AP Macro Test 2 (GDP through Fiscal Policy)

Expenditures: Personal consumption in the economy 

The purchases of finished goods and services (but not houses)

Expenditure: Personal consumption in the economy symbol

C

Expenditure: Gross private business investment monies

means to an end (factory equipment maintenance, new factory equipment, construction of housing, unsolved inventory of products built in a year)

Expenditure: Gross private business investment monies symbol

Ig

Expenditure: Government spending

Government purchases of products and services

Expenditure: Government spending symbol

G

Expenditure: Net foreign factor of trade

exports minus imports

Expenditure: Net foreign factor of trade symbol

Xn

What does not count in GDP

Used/second hand goods, gifts or transfers, stock/equity/securities purchases, unreported business activities conducted in “cash”, illegal activities, loans

Income GDP: Wages

money earned by workers

Income GDP: Rent

money earned by those who lease land/structures

Income GDP: Interest

money earned by those who lend savings to firms and government (debt)

Income GDP: profit

money earned by firm owners that is no paid out in wages, interest or rent

Statistical adjustment

The income approach on GDP does not match the CIGX/expenditures approach and needs adjustment

Statistical adjustment: depreciation

Business set aside money for declining value of goods such as equipment. This is a loss of income to them.

Statistical adjustment: Business taxes (sales tax)

loss of income for the businesses but counted towards GDP in the expenditure approach.

Statistical adjustment: Net foreign income

If foreigners earn money in the US that money leaves the US and does not count as increase income in US GDP. If US people earn money in foreign countries it is money flowing in to the US.

Expenditure formula for GDP

C+Ig+G+Xn

Income formula for GDP

W+R+I+P+SA

Gross

Totals before adjustments (inflations affect)

National Product

Product owned by US companies

Domestic product

production in the US even if foreign owned

Nominal GDP

current output and current prices (not adjusted for inflation )

Real GDP

adjusted for inflation. Sets inflation at constant to show change in quantity only

Real GDP formula

price of the good in a base x quantity of the current year

Nominal GDP formula

price x quantity of each good added together

Deflator

removes balloon of inflation, shows change in quantity, allows for true/better assessment of GDP

Deflator equation

N/r x 100

Percent change formula

(y2-y1)/y1 ×100

Who is included in non-institutional adult civillians

Every person in America who is not under 16, in the armed forces, or institutionalized

Who is included in the civilian labor force?

subtract the retired, homemakers, full time students over 16, and the discouraged (those not looking for jobs) from the non-institutional adult civilians 

Civilian labor force includes

employed, full time and part time, employed unpaid workers in family businesses, those on sick leave, strike, or vacation, those unemployed but looking for a job.

CPI

Consumer Price Index, tracks changes in the prices in goods and services/inflation

AD

Aggregate Demand

Real wealth affect

When price level rises, purchasing power of money decreases so fewer goods purchase

Interest rate effect

When price level rises, people demand more money so interest rate rises making buying goods with borrowed money more expensive so fewer goods are purchased

Exchange rate

When price level rises, people look to buy cheaper foreign goods as a substitute which decreases the quantity demanded of domestic goods

SRAS

Short-run aggregate supply

What causes a rightward shift of SRAS

Anything that makes it cheaper or easier to produce goods and services

What causes a leftward shift of SRAS

Anything that makes it harder or more expensive to produce goods and services

What causes a movement along the SRAS curve?

A change in the aggregate price level

LRAS

Long run aggregate supply, 4% unemployment rate

Business cycle: horizontal line

recessionary gap, can increase inflation without much inflation

Business cycle: diagonal line

Sticky prices, trade off between inflation and unemployment

Business cycle: Vertical line

goal, no more production increase can take place, at limits of productive capabilities

Business cycle: Recession graph

equilibrium left of LRAS

Business cycle: Over extended graph

Right of LRAS

Two groups of fiscal policy

Congress and Federal Reserve Bank

Congresses two tools

taxation and government spending

Expansionary fiscal policy

actions by congress to expand GDP, counteract a recession

Contractionary fiscal policy

Actions by congress to decrease GDP, counteract excessive inflation

Automatic stabilizers

policies already in place to help economy: taxes, unemployment insurance, and temporary assistance

Discretionary policies

Need congress to vote, larger, more significant changes (change in tax rates, spending program bill)

DI 

disposable income

C

consumption

S

Savings

Disposable income formula

DI=C+S

New disposable income equation

New DI=MPC+MPS

Spending multiplier equation

1/1 - MPC or 1/MPS

tax multiplier formula

-MPC/MPS