EC211 Test 2

What is a price ceiling? Give examples

The maximum amount that a seller is allowed to charge for a product

Price gouging laws, rent control

1) What is a price floor? Give an example.

How low a price can be. Minimum wage

1) What is the difference between binding and non-binding price controls?

Binding is takes effect, non-binding is no effect

1) Fully explain the concept of tax incidence.

How the tax burden is shared between buyer and seller.

There is zero correlation between who writes the check and who bears the burden

1) What is the difference between macroeconomics and microeconomics?

Macro is the economy wide phenomenon, micro is households and firms

1) Fully explain the concept of GDP.

(Gross Domestic Product) The market value of all final goods and services. The single best measure we have of the economic well being of a society

1) What is the equation for GDP and what do the components represent?

Y=C+I+G+NX

Y= GDP

C= Consumption

I= Investment

G=Government purchases

NX = Net Exports

1) What is the difference between real GDP and nominal GDP?

Real GDP is adjusted for inflation, Nominal isn't

1) What is the CPI and how is it calculated?

Consumer Price Index, The current cost of the basket is compared to its cost in the prior year, and then multiplied by 100 to determine the percentage.

1) What is the PPI? How does it relate to the CPI?

Producer Price Index, Good indicator for predicting CPI

1) What is the difference between the nominal interest rate and the real interest rate?

Nominal is the actual price

Real takes into account inflation

1) Fully explain the types of unemployment described in your text.

Structural (Not enough jobs)

Frictional (takes time)

1) Fully explain the concepts of labor unions described in your text.

Collective bargaining

Typically earn 10-20% more

1) Fully explain the concept of efficiency wages.

Above equilibrium wages paid by firms to increase productivity

1) Fully explain the functions of money.

A medium of exchange

A unit of account

A store of value

1) Explain the difference between commodity money and fiat money.

Commodity money has intrinsic value

Fiat money is by decree

1) Describe the components of M1 money supply discussed in lecture.

The most liquid measure of money supply

Currency

Demand deposits/Checking deposits

Savings deposits

1) Explain the two main jobs of the U.S. central bank discussed in this course.

Oversee commercial banks

Control money supply

Mandate (Price stability and maximum employment)

1) Explain the difference between monetary policy and fiscal policy.

Monetary policy is setting the money supply

Fiscal policy is the budget supply

1) Fully explain the tools of the Federal Reserve.

Open market operations

Lending to banks

Reserve requirements

Paying interest on reserves

1) Explain the difference between the discount rate and the federal funds rate.

Discount rate the interest rate that the central banks lend to banks

Federal funds rate is the interest rate that banks charge to other banks

1) Traditionally (in your lifetime), how has the Fed most often raised or lowered interest rates?

Through open market operations

1) How do you identify binding vs. non-binding floors and ceilings on a graph?

Only a floor above equilibrium and a ceiling under equilibrium is binding

1) What is the formula given in this course to calculate the unemployment rate?

Unemployed/Labor force x 100

1) Fully explain the concept of a fractional-reserve banking system.

banks that take deposits from the public keep only part of their deposit liabilities in liquid assets as a reserve, typically lending the remainder to borrowers.

1) Who is the current chairperson of the Federal Reserve?

Jerome Powell

1) Who is the current Treasury Secretary?

Janet Yellen

1) What is the current, approximate inflation rate in the U.S.?

3-4%

1) What is the current, approximate unemployment rate in the U.S.?

4-5%

What externalities are created by unemployment

Unemployment insurance causes more unemployment because people aren't in a hurry to look for a job

Minimum wage laws will increase the quantity of people who want to work but firms employee less people because it is more expensive creating a surplus of workers

Union workers get paid 10-20% more therefore firms want to hire less

1) According to this course, what is the biggest problem inflation creates?

Erodes the real value of money

Not predictable/ Uncertainty

1) What is your textbook's definition of inflation?

Sustained increase in average levels of prices

Demand/Checking deposits are most liquid than what?

Savings deposits

Who is responsible for Monetary Policy

The FED

Who is responsible for Fiscal Policy

Congress

What is GNP

Gross National Product.

Produced by a nations citizens