which increases the aggregate demand and which shifts the aggregate demand curve to the right.
what is contractionary fiscal policy, and when is it used
Contractionary fiscal policy is a form of fiscal policy that involves increasing taxes, decreasing government expenditures or both in order to fight inflationary pressures.
What is crowding out, and why does it happen?
Crowding out is a phenomenon that occurs when increased government involvement in a sector of the market economy substantially affects the remainder of the market, either on the supply or demand side of the market.
What is money?
A medium of exchange (currency, which includes coins and paper bills)
What are functions of money
medium of exchange, unit of account, store of value
What is fiat money?
A government-issued currency that is not backed by a commodity such as gold.
What is seigniorage?
profit made by a government by issuing currency, especially the difference between the face value of coins and their production costs.
What is fractional reserve banking?
system in which only a fraction of the deposits in a bank is kept on hand, or in reserve; the remainder is available to lend
what is m1 and m2
Demand deposits and new money
What is the difference between required and excess reserves?
The Required reserve is that minimum cash on hand, while the Excess reserve is any cash over the required minimum that the bank is holding in the vault rather than putting it to use as loans.
What is the money multiplier?
1/required reserve ratio
How do banks create money?
When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands.
What is the maximum amount of money that could be created by the banking system?
Equal to the excess reserve
what is the federal reserve system
the central bank of the United States
What are the functions of the federal reserve
provide special financial services
respond to emergency economic situations
What is Federal Open Market Committee? What is its main function?
The Federal Open Market Committee manages the nation's money supply.
How many Federal Reserve district banks are there?
How many governors are there on Fed's Board of Governors? How are they appointed?
7 members, who are appointed by the President and confirmed by the Senate
What is monetary policy?
what the Federal Reserve, the nation's central bank, does to influence the amount of money and credit in the U.S. economy.
What is expansionary monetary policy?
When a central bank uses its tools to stimulate the economy
What is contractionary monetary policy? When is it used?
Contractionary Monetary Policy is a strategy used by a nation's central bank during booming growth periods to slow down the economy and control rising inflation.
What are the tools of monetary control?
discount rate, reserve requirements, open market operations, and interest on reserves.
How does the Fed affect banks with use of monetary policy tools?
It affects interest
What is the difference between discount rate and federal funds rate?
The Fed Funds Rate is the interest rate that depository institutions—banks, savings and loans, and credit unions charge each other for overnight loans, while the Discount Rate is the interest rate that Federal Reserve Banks charge when they make collateralized loans—usually overnight—to depository institutions.
What is the discount rate, and how is it used to change money supply?
is the rate of interest which a central bank charges on its loans and advances to a commercial bank, and the feds decrease the discount rate to increase the money supply
What is reserve requirement?
Percentage of the member banks total net transaction accounts
When does a currency appreciate/depreciate?
High inflation causes currency to depreciate, and government spending causes currency appreciation
When a currency appreciates/depreciates, how does it affect domestic/foreign consumers and producers?
It affects the exchange rate
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