Economics UTA Macro Final Exam test 3

Ten Principles of Economics

1) People face trade-offs; the cost of something is what you give up; rational people think at the margin; people respond to incentives; trade makes everyone better off; markets organize activity; governments can improve outcomes; living standards depend on productivity; prices rise when government prints money; society faces a short-run tradeoff between inflation and unemployment
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Opportunity Cost

Four C’s of Banking

Character (repayment history), Capacity (income/cash flow), Conditions (economy/loan purpose), Collateral (asset pledged)
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Absolute Advantage

Adam Smith: the producer who can make MORE output with the same resources.
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Comparative Advantage

Legal Tender Act of 1862

Created greenbacks; gave government exclusive right to create money (seigniorage).
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Federal Reserve Act of 1913

Implicit Exchange Rate

(A/B) × (B/C) = implicit A/C exchange rate.
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Crowding Out

More government spending reduces private investment.
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Ricardian Equivalence

Milton Friedman

Monetarist; believed in steady money supply growth; supported 100% RR (multiplier becomes 1).
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Money Multiplier

Monetary Policy

Change in the money supply.
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Fiscal Policy

Lower Rates/Lower RR/Lower Discount Rate

Increase money supply.
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Higher Rates/Higher RR/Higher Discount Rate

Most Powerful Fed Tool

Reserve requirement: RR↓ → MS↑; RR↑ → MS↓.
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Fed Tools (Simple)

Reserve Requirement

Lower RR → MS↑; higher RR → MS↓.
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Discount Rate

Equation of Exchange

M×V = P×Y (M money supply, V velocity, P prices, Y output).
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Cambridge Equation

Federal Reserve System

12 districts; District 11 = Dallas (Texas, southern NM, northern LA).
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Stock Variables

Measured at one moment (national debt, wealth, odometer).
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Flow Variables

T-Bill

Less than 1-year maturity; sold at discount.
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T-Note

G2

U.S. and Japan.
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G5