Term
| Compare and contrast the president’s proposed budget deficit, the actual budget deficit, and the structural deficit. |
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Definition
The president’s proposed budget deficit is given in February based on estimates from the office of manpower and budget for federal tax revenues and expenditures, where it is then proposed to Congress.
Actual budget deficits are calculated at the end of the fiscal year (October) is authored by Congress based on tax legislation, spending appropriation, economic conditions, and behavior of taxpayers.
Structural deficits are based on the deficit at full employment. During a boom the structural deficit will be lower. |
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Term
| What are automatic stabilizers and how do they work to reduce economic fluctuations? |
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Definition
Progressive Taxes--taxes proportional to income level to not decrease personal disposable income too far
Income transfers--unemployment benefits and social security are used to cushion economy during high inflation and recessions |
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Term
| Compare and contrast the effects of changes in government purchases, taxes, and transfer payments. |
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Definition
Government purchases directly affect aggregate demand
Taxes affect income and provide for government purchases
Transfer payments are a form of government spending |
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Term
| What are the appropriate roles of monetary and fiscal policies to achieve the best performance of our economy? |
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Definition
Monetary policies are used to affect spending in order to achieve potential GDP
Fiscal policies change the mix of public and private spending |
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Term
| Explain in detail the process of open market operations in the US |
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Definition
Quarterly the Federal Open Market Commission meets to discuss the upcoming interval, where 12 members come together, 5 Federal Reserve Bank presidents, and 7 of the Federal Reserve Board
Daily conference calls occur where the Federal Open Market Commission discusses daily activities and shops around the market for buying and selling assets, allowing 30 minutes for each transaction |
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Term
| What determines business cycle theories that focus on aggregate demand, and economic growth theories that focus on potential production? |
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Definition
Business cycle theories are determined by prices, tastes, income, price expectations, and the size of markets
Economic growth theories are determined by the point the economy is in during expansion or recession |
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Term
| Why is the rate of unemployment equal to zero in normal times? |
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Definition
| Frictional unemployment will always exist due to the nature of some job |
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Term
| How would you characterize the demand for money? |
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Definition
Transaction demand is for everyday spending
Precautionary demand if for emergency spending
Speculation demand is for unexpected opportunities for profit |
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Term
| Identify the determinants of Supply |
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Definition
-input prices
-technology
-expectations of sales
-size of markets |
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Term
| Describe six benefits and two costs associated with economic specialization |
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Definition
Benefits
-utilization of natural aptitudes
-utilization of natural resources
-task specialization
-artificial agent specialization
-education and knowledge
-minor technical gains
Costs
-interdependence
-technical costs |
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Term
| What problems do we encounter computing and using National Income Accounts? |
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Definition
| Fail to take into account social and environmental concerns as well as depreciation |
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Term
| How does GDP influence Personal Consumption? |
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Definition
| Personal consumption increases with GDP, and decrease with GDP as well |
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Term
| What is Export led growth |
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Definition
Lower tariffs and taxes on foreign goods
Increases competition and innovation |
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Term
| What is import substitution |
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Definition
| Raises tariffs and taxes on foreign goods in order to allow for domestic production |
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Term
| What determines the quantity of money in a floating foreign exchange rate environment? |
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Definition
The central bank changes money base to alter money supply
During periods of high financial flows in, assets are sold to decrease money base
During periods of high financial flows out,, assets are bought to increase money base |
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Term
| How does the level of real interest rates influence investment? |
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Definition
| high levels of real interest rates causes higher investment |
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Term
| Explain the calculation and use of the Consumer Price Index and the GDP Deflator |
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Definition
CPI is average price of basket of goods consumed by average family of 4 in a year
GDP Deflator is GDP/Base GDP x 100 |
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Term
| Why is a global perspective on fiscal and monetary policy necessary? |
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Definition
a global perspective is rational
if another country lowered tariffs, US would also
if supply and demand are not balance, central bank rationally should alter money base |
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Term
| Why do we rarely observe the exact correspondence between a change in autonomous spending and the ensuing change in income predicted by the spending multiplier? |
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Definition
-autonomous spending may increase money demand and monetary policy may not accommodate that level
-propensity to spend income, taxes, and import may change altering the equation |
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Term
| Compare and contrast the determinants of money supply in the US and in Namibia. |
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Definition
-in US floating foreign exchange economy money supply is controlled by the Fed by altering money base through buying or selling assets
-in Namibia fixed foreign exchange is pegged to South African Rand, not allowing the central bank to control money supply |
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Term
| How, and why, does the gap between actual GDP and potential GDP influence the rate of inflation? |
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Definition
-during expansion actual GDP is greater than potential GDP, demand is greater than supply, prices are set higher, inflation
-during recession actual GDP is less than potential GDP, demand is less than supply, spending decreases, production decreases, wages decrease, inflation decreases |
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Term
| What is capital account in balance of payments? |
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Definition
| includes all lending and borrowing in foreign economies and all savings and investing in foreign assets |
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Term
| What is current account in balance of payments? |
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Definition
-net exports
-net investment income
-net transfers |
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Term
| Compare and contrast the significance of inflation expectations, implicit contracts, and staggered price setting in determining the rate of price adjustment? |
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Definition
-inflation expectations allow for prices to be move around more
-implicit contracts allow for prices to be lowered only so far so that during recession consumers stay happy, and they allow for wages to increase during expansion, but laying off during recession so that workers still get enough to stay motivated
-staggered price setting (like college tuition) does not adjust to changes in the economy as quickly
-all these determinants are sticky |
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Term
| Compare and contrast the president’s proposed budget deficit, the actual budget deficit, and the structural deficit. |
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Definition
-proposed budget deficit is made in February and is based on estimates by Office of Manpower and budgeted for federal tax revenues
-actual budget deficits are made at the end of September, fiscal year, and is authored by Congress for tax legislation, spending appropriation, economic conditions, and the behavior of taxpayers
-structural deficits are based on full employment, and are lower during expansion and higher during recession |
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Term
| Identify and explain the Price Elasticity of Demand and the Income Elasticity of Demand. |
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Definition
| percentage change in demand for a percentage change in prices (income) |
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Term
| Define Gross Domestic Product, Gross National Product, Net National Product, National Income, Personal Income, and Personal Disposable Income. |
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Definition
-GDP is total domestic production for country in year
-GNP is total production for country in year
-NNP is GNP-depreciation
-National Income is NNP-indirect business taxes and business subsidies
-Personal Income is National Income-income retained by firms and government payment on interests
-PDI is Personal Income-income taxes |
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Term
| Contrast frictional and structural unemployment. |
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Definition
-frictional unemployment is caused by seasonal jobs and temporary job changes
-structural unemployment is a persistent mismatch between worker skills and job requirements |
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Term
| What determines Labor Productivity? |
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Definition
-capital per worker
-technology resources
an increase in either knowledge or technology will cause greater labor productivity |
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Term
| Why would an unemployment rate of zero be undesirable? |
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Definition
-lower wages
-lower demand
-lower supply
-higher prices
-upward pressure on wages
-inflation |
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Term
| How do relative interest rates influence foreign exchange rates and thus imports and exports? |
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Definition
-domestic products will appear relatively more expensive than foreign products
-foreign products will appear relatively cheaper than domestic products
-exports will fall and imports will rise
-net exports will fall |
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Term
| What are the contributors to economic growth? (consider direct causes) |
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Definition
-Capital (increased through investment, decreased through depreciation)
-Labor (capital per worker, technology resources)
-Technology (management decisions, market style) |
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Term
| How does economic growth in the last 200 years differ from prior periods? |
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Definition
| the industrial revolution has allowed for more sustained economic growth through higher wages, technological change, and greater capital per worker |
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Term
| How is technology produced? |
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Definition
-incentives
-inventions
-innovations
-diffusion |
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Term
| Explain the growth accounting formula. |
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Definition
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Term
| Derive the four sector spending multiplier |
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Definition
Spending Multiplier is 2.78
Consumption=0.63y
Investment=0.15y
Government=0
Exports=0
Imports=N=0.14y
change=d
income=y
Final change in income=Dy
Autonomous change in income=Da
dy=da+dC+dI-dN
dy=da+0.63dy+0.15dy-0.14dy
dy=da+0.64dy
0.36dy=da
dy=2.78da |
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Term
| What is necessary to reduce the rate of inflation? |
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Definition
-demand must be decreased by lowering money supply
-supply must be increased by increasing production and imports
-both |
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Term
| Why have price shocks frequently been followed by increases in unemployment? |
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Definition
-prices of other goods increase
-spending decreases
-production decreases
-unemployment increases |
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Term
| Why are investment and net exports negatively related to the level of domestic interest rates? |
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Definition
-higher interest rates cause investment to decrease because it is too expensive to borrow
-and net exports decrease because foreign exchange rates increase and products appear relatively more expensive than foreign domestic products |
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Term
| Compare and contrast the effects of changes in government purchases, taxes, and transfer payments. |
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Definition
-government purchases directly affect aggregate demand
-taxes indirectly affect aggregate demand but directly affect consumption and provide for government purchases
-transfer payments indirectly affect aggregate demand through income and government payments |
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Term
| What causes an economy to recover after a recession? |
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Definition
-debts are paid off due to lack of lending and borrowing
-interest rates are lowered to encourage spending and borrowing
-spending increases
-production increases
-wages increase
-unemployment decreases |
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Term
| What are the differences between the merchandise trade balance, the balance of goods and services, and the current account balance? |
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Definition
-merchandise trade balance only includes goods from net exports
-balance of goods and services includes both goods and services of net exports
-current account balance includes the balance of goods and services, net investment income, and net transfers |
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Term
| Compare and contrast the current account and the capital account in the balance of payments. |
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Definition
-current account includes balance of goods and services, net investment income, and net transfers
-capital account includes lending and borrowing in foreign companies and investment in foreign assets |
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Term
| Why would you expect the income elasticity of demand and price elasticity of demand for money to be unity? |
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Definition
Money x Velocity = Price x Output
Since velocity is constant, any change in one of the variables will result in an equal change to the other side of the equation
Ex) 10 x 1 = 5 x 2
If Money becomes 20, then the other side must equal 20
So, 20 x 1 = either 10 x 2, or 5 x 4 |
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Term
| Why is the quantity of money important? |
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Definition
-too low of money supply will result in too low of spending and recession
-too high of money supply will result in too high of spending and inflation |
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Term
| How do economists explain international difference in per capita income? |
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Definition
-government infrastructure
-public health
-education
-economic planning
-technological markets
-social cocnerns |
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Term
| Why are incomes among some developed nations converging, but incomes in the poorest nations are not? |
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Definition
-wars and revolutions
-lack of savings and investing
-lacking education
-failure to enforce the rule of law |
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