ECN 211 Exam Review: GDP, Inflation, Unemployment, Money and Policy

Terms in this set (30)

1. Define GDP.Gross domestic product is the market value of all final goods and services produced within a country in a given period.
2. Write the expenditure approach to GDP and define each term.Y = C + I + G + NX. C: consumption, I: business investment (including new housing and inventories), G: government purchases, NX: exports minus imports.
3. Why are intermediate goods excluded from GDP?Their value is already included in the price of the final good, so counting them would double count.
4. Are transfer payments like Social Security counted in G?No. Transfer payments are not purchases of goods or services, so they are excluded from government purchases in GDP.
5. Nominal vs real GDPNominal GDP uses current prices. Real GDP uses constant base-year prices, so it changes only when output changes.
6. How is the GDP deflator calculated?GDP deflator = (nominal GDP / real GDP) x 100.
7. Nominal GDP is $1,200 billion and real GDP is $1,000 billion. What is the deflator?(1200 / 1000) x 100 = 120, meaning prices are 20 percent higher than in the base year.
8. How is the inflation rate computed from the CPI?Inflation rate = (CPI this year - CPI last year) / CPI last year x 100.
9. Name two biases that cause the CPI to overstate inflation.Substitution bias (consumers switch to cheaper goods), introduction of new goods, and unmeasured quality improvements.
10. Real interest rate formula (Fisher equation)Real interest rate is approximately the nominal interest rate minus the inflation rate.
11. How is the unemployment rate calculated?Unemployment rate = unemployed / labor force x 100, where the labor force = employed + unemployed people actively seeking work.
12. Frictional vs structural vs cyclical unemploymentFrictional: short-term job searching. Structural: mismatch of skills or location with available jobs. Cyclical: caused by recessions. The natural rate includes frictional and structural only.
13. Why are discouraged workers a problem for the unemployment rate?They want work but stopped searching, so they are not counted in the labor force, making the official rate understate joblessness.
14. What are the three functions of money?Medium of exchange, unit of account and store of value.
15. M1 vs M2M1: currency in circulation, checkable deposits and other liquid deposits. M2: M1 plus less liquid assets such as small time deposits and retail money market funds.
16. What is the simple money multiplier?Money multiplier = 1 / reserve requirement. With a 10 percent ratio, the multiplier is 10.
17. Name the Federal Reserve's main tools for conducting monetary policy today.Interest on reserve balances, open market operations (buying or selling government securities), the discount rate, and overnight reverse repurchase agreements.
18. What is expansionary monetary policy and its expected effect?The Fed lowers its interest rate target or buys securities, lowering interest rates, which boosts investment and spending, raising output in the short run.
19. What is fiscal policy?Government changes to spending and taxes to influence aggregate demand. Expansionary: raise spending or cut taxes. Contractionary: cut spending or raise taxes.
20. Spending multiplier formulaMultiplier = 1 / (1 - MPC) = 1 / MPS. With MPC = 0.8, the multiplier is 5.
21. Why is the tax multiplier smaller than the spending multiplier?A tax cut is partly saved before it is spent, so the first-round change in spending is MPC times the tax change. Tax multiplier = -MPC / (1 - MPC).
22. What is crowding out?Government borrowing raises interest rates, which reduces private investment and offsets part of the fiscal stimulus.
23. Budget deficit vs national debtA deficit is the shortfall in a single year (spending exceeds revenue). The debt is the accumulated total of past deficits minus surpluses.
24. What shifts aggregate demand to the right?Increases in consumption, investment, government purchases or net exports, for example from higher wealth, lower interest rates or more optimism.
25. Short-run vs long-run aggregate supplySRAS slopes upward because some prices and wages are sticky. LRAS is vertical at potential output, determined by labor, capital, resources and technology.
26. What is stagflation and what causes it?Rising inflation together with falling output and higher unemployment, typically caused by a negative supply shock that shifts SRAS left (such as an oil price spike).
27. What is the Phillips curve?A short-run inverse relationship between inflation and unemployment. In the long run it is vertical at the natural rate of unemployment.
28. What are automatic stabilizers?Taxes and transfers that change with the economy without new legislation, such as unemployment benefits and progressive income taxes, cushioning recessions and booms.
29. What drives long-run economic growth across countries?Growth in productivity: physical capital, human capital, natural resources and technological knowledge, supported by institutions such as property rights and rule of law.
30. What is the rule of 70?Years for a variable to double is approximately 70 divided by its annual growth rate in percent. At 2 percent growth, about 35 years.