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73 Cards in this Set
- Front
- Back
What is the definition of GDP?
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Gross Domestic Product: The Market value of all final goods and services newly produced by the economy during a specified period of time.
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List at least four things included when calculating GDP.
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1. Final goods and services
2. Newly Produced 3. Specified period of time 4. Market Value (must go through a market). |
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List at least four things not included when calculating GDP.
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1. No Do-it-yourself projects
2. No Illegal Activity 3. No Unreported Activity 4. No Financial Transactions |
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What are the components of GDP and their definitions?
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GDP = C + I + G + (X - IM)
C = consumption is consumer spending on final goods and services (Largest component 2/3) I = Investments is firm spending on plant, equipment, inventory, and consumer spending on new homes (most unstable) G = Gov. spending is all Federal, State, Regional, and local spending on goods and services used by the government. (X - Im) = Net Exports = Exports (foreign spending on domestic goods and services) minus Imports (domestic spending on foreign goods and services). |
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Name the two Methods for measuring GDP.
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Expenditure Method and the Income Method
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How do you calculate GDP using the Expenditure Method?
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GDP = Consumption (C) + Investment (I) + Government (G) + Net Exports (X - IM)
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How do you calculate GDP using the Income Method?
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GDP = Employee Compensation + Rents + Profits + Net Interest + Indirect Business Taxes + Depreciation
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What does MPC stand for?
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Marginal Propensity to Consume: The change in C (consumption) resulting from each dollar increases in DI.
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List five reasons why GDP is not a measure of National Welfare.
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1. GDP does not account for leisure activities
2. GDP doesn't include the cost of negative externalities. 3. GDP doesn't account for the composition (mix) of output. 4. GDP doesn't account for the distribution of output. 5. GDP doesn't include non-market production. |
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Define a Labor Force
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The number of people holding or seeking jobs.
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Define who is not in the labor force.
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People not actively searching for a job.
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Define who is Employed.
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All full and part-time workers.
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Define who is unemployed
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All temporarily laid off-workers and all persons actively searching for a job.
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Define The Natural Rate of Unemployment (Full Employment).
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The natural rate of unemployment a.k.a (Full Employment). Which is the Frictional plus the Structural Unemployment.
(Non-inflationary level of unemployment). |
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List and describe the methods for measuring unemployment.
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1. Establishment Survey - calculates payroll unemployment 160,000 business and gov. agencies from unemployment tax.
2. Household Survey - 60,000 households are surveyed each month by U.S. census bureau |
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List five problems with the Unemployment rate measurement
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1.Ignores Discouraged Workers
2.Ignores underemployed workers (Part time & lower skill level) 3. Ignores Increasing Prison Populations 4. Ignores Increasing Disability claims 5. |
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List and describe the three types of unemployment.
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1. Frictional (Natural): Normal turnover rate in the labor market.
2. Structural (Natural): Changes in the structure of the economy. (ie changes in Demand). 3. Cyclical (Not Natural): Decline in the economy's total production. |
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List and describe the three costs of unemployment.
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1. Social Crisis - increase in crime, substance abuse, domestic violence, depression, suicide...
2. Lower living standards - Workers lose wages. (which may be partially offset by unemployment benefits). 3. Slow Economic Growth - Permanent loss of goods and services. |
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Define Inflation.
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Increase in the general price level from one year to the next.
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Define Deflation.
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Decreases in the general price level from one year to the next.
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Define Stagflation.
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The combination of high unemployment and severe inflation.
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Give three reasons why inflation may be overstated a.k.a the Three Uneven Redistributive Effects
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(Winners and Losers)
1. Price Effects - Goods and services 2. Wealth Effects - Stocks, Bonds, Home 3. Income Effects - Wages and salary |
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List and describe the three costs of inflation.
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1. Credit and Spending Crisis - Redistributes income from lenders to borrowers
2. Lower standard of living - People on fixed incomes suffer. 3. Slow Economic Growth - Discourages long-term contracts and planning. |
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List and describe the three costs of deflation.
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1. Credit and Spending Crisis - Redistributes income from borrowers to lenders.
2. Lower living standards - Workers lose jobs. 3. Slow economic growth - Discourages long-term contracts and planning. |
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What is the CPI? How is it used? and how is it calculated?
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CPI is the Consumer Price index which is used for changes in consumer prices.
CPI = (Market value of a bundle of consumer products in a given year/ Market value of a bundle of consumer products in a base year) x 100 CPI = 1 (--) take last two digits to make a percent. |
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What is the PPI? How is this used?
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PPI is the Producer Price Index which is used for changes in producer prices.
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What is the GDP Deflator? How is this used?
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GDP Deflator is a measure of the change in prices of all new, domestically produced, final goods and services in an economy. This is used for general Price Changes
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What is the difference between nominal variables and real variables?
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Nominal: measured in current dollars.
Real: measured in constant dollars |
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How do you calculate Real Income?
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Real Income =
Nominal Income/CPI x 100 To find percentage change (New - Old) / Old |
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How do you calculate Real GDP? What does this number mean?
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REAL GDP = (Nominal GDP/ GDP Deflation) x 100
Real GDP shows the changes in the actual number of goods and services. |
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Define Aggregate Supply.
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The quantity of goods and services firms are willing to supply at different price levels, certeris paribus.
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Describe the meaning of the flat and steep parts of the Aggregate Supply Curve
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Flat at low levels of GDP
Low GDP = Low capacity utilization = low cost pressure. (firms willing to produce more without higher prices) Steep section at high GDP High GDP = High capacity utilization = high cost pressure. (firms are willing to produce more only with much higher prices). |
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What are the three factors that account for the shifting of the Aggregate Supply curve.
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1. Change in Cost of Inputs
2. Change in productivity 3. Change Available Supplies of Land, Labor, and capital |
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Define Aggregate Demand
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The quantity of goods and services individuals demand at different price levels, certeris paribus
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What are the determinants of consumer spending?
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Wealth
Price Levels Expectations of Future Income |
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What are the determinants of Investment Spending?
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Technology
Interest Rate Expectations Level of AD Corporate Taxes |
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What are the determinants of government spending?
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Political Manipulation
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What are the determinants of Net Export Spending (X-IM)?
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Price Levels
Economic Conditions |
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What determines the slope of the Aggregate Demand Curve? What does that consist of?
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AD determined by Price Level
(consists of Consumer Spending and Net Export Spending, C and X - IM) |
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What are the non-price determinants of AD called?
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Autonomous Spending Changes
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How do you calculate the oversimplified Multiplier? Why is this done,and what does this mean?
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1/(1-MPC)
The oversimplified multiplier summarizes the infinite geometric progression of Initial and induced spending. which is oversimplified because it ignores price level changes, financial transactions, and international trade. |
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What is the formula used to calculate the shift of the Aggregate Demand Curve?
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= Autonomous Spending Change x Oversimplified Multiplier
ie = $100B x (1/1-.9) = 10 |
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What are the three perspectives that make up the classical models ideas about the macro economy?
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1. Macro is just a simple aggregation of Macro
2. Say's law holds (supply creates its own demand) 3. Engine of growth is supply A.S. self corrects to full employment, vertical at potential GDP, and government interference will make it worse. Policy: Laissez Faire |
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What five perspectives make up the Keynesian ideas about the macro economy?
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1. Macro > Micro because of expectations. Negative expectations creating inadequate AD (recessionary gap). Positive expectations creating excessive AD (inflationary gap)
2. May - self - correct in the long run, but... "In the long run, we are all dead!" 3. Say's law doesn't hold 4. Demand can be the engine of growth 5. Government can stabilize the economy through fiscal and monetary policy. 2. Ov |
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How do you calculate Real GDP?
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Real GDP = (Nominal GDP / GDP Deflation) x 100
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How many federal reserve district banks are there?
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12 Banks
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What is a stabilization Policy? Define and explain its means of effects on consumer spending.
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Stabilization Policy is a fiscal policy or a use of government spending and taxes (on middle and lower income people) to affect levels of GDP
change government spending or change tax level to change consumer spending |
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What are the characteristics of an expansionary fiscal policy?
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Increase Government Spending
Decrease taxes to increase consumer spending & AD |
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What are the characteristics of a contractionary fiscal policy?
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Decrease Government Spending
Increase taxation to decrease consumer spending & AD (Political Suicide) |
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What a monetary policy entail?
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The use of interest rates to affect levels of GDP.
(Changes in interest rates affect changes in Investments) |
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What are the characteristics of a loose monetary policy?
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Decrease in federal reserve interest rate to increase Investments
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What are the characteristics of a tight monetary policy?
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An increase in the interest rate causes a decrease in the number of investments.
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According to the supply side theory how would you correct government intervention artificially shifting AS to the left and stagflation.
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By making production more profitable for firms and increase full employment.
Solutions: 1. Increase tax incentives to: work, save, and Invest 2. Deregulation 3. Ease Trade Barriers 4. Infrastructure Development 5. Invest in Human Capital 6. Business Friendly Expectations |
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How would the Keynesian model fix a recessionary gap?
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It would advocate shifting the AD right by increasing government spending (initial spending) increasing consumer spending (Induced spending).
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How would the Keynesian Model fix an inflationary gap?
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Increase the interest rate to decrease the investment rate. (Tight Monetary Policy).
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What are the supply side criticisms of the Keynesian Solutions?
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1. Creates Inflation and unemployment.
2. Decreases standard of living (Lower Real GDP). |
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What are the three Keynesian Criticisms of Supply Side Solutions?
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1. Excuse to make the rich richer (i.e. increase income inequality.)
2. Increase Profitablity doesn't mean Increased production. (ie increased mergers) 3. Irresponsible tax cuts (evidence: increase budget deficit and debt). |
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Describe the organization of the Federal Reserve.
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U.S. Central Bank
12 District Banks 7 Members of the board of governors 14 year non-reservable term Chairman: 4 terms Federal Open Market Committee 12 members: 7 BOCY, 5 Rotating |
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What are the goals of the federal reserve?
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1. Sustainable Economic Growth
2. Sustainable Prices 3. Full Employment |
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What are the steps taken from changing the interest rate to changing GDP?
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Change in interest rate causes change in investment, causes
change in Shift of AD, causes change in GDP. |
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What monetary policy do you want to use if economy is in recessionary gap? Expansionary gap?
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Recessionary Gap: Want lose monetary policy.
Expansionary Gap: Want tight monetary policy. |
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What is money?
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A unit of exchange and repayment for debt.
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What is the interest rate?
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The price of money (determined in the market) "r"
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What is the Money Multiplier?
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Fraction:
1/RR (Reserve Requirement) |
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How do you calculate the Induced change in Money supply?
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Induced Change in Money Supply = Initial Excess Reserve x Money Multiplier.
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What affect would a decrease in "r" have on the money market?
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Decreasing "r" would increase investments which would shift AD right shifting the Money supply to the right.
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What affect would an increase in "r" have on the money market?
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Increasing "r" would decrease investments which would shift AD left which would shift the Money supply left.
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What role do commercial banks play?
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They control the money supply, however are subject to Federal Reserves' Reserve Requirement "RR"
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What are the three actions available to the Federal Reserve?
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1. Change Reserve Requirement
(Amount of $ commercial banks must hold) 2. Change in the Discount Rate (rate of interest Fed charges for loans) 3. Open Market Operators (the buying and selling of Government securities) |
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If the federal Reserve chose to change the reserve requirement would it be increased or decreased if the economy was in a recessionary gap? Expansionary Gap?
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Recessionary Gap: Decrease RR
Expansionary Gap: Increase RR |
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If the federal Reserve chose to change the discount rate would it be increased or decreased if the economy was in a recessionary gap? Expansionary Gap?
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Recessionary Gap: Decrease DR
Expansionary Gap: Increase DR |
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If the federal reserve chose to sell government securities would it buy or sell them if the economy was in a recessionary gap? Expansionary Gap?
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Recessionary Gap: Buy Gov. Securities
Expansionary Gap: Sell Gov. Securities |
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What are the three "mechanics" of the federal reserve?
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Three Books:
1. Beige Book (Current Econ. Conditions) 2. Green Book (Econ. Forecast) 3. Blue Book (Staff Policy Recommendations). |