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106 Cards in this Set

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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
What is the equation for the expenditure approach?
Y=GDP=C+I+G+NX
Define net exports.
exports - imports
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
Define comsumption.
And approximately how much of GDP is consumption goods?
spending on goods & services by households used for consumption

2/3
Why must exports be included in GDP?
they are goods produced in the economy so they increase economic activity
What "investments" can investment spending be broken down into?
1- gross investment
2- net investment
Why must imports be subtracted from GDP?
they are goods not produced in the economy so they don't lead to economic activity
What is nominal GDP?
measures the value of goods produced in the economy valued at current market prices

sum of Pcurrent*Qcurrent
What is real GDP?
production of goods and services valued at constant prices

sum of Pbase*Qcurrent
What is GDP?
Gross Domestic Product-
value of all final goods and services produced in the domestic economy
What's the difference between micro-economics and macro economics?
Micro- studies the individual components of economy

Macro- studies the overall economy
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)
What are the 4 types of spending on goods & services?
1- consumption=C
2- investmenet spending=I
3- gov't expenditure=G
4- net exports=NX
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
What does GNP measure?
the value of all goods & services produced by domestic producers regardless of where they are located
When does full employment exist?
when everyone is working who wants to
What is the unemployment rate?
unemployed/labor force
Define frictional unemployment.
results b/c it takes time for workers to search for the best suited job, this will always exist
What people does unemployment include and not include?
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
What are the avg. level of prices measured by?
And what are the two most important?
price indices

1- CPI deflator
2- GDP deflator
What is the GDP deflator? (equation)
nominal GDP
----------- x 100
real GDP
What is the best measure of inflation for;
1- how inflation affect households
2- whole economy
1- CPI
2- GDP deflator
What is the equation for CPI?
crrnt cost of mrkt basket
------------------------- X100
cost of basket in base yr
The CPI in base yr is always equal to what?
100
What is structural unemployment?
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
What is CPI?
Consumer Price Index-
measures the avg. level of the prices of goods & services consumed by a traditional family
What are the 3 types of unemployment?
1- frictional
2- structural
3- cyclical
Define cyclical unemployment.
occurs when economy is operating below ful employment
What are the results from expected inflation?
1- menu costs
2- shoe leather costs
3- higher taxes paid
What is the natural rate of unemployment?
unemployment at full employment
What is labor force?
employed + unemployed
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
What does the GDP deflator measure?
average level of prices of goods & services included in GDP
What is risk aversion?
dislike of uncertainty
How are the price of stocks determined?
supply and demand
If the interest rate is higher what is the PV of future $?
lower
Whats the equation for Present Value?
PV=FV/(1+r)^n
What is Present Value of future income?
income discounted at the current interest
The interest rate is determined in...
the market for loanable funds
Where does the demand for loanable funds come from?
domestic businesses(I) &
foreign companies(NCO)
What are savings?
supply of loanable funds
What is national savings?
sum of private and public savings
What are Financial Institutions?
institutions that channel savings from households to firms either
directly(financial institutions) or
indirectly(financial intermediaries)
Policies to improve economic growth are...
any policies that will promote-
higher savings,
more human capital,
more technology,
greater stability,
and freer trade
How is productivity measured?
output per worker
Whats the difference between GDP & GDP growth?
GDP measures prosperity
GDP growth measures economic potential
What does Y=Af(L,K,N,H) show?
that GDP is a function of
technology(Af)
labor(L)
capital(K)
natural resources(N)
human capital(H)
What are the three roles of money?
1- medium of exchange
2- unit of account
3- store of value
What was money before it was fiat money?
commodity money
We refer to money as M1 which is what?
currency and demand deposits
What is the Federal Reserve?
central bank of the U.S. and is a quasi-gov't entity
What are the two roles of the Federal Reserve?
1- to regulate the banking system
2- control monetary
What is the FOMC?
Federal Open Market Committee-
changes the money suppply to change the interest rates and affect spending
What are the 3 tools of the Federal Reserve?
1- discount rate
2- required reserve rate
3- open market operations
What is Discount Rate?
(Fed tool)- rate which the Fed charges banks to borrow money from the Fed
What is Required Reserve Rate?
(Fed tool)- % of deposits which banks are required to hold as reserves rather then lend out
What is Open Market Operations?
(Fed tool)- buying and selling of gov't securities
What is the simple money multiplier equal to ?
1/rr
What is long-run money said to be?
Which means?
neutral

an increase in money will only affect nominal values and not real values
When can be seen as an inflation tax?
printing money since it decreases the value of money
What is hyperinflation?
inflation rates of over 50%
Trade deficit is what?
Trade surplus is what?
X<M
---
X>MK
Why does NX(net exports) equal NCO(capital outflows-capital inflows)?
the supply of $ always equal demand for $
What is NCO?
capital outflows-capital inflows
What is nominal exchange rate?
rate at which one currency can be exchanged for another
What happens to the $ if the exchange rate increases?
it appreciates
Real exchange rate represents what?
how much of one good can be exchanged for the other
Where is Exchange rate determined?
in the market of foreign currency
Where does demand for $ come from?
NX-
foreigners wishing to buy U.S. goods need to exchange their foreign currency for American dollars
Where does the supply of $ come from?
NCO-
Americans wishing to buy foreign financial assets must exchange their $ for foreign currency
aAs the exchange rate increases, U.S. goods are more expensive to D$ decreases thus doing what to the demand curve?
making it negatively sloped
NCO is dependent on interest rates and not the exchange rate and is thus...
vertical
How is exchange rate determined?
the supply and demand for $
What is the Aggregate demand?
gives us total demand for good sand services in economy rom all sectors in the economy at different prices?
What is the equation for Aggregate demand?
AD=C+I+G+NX
What do Aggregate demand curves do?
gives us the relationship between real GDP demanded and the price level in the economy measured by the GDP deflator
What are the three reasons that the Aggregate demand is negatively sloped?
1- real wealth effect
2- interest rate effect
3- international substitution effect
What is real wealth effect?
as the price level increases the purchasing power of people's wealth decreases thus they buy less goods
What is interest rate effect?
as the price level increases people demand more money causing the interest rate to increase
What is international substitution effect?
an increase in price causes people to buy less US goods and more foreign goods

decreases NX
Anything that changes either consumption, investment, government spending or net exports will lead to what?
a shift in the aggregate demand curve
What is Aggregate supply?
represents the total amount of final goods and services supplied by all firms
What is short run aggregate supply curve?
represents the relationship between what firms are willing to supply and the price level in the short-run, it is upward sloping
What is the long run aggregate supply?
in the long run the level of GDP is determined by the availability of resources
What is SRAS=AD?
macroeconomic equilibrium
What are the 3 different types of equilibrium situations?
1- full employment equilibrium
2- below full employment equilibrium or recessionary gap
3- above full employment equilibrium- inflationary gap
What are fluctuations in GDP caused by?
changes in AD or changes in aggregate supply
What is Money Market?
short run theory for explanation of interest rate
Money demands come from where?
transactions demand and speculative demand
What is transactions demand?
wish to hold money to purchase goods
What is speculative demand?
wish to hold money today to have it available when a high return possibility arises
What is the stabilization policy?
the government can return economy back to full employment through fiscal policy or monetary policy
What are the 3 lags associated with stabilization policy?
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
What is restrictive monetary policy?
fed. decreases M,
less reserves in the bank,
high interest rates,
higher cost of borrowing,
thus AD decreases(shifts left)
What is expansionary monetary policy?
feds increase money supply,
reserves increase,
lower interest rates,
lower cost of borrowing,
thus AD increases(shifts right)
What is Fiscal Policy?
attempt by gov't to stabilize the economy
What are the two types that Fiscal Policy can be broken down into?
1- automatic stabilizer
2- discretionary fiscal policy
What is automatic stabilizer?
built in mechanisms that automatically keep output from falling as much as they would without them

example- income tax
What is discretionary fiscal policy?
gov't takes action by passing a bill to stabilize the economy
What are the two tools used in Fiscal Policy?
1- gov't spending
2- taxes
Expansionary does what to AD?
increases
Restrictive fiscal policy does what to AD?
decreases/moves inward
What is Multiplier effect?
additional shifts in aggregate demand that result when expansionary fiscal policy increases income and thereby increases consumer spending
What is the equation for the Multiplier effect?
1/1(1-mpc)
What is MPC?
marinal propensity to consumer/ the change in consumption due to a 1.00 increase in money