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Econ 110 Final
Macroeconomic terms for final
| Question | Answer |
|---|---|
| What are the components of Aggregate Demand (AD)? | C + I + G + NX |
| Why is AD downward sloping? | Real Wealth Effect, Money Market Effect, International Substitution Effect |
| What shifts AD outward? | ↑C (confidence, tax cuts), ↑I (low interest rates, optimism), ↑G (more spending), ↑NX (export increases, favorable exchange rates) |
| What shifts AD inward? | ↓C, ↓I (high interest rates), ↓G, ↓NX (strong dollar, trade restrictions abroad) |
| Why is SRAS upward sloping? | Prices rise → firms produce more short-run due to sticky wages and diminishing returns |
| What shifts SRAS outward (right)? | Lower input costs, improved productivity, favorable supply shocks |
| What shifts SRAS back (left)? | Higher input costs (wages, energy, tariffs), negative supply shocks (COVID, weather) |
| What shifts LRAS? | Productivity growth, technology, capital, labor, human capital |
| How does unemployment appear in the AD/AS model? | Equilibrium left of LRAS = high unemployment; right of LRAS = low unemployment |
| How does inflation appear in AD/AS? | Increase in price level at equilibrium (usually from AD→ or SRAS←) |
| How does economic growth appear in AD/AS? | LRAS shifts right (economy’s capacity increases) |
| What zone of SRAS shows high unemployment and low inflation? | Keynesian zone (flat SRAS) |
| What zone shows trade-off between unemployment and inflation? | Intermediate zone |
| What zone shows low unemployment and strong inflation pressure? | Neoclassical zone (steep SRAS) |
| What is stagflation? | Inflation + falling output, typically from SRAS shifting left |
| What are the four functions of money? | Medium of exchange, store of value, unit of account, standard of deferred payment |
| What characteristics must money have? | Durable, valuable, standardized, divisible, generally accepted |
| What is commodity money? | Money with intrinsic value (gold, silver) |
| What is commodity-backed money? | Paper money redeemable for a commodity |
| What is fiat money? | Money with no intrinsic value; value comes from government declaration |
| What is the double coincidence of wants? | In barter, both parties must want each other’s goods—money solves this |
| What is M1? | Currency, demand deposits, checkable deposits |
| What is M2? | M1 + money market funds + time deposits (savings) |
| Do credit cards count as money? | No, they are short-term loans |
| How do banks make profit? | Paying low interest on deposits and earning higher interest on loans |
| What is fractional reserve banking? | Banks keep only a fraction of deposits as reserves and loan out the rest |
| Formula for money multiplier? | mm = 1 / rr |
| Total deposits formula? | mm × initial deposit |
| What year was the Federal Reserve created? | 1913 |
| Why was the Fed created? | Prevent bank failures, stabilize financial system |
| What is the Fed’s structure? | Board of Governors (7 members) + 12 Regional Banks |
| What is the Fed’s key role during crises? | Lender of last resort |
| What is deposit insurance? | FDIC insures deposits up to $250,000 |
| What is the federal funds rate? | Rate banks charge each other for overnight loans of reserves |
| What are open market operations? | Fed buys/sells treasury securities to change reserves and interest rates |
| What happens when Fed buys bonds? | Reserves ↑, interest rates ↓, money supply ↑, AD shifts outward |
| What is the discount rate? | Rate banks pay when borrowing directly from the Fed. |
| What is IORB? | Interest On Reserve Balances—rate paid on reserves in ample reserves framework. |
| What is ONRRP? | Overnight Reverse Repo Facility—sets rate floor for non-banks |
| In ample reserves framework, how does Fed influence rates? | Using administered rates (IORB, ONRRP) instead of changing money supply |
| What is a pitfall of monetary policy? | Long lags, excess reserves reduce effectiveness, unpredictable velocity of money |
| Quantity theory of money equation? | M × V = P × Y |
| Difference between deficit and debt? | Deficit = yearly shortfall; debt = accumulation of past deficits |
| What is entitlement spending? | Mandatory spending (Social Security, Medicare, Medicaid) |
| What is discretionary spending? | Spending Congress decides annually (defense is largest) |
| What is a progressive tax system? | Higher income → higher tax rate |
| What is expansionary fiscal policy? | ↑G or ↓T to shift AD outward |
| What is contractionary fiscal policy? | ↓G or ↑T to shift AD inward |
| What is crowding out? | Government borrowing raises interest rates, reducing private investment |
| What are automatic stabilizers? | Policies that automatically change with the business cycle (UI, SNAP, progressive taxes) |
| Problems with fiscal policy? | Recognition lag, legislative lag, implementation lag, political incentives, inflation risk |
| What is the debt-to-GDP ratio? | Government debt divided by GDP, measure of solvency |
Created by:
lexi.welte