10/31 Econ Quiz

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51 Terms

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Macroeconomics

The study of aggregate economic behavior.

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Circular Flow Markets

Households, gov sector, foreign sector, banking sector, firms

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Leakage

Money leaving circular flow

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Injection

Money entering circular flow

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Income/leakages examples

Taxes (gov), imports (foreign), savings (banking)

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Expenditures/injections

Gov spending (gov), exports (foreign), firm investments [aka spending] (banking)

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Income approach

Measures household income on resource market in exchange for providing FOP (adds wages, interest, rent, and profit)

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Output approach

Measures value of goods and services produced by nation (primary, secondary, and tertiary sector)

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Expenditure approach

Counts total household spending on final goods and services

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National Income Accounting

System of stats and accounts that tracks production, consumption, savings, and investment

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Gross Domestic Product (GDP)

Expenditure approach; dollar value of all final goods and services produced within a country’s borders within a year (used goods and financial transactions dont count)

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GDP equation

C + I + G + (X-M)

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C

Consumption (amount households spent on goods & services)

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I

Investment (spending by firms on capital)

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G

Gov spending (gov purchase of goods and services)

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X - M

Net exports

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Normal GDP

Value shown with current prices (subject to inflation)

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Real GDP

Value adjusted for price changes, allows year-by-year comparison

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Real GDP formula

(Nominal / Price deflator) * 100

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Green GDP

Subtracts an assigned monetary value of environmental loss from GDP

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GNI/GNP

Gross national oncome/product attempts to measure value of goods & services produced by US no matter where

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GNI formula

GDP + abroad US income - foreign domestic affairs

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Net National Income

GNI - depreciation

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Depreciation

Loss of value due to wear and tear

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National Income

NNI - indirect business taxes

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Personal Income

NI - corporate taxes - retained earnings - social insurance taxes + transfer payments + net interest

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Disposable Personal Income

PI - personal taxes

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Why analyze measures of economic activity?

Info is power for consumers & policy makers Allows for comparisons across countries

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GDP weaknesses

Overestimates well-being (measures val, not whats actually produced) Underrepresents loss of natural resources Underestimates well-being (black market, volunteering, housework/kids) Lacks info (what, quality, income distribution, living conditions) Contains inaccuracies (needs lots of data, govs purposefully dont share)

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The business cycle

Reflects ups and downs of real GDP

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Expansion

Short term econ growth, real GDP rises

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Peak

Height of econ expansion, real GDP stops rising

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Contraction

Short term econ decline, real GDP falls

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Trough

Lowest point, real GDP stops falling

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Recessions

Two consecutive quarters if declining GDP, negative growth rate, typically lasts 6 - 8 months

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Aggregate demand

Total quantity demanded of a nation’s goods and services

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Wealth effect

Lower prices make the public feel richer so they buy more

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Interest rate effect

As price levels fall so do interest rates which causes
consumers to borrow more in order to purchase more

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Net export effect

If domestic goods are more expensive, then consumers
will choose to purchase more less expensive foreign goods

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Components of AD - Consumption

  • Interest rates: ↑ means AD ↓

  • Consumer Confidence: ↑ means AD ↑

  • Wealth: ↑ means AD ↑

  • Personal Income Taxes: ↑ means AD ↓

  • Level of household debt: Short term ↑ means AD ↑; Long term ↑ means AD ↓

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Components of AD - Investment

  • Interest Rates: ↑ means AD ↑

  • Business Confidence: ↑ means AD ↑

  • Technology: ↑ means AD ↑

  • Business taxes: ↑ means AD ↓

  • Corporate indebtedness: Short term ↑ means AD ↑; Long term ↑ means AD ↓ (?)

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Components of AD - Government Spending

  • Economic priorities: ↑ means AD ↑

  • Political priorities: ↑ means AD ↑

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Components of AD - Net Exports

  • Foreign income: Foreign household ↑ means AD ↑

  • Exchange rates: Value of country’s currency in another currency; ↑ means AD ↓ ( X ↓ & M ↑)

  • Trade protection: ↑ means M ↓ and X ↑; AD ↑

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Aggregate Supply

Total quantity of goods and services produced by firms in a nation during a certain time period

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Determinants of SRAS

  • Change in input prices: Energy & transport costs

  • Gov regulations & taxes: Changes cost of production

  • Changes in productivity

  • Exchange rates: ↓ means AS ↓

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Neo Classical/Flexible Wage Model

  • Long term; vertical

  • Labor markets are responsive to changes; Self correcting

  • Left unregulated, weak econ can recover on its own

  • Firms can lower/raise wages to maintain output

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Keynesian/Sticky Wage Model

  • Short term; horizontal

  • Full employment not attainable

  • No self correction bc inflexible wages

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Shifts in AS

New resources/tech means AS ↑

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Aggregate equilibrium

  • When AD & [SR]AS intersect

  • Fully optimized/on PPC

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Recessionary gap

  • SRAS < LRAS

  • Contraction in business cycle & rising unemployment

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Inflationary gap

  • LRAS < SRAS

  • Peak, unsustainable