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106 Cards in this Set
- Front
- Back
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What goods are not included in GDP?
And why? |
intermediate goods
since they are already included in the value of the final goods produced |
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What is the equation for the expenditure approach?
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Y=GDP=C+I+G+NX
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Define net exports.
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exports - imports
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What are the 5 limitations of GDP?
(as a measure of welfar of society) |
1- underground economy not included
2- household production is not included 3- environmental damage is not included 4- leisure time 5- economic equality |
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Define comsumption.
And approximately how much of GDP is consumption goods? |
spending on goods & services by households used for consumption
2/3 |
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Why must exports be included in GDP?
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they are goods produced in the economy so they increase economic activity
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What "investments" can investment spending be broken down into?
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1- gross investment
2- net investment |
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Why must imports be subtracted from GDP?
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they are goods not produced in the economy so they don't lead to economic activity
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What is nominal GDP?
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measures the value of goods produced in the economy valued at current market prices
sum of Pcurrent*Qcurrent |
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What is real GDP?
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production of goods and services valued at constant prices
sum of Pbase*Qcurrent |
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What is GDP?
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Gross Domestic Product-
value of all final goods and services produced in the domestic economy |
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What's the difference between micro-economics and macro economics?
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Micro- studies the individual components of economy
Macro- studies the overall economy |
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Define Government expenditure.
What does it specifically not include? |
INCLUDES-
all $ spent by the government on final goods & services DOESNT INCLUDE- $ spent on transfer payments (welfare) |
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What are the 4 types of spending on goods & services?
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1- consumption=C
2- investmenet spending=I 3- gov't expenditure=G 4- net exports=NX |
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Define investment spending.
And explain the 3 categories of it. |
goods purchased by firms
1- spending on capital goods 2- change in inventories 3- construction spending |
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What does GNP measure?
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the value of all goods & services produced by domestic producers regardless of where they are located
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When does full employment exist?
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when everyone is working who wants to
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What is the unemployment rate?
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unemployed/labor force
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Define frictional unemployment.
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results b/c it takes time for workers to search for the best suited job, this will always exist
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What people does unemployment include and not include?
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INCLUDE-
1- people actively searching for a job 2- laid off and waiting to be called back 3- waiting to start DOESNT INCLUDE- 1- discouraged workers 2- part-time wanting to be full time |
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What are the avg. level of prices measured by?
And what are the two most important? |
price indices
1- CPI deflator 2- GDP deflator |
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What is the GDP deflator? (equation)
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nominal GDP
----------- x 100 real GDP |
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What is the best measure of inflation for;
1- how inflation affect households 2- whole economy |
1- CPI
2- GDP deflator |
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What is the equation for CPI?
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crrnt cost of mrkt basket
------------------------- X100 cost of basket in base yr |
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The CPI in base yr is always equal to what?
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100
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What is structural unemployment?
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results when wage is above the market wage/
b/c the # of jobs available in some labor markets is insufficient to provide a job for everyone who wants one |
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What is CPI?
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Consumer Price Index-
measures the avg. level of the prices of goods & services consumed by a traditional family |
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What are the 3 types of unemployment?
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1- frictional
2- structural 3- cyclical |
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Define cyclical unemployment.
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occurs when economy is operating below ful employment
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What are the results from expected inflation?
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1- menu costs
2- shoe leather costs 3- higher taxes paid |
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What is the natural rate of unemployment?
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unemployment at full employment
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What is labor force?
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employed + unemployed
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What is inflation?
What is the equation for it? |
% change in the price level
_________________________ crrnt yrs price level - last years --------------------- X 100 last years price level |
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What does the GDP deflator measure?
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average level of prices of goods & services included in GDP
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What is risk aversion?
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dislike of uncertainty
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How are the price of stocks determined?
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supply and demand
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If the interest rate is higher what is the PV of future $?
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lower
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Whats the equation for Present Value?
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PV=FV/(1+r)^n
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What is Present Value of future income?
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income discounted at the current interest
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The interest rate is determined in...
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the market for loanable funds
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Where does the demand for loanable funds come from?
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domestic businesses(I) &
foreign companies(NCO) |
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What are savings?
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supply of loanable funds
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What is national savings?
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sum of private and public savings
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What are Financial Institutions?
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institutions that channel savings from households to firms either
directly(financial institutions) or indirectly(financial intermediaries) |
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Policies to improve economic growth are...
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any policies that will promote-
higher savings, more human capital, more technology, greater stability, and freer trade |
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How is productivity measured?
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output per worker
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Whats the difference between GDP & GDP growth?
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GDP measures prosperity
GDP growth measures economic potential |
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What does Y=Af(L,K,N,H) show?
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that GDP is a function of
technology(Af) labor(L) capital(K) natural resources(N) human capital(H) |
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What are the three roles of money?
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1- medium of exchange
2- unit of account 3- store of value |
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What was money before it was fiat money?
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commodity money
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We refer to money as M1 which is what?
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currency and demand deposits
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What is the Federal Reserve?
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central bank of the U.S. and is a quasi-gov't entity
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What are the two roles of the Federal Reserve?
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1- to regulate the banking system
2- control monetary |
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What is the FOMC?
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Federal Open Market Committee-
changes the money suppply to change the interest rates and affect spending |
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What are the 3 tools of the Federal Reserve?
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1- discount rate
2- required reserve rate 3- open market operations |
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What is Discount Rate?
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(Fed tool)- rate which the Fed charges banks to borrow money from the Fed
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What is Required Reserve Rate?
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(Fed tool)- % of deposits which banks are required to hold as reserves rather then lend out
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What is Open Market Operations?
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(Fed tool)- buying and selling of gov't securities
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What is the simple money multiplier equal to ?
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1/rr
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What is long-run money said to be?
Which means? |
neutral
an increase in money will only affect nominal values and not real values |
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When can be seen as an inflation tax?
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printing money since it decreases the value of money
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What is hyperinflation?
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inflation rates of over 50%
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Trade deficit is what?
Trade surplus is what? |
X<M
--- X>MK |
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Why does NX(net exports) equal NCO(capital outflows-capital inflows)?
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the supply of $ always equal demand for $
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What is NCO?
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capital outflows-capital inflows
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What is nominal exchange rate?
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rate at which one currency can be exchanged for another
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What happens to the $ if the exchange rate increases?
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it appreciates
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Real exchange rate represents what?
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how much of one good can be exchanged for the other
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Where is Exchange rate determined?
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in the market of foreign currency
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Where does demand for $ come from?
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NX-
foreigners wishing to buy U.S. goods need to exchange their foreign currency for American dollars |
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Where does the supply of $ come from?
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NCO-
Americans wishing to buy foreign financial assets must exchange their $ for foreign currency |
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aAs the exchange rate increases, U.S. goods are more expensive to D$ decreases thus doing what to the demand curve?
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making it negatively sloped
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NCO is dependent on interest rates and not the exchange rate and is thus...
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vertical
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How is exchange rate determined?
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the supply and demand for $
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What is the Aggregate demand?
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gives us total demand for good sand services in economy rom all sectors in the economy at different prices?
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What is the equation for Aggregate demand?
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AD=C+I+G+NX
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What do Aggregate demand curves do?
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gives us the relationship between real GDP demanded and the price level in the economy measured by the GDP deflator
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What are the three reasons that the Aggregate demand is negatively sloped?
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1- real wealth effect
2- interest rate effect 3- international substitution effect |
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What is real wealth effect?
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as the price level increases the purchasing power of people's wealth decreases thus they buy less goods
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What is interest rate effect?
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as the price level increases people demand more money causing the interest rate to increase
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What is international substitution effect?
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an increase in price causes people to buy less US goods and more foreign goods
decreases NX |
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Anything that changes either consumption, investment, government spending or net exports will lead to what?
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a shift in the aggregate demand curve
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What is Aggregate supply?
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represents the total amount of final goods and services supplied by all firms
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What is short run aggregate supply curve?
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represents the relationship between what firms are willing to supply and the price level in the short-run, it is upward sloping
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What is the long run aggregate supply?
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in the long run the level of GDP is determined by the availability of resources
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What is SRAS=AD?
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macroeconomic equilibrium
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What are the 3 different types of equilibrium situations?
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1- full employment equilibrium
2- below full employment equilibrium or recessionary gap 3- above full employment equilibrium- inflationary gap |
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What are fluctuations in GDP caused by?
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changes in AD or changes in aggregate supply
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What is Money Market?
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short run theory for explanation of interest rate
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Money demands come from where?
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transactions demand and speculative demand
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What is transactions demand?
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wish to hold money to purchase goods
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What is speculative demand?
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wish to hold money today to have it available when a high return possibility arises
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What is the stabilization policy?
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the government can return economy back to full employment through fiscal policy or monetary policy
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What are the 3 lags associated with stabilization policy?
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1- recognition lag- takes time to recognize problem
2- implementation lag- takes time to implement policy 3- response lag- takes time for policy to have effect on economy |
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What is restrictive monetary policy?
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fed. decreases M,
less reserves in the bank, high interest rates, higher cost of borrowing, thus AD decreases(shifts left) |
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What is expansionary monetary policy?
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feds increase money supply,
reserves increase, lower interest rates, lower cost of borrowing, thus AD increases(shifts right) |
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What is Fiscal Policy?
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attempt by gov't to stabilize the economy
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What are the two types that Fiscal Policy can be broken down into?
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1- automatic stabilizer
2- discretionary fiscal policy |
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What is automatic stabilizer?
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built in mechanisms that automatically keep output from falling as much as they would without them
example- income tax |
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What is discretionary fiscal policy?
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gov't takes action by passing a bill to stabilize the economy
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What are the two tools used in Fiscal Policy?
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1- gov't spending
2- taxes |
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Expansionary does what to AD?
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increases
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Restrictive fiscal policy does what to AD?
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decreases/moves inward
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What is Multiplier effect?
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additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending
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What is the equation for the Multiplier effect?
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1/1(1-mpc)
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What is MPC?
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marinal propensity to consumer/ the change in consumption due to a 1.00 increase in money
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