ECON 102 Exam Review: GDP, Inflation, Unemployment, AD-AS and Fiscal and Monetary Policy

Terms in this set (29)

1. GDP definitionThe market value of all final goods and services produced within a country in a given period. Intermediate goods and used goods are not counted.
2. Expenditure approach to GDPGDP = C + I + G + NX: consumption, investment, government purchases, and net exports (exports - imports).
3. Do transfer payments count in G?No. Social Security and unemployment benefits are transfers, not purchases of goods or services, so they are excluded from G and GDP.
4. Nominal vs real GDPNominal GDP uses current prices. Real GDP uses base-year prices, so it changes only when output changes.
5. GDP deflator formulaGDP deflator = (nominal GDP / real GDP) x 100.
6. How is the inflation rate computed from the CPI?Inflation = (CPI this year - CPI last year) / CPI last year x 100%.
7. Three biases that make the CPI overstate inflationSubstitution bias, introduction of new goods, and unmeasured quality change.
8. Unemployment rate formula and who counts as unemployedUnemployment rate = unemployed / labor force x 100. Unemployed means without a job but actively looking in the past four weeks; labor force = employed + unemployed.
9. Frictional, structural and cyclical unemploymentFrictional: short spells while job searching. Structural: mismatch of skills or location with available jobs. Cyclical: caused by recessions. Natural rate = frictional + structural.
10. Why does a discouraged worker lower the measured unemployment rate?They have stopped looking for work, so they leave the labor force and are no longer counted as unemployed.
11. Fisher equationReal interest rate is approximately the nominal interest rate minus the inflation rate.
12. Who is hurt by unexpected inflation?Lenders and savers with fixed nominal returns, and people on fixed incomes. Borrowers with fixed-rate loans benefit.
13. Rule of 70The number of years for a variable to double is about 70 divided by its annual growth rate in percent. At 2% growth, output doubles in about 35 years.
14. Sources of long-run economic growthGrowth in physical capital, human capital, natural resources and especially technology (productivity).
15. Why does the aggregate demand curve slope downward?A lower price level raises real wealth (wealth effect), lowers interest rates (interest rate effect) and makes exports cheaper (exchange rate effect).
16. Short-run vs long-run aggregate supplySRAS slopes upward because some wages and prices are sticky. LRAS is vertical at potential output, determined by resources and technology, not the price level.
17. Effect of a negative supply shock such as an oil price spikeSRAS shifts left: output falls and the price level rises at the same time (stagflation).
18. Recessionary gap and how the economy self-correctsOutput is below potential and unemployment is above natural. Over time wages and prices fall, shifting SRAS right and returning output to potential.
19. Marginal propensity to consume and the spending multiplierMPC = change in consumption / change in disposable income. Spending multiplier = 1 / (1 - MPC). With MPC = 0.8, the multiplier is 5.
20. Expansionary vs contractionary fiscal policyExpansionary: raise government purchases or cut taxes to shift AD right in a recession. Contractionary: cut spending or raise taxes to cool inflation.
21. Crowding outGovernment borrowing to finance deficits can raise interest rates and reduce private investment, weakening the effect of expansionary fiscal policy.
22. Budget deficit vs national debtThe deficit is the one-year gap when spending exceeds tax revenue. The debt is the accumulated total of past deficits minus surpluses.
23. Automatic stabilizersPolicies that change fiscal stance without new legislation, like progressive income taxes and unemployment insurance, which soften booms and busts.
24. Three functions of moneyMedium of exchange, unit of account and store of value.
25. Simple money multiplierMoney multiplier = 1 / reserve requirement ratio. With a 10% requirement, each new dollar of reserves can support up to $10 of deposits.
26. Tools of the Federal ReserveSetting the federal funds rate target, mainly through interest on reserve balances, plus open market operations, the discount rate and, historically, reserve requirements.
27. Effect of expansionary monetary policyThe Fed lowers interest rates (for example by buying bonds), which raises investment and consumption, shifting AD right.
28. Short-run Phillips curveA short-run tradeoff: lower unemployment comes with higher inflation. In the long run the Phillips curve is vertical at the natural rate of unemployment.
29. Quantity theory of moneyM*V = P*Y. If velocity V and real output Y are stable, growth in the money supply M leads to proportional growth in the price level P.

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