Econ 1b Uc davis Final Exam

Transaction Costs

In economics, the time, effort, and money spent to find the parties with whom to enter transactions

Fiat Money

type of money that has no intrinsic value, but is still used as means of payment

Medium of Exchange

function of money that allows the avoidance of the double coincidence of wants problems associated with the barter system

Discount Rate

the rate of interest charged on loans by the Fed

Federal Funds Rate

The interest rate on loans made between banks in federal funds market

Required Reserve

The money that banks keep and don't loan out

Store of Value

function of money that refers to money's usefulness as an assest

Liquidity

the ease with which you can sell an asset, and it is a relative concept

Commodity of Money

type of money that has other uses besides serving as money and thus has intrinsic value. ex) gold and silver

Supply of Money

the amount of money people

ACTUALLY hold at a point in time in their pockets

Demand for Money

the amount of money people WANT or desire to hold at any point in time.

Excess Reserves

the amounts of reserves banks hold in excess of what is required by law

Financial Crisis

happens when some depositors suddenly lose confidence in the financial soundness of their banks and begin withdrawing their deposits.

Open Market Operations

refer to buying and selling of government bonds by the Fed.

Required Reserve Ratio

the Fed requires banks to keep a certain percentage of their deposits in their accounts at the Fed

M1

Currency + Travelers' Checks + Demand Deposits

M2

M1 + savings deposits + small denomination time deposits LESS THAN 100 + money market

mutual fund deposits by INDIVIDUALS

Discount loans

loans that the Fed extends to the banks at an interest rate called the discount rate.

Unit of Amount

function of money that allows prices to be easily expressed according to a standard measure.

balance sheet

statement of assets, liabilities, and net worth

fully loaned out

banks are said to be this when they have no excess reserves

simple money multiplier

1/rrr

net worth

the difference between assets and liabilities

general definition of money

currency plus bank deposits

unit of account

prices of goods and services are expressed in the form of money

Factors of Production

Inputs such as labor land and capital

GDP

definition + formuler

market value of all final goods/ Y=C+I+G+(EX-IM)

calculating Real GDP

Current Quantities x Base Year Prices

GDP deflator

(nominal/ real)*100

GDP doesnt account for?

Distribution of income, health, education/Hours of work and other measures of the quality of life

how to calculate CPi?

(nominal Cost of basket current/ real Cost of basket current)*100

Real Interest Rate

(Nominal)-(Inflation)

amount of money?

Currency+Deposits

Main roles of fed?

regulate private banks and control the money supply

Bank Assets:

Reserves and Loans

How does Fed influence reserve ratio?

1) Reserve requirements

2)Interest on Reserves

Frictional Unemployment

unemployment that results because it takes time for workers to search for the jobs that best suit their tastes and skills

Structural Unemployment-

results because number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one

Shoe leather Costs

refers to the cost of time and effort (more specifically the opportunity cost of time and energy) that people spend trying to counter-act the effects of inflation, such as holding less cash, editing the menu card of an restaurant and having to make additional trips to the bank.

Open market operations

buying and selling of government bonds by the Fed.

how does the fed change the amount of discount loans?

The Fed can increase or decrease the amount of discount loans by changing the discount rate it charges banks.

net worth

the value of the asset net of the liability

federal funds market

Banks borrow from each other overnight

Growth rate formuler

𝖦𝗋𝗈𝗐𝗍𝗁 𝖱𝖺𝗍𝖾 = (𝖭𝖾𝗐 𝖵𝖺𝗅𝗎𝖾 - 𝖮𝗅𝖽 𝖵𝖺𝗅𝗎𝖾)/𝖮𝗅𝖽 𝖵𝖺𝗅𝗎𝖾

Y

Real GDP

L

Number of workers employed

LF

Labor Force

(Willing and able)

N

Number of people in the country

Y/N

GDP Per Capita

LF/N

Labor Force Participation Rate

L/LF

Employment Rate

Y/L

Average Labor Productivity

How to increase productivity?

-Give them more capital

-Technological Progress

What causes K (capital) to increase?

-Saving

-Technological Progress

Exogenous

happening by external factors

Endogenous

having an internal cause or origin

Human Capital

people with skills competing for work

Knowledge Capital

The sum total of all the ideas people have in a society.

-Non competitive

Direct Finance

Funds go directly to thing

Indirect finance

Money first goes to a financial institution, where people can then borrow from.

Fisher effect

Real interest rate will tend to stay at equilibrium

Deflation

Decrease in price

Disinflation

Decrease in inflation rate

Inflation hurts:

lenders

Inflation benefits who?

Borrowers

How do borrowers borrow?

Borrow when the money is high, pay when its low (inflation)

How do lenders lend?

Lend when the money is low to receive a higher value of money (ideal)

Low interest rate=

More borrowing

benefits of inflation

1)encourages consumption and investment

2)Creates real wage flexibility

Why are coupon bonds special?

Make more than one payment

Rate of return on an investment formula:

(future payout-asset price)/asset price X100

Interest rate for bond formula:

=(face value-present price)/present price

Risk Premium Formuler

(Rate of return on risky asset)-(rate of safe one)

Arbitrage

means buying and selling assets of different rates of return in order to make a profit

out of the return differential.

Okuns Law formula:

(Yp-Y)/Y=Okuns alpha * Cyclical

Potencial GDP

is the total amount of output we can produce if all the resources of the economy are fully employed.

MPL Formula:

W/P (wage/price)

Substitution effect

substitute Leisure for work when wages are higher

Income effect

income rises so you can work less for the same pay as before.

Goods excluded from GDP

1) Goods produced in households for households

2)Non-Produced Goods

3)Imported Goods

Included in GDP

1)All the Goods Produced in that year

2)All services rendered

Positive statement

Presenting as a matter of fact

Normative statements

often contain "should" and are opinion based

What do demand shocks do to the inflation and unemployment rates?

Demand shocks result in a NEGATIVE relationship between the inflation rate and the unemployment rate.

What do supply shocks do to the inflation and unemployment rates?

Supply shocks generate a POSITIVE relationship between the inflation and unemployment rates and cause the Phillips Curve to shift.

What is the main cause of business cycles?

Demand Shocks

How do wage and prices act in the short run

they are sticky

Difference between implicit and explicit labor contracts and why aren't they "good"

Implicit: Not witten

Explicit: Written

They are bad because they are one of the causes of price and wage "stickiness"

The Wealth effect [negative]

With peoples uncertainty about their financial situation they are less likely to buy goods and services. [negative]

Foreign trade effect [negative]

Foreign countries also suffering from recessions might not be able to import US goods. Screwing us over. [negative]

Interest Rate effect [negative]

1)Households are reluctant to borrow money to invest and buy stuff, even with low interest rate.

2)Banks would be reluctant to lend do to increase credit risk.

3)Interest rates could be in liquidity trap because of excessive increases in money supply.

Real GDP in the long run:

Y = Yp

(= potencial)

Unemployment in the long run:

unemployment = natural unemployment

Only natural unemployment in the long run

Potencial GDP formula:

Yp =𝐶+𝐼+𝐺+𝐸𝑋-𝐼𝑀

Velocity of circulation:

Number of times money changes hands

equation of exchange

M × V = P × Y

if the velocity of money is constant, the rate of growth of the money supply will equal the rate of growth of:

the nominal GDP

𝛱 = m − g

define variables

𝛱 = inflation

m= money supply

g= growth rate of potential GDP

money supply does not have an effect on what type of variables?

Real variables

Fiscal Policy;

how does this policy work?

changes in government purchases, taxes, or transfer payments in order to achieve a macroeconomic objective.