Macroeconomics Midterm 2: GDP, Inflation, IS-LM, and Money

What is the equation for GDP (Spending)?

Y = C + I + G + NX

What does YN represent in the long run GDP equation?

Potential GDP, calculated as YN = A x F (K, L, N, H)

What is the formula for Consumption?

C = C0 + m (Y - T)

How do you calculate total savings?

Stotal = Sprivate + Sgovernment = (Y - T - C) + (T - G) = Y - T - G = I + NX

What is the formula for calculating growth rates or inflation rates?

(new - old)/old

What is the Consumer Price Index (CPI) formula?

CPI = Basket this year / Basket base year x 100

How is the GDP Deflator calculated?

GDP Deflator = Nominal GDP / Real GDP x 100

What does Real GDP represent?

Real GDP = Base year prices x current year quantities

What is the Money Multiplier formula?

Money multiplier = 1/rr (reserve ratio)

What is the Government multiplier formula?

Government multiplier = 1 / (1-m)

What is the Tax multiplier formula?

Tax multiplier = [1 / (1-m)] - 1

What is the formula for real money supply?

Real money supply = MS/P

What is the relationship between nominal and real values?

Multiply real by P to get nominal; divide nominal by P to get real.

What is the formula for the nominal interest rate?

Nominal interest rate = real interest rate + inflation rate

What are the three uses of money?

Medium of Exchange, Store of Value, Unit of Account

What is the Fed's dual mandate for monetary policy?

Stabilize prices and maximize employment

What tools does the Fed use for monetary policy?

Open market operations, discount rate, required reserve ratio, change interest rate paid on reserves, quantitative easing.

What is the equation for real money demand?

Real money demand = L ( r, Y )

What is the significance of the Chair of the Fed?

The Chair oversees the Federal Reserve and its policies.

What is the importance of understanding the IS-LM graph?

It illustrates the relationship between interest rates and real output in the goods and services market.

What should you be able to calculate regarding GDP?

You should be able to calculate GDP using the expenditure method and understand how changes affect each category.

Expenditure (measuring GDP)

Add up something on final goods and services: C + I + G + NX.

Income (measuring GDP)

Add up everything earned from production: wages, rent, interest, profit (plus depreciation and indirect business taxes).

Value added (measuring GDP)

At each stage of production, count sale price minus the cost of inputs bought. The sum across stages equals the price of the final good.

What is kind of goods are counted for GDP?

Only final goods count. Intermediate goods (flour sold to a bakery for example) are skipped to avoid double counting.

What kind of goods are not counted as GDP?

Used-goods sales, household production, illegal and underground activity, leisure.

What factors determine the long-run (potiental) output?

depends on technology and the quality of inputs: A, K, L, N, H

How is productivity define and what causes it to rise?

Productivity is output per worker. it rises with more capital per worker, more human capital per worker, more natural resources per worker, and better technology.

In the context of returns to scale, what do the following describe?

1.Output more than doubles when input doubles

2.Output exactly doubles when input doubles

3. Output less than double when input doubles

1.Increasing returns to scale

2.Constant returns to scale

3.Decreasing returns to scale

What is the consumption function formula and what does m represent?

C = C0 + m(Y - T), m represents the marginal propensity to consume (the number of cents consumption rises for every extra dollar of disposable income)

How do you calculate Private Saving and Government spending?

Private Saving = Y - T - C

Government Saving = T - G (Note: A negative value indicates a budget deficit).

What are the 3 uses of money?

medium of exchange, store of value, unit of account

What is the formula for National Savin and what does it link to?

National Saving = Y - C - G, it is equal to I + NX, which links the savings and spending views of GDP.

How is the Consumer Price Index (CPI) calculated?

example : (price of basket in current year/price of basket in base year), the base year is always 100

What is the formula for the Inflation Rate?

Inflation Rate = (CPI new - CPI old)/CPI old

What is the difference between the GDP Deflator and the CPI?

The GDP Deflator covers all goods in GDP (nominal GDP/real GDP x 100), Whereas the CPI only a consumer basket

What is the Fisher relation for the Nominal Interest Rate?

Nominal interest rate = real rate + inflation.

How do banks create money?

A bank keeps a fraction of rr of each deposit as reserves and lends out the rest. The loan is spent, ends up deposited at another bank, and that bank lends out its share. Total deposits can grow to deposit x 1/rr