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35 Cards in this Set

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What is GDP?

The measure of income and expenditures of an economy.



"The total market value of all final goods and services produced within a country in a given period of time."

What are the components of GDP?

Consumption (C): purchases of goods and services


Investment (I): spending on capital equipment, inventories, and structures


Government Purchases (G): purchases by local, state, and federal governments


Net Exports (NX): exports - imports

Is GDP a good measure of well-being?

No, because it does not value leisure, a clean environment, and anything outside of markets. Yes, because people prefer higher to lower incomes.

Discuss the measurement of the cost of living by the CPI and the GDP Deflator.

The GDP Deflator measures the level of price in an economy and when there is a higher GDP, there is a higher standard of living.



The CPI measures the overall costs of the goods and services bought by a consumer.

What are the problems with the CPI?

Substitution Bias, Introduction of New Goods, and Unmeasured quality changes.

How do the CPI and GDP Deflator differ?

The GDP deflator reflects the prices of all the goods and services domestically while the CPI measures the prices bought by the consumers.

Why is productivity important for economic growth?

The more goods and services that workers produce, also known as productivity, the more that the market value of those goods and services goes up, also known as the economic value.

Discuss the Determinants of Productivity.

Physical Capital - produced factor and the tools and equipment.


Human Capital - knowledge and skills for the workers


Natural Resources - things used in production from nature


Technological Knowledge - society's understanding of the best way to produce goods and services

Discuss the Market for Loanable Funds.

For those who want to save supply funds or borrow to invest demand funds.

What are the effects of Savings Incentives, Investment Incentives, and Government Deficit?

Savings Incentives - increase supply of loanable funds and quantity, decrease in interest rate


Investment Incentives - increase in all 3


Government Deficit - increase in interest rate, decrease in loanable funds and quantity

How is the unemployment rate calculated?

Unemployment Rate = number unemployed/labor force × 100

What are the three types of unemployment?

Cyclical - deviations of the natural rate


Frictional - where it involves matching the person to the right job


Structural - the amount of jobs are insufficient to the amount of people looking for them.

What is the natural rate of unemployment?

Unemployment that does not go away on its own.

Discuss the concept of money.

Money is a set of assets used to buy goods and services.



The 3 functions of money include:


-Medium of Exchange which are items buyers use to purchase items from sellers


-Unit of Account which people use to post prices and record debts


- Store of Value which is an item people use to transfer purchasing power from past to present.

What are the measurements of money?

M1: currency and coin in the hands of the people + demand deposits



M2: savings deposits, small time deposits, and mutual funds

Discuss the origin and functions of the Fed.

The federal reserve functions as the nations central bank, it was created in 1913 to stabilize the bank system due to a series of bank failures. The federal open-market committee serves as the policymaking people for the fed.



The 3 primary functions of the fed include:


1. Regulating banks


2. Acts as a bankers bank


3. Controls money supply

Discuss the process of money creation with the fractional reserve banking.

The banks hold a fraction of the money as reserves and loans out the rest. When the bank makes a loan from its reserves, the money supply increases. And when one bank loans money, it is deposit ed into another bank and creates more deposits and reserves.

Discuss the Feds tool of Monetary Control and Federal Funds Rate.

Open-Market Operations - buys or sells government bonds to the public (buying = increase, selling =decrease)Changing Reserve Requirement - the amount of a banks total reserves that may not be loaned outChanging the Discount Rate - the interest rate the fed charges for loansFederal Funds Rate - the rate banks charge other banks

Discuss the Classical Dichotomy in terms of the Quantity Equation.

Classical Dichotomy - different forces affect the nominal and real interest rate



Quantity Equation: M×V = P×Y (Relates the Quantity of money to the nominal value)

What is Fiscal Policy?

Refers to the government s choices regarding government purchases of taxes.

What are the two major problems with Fiscal Policy?

The Multiplier Effect - when the government spends money, the income could raise and increase consumer spending.



The Crowding Out Affect - when the government spends money, the interest rate rises and investment decreases.

Discuss Automatic Stabilizers.

Changes to fiscal policy that increases aggregate demand during recession when the government doesnt do anything.

Why is the return to capital especially high in poor countries?

Because there is extra output being produced from an additional unit of capital that fell.

What is the effect of a government budget deficit on public saving and investment.?

The government budget deficit is where it spends more money than it receives.

What accounts for most unemployment observed at any given time?

Long-Term

Define efficiency wages.

Above equilibrium wages where firms try to increase worker productivity

Distinguish commodity money and fiat money.

Commodity money comes from a commodity that has intrinsic value while fiat money is used as money but does not have intrinsic value.

What is the Fisher Effect?

One on one adjustment of the nominal interest rate to the inflation rate.

Does inflation make you poorer?

No because it raises the cost of what you buy and your income making it about the same amount.

For what purpose can an economy saving be used?

When saving equals investment.

Distinguish Nominal and Real Exchange Rates.

Nominal - the rate at which a person exchanges currency from one country to another.


Real - the rate at which a person trades a good or service in one country to another.

What is the liquidity preference Theory of Keynes?

The interest rate asjusts to balance the supply and demand for money.

What do advocates of active stabilization policy claim?

The government should stop being the cause and should respond to the changes in the private economy to stabilize aggregate demand.

What do opponents of active stabilization policy claim?

That monetary and fiscal policy create a lag in the economy and that it should be left to deal with short-run inflations on its own.

How can a credible commitment to inflation reduce the costs of disinflation?

By inducing a quick adjustment of expectations.