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difference between real and nominal GDP:
Nominal GDP isn't corrected for inflation like Real GDP is; nominal uses current prices, real uses base year prices
GDP Deflator formula?
100 x (nominal GDP / real GDP)
How to measure inflation from GDP:
Using the GDP deflator; "100" is base year and the deflator number is like a % in relation to the 100 (ex: deflator of 50 means it's currently half of the base year price)
How to measure the cost of living:
Consumer Price Index (CPI)
100 x (cost of basket in current year / cost of basket in base year)
Calculate inflation though CPI:
[(CPI this year - CPI last year) / CPI last year] x 100
What's the problem with using CPI to calculate inflation?
it uses only fixed goods AND is hard to measure and overstates the increase in the cost of living
Difference between GDP deflator and CPI:
GDP Deflator misses personal things/time and CPI overstates an increase in the cost of living
Difference between rean and nominal interest rate:
- Nominal: the rate of growth in the dollar value of a deposit or debt; not corrected for inflation
- Real: the rate of growth in the purchasing power of a deposit or debt; corrected for inflation
function of money:
a medium of purchasing things
takes the form of a commodity with intrinsic value
money without intrinsic value, used as money because of govt decree
How many board of governors are there in the fed reserve
how many regional banks are there?
Open market operations:
the purchase and sale of U.S. government bonds by the Fed
the interest rate on loans the Fed makes to the banks
Reserve requirements for banks:
regulations on the minimum amount of reserves banks must hold against deposits
Reserve ratio =
- = fraction of deposits that banks hold as reserves
- = total reserves as a percentage of total deposits
the amount of money the banking system generates with each dollar of reserves
fractional reserve banking:
banks keep a fraction of deposits as reserves and use the rest to make loans
quantity theory of money:
the more money there is out there, the less value it has
the theoretical separation of nominal and real variables
Quantity of money equation:
- M*V = P*Y
- M: money supply
- V: velocity of money
- P: price level
- Y: GDP
change in money growth affects inflation rate, but not the real interest rate
the proposition that changes in the money supply do not affect real variables
Cost of inflation:
- have to change prices
- excess supplies
- tax distortions
- varying prices
deficit of exports over imports
excess of exports over imports
Net Capital Outflow:
domestic residents’ purchases of foreign assets minus foreigners’ purchases of domestic assets
When a transaction affects NX, how much does it affect NCO?
When S > I, the excess loanable funds flow where?
abroad in the form of positive net capital outflow
When S < I, who is funding some of the country's investments?
foreigners are financing some of the country’s investment, and NCO < 0 BECAUSE WE'RE BORROWING!
nominal exchange rate:
the rate at which one country’s currency trades for another
real exchange rate:
the rate at which the g&s of one country trade for the g&s of another
purchasing power parity:
a theory of exchange rates whereby a unit of any currency should be able to buy the same quantity of goods in all countries
2 limitations to PPP:
- Many goods cannot easily be traded (like a haircut)
- Foreign and domestic goods are not perfect substitutes
What are the 3 reasons the AD curve goes downward?
- wealth effect (the dollar value goes down and people feel poorer)
- exchange rate effect (US exchange rate appreciates; exports become more expenseive and imports become cheaper)
- interest rate effect (Buying things requires more dollars, so people sell bonds and assets, driving up interest rates)
What has to be affected to shift the AD curve?
C, I, G, or NX
Why is the SRAS curve going upward?
an increase in P causes an increase in the quantity of goods and services
Why is the LRAS curve vertical?
an increase in P doesn't affect labor, capital, and economy
What shifts an AS curve?
- Changes in L (natural rate of unemployment)
- Changes in K or H (people getting college degrees, investment in factories, destroyed factories, etc.)