2. Study Guide Chapters 19-22

3. What 2 factors can cause GDP per capita to increase? Output per worker increases or share of population employed increases What 6 factors determine average labor productivity? 1.Human capital 2.Physical capital 3.Land and other natural resources 4.Technology 5.Entrepreneurship and management 6.Political and legal environment

4. Give an example of a capital gain and a capital loss. Capital Gain – increase in the value of assets; stocks increase Capital Loss – decrease in the value of assets; value of home decreases What is the private savings level if income = $50,000, taxes = $5,000, and consumption = $35,000? 50,000-5,000-35,000 = $10,000 in private savings What are three reasons for household savings? Life-cycle saving - to meet long-term objectives Precautionary saving - for protection against setbacks Bequest saving - to leave an inheritance

5. If the actual interest rate is above the equilibrium interest rate, will there be a surplus or a shortage of savings? Surplus of savings If the government budget deficit increases, what will happen to the real interest rates, savings, and investment? There will be a leftward shift in the savings curve, causing the real interest rate to increase. There will be lower levels of both savings and investments. Explain the difference between stocks and bonds. A share of stock is a claim to partial ownership of a firm; a bond is a legal promise to repay debt What are the three principal uses of money? 1.Medium of exchange 2.Unit of account 3.Store of value

6. A bank has $100,000 in deposits, and the reserve-deposit ratio is 10%. If their current reserve level is $15,000, how much are they going to loan out in order to meet the reserve-deposit ratio? $5,000 (The bank only needs $10,000 in reserves since this is 10% of their deposits) A bank has reserves of $25,000 and the reserve-deposit ratio is 10%. The residents of the country hold $100,000 in currency. What is the total money supply? Money Supply = Currency held by public + (bank reserves/reserve-deposit ratio) 100,000 + 250,000 = $350,000 The citizens of a country hold $1000 in currency. The bank has $500 in reserves, and the reserve-deposit ratio is 5%. The Federal Reserve conducts open-market operations to stimulate the economy, and purchases bonds for $100. Assume the $100 from the Federal Reserve is deposited completely into the bank. What was the money supply before the Fed’s action, and what is the money supply after the Fed’s action? Before: $1000 + (500/.05) = $11,000 After: $1000 + (600/.05) = $13,000 ~The Federal Reserve’s $100 in open-market operations increased the money supply by $2,000.

7. Define recession, peak, and trough. Recession - a period in which the economy is growing at a rate below normal Peak - the beginning of a recession; high point of the business cycle Trough - the end of a recession; low point of the business cycle If potential output is $50 billion and actual output is $46 billion, what is the value of the output gap? Is this a recessionary or expansionary gap? Output Gap = $46-$50 = $-4 billion; this is a recessionary gap since actual output is less than potential output. If frictional unemployment is 2%, structural unemployment is 4%, and cyclical unemployment is 3%, what is the natural rate of unemployment? Is this situation representative of a recessionary gap or expansionary gap? Natural Rate of Unemployment = 2% (frictional) + 4% (structural) = 6% This is a recessionary gap, since total unemployment (9%) exceeds the natural rate of unemployment.