What are the three functions of money?
Answer: Medium of exchange, unit of account, store of value.
Explanation
Fiat money has value by government decree, not intrinsic worth.
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Macroeconomics Principles (University)
MoneyBusiness cycleInternationalGrowthMonetary policyMeasurementFiscal policyAD/AS
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Money
How do banks create money?
Answer: Through fractional reserve lending: deposits are partly held as reserves and the rest is lent, becoming new deposits.
Explanation
Money multiplier = 1 / reserve ratio.
What is M1 vs M2?
Answer: M1: currency, checking deposits, and other liquid deposits. M2: M1 plus savings deposits, small time deposits, and money market funds.
Explanation
M2 is the broader measure.
Business cycle
What are the phases of the business cycle?
Answer: Expansion, peak, contraction (recession), trough.
Explanation
A recession is commonly defined as two consecutive quarters of falling real GDP.
International
What are tariffs and quotas?
Answer: A tariff is a tax on imports; a quota is a limit on import quantity. Both raise domestic prices and protect domestic producers.
Explanation
Both create deadweight loss.
What is comparative advantage in trade?
Answer: Countries gain by specializing in goods they produce at lower opportunity cost and trading.
Explanation
Basis for the argument that trade raises total output.
How does currency appreciation affect trade?
Answer: A stronger currency makes exports more expensive abroad and imports cheaper, reducing net exports.
Explanation
Depreciation does the opposite.
What is a trade deficit?
Answer: Imports exceed exports (negative net exports).
Explanation
Financed by capital inflows; not inherently bad.
Growth
What is the rule of 70?
Answer: Years to double ≈ 70 ÷ annual growth rate (%).
Explanation
3% growth doubles output in about 23 years.
What determines long-run economic growth?
Answer: Growth in physical capital, human capital, natural resources, and especially technology and productivity.
Explanation
Measured as growth in real GDP per capita.
Monetary policy
What is quantitative easing?
Answer: Central bank purchases of long-term securities to lower long-term rates when the policy rate is near zero.
Explanation
Used after 2008 and during 2020.
What is the Phillips curve?
Answer: A short-run inverse relationship between inflation and unemployment.
Explanation
In the long run, the curve is vertical at the natural rate of unemployment.
What is the federal funds rate?
Answer: The interest rate banks charge each other for overnight loans of reserves; the Fed's main policy target.
Explanation
Changes ripple to other interest rates.
What is expansionary monetary policy and its effects?
Answer: Increasing the money supply lowers interest rates, boosting investment and consumption and raising aggregate demand.
Explanation
Risk: inflation if the economy is near potential.
What are the Federal Reserve's main tools?
Answer: Open market operations, the discount rate, reserve requirements, and interest on reserves.
Explanation
Open market purchases of bonds increase the money supply.
Measurement
What is GDP and what are its four components?
Answer: The market value of all final goods and services produced in a country in a period; GDP = C + I + G + (X − M).
Explanation
Consumption, investment, government purchases, net exports.
Real interest rate formula
Answer: Real rate ≈ nominal rate − inflation rate.
Explanation
The Fisher equation.
What is the difference between demand-pull and cost-push inflation?
Answer: Demand-pull: too much spending chasing goods. Cost-push: rising production costs (e.g., oil) raise prices.
Explanation
Stagflation combines cost-push inflation with high unemployment.
What does the CPI measure and how is inflation computed?
Answer: The CPI tracks the price of a fixed basket of consumer goods; inflation = (CPI this year − CPI last year) / CPI last year × 100.
Explanation
The GDP deflator is a broader price index.
What are the three types of unemployment?
Answer: Frictional (between jobs), structural (skills mismatch), and cyclical (from recessions).
Explanation
Natural rate = frictional + structural; full employment means zero cyclical.
How is the unemployment rate calculated?
Answer: Unemployed ÷ labor force × 100, where the labor force is employed plus unemployed people actively seeking work.
Explanation
Discouraged workers are not counted.
Nominal vs real GDP?
Answer: Nominal uses current prices; real uses constant base-year prices, removing inflation.
Explanation
Real GDP growth measures actual output change.
Fiscal policy
Deficit vs debt?
Answer: The deficit is one year's shortfall of revenue below spending; the debt is the accumulated total of past deficits.
Explanation
Debt-to-GDP ratio is the usual comparison.
What is crowding out?
Answer: Government borrowing raises interest rates and reduces private investment.
Explanation
Weakens the effect of deficit-financed fiscal policy.
What are automatic stabilizers?
Answer: Taxes and transfer programs that automatically cushion the business cycle, such as unemployment insurance and progressive taxes.
Explanation
No new legislation needed.
What is expansionary fiscal policy?
Answer: Increasing government spending or cutting taxes to raise aggregate demand during a recession.
Explanation
Contractionary policy does the opposite to fight inflation.
AD/AS
What is the multiplier effect?
Answer: An initial change in spending causes a larger change in GDP; spending multiplier = 1 / (1 − MPC).
Explanation
MPC of 0.8 gives a multiplier of 5.
What is a recessionary gap and an inflationary gap?
Answer: Recessionary: real GDP below potential (unemployment above natural rate). Inflationary: real GDP above potential.
Explanation
The economy self-corrects slowly through wage adjustment.
Why does the short-run aggregate supply curve slope upward?
Answer: Sticky wages and prices mean higher price levels raise profits and output in the short run.
Explanation
Long-run aggregate supply is vertical at potential GDP.
What shifts aggregate demand?
Answer: Changes in consumption, investment, government spending, or net exports, driven by confidence, wealth, interest rates, taxes, and exchange rates.
Explanation
Price-level changes move along the curve, not shift it.
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