CAS EC 102 Study Guide - Midterm Guide: Positive Statement, Financial Market, Economic System

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CAS EC 102 Full Course Notes

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7: population 7, a nation"s output: gdp 8, introduction. Macroeconomic = study of large economic forces in the world. Political and economic systems are not tied together. Individual owns some business while government owns key sectors: banks, airlines, utilities: communism, government owns all. There are many political systems but the main difference is how much one has a say in government decision. Micro studies market de(cid:272)isio(cid:374)s that are u(cid:374)der a perso(cid:374)(cid:859)s, fa(cid:373)il(cid:455)(cid:859)s or (cid:272)o(cid:373)pa(cid:374)(cid:455)(cid:859)s (cid:272)o(cid:374)trol. Macro studies market forces beyond control of anyone: important since understanding them can better people off. Incentive: a(cid:374)(cid:455)thi(cid:374)g that i(cid:374)flue(cid:374)(cid:272)es people(cid:859)s (cid:271)eha(cid:448)ior, positive incentive is when one is rewarded for doing sth, negative incentive is when one is punished for doing sth. Interconnections: entire world is connected, each decision affects the economic world. Increase in interconnection raises amount of output available: decrease in interconnection decrease output available, interconnection allows people to specialize (specialist produces more than generalist)

Related Questions

1. Explain why economics is a study of choices. Why do we have to make choices?

2. What are the economic resources? Why are they scarce?

3. Outline the differences between macroeconomics and microeconomics.

4. What are the economic questions? How is each question answered?

5. Outline the interaction of supply, demand, and price.

6. What is the difference between a buyers and a sellers market? Provide examples of each in your answer.

7. What causes equilibrium? How does price react?

8. What is the marginal principle? How can you apply it as a consumer?

9. & 10. We all hear talk about the dependency of oil and how higher oil prices affect our economy. Why have we not made greater strides to energy efficiency? Make sure you have at least two references to back your opinion.

1. Impact of Monetary Policy How does the Fedâs monetary policy affect economic conditions?

2. Trade-offs of Monetary Policy Describe the economic trade-off faced by the Fed in achieving its economic goals.

3. Choice of Monetary Policy When does the Fed use a loose-money policy, and when does it use a tight- money policy? What is a criticism of a loose-money policy? What is the risk of using a monetary policy that is too tight?

4. Active Monetary Policy Describe an active monetary policy.

5. Passive Monetary Policy Describe a passive monetary policy.

6. Fed Control Why may the Fed have difficulty controlling the economy in the manner desired? Be specific.

7. Lagged Effects of Monetary Policy

Compare the recognition lag and the implementation lag.

8. Fedâs Control of Inflation Assume that the Fedâs primary goal is to reduce inflation. How can it use open market operations to achieve this goal? What is a possible adverse effect of such action by the Fed (even if it achieves the goal)?

9. Monitoring Money Supply Why do financial market participants closely monitor money supply movements?

10. Monetary Policy during the Credit Crisis

Describe the Fedâs monetary policy response to the credit crisis.

22. The Fedâs Impact on the Housing Market In periods when home prices declined substantially, some homeowners blamed the Fed. In other periods, when home prices increased, homeowners gave credit to the Fed. How can the Fed have such a large impact on home prices? How could news of a substantial increase in the general inflation level affect the Fedâs monetary policy and thereby affect home prices?

mauvearmadillo597

MBA502, Economics for Business

Apply and Discover 7.2

You are responsible for economic policymaking in your country. Your desire is to eliminate inflation, keeping prices absolutely stable at P = 100, no matter what happens to output. Currently, the economy is in equilibrium at Q = 3200 (where Q = potential GDP) and P = 100. You can use monetary and fiscal policies to affect aggregate demand but you cannot affect aggregate supply in the short run. How would you respond to the following scenarios?

Explain and illustrate how each of these events would affect aggregate demand, aggregate supply, and prices, then explain how you would respond with economic policies.

1. A surprise increase in investment spending

In the short run, when investment spending increases, it results in an increase in Aggregate Demand (AD), which in turn pushes up both GPD and the price index.

To counterbalance this development, government might pursue contractionary fiscal policy by increasing taxes (to reduce consumption) or decreasing its own investment and spending so that the AD curve shifts back to its original position. Alternatively, the government can pursue contractionary monetary policy by reducing money supply and increasing interest rate to discourage economic activity.

2. Catastrophic floods that cause a sharp food price increase

In this case, sharp food shortages and consequent price increases cause a shock-type adjustment of the aggregate supply curve (it shift up and to the left). The result is a lower GDP and a higher price level.

The government cannot do anything to adjust AS in the short run. However, if the goal is to maintain the price level constant, the government can decide to do something to decrease the aggregate demand to force prices to come down, though it will be accompanies by another contraction in GDP and so it would not be a smart thing to do.

To cause AD to decrease, the government, similar to example above, can pursue fiscal policy (increase taxes, decrease spending) or monetary policy (reduce supply of money to the economy and thus increase interest rates).

3. A productivity decline that reduces potential output

In this case, AS shifts to the left, as was the case in example 2. As a result, price levels go up, as the same amount of money is chasing the reduced amount of goods and services, and GDP declines.

Government remedies here would be centered about causing AD to decrease through contractionary fiscal (higher taxes, lower spending) or monetary (reduce money supply and increase interest rates) policy. Again, this decision reduces inflation but at expense of GDP, as real output shrinks further.

4. A deep depression in East Asia that causes a sharp decrease in net exports to the United States

A decrease in exports of goods to from the United States to Asia will mean that the aggregate demand (which includes net exports

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CAS EC 102 Study Guide - Midterm Guide: Positive Statement, Financial Market, Economic System

CAS EC 102 Full Course Notes

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