Basic Economic Measurements

Question 0

Value Added (GDP)

Answer 0

Adding up all the profits that is made in the process of making a good.

This avoids double counting

Question 1

Expenditures vs Income (GDP)

Answer 1

Basically no matter what you look at, expenditures or income, you will get same result.

Expenditures: final cost of an item
Income: all the profit earned on an item

Will essentially be equivalent

Question 2

GDP vs NDP

Answer 2

GDP:
I + C + G + X
Only looks at investment (this includes in segment to replace depreciation)

NDP:
Same as GDP except it only looks at invest,met added on after depreciation is covered for

For NDP to increase, stock of capital goods must increase

Question 3

Types of Inflation

Answer 3

Demand-pull:
Excess of spending beyond economies capacity, demand drives up prices

Cost-Push Inflation:
Rising costs-per-unit-of-production, usually do to supply shock

Question 4

Real vs Nominal Wage

Answer 4

Real wage - what wage can actually buy

Nominal - dollar increase

Question 5

Real vs Nominal Interest Rates

Answer 5

Basically percentage lender gets back on loan
Ex: loans $100 at 8%, inflation is 5%

Nominal Interest: 8%
Real Interest: 3% (8%-5%)

Question 6

Anticipated Inflation

Answer 6

Has little to no effect

People can adjust nominal wages

Lenders can charge inflation premium

Question 7

Rule of 70

Answer 7

How long it takes prices to double

70/(interest rate)

Question 8

Unemployment types

Answer 8

Frictional - workers looking for jobs or moving to new ones (inevitable)

Structural - worker no longer has skills to compete in labor force and is fired and not hired

Cyclical - this is due to decrease in demand for goods

Question 9

Who’s in labor force

Answer 9

• 16+ years of age
• Non-military
• non-institutionalized
• working
• “actively seeking” work

Question 10

Discouraged Workers affect on unemployment rate

Answer 10

People who have given up looking for jobs are not counted in labor force. This underscores the severity of unemployment.

Question 11

Who controls fiscal policy

Answer 11

Congress

Question 12

Tools of Fiscal policy

Answer 12

Taxes and government spending

Question 13

Debt and Deficits (fiscal)
Help?
Hurt?
Inflationary?

Answer 13

Help:
Expansionary and counters recession

Hurts:
crowding out

Inflationary:
If government prints money to cover deficit then, yes, can be inflationary.

Question 14

Supply-side Economics

Answer 14

Aggregate supply affect inflation and unemployment

Taxes hurt productivity and should be reduced to increase aggregate supply and increase incentive to work

Believe in Laffer Curve

Question 15

Terms of trade

Answer 15

Amount if one thing that a country must trade to get something else

Question 16

Balances of Trade

Answer 16

Favorable (exports > imports)
Good: American goods are cheaper so Ameicans buy those
Bad: foreign goods are more expensive due to depreciation of $

Unfavorable (imports > exports)
Good: dollar appreciates and foreign goods are now easier to buy
Bad: less foreign business

Question 17

How so monetarist a view economy’s stability

Answer 17

Inherently stable, government intervention just hurts economy

Question 18

Equation of exchange

Answer 18

MV = PQ

M - money supply
V - velocity of money

P- prices
Q- output

Question 19

Problems with fiscal policy

Answer 19

Recognition Lag -
Lag between realizing there is a problem and when it is realized

Administrative Lag -
Due to democratic government there is a lag between recognition of problem and when it’s addressed

Operational Lag -
Lag between time action is taken and when it’s effect starts to come into play

Question 20

Monetary policy problems

Answer 20

Recognition and operational lag too

Question 21

Money Market Graph

Answer 21

What shifts demand
Real income - more goes to right
Price levels - higher goes to right

Money supply - fed

Question 22

Current account vs. Financial account

Answer 22

Current:

• More consumer
• Income from US investment abroad
• Current import and export payments of goods and services
• net transfers

Financial:

• generally capital
• inflows of foreign currency for purchase of real and financial assets at home
• outflows of currency for purchase of real and financial capital in foreign nations

Financial and Current accounts must balance to 0