Econ Exam 2
Card Set Information
Econ Exam 2
Gross Domestic Product (GDP)
measures total income of everyone in the economy AND total expenditure on the economy's output of goods and services produced within the country (only final goods!)
What does the Circular-Flow Diagram depict?
illustrates GDP as spending, revenue, factor payments, and income
Preliminaries for Circular-Flow Diagram:
Factors of Production
payments to the factors of production
(e.g., wages, rent)
What the Circular-Flow Diagram Omits:
the price of something in currency
intended for the end user
used as components to make other goods
Does GDP include produced goods of the past?
GDP includes _____ goods and ______ services.
Is there a time limit for a GDP?
each GDP is only for a given period of time
Components of GDP (Y):
Investment (I)Government Purchases (G)
Net Exports (NX)
GDP Component: Consumption
total spending by households and G&S
GDP Component: Investment
is total spending on goods that will be used in the future to produce more goods.
GDP Component: Governmnet Purchases
is all spending on the g&s purchased by govt at the federal, state, and local levels
GDP Component: NX
export - import
exports are foreign spending
imports are portions of C, G, and I that are spent on things produced abroad
not corrected for inflation, values output using current prices
corrected for inflation, values output using base year prices
What does the GDP Deflator measure?
overall level of prices; uses currently produced goods and services
GDP deflator formula
100 x (nominal GDP / real GDP)
What is the main indicator of the average person's standard of living?
Real GDP per capita
GDP doesn't care about:
quality of environment
non-market activity (like child care)
an equitable distribution of income
Why care about GDP?
large GDP = better school, environment, etc.
indicates quality of life
Consumer Price Index:
measures the typical consumer’s cost of living and is the basis of cost of living adjustments; uses a fixed basket!
5 steps to finding CPI:
1) determine what's in the "basket"
2) find prices of things in the basket
3) compute the basket's cost
4) chose a base year and compute index
5) compute inflation rate
CPI in any year fomula
100 x (cost of basket in current year / cost of basket in base year)
Inflation rate formula
[(CPI this year - CPI last year) / CPI last year] x 100
consumers substitute towards goods tha become cheaper
How does substitution bias, introduction of new goods, and unmeasured quality change effect CPI?
CPI misses these things because it uses only fixed goods/is hard to measure and overstates the increase in the cost of living
Effect of the Introduction of new goods:
increases variety, dollar becomes more valuable
Effect of Unmeasured quality change:
improvements in quality of goods in the basket increase the value of each dollar
Imported consumer goods are ______ in/from CPI and _______ in/from GDP deflator.
Capital goods are ______ in/from CPI and _______ in/from GDP inflator (if produced domestically).
Formula to compare dollar figures in different times:
amount in today's dollars = amount in year T dollars x (price level today / price level in year T)
A dollar amount is indexed for inflation if it is automatically corrected for inflation by law or in a contract.
Nominal interest rate:
the rate of growth in the dollar value of a deposit or debt; not corrected for inflation
Real interest rate:
the rate of growth in the purchasing power of a deposit or debt; corrected for inflation
Real interest rate formula
Real interest rate = nominal interest rate - inflation rate
the group of institutions that helps match the saving of one person with the investment of another.
institutions through which savers can directly provide funds to borrowers.
certificate of indebtedness
a claim to partial ownership in a firm
institutions through which savers can indirectly provide funds to borrowers.
institutions that sell shares to the public and use the proceeds to buy stocks and bonds
the portion of households’ income that is not used for consumption or paying taxes
Y - T - C
Tax revenue less government spending
T - G
and formula (is also Investment fomula)
the portion of national income that is not used for consumption or government purchases
Y - C - G
What is a saving?
investment in a closed economy
an excess of tax revenue over govt spending
T - G
a shortfall of tax revenue from govt spending
G - T
The supply of loanable funds comes from saving:
households with extra income
positive public saving
The demand for loanable funds comes from investment:
firms borrow funds to pay for equipment
households borrow funds to buy new houses
government borrows to finance its deficit, leaving less funds available for investment
paid employees, self-employed, and unpaid workers in a family business
people not working who have looked for work during previous 4 weeks (MUST BE LOOKING FOR A JOB)
Everyone else that is not employed or unemployed is considered to be not ______.
in the labor force
total number of workers including the employed and unemployed
% of labor force that is unemployed
(# of unemployed / labor force) x 100
Labor force participation rate:
% of the adult population that is in the labor force
(labor force / adult population) x 100
Beareau of Labor Statistics
want to work, but have given up on finding job; classified as "not in labor force"
What is the flaw in the Unemployment Rate?
It doesn't always show improvement or worsening because it depends on how many people are actually applying for unemployment
Natural rate of unemployment:
the normal rate of unemployment around which the actual unemployment rate fluctuates
the deviation of unemployment from its natural rate; associated with the business cycle
occurs when workers spend time searching for the jobs that best suit their skills and tastes; usually doesn't last long
occurs when there are fewer jobs than workers; usually lasts a long time
is the process of matching workers with appropriate jobs
are changes in the composition of demand across industries or regions of the country; this puts people out of work and they need to look for new jobs that fit their skills
a govt program that partially protects workers’ incomes when they become unemployed; increases frictional unemployment and this ends when the person gets a job
a worker association that bargains with employers over wages, benefits, and working conditions; exert market power
Firms voluntarily pay above-equilibrium wages to boost worker productivity
Four reasons to use efficiency wages –
1) worker health
2) worker turnover
3) worker quality
4) worker effort
the set of assets that people regularly use to buy g&s from other people
Medium of exhange:
an item buyers give to sellers when they want to purchase g&s
unit of account:
the yardstick people use to post prices and record debts
Store of value:
an item people can use to transfer purchasing power from the present to the future
takes the form of a commodity with intrinsic value
money without intrinsic value, used as money because of govt decree
exchange of one good or service for another
double coincidence of wants:
the unlikely occurrence that two people each have a good the other wants
the quantity of money available in the economy
the paper bills and coins in the hands of the (non-bank) public
balances in bank accounts that depositors can access on demand by writing a check
an institution that oversees the banking system and regulates the money supply
the setting of the money supply by policymakers in the central bank
the central bank of the U.S.
How many board of governors are there and where are they located?
7 and in Washington, D.C.
How many regional Fed banks are there?
Who does the Federal Open Market Committee?
board of governors and presidents of some of the regional banks
fractional reserve banking system:
banks keep a fraction of deposits as reserves and use the rest to make loans
regulations on the minimum amount of reserves that banks must hold against deposits
reserve ratio (R) –
= fraction of deposits that banks hold as reserves
= total reserves as a percentage of total deposits
a simplified accounting statement that shows a bank's assets and liabilities
Does a fractional reserve banking system create wealth?
NO, only money
the amount of money the banking system generates with each dollar of reserves
the resources a bank obtains by issuing equity to its owners
the use of borrowed funds to supplement existing funds for investment purposes
the ratio of assets to bank capital
a govt regulation that specifies a minimum amount of capital, intended to ensure banks will be able to pay off depositors and debts.
when banks don't a lot of capital and start lending less
the purchase and sale of U.S. government bonds by the Fed.
the interest rate on loans the Fed makes to the banks
regulations on the minimum amount of reserves banks must hold against deposits
run on banks:
when people suspect their bank is in trouble and they run to the bank to withdraw all their money
federal funds rate:
interest rate on the loans that a bank with excessive reserves gives to the bank with very little reserves