ECON 295 Lecture Notes - Lecture 1: Real Interest Rate, Bankrate, Potential Output

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pinkwombat476

27 May 2016

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Output: value of products produced transformed into income. Nominal: using the prices of today (current prices) Real: select a base year and always using this particular year (fixed prices) Problem with using nominal: don"t know if quantity or prices have changed when comparing years. Inflation: produce more than potential output, loose purchasing power, instability. What will happen in the future if want consumers to consume today. Flow of credit allows companies to produce output. Difference between nominal and real interest rate is inflation. Real interest rate will depend on inflation during this time. If central bank increase or decrease the bank rate the same will happen to all the banks in the economy, will work together. Only want to add value each firm is adding to the final problem. Value of final product value of intermediaries = value added. Transfer payments such as employment subsidy, take taxes, transferring resources, not buying anything.

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Short Answer/ProblemsâAnswer all numbered questions @ 10 points each. Provide your answers in the space provided or the back of the page. Make sure to scan all work pages. Any quantitative questions require showing your work for full credit. Round all $ problems to the nearest cent. All other calculations must be to at least the fifth decimal place. 1. Answer BOTH parts a & b below. a) Explain the impacts of low level unanticipated inflation for a country like the United States. b) In the United States, our confidence in our fiat money is derived from (3 things) 2. Given the following 4 scenarios: â¢ The contract interest rate was 6.5% and the expected inflation rate was 2.5%. â¢ The contract interest rate was 12% and the expected inflation rate was 10%. â¢ The contract interest rate was 7.5% and the expected inflation rate was 4%. â¢ The contract interest rate was 4% and the expected inflation rate was 1%. a) Indicate which scenario would have been best for the lender and explain why it is best for the lender. b) With an ex post actual inflation rate of 2.25%, indicate which scenario would have been best for society and explain why it is best for society of the four options. 3. Define, compare, and contrast two of the following sets of terms as they. a. organized exchange markets vs. OTC (over the counter) markets b. fiat money vs. representative full-bodied money c. adverse selection vs. moral hazard 4. Indicate what would happen to both M1 and M2 (increase, decrease, no change) due to each of the following events. Consider each lettered event to be independent of the others. a) you write a check for cash at the casino b) an individual redeems a personal CD and deposits the funds into a savings deposit account c) U.S. commercial banks use some of their excess reserves to purchase $250 billion worth of U.S. Treasury securities from the Federal Reserve. d) as the economy improves, banks ease their credit standards and approve a higher percentage of loan applications. e) you spend $4,000 in U.S. currency while on your spring break trip to Acapulco (if you spent less than that you could not have had much fun) Part III: Longer ProblemsâAnswer all numbered questions @ 15 points each. Provide your answers in the space provided or the back of the page. Make sure to scan all work pages. Any quantitative questions require showing your work for full credit. Round all $ problems to the nearest cent. All other calculations must be to at least the fifth decimal place. 5. The following is a historical list of median home prices in two states. Year State 1 ($) State 2 ($) GDP deflator (2009 base year) 1950 9,564 5,396 14.09 1960 15,100 9,800 17.56 1970 23,100 13,000 23.18 1980 84,500 43,900 46.05 1990 195,500 50,800 67.62 2000 211,500 74,400 82.59 2017 (estimate) 400,000 201,991 113.61 a. Convert each price into current year dollars. b. Determine how much a person would have had to pay in 1950 (for both states) to equal the 2017 real home value. c. For both states, determine the percentage increase in home values from 1950-2017 (one calculation for each). 6. Using the following information for a U.S. state: Nominal GDP Real GDP Population Year (millions) (millions 2009 $âs) 1,151,119 1,421,713 32,987,911 1998 1,879,520 1,975,457 36,020,878 2006 2,350,807 2,143,167 38,792,459 2014 a. What is the average annual growth rate for this state during the time periods listed? (Note: time periods of interest are 1998-2006 & 2006-2014) b. What is the average annual inflation rate for this state during the time periods listed? c. To what extent are living standards likely changing in this economy? Explain and support your claim using evidence from the above table. d. For 1 bonus point, indicate the U.S. state associated

1. A financial crisis coupled with a recession seems to affect the severity and duration of the recession. How?

a. Financial crises tend to make recessions milder and shorter
b. Financial crises tend to make recessions milder, but last longer
c. Financial crises tend to make recessions longer and more severe
d. Financial crises tend to make recessions more severe, but shorter

2. The end of the Great Depression troubled a lot of people. Why?

a. It lasted so long that people actually missed it
b. It disappeared without any warning
c. It ended so slowly that the public thought that was no improvement
d. It never really ended; it was merely interrupted by World War II
e. President Roosevelt said that he had ended the depression, but he was lying
f. The end of the depression coincided with massive inflation

Suppose that you have been asked to compare the problem of bank failures during the Obama recession with the past. How does the number of bank failures in the Obama recession compare to the 1930s or the Reagan recession?

a. the Obama recession had far more bank failures than the Great Depression or the Reagan recession
b. the bank failures of the 1930s were the worst, but the Obama recession was second only to the Great Depression in bank failures
c. bank failures were more numerous in the 1930s and in the Reagan recession
d. many banks failed in the 1930s and the current situation is not quite as bad, but there were no bank failures in the Reagan recession

When we reach full employment in the U.S. economy today, what will the unemployment rate be?

a. 0%

b. 3%

c. 4% - 4.5%

d. 5.0% - 6.0%

e. 10%

5. Which type of unemployment includes a person who has given up looking for a job because he thinks it is just a waste of time?

a. frictional unemployment
b. structural unemployment
c. cyclical unemployment
d. seasonal unemployment
e. voluntary unemployment
f. discouraged workers

Choose the answer that fills-in both blanks: How good was the original fit of the data for the Phillips Curve for the U.S. economy in the 1960s? __________ How good was the fit of the data for the Phillips Curve for the U.S. economy after the 1960s? ______________
a. adequate/okay
b. adequate/very good
c. okay/not as good, but still okay
d. adequate/not good
e. very good/even better
f. very good/okay
g. very good/not good
h. very good/very good

In the 20th century, only two countries stood out in terms of robust job creation. The two countries were:

a. China and Japan
b. Germany and France
c. The U.S. and the U.S.S.R.
d. The U.S. and Japan
e. The U.S. and Germany

8. It is very common to see the unemployment rate actually increase as the economy begins to recover (i.e., after the trough). What causes the unemployment rate to rise at this time?

a. structural unemployment increases
b. cyclical unemployment increases
c. seasonal unemployment increases
d. voluntary unemployment increases
e. discouraged workers return to the workforce

Danish labor market reforms are referenced in the Commentary. These reforms attempt to make it easier for firms to hire and fire workers. Which of these two are easier to hire or easier to fire is the primary or critical dimension of the reforms?
a. hire workers
b. fire workers
c. neither hire nor fire workers; the reforms have nothing to do with either

10.

The original Phillips Curve depicted by Almarin Phillips sought to show a relationship between unemployment and _______________. Subsequent versions of the Phillips Curve usually depict a relationship between unemployment and ___________________.
a. real GDP / nominal GDP
b. nominal GDP / real GDP
c. changes in wages/changes in prices (inflation)
d. changes in prices/changes in wages
e. changes in employment/changes in new jobs created
f. changes in new jobs created / changes in employment
g. changes in hat sizes/changes in dress sizes

chocolatemuskrat416

QUESTION 41

The consumer price index is intended to measure the cost of all goods purchased in the economy over time.

True

False

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QUESTION 42

When an economy has reached a zero unemployment rate, it is said to have reached full employment.

True

False

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QUESTION 43

The official unemployment rate is a useful but not altogether accurate measure of joblessness.

True

False

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QUESTION 44

The two types of reserves are federal reserves and required reserves.

True

False

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QUESTION 45

Automatic stabilizers, such as tax revenues and transfer payments, eliminate fluctuations in the business cycle.

True

False

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QUESTION 46

When the actual rate of unemployment is equal to the natural rate of unemployment, we conclude that there is no cyclical unemployment.

True

False

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QUESTION 47

Increased government regulation can cause the aggregate supply curve to shift to the left.

True

False

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QUESTION 48

The price index in the base year is normalized so that it equals 100.

True

False

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QUESTION 49

If the Federal Reserve wants to increase the money supply, it should raise the required reserve ratio.

True

False

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QUESTION 50

The aggregate supply curve in the long run is vertical because wages and other input prices respond completely to a change in price level.

True

False

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QUESTION 51

Public choice analysis helps us to understand why deficits seem inevitable, since we always pay the full costs of government programs today.

True

False

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QUESTION 52

Expansionary demand-side fiscal policies set up a tradeoff between increasing output at the expense of raising prices.

True

False

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QUESTION 53

Cathy works part-time as a bookkeeper but would like to have a full-time position. She has been actively searching for months but so far has not found a job. According to the Bureau of Labor Statistics, Cathy is unemployed.

True

False

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QUESTION 54

The real rate of interest is the nominal rate of interest times the inflation rate.

True

False

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QUESTION 55

The time required to comprehend that a recession has in fact begun is called the recognition lag.

True

False

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QUESTION 56

If an economy is in long-run equilibrium, it is also in short-run equilibrium.

True

False

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QUESTION 57

Policymakers can increase output by enacting policies that expand government spending, consumption, investment, or net exports or reduce taxes.

True

False

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QUESTION 58

When Disney builds a new amusement park in the United States, it is counted as part of GDP.

True

False

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QUESTION 59

The oil shock of 1973 led to demand-pull inflation.

True

False

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QUESTION 60

Casey is a 16-year-old high school student who has no marketable skills. He has been browsing the want-ads in the local newspaper for months but finally got so discouraged that he quit looking. According to the Bureau of Labor Statistics, Casey is unemployed.

True

False

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ECON 295 Lecture Notes - Lecture 1: Real Interest Rate, Bankrate, Potential Output

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