ECON-UA 1 Exam Review: GDP, Inflation, Unemployment, Growth, Money and the Fed

Terms in this set (29)

1. GDP definitionGross domestic product is the market value of all final goods and services produced within a country in a given period of time.
2. Expenditure approach to GDPY = C + I + G + NX, where C is consumption, I is investment, G is government purchases and NX is net exports (exports minus imports).
3. Why are intermediate goods excluded from GDP?Their value is already included in the price of the final good; counting them separately would double count.
4. Do transfer payments like Social Security count in G?No. G counts only government purchases of goods and services; transfers are excluded because nothing is produced in exchange.
5. Nominal vs real GDPNominal GDP uses current-year prices; real GDP uses constant base-year prices, so it changes only when quantities produced change.
6. GDP deflator formulaGDP deflator = (nominal GDP / real GDP) x 100. It measures the price level of all domestically produced goods and services.
7. Mini-problem: nominal GDP is 1,200 and real GDP is 1,000. What is the deflator?Deflator = (1,200 / 1,000) x 100 = 120, meaning prices are 20 percent higher than in the base year.
8. How is the inflation rate calculated from the CPI?Inflation rate = (CPI this year - CPI last year) / CPI last year x 100.
9. CPI vs GDP deflatorThe CPI tracks a fixed basket of goods bought by consumers, including imports; the deflator covers all domestically produced goods and uses current quantities.
10. Unemployment rate formulaUnemployment rate = (number unemployed / labor force) x 100, where labor force = employed + unemployed.
11. Who is counted as unemployed?People without a job who are available for work and have actively looked for work in the past four weeks. Discouraged workers who stopped looking are not in the labor force.
12. Frictional vs structural vs cyclical unemploymentFrictional: short-term job searching. Structural: mismatch between workers' skills or location and available jobs. Cyclical: caused by recessions. The natural rate includes frictional and structural only.
13. Real interest rate (Fisher equation)Real interest rate is approximately nominal interest rate minus inflation rate (r = i - pi).
14. Who is hurt by unexpectedly high inflation?Lenders and savers with fixed nominal returns, and people on fixed nominal incomes; borrowers with fixed-rate debt gain because they repay with less valuable money.
15. Main sources of long-run economic growthGrowth in productivity, driven by physical capital per worker, human capital, natural resources and technological knowledge.
16. Rule of 70The number of years for a variable to double is about 70 divided by its annual percentage growth rate. At 2 percent growth, output doubles in about 35 years.
17. Catch-up (convergence) effectCountries that start with less capital tend to grow faster because of diminishing returns to capital: each additional unit of capital raises output more when capital is scarce.
18. Three functions of moneyMedium of exchange, unit of account and store of value.
19. Simple money multiplierMoney multiplier = 1 / reserve ratio. With a 10 percent reserve ratio, each new dollar of reserves can support up to 10 dollars of deposits.
20. Main tools of the Federal ReserveSetting the target federal funds rate, paying interest on reserves, open market operations (buying or selling government bonds) and lending through the discount window.
21. Effect of the Fed buying government bondsIt adds reserves to the banking system, increases the money supply and puts downward pressure on interest rates, which is expansionary.
22. Quantity theory of moneyM x V = P x 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 in the long run.
23. Why does aggregate demand slope downward?A lower price level raises real wealth (wealth effect), lowers interest rates (interest rate effect) and makes domestic goods cheaper relative to foreign goods (exchange rate effect).
24. Short-run vs long-run aggregate supplyLong-run AS is vertical at potential output because it depends on resources and technology, not prices. Short-run AS slopes upward because some wages and prices are sticky.
25. Expansionary fiscal policy and its effect in the AD-AS modelIncreasing government spending or cutting taxes shifts AD right, raising output and the price level in the short run.
26. Spending multiplier formulaMultiplier = 1 / (1 - MPC), where MPC is the marginal propensity to consume. With MPC = 0.8, the multiplier is 5.
27. Crowding outWhen government borrowing raises interest rates, private investment falls, offsetting part of the effect of expansionary fiscal policy.
28. Stagflation and what causes itSimultaneous high inflation and falling output or rising unemployment, typically caused by an adverse supply shock (such as an oil price spike) that shifts short-run AS left.
29. Recession definition (common rule of thumb)A significant, widespread decline in economic activity; a common rule of thumb is two consecutive quarters of falling real GDP, though the NBER uses a broader set of indicators.