ECO 2013 Final Review: GDP, Inflation, Unemployment, Money and Fiscal and Monetary Policy

Terms in this set (30)

1. Define GDP.The market value of all final goods and services produced within a country in a given period. Intermediate goods are excluded to avoid double counting.
2. Expenditure approach formula for GDPGDP = C + I + G + NX: consumption, investment, government purchases, and net exports (exports minus imports).
3. Why aren't transfer payments like Social Security counted in G?They are not payments for newly produced goods or services; they redistribute income.
4. Nominal vs real GDPNominal GDP uses current prices; real GDP uses base-year prices, so it changes only when output changes. GDP deflator = (nominal/real) x 100.
5. Does buying a used car or a share of stock add to GDP?No. Used goods were counted when produced and stocks are financial transfers. A dealer's commission on the sale is counted as a service.
6. How is the CPI inflation rate calculated?Inflation = (CPI this year - CPI last year) / CPI last year x 100%.
7. Name a bias that makes the CPI overstate inflation.Substitution bias (consumers switch to cheaper goods), plus quality changes and introduction of new goods.
8. How is the unemployment rate calculated?Unemployed / Labor force x 100, where the labor force = employed + unemployed (actively looking). Discouraged workers are not counted.
9. Frictional, structural and cyclical unemploymentFrictional: between jobs or searching. Structural: skills mismatch or lack of jobs in a field. Cyclical: due to recessions. The natural rate = frictional + structural.
10. Real interest rate approximation (Fisher equation)Real interest rate = nominal interest rate - inflation rate.
11. Who is hurt by unexpected inflation?Lenders and savers with fixed nominal returns, and people on fixed incomes. Borrowers with fixed-rate loans benefit.
12. Why does aggregate demand slope downward?Because of the wealth effect, interest rate effect and exchange rate effect: a lower price level raises spending on C, I and NX.
13. What shifts aggregate demand to the right?Increases in consumer or business confidence, government spending, tax cuts, money supply growth (lower interest rates), or foreign demand for exports.
14. Long-run aggregate supply: shape and determinantVertical at potential (full-employment) output, determined by labor, capital, natural resources and technology, not the price level.
15. Effect of a negative supply shock (e.g. oil price spike) in the AD-AS modelShort-run aggregate supply shifts left: output falls and the price level rises, causing stagflation.
16. Simple spending multiplier formulaMultiplier = 1/(1 - MPC) = 1/MPS. With MPC = 0.8, a $10 billion rise in spending can raise GDP by up to $50 billion.
17. Expansionary vs contractionary fiscal policyExpansionary: raise government spending or cut taxes to fight recession. Contractionary: cut spending or raise taxes to fight inflation.
18. Budget deficit vs national debtA deficit is the yearly shortfall of revenue relative to spending; the debt is the accumulated total of past deficits minus surpluses.
19. What is crowding out?Government borrowing to fund deficits raises interest rates, reducing private investment and offsetting part of the fiscal stimulus.
20. Automatic stabilizers: definition and exampleFeatures of the budget that counter the business cycle without new legislation, like progressive income taxes and unemployment insurance.
21. Three functions of moneyMedium of exchange, unit of account, and store of value.
22. Simple money multiplier formulaMoney multiplier = 1 / reserve requirement. With a 10% requirement, $1,000 of new reserves can support up to $10,000 of deposits.
23. Name the Fed's main monetary policy tools.Interest on reserve balances, open market operations (buying and selling government securities), the discount rate, and (historically) reserve requirements.
24. How does the Fed conduct expansionary monetary policy?It lowers its federal funds rate target (e.g. by buying bonds or lowering interest on reserves), reducing interest rates and boosting investment and AD.
25. What is the federal funds rate?The interest rate banks charge each other for overnight loans of reserves; the Fed targets a range for it.
26. State the quantity theory of money.M x V = P x Y: money supply times velocity equals the price level times real output. With constant V and Y, faster money growth causes inflation.
27. Short-run Phillips curveAn inverse short-run trade-off between inflation and unemployment. In the long run the curve is vertical at the natural rate of unemployment.
28. Sources of long-run economic growthGrowth in physical capital, human capital (education, skills), technology and productivity, and institutions such as property rights.
29. What is the rule of 70?Years to double = 70 / growth rate (%). At 2% growth, real GDP per person doubles in about 35 years.
30. Effect of a stronger U.S. dollar on net exportsU.S. exports become more expensive abroad and imports cheaper, so net exports tend to fall.