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Econ Exam 2
Econ 202 Exam 2
71
Economics
Undergraduate 1
11/08/2007

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Term
Classical relationship between savings and investment
Definition
Savings and investment are functions of interest
Term
Savings is a positive function of: (keynes)  
Definition
income
Term
unspent income creates
Definition
unsold output
Term
Three regions of aggregate supply graph  
Definition

1)Keynesian region

2)Intermediate region

3)Classical region 

Term
First fundamental classical assumption  
Definition
competition exists in all markets creating flexible prices and wages (including the labor market)
Term
Second classical fundamental assumption  
Definition
Savings and investment are functions of interest
Term
Income (y) =
Definition
Savings (s) + Consumption (c)
Term
Average propensity to consume (APC)--definition  
Definition
the part of the income spent on consumption at each level of income
Term
APC (formula)
Definition

C/Y=APC 

Term
Marginal Propensity to Consume (MPC)--definition  
Definition
The proportion of change in income that is translated into change in consumption
Term
MPC (formula)
Definition
∆C/∆Y=MPC
Term
The relationship between income and savings is
Definition
Positive
Term
Average Propensity to Save (APS)--definition
Definition
The proportion of income that is saved
Term
APS (formula)
Definition
S/Y=APS
Term
Marginal Propensity to Save (MPS)--definition
Definition
proportion of a change in income that is devoted to a change in savings
Term
MPS (formula)
Definition
∆S/∆Y=MPS
Term
The slope of the savings function equals:
Definition
MPS
Term
APC+APS=
Definition
1
Term
MPC+MPS=  
Definition
1
Term
when the consumption function shifts upwards the savings function shifts
Definition
downwards
Term
Equillibrium in a savings function occurs when  
Definition
when planned savings equals planned investments
Term
GDP Gap  
Definition
the difference between full employment output and equillibrium output
Term
Multiplier (K)--definition
Definition
the ratio between the permanent change in income and the change in investment
Term
Multiplier (K) formula  
Definition
1 / MPS = K
Term
Recessionary Gap (formula)
Definition
(Yfe-Ye) / K
Term
Inflationary Gap (Definition)
Definition
when FE output exceeds equillibrium
Term
Inflationary Gap (formula)
Definition
(Ye-Yfe) / K
Term
Budgetary deficit
Definition
When gov't expenditures (G) exceeds tax revenues (T)
Term
Budgetary Surplus
Definition
when tax revenue (T) exceeds gov't expenditures (G)
Term
tax function  
Definition
the positive relationship between income (independent variable) and tax revenue (dependent variable)
Term
progressive tax
Definition
when proportion of taxes paid rises with income
Term
regressive tax
Definition
when proportion taxes paid declines as income increases
Term
proportional tax
Definition
when proportion of taxes paid remains constant as income rises
Term
taxes are a tool of
Definition
fiscal policy
Term
recognition lag
Definition
time elapsed between the emergence of a problem and the recognition of the problem by policy makers
Term
action lag
Definition
time elapsed between recognition and action
Term
policy lag
Definition
the time elapsed between action and its effect on the economy (6-9 months)
Term
leading indicators
Definition
certain variables that predict the course of the economy
Term
Crowding-out effect  
Definition
when gov't finances deficits by borrowing (selling bonds) interest rates rise, reducing private spending (consumers and investors are crowded out of the market)
Term
functional finance
Definition
a political philosophy which says the main function of the federal budget is to stabilize the economy regardless of the size of the imbalance
Term
balanced-budget advocates
Definition
conservatives who advocate balancing the budget every year regardless of the cost of doing so
Term
balancing the budget over the cycle (definition)
Definition
deficits in recessions years should roughly equal surpluses in boom years
Term
flat money
Definition
money which has value by gov't decree
Term
legal tender
Definition
the value of money is determined by the amount of goods and services it can buy
Term
fractional reserve system  
Definition
when banks keep on reserve only a fraction of the deposits they owe
Term
reserve requirement
Definition
the percentage of deposits a bank is required to keep at all times
Term
Federal Deposit Insurance Corporation (FDIC)
Definition
a gov't agency that insures each checking account up to $100,000
Term
Balance Sheet
Definition
a T-account which shows what the bank owns (assets) and owes (liabilities)
Term
Reserve ratio (definition)
Definition
the ratio bewteen legal reserves and demand deposits liabilities
Term
reserve ratio (formula)
Definition
(Deposit with FRB) / (demand deposit liabilities) = RR
Term
required reserves  
Definition
the amount of reserves the bank is required to hold
Term
excess reserves
Definition
reserves held over and above the amount required to satisfy the legal-minimum reserve requirement
Term
Deposit multiplier (definition)
Definition
the number by which excess reserves are multiplied to obtain total demand deposits that can be created
Term
deposit multiplier (formula)
Definition
1 / (required reserve ratio)
Term
M1
Definition
currency + checking accounts + negotiated orders of withrdawal
Term
M2
Definition
M1 + savings deposits + small certificates of deposit
Term
M3
Definition
M2 + large denomination time deposits
Term
liquidity
Definition
the ease and speed at which an asset can be converted into cash without a loss
Term
capital loss
Definition
a loss on the sale of assets as their prices changed since date of purchase
Term
objective of monetary policy
Definition
stabilize the economy by changing the rate of growth in money supply
Term
Discount Rate
Definition
interest rate the fed charges to commercial banks
Term
federal funds rate
Definition
the rate commercial banks charge other banks for overnight loans
Term
prime rate  
Definition
the rate charged by large banks to large corporations
Term
interest rate structure (three things)
Definition

interest rates vary according to:

 

1) degree of risk

2) time length of loan

3) tax exempt status of earnings 

Term
Quantitative Control (Definition)
Definition
change the quantity of money or its growth rate
Term
quantitative controls (examples)
Definition

1) change in reserve requirements

2) change in discount rate

3) open market operations (sales and purchase of gov't bond by the fed) 

Term
qualitative control (definition)
Definition
when a government imposes restrictions on certain segments of the market
Term
qualitative control (examples)
Definition

1) impose minimum down payments

2) limitations on credit card use 

Term
equation of exchange
Definition
PQ=MV   (=GDP)
Term
effects of deflation
Definition
increases debt burden on debtors and reduces real interest and real wages
Term
Say's Law
Definition
supply creates its own demand
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