Econ 210 Final exam

GDP

market value of all final goods and services produced within a country in a year

Gross National Product

measures what is produced by the labor and property supplied by the US permanent residents wherever in the world that labor or capital is located, rather than what is produced within the US border

Nominal GDP

NOT been adjusted for inflation

Real GDP

adjusted for changes in prices

GDP Deflator

( Nominal GDP/ Real GDP ) * 100

Best reflection of changing living standards

growth in real GDP

Business fluctuations/ business cycles

short run movements in real GDP around its long term trend

National Spending approach

y= C+I+G+Nx

Y:

nominal GDP

C:

market value of consumption goods and services

G:

market value of gov. purchases

Nx:

Net exports ( exports- imports)

largest component of national expenditure

consumption

economic growth

growth rate of real per capita GDP

physical capital

stock of tools including machines, structures

human capital

production knowledge and skills that workers acquire through education, training, and experience

technological knowledge

knowledge about how the world works that is used to produce good/services

institutions of economic growth

property rights, honest gov, political stability, dependable legal system, competitive and open markets

economies of scale

the advantage of large scale production that reduce average costs as the quantity increases

Federal Reserve

- Federal government bank
-US central bank
-bankers bank in the US

systematic risk

risk of contagion that occurs when a failing institution owes significant sums of money to other financial institutions

moral hazard

financial institutions take on too much risk because they are insured

Fed buys bonds ( money supply)

increases ( cash for bonds )

Fed sells bonds ( money supply )

decreases ( bonds for cash )

Fed sells bonds ( i )

increase

Fed buys bonds ( i )

decrease

Fed sells bonds ( loanable fund )

decrease

Fed buys bonds ( loanable fund )

increases

Fed sells bonds ( base )

decrease

Fed buys bonds ( base )

increase

reserve ratio

that sets the minimum fraction of customer deposits and notes that each commercial bank must hold as reserves

Money multiplier

1 / reserve ratio

insolvent bank

- liabilities greater than assets
- have loan values that are low compared to what they owe depositors
-have some occasions been recapitalized by treasurey

increase in growth rate of money supply

-real GDP growth rate increases in short run
-increase in inflation

expansionary monetary policy

-increases money supply
- decreases i
-decrease savings
- increase GDP in short run
-increase inflation in long run

y= F ( A,k. eL )

k: physical capital
eL: human capital
L: labor
A: ideas that increase prodution

marginal product of capital

increase in output caused by the addition of one more unit of capital. Diminishes as more and more capital is added

investment > depreciation

capital stock grows
output next perios is bigger

investment < depreciation

capital stock shrinks
output for next period is smaller

investment = depreciation

capital stock and output are constant
steady state

conditional convergence

the tendency among countries with similar steady state levels of output for poorer countries to grow faster than richer countries and thus for poor and rich countries to converge in income

non-rivalrous

two or more people can consume it at the same time

spillovers

too little investment in R&D

Solow model

countries that devote a larger share of output to invest will be wealthier

crowding out

decrease in private consumption and investment that occurs when gov borrows more

leverage ratio

ratio of debt to equity
D/E

monetary base

currency plus reserves held by banks at the Fed

Fractional reserve banking

banks hold only a fraction of deposits in reserve, lending the rest

change in money supply

change in reserve * money multiplier

3 major tools Fed uses to control money supply

-open market operation
-discount rate
- paying interest on reserves

quantitative easing

Fed buys long term government bonds

quantitative tightening

Fed sells longer term government bonds

Federal funds rate

overnight lending rate from one major bank to another

Discount rate

the minimum interest rate set by the Federal Reserve for lending to other banks.

illiquid bank

short term liabilities that are greater than its short term assets but overall has assets that are greater than its liabilities

Growth Rate

( GDP t / GDP t-1 ) * 100

Deflator

( current year price / base year price ) * 100

catching up growth pattern

adoption of simple ideas

cutting edge growth

idea generation

capital growth

investment - depreciation

Rule of 70

if the annual growth rate of a variable is x% then the doubling time is 70/x years√√

production function

y√k
amount of output is produced for every level of capital

Monetary base

currency & reserves held by banks at the Fed

M1

currency + checkable deposits

M2

M1 + saving deposits + money market mutual funds + small time deposits

Annual growth rate

real GDP per capita ( 1 + r ) ^ t

Price ceiling

shortage

Price floor

surplus