Studied by 6 people
notes for sem. p 2 page 20
GDP
total market value of new final goods and services produced by a country
the GDP expenditure approach
C + I + G + Nx
what does C stand for
consumers (households)
What does I stand for
Investments
What does G stand for
Government spending
What does Nx Stand for
Net exports
What is Consumption spending
all household consumption on durable and non-durable goods
What is Investment spending
purchasing:
-capital goods
-services
-firms buying anything for the company
-real estate
What is government spending
-federal gov spending
-all defense spending
-infrastructure
-healthcare
-school
-justice system
-NASA
-etc.
Are transfer programs part of government spending
NOPE
What do transfer programs include
-medicare
-medicaide
-social security
-housing assistance
-transfers from the state
What is the Net Export formula
Exports - imports
inventory
goods that firms produce now but intend to sell later
What does GDP NOT measure
-crime levels
-work hours
-non official markets like babysitting and the drug markets
-distribution
growth rate formula
( ( y2 - y1 ) / Y1 ) x 100
what is nominal GDP
-current dollars
-measures value of a variety of “market” goods at the dollar price they are sold as
Real GDP
-accounts for inflation when we measure our time
-attempts to capture the change in amount
Real GDP formula
Nominal GDP / GDP deflator
How many quarters of negative GDP growth are required to have a recession
2
What does CPI stand for
Consumer Price Index
What is the CPI
-a static basket of goods measured over many years
What are some issues with using the CPI to measure inflation
-tends to be more volatile
-not reflective of population
-measures data from only urban consumers
What percent of consumers does CPI measure
93%
What are the negative effects of inflation
-less access to necessary goods
-impact on lower middle class/ lower class
-negative impacts on lower class
real interest rate formula
nominal interest rate + inflation rate
Who is in the laborforce
-people 16 and older
-had employment during the reference week
labor force participation rate
(Labor Force ÷ Civilian Noninstitutional Population) x 100
Cyclical unemployment
-the people who are laid off due to a recession
Frictional unemployment
stuck between old job and new job
Structural Unemployment
Tech change and the job becomes unnecessary
What is underemployed
want full time work but you can only find part time
do underemployed count as employed
YEP
Discouraged workers
people who are not looking for a job
Are discouraged workers people counted towards unemployment or employment
employment
What is the order of the Macro Cycle
Production → Income → Spending →
Aggregate expenditure approach
C + I + G
What is a simple model
Prices are stable and there is a closed economy
Y =
GDP
Y is
national income/ aggregate output
AE
aggregate expenditures
C formula
A+ B*Y
A in C formula stands for
autonomous consumption
B in C formula stands for
MPC
MPC
ΔC/ΔY
MPS formula
1-MPC
What is the MPC for people with high income
low MPC
If you want to generate local income should you give stimulus to people with ______ income
low
Change in GDP formula (multiplier effect)
ΔAE * (1 / MPS )
The higher the MPC the ________ the multiplier effect
higher
fiscal policy
taxes/government spending
Multiplier formula
1/MPS
total taxes formula
taxes - transfer payments
What kind of budget do you have if G = T
balanced budget
What kind of budget do you have if G > T
budget deficit
What kind of budget do you have if G < T
budget surplus
Yd stands for
disposable income
Yd formula
y-t
ΔY formula for taxes
-ΔT * (MPC/MPS)
ΔY for gov. spending
ΔG * 1/MPS
Expansions are caused by
-decrease in Gov/ transfer payments
-increase in tax rev
-trends towards budget surplus
Downturns are caused by
-gov./ transfer payments increase
-tax revenue decreases
-trends toward budget deficit
What is money
socially acceptable form of payment for goods, services, or paying off a debt
wealth formula
total assets - debts
what is income
flow of resources coming over time
fiat money
money that represents worth
a dollar bill is (fiat/commodity)
fiat
What is commodity money
something that has worth that is traded
cigarette are (fiat/commodity)
commodity
What is liquidity
the relative ease and speed with which an asset can be used for real transactions
the federal reserve
the central bank of the US
central bank
controls the money supply
M1
-currency
-demand deposits
-travelers checks
What are demand deposits
checking accounts
M2
-currency
-demand deposits
-travelers checks
-money market mutual fund
-savings accounts
-small denomination time deposits
M3
-currency
-demand deposits
-travelers checks
-money market mutual fund
-savings accounts
-small denomination time deposits
-large time deposits
-institutional money market funds
-short term repurchase agreements
-larger liquid funds
Which type of money is more liquid
M1
Money demand
demand for liquidity
DD stands for
demand deposits
RR stands for
Required reserves
What are required reserves
amount of deposits banks must keep
ER
Effective interest rates
What is ER
amount of deposits the banks can lend out or use to buy bonds
TR stands for
total reserves
What is R
fraction of deposit banks are required to hold on to
Money multiplier
1/r
Federal funds rate
the interest rates that banks charge other institutions to loan on an overnight basis
what will the federal reserve do to increase the FFR
sell securities
FFR is also equal to
the policy rate
what is the bank prime rate
what banks actually charge
What components of GDP are effected by Interest rates
C and I
Why might the fed increase interest rates
reduce inflation
What causes inflation
raise in price levels for goods
demand pull inflation
increase in demand raises prices
cost push inflation
increase in cost for an important good with no replacement
soft landing
reduce demand → raise unemployment → lower wage growth → firms start to lower prices
profit push
firms use the idea of inflation to give a reason for raising prices
Note 
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