Untitled Flashcards Set

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The Accounting Identity for GDP GDP = C + I + G + (X - M), where C = Consumption, I = Investment, G = Government Spending, and (X - M) = Net Exports.

Components of GDP The four main components of GDP are Consumption, Investment, Government Spending, and Net Exports (Exports - Imports).

Calculating Real GDP Real GDP = Year 1 Quantity × Base Year Price; measures the value of goods and services adjusted for inflation.

Calculating Nominal GDP Nominal GDP = Price × Quantity (sum of all final goods and services produced in a given year without adjusting for inflation).

Inflation Rate Calculations Inflation Rate = [(CPI in current year - CPI in previous year) / CPI in previous year] × 100%.

Quantity Theory of Money MV = PQ, where M = Money supply, V = Velocity of money, P = Price level, and Q = Output (Real GDP). It explains the relationship between money supply and inflation.

Costs of Inflation The costs of inflation include menu costs (cost of changing prices), shoe leather costs (extra time spent managing cash), and loss of purchasing power.

Types of Unemployment

- Frictional Unemployment Temporary unemployment due to job searching.

- Structural Unemployment Mismatch between workers' skills and job requirements.

- Cyclical Unemployment Caused by economic downturns.

Employment / Unemployment Rate Changes and Factors The unemployment rate is influenced by economic growth, job creation, labor force participation, and technological changes.

Shifts in the Demand Curve The demand curve shifts due to changes in income, consumer preferences, price of substitutes/complements, expectations, and population size.

Shifts in the Supply Curve The supply curve shifts due to changes in production costs, technology, number of sellers, taxes/subsidies, and expectations of future prices.

Present Value Formula PV = FV / (1 + r)^n, where PV = Present Value, FV = Future Value, r = interest rate, and n = number of periods.

Credit and Interest Rate Credit is the ability to borrow money, and the interest rate is the cost of borrowing or the return on savings.

Bank Fundamentals Banks operate by accepting deposits, making loans, and earning interest rate spreads while maintaining reserves for withdrawals.

Federal Reserve System The central banking system of the U.S., which regulates banks, controls the money supply, and sets interest rates.

Monetary Policy The Federal Reserve's actions to control money supply and interest rates to influence economic activity (e.g., open market operations, discount rate changes).

Fiscal Policy Government policy involving taxation and government spending to influence economic conditions.

Word Problems Applied economic questions that require calculations and analysis of economic concepts.

Bank Runs When a large number of depositors withdraw their funds simultaneously due to fear of bank failure.

Types of Firms and What They Do

- Sole Proprietorship Single owner, unlimited liability.

- Partnership Owned by two or more people, shared liability.

- Corporation A separate legal entity, limited liability.

Financial Regulation Government laws and policies that oversee financial institutions to ensure stability and prevent fraud.

Trade Deficit Occurs when a country's imports exceed its exports, leading to a negative balance of

Here are the flashcards based on the two documents:

1. Accounting Identity - The equation used to estimate GDP.

2. Components of GDP - Consumption, Investment, Government spending, Net exports.

3. Real GDP Calculation - Real GDP = Year 1 quantity × Base year price.

4. Nominal GDP Calculation - Nominal GDP = Price × Quantity (final goods only).

5. Inflation Rate Calculation - Measures the percentage increase in the price level over time.

6. Quantity Theory of Money - MV=PYMV = PY, where M is money supply, V is velocity, P is price level, and Y is output.

7. Costs of Inflation - Includes shoe-leather costs, menu costs, and uncertainty in price signals.

8. Types of Unemployment - Frictional, structural, cyclical.

9. Employment/Unemployment Rate - Measures labor market conditions.

10. Shifts in Demand Curve - Caused by changes in income, preferences, prices of related goods.

11. Shifts in Supply Curve - Caused by changes in production costs, technology, expectations.

12. Present Value Formula - PV = Future Value / (1 + r)^t.

13. Credit and Interest Rate - Interest rate is the cost of borrowing money.

14. Bank Fundamentals - Includes reserves, loans, deposits.

15. Federal Reserve System - The central banking system of the U.S.

16. Monetary Policy - Central bank actions to control money supply and interest rates.

17. Fiscal Policy - Government actions on taxation and spending.

18. Bank Runs - Occurs when many depositors withdraw funds simultaneously.

19. Types of Firms - Sole proprietorships, partnerships, corporations.

20. Financial Regulation - Rules to maintain financial stability.

21. Trade Deficit - When a country imports more than it exports.

22. Expected Value - The weighted average of possible outcomes.

23. Measurement Identity - Two magnitudes are related when defined equally.

24. Expenditure-Based GDP - Y=C+I+G+X−MY = C + I + G + X - M.

25. Medium of Exchange - Facilitates trade by eliminating the need for barter.

26. Store of Value - Allows purchasing power to be retained over time.

27. Unit of Account - Standardized measurement of value in an economy.

28. Labor Force Calculation - Labor force = Employed + Unemployed.

29. Natural Rate of Unemployment - The rate around which an economy fluctuates.

30. Business Cycles - The short-term ups and downs in economic activity.

31. Economic Fluctuations - Variations in GDP growth and employment.

32. Net Present Value (NPV) - The sum of discounted future costs and benefits.

33. Central Bank Functions - Regulates banks, controls interest rates, manages inflation.

34. Federal Reserve Act - Legislation establishing the U.S. Federal Reserve.

35. Open Market Operations - Fed buying/selling securities to control reserves.

36. Bond Pricing Equation - Determines the present value of bond payments.

37. Stock Pricing Equation - Determines the present value of stock dividends.

38. Asset Price Equation - Values financial assets based on expected returns.

39. Recession Definition - A widespread contraction in economic activity.

40. Aggregate Demand Equation - Y=C(Y−T,r)+I(Y,r)+G+X−MY = C(Y - T, r) + I(Y, r) + G + X - M.

41. Financial Markets Function - Facilitate savings, investments, and borrowing.

42. Interest Rate Components - Real interest rate, inflation, risk premium.

43. Role of Banks - Facilitate transactions, manage risk, and allocate credit.

44. Securities Market - Trading of bonds, stocks, and other financial instruments.

45. Diversification Principle - Reducing risk by holding a variety of assets.

46. Expansionary Monetary Policy - Lowers interest rates to increase demand.

47. Contractionary Monetary Policy - Raises interest rates to decrease demand.

48. Federal Funds Rate - The interest rate at which banks lend to each other.

49. Quantitative Easing (QE) - Central bank buying assets to lower long-term interest rates.

50. Inflation Equation - π=m−y\pi = m - y, where m is money supply growth and y is real GDP growth.

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