GDP
gross domestic product
the market value of all goods and services produced in a country at any given time
GDP
GDP formula
Y=C+G+I+NX
what does C stand for in the GDP formula
consumption the spending by households on goods and services, with the exception of purchases of new housing include durable goods and non durable goods D: automobiles and appliances ND: food and clothing
what does the G stand for in the GDP formula
government spending spending on goods and services by local, state, and federal governments ex. salaries of gov’t workers (army general or school teacher) and expenditures on public works NOT classified as gov’t spending: paying social security to retired person or unemployment insurance benefit to someone who was laid off
what does the I stand for in the GDP formula
investments the purchase of goods that will be used in the future to produce more goods and services the sum of purchases of business capital, residential capital, and inventories BC: business structures, equipment, and intellectual property products RC: ex. landlords apartment building and a homeowners personal residence I:
what does the NX stand for in the GDP formula
net exports foreign purchases of domestically produced goods minus the domestic purchases of foreign goods
the production of goods and services valued at constant prices accounts for inflation uses base yr price level measures in physical units
real GDP
the production of goods and services valued at current prices does not account for inflation uses their own price levels measures in #$ units
nominal GDP
GDP deflator formula
(nominal/real) x100
GDP inflation
(deflator 2-deflator1/deflator1)
CPI means
consumer price index
measure of goods bought by average customer
CPI
basket price formula
(P x Q) + (P x Q) + (P x Q) etc
CPI formula
(basket price/base yr basket price) x 100
CPI calculated w inflation
(CPI2-CPI1/CPI1) x 100%
CPI correcting inflation
(price level today/price level base) basket price
financial system lenders
you putting money in the bank
financial system borrowers
needing loans
financial systems intermediate
the bank
unemployment
anyone who doesnt have a job but is looking for one
labor force
employed and unemployed
adult population
anyone over 18 employed + unemployed + not in work force
how many types of unemployment are there
3
cyclical unemployment
the deviation of unemployment from its natural rate rates go up and down
structural unemployment
results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one not enough seats to fill
frictional unemployment
the unemployment that results from the process of matching workers and jobs often though to explain relatively short spells of unemployment haven’t found the perfect job yet
why is it bad for unemployment to be at 0%?
inflation goes up we are not filling all jobs people are not cycling through jobs–> transferring
what does the federal reserve do?
control money supply and monetary policy
how does the federal reserve influence money supply??
by buying and selling bonds
how does the federal reserve buy and sell bonds?
through open market operations bonds adjust money supply
how do bonds adjust money supply?
they decrease by selling bonds (money out of system) increase by buying bonds (money in system)
what is the reserve ratio?
the fraction of the banks deposit that keeps safe
what is the formula for money multiplier?
1/RR(.10)
reserve ratio=
10%
reserve ratio ex. $10
for every dollar spent, $10 is added to the money supply
money multiplier effect happens____
in a chain
mm= the bank has to ____
maintain capital amount (how much they keep in safe)
federal funds rate
the short-term rate to overnight money
money supply is dictated by ___
the feds
supply and demand: nominal is measured in
$ units
supply and demand: real is measured in
physical units
classical dichotomy
the theoretical separation of nominal and real variables
velocity of money
the rate at which money changes
velocity of money formula
V= PY/M
for the velocity of money formula, what is P? P= price level
GDP deflator
for the velocity of money formula, what is Y output?
real GDP
for the velocity of money formula, what is M?
quantity of money
quantity formula
MV=PY
quantity formula: MV=
monetary policy value
quantity formula: PY=
value of output
Which of the following does NOT add to U.S. GDP? a. Air France buys a plane from Boeing, the U.S. aircraft manufacturer. b. General Motors builds a new auto factory in North Carolina. c. The city of New York pays a salary to a policeman. d. The federal government sends a Social Security check to your grandmother.
the federal government sends a social security check to your grandmother bc shes retired and its social security
An American buys a pair of shoes manufactured in Italy. How do the U.S. national income accounts treat the transaction? a. Net exports and GDP both rise. b. Net exports and GDP both fall. c. Net exports fall, while GDP is unchanged. d. Net exports are unchanged, while GDP rises.
net exports fall, while GDP is unchanged
The consumer price index (CPI) measures approximately the same economic phenomenon as a. Nominal GDP b. Real GDP c. The GDP Deflator d. The Unemployment Rate
the GDP deflator
Which of the following best describes the catch-up effect? a. The property whereby the benefit from an extra unit of input declines as the quantity of the input increases. b. The property whereby countries that start off poor tend to grow more rapidly than countries that start off rich. c. The quantity of goods and services produced from each unit of labor input. d. Society’s understanding of the best ways to produce goods and services.
The properties whereby countries that start off poor tend to grow more rapidly than countries that start off rich
How does the Fed increase the money supply in the economy using Open Market Operations? a. Buying Bonds b. Selling Bonds c. Increasing Inflation d. Decreasing the Reserve Ratio
buying bonds
The Federal Reserve sets a reserve ratio at 10% (0.10) for all banks. What will the money multiplier be? MM=1/RR=(1/.10) = 10
MM= 1/RR MM= 1/.10= 10
T or F: GDP is the market value of all final intermediate goods produced within the United States during a given time period.
false
Y/N: will this increase the U.S. GDP? A United States-based company in New York City opens a plant in Viet Nam that produces all of their good.
no
Y/N: will this increase U.S. GDP? Samsung, a Korean company, produces their phones in Korea and ships them to the United States to be sold.
no
Y/N: will this increase U.S. GDP? A stay at home mom in Montana starts babysitting for the local community and gets paid.
yes
Y/N: will this increase U.S. GDP? A local lawyer that usually makes $110/hour takes a pro bono case to help a struggling family in New Jersey.
no
Y/N: will this increase U.S. GDP? A businessman in Los Angeles decides to invest more assets into technological stocks.
no
Y/N: will this increase U.S. GDP? The U.S. Congress signs a bill funding the creation of 1,000 new federal job positions.
yes
Y/N: will this increase GDP? A local consulting firm decides to invest in the construction of a new office space. [
yes
Y/N: will this increase GDP? 20,000 textbooks are sold to schools in Germany by a U.S. textbook company.
yes
Y/N: will this increase GDP? A local gamer buys a new steady state hard drive from Japan.
no
Y/N: will this increase GDP? A U.S. shoe company produces shoes in China that are then sold in the United States.
no
Which of the following is a better indicator of economic well-being? a. Nominal GDP b. Real GDP c. GDP deflator d. Inflation rate
Real GDP
GDP is an imperfect measure of a country’s well-being because it does not capture a. how much a country spends on goods b. how much leisure time a country takes c. the amount of government involvement in the economy d. GDP is a perfect measure of well-being.
how much leisure time a country takes
An American buys a Korean made car. How do the U.S. national income accounts treat the transaction? a. Net Exports fall and GDP is unchanged b. Net Exports and GDP both fall c. Net Exports and GDP both rise d. Net Exports are unchanged and GDP rises
net exports fall and GDP is unchanged
the GDP deflator measures roughly the same economic phenomenon as ______.
CPI
Suppose the government wants to reduce the type of unemployment from the previous question. Which of the following policies would help achieve this goal? Check all that apply. a. Improving a widely used job-search website so that it matches workers to job vacancies more effectively b. Extending the number of weeks for which unemployed workers are eligible for unemployment insurance benefits from the government c. Establishing government-run employment agencies to connect unemployed workers to job vacancies d. Decrease government spending
a. improving a widely used job-search website so that it matches workers to job vacancies more effectively c. establishing government-run employment agencies to connect unemployed workers to job vacancies
fisher effect formula for real interest rate
RIR= nominal interest rate- inflation rate
productivity
the quantity of goods and services produced from each unit of labor input
why is productivity important?
ex. crusoe if he is good at catching fish, growing vegetables and making clothes, he lives well. if he is bad, he lives poorly. if he gets to consume only what he produces, his living standards are tied to his productivity
how is productivity determined?
physical capital per worker human capital per worker natural resources technological knowledge
physical capital
the stock of equipment and structures used to produce goods and services
factors of production
the inputs used to produce goods and services
human capital
the economists term for the knowledge and skills that workers acquire through education, training, and experience raises a nation’s ability to produce goods and services includes the skills accumulated in early childhood programs, grade school, high school, college, etc
natural resources
inputs into production that are provided by nature, such as lands, rivers, and mineral deposits take two forms: renewable and nonrenewable
technological knowledge
the understanding of the best ways to produce goods and services takes many forms- common knowledge or proprietary
diminishing returns
the property whereby the benefit from an extra unit of an input declines as the quantity of the input increasees
catch-up effect
the property whereby countries that start off poor tend to grow more rapidly than countries who start off rich
bond
certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond
financial markets
the institutions through which a person who wants to save can directly supply funds to a person who wants to borrow
financial intermediaries
financial institution through which savers can indirectly provide funds to borrowers
mutual fund
an institution that sells shared to the public and proceeds to buy a selection, or portfolio, of various types of stocks, bonds, or both stocks and bonds
formula for savings
S= (Y - T - C) + (T - G)
private savings
the amount of income that householders have left after paying their taxes and paying for their consumption
public savings
the amount of tax revenue that the government has left after paying for its spending
budget surplus
when the government receives more money than it spends
budget deficit
when the government spends more than it receives in tax revenue
natural rate of unemployment
the normal rate of unemployment around which the unemployment rate fluctuates
unemployment insurance
government program that partially protects workers’ incomes when they become unemployed unintentionally increases the amount of frictional unemployment
collective bargaining
the process by which unions and firms agree to the terms of employment
efficiency wages
above-equilibrium wages paid by firms to increase worker productivity one of the reasons why economies always experience some unemployment (along with job search, minimum-wage laws, and unions)
what are the different types of efficiency wages?
worker health worker turnover worker quality worker effort
what is money’s three functions in the economy?
medium of exchange unit of account store of value
medium of exchange
an item that buyers give to sellers when they purchase goods and services
unit of account
the yardstick people use to post prices and record debts
store of value
an item that people can use to transfer purchasing power from the present to the future
what are the two different kinds of money?
commodity money and fiat money
commodity money
when money takes the form of a commodity with intrinsic value intrinsic- the item would have value even if it were not used as money
fiat money
money without intrinsic value established as money by government decree
the federal reserve
the agency that is responsible for regulating the system of fiat money
central bank
an institution designed to oversee the banking system and regulate the quantity of money in the economy
who runs the federal reserve?
a board of 7 governors appointed by the president and confirmed by the senate the governors have 14 year terms
who is the most important member of the board of governors? why?
the chair they direct the Fed staff, preside over board meetings, and testify regularly about federal policy in front of congressional committees
how many federal reserve banks are there?
12
monetary policy
the setting of the money supply by policy makers in the central bank
what is the federal open market committee made up of?
seven members of the board of governors five of the twelve regional bank presidents
why is NY permanent?
NY is the traditional financial center of the US economy and because all Fed purchases and sales of government bonds are conducted at the New York Fed’s trading desk the president of the NY fed always gets a vote
reserves
deposits that banks have received but not loaned out
money multiplier definition
the amount of money the banking system generates with each dollars of reserves
leverage
the use of borrowed money to supplement existing funds for purposes of investment
open-market operations
the purchase and sale of US government bonds by the Feds
quantity theory of money
explanation of how the price level is determined and why it might change over time
fisher effect
the one-for-one adjustment of the nominal interest rate to the inflation rate crucial for understanding this change
shoeleather costs
the resources wasted when inflation encourages people to reduce their money holdings
which graph is this?
loanable funds market graph
what are A and B?
wage and labor
what are C and D?
supply and minimum wage (floor)
what are E and F?
demand and efficient wage
what are G and H?
W* and L*
what are I, J, and L?
LD, LS, and unemployment
what graph is this?
minimum wage graph
what are A and B?
interest rate & amount loanable funds
what are C and D?
demand and supply
what are E and F?
E nothing, F=$
what are G and H?
D3 and S2
what are I, J, and K?
$2 and i2 and i3
what graph is this?
money supply
what are A and B?
v=1/p and MD
what are C and D?
MS and MD2
what are E and F?
SL and 4
what are G and H?
3 and 2
what are I and J?
1 and 1
what are K, L, and M?
3, 2, and 1
dont forget the i1, i2, and i3