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ECON FINAL WINTER

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  • What is stock?
    Shares or portions of ownership in a corporation.
  • How are MPS and MPC related?
    MPS = 1 – MPC.
  • Give another limitation of the CPI.
    It does not adjust fully for quality changes.
  • Into how many Federal Reserve districts was the nation divided?
    Twelve districts.
  • How is the rate of inflation calculated?
    ((Recent CPI – Earlier CPI) / Earlier CPI) × 100.
  • Name one function of the Federal Open Market Committee (FOMC).
    Buys and sells government securities to affect the money supply.
  • How many members are on the Fed’s Board of Governors?
    Seven members.
  • What two fiscal steps do proponents urge during economic decline?
    Increase government spending and/or cut taxes to boost demand.
  • What happens if money supply grows faster than production?
    A general rise in prices (inflation).
  • How did Keynesians expect borrowing to help the economy?
    Debt would “prime” demand and later be repaid by taxation.
  • Name one limitation of the CPI.
    It assumes all urban households buy the same basket of goods.
  • What is a proportional (flat) tax?
    A tax where everyone pays the same percentage of earnings.
  • What is a financial market?
    Organizations that channel household savings to businesses and government.
  • How does inflation affect consumers overall?
    Over time, inflation robs consumers of purchasing power.
  • What is the marginal propensity to save (MPS)?
    The portion of each dollar the average person saves.
  • What is fiat money?
    Money with no intrinsic backing, accepted by faith in its value.
  • What is a thrift (S & L) primarily associated with?
    Savings and loan associations for mortgage and savings services.
  • What is speculative bubble?
    When stock prices rise above true value due to expectations.
  • What is frictional unemployment?
    Temporary unemployment while between jobs for various reasons.
  • What is a discouraged worker?
    Someone not counted as unemployed because they stopped looking for work.
  • Name three tools the Fed can use to change the money supply.
    Changing the discount rate, changing the reserve requirement, and open market operations.
  • What does the monetary theory of business cycles focus on?
    Changes in the money supply affecting expansion and contraction.
  • What is the reserve requirement?
    A specified percentage of deposits banks must keep on hand.
  • What is a central bank?
    A bank the government uses to control and accommodate national finances (e.g., the Federal Reserve).
  • What is the marginal propensity to consume (MPC)?
    The portion of each dollar the average person spends.
  • During expansion, what happens to GDP and unemployment?
    GDP rises and unemployment falls.
  • What is inflation?
    A sustained rise in the average price level.
  • What is fiscal policy?
    The government’s ability to affect GDP and employment through spending, taxes, and borrowing.
  • What index measures price changes for about 400 goods and services?
    The Consumer Price Index (CPI).
  • Which principle supports progressive taxation?
    Ability-to-pay principle.
  • What did the Employment Act of 1946 declare a government priority?
    Maximum employment.
  • How does seasonal unemployment arise?
    Job changes due to seasons (e.g., harvest work).
  • What is “pump priming” in Keynesian thought?
    Using government debt (spending) to stimulate the economy, expecting future taxes to pay it off.
  • How many organizations create money in the United States today?
    Three: US Treasury, financial institutions, and the Federal Reserve Bank.
  • What are the four phases of the business cycle?
    Expansion, Peak, Recession, Trough.
  • Who is hurt most by inflation among people with fixed incomes?
    Persons living on fixed incomes.
  • Define the unemployment rate.
    The percentage of the labor force that is not employed but is looking for work.
  • Give an example of a regressive tax from the text.
    Tax on gasoline.
  • Name the four kinds of unemployment listed.
    Frictional, structural, seasonal, and cyclical unemployment.
  • Why do creditors lose during inflation?
    Repayments are worth less in terms of purchasing power.
  • What happens to big-ticket sales in a recession?
    They decline as buyers become uncertain.
  • According to the text, what is the root cause of inflation?
    Money growth — continual increase in the money supply.
  • What is representative money?
    Money that represents a commodity held in storage (e.g., past US notes).
  • Which governmental spending category is the largest portion?
    Social security, unemployment, and labor (transfer payments).
  • Define a “run on the bank.”
    When many depositors withdraw funds simultaneously, threatening bank solvency.
  • What characterizes the peak phase?
    Limited resources, rising prices, rising wages, and higher interest rates.
  • Who is excluded from the labor force in official unemployment statistics?
    Minors, elderly, armed forces, institutionalized, and those not seeking work by choice.
  • How can savers be harmed by inflation?
    Prices can increase faster than interest earned, causing lost savings.
  • What term describes extremely high, runaway inflation?
    Hyperinflation.
  • What are open market operations?
    Fed purchases/sales of government securities to inject or withdraw money.
  • What does M-2 include?
    M-1 plus money available to spend after a short delay (near-money).
  • What is the difference between tight and loose monetary policy?
    loose increases it (encourage growth).
    Tight reduces the money supply (fight inflation)
  • What is cyclical unemployment linked to?
    The business cycle (recessionary downswings).
  • Name one group that can win from inflation.
    Borrowers.
  • What adjustment ties wages to inflation to protect purchasing power?
    Cost of living adjustment (COLA).
  • Write the money multiplier formula given initial deposit D and reserve requirement rr.
    Increase in money supply = D × 1/rr.
  • Which agency was created to regulate securities and require corporate transparency?
    The Securities and Exchange Commission (SEC).
  • Where does additional government spending typically come from?
    Taxation and borrowing.
  • Name three problems associated with governmental borrowing.
    Addiction to borrowing, lack of debt reduction, and destruction of future productivity/opportunity costs.
  • Who developed the concept of fiscal policy?
    British economist John Maynard Keynes.
  • What is the difference between common and preferred stock?
    preferred gets dividends first and typically no voting rights.
    Common is true ownership and last paid if firm fails
  • Write the expenditure multiplier formula given the MPC.
    Total change in national income = amount initially received × 1/(1 – MPC).
  • Define monopoly.
    An industry with a single firm that controls price and supply.
  • In what three ways is the Fed independent?
    Politically independent, financially independent, and operationally independent.
  • What is underemployment?
    Working part-time or below one’s skill level with insufficient income.
  • What is an economic depression per the text?
    An extended severe trough with especially bad conditions.
  • What is a commercial bank?
    A financial institution that accepts deposits and makes commercial loans.
  • What does M-1 include?
    Currency, traveler’s checks, and checking accounts (money for immediate spending).
  • What banking practice allows banks to lend more than they hold in reserves?
    Fractional reserve banking.
  • What is an initial public offering (IPO)?
    The first sale of a corporation’s stock to the public.
  • Why can governmental borrowing become a long-term problem?
    It can be addictive politically and imposes opportunity costs on future generations.
  • About what percentage of total US spending is government spending, per the text?
    About 20%.
  • Name one timing problem with fiscal policy.
    Time lags (procrastination, debate, and political maneuvering).
  • Name three antitrust acts mentioned in the text after Sherman.
    The Clayton Act (1914), Federal Trade Commission Act (1914), and Robinson-Patman Act (1936).
  • What is commodity money?
    Money that is itself a commonly used good (e.g., historically full-bodied coins).
  • Why is the multiplier uncertain?
    It cannot be gauged with precision in the real world.
  • What is a regressive tax?
    A tax that takes a smaller percentage as income increases.
  • What is “elastic currency”?
    A money supply that can be expanded or contracted.
  • What is demand-pull inflation?
    Inflation caused by an increase in aggregate demand.
  • Name two problems of using taxation as a fiscal tool.
    Undermining the work ethic and market confusion (taxes on savings/investment).
  • How can a progressive income tax act automatically in the economy?
    As an automatic stabilizer.
  • What is cost-push inflation?
    Inflation caused by a decrease in supply or rising production costs.
  • What are the four factors of production?
    Land (natural resources), labor (human effort), capital (goods used to produce), and entrepreneurship (organizing resources).
  • What principle is associated with regressive or user-fee taxes?
    Benefit principle.
  • Which tool does the Fed use most often to change the money supply?
    Open market operations.
  • What is structural unemployment?
    When a worker’s skills do not match available jobs.
  • Name two non-economic theories mentioned that attempt to explain business cycles.
    Sunspot theory (Jevons) and psychological theory.
  • What is the CPI’s base concept used for comparisons?
    A base period.
  • How does technology theory explain recoveries?
    Bursts of inventiveness spark investment spending and recovery.
  • What are four problems associated with governmental spending as fiscal policy?
    Time lags, uncertain multiplier, political constraints, and financing choices (tax/borrow).
  • What economic concept ties present wages/prices to an adjustment figure?
    Indexing.
  • What does the Sherman Antitrust Act of 1890 address?
    Declared trusts and similar arrangements illegal to preserve competition.
  • Give an example of a proportional tax type mentioned.
    no specific example in text).
    A “flat tax” (general term
  • Why are wage-price controls usually ineffective?
    They don’t address the underlying cause (money growth) and cause distortions.
  • Name three sources of tax revenue listed.
    Personal income taxes, FICA (social security), and corporate taxes (also excise taxes).
  • Which economist argued government should regulate demand to smooth the business cycle?
    John Maynard Keynes.
  • What does it mean for the Fed to act as the government’s fiscal agent?
    It holds the Treasury’s accounts and helps finance government operations.
  • Which national measure tracks price changes for all goods in the economy?
    The GDP deflator.
  • What is the interest rate described as in the text?
    The price of money.
  • What is a progressive tax?
    A tax that takes a greater percentage as income increases.
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