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Chapter 10 - Section 1
The Origins of Money
Vocab / Review questions
Define:
1. Barter Economy2. Transaction Costs-
3. Money4. Medium of Exchange-
5. Unit of Account6. Store of Value-
7. Fractional Reserve Banking-
Review Questions:
1. What gives money its value?
2. Money serves as a unit of account. Give an example to
illustrate what this means.
3. What does it mean to say that the US has a fractional reserve
banking system?
4. Is specialization in a money economy more or less likely to
happen than in a barter economy?
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Chapter 10 - Section 2
The Money Supply
Vocab / Review questions
Define:
1. Money Supply2. Currency –
3. Federal Reserve Note –
4. Demand Deposit –
5. Savings Account –
6. Near- Money
Review Questions:
1. What is the official name for a “dollar bill”?
2. What is the difference between near-money and money?
3. Credit cards are widely accepted for purposes of exchange, yet they are not money. Why not?
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Chapter 10 - Section 3
The Federal Reserve System
Vocab / Review questions
Define:
1. Federal Open Market Committee (FOMC) –
2. Federal Reserve System –
3. Board of Governors of the Federal Reserve System –
4. Reserve Account –
Review Questions:
1. In what year did the Fed begin operating?
2. Explain how a check is cleared.
3. What does it mean when we say the Fed is the lender of last resort?
4. Do you think banks need the Fed to act as “lender of last resort” more often during good economic
times or bad economic times?
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Chapter 10 - Section 4
The Money Creation Process
Vocab / Review questions
Define:
1. Total Reserves –
2. Required Reserves –
3. Reserve Requirements –
4. Excess Reserves –
Review Questions:
1. Bryce creates $2,000 in currency with the snap of his fingers and deposits it in bank A. The reserve
requirement is 10 percent. By how much does the money does supply increase?
2. Bank A has checking account deposits of $20 million, the reserve requirement if 10 percent, vault
cash equals $2 million, and deposits in the reserve account at the Fed equal $1 million. What do
required reserved equal? What do excess reserves equal?
3. Is a $100 check money?
4. The numerical examples in this section always had banks creating loans (new checking account
deposits) equal to the amount of excess reserves they held. For example, if bank A had $900 in
excess reserves, it would create new loans equal to $900, not something less. In reality, banks may
not lend out every dollar of their excess reserves, but they usually come close. Why would a bank
want to lend out nearly all (if not all) of its excess reserves?
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Chapter 10 - Section 5
Fed Tools for Changing the Money Supply
Vocab / Review questions
Define:
1. Discount rate2. Federal Funds Rate3. Open Market Operations Review Questions:
1. The Fed wants to increase the money supply.
a. What can it do to the reserve requirement?
b. What type of open market operation can it conduct?
c. What can it do to the discount rate?
2. The Fed conducts an open market sale. Does the money for which it sells the government securities
stay in the economy?
3. When the Fed conducts an open market purchase, it buys government securities. As a result, the
money supply rises. Could the Fed raise the money supply by buying something other than
government securities? For example, suppose the Fed were to buy apples instead of government
securities. Would apple purchases (by the Fed) raise the money supply?
4. If the Fed wants the money supply to rise by a ridiculously high percentage ---- say, 1 million percent
--- could it accomplish this objective?
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Chapter 11 – Section One
National Income Accounting
Vocab/ Review questions
Define:
1. Gross domestic product (GDP) –
2. Double counting –
Answer:
1. In a single economy, three goods are produced during the year, in these
quantities: 10 pens, 20 shirts, and 30 radios. The price of pens is $4 each, the
price of shirts is $30 each, and the price of radios is $35 each. What is GDP
for the economy?
2. Why are only final goods and services computed in GDP?
3. Which of the following are included in the calculation of this year’s GDP?
a. Seventeen-year-old Ricky mowing his family’s lawn.
b. Nolan buying a used car.
c. Brittany buying 100 shares of Chrysler Cooperation.
d. Nick’s receipt of a Social Security check.
e. An illegal sale at the corner of Elm and Jefferson.
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Chapter 11 – Section Two
Vocab/ Review questions
Define:
1. Consumption 2. Investment –
3. Government purchases –
4.
Export spending –
5. Import spending -
Answer:
1. Why is import spending subtracted from the sum of consumption, investment,
government purchases, and export spending in computing GDP?
2. Suppose consumption is $2,000 billion, investment is $700 billion, government
purchases are $1,200 billion, export spending is $100 billion, and import
spending is $150 billion. What does GDP equal?
3. “Johns,” a computer company produces 25,000 computers year and sells 22,000
to its customers. According to government statisticians, however, all 25,000
computers have been purchased. How do the statisticians reach this conclusion?
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Chapter 11 – Section Three
Measuring Price Changes and The Unemployment Rate
Vocab/ Review questions
Define:
1. Base Year -
2. Real GDP -
Answer:
1. GDP is $6,ooo billion in one year and $6,500 billion the next year. Is output
necessarily higher in the second year than in the first?
2. Why do economists compute real GDP?
3. When real GDP increases, which variable, P or Q, is increasing?
4. Can GDP go up at the same time that real GDP goes down?
5. Becky, an economist wants to know whether the “average person” in country X
has more goods and services to consume than the “average person” in country Y.
Do you recommend that the economist look at per capita GDP or per capita real
GDP?
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Chapter 11 – Section Four
Measuring Price Changes and the Unemployment Rate
Vocab/ Review questions
Define:
1. Price index -
2. Consumer price index -
3. Aggregate demand curve -
4.
Aggregate supply curve -
5. Unemployment rate –
6. Employment rate -
Answer:
1.
Suppose the CPI was 143 in year 1 and 132 in year 2. Did prices rise or fall between year 1 and
year 2?
2.
The noninstitutional adult civilian population is 120 million, the number of unemployed persons is
5 million, and the number of employed persons is 60 million. What is the unemployment rate?
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3.
What can cause the equilibrium price level to rise? What can cause the equilibrium quantity of
goods and services (in the economy) to fall?
4.
Samantha earned $40,000 in 2003 and $50,000 in 2004. The CPI was 184.0 in 2003 and 188.9
in 2004. Using the data presented, how can Smith figure out whether his earnings went up by
more than, less than, or equal to the change in price?
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Chapter 12 – Section
Inflation and Deflation
Vocab/ Review questions
Define:
1. Inflation –
2. Demand –side inflation –
3. Supply – side inflation –
4. Velocity –
5. Simple quantity theory of money –
6. Hedge –
7. Deflation –
Answer the following:
1. The CPI is 167 in year 1 and 189 in year 2. What is the inflation rate between
the two years?
2. The CPI is 180 in year 1 and 174 in year 2. What is the deflation rate between
the two years?
3. An increase in the money supply is more likely to cause supply- side inflation
than demand – side inflation. Do you agree or disagree?
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4. Explain how a change in aggregate demand and aggregate supply can cause
deflation.
Chapter 12 – Section
Business Cycles
Vocab/ Review questions
Define:
1. Business Cycle -
2. Recession -
Answer the following:
1. What are the five phases of a business cycle?
2. What is the coincident indicator?
3. If the initial peak of a business cycle was January 1, year 1, the trough was July
1, year 2, and the final peak was July 1, year 4, how long was the contraction (in
months)?
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4. One leading indicator is average weekly hours worked. If this rises, what does it
indicate for the future performance of the economy?
Chapter 12 – Section
Economic Growth
Vocab/ Review questions
Define:
1. Absolute real economic growth -
2. Per capita real economic growth –
3. Human capital -
Answer the following:
1. Can real GDP rise as per capita real GDP falls?
2. Aloha puts $1000 into a savings account that pays an interest rate of 6 percent
annually. How many years before her savings doubles?
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3. Can labor productivity decline as total output is rising?
4. What do you see as the costs of economic growth? What do you see as the
benefits?
Chapter 13 – Section 1
Fiscal Policy
Vocab/ Review questions
1. Fiscal policy 2. Expansionary fiscal policy–
3. Contractionary fiscal policy –
4. Crowding out –
5. Crowding in 6. After-tax income –
7. Laffer Curve -
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1.
Why do we use contractionary fiscal policy?
2. Give a numerical example of complete crowding out?
3. Is expansionary fiscal policy always effective at increasing total spending in the
economy and decreasing unemployment? Explain.
Chapter 13 – Section 2
Monetary Policy
Vocab/ Review questions
1. Expansionary monetary policy–
2. Contractionary monetary policy -
1.
Explain how expansionary monetary policy can lower the unemployment rate.
2. The objective is to keep prices stable. Suppose the average annual change in
velocity is 1 percent, and the average annual change in the quantity of goods and
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services is 4 percent. By what percentage should the Fed increase the money
supply?
Chapter 13 – Section 3
Stagflation: The Two Problems Appear Together
Vocab/ Review questions
1. Stagflation –
2. Stop – and – go, on – and – off monetary policy -
1.
In the past how did economists view the relationship between unemployment and
inflation? When did economic events begin to change this view?
2. Does a decrease in the money supply cause a change in output, prices, or both?
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3. When the money supply increases, output rises before prices. Why?
4. What are the causes of stagflation mentioned?
Chapter 14 – Section 1
Vocab/ Review questions
Define:
1. Proportional income tax –
2. Progressive income tax –
3. Regressive income tax -
Answer the following questions:
1. What three federal taxes together account for approximately 92.3 percent of
federal government tax revenue?
2. Which federal tax raises the greatest tax revenue?
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3. What percentage of the year 2000 did the average tax payer have to work in order
to pay all his or her taxes?
4. Is it possible for a high-income earner to pay more in taxes than a low-income
earner under a regressive income tax. Do you agree or disagree?
5. Is a sales tax regressive, proportional, or progressive?
Chapter 14 – Section 2
Vocab/ Review questions
Define:
1. National Debt -
2. Budget Deficit -
3. Budget Surplus -
Answer the following questions:
1. How does the federal government spend its tax revenues?
2. How are current budget deficits linked to higher taxes in the future?
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3. What was the public debt equal to on June 22, 2005?
4. What do people mean when they say it is better to balance the economy than to
balance the budget?
5. Suppose the Fed were to create enough money to pay off the entire public debt. What would
happen to prices?